ASEC Spolka Akcyjna
On
October 22, 2004, we completed the acquisition of ASEC, which is headquartered in Krakow,
Poland, from Nextel Spolka Akcyjna, or Nextel. ASEC develops, manufactures and markets
card readers and reader modules based on radio frequency identification technologies,
including high-end programmable smart card as well as economically priced readers.
Pursuant to the Preliminary Share Purchase Agreement, dated as of September 14, 2004, as
amended in October 2004, between us and Nextel, the aggregate purchase price for the
acquisition was $1.6 million, which was paid to Nextel through the issuance of 186,264 of
our ordinary shares, calculated by dividing the purchase price by the average price of our
ordinary shares during the ten trading days prior to, but excluding, the closing date of
the acquisition ($8.59 per share). In addition, the agreement provides for additional
consideration of up to $350,000 to be paid to Nextel in the form of our ordinary shares,
subject to ASEC meeting specified performance criteria for the years ended December 31,
2004 and 2005, referred to as the earn-out formula. ASEC met the performance criteria for
the year ended December 31, 2004. Accordingly, as of December 31, 2004 we recognized a
liability of $175,000 in connection with the earn-out formula, which was settled by 14,298
ordinary shares that were issued by us to Nextel in June 2005.
Based
on ASECs 2005 performance, we did not incur any further liability in connection with
the earn-out formula. The results of operations of ASEC have been included in the
consolidated financial statements as from October 1, 2004.
Far East
Pioneer
Oriental International Ltd.
In
July 2005, we completed the acquisition of POI, a Hong Kong company, a subsidiary of POE,
a Hong Kong company. POI is an engineering company that develops and manufactures
machinery used to create smart card inlays for smart cards and other products, and also
manufactures contact and contactless smart cards themselves. Pursuant to an Asset Purchase
Agreement dated June 16, 2005, between us, POE, and its shareholders (together, referred
to as the Sellers), as amended, the aggregate purchase price for the acquisition was paid
to the Sellers through the issuance of an aggregate 40,441 of our ordinary shares.
In
July 2005, POI completed the acquisition of substantially all of the assets of POE
relating to the design and manufacture of machinery for the manufacture of smart cards,
including certain proprietary technologies related to the manufacturing process. Pursuant
to the Asset Purchase Agreement dated June 16, 2005, between POI and POE, POI also agreed
to make offers of employment to each of the employees of POE. The aggregate purchase price
for the acquisition was paid to POE through the issuance of an aggregate of 41,788 of our
ordinary shares. On September 1, 2006, we completed a structural change in the Far-East,
under which the operations of POI was transferred to Millennium Cards Technology
Limited. Following the structural change, the Company has sold its shares in POI.
e-Pilot
Ltd.
In July 2005, we completed the acquisition of a 71.5% interest in e-Pilot Ltd, a
British Virgin Islands company, from three of e-Pilots shareholders (collectively,
referred to as the e-Pilot Shareholders). e-Pilot, which is headquartered in Hong Kong,
develops, manufactures and markets smart card inlays for smart cards and other products.
Pursuant to share purchase agreements entered into with each of the e-Pilot Shareholders,
the aggregate purchase price for the acquisition was paid to the e-Pilot Shareholders
through the issuance of an aggregate of 52,572 of our ordinary shares. On September 1,
2006, we completed a structural change in the Far-East, under which the operations of
e-Pilot was transferred to Millennium Cards Technology Limited. Following the
structural change, the Company has sold its shares in e-Pilot.
Millennium
Cards Technology Limited
On
September 1, 2006, we completed a structural change in the Far-East, under which the
operations of POI and of e-Pilot were transferred to Millennium Cards Technology
Limited (MCT), a subsidiary which was established during 2006. Following the
structural change, the Company has sold its shares in POI and e-Pilot for a total
consideration of $200,000 and recorded a $122,000 gain from sale of subsidiaries. Our
initial holding in MCT was 60%. In September 2008 MCT issued additional 3,000 shares of
HK$1.00 against the conversion of the debt of MCT to us in the principle amount of
$6,900,000. Following the shares allotment, our holding in MCT was increased to 90%.
InSeal SAS
In
May 2006, we completed the acquisition of all the share capital of InSeal SAS, for an
aggregate of 243,800 of our ordinary shares and 180,000 warrants. The warrants, which have
a nominal exercise price, become exercisable in four equal annual installments. InSeal SAS
is a Marseille, France based company currently providing an operating system for
contactless applications to a variety of customers in the payments market. InSeals
JayCOS® is currently in use in contactless payments programs in the US.
37
PARX Ltd.
PARX
Ltd. is incorporated under the laws of the State of Israel. By reason of our ownership of
94.33% of PARXs outstanding shares, we currently have the right to appoint all of
the members of its board of directors.
PARX
is responsible for marketing electronic parking solutions in international markets, which
includes the successful EasyPark in-vehicle electronic parking product.
PARX France.
In
June 2008 we completed, through PARX Ltd., the acquisition of 100% of the share capital of
PARX France (formerly ID Parking) from Gilbert and Majeste Nadine Baup, for a purchase
price of euro 750,000 (after deducting transaction costs of $319,000), which was paid
partly (euro 250,000) in cash and partly through the issuance of 300,698 of our ordinary
shares (where additional funds may need to be paid if the total value of such shares at
determined dates does not equal to euro 500,000).
D.
|
PROPERTY,
PLANT AND EQUIPMENT
|
We
lease an aggregate of 10,639 square meters of land in Rosh Pina, Israel from the Israel
Lands Authority. Of the 10,639 square meters, 2,377 meters are leased under a 49 year
lease which expires on November 16, 2041, with an option to extend for a further period of
49 years. Our principal management, administration and marketing activities occupy a 1,188
square meter facility on the site. The remaining 8,262 square meters of land are leased
under a 49 year lease with the Israel Lands Authority which expires on September 14, 2047,
with an option to extend for a further period of 49 years. Our principal engineering,
research and development and part of our manufacturing activities occupy a 4,000 square
meter facility on this site. The rent for the initial 49-year term of each of these leases
was prepaid in its entirety at the beginning of the lease terms as is customary in Israel
for leases of property for industrial purposes from the Israel Lands Authority. Our rights
under these leases, including the facilities built on the site, are pledged for the
benefit of Bank Hapoalim. Our majority owned subsidiary, Easy Park Ltd., leases office
space in this complex from us. Easy Park also leases an aggregate of 137 meters in Tel
Aviv pursuant to a lease that expires on April 14, 2011, with an option to extend for a
further period of 3 years.
We
also lease an aggregate of 270 meters in Tzur Igal, Israel pursuant to a lease that
expires on February 28, 2011, with an option to extend it for additional three periods of
1 year each.
OTI
America, Inc. leases an aggregate of 4,375 square feet of office space in Fort Lee, New
Jersey pursuant to a lease that expires on August 31, 2009. OTI Africa (Pty) Ltd. owns an
aggregate of 770 square meters of office space in Century City, South Africa.
ASEC
leases an aggregate of 495 square meters of office space in Krakow, Poland pursuant to a
lease terminable by giving a three months notice, and 169 square meters of office
space in Warsaw, Poland pursuant to a lease that expires on March 29, 2013.
InterCard
Systemelectronic owns an aggregate of 5,201 square meters of land in Bad Durrheim,
Germany. The area is being used commercially for its manufacturing facility.
MCT
leases office space in Futian, Shenzhen with areas of 4,779 square
meters and 2,732 square meters pursuant to leases that expires
on August 31, 2013 and January 16, 2012, respectively. The office space is
currently being used for its manufacturing facility. Additionally,
MCT leases office space in Causeway Bay, Hong Kong with areas of
132 square meters pursuant to a lease that expires on May 13, 2009. The
office space is used for administrative purpose.
InSeal
leases an aggregate of 220 square meters of office space in Paris, France, pursuant to a 9
years lease starting January 2007, with an option to terminate once every three years by
giving a 6 months notice.
ITEM 4A.
|
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
38
ITEM 5.
|
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion and
analysis includes certain forward-looking statements with respect to the business,
financial condition and results of operations of our company. The words
estimate, project, intend, expect and
similar expressions are intended to identify forward-looking statements within the Private
Securities Litigation Reform Act of 1995 and other federal securities laws. These
forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated by such forward-looking statements,
including those Risk Factors contained in this annual report. This discussion and analysis
should be read in conjunction with our consolidated financial statements and notes thereto
contained in Item 18. Financial Statements of this annual report.
The
following discussion and analysis is based on and should be read in conjunction with our
consolidated financial statements contained in Item 18. Financial
Statements.
Overview
We
design, develop and sell contactless microprocessor-based smart card systems. Our
headquarters and main research and development activities are in Israel. Our sales and
marketing efforts are directed from our Israeli headquarters with additional sales support
offices located in U.S. subsidiary, OTI America, located in Fort Lee, New Jersey, Europe,
South Africa and the Far East. Our packaging, assembly and manufacturing facilities are
located in Israel, Germany and the Far East.
Since
our incorporation in 1990, we have focused on the development of our core technologies and
our OTI Platform-based products. We currently offer three lines of products, each of which
constitutes a complete system, as well as components (such as smart cards, inlays, readers
and machines ) that we sell to original equipment manufacturers, OEMs, as well as other
cards manufactures and companies for sale or incorporation into their own products. Our
three complete system product lines include:
|
|
Payments
Solutions:
we offer financial institutions a cashless system and loyalty
program to replace cash, which includes the
PayPass
system that we are installing
for MasterCard, our EasyPark system and our mass transit payment system as well as cards,
inlays and machineries for the production of SmartID solutions as well as production line
for SIM cards;
|
|
|
Petroleum
Systems:
OTIs EasyFuel is a wireless, cashless, cardless, and
paperless fuel management and petroleum solution which includes both our gasoline
management system, or GMS, and our EasyFuel systems; and
|
|
|
Smart
ID Solutions:
OTIs solutions for credentialing, identifying and
verifying individuals combine the capability to support biometric identification with the
portability of smart cards. We also offer cards, inlays and machineries for the
production of SmartID solutions.
|
In
2003 we introduced and began to realize revenues from EasyFuel, our contactless petroleum
system, which we expect to account for an increasing proportion of our petroleum system
sales. In 1998, we were awarded a contract for the first of our micropayments systems, an
electronic parking payment system which we refer to as EasyPark. We began to deploy
EasyPark in 2000 and completed deployment of the first system in June 2001. We deployed
our first mass transit micropayments system in China during 2000 and in the United States
in 2003. In 2002, we began to realize nonrecurring engineering revenues from the
PayPass micropayments system that we are installing for MasterCard International and
we began to recognize product sale revenues from that system in 2004.
We
began to market components for incorporation into the products of OEMs with our
acquisition of InterCard Systemelectronic in June 2000. During 2006, 2007 and 2008,
product sales to OEMs accounted for $7.8 million, $8.7 million and $8.9 million,
respectively, of our total revenues.
We
began marketing cards, inlays and machineries following our acquisitions of MCT, e-Pilot
and POE .
39
We
have reported net losses for each year that we have been in business, and we expect to
incur full year losses at least through 2009. Our business tends to be seasonal, with
greater sales in the third and the fourth quarters of every year, we do not anticipate
having net earnings for either of the first two quarters of 2009 and we also cannot assure
you that we will be profitable in either of the last two quarters of 2009, or afterwards.
Sources of Revenue
We
have historically derived a substantial majority of our revenues from the sale of our
products, including both complete systems and OEM components. A
substantial
majority of our revenues has been, and is likely to continue to be, from the sale of
complete systems and its components. We anticipate that revenues from sales will continue
to represent the substantial majority of our revenues in the future. In addition, we
generate revenues from licensing and transaction fees, and also, less significantly, from
non-recurring engineering, customer services and technical support.
During
the past three years, the revenues that we have derived from sales and licensing and
transaction fees have been as follows (dollar amounts in thousands):
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
$
|
35,171
|
|
|
87
|
%
|
$
|
40,854
|
|
|
94
|
%
|
$
|
37,582
|
|
|
93
|
%
|
|
|
|
Licensing and
|
|
|
transaction fees
|
|
|
|
5,382
|
|
|
13
|
%
|
|
2,631
|
|
|
6
|
%
|
|
2,635
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,553
|
|
|
100
|
%
|
$
|
43,485
|
|
|
100
|
%
|
$
|
40,217
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
increased by $5.7 million in 2007 as compared to 2006 and decreased by $3.3 million in
2008 as compared to 2007. The increase in 2007 is mainly attributed to an increase in
sales of Petroleum products, Payments products and its components, and OEM. The decrease
in 2008 is mainly attributed to decrease in sales of Payments products and its components.
Licensing
and transaction fees
include one-time and periodic payments for manufacturing or
distribution rights for our products. Transaction fees are paid by customers based on the
volume of transactions processed by systems that contain our products. The decrease in
2007 as compare to 2006 is primarily consisted of a decrease in transaction fees from the
China ID project.
We
expect to generate additional revenues from transaction fees in the future as the
installation and usage of systems that contain our products become more widespread.
We
have historically derived revenues from different geographical areas. The following table
sets forth our revenues, by dollar amount (in thousands) and as a percentage of revenues
in different geographical areas, during the past three years:
|
Africa
|
Europe
|
Far East
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
$
|
3,200
|
|
|
8
|
%
|
$
|
14,065
|
|
|
35
|
%
|
$
|
11,958
|
|
|
29
|
%
|
2007
|
|
|
$
|
4,710
|
|
|
11
|
%
|
$
|
17,924
|
|
|
41
|
%
|
$
|
9,024
|
|
|
21
|
%
|
2008
|
|
|
$
|
5,423
|
|
|
13
|
%
|
$
|
19,258
|
|
|
48
|
%
|
$
|
6,364
|
|
|
16
|
%
|
|
North, Central and South
America
|
Israel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
$
|
8,174
|
|
|
20
|
%
|
$
|
3,156
|
|
|
8
|
%
|
|
2007
|
|
|
$
|
7,569
|
|
|
17
|
%
|
$
|
4,258
|
|
|
10
|
%
|
|
2008
|
|
|
$
|
5,100
|
|
|
13
|
%
|
$
|
4,072
|
|
|
10
|
%
|
|
We
anticipate that, over time, the revenues that we derive from the Americas will grow both
in absolute amounts and as a percentage of our total revenues. Our revenues derived from
outside the U.S., which are primarily received in currencies other than the U.S. dollar,
will have a varying impact upon our total revenues, as a result of fluctuations in such
currencies exchange rates against the U.S. dollar.
40
Cost of revenues and
gross margin
Our
cost of revenues, by revenue source, and gross profit, for each of the past three years
were as follows (dollar amounts in thousands):
|
Year ended December 31
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
$
|
21,871
|
|
$
|
25,918
|
|
$
|
24,743
|
|
|
|
|
Licensing and transaction fees
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
$
|
21,871
|
|
$
|
25,918
|
|
$
|
24,743
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
$
|
18,682
|
|
$
|
17,567
|
|
$
|
15,474
|
|
Sales.
Cost of revenues relating to sales consists primarily of materials, as well as
salaries, fees payable to subcontractors and related costs for our technical
staff who assemble our products. The increase in 2007 is primarily the result of
increased sales which generated corresponding increased costs, and due
to
increase in costs associated with the revenue mix in the year ended December 31,
2007 as compared to the same period in 2006. The decrease in 2008 is primarily
the result of decreased sales which generated corresponding decreased costs.
Licensing
and transaction fees.
Licensing and transaction fees revenues do not have directly
attributable cost of revenues. The only costs incurred to initiate the project represent
selling and marketing expenses and are classified as such in the consolidated statement of
operations.
Operating expenses
Our
operating expenses and operating loss for each of the past three years were as follows
(dollar amounts in thousands):
|
Year ended December 31
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
$
|
7,065
|
|
$
|
12,265
|
|
$
|
11,129
|
|
Selling and marketing
|
|
|
|
7,072
|
|
|
9,670
|
|
|
11,875
|
|
General and administrative
|
|
|
|
11,948
|
|
|
17,593
|
|
|
14,274
|
|
Amortization and impairment of intangible
|
|
|
assets
|
|
|
|
821
|
|
|
1,314
|
|
|
2,794
|
|
Impairment of goodwill
|
|
|
|
-
|
|
|
-
|
|
|
24,217
|
|
|
|
|
Gain from sale of subsidiary
|
|
|
|
(122
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
26,784
|
|
|
40,842
|
|
|
64,289
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
$
|
(8,102
|
)
|
$
|
(23,275
|
)
|
$
|
(48,815
|
)
|
Research
and development.
Our research and development expenses consist primarily of salaries
and related expenses of our research and development staff, as well as subcontracting
expenses. All research and development costs are expensed as incurred. The increase in
2007 as compared to 2006 was primarily due to a $3.6 million increase in expenses related
to salaries that resulted from increase of 17 employees, mainly following the acquisitions
of InSeal during May 2006 and the IPS division of Vuance (formerly SuperCom) which took
place on December 31, 2006, a $862,000 increase in share-based compensation expenses, in
accordance with SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R),
and due to a $845,000 increase in expenses related to subcontractors, and rental expenses.
The decrease in 2008 was primarily due to a $1.0 million decrease in expenses related to
salaries resulting from a $426,000 decrease in share-based compensation expenses, in
accordance with SFAS 123R and from a decrease in number of research and development
employees. Our research and development expenses may increase in the future as we continue
to develop new products and new applications for our existing products.
41
Selling
and marketing.
Our selling and marketing expenses consist primarily of salaries and
substantially all of the expenses of our sales and marketing subsidiaries and offices in
the United States, South Africa, the Far East and Europe, as well as expenses related to
advertising, professional expenses, participation in exhibitions and tradeshows. The
increase in 2007 as compared to 2006 was primarily due to a $1.4 million increase in
expenses related to salaries that resulted from an increase of employees, mainly following
the acquisitions of InSeal during May 2006 and the IPS division of Vuance (formerly
SuperCom) which took place on December 31, 2006, and due to a $678,000 increase in
expenses related to our marketing efforts in new and existing markets. The increase in
2008 was primarily due to a $1.8 million increase in professional expenses resulting from
marketing services related to existing projects and future projects, legal expenses
related to the Smartrac law suit and increase in compensation expenses, in compliance with
SFAS 123R and EITF 96-18, Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
(EITF 96-18).
Our
selling and marketing expenses may increase in the future as we continue to expand our
local sales and marketing subsidiaries, open new offices and in the event that we hire
additional personnel.
General
and administrative.
Our general and administrative
expenses consist primarily of salaries and related expenses of our executive management
and financial and administrative staff. These expenses also include costs of our
professional advisors (such as lawyers and accountants), office expenses and insurance and
vehicle expenses, which have collectively grown with the scope, magnitude and complexity
of our business, and provision for doubtful accounts. The increase in 2007 as compared to
2006 is primarily attributed to a $2.5 million provision for doubtful accounts for the
year ended December 31, 2007, a $1.2 million increase in share-based compensation
expenses, in accordance with SFAS No. 123R, and due to a $1 million increase in expenses
related to professional and rental expenses. The decrease in 2008 as compared to 2007 is
primarily due to a $2.0 million decrease in provision for doubtful accounts, a $947,000
decrease in share-based compensation expenses, in compliance with SFAS 123R and EITF
96-18, and a $703,000 decrease in professional expenses. General corporate and
administrative expenses may increase in the future as we continue to expand our
operations.
Amortization
and impairment of intangible assets.
The increase in 2008 as compared to 2007 is
primarily due to a $1.4 million impairment charge against other intangible assets
(customers contracts and relationships) acquired in acquisition of InSeal SAS.
Impairment
of goodwill.
We conducted a goodwill impairment
test on the goodwill acquired. The test was based on our single reporting unit structure.
As a result of the decrease in our market capitalization in 2008 and deteriorating global
economy, we determined that the carrying value of the goodwill exceeded its implied fair
value. We further concluded that all of the goodwill acquired had been impaired and
therefore, in the fourth quarter of 2008, we recorded an impairment charge of $24.2
million.
Financing income
(expenses), net
Financing
income consists primarily of interest earned on our investments in U.S. treasury
securities and foreign exchange gains. Financing expenses consist primarily of interest
payable on bank loans and foreign exchange losses. The decrease in financing income is
mainly due to decrease in interest earned on investments in U.S. treasury securities and
the increase in financing expenses is mainly due to an increase in interest expenses from
short term loans and credit.
Our
financing income, net for each of the past three years, has been as follows (in
thousands):
|
Year ended December 31
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing income
|
|
|
$
|
2,459
|
|
$
|
2,800
|
|
$
|
561
|
|
Financing expenses
|
|
|
|
(747
|
)
|
|
(938
|
)
|
|
(1,089
|
)
|
|
|
|
|
|
|
|
Financing income (expenses), net
|
|
|
$
|
1,712
|
|
$
|
1,862
|
|
$
|
(528
|
)
|
|
|
|
|
|
|
|
42
Net loss
Our
net loss increased in 2007 as compared to 2006 primarily due to an increase in our
operating expenses as mentioned above and a decrease in our gross margin primarily due to
a decrease in revenues from licensing and transaction fees. The increase in 2008 as
compared to 2007 is primarily due to an increase in the Companys operating expenses,
mainly due to the goodwill impairment charge as mention above, increase in financial
expenses, net as mentioned above, decrease in gross profit resulting from decrease in
sales, decrease in minority share in loss of subsidiaries and increase in equity loss of
affiliated company.
Our
net loss for each of the past three years has been as follows (in thousands):
|
Year ended December 31
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
$
|
(6,604
|
)
|
$
|
(20,643
|
)
|
$
|
(49,995
|
)
|
|
|
|
|
|
|
|
Critical Accounting Policies and Estimates
We
prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States. Accordingly, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable based upon the
information available. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and results of operations.
To fully understand and evaluate our reported financial results, we believe it is
important to understand our revenue recognition policy, our policy with respect to the
impairment of goodwill and other intangible assets and our policy with respect to
stock-based compensation.
Revenue
recognition.
We recognize product sale revenues upon delivery, provided there is
persuasive evidence of an agreement and the risks and rewards of ownership have
transferred to the buyer, delivery has occurred, the fee is fixed or determinable and
collection is probable and no further obligation exists. In the case of nonrecurring
engineering, revenue is recognized upon completion of testing and approval of the
customization of the product by the customer and provided that no further obligation
exists.
Technology
license revenues are recognized at the time the technology and license are delivered to
the customer, collection is probable, the fee is fixed and determinable, persuasive
evidence of an arrangement exists, no significant obligation remains under the sale or
licensing agreement and no significant customer acceptance requirements exist after
delivery of the technology.
We
recognize revenues from customer services and technical support as the services are
rendered ratably over the period of the related contract.
We recognize transaction fees as they are earned, based on actual usage.
Our
revenue recognition policies are consistently applied for all revenues recognized.
Goodwill
and other intangible assets
.
Goodwill represents the excess of the aggregate
purchase price over the fair value of the net assets acquired in a purchase business
combination. Goodwill is reviewed for impairment at least annually, as of December every
year, in accordance with the provisions of FASB Statement No. 142, Goodwill and
Other Intangible Assets. The goodwill impairment test is a two-step test. Under the first
step, the fair value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its carrying value, an
indication of goodwill impairment exists for the reporting unit and the enterprise must
perform step two of the impairment test (measurement). Under step two, an impairment loss
is recognized for any excess of the carrying amount of the reporting units goodwill
over the implied fair value of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance with FASB Statement No. 141, Business
Combinations. The residual fair value after this allocation is the implied fair value of
the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying
value, step two does not need to be performed.
43
The Company conducted its goodwill
impairment test on the goodwill acquired. The test was based on the Companys single
reporting unit structure. As a result of the decrease in the Companys market
capitalization in 2008 and the deteriorating global economy, the Company determined that
the carrying value of the goodwill exceeded its implied fair value. The Company further
concluded that all the goodwill acquired had been impaired and therefore, in the fourth
quarter of 2008, it recorded an impairment charge of $24.2 million. No impairment losses
were recorded in 2007 and 2006.
Purchased
intangible assets are carried at cost, less accumulated amortization. Amortization is
computed over the estimated useful lives of the respective assets, generally three to
seven years.
Impairment
of long-lived assets.
In accordance with FASB Statement No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived
assets, such as property, plant, and equipment, and purchased intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If circumstances
require a long-lived asset be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by an asset to the carrying value of the
asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted
cash flow basis, impairment is recognized to the extent that the carrying value exceeds
its fair value. Fair value is determined through various valuation techniques including
discounted cash flow models, quoted market values and third-party independent appraisals,
as considered necessary.
As of
December 2008 the Company conducted its impairment test on the intangible assets
recognized in the acquisition of InSeal, as a result of an uncertainty relating to a
customer of InSeal and the future revenues from that customer. As a result, the Company
recorded an impairment charge of $1.4 million in the fourth quarter of 2008. No impairment
charges were recoded in 2007 and 2006.
Other
intangible assets, net, amounted to approximately $2.5 million as of December 31, 2008. If
these estimates change in the future, we may be required to record impairment charges for
our other intangible assets.
Stock
option plans
. Prior to January 1, 2006, the Company accounted for stock based employee
and director compensation by using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB
25) and related interpretations, as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Accordingly, compensation cost for stock
options was measured as the excess of the market price of the underlying stock on the date
of grant over the exercise price and was recognized over the scheduled vesting.
On
January 1, 2006, the Company adopted SFAS 123R, which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees
and directors based on estimated fair values. The Company adopted SFAS 123R using the
modified-prospective-transition method. Under the modified-prospective-transition method,
compensation cost is recognized on a prospective basis for all share-based payments
granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123. For share-based
payment awards granted after January 1, 2006, the Company recognizes compensation cost
based on estimated grant date fair value using the Black-Scholes option pricing model. In
accordance with the modified prospective method, the Companys consolidated financial
statements for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123R. As a result of adopting SFAS 123R, the Companys loss before
taxes and minority interests and net loss for the year ended December 31, 2006, are
$2,354,000 larger, and loss per share for the year ended December 31, 2006 is $0.17
larger, than if it had continued to account for share-based compensation under APB 25.
Upon adoption of SFAS 123R, the $833,000 in Additional Paid-In Capital and the offsetting
amount in Deferred Stock-Based Compensation, that were both reflected in
shareholders equity at December 31, 2005, have been reversed as required by SFAS
123R. The net effect had no change in total shareholders equity.
The
critical assumptions relate to determining the expected life of the option, considering
the outcome of service-related conditions (i.e., vesting requirements and forfeitures),
expected volatility of the underlying stock as an estimate of the future price fluctuation
for a term commensurate with the expected life of the option, expected dividend yield on
the underlying stock, commensurate with the expected life of the option, and the risk-free
interest rate commensurate with the expected term of the option.
44
SFAS
No. 123R requires that the option pricing model used consider managements
expectations about the life of the option, future dividends, and stock price volatility.
Both the volatility and dividend yield components should reflect reasonable expectations
commensurate with the expected life of the option. To determine the expected volatility,
we generally begin with calculating historical volatility over the most recent period
equal to the expected life of the options. The expected dividend yield on the underlying
stock for all relevant periods is zero since there is no history of paying dividends. The
expected life of an employee stock option award was estimated based on reasonable facts
and assumptions on the grant date.
These
estimates incorporate significant judgment in determining the fair value of stock-based
compensation awards.
During
2008 most of the options were granted with a par value exercise price. Due to the par
value nominal amount of NIS 0.1, the fair value of these options was estimated to be equal
to the Companys share price as of the day of grant.
Recently Issued
Accounting Guidance
In
February, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an amendment of FASB Statement
No. 115 (FAS 159). The statement allows the Company to irrevocably choose to measure many
financial assets and liabilities at fair value that are not currently required to be
measured at fair value. This Statement is effective as of the beginning of an
entitys first fiscal year that begins after November 15, 2007. The adoption of FAS
159 did not have an impact on the Companys consolidated results of operations and
financial position.
In
June 2007, the FASB reached a final consensus on Emerging Issues Task Force Issue 07-3,
Accounting for Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities (EITF 07-03). The consensus reached by the
FASB requires companies involved in research and development activities to capitalize such
non-refundable advance payments for goods and services pursuant to an executory
contractual arrangement because the right to receive those services in the future
represents a probable future economic benefit. Those advance payments will be capitalized
until the goods have been delivered or the related services have been performed. The
consensus on EITF 07-03 is effective prospectively for financial statements issued for
fiscal years beginning after December 15, 2007, and interim periods within those
fiscal years. The adoption of the provisions of EITF 07-03 did not have an impact on its
financial position, results of operations or cash flows
In
December 2007, the FASB issued FASB Statement No. 141R, Business Combinations (Statement
141R) and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment to ARB No. 51 (Statement 160). Statements 141R and 160
require most identifiable assets, liabilities, noncontrolling interests, and goodwill
acquired in a business combination to be recorded at full fair value and
require noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting for transactions with
noncontrolling interest holders. Both statements are effective for periods beginning on or
after December 15, 2008, and earlier adoption is prohibited. Statement 141R will be
applied to business combinations occurring after the effective date. Statement 160 will be
applied prospectively to all noncontrolling interests, including any that arose before the
effective date. The Company will adopt the guidance in Statement 141R and Statement 160 to
future transactions. The Company will follow upon adoption the presentation and disclosure
requirements with respect to minority interests in subsidiaries, this will result in a
reclassification of immaterial amounts from minority interest liability classified balance
to an equity account.
Effective
January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair
Value Measurements, (SFAS 157), for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are
recognized or disclosed at fair value in the financial statements on a recurring basis.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS 157 also establishes a framework for measuring fair value and
expands disclosures about fair value measurements. FASB Staff Position FAS 157-2,
Effective Date of FASB Statement No. 157, delays the effective date of SFAS
157 until fiscal years beginning after November 15, 2008 for all nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. On January 1, 2009, the Company will be required to
apply the provisions of SFAS 157 to fair value measurements of nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The Company is in the process of evaluating the
impact, if any, of applying these provisions on its financial position and results of
operations. In October 2008, the FASB issued FASB Staff Position FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset is
Not Active, which was effective immediately. FSP FAS 157-3 clarifies the application
of SFAS 157 in cases where the market for a financial instrument is not active and
provides an example to illustrate key considerations in determining fair value in those
circumstances. The adoption of FSP FAS 157-3 did not have an impact on the
Companys consolidated results of operations and financial position.
45
In
March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No.
133. Statement 161 requires entities that utilize derivative instruments to
provide qualitative disclosures about their objectives and strategies for using such
instruments, as well as any details of credit-risk-related contingent features contained
within derivatives. Statement 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the financial
statements, how the provisions of Statement 133 have been applied, and the impact that
hedges have on an entitys financial position, financial performance, and cash
flows. Statement 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company believes that the impact, if
any, of adopting Statement 161 will not have a material impact on the Companys
financial statement.
In
April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is effective
for fiscal years beginning after December 15, 2008. The Company believes that the
impact, if any, of adopting FSP FAS 142-3 will not have a material impact on the
Companys financial statement.
In
June 2008, the FASBs Emerging Issues Task Force reached a consensus on EITF Issue
No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entitys Own Stock. This EITF Issue provides guidance on the determination of
whether such instruments are classified in equity or as a derivative instrument. The
Company will adopt the provisions of EITF 07-5 on January 1, 2009 and expect that the
impact, if any, of adopting EITF 07-5 will not have a material impact on the
Companys financial statement.
In
November 2008, the FASBs Emerging Issues Task Force reached a consensus on EITF
Issue No. 08-6, Equity Method Investment Accounting Considerations. EITF
08-6 continues to follow the accounting for the initial carrying value of equity method
investments in APB Opinion No. 18, The Equity Method of Accounting for Investments in
Common Stock, which is based on a cost accumulation model and generally excludes
contingent consideration. EITF 08-6 also specifies that other-than-temporary impairment
testing by the investor should be performed at the investment level and that a separate
impairment assessment of the underlying assets is not required. An impairment charge by
the investee should result in an adjustment of the investors basis of the impaired
asset for the investors pro-rata share of such impairment. In addition, EITF 08-6
reached a consensus on how to account for an issuance of shares by an investee that
reduces the investors ownership share of the investee. An investor should account
for such transactions as if it had sold a proportionate share of its investment with any
gains or losses recorded through earnings. EITF 08-6 also addresses the accounting for a
change in an investment from the equity method to the cost method after adoption of
Statement 160. EITF 08-6 affirms the existing guidance in APB 18, which requires cessation
of the equity method of accounting and application of FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities, or the cost method under APB 18, as
appropriate. EITF 08-6 is effective for transactions occurring on or after December 15,
2008. The Company does not anticipate that the adoption of EITF 08-6 will materially
impact the Companys financial position or results of operations.
In
May 2009, the FASB issued Statement No. 165, Subsequent Events, addressing accounting and
disclosure requirements related to subsequent events. Statement 165 requires management to
evaluate subsequent events through the date the financial statements are either issued or
available to be issued, depending on the companys expectation of whether it will
widely distribute its financial statements to its shareholders and other financial
statement users. Companies will be required to disclose the date through which subsequent
events have been evaluated. Statement 165 is effective for interim or annual financial
periods ending after June 15, 2009 and should be applied prospectively. The adoption of
Statement 165 is not expected to have a material effect on the Companys financial
statements.
46
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
Our
principal sources of liquidity since our inception have been sales of equity securities,
borrowings from banks, and cash from the exercise of options and warrants. We had cash and
cash equivalents of $27.2 million as of December 31, 2008 and $35.5 million as of December
31, 2007. In addition, we had short-term investments of $904,000 (representing U.S.
treasury securities) as of December 31, 2008 and $6.4 million as of December 31, 2007. We
believe that our working capital is sufficient to meet our present requirements.
Operating
activities.
For the year ended December 31 , 2008
we have used $12.2 million in operating activities primarily due to a $50.0 million net
loss, a $2.0 million decrease in other current liabilities, a $1.9 million decrease in
trade payables and a $711,000 decrease in deferred tax liability, partially offset by a
$24.2 million impairment of goodwill, a $6.3 million of stock based compensation issued to
employees and others, a $2.7 million decrease in trade receivables, a $3.0 million
depreciation, $2.8 million amortization and impairment of intangible assets, a $1.3
million equity in net losses of an affiliated company, a $869,000 decrease in inventories,
a $567,000 decrease in other receivables and prepaid expenses, a $548,000 increase in
allowance for doubtful accounts and a $78,000 increase in accrued severance pay, net. For
the year ended December 31, 2007 we have used $6.3 million in operating activities
primarily due to a $20.6 million net loss, a $2.8 million increase in inventories due to
purchasing for future and existing orders, a $1.0 million minority interest, and a
$686,000 increase in other receivables and prepaid expenses, partially offset by a $6.9
million of stock based compensation issued to employees and others, a $3.3 million
increase in trade payables, a $2.6 million depreciation, a $2.5 million increase in
allowance for doubtful accounts, a $2.0 million increase in other current liabilities, a
$1.3 million amortization of intangible assets, a $358,000 equity in net losses of an
affiliated company, a $283,000 increase in accrued severance pay, net, and a $104,000
decrease in trade receivables. For the year ended December 31, 2006 we used $3.5 million
of cash in operating activities primarily due to our net loss of $6.6 million, a $3.2
million increase in inventories, a $1.9 million increase in trade receivables, a $2.1
decrease in other current liabilities, $625,000 of minority share in loss of subsidiaries
and a $551,000 decrease in allowance for doubtful accounts, partially offset by a $3.8
million stock-based compensation related to options and shares issued to employees and
others, a $2.6 million increase in trade payables, a $1.9 million charge for depreciation
of our property and equipment, a $1.1 million decrease in other receivables and prepaid
expenses, a $1.1 million equity in net losses of an affiliated company, a $821,000
amortization of intangible assets and a $796,000 increase in accrued severance pay, net.
Investing
and financing activities
. For the year ended December 31, 2008, net cash provided by
investing activities was
$3.4 million, mainly due to $34.6 million proceeds from
maturity of available-for-sale securities, partially offset by a $29.0 million investment
in available-for-sale securities, a $1.5 million used in the purchase of property and
equipment and a $565,000 purchase of PARX France (formerly ID Parking). For the year ended
December 31, 2007, net cash provided by investing activities was $6.6 million, mainly due
to $148 million proceeds from maturity of available-for-sale securities and a $837,000
receipt on account of loans and receivables, partially offset by a $136.1 million
investment in available-for-sale securities and a $6.2 million purchase of property and
equipment. For the year ended December 31, 2006, net cash used in investing activities was
$1.1 million, mainly due to a $23.6 million investment in available-for-sale securities
and to a $3.1 million investment in equipment purchases, partially offset by $25.4 million
proceeds from maturity of available-for-sale securities and $350,000 receipts on account
of loans and receivables related to our disposition of a German subsidiary in 2004.
For
the year ended December 31, 2008, net cash provided by financing activities was $598,000,
mainly due to $1.5 million proceeds from receipt on account of share and exercise of
options and warrants, net, partially offset by $508,000 repayment of long-term bank loans
and $358,000 decrease in short-term bank credit. For the year ended December 31, 2007, net
cash provided by financing activities was $5.1 million, mainly due to $4.8 million
increase in short-term bank credit, net, and $739,000 proceeds from long-term loans,
partially offset by $495,000 repayment of long-term bank loans. For the year ended
December 31, 2006, net cash provided by financing activities was $4.9 million, mainly due
to $3.2 million due to exercise of options and warrants, $1.5 million of proceeds from
minority in subsidiary and $978,000 from long-term bank loans, partially offset by a
$570,000 repayment of long-term bank loans and by a $231,000 decrease in short term
credit.
Market Risks
Market
risks relating to our operations result primarily from changes in interest rates and
currency fluctuations. In order to limit our exposure, we may enter, from time to time,
into various derivative transactions. Our objective is to reduce exposure and fluctuations
in earnings and cash flows associated with changes in interest rates and foreign currency
rates. We do not use financial instruments for trading purposes. It is our policy and
practice from time to time to use derivative financial instruments only to limit exposure.
47
Interest Rate Risks
We
are exposed to market risks resulting from changes in interest rates, relating primarily
from our loan obligations to banks. We do not currently use derivative financial
instruments to limit exposure to interest rate risk. As of December 31, 2008, we had fixed
interest rate loan obligations of $2.3 million. Of this amount, $1.4 million was
denominated in euro, $703,000 was denominated in USD, $120,000 was denominated in New
Israeli Shekel, $49,000 was denominated in Polish Zloty and $41,000 was denominated in
South African Rand. These loans will be repaid during the next five years.
The
carrying values of the loans are equivalent to or approximate their fair market value as
they bear interest at approximate market rates.
Impact of Inflation and
Currency Fluctuations
Our
functional and reporting currency is the U.S. dollar. We generate a significant portion of
our revenues and we incur some of our expenses in other currencies. As a result, we are
exposed to the risk that the rate of inflation in countries in which we are active other
than the United States will exceed the rate of devaluation of such countries
currencies in relation to the dollar or that the timing of this devaluation will lag
behind inflation in such countries. To date, we have been affected by changes in the rate
of inflation or the exchange rates of other countries currencies compared to the
dollar, and we cannot assure you that we will not be adversely affected in the future.
The
annual rate of inflation (deflation) in Israel was 3.8% in 2008, 3.4% in 2007 and (0.1%)
in 2006. The NIS revalued by approximately 1.1% and 9.0% in 2008 and 2007, respectively,
against the U.S. dollar.
The
functional currency of InterCard Systemelectronic, Inseal SAS and PARX France is euro and
of ASEC Spolka Akcyjna is the Polish Zloty and the functional currency of MCT is the
Chinese Yuan Renminbi. Significantly all of these subsidiaries revenues are earned,
and significantly all of their expenses are incurred, in their functional currencies. To
the extent that there are fluctuations between the euro, the Polish Zloty and/or the
Chinese Yuan Renminbi against the U.S. dollar, the translation adjustment will be included
in our consolidated changes in shareholders equity and will not impact the
consolidated statement of operations. We cannot assure you that we will not be adversely
affected in the future.
Corporate Tax Rate
On
July 25, 2005 the Knesset, the Israeli Parliament, passed the Law for the Amendment of the
Income Tax Ordinance (No.147 and Temporary Order) 2005, or the Amendment. The
Amendment provides for a gradual reduction in the company tax rate in the following
manner: in 2006 31%, in 2007 29%, in 2008 27%, in 2009 26% and
from 2010 onward the tax rate will be 25%. Furthermore, as from 2010, upon reduction of
the company tax rate to 25%, real capital gains will be subject to tax of 25%. As of
December 31, 2008, our net operating loss carry-forwards for Israeli tax purposes amounted
to approximately $84.4 million. Under Israeli law, net operating losses can be carried
forward indefinitely and offset against certain future taxable income. Since we have
incurred tax losses through December 31, 2008, we have not yet utilized the tax benefits
for which we are eligible under the Approved Enterprise status. $4.5 million
of our investment programs in buildings, equipment and production facilities have been
granted Approved Enterprise status and we are, therefore, eligible for a tax
exemption under the Law for the Encouragement of Capital Investments, 1959. Subject to
compliance with applicable requirements, the portion of our income derived from the
Approved Enterprise programs is tax-exempt for a period of the earliest of (1)
ten years commencing in the first year in which it generates taxable income, (2) 14 years
from the date of approval or (3) 12 years from the date of beginning of production. If we
do not comply with these requirements, the tax benefits may be cancelled and we may be
required to refund the amount of benefits received, in whole or in part, with the addition
of linkage differences to the Israeli consumer price index and interest. As of the date of
this annual report, we believe that we are in compliance with these conditions.
Government of Israel
Support Programs
Until
2005 we participated in programs offered by the Office of the Chief Scientist of the
Ministry of Industry and Trade (OCS) that support research and development
activities. Under the terms of these programs, a royalty of 3% to 3.5% of the sales of
products must be paid to the OCS, beginning with the commencement of sales of products
developed with grant funds and ending when the dollar value of the grant is repaid. In
2006 we decided to cease our participation with the OCS.
48
Royalties
payable with respect to grants received under programs approved after January 1, 1999,
however, will be subject to interest on the dollar-linked value of the total grants
received at an annual rate of LIBOR applicable to dollar deposits. As of December 31,
2008, we have received a total of $5.0 million from the OCS net of royalties paid to it
(or accrued for). The terms of Israeli government participation also require that the
manufacturing of products developed with government grants be performed in Israel, unless
the OCS has granted special approval. If the OCS consents to the manufacture of the
products outside Israel, we may be required to pay increased royalties, ranging from 120%
to 300% of the amount of the OCS grant, depending on the percentage of foreign
manufacture. These restrictions continue to apply even after we have paid the full amount
of royalties payable in respect of the grants. Based upon the aggregate grants received to
date, we expect that we will continue to pay royalties to the OCS to the extent of our
sales of our products and related services for the foreseeable future.
Separate
OCS consent is required to transfer to third parties technologies developed through
projects in which the government participates. These restrictions do not apply to exports
from Israel of products developed with these technologies.
C.
|
RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
|
Discussed
above in "Item 5.A. Overview."
Discussed
above in "Item 5.A. Overview."
E.
|
OFF
BALANCE SHEET ARRANGEMENTS
|
None.
F.
|
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
As
of December 31, 2008, we and our subsidiaries had contractual obligations which are
expected to affect our consolidated cash flow in future periods as follows: (in thousands)
|
2009
|
2010
|
2011
|
2012
|
2013 and
thereafter
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
$
|
751
|
|
$
|
513
|
|
$
|
464
|
|
$
|
455
|
|
$
|
471
|
|
$
|
2,654
|
|
Long-term debt obligations
|
|
|
$
|
580
|
|
$
|
528
|
|
$
|
272
|
|
$
|
128
|
|
$
|
834
|
|
$
|
2,342
|
|
Deferred tax liability
|
|
|
$
|
82
|
|
$
|
36
|
|
$
|
19
|
|
$
|
12
|
|
$
|
53
|
|
$
|
202
|
|
Total
|
|
|
$
|
1,413
|
|
$
|
1,077
|
|
$
|
755
|
|
$
|
595
|
|
$
|
1,358
|
|
$
|
5,198
|
|
We
shall also pay royalties to the Office of the Chief Scientist as discussed above in B,
Liquidity and Capital Resources.
Our
liability for severance pay for some of our Israeli employees is calculated pursuant to
Israeli severance pay law based on the most recent salary of the employee multiplied by
the number of years of employment, as of the balance sheet date. Those employees are
entitled to one months salary for each year of employment or a portion thereof.
Certain senior executives are entitled to receive additional severance pay. Our liability
for those Israeli employees is partially provided for by monthly deposits for insurance
policies and by an accrual. The value of these policies is recorded as an asset in our
balance sheet. The deposited funds include profits and losses accumulated up to the
balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli Severance Pay Law or labor agreements. The value of the
deposited funds is based on the cash redemption value of these policies. Our total
liability, net of deposited funds, at December 31, 2008 was $2.5 million. Timing of
payment of this liability is dependent on timing of the departure of the employees.
For
additional information on our contractual obligations as of December 31, 2008, under
long-term bank loans and operating leases, see Notes 8 and 9 to our consolidated financial
statements. For a description of liens on our assets see Note 9C to our consolidated
financial statements.
49
ITEM 6.
|
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
Management
The
following table sets forth certain information concerning our current directors and
executive officers.
Name
|
Age
|
|
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oded Bashan (1)
|
62
|
|
Chief Executive Officer, Chairman and Director
|
Ronnie Gilboa
|
53
|
|
Vice President - Projects and Director
|
Guy Shafran
|
36
|
|
Chief Financial Officer (until
September 30, 2008),
|
|
|
|
Chairman and President of Millennium Cards Technology Ltd.
|
Tanir Horn
|
33
|
|
Chief Financial Officer (from October 1, 2008)
|
Moshe Aduk
|
52
|
|
Vice President - Gasoline Management System
|
Nehemya Itay
|
60
|
|
Vice President - Hardware Engineering
|
Ohad Bashan
|
38
|
|
President, Chief Marketing Officer and Director;
|
|
|
|
Chief Executive Officer, OTI America, Inc.
|
Eliezr Manor (1)(2)(3)
|
62
|
|
Director
|
Ora Setter (1)(2)(3)
|
58
|
|
Director
|
Eli Akavia (1)(2)
|
61
|
|
Director
|
Raanan Ellran (1)(2)(3)
|
59
|
|
Director
|
Shlomo Tussia-Cohen (1)(2)(3)
|
36
|
|
Director
|
(1)
Compensation committee member
|
(2)
Audit committee member
|
Oded
Bashan
co-founded the Company in 1990 and has continued to serve as our Chief
Executive Officer and Chairman since that time. Prior to founding us, he served as the
president of Electo-Galil, an Israeli manufacturer of radio frequency identification
cards, from 1984 to 1990. Mr. Bashan is Chairman of OTI America, Inc., OTI Africa (Pty)
Ltd., SoftChip Technologies (3000) Ltd., SoftChip Israel Ltd., Easy Park Ltd., Easy Park
Israel Ltd. and PARX Ltd., President of InSeal SAS and a director of ASEC, Millennium
Cards Technology Ltd., and Z.H.R. Industrial Park Company Ltd. In 1997, Mr. Bashan
was awarded the Leading Businessman Award in Management, Business and Economics by the
Israeli Institute of Public Opinion. He is currently a member of the trustee committee of
the Tel-Chai College and a member of the consulting committee for the Executive MBA
program at Bar Ilan University. Mr. Bashan holds both a B.Sc and an M.Sc in economics and
business management from the Hebrew University of Jerusalem.
Ronnie
Gilboa
co-founded the Company in 1990 and has continued to serve as a director since
that time. From 1990 to the end of 2001 he served as Vice President R&D and since that
date has served as our Vice President-Projects. He serves on the board of directors of OTI
America, Inc., ASEC S.A, OTI Africa Ltd., Easy Park Ltd., Easy Park Israel Ltd., PARX
Ltd., Softchip Technologies (3000) Ltd., SoftChip Israel Ltd., and Origin GPS Ltd. Prior
to founding us, Mr. Gilboa was the manager of research and development at Electo-Galil, an
Israeli manufacturer of radio frequency-based identification cards, from 1984 to 1990. Mr.
Gilboa holds a B.Sc. in electrical engineering from The Technion Israeli Institute
of Technology.
Guy
Shafran
served as our Chief Financial Officer until September 30, 2008, having served in
that position since June 2000, and has served as a director of Easy Park Ltd. since June
2000 and as a director of Easy Park (Israel) Ltd. since March 2002. Since 2005 Mr. Shafran
also serves as the President and Chairman of Millennium Cards Technology Ltd. Mr.
Shafran is also a director in Millennium Cards Technology Ltd. Prior to joining us,
Mr. Shafran was chief financial officer at the Israel Cold Storage and Supply Company
Ltd., an Israeli public company engaged in the distribution of soft drinks and cold
storage, from June 1996 to March 2000. From July 1995 to February 1996, Mr. Shafran was
assistant to the chairman of the Baran Group Ltd., an Israeli engineering company. Mr.
Shafran holds a B.A. in economics with a specialization in business administration from
Ben Gurion University, Beer Sheba, and a MEI Graduate Degree in Management specializing in
International Management and Entrepreneurship from Swinburne University of Technology.
Tanir
Horn
serves as our Chief Financial Officer since October 1, 2008. Ms. Horn is a
Certified Public Accountant and has been with OTI since 2006, acting first as a Deputy CFO
of OTIs joint venture in China and then as OTIs controller at its headquarters
in Israel. Prior to joining OTI, Ms. Horn worked as an examiner for large enterprises at
the head office of the Income Tax Division of the Israeli Treasury from 2001 until 2006.
She holds a BA in Business Administration and Accountancy from College of Business
Management, Tel Aviv, and has been a lecturer and instructor on taxation laws since 2002
in colleges and for the Tax Division of the Israeli Treasury.
50
Moshe
Aduk
serves as our Vice PresidentGasoline Management System, having served in
that position since July 1995. From 1990 to July 1995, he was employed by us as a research
and development engineer. He served as a director from 1995 to July 1999. Prior to joining
us, Mr. Aduk was a hardware and software development engineer at Electo-Galil, an Israeli
manufacturer of radio frequency-based identification cards, from 1985 to 1990. From 1984
to 1985, he was employed as a technical support engineer at Motorola Israel. Mr. Aduk
holds a B.Sc. in electrical engineering from The Technion Israeli Institute of
Technology.
Nehemya
Itay
serves as our Vice PresidentHardware Engineering, having served in that
position since July 1995. From 1990 to July 1995, he was employed by us as a research and
development engineer. He served as a director from 1991 to July 1999. Mr. Itay is a member
of the Joint Task Committee of the International Standards Organization on standards for
contactless smart cards. Prior to joining us, Mr. Itay was a hardware development engineer
at Electo-Galil, an Israeli manufacturer of radio frequency-based identification cards,
from 1986 to 1990. From 1982 to 1985, he was an hardware electronic engineer at Elscint,
an Israeli technology company. Mr. Itay holds a B.Sc. in electrical engineering from The
Technion Israeli Institute of Technology and an M.A. in electronics from Drexel
University, Philadelphia.
Ohad
Bashan
serves as our President and Chief Marketing Officer. Prior to that
he
served as our Head of Global Marketing and Strategy Development (since June 2000). Mr.
Bashan was appointed as the President of the Company commencing August 2007, pursuant to
which he relocated from the U.S. to the Companys headquarters in Israel and stepped
down from his office as the President of OTI America, however, remained his position as
Chief Executive Officer and a director of OTI America, Inc., which he holds since 1998. Mr
Bashan serves as a director of our board, as a director of Millennium Cards
Technology Ltd. since 2005 and as a director in PARX Ltd since 2008. From 1996 to August
1998, he was our business development manager. Mr. Bashan holds a B.A. in business from
the College of Business Management, Tel Aviv, with specializations in marketing and
finance, and an M.B.A. from Pepperdine University, California. Ohad Bashan is the
son of Oded Bashan.
Eliezer
Manor
serves as a director, having served in that position since July 2003. Mr. Manor
is a private businessman engaged in hi-tech entrepreneurship and venture capital. His
activities are carried out through his wholly owned company, Shirat Enterprises Ltd.,
which holds a portfolio of private investments and, in addition, carries out a broad
program dedicated to establishment of joint ventures between Israeli hi-tech companies and
Chinese industrial mature companies. In the past Mr. Manor was the co-founder and director
of several hi-tech start-up companies. He also served as a member of the international
team of WJ Hopper investment bank. Mr. Manor was also a co-founder and managing director
of two VC funds (Mofet in Israel and GCP in the Silicon Valley), and a founder of IVA
(Israel Venture Capital and Private Equity Association) and served as its first Executive
Director. Mr. Manor holds a B.Sc. Physics from the Tel Aviv University and a M.Sc. Applied
Physics from the Weizmann Institute of Science, Israel, specializing in electro-optics and
is a member of the Advisory Editorial Board of Photonics Spectra the international
journal of electro-optical engineering. Mr. Manor is also engaged in venture philanthropy,
and he and his family established in the past and are supporting Schools-On-Line, a NGO
active among high-school children and teachers.
Ora
Setter
(PhD) serves as a director, having served in that position since August 2006.
Until August 2006 Dr. Setter was the CEO and Academic Director of Lahav Executive
Education Center in Tel Aviv University. Dr. Setter also served a as director in Sapanut
& Aspaka Ltd., Marnetics Inc., Topspin Medical Inc., Ravad Ltd, and Medcon Ltd. Dr.
Setter is an active lecturer at the Recanati Business School at Tel Aviv University, and
in other academic institutions. Dr. Setter is a consultant to many leading companies in
Israel, focusing on organizational development and business, and specializing in knowledge
management and implementation of knowledge management systems, and in building and
organizing training programs for organizations. She is also a well known lecturer and
writer. In the past Dr. Setter was the entrepreneur and Managing Director of Book A la
Carte, Inc. as start up company dealing with publishing books through the Internet.
Dr. Setters areas of teaching and research include Psychological Contracts in
organizations, Leadership, Organizational Diagnosis & Development, Real and Virtual
Team Building, Organizational Politics and Power and Career Dynamics. Dr. Setter serves in
the board of several organizations business companies and NGOs. She is the
organizing force and leader of the Women promoting women network in Israel,
including most of the women leaders in business, academia, public sector and NGOs.
These days Dr. Setter has completed her studies for a MA degree in Religions Science South
Asian Studies in Tel Aviv University, and is involved with several ventures as a partner
and business consultant.
Eli
Akavia,
serves as a director, having served
in that position since December 2003. Mr. Akavia is an independent consultant and he
serves as a director of several other Israeli public companies (Eden Springs Ltd., Eshlad
Ltd., Starling Advanced Communications Ltd. and Rada Electronics Industry Ltd.). Mr.
Akavia worked for Luboshitz Kasierer, an Israeli auditing firm (formerly a member firm of
Arthur Andersen and currently merged with Ernst & Young, Israel) for 30 years and
until 2002, first as an employee and later as a senior partner. Mr. Akavias roles at
Luboshitz Kasierer included: Head of Audit Department, Head of Hi-Tech Division and
Partner in charge of the Firm Professional Standards Group. He specialized in hi-tech
companies and accumulated invaluable experience in US GAAP and SEC rules. Mr. Akavia has
participated in a large number of Israeli companies initial public offerings in the
United States.
51
Raanan
Ellran
served as a director between 1999- 2005, resuming the position in July 2007.
Since April 2009 Mr. Ellran is the CEO of CSB Home Appliances Ltd, and in addition, he
currently serves on the board of directors of AAI Ltd., an Israeli internet software
designer and of Rafael Advanced Defense Systems Ltd (between 2002-2005, resuming the
position in 2006), where he also serves as Chairman of the Finance Committee, and as
Chairman of the Investment Committee. Previous positions as board member include the First
International Bank, Dikla Mutual Funds Management Company, F.I.B.I. Holding Company Ltd.
(until October 2006), and First International Bank of Israel, Provident and Pension funds
(between 1993-1998). Between 1997- 2002 he served as the General Manager of Assuta Medical
Centers, between 1995 to 1997, he served as the General Manager of Ratfon Import Ltd., and
prior to that he was the General Manager of ACE Hardware (Israel) Ltd. (1994-1995).
Shlomo
Toussia-Cohen
serves as a director, having served in that position since June 2005.
From 2002 to 2005 Mr. Toussia-Cohen worked as senior assistant to Director General of the
Israeli Broadcasting Authority the Israeli Public TV and Radio and as chief
executive officer and member of the investment committee in the Education Fund for
Journalists (1977) Ltd. Holding a Master degree in Law (L.L.M.) with specialization in
private law from the Hebrew University of Jerusalem and a bachelor degree in Business
(B.A.) with specialization in finance from the Interdisciplinary Center of Herzelia, Mr.
Toussia-Cohen works as a Lawyer and is a member of both the Israeli Bar and the of New
York State bar.
Executive Compensation
The
aggregate compensation paid by us and our subsidiaries to our executive directors and
executive officers listed above under Management, for the year ended December
31, 2008 was $1,945,000, of which approximately $45,000 relates to 2008 bonuses paid in
2009. This amount includes approximately $405,000 set aside or accrued to provide pension,
severance, retirement or similar benefits or expenses, but does not include business
travel, relocation, professional and business association dues and expenses reimbursed to
officers, and other benefits commonly reimbursed or paid by companies in Israel. The
amounts mentioned above include the compensation paid to our current and previous Chief
Financial Officers in respect of their partial office periods during 2008.
Non-executive
directors are reimbursed for their expenses for each board meeting attended and in
addition receive compensation for their service on the board. Our executive directors do
not receive compensation for their service on the board of directors or any committee of
the board of directors. The aggregate amount paid by us to our non-executive directors
listed above under Management, in the year ended December 31, 2008 was
$176,287.
See
Item 6. E. Share Ownership for information on beneficial
ownership of our shares by our directors and executive officers. We have no outstanding
loans to any of our directors or executive officers.
Employment Agreements
We
maintain written employment and related agreements with all of our office holders. These
agreements provide for monthly salaries and contributions by us to executive insurance and
vocational studies funds. The employment agreements of certain of our office holders
further provide that we may give the employee an annual bonus in accordance with targets
to be determined by the compensation committee by December 31 of each calendar year in
respect of the following year. In determining the amount of the bonus, the compensation
committee must relate it to our revenues or profits, as applicable to the employee. We
approved bonus plan principles for our senior management on a shareholders general
meeting held on January 31, 2003. If justifiable in light of our quarterly financial
results, we may make advances on bonus payments pursuant to a resolution of our board of
directors. All of our office holders employment and related agreements contain
provisions regarding noncompetition, confidentiality of information and assignment of
inventions. The enforceability of covenants not to compete in Israel is unclear.
52
Agreement
with Oded Bashan.
The employment agreement of Oded Bashan, dated July 1, 2004, as was
amended at our shareholders meetings dated June 3, 2005, August 24, 2006 and July 27,
2007, provides for a seven-year term ending on June 30, 2011. Mr. Bashan may terminate his
employment, and we may terminate his employment for reasonable and justifiable cause, in
either case upon six months notice. In the event of termination, Mr. Bashan is
entitled to receive severance pay equal to twice the rate of one months current
salary multiplied by the number of years of employment. In the event we terminate his
employment prior to June 30, 2011, unless the termination occurred as a result of
circumstances depriving him of the right to severance pay at law or as a result of a
breach of fiduciary duty or a material breach of confidentiality or noncompetition
undertakings, we are required to continue paying Mr. Bashan a monthly compensation,
including benefits but excluding bonuses, until June 30, 2011, and in any event, for a
period that shall not be less than six months following the notice period described above.
In addition to the compensation, contributions and bonus described above, Mr. Bashan is
entitled under his contract of employment to an additional bonus of $15,000 for every one
percent increase in our average share price quoted for the last two months of any year
over the average share price quoted for the last two months of the preceding year. The
total compensation that Mr. Bashan is entitled to under his employment agreement is paid
to Mr. Bashan partially as a salary, in his capacity as an employee of the company, and
partially as a service fee, in his capacity as a service provider.
Agreement
with Ronnie Gilboa.
The employment agreement of Ronnie Gilboa, dated July 1, 1999, as
was amended at our shareholders meeting dated July 27, 2007, provides for a five-year term
ended on June 30, 2004, and was extended automatically for a non-determined period. Mr.
Gilboa may terminate his employment, and we may terminate his employment for reasonable
and justifiable cause, in either case upon six months notice. In the event of
termination, Mr. Gilboa is entitled to receive severance pay equal to twice the statutory
rate of one months current salary multiplied by the number of years of employment.
On July 2007, Mr. Gilboas employment agreement was amended to include a commission
of one (1%) percent from the net revenues and five (5%) percent from the net royalty
payments and net NRE payments (i.e., after deduction of applicable tax) from projects
resulting from his direct contribution.
Agreement
with Guy Shafran.
The employment agreement of Guy Shafran, dated January 1,
2006, as was renewed in 2008, provides for a three-year term ending on December 31, 2011,
and is automatically extended unless terminated as described below. In the event of
termination, Mr. Shafran is entitled to receive severance pay equal to twice the rate of
one months current salary multiplied by the number of years of employment in OTI or
one of its subsidiaries. Mr. Shafran is expected to work in Hong-Kong for three
years with option for an additional two years and in the event that the employment abroad
or in connection to it will be terminated before such period, Mr. Shafran will be paid in
full and will be entitled to all terms as if such a termination did not exist. Mr. Shafran
may terminate his employment on six months notice, and we may terminate his employment for
reasonable or justifiable cause on one year notice. In the event of termination of
employment, unless the termination occurred as a result of circumstances depriving Mr.
Shafran of the right to severance pay at law or as a result of a breach of fiduciary duty
or a material breach of his confidentiality or noncompetition undertakings, Mr. Shafran
shall be entitled to additional six months severance payments with full terms and
benefits.
Agreement
with Tanir Horn
The employment agreements of Tanir Horn, dated June 25, 2007, provides
for an undetermined employment period. Ms. Horn may terminate her employment, and we may
terminate her employment, in either case on two months notice. In the event of
termination, unless the termination occurred as a result of circumstances depriving her of
the right to severance pay at law, Ms. Horn is entitled to receive severance pay from
funds deposited by us in her name.
Agreements
with Moshe Aduk and Nehemya Itay.
The employment agreements of Moshe Aduk and Nehemya
Itay, each dated July 1, 1999, provide for a five-year term ending on June 30, 2004, and
were extended automatically for an undetermined employment period. These individuals may
terminate their employment, and we may terminate their employment for reasonable and
justifiable cause, in either case upon six months notice. In the event of
termination, these individuals are entitled to receive severance pay equal to twice the
rate of one months current salary multiplied by the number of years of employment.
In the event we terminate the employment of either Mr. Aduk or Mr. Itay, unless the
termination occurred as a result of circumstances depriving them of the right to severance
pay at law or as a result of a breach of fiduciary duty or a material breach of his
confidentiality or noncompetition undertakings, we are required to continue paying each of
them a monthly salary for three months following the notice period described above.
Agreement
with Ohad Bashan.
The employment agreement of Ohad Bashan with OTI America,
Inc., dated October 6, 2005, as was approved at our shareholders meeting dated November
12, 2005, and amended at our shareholders meetings dated July 27, 2007 and August 6, 2008,
provides for a four-year term ending on August 24, 2009. On June 2007 the Company assumed
his employment agreement and he was appointed as the President of the Company commencing
in August 2007, pursuant to which he relocated from the U.S. to the Companys
headquarters in Israel and stepped down from his office as the President of OTI America,
however, remained his position as Chief Executive Officer and a director of OTI America,
Inc. Mr. Bashan may terminate his employment on six months notice and we may terminate his
employment upon six months notice. In the event we terminate his employment, Mr.
Bashan shall be entitled to six months severance payments with full terms and benefits,
and shall be entitled to severance payment in an amount equal to two monthly salaries for
each year Mr. Bashan was employed with the Company or OTI America, in addition to all
benefits and salary Mr. Bashan is entitled to during the six month period. In addition to
his monthly compensation, Mr. Bashan is entitled to receive a special annual bonus of 0.5%
of the annual sales in the Americas markets. The bonus is paid during the month of April
of the following year of the actual sales, as recognized in OTIs financial
statements. The total compensation that Mr. Bashan is entitled to under his employment
agreement is paid to Mr. Bashan partially as a salary, in his capacity as an employee of
the company, and partially as a service fee, in his capacity as a service provider.
53
Election of Directors;
Appointment of Officers
Our
current board of directors consists of eight directors. Under our articles of association,
our board of directors may not consist at any time of more than nine members. A majority
of these directors must be non-executive directors, who are directors that are neither
office holders nor our employees. Directors are appointed, removed or replaced, by a
majority vote of our shareholders present in person or by proxy at a general meeting of
shareholders.
Once
elected at a shareholders meeting, our directors, except our external directors,
hold office until the first general meeting of shareholders held at least thirty six
months after their election, except for Mr. Oded Bashan and Mr. Ronnie Gilboa who may not
be replaced or removed unless by an affirmative vote of 75% of the Companys
shareholders entitled to vote and voting in person or by proxy at a general meeting of
shareholders. Incumbent directors may be reelected at that meeting. Unless contrary to the
law, a director may be elected for consecutive terms.
Under
the new Israeli Companies Law, which entered into effect on February 1, 2000 (the
Companies Law), the chief executive officer of a public company may not serve
as a chairman of the board of directors, and vice versa, unless authorized by a general
meeting of the shareholders and then only for a period of time that does not exceed three
years. On August 24, 2006 our shareholders authorized our Chairman, Oded Bashan, to act as
our Chief Executive Officer for an additional three-year period, after such date, we plan
to recommend to our shareholders to authorize Mr. Bashan to act as our Chief Executive
Officer for an additional 3-year period.
Our
board of directors appoints our chief executive officer. Each of our executive officers
serves at the discretion of the board of directors, subject to the terms of any employment
agreement, and holds office until his or her successor is elected or until his or her
earlier resignation or removal. Except for Ohad Bashan, our President and Chief Marketing
Officer, and Chief Executive Officer of OTI America, who is the son of Oded Bashan, our
co-founder and chairman of our board of directors, none of our directors or executive
officers has any family relationship with any other director or executive officer.
External Directors
The
Israeli Companies Law requires Israeli companies with shares that have been offered to the
public in or outside of Israel to appoint at least two external directors. No person may
be appointed as an external director of a company if the person, or the persons
relative, partner, employer or any entity under the persons control, has, or had
within the two years preceding the persons appointment as an external director, any
affiliation with the company or with any entity controlling, controlled by or under common
control with the company. The term affiliation includes control, an employment
relationship, a business or professional relationship maintained on a regular basis, or
service as an office holder, excluding service as a director appointed to serve as an
external director in a company that intends to make an initial offering of its shares to
the public. The term office holder is defined as a director, general manager,
chief business manager, deputy general manager, vice general manager, executive vice
president, vice president, other manager directly subordinate to the general manager or
any other person assuming the responsibilities of any of the foregoing positions, without
regard to such persons title. Each person listed in the table above is an office
holder. The external directors were not office holders until elected.
In
addition, no person may serve as an external director if that persons other
positions or business activities create, or may create, a conflict of interest with the
persons service as an external director or may otherwise interfere with the
persons ability to serve as an external director. If, at the time an external
director is appointed, all current members of the board of directors are of the same
gender, then that external director must be of the other gender. Regulations promulgated
under the Companies Law provide that the requirement of Israeli residency does not apply
to the external directors of companies whose shares are listed for trading outside of
Israel.
External
directors are elected by a majority vote at a shareholders meeting at which either
the majority of shares voted at the meeting, including at least one-third of the shares
held by non-controlling shareholders voted at the meeting, vote in favor of the election
of the external director, or the total number of shares held by non-controlling
shareholders voted against the election of the external director does not exceed one
percent of the aggregate voting rights in the company.
The
initial term of an external director is three years and under legislation that apply to
Israeli companies whose shares that have been offered to the public outside of Israel or
traded on a stock exchange outside of Israel, may be extended for consecutive additional
three year periods (unlike other public companies, in which only one additional three year
period is allowed). External directors may only be removed by the same percentage of
shareholders as is required for their election, or by a court, and then only if the
external directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the company. If an external directorship becomes
vacant, our board of directors is required under the Companies Law to call a
shareholders meeting immediately to appoint a new external director.
54
A
company may not appoint an external director as an office holder and may not employ or
receive services from an external director, directly or indirectly, including through a
corporation controlled by that person, for two years following the termination of his or
her service as an external director of that company.
Each
committee of our board of directors must include at least one external director and the
audit committee must include all of the external directors. An external director is
entitled to compensation as provided in regulations adopted under the Companies Law and is
otherwise prohibited from receiving any other compensation, directly or indirectly, in
connection with services provided as an external director.
In
addition, the audit committee of our board of directors must include at least three
independent directors within the meaning of the NASDAQ Global Market listing requirements.
Our directors Raanan Ellran, Shlomo Toussia-Cohen, Eliezer Manor and Ora Setter, qualify
as external directors under the Companies Law and independent directors under the NASDAQ
Global Market listing requirements. In addition, our director Eli Akavia, CPA is qualified
as an independent director under the NASDAQ Global Market listing requirements.
Alternate Directors
Under
our articles of association, each of our directors, other than our external directors, may
appoint, by written notice to us, any person to serve as an alternate director. Under the
Companies Law, a current director cannot be appointed as an alternate director nor can a
currently-serving alternate director be appointed as an alternate director. An alternate
director has all the rights and duties of the director appointing him, unless the
appointment of the alternate provides otherwise, and the right to remuneration. The
alternate director may not act at any meeting at which the appointing director is present.
Unless the time period or scope of the appointment is limited by the appointing director,
the appointment is effective for all purposes, but expires upon the expiration of the
appointing directors term. Currently, none of our directors has appointed any
alternate directors.
Directors Service
Contracts
Except
directors who are also officers of the Company, none of our directors have any services
contracts either with us, or with any of our subsidiaries, which provide for benefits upon
termination of employment or service.
Directors
Compensation
In
accordance with the Israeli Companies Law, we pay each director (other than directors who
are also officers of the Company) annual compensation in the amount of NIS 73,124 (around
$17,410), and in addition an amount of NIS 2,813 (around $700) for each meeting of the
board or any one of its committee attended in person (and 50% of this amount for each
meeting attended via a conference call).
In
addition, we grant our directors, from time to time, options to purchase our ordinary
shares, subject to the approval of our shareholders meeting.
Board Committees
Our
Board of Directors has established an audit committee, compensation committee and steering
committee.
Compensation Committee
Our
board of directors established our compensation committee in July 1999. The duties of the
compensation committee are to review the terms of employment of our senior management, to
review and recommend to our board of directors the issuance and the allocation of options
under our share option plans and to perform any other task delegated by our board of
directors.
55
The
current members of our compensation committee are Oded Bashan, Eliezer Manor, Shlomo
Toussia-Cohen, Ora Setter, Raanan Ellran and Eli Akavia. Other than Oded Bashan, who
serves as a member of our compensation committee, none of the members of our compensation
committee or audit committee is currently, or has ever been at any time since our
formation, an officer or employee of our company. Since our compensation committee is not
comprised solely of independent directors, all compensation arrangements of our executive
officers are determined by a majority of our independent directors in accordance with
NASDAQ Marketplace Rules.
Steering Committee
Our
board of directors established our steering committee in November 2004. The duties of the
steering committee were to review the deployment of our company towards the implementation
of the Sarbanes-Oxley Act. Following the establishment of the required procedure pursuant
to the Sarbanes-Oxley Act, we concluded that the steering committee is no longer required.
Audit Committee
Our
board of directors established our audit committee in July 1999. The Companies Law
requires public companies to appoint an audit committee consisting of at least three
directors, including all the external directors. The audit committees
responsibilities are governed by a written charter. The responsibilities of the audit
committee include appointing our independent registered public accounting firm (subject to
the shareholders approval under the Companies Law) and identifying irregularities in the
management of our business in consultation with our independent accountants and the
internal auditor and suggesting appropriate responses. The audit committees
responsibilities also include approving related party transactions as required by the
Companies Law. Neither the chairman of the board of directors, nor any director employed
by or otherwise providing services on a regular basis to us, a controlling shareholder, or
relative of a controlling shareholder may be a member of the audit committee. The audit
committee may not approve an action or a transaction with a controlling shareholder, or
with an office holder, unless at least two external directors are serving on the audit
committee at the time of the approval, one of whom is present at the meeting at which the
approval is granted. In addition, pursuant to the listing requirements of the NASDAQ
Global Market, we are required to maintain an audit committee including at least three
independent directors. In accordance with the provisions of the Sarbanes-Oxley Act, our
audit committee is required to pre-approve all audit and permitted non-audit services
provided by our external auditors.
The
current members of our audit committee are Shlomo Toussia-Cohen, Ora Setter, Eliezer
Manor, Raanan Ellran and Eli Akavia, all of which are independent directors.
Eli Akavia is the Audit Committees Chairman, and our board has determined that he is
an Audit Committee Financial Expert.
Internal Auditor
Under
the Companies Law, the board of directors must appoint an internal auditor that is
recommended by the audit committee. The role of the internal auditor is to examine, among
other things, whether the companys actions comply with the law and orderly business
procedure. Under the Companies Law, the internal auditor may not be an office holder or an
interested party, as defined below, or a relative of an office holder or an interested
party, and he or she may not be the companys independent accountant or the
independent accountants representative. The Companies Law defines an
interested party as a holder of 5% or more of the issued shares or voting
rights of a company, a person or entity who has the right to designate at least one
director or the general manager of the company, and a person who serves as a director or
general manager. On January 1, 2008, our audit committee recommended the appointment of
Mr. Gali Gana, CPA, from the office of Rosenblum Holzman & Co., as our internal
auditor for the year 2008, and our board of directors approved the appointment.
Fiduciary Duties;
Approval of Certain Transactions
The
Companies Law codifies the fiduciary duties that office holders owe to a company. An
office holders fiduciary duties consist of a duty of care and a duty of loyalty. The
duty of care requires an office holder to act with the degree of care with which a
reasonable office holder in the same position would act under the same circumstances. The
duty of care includes using reasonable means to obtain information as to the advisability
of a given action submitted for his or her approval or performed by virtue of his or her
position, as well as all other information pertaining to such actions.
56
The
duty of loyalty requires an office holder to act in good faith and for the benefit of the
company, and includes avoiding any conflict of interest between the office holders
other positions or personal affairs and the performance of his or her position in the
company, avoiding any competition with the company, avoiding exploiting any business
opportunity of the company in order to receive a personal benefit for himself or herself
or others, and revealing to the company any information or documents relating to the
companys affairs which come into the office holders possession as a result of
his or her position as an office holder.
The
Companies Law further requires that an office holder discloses to the company any personal
interest that he or she may have and all related material information known to him or her
in connection with any existing or proposed transaction by the company. The disclosure
must be made promptly and in no event later than the board of directors meeting at which
the transaction is first discussed. In addition, if the transaction is an extraordinary
transaction, as defined below, the office holder must also disclose any personal interest
held by the office holders spouse, siblings, parents, grandparents, descendants,
spouses descendants and the spouses of any of the foregoing and by any corporation
in which the office holder is a 5% or greater shareholder, director or general manager or
in which he or she has the right to appoint the general manager or at least one director.
The Companies Law defines an extraordinary transaction as a transaction that
is not in the ordinary course of business, that is not on market terms, or that is likely
to have a material impact on a companys profitability, assets or liabilities. In the
case of a transaction between the company and an office holder, or a third party in which
an office holder has a personal interest, but that is not an extraordinary transaction and
is not adverse to the companys interest, once the office holder complies with the
above disclosure requirements only board approval is required, unless the articles of
association of the company provide otherwise. In the case of an extraordinary
transaction
between the company and an office holder, or a third party in which an
office holder has a personal interest, in addition to any approval required by the
articles of association, the transaction must be approved first by the audit committee,
then by the board of directors and, in certain cases, by the shareholders. A director who
has a personal interest in a matter that is considered at a meeting of the board of
directors or the audit committee should in general not be present at this meeting or vote
on this matter. If a majority of the directors have a personal interest in an
extraordinary transaction, these directors are permitted to be present and vote on the
transaction, but shareholder approval is also required. Under NASDAQ Marketplace Rule
4350(h), the Company should conduct an appropriate review of all related party
transactions for potential conflict of interest situations on an ongoing basis and all
such transactions should be approved by the companys audit committee or another
independent body of the Board of Directors.
Under
the Companies Law, all arrangements as to compensation of office holders who are not
directors require approval by the board of directors, and undertakings to indemnify or
insure an office holder who is not a director require both board and audit committee
approval. In general, arrangements regarding the compensation, indemnification and
insurance of directors require audit committee and shareholder approval in addition to
board approval. Under NASDAQ Marketplace Rule 4350(c)(3)(A), compensation of the Chief
Executive Officer must be determined, or recommended to the Board for determination,
either by: (i) a majority of the independent directors, or (ii) a compensation committee
comprised solely of independent directors. The Chief Executive Officer may not be present
during voting or deliberations. Under NASDAQ Marketplace Rule 4350(c)(3)(B) compensation
of all executive officers, except the Chief Executive Officer, must be determined, or
recommended to the Board for determination, either by (i) a majority of the independent
directors, or (ii) a compensation committee comprised solely of independent directors.
The
Companies Law applies the same disclosure requirements to a controlling party of a public
company that it applies, as described above, to an office holder. For these purposes a
controlling party is any person possessing the ability to direct the
activities of the company, including a shareholder which holds 25% or more of the voting
rights of the company if no other shareholder owns more than 50% of the voting rights in
the company, but excluding a person whose power is derived solely from his or her position
on the board of directors or from another position with the company. Two or more
shareholders with a personal interest in the approval of the same transaction are deemed
to be joint shareholders. Extraordinary transactions with a controlling party or in which
a controlling party has a personal interest, a private placement in which the controlling
party has a personal interest and the engagement and terms of compensation of a
controlling party or his family members, require the approval of the audit committee, the
board of directors and the shareholders. Shareholders approval must be by a majority of
shares voted at the meeting, including at least one-third of the shares of the
disinterested shareholders who are present, in person or by proxy, at the meeting, or,
alternatively, the total shareholdings of the disinterested shareholders who vote against
the transaction must not represent more than 1% of the aggregate voting rights in the
company.
57
Under
the Companies Law, a shareholder has a duty to refrain from abusing his or her power in
the company and to act in good faith in exercising its rights and performing its
obligations to the company and other shareholders, including, among other things, voting
at a general meeting of shareholders on the following matters:
|
|
an
amendment to the articles of association;
|
|
|
an
increase in the company's authorized share capital;
|
|
|
approval
of a related-party transaction requiring shareholder approval.
|
In
addition, any controlling shareholder, any shareholder who knows that his vote can
determine the outcome of a shareholder vote and any shareholder who, under a
companys articles of association, can appoint or prevent the appointment of an
office holder, is under a duty to act with fairness towards the company. The Companies Law
does not describe the substance of this duty.
The
breakdown of the number of our employees, including employees in our subsidiaries, by
department, is as follows:
|
Number of employees as of December 31
|
Department
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
39
|
|
|
41
|
|
|
41
|
|
Research and development
|
|
|
|
103
|
|
|
120
|
|
|
115
|
|
Manufacturing and operations
|
|
|
|
301
|
|
|
373
|
|
|
322
|
|
Customer support
|
|
|
|
20
|
|
|
22
|
|
|
23
|
|
Management and administration
|
|
|
|
125
|
|
|
126
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
588
|
|
|
682
|
|
|
625
|
|
The
decrease in the number of our employees in 2008 compared to 2007 was mainly in
manufacturing and operation in the Far East and in research and development. Of our
employees, on December 31, 2008, 121 were based in Israel, 10 in the United States, 105 in
Europe, 34 in South Africa and 355 in the Far East.
Under
applicable law and by order of the Israeli Ministry of Labor and Welfare, we and our
Israeli employees are subject to certain provisions of the collective bargaining
agreements between the Histadrut, the General Federation of Labor in Israel and the
Coordination Bureau of Economic Organizations, including the Industrialists Association.
These provisions principally concern cost of living increases, length of the working day,
minimum daily wages for professional employees, contributions to pension funds, insurance
for work-related accidents, procedures for dismissing employees, determination of
severance pay, annual and other vacation, sick pay and other conditions of employment. We
provide our employees with benefits and working conditions above the required minimum and
which we believe are competitive with benefits and working conditions provided by similar
companies in Israel. Our employees are not represented by a labor union. We have written
employment agreements with substantially all of our employees. Competition for qualified
personnel in our industry is intense and it may be difficult to attract or maintain
qualified personnel to our offices. We dedicate significant resources to employee
retention and have never experienced work stoppages and we believe that our relations with
our employees are good.
The
following table sets forth certain information as of June 23, 2009 regarding the
beneficial ownership of our ordinary shares by each of our directors and executive
officers. Beneficial ownership is determined in accordance with rules of the Securities
and Exchange Commission.
All information with respect to the beneficial ownership of any of the below shareholders
has been furnished by such shareholder and, unless otherwise indicated below, we believe
that persons named in the table have sole voting and sole investment power with respect to
all of the shares shown as beneficially owned, subject to community property laws, where
applicable. The shares beneficially owned by the directors and executive officers include
the shares owned by their family members to which such directors and executive officers
disclaim beneficial ownership.
58
The
share numbers and percentages listed below are based on 22,860,102 shares outstanding as
of June 23, 2009:
Name of beneficial owner(1)
|
Number of Shares
Beneficially
Owned (2)
|
% of Class of Shares
|
Number of
Options
Beneficially
Owned (3)
|
Exercise Price
|
Date of Expiration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oded Bashan(4)
|
2,417,509
|
10.6%
|
|
|
|
Ronnie Gilboa(5)
|
241,089
|
1.0%
|
2,000
|
USD 32.00
|
March 1,2011
|
|
|
|
2,000
|
USD 9.00
|
March 1,2011
|
|
|
|
10,000
|
NIS 0.10
|
March 7,2012
|
|
|
|
15,000
|
NIS 0.10
|
April 13,2012
|
|
Guy Shafran(6)
|
236,003
|
1.0%
|
574
|
NIS 0.10
|
May 14,2012
|
|
|
|
841
|
NIS 0.10
|
November 26, 2009
|
|
|
|
34,000
|
NIS 0.10
|
March 7,2012
|
|
|
|
75,000
|
USD 2.48
|
May 26, 2013
|
|
|
|
75,000
|
NIS 0.10
|
May 26, 2013
|
|
|
|
17,000
|
NIS 0.10
|
June 25, 2013
|
|
Tanir Horn(7)
|
32,469
|
***
|
20,000
|
NIS 0.10
|
May 24, 2014
|
Moshe Aduk(8)
|
223,411
|
1.0%
|
662
|
NIS 0.10
|
May 14,2012
|
|
|
|
1,014
|
NIS 0.10
|
November 26, 2009
|
|
|
|
10,000
|
NIS 0.10
|
March 7,2012
|
|
|
|
15,000
|
NIS 0.10
|
April 13,2012
|
|
Nehemya Itay(9)
|
233,883
|
1.0%
|
675
|
NIS 0.10
|
May 14,2012
|
|
|
|
1,064
|
NIS 0.10
|
November 26, 2009
|
|
|
|
5,000
|
NIS 0.10
|
August 17,2011
|
|
|
|
10,000
|
NIS 0.10
|
March 7,2012
|
|
|
|
12,000
|
NIS 0.10
|
December 3, 2007
|
Ohad Bashan
|
237,268
|
1.0%
|
|
|
|
Shlomo Tussia-Cohen(10)
|
70,000
|
***
|
40,000
|
$11.23
|
September 22, 2010
|
|
|
|
30,000
|
NIS 0.10
|
April 13,2012
|
|
|
|
50,000
|
$11.23
|
September 22, 2010
|
Eliezer Manor(11)
|
80,000
|
***
|
30,000
|
NIS 0.10
|
April 13,2012
|
Ora Setter(12)
|
30,000
|
***
|
30,000
|
NIS 0.10
|
April 13,2012
|
Eli Akavia(13)
|
50,000
|
***
|
50,000
|
$11.23
|
September 22, 2010
|
|
|
|
1,200
|
$42.50
|
March 11, 2011
|
Raanan Ellran(14)
|
31,200
|
***
|
30,000
|
NIS 0.10
|
April 13,2012
|
|
|
|
|
|
|
All executive officers
|
and directors as a group
|
3,882,832
|
16.6 %
|
|
|
|
*** Less than 1%
59
(1)
|
The
number of ordinary shares shown includes shares that each shareholder has
the right to acquire within 60 days after June 23, 2009 (as determined in
accordance with footnote (3)).
|
(2)
|
If
a shareholder has the right to acquire shares by exercising options (as
determined in accordance with footnote (3)), these shares are deemed
outstanding for the purpose of computing the percentage owned by the
specific shareholder (that is, they are included in both the numerator and
the denominator), but they are disregarded for the purpose of computing
the percentage owned by any other shareholder.
|
(3)
|
Number
of options immediately exercisable or exercisable within 60 days from June
23, 2009. The exercise price of some of these options is greater than our
current share market price.
|
(4)
|
Includes
861,663 ordinary shares held by Mr. Bashan and 7,462 ordinary shares held
by Mr. Bashans wife. Mr. Bashan disclaims beneficial ownership of the
share held by his wife. Also includes 1,548,384 ordinary shares as to
which Mr. Bashan has voting power pursuant to irrevocable proxy granted to
him.
|
(5)
|
Includes
197,089 ordinary shares held by Mr. Gilboa, 15,000 ordinary shares held by
Mr. Gilboas wife and options held by Mr. Gilboa and his wife to
purchase 29,000 ordinary shares.
|
(6)
|
Includes 33,588 ordinary shares held by Mr. Shafran and options to purchase
202,415 ordinary shares. Mr. Shafran acted as our Chief Financial Officer until
September 30, 2008.
|
(7)
|
Includes 12,469 ordinary shares held by Ms. Horn and options to purchase 20,000
ordinary shares. Ms. Horn acts as our Chief Financial Officer commencing October
1, 2008.
|
(8)
|
Includes 196,735 ordinary shares held by Mr. Aduk and options to purchase 26,676
ordinary shares.
|
(9)
|
Includes 205,144 ordinary shares held by Mr. Itay and options held by Mr. Itay
and his wife to purchase 28,739 ordinary shares.
|
(10)
|
Consists of options to purchase 70,000 ordinary shares.
|
(11)
|
Consists of options to purchase 80,000 ordinary shares.
|
(12)
|
Consists of options to purchase 30,000 ordinary shares.
|
(13)
|
Consists of options to purchase 50,000 ordinary shares.
|
(14)
|
Consists of options to purchase 31,200 ordinary shares
|
Share Option Plans
The
following is a description of the share option plans that we and our subsidiaries
maintain. In addition to the discussion below, please see Note 10 to our consolidated
financial statements. Under Israeli law, except for issuances of options to directors, or
members of their families, adoption of share option plans and revisions to these plans are
not subject to shareholder approval. Under NASDAQ Marketplace Rules, however, absent an
exemption, most new share option plans and material revisions are subject to shareholders
approval.
2008 Employee Stock
Purchase Plan
In
2008, the Company established an Employee Stock Purchase Plan pursuant to which 1,500,000
of our ordinary shares have been reserved for eligible employees of the Company and its
subsidiaries. The purchase price of the ordinary shares is 85% of the closing price on
certain dates specified in the plan. As of June 23, 2009, an aggregate of 1,009,213 of our
ordinary shares have been issued to eligible employees under this plan. In accordance with
the decision of our board of directors, the implementation of this plan has been suspended
with respect to the offering period of April-June 2009.
2006 Alternative Option
Exercise Mechanism
On
April 11, 2006, we offered to each of our and our subsidiaries employees, and its
directors and office holders (other than External Directors, as such term is
defined in the Israeli Companies Law of 1999) who held outstanding vested and unvested
options to purchase an aggregate of 4,485,017 of our ordinary shares, which were issued
pursuant to the terms of the our 2001 Share Option Plan, as amended, to replace all of
their outstanding vested and unvested options into a new number of ordinary shares, with
the same fair values, as determined using the Black-Scholes pricing model, and the same
vesting schedules. Our Board of Directors approved the Alternative Option Exercise
Mechanism (AOEM), on February 12, 2006. Further, our shareholders approved the
AOEM at an extraordinary meeting of the shareholders on March 21, 2006. As a result of the
AOEM, we issued a total of 2,437,075 ordinary shares in exchange for options to acquire a
total of 3,737,369 ordinary shares. A holder of options who did not participate in the
AOEM, the original terms of his or her option agreement and the Share Option Plan
continued to apply and such options are exercisable in accordance with their terms. In
accordance with SFAS 123 R we consider the AOEM as a short-term inducement. Since the fair
market value of the Companys ordinary shares newly issued to each employee equals
the fair value of the options replaced from him/her, no incremental compensation cost was
recognized pursuant to the AOEM.
60
2001 Share Option Plan
We
established our 2001 Share Option Plan in February 2001. The plan provides for the grant
of options to our employees, directors and consultants, and those of our subsidiaries and
affiliates. Upon establishment of the plan, we reserved 75,000 ordinary shares for
issuance. On February 26, 2002, on July 12, 2002, on March 28, 2003, on July 16, 2003, on
September 2, 2003, on November 17, 2003, on April 20, 2004, on March 25, 2005, on
September 25, 2005, and on December 3, 2007 our board of directors adopted certain
resolutions with regard to the 2001 Share Option Plan that increased the number of
available options under the plan by a total of 11,175,000 so that the aggregate number of
options available under the plan is now 11,250,000. Under NASDAQ Marketplace Rules, the
increase of the number of available options under the plan pursuant to the board of
directors resolutions dated March 28, 2003, July 16, 2003 and September 2, 2003 were
subject to either our shareholders approval or an exemption granted that such
approval is not required. We applied for an exemption in connection with such increases
approved by the board of directors and such exemption has been granted by NASDAQ due to
differences between the Israeli law and NASDAQ rules. On November 17, 2003, our board of
directors approved a further increase of 500,000 options subject to either
shareholders approval or additional exemption from NASDAQ. On April 20, 2004, our
board of directors approved a further increase of 2,500,000 options subject to either
shareholders approval or additional exemption from NASDAQ. On March 25, 2005, our
board of directors approved a further increase of 2,500,000 options subject to either
shareholders approval or additional exemption from NASDAQ. On September 25, 2005,
our board of directors approved a further increase of 2,000,000 options. On December 3,
2007, our board of directors approved a further increase of 1,500,000 options. Currently,
in accordance with Israeli law, increasing the shares pool in an option plan does not
require shareholders approval.
Under this plan, as of June 23, 2009,
6,338,529 options had been exercised and 1,710,936 options are outstanding and
exercisable. Of the options that are outstanding, as of June 23, 2009, 657,029 options are
held by our directors and officers listed above under Item 6.A Directors and
Senior Management, and have a weighted average exercise price of $2.99.
Our
2001 Share Option Plan is administered by our compensation committee which makes
recommendations to our board of directors regarding the grantees of options and the terms
of the grant, including exercise prices, grant dates, vesting schedules, acceleration of
vesting and forfeiture. Under the Companies Law the allocation of options is solely within
the authority of our board of directors. Under the plan, the terms and conditions of
options are set forth in individual option agreements with the grantee.
Under
the plan, if the employment of a grantee is terminated for cause, all of his or her
options expire immediately. A grantee whose employment is terminated without cause may
exercise his or her vested options within three months of termination. If the termination
is due to the death or disability of the grantee, the options may be exercised within 18
months of the date of termination in the case of death and 12 months in the case of
disability.
In
accordance with the terms and conditions imposed by Section 102 of the Israel Income
Tax Ordinance, or the Ordinance, grantees subject to taxation by the State of Israel that
receive options under the 2001 Share Option Plan (excluding grantees who previously
received options that were incorporated upon the commencement of Amendment No. 132 of the
Income Tax ordinance, or the Tax Reform, that was approved on July 24, 2002 and became
effective on January 1, 2003, and those who are not employees or office holders and those
who are our controlling shareholders) are afforded certain tax benefits. We elected the
benefits available under the capital gains alternative. There are various
conditions that must be met in order to qualify for these benefits, including registration
of the options in the name of a trustee, or the Trustee, for each of the Israeli employees
who is granted options. Each such option, and any ordinary shares acquired upon the
exercise of such option, must be held by the Trustee for a period commencing on the date
of grant and ending no earlier than 24 months as of the end of the date in which the
option was granted and deposited in trust with the Trustee or as of the end of such tax
year (based on the time of grant). In the capital gains alternative a company may not
recognize expenses pertaining to the options for tax purposes. We also granted our Israeli
employees options pursuant to Section 102(c) of the Ordinance that are not held in trust
by a trustee, which while enabling the immediate exercising and selling of options granted
under the 2001 Share Option Plan, will be subject to the marginal tax rate up to 50% plus
payments to the National Insurance Institute and health tax on the date of the sale of the
shares or options. As of January 1, 2003, Section 3(i) of the Ordinance was partially
replaced by Section 102(c) and no longer applies to allocations of options to Israeli
employees (including directors and office holders). Section 3(i) still applies and imposes
taxes on individuals and entities subject to taxation in Israel who are not employees
(such as consultants and service providers) and to employees who are considered
controlling shareholders.
61
2001 Employee
Share
Purchase Plan
In
June 2001, we approved the establishment of an employee share purchase plan. No shares
have been issued under the plan. Under the plan, we have reserved 67,500 ordinary shares
for purchase by our employees and those of our subsidiaries who have been employed for at
least six months. Eligible employees may purchase our ordinary shares at 85% of the lesser
of the fair market value of our ordinary shares of the first day of the applicable
offering period or the first day of the applicable offering period.
On
March 22, 2009 our board of directors resolved to terminate this plan.
ITEM 7.
|
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The
following table provides summary information regarding the beneficial ownership by each
person or entity known to beneficially own more than 5% of our ordinary shares as of
December 31, 2008, or a different date, if so provided in the table below.
Beneficial
ownership of shares is determined under the rules of the Securities and Exchange
Commission All information with respect to the beneficial ownership of any of the below
shareholders has been furnished by such shareholder and, unless otherwise indicated below,
we believe that persons named in the table have sole voting and sole investment power with
respect to all of the shares shown as beneficially owned, subject to community property
laws, where applicable.
The table also includes the number of
shares underlying options and warrants that are exercisable within 60 days of December 31
of each of the year shown below in the table. Ordinary shares subject to these options and
warrants are deemed to be outstanding for the purpose of computing the ownership
percentage of the person holding these options and warrants, but are not deemed to be
outstanding for the purpose of computing the ownership percentage of any other person.
|
December 31, 2006
|
December 31, 2007
|
December 31, 2008
|
Name of
Beneficial Owner
|
Number of
Shares
Beneficially
Owned
|
% of Class
of Shares
|
Number of
Shares
Beneficially
Owned
|
% of Class
of Shares
|
Number of
Shares
Beneficially
Owned
|
% of
Class of
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oded Bashan (1)
|
|
|
|
5,523,591
|
|
|
29.84
|
%
|
|
3,906,989
|
|
|
19.9
|
%
|
|
2,643,384
|
|
|
12.2
|
%
|
Diker Management, LLC (2)
|
|
|
|
-
|
|
|
-
|
|
|
1,848,741
|
|
|
9.42
|
%
|
|
1,883,888
|
|
|
8.75
|
%
|
Trellus Management
|
|
|
Company, LLC (3)
|
|
|
|
-
|
|
|
-
|
|
|
1,299,700
|
|
|
6.62
|
%
|
|
1,768,855
|
|
|
8.21
|
%
|
Crossfields Fund I LP (4)
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,649,137
|
|
|
7.66
|
%
|
(1)
|
Includes
ordinary shares held by Mr. Bashan. Also includes ordinary shares held by
Mr. Bashans wife. Also includes options held by Mr. Bashan to purchase
ordinary shares. Mr. Bashan disclaims beneficial ownership of the share
held by his wife. Also includes ordinary shares as to which Mr. Bashan has
voting power pursuant to irrevocable proxy granted to him.
|
(2)
|
This
information is based solely on Forms 13F filed with the SEC by Diker
Management, LLC. The percentage of beneficial ownership was computed by us
based on the information included in the Forms 13F and the total number of
outstanding ordinary shares as of December 31 of each of the years shown
in the table. Based on the information provided in such Forms 13F, the
address of Diker Management LLC. is: 745 Fifth Avenue Suite 1409, New
York, NY 10151. Diker Management LLC reports shared voting power over
1,732,329shares and sole voting power over 151,559 shares as of December
31, 2008.
|
62
(3)
|
This information is based solely on
Forms 13G filed with the SEC by Trellus Management Company, LLC. The percentage of
beneficial ownership was computed by us based on the information included in the Forms 13G
and the total number of outstanding ordinary shares as of December 31 of each of the years
shown in the table. Based on the information provided in such Forms 13G, the address of
Terllus Fund Management Company, LLC. is: 350 Madison Avenue, 9
th
Floor New
York, NY 10017. Terllus Fund Management Company, LLC reports shared voting power over
1,768,855 shares as of December 31, 2008.
|
(4)
|
This
information is as of December 31, 2008 and is based solely on a Form 13G
filed with the SEC on February 12, 2009, by Crossfields Fund I LP. Based
on the information provided in such Form 13G, the address of Crossfields
Fund I LP is: 800 Third Avenue, Suite 1701, New York, NY 10022.
Crossfields Fund I LP reports shared voting power over 1,649,137 shares.
|
Major Shareholders
Voting Rights
Our
major shareholders do not have different voting rights.
Record Holders
Based on a review of the information
provided to us by our transfer agent, as of June 23, 2009, there were 79 holders of record
of our ordinary shares, of which 21 record holders holding approximately 1% of our
ordinary shares had registered addresses in the United States. These numbers are not
representative of the number of beneficial holders of our shares nor is it representative
of where such beneficial holders reside since many of these ordinary shares were held of
record by brokers or other nominees (including one U.S. nominee company, CEDE & Co.,
which held approximately 90% of our outstanding ordinary shares as of said date).
B.
|
RELATED
PARTY TRANSACTIONS
|
Our
policy is to enter into transactions with related parties on terms that are on the whole
no less favorable to us than those that would be available from unaffiliated parties.
Based on our experience in the business sectors in which we operate and the terms of our
transactions with unaffiliated third parties, we believe that all of the transactions
described below met this policy standard at the time they occurred.
Agreement with HolyTech
Ltd.
In
January 1996, we entered into an agreement with HolyTech Ltd., a company owned by Varda
Bashan, Ora Gilboa and certain other of our shareholders, which formalized an arrangement
that had existed since 1992. Varda Bashan is the spouse of Oded Bashan, our co-founder and
chairman of our board of directors, and Ora Gilboa is the spouse of Ronnie Gilboa, our
co-founder and a director. Under the agreement, HolyTech provides us with management and
engineering services as needed. Mrs. Bashan provides administration services and a number
of other shareholders of HolyTech, who are also our employees, provide engineering and
warehouse services. HolyTech has no activities other than the provision of these services
to us. The cost of these services is intended to equal the cost of these services if
performed by unrelated parties. The aggregate consideration for the services that HolyTech
provided to us was $68,000 in 2006 , $73,000 in 2007 and $109,000 in 2008.
Agreements with
Directors and Officers
We
have entered into employment agreements with all of our officers. In addition, we have
granted options to purchase our ordinary shares to our officers and directors. On January
31, 2003 the shareholders of OTI approved a bonus plan for our senior management and on
July 11, 2003 our general meeting of shareholders approved a plan to issue options to our
non-executive directors. See also Item 6.B. under Executive Compensation.
Agreement Relating to
Insurance Services
We
have been receiving insurance agency services from a family member of one of our officers.
On August 22, 2003, our board of directors ratified and approved such engagement in
accordance with the applicable Israeli Companies Law provisions.
63
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
ITEM 8.
|
|
FINANCIAL INFORMATION
|
A.
|
CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
|
The
financial statements required by this item are found in Item 18 of this annual report,
beginning on page F-1.
Legal Proceedings
We
or our subsidiaries are a named defendant in the following litigations:
On May
20, 2008 a plaintiff filed a complaint against us and one of our subsidiaries, in the US
District Court for the District of Delaware, alleging infringement of two US patents and
requesting a declaration that we infringe these patents, and therefore asking for an
injunction, damages and attorneys fees. We filed our response on July 25, 2008,
denying infringement and identifying certain defenses. Further, we brought a counterclaim
against the plaintiff for infringement of a U.S. patent of us, seeking a declaration that
the plaintiff is infringing our patent, and therefore asking for an injunction, damages
and attorneys fees. At this stage, based on legal advice, we are unable to estimate
the chances of the claim and, therefore, no provision has been made in the financial
statements in respect of this claim.
On September 3, 2003, Edi Wuhl, a
former employee of us, filed a suit against us in the District Labor Court in Nazareth in
the amount of NIS 3,953,000 (approximately $1,040,000) claiming that we breached the
employment agreement with him, and that we owe him commission payment for certain sales.
On January 10, 2008, the district court resolved that Mr. Wuhl is entitled to
approximately $60,000, and therefore, during 2008 the Company paid this amount and
recorded it in the financial statements. On April 28, 2008 the plaintiff submitted an
appeal to the National Labor Court in Jerusalem. A hearing in the appeal was conducted in
June 2009. At this stage, based on legal advice, we are unable to estimate the chances of
the appeal and, therefore, no provision has been made in the financial statements in
respect of the appeal.
In
September 2007, a plaintiff
filed against one of our subsidiaries, a motion to
approve a class action at the Tel Aviv District Court, at the sum of NIS 67.1 million
($17.6 million). The law suit was based on claims regarding the performance of certain
device product of the subsidiary. Based on the courts recommendation at the
preliminary hearing, on January 21, 2009 the plaintiff
had filed an application to
remove the motion, and the court had accepted this application and the motion was removed.
In
October 2007, a plaintiff filed against one of our subsidiaries, and other third parties a
motion to approve a class action at the Tel Aviv District Court, at the sum of
approximately NIS 2 million ($526,000). According to the plaintiff, the subsidiary and the
other defendants charged via the subsidiarys product, an amount per hour which
exceeds the amount that they are authorize to charge. On January 15, 2008, our subsidiary
submitted to court a notice in which it joins to the other defendants application to
dismiss the motion. On a preliminary hearing conducted on September 14, 2008, the court
accepted such defendants arguments that the motion should be dismissed. In addition,
the court instructed the parties to submit their summaries only with respect to the
consideration to be paid to the plaintiff and his legal counsel. At this stage, based on
legal advice, we are unable to estimate the chances of the motion and, therefore, no
provision has been made in the financial statements in respect of this motion.
On
June 16, 2008, a plaintiff (Plaintiff) filed a patent infringement suit in
Shenzhen Intermediate Court, Shenzhen, China (Lawsuit), alleging that one of
our subsidiaries infringes a Chinese patent assigned to the Plaintiff
(Patent). The Plaintiff requested an injunction, a relief of RMB 1 million
(approximately $146,000) for its damages, the expenses incurred by it in relation to the
efforts to cease the infringement and all court fees of the case. On May 5, 2009, the
Shenzhen Intermediate Court stayed the Lawsuit until a litigation between the Plaintiff
and a third party relating to the assignment of the Patent rights pending in the Beijing
1
st
Intermediate Court is resolved. At this stage, based on legal advice, we
are unable to estimate the chances of the Lawsuit and, therefore, no provision has been
made in the financial statements in respect of the Lawsuit.
64
Dividend Policy
We
have never declared or paid any cash dividends on our ordinary shares or other securities.
We currently
expect to retain all future earnings, if any, to finance the development of our business,
and do not anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to dividend policy will be made by our board of directors and will
depend on a number of factors, including future earnings, capital requirements, financial
condition and future prospects and other factors the board of directors may deem relevant.
In the event of a distribution of a cash dividend out of tax exempt income, we will be
liable for corporate tax at a rate of 25% in respect of the amount distributed.
Though
we never declared or paid a cash dividend, in November 2008 our board of directors has
authorized the repurchase of our shares in a total aggregate amount not to exceed $5
million conditioned approval by court, as required under Israeli law. In May 2009 the
court approved a repurchase program in a total amount of up to $2 million.
Except
as otherwise disclosed in this annual report, no significant change has occurred since
December 31, 2008.
ITEM 9.
|
|
THE OFFER AND LISTING
|
A.
|
OFFER
AND LISTING DETAILS
|
Our
ordinary shares were quoted on the Neuer Market of the Frankfurt Stock Exchange since
August 31, 1999 until January 31, 2003. Since January 31, 2003, the shares have been
listed on the new Prime Standard Segment of the Frankfurt Stock Exchange. Following the
approval of our general shareholders meeting, our board of directors applied for the
delisting of our shares from the Frankfurt Stock Exchange, which has been approved. The
last day of trading of our ordinary shares on Frankfurt Stock Exchange was December 20,
2005. Our shares were quoted on the NASDAQ SmallCap Market from November 12, 2002 until
December 20, 2004. On December 16, 2004, we were approved for listing on the NASDAQ Global
Market, then known as the NASDAQ National Market, and our shares commenced trading on
NASDAQ Global Market on December 20, 2004.
The
following table shows, for the periods indicated, the high and low closing prices of our
ordinary shares in euros giving effect to the reverse split as reported on the Neuer
Market of the Frankfurt Stock Exchange. The closing prices that are indicated below
commencing January 31, 2003 were as reported in the Prime Standard Market of the Frankfurt
Stock Exchange. It also shows, for the periods indicated, the high and low closing prices
of our ordinary shares as expressed in U.S. dollars based on the noon buying rate in New
York City for cable transfers in foreign currencies, as certified for customs purposes by
the Federal Reserve Bank of New York on the relevant dates. See the discussion below for
the exchange rates applicable during the periods set forth below. The following table also
shows, for the periods indicated since January 2004 until December 2004, the high and low
closing prices of our ordinary shares in U.S. dollars as reported on NASDAQ SmallCap, and
for the periods indicated since December 2004, the high and low closing prices of our
ordinary shares in U.S. dollars as reported on NASDAQ Global Market.
65
|
Frankfurt Stock
Exchange (1)(3)
per
Share
|
Frankfurt Stock
Exchange (1)(3)
per
Share $
|
NASDAQ Global
Market (2)
per
Share $
|
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
11.5
|
|
|
5.3
|
|
|
14.5
|
|
|
6.5
|
|
|
14.74
|
|
|
6.46
|
|
2005
|
|
|
|
13.0
|
|
|
8
|
|
|
16.1
|
|
|
10.4
|
|
|
13.80
|
|
|
10.3
|
|
2006
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17.23
|
|
|
6.16
|
|
2007
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8.43
|
|
|
3.60
|
|
2008
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.57
|
|
|
1.07
|
|
|
|
|
2007
|
|
|
|
|
|
First quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7.36
|
|
|
6.05
|
|
Second quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8.43
|
|
|
6.25
|
|
Third quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6.37
|
|
|
4.74
|
|
Fourth quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.91
|
|
|
3.60
|
|
2008
|
|
|
|
|
|
First quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.57
|
|
|
2.65
|
|
Second quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.06
|
|
|
2.31
|
|
Third quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.10
|
|
|
2.10
|
|
Fourth quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2.70
|
|
|
1.07
|
|
2009
|
|
|
|
|
|
First quarter
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.94
|
|
|
0.96
|
|
|
|
|
Month
|
|
|
|
|
|
December 2008
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.70
|
|
|
1.07
|
|
January 2009
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.94
|
|
|
1.24
|
|
February 2009
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.90
|
|
|
1.36
|
|
March 2009
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.26
|
|
|
0.96
|
|
April 2009
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.25
|
|
|
0.88
|
|
May 2009
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.69
|
|
|
1.30
|
|
June 2009 (until June 23)
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.49
|
|
|
1.25
|
|
(1)
|
Our
ordinary shares were quoted on the Neuer Market of the Frankfurt Stock
Exchange from August 31, 1999 until January 31, 2003, after which, until
December 20, 2005, the shares were listed on the new Prime Standard
Segment of the Frankfurt Stock Exchange. To the extent required, shares
prices are adjusted to give effect to our 10-for-1 reverse share split
effective as of June 17, 2002.
|
(2)
|
Our
ordinary shares were quoted on the NASDAQ SmallCap Market from November 12,
2002 until December 20, 2004. On December 16, 2004, we were approved for
listing on the NASDAQ Global Market, and our ordinary shares commenced
trading on the Global Market on December 20, 2004.
|
(3)
|
Until
December 20, 2005
|
Not
applicable.
Our
ordinary shares are traded publicly on the NASDAQ Global Market under the symbol
OTIV since December 20, 2004, and were traded on the NASDAQ Small Cap Market
from November 12, 2002 until December 20, 2004. Until December 20, 2005, our ordinary
shares were traded publicly on the Prime Standard Market of the Frankfurt Stock Exchange
under the symbol OT5.
Not
applicable.
Not
applicable.
66
Not
applicable.
ITEM 10.
|
|
ADDITIONAL INFORMATION
|
Not
applicable.
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
We
were incorporated under the laws of the State of Israel on February 15, 1990, under the
name of De-Bug Innovations Ltd., with unlimited duration. We are registered with the
Israeli registrar of companies in Jerusalem. Our founders were Oded Bashan and Ronnie
Gilboa and our registration number is 52-004286-2. Our name was changed to On Track
Innovations on July 8, 1991. Our objectives under our memorandum of association are to
engage in any activity related to innovation and inventions in the fields of science and
technology.
The
following is a summary of the material provisions of our Articles of Association and
related provisions of Israeli corporate law. This summary is qualified in its entirety by
reference to the complete text of the Articles of Association; see Item
4. Information on the Company. General and Item
19. Exhibits.
Description of Shares
Our
authorized share capital consists of 50,000,000 ordinary shares, NIS 0.1 nominal value.
The
following table sets out changes in our authorized share capital that occurred during the
last four years:
Date
|
Nature of Action
|
State of Authorized Share Capital After the
Action
|
|
|
|
|
|
|
|
|
|
|
|
|
April 6, 2004
|
Increase in share capital by additional 20,000,000 shares
|
NIS 3,000,000 divided into 30,000,000 ordinary shares of nominal value NIS 0.1.
|
|
|
|
|
August 24, 2006
|
Increase in share capital by additional 20,000,000 shares
|
NIS 5,000,000 divided into 50,000,000 ordinary shares of nominal value NIS 0.1.
|
|
|
|
Description of Ordinary
Shares
As
of June 23, 2009, our authorized share capital consists of 50,000,000 ordinary shares,
nominal value of NIS 0.1 per share, of which 22,860,102 were issued and outstanding.
The
ownership or voting of ordinary shares by non-residents of Israel is not restricted in any
way by our articles of association or the laws of the State of Israel, except that
nationals of countries which are in a state of war with Israel might not be recognized as
owners of ordinary shares.
Dividend and Liquidation
Rights
We
are permitted to declare a dividend to be paid to the holders of ordinary shares, but we
have never declared a dividend and we do not anticipate any dividend declaration in the
foreseeable future. Dividends may only be paid out of our profits and other surplus funds,
as defined in the Companies Law, as of the end of the most recent fiscal year or as
accrued over a period of two years, whichever is higher, provided that there is no
reasonable concern that payment of a dividend will prevent us from satisfying our existing
and foreseeable obligations as they become due. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the holders of
ordinary shares in proportion to the nominal value of their holdings. This right may be
affected by the grant of preferential dividend or distribution rights to the holders of a
class of shares with preferential rights that may be authorized in the future by our
shareholders. Under the Companies Law, the declaration of a dividend does not require the
approval of the shareholders of a company unless the companys articles of
association require otherwise. Our articles of association provide that our board of
directors may declare and pay dividends without the approval of our shareholders.
67
Preemptive Rights
Under
Israeli law, shareholders in public companies such as ours do not have preemptive rights.
This
means that our shareholders do not have the legal right to purchase shares in a new issue
before they are offered to third parties. As a result, our shareholders could experience
dilution of their ownership interest if we decide to raise additional funds by issuing
more shares and these shares are purchased by third parties.
Voting,
Shareholders Meetings and Resolutions
Holders
of our ordinary shares have, for each ordinary share held, one vote on all matters
submitted to a vote of shareholders. These voting rights may be affected by the grant of
any special voting rights to the holders of a class of shares with preferential rights
that may be authorized in the future by our shareholders. The quorum required for a
general meeting of shareholders consists of at least two shareholders present, in person
or by proxy, who hold or represent together at least 25% of our issued and outstanding
ordinary shares, provided, however that as long as we are listed on NASDAQ, the quorum at
a general meeting shall be two members present in person or by proxy holding at least
33-1/3% of our issued and outstanding ordinary shares or such higher percentage as NASDAQ
may impose on listed companies from time to time so long as such higher percentage is in
effect. A meeting adjourned for lack of a quorum is generally adjourned to the same day in
the following week at the same time and place. If a quorum is not present within half an
hour following the time appointed for the reconvened meeting, the shareholders then
present, in person or by proxy, shall constitute a quorum.
Under
the Companies Law, unless otherwise provided in the articles of association or by
applicable law, shareholders resolutions require the approval of holders of a simple
majority of our ordinary shares voting, in person or by proxy on the matter. Unless a
higher percentage for taking an action is required under our articles of association, a
shareholders resolution to amend our articles requires the approval of a simple
majority of our shareholders present in person or by proxy.
Under
the Companies Law, a shareholder has certain duties of good faith and fairness towards the
company.
Election of Directors
Our
ordinary shares do not have cumulative voting rights for the election of directors.
Rather, under our articles of association our directors (other than external directors)
are elected at a shareholders meeting by a simple majority of our ordinary shares. As a
result, the holders of our ordinary shares that represent more than 50% of the voting
power represented at a shareholder meeting have the power to elect any or all of our
directors whose positions are being filled at that meeting, subject to the special
approval requirements for external directors. For more information see description under
Item 6.C Board Practices Election of Directors; Appointment of
Officers and Item 6.C Board Practices External Directors.
Modification of Class
Rights
The
rights attached to any class, such as voting, liquidation and dividend rights, may be
amended by written consent of holders of three-fourth of the issued shares of that class,
or by adoption of a resolution by a simple majority of the shares of that class
represented at a separate class meeting.
Transfer of Shares and
Notices
Fully
paid ordinary shares are issued in registered form and may be freely transferred under our
articles of association unless the transfer is restricted or prohibited by Israeli law,
U.S. securities laws or the rules of a stock exchange on which the shares are traded.
Under the Companies Law and applicable regulations, unless otherwise provided in the
articles of association or by applicable law, shareholders of record are entitled to
receive 35 or 21 days prior notice of meetings of shareholders, based on the matters that
are on the agenda. Subject to the foregoing provisions of the Companies Law and applicable
regulations, our articles of association provide that each shareholder of record is
entitled to receive at least 14 days prior notice of any annual or extraordinary
shareholders meeting and at least 21 days prior notice of any shareholders
meeting at which a special resolution is proposed. Under new regulations, a longer
advanced notice of at least 35 days is required in certain cases.
68
Our
transfer agent and registrar for our ordinary shares is Continental Stock Transfer &
Trust Company. Its address is 17 Battery Place, New York, New York 10004, and its
telephone number at this location is 212-509-4000.
Special Notification
Duties
Our
articles of association provide that any shareholder whose shareholding increases above
1%, 5%, 10%, 15%, 20%, 25%, 30%, and so on, of our then outstanding share capital, is
obliged to notify us in writing of such change within ten days. A shareholder who fails to
comply with this requirement will be denied his or her voting rights, in respect of shares
in excess of the particular threshold the crossing of which was not reported, for a six-
to 24-month period to be determined in light of relevant circumstances by the board of
directors in its sole discretion. Shareholders complying with the filing requirements of
Sections 13(d) and 13(g) of the Exchange Act and the regulations promulgated thereunder
will not be subject to this requirement.
Anti-Takeover Provisions
under Israeli Law
Tender
Offer
. A person wishing to acquire shares of a publicly traded Israeli company and who
would as a result hold over 90% of the companys issued and outstanding share capital
is required by the Companies Law to make a tender offer to all of the companys
shareholders for the purchase of all of the issued and outstanding shares of the company.
If the shareholders who refuse to sell their shares hold less than 5% of the issued share
capital of the company, all of the shares held by such shareholders that the acquirer
offered to purchase will be transferred to the acquirer by operation of law. However, the
shareholders may petition the court to alter the consideration for the acquisition. If the
dissenting shareholders hold more than 5% of the issued and outstanding share capital of
the company, the acquirer may not acquire additional shares of the company from
shareholders who accepted the tender offer if following such acquisition the acquirer
would then own over 90% of the companys issued and outstanding share capital.
The
Companies Law provides that an acquisition of shares of a public company must be made by
means of a special tender offer if as a result of the acquisition the purchaser would
become a 25% or greater shareholder of the company. This rule does not apply if there is
already another 25% shareholder of the company. As of the date of this annual report, we
are not aware of any single shareholder which holds 25% or more of our shares. Similarly,
the Companies Law provides that an acquisition of shares in a public company must be made
by means of a special tender offer if as a result of the acquisition the purchaser would
become a 45% or greater shareholder of the company, if there is no 50% or greater
shareholder of the company. The special tender offer must be extended to all shareholders
but the offeror is not required to purchase shares representing more than 5% of the voting
power attached to the companys outstanding shares, regardless of how many shares are
tendered by shareholders. The special tender offer may be consummated only if (i) at least
5% of the voting power attached to 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.
Merger
.
The Companies Law permits merger transactions if approved by each partys
board of directors and the majority of each partys shares voted on the
proposed merger at a shareholders meeting called on at least 21 days
prior notice. Our articles of association provide that merger transactions may
be approved by a simple majority of the shareholders present, in person or by
proxy, at a general meeting of our shareholders. Under the Companies Law, in
determining whether the required majority has approved the merger, shares held
by the other party to the merger, any person holding at least 25% of the
outstanding voting shares or holding at least 25% of the means of appointing
directors of the other party to the merger, or anyone acting on their behalf,
including their relatives or companies controlled by them, are excluded from
the vote. If a majority of shareholders of one of the parties do not approve
the transaction because the votes of certain shareholders are excluded from the
vote, a court may still approve the merger upon the request of holders of at
least 25% of the voting rights of a company, if the court holds that the merger
is fair and reasonable, taking into account the value of the parties to the
merger and the consideration offered to the shareholders. Upon the request of a
creditor of either party to the proposed merger, the court may delay or prevent
the merger if it concludes that there exists a reasonable concern that, as a
result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger. In addition, a merger may not
be executed unless at least 50 days have passed from the time that a proposal
for approval of the merger has been filed with the Israeli Registrar of
Companies.
69
Tax
Law
. Israeli tax law treats specified acquisitions, including a share-for-share swap
between an Israeli company and a foreign company, less favorably than does United States
tax law. For example, Israeli tax law may subject a shareholder who exchanges ordinary
shares in an Israeli company for shares in a foreign company to immediate taxation.
Other Anti-Takeover
Provisions
We
may also be subject to the tender offer provisions of the Exchange Act, as amended.
Anti-Takeover Actions
Taken by the Company
In
January 2009, our board of directors approved the adoption of a Shareholders Rights Plan,
according to which each of our ordinary shares shall give its holder a right which will
become exercisable only after a person or a group becomes an Acquiring Person,
by obtaining beneficial ownership of, or by commencing a tender or exchange offer for, 15%
or more of the our issued and outstanding ordinary shares (our board of directors may
reduce this percentage to not less than 10%), unless our board of directors approves such
Acquiring Person or redeems the rights. Each right, once becomes exercisable,
will generally entitle its holder, other than the Acquiring Person, to
purchase from us either one or three ordinary shares (depending on our registered capital
on the date of exercising the rights), at par value. For more information about the said
rights see description under Item 14 Material Modifications to the Rights of
Security Holders and Use of Proceeds.
Exculpation,
Indemnification and Insurance of Office Holders
Under
the Companies Law, an Israeli company may only exculpate an office holder in advance, in
whole or in part, for breach of duty of care and only if a provision authorizing such
exculpation is included in its articles of association. Our articles of association
include such a provision. A company may not exculpate an office holder in advance from his
liability towards the company which is caused by a breach of duty of care in case of
distribution (as defined in the Companies Law). A company may not exculpate an office
holder for breach of duty of loyalty. However, the company may approve an act performed in
breach of the duty of loyalty of an office holder provided that the office holder acted in
good faith, the act or its approval does not harm the company, and the office holder
discloses the nature of his or her personal interest in the act and all material facts and
documents a reasonable time before discussion of the approval.
A
company may indemnify an office holder in respect of certain liabilities either in advance
of an event or following an event provided a provision authorizing such indemnification is
inserted in its articles of association. Advance indemnification of an office holder must
be limited to the following:
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a
financial liability imposed on him in favor of another person pursuant to a judgment,
settlement or arbitrators award approved by court provided that the indemnification
shall be limited to events which are determined by the board of directors, are
foreseeable in light of the companys activities at the time when the obligation for
indemnification is granted, and to amounts and standards which are determined by the
board of directors as reasonable in such event, and provided that the obligation for
indemnification will specify the said events and amounts or standards;
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reasonable
litigation expenses, including attorneys fees, incurred by the office holder or
imposed by a court in proceedings instituted against him by the company, on its behalf or
by a third party, in connection with criminal proceedings in which the officer holder was
acquitted or as a result of a conviction for a crime that does not require proof of
criminal intent; and
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reasonable
litigation expenses, including attorneys fees, incurred by the office holder due to
investigation or proceedings instituted against the office holder by an authority
authorized to conduct such investigation or proceedings and ended without filing an
indictment against him and without imposing monetary liability as an alternative to
criminal proceedings or ended without filing an indictment against him but in imposing
monetary liability as an alternative to criminal proceedings for a crime that does not
require proof of criminal intent.
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70
A
company may insure an office holder against the following liabilities incurred for acts
performed as an office holder:
|
A
breach of duty of loyalty to the company, to the extent that the office holder acted in
good faith and had a reasonable basis to believe that the act would not prejudice the
company;
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A
breach of duty of care to the company or to a third party; and
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A
financial liability imposed on the office holder in favor of a third party.
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An Israeli company may not indemnify
or insure an office holder against any of the following:
|
A
breach of duty of loyalty, except to the extent that the office holder acted in good
faith and had a reasonable basis to believe that the act would not prejudice the company;
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A
breach of duty of care committed intentionally or recklessly except that such
recklessness is made solely negligently;
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An
act or omission committed with intent to derive illegal personal benefit; or
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A
fine levied against the office holder.
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Under
the Companies Law, indemnification and insurance of office holders must be approved by our
audit committee and our board of directors and, in specified circumstances, by our
shareholders.
Our
articles of association allow us to indemnify and insure our office holders to the fullest
extent permitted by the Companies Law.
In
connection with such indemnification, we have undertaken to indemnify our directors and
officers for certain events listed in the indemnification letters given to them. The
aggregate amount payable to the directors and officers who may have been or will be given
such indemnification letters is limited to $20 million per case and per each director or
officer.
Our
office holders are currently covered by a directors and officers liability insurance
policy with an aggregate claim limit of $5 million. As of the date of this annual report,
no claims for directors and officers liability insurance have been filed under this
policy.
Our
U.S. subsidiary has also entered into indemnification agreements with certain of its key
employees. These agreements provide, independent of the indemnification these individuals
are entitled to by law and under the provisions of the subsidiarys charter,
indemnification for certain acts while employed by the subsidiary. These indemnification
agreements contain exclusions, such as limiting indemnification that would be unlawful or
that is covered by other liability insurance. Moreover, employees are not indemnified
against liability to the extent that the employee gained a personal profit to which he or
she is not legally entitled, including proceeds obtained from the illegal trading of our
equity securities. The performance of these agreements is guaranteed by us as parent of
the U.S. subsidiary, to the extent permitted by Israeli law.
The
Rights Agreement
On
January 12, 2009, we entered into a Rights Agreement, with Continental Stock Transfer
& Trust Company, which provides for the implementation of the Shareholders Rights Plan
authorized by our board of directors. For more information about the Shareholders Rights
Plan see description under Item 14 Material Modifications to the Rights of
Security Holders and Use of Proceeds.
The
2005 financing
On
November 1, 2005 we completed an approximately $22.2 million private placement, or the
Private Placement, of new equity financing with institutional investors from the US,
Switzerland and England. The transaction involved the sale of 1,828,026 units, of which
(i) 1,544,568 consist of one ordinary share and a warrant to purchase three-fifths (3/5)
of an ordinary share and (ii) 283,458 consist of one ordinary share and a warrant to
purchase one-half (1/2) of an ordinary share. The purchase price for each of the 1,828,026
units was $12.15 per unit, which equaled the average closing price of our ordinary shares
on the NASDAQ Global Market during the last five trading days before pricing.
71
In
addition to the issuance of warrants to the institutional investors, the Company issued an
aggregate of 127,961 warrants to the placement agent for the private placement of the
units and to certain other persons who facilitated the offering.
The
1,196,431 warrants, which are exercisable since May 1, 2006, are for the purchase of an
aggregate of up to 1,196,431 ordinary shares, they have terms of five years and an
exercise price of $14.58 per share, and may be redeemed by OTI after two years if the
market price of the underlying ordinary shares reaches $26.25 and certain other conditions
are met.
Vuance
(formerly SuperCom) Transaction
On
December 31, 2006, pursuant to an asset purchase agreement (the Agreement)
dated as of November 7, 2006 between us and Vuance Ltd., an Israeli corporation
(Vuance), we completed the acquisition of the main assets of Vuance ,
including the International Project Solution (IPS) division of Vuance . Vuance
is an Israeli based company, which through its IPS division develops and provides a
wide-range of complementary technologies and solutions for the smart card market. The
acquisition provides us with accesses to new growing markets and complementary security
technologies that safeguard against counterfeit and forgery.
The
aggregate purchase price for the acquisition was paid through the issuance of an aggregate
of 2,827,200 of the Companys ordinary shares. The 2,827,200 ordinary shares issued
to Vuance were subject to a lock-up agreement, where one-seventh of the shares (403,885
ordinary shares) were released from the lock-up restrictions every three months beginning
on the closing date, December 31, 2006, for an aggregate period of eighteen months. Vuance
executed an irrevocable proxy appointing our Chairman, on behalf of the board of
directors, or a person the board of directors will instruct, to vote the 2,827,200
ordinary shares issued to Vuance in connection with the transaction.
The
parties also entered into a service and supply agreement giving Vuance a license to use
applicable Vuance intellectual property transferred to the Company for the duration of
certain existing contracts and projects.
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 sales 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.
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.
Israeli Taxation,
Foreign Exchange Regulation and Investment Programs
THE FOLLOWING IS A SUMMARY OF THE
MATERIAL ASPECTS OF THE CURRENT TAX STRUCTURE APPLICABLE TO COMPANIES IN ISRAEL AND THEIR
EFFECT ON US. THE SUMMARY ALSO CONTAINS A DISCUSSION OF ISRAELI TAX CONSEQUENCES TO
PERSONS PURCHASING OUR ORDINARY SHARES NOT BY WAY OF ISSUANCE OF BONUS SHARES AND ISRAEL
GOVERNMENT PROGRAMS BENEFITING US. PORTIONS OF THIS DISCUSSION ARE BASED ON TAX
LEGISLATION THAT HAS NOT YET BEEN SUBJECT TO JUDICIAL OR ADMINISTRATIVE INTERPRETATION,
AND WE CANNOT ASSURE YOU THAT THE VIEWS EXPRESSED IN THIS DISCUSSION WILL BE ACCEPTED BY
THE TAX AUTHORITIES IN QUESTION. THE DISCUSSION SHOULD NOT BE RELIED ON AS LEGAL OR
PROFESSIONAL TAX ADVICE AND IS NOT EXHAUSTIVE OF ALL POSSIBLE TAX CONSIDERATIONS.
72
WE URGE INVESTORS IN OUR ORDINARY
SHARES TO CONSULT THEIR OWN TAX ADVISORS AS TO THE 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.
Tax Reform
Effective
as of January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to the
reform, resident companies are subject to Israeli tax on income accrued or derived in
Israel or abroad. In addition, the concept of controlled foreign corporation
was introduced according to which an Israeli company or an individual may become subject
to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiarys
primary source of income is passive income (such as interest, dividends, linkage
differences royalties, rental income or capital gains). The tax reform also substantially
changed the system of taxation of capital gains.
Taxation of companies
General
Corporate Tax Structure.
Israeli companies are subject to corporate tax at the rate of
34% of taxable income in the 2005 tax year, 31% in the 2006 tax year, 29% in the 2007 tax
year, 27% in the 2008 tax year, 26% in the 2009 tax year and 25% in the 2010 tax year and
thereafter. However, the effective tax rate payable by a company which derives income from
certain approved enterprises may be considerably lower, as discussed further below.
Tax
Benefits Under the Law for the Encouragement of Capital Investments, 1959
. The Law for
the Encouragement of Capital Investment, 1959, commonly referred to as the Investment Law,
provides that a proposed capital investment in eligible facilities may, upon application
to the Investment Center of the Ministry of Industry and Trade of the State 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, e.g., the
equipment to be purchased and utilized under the program. The tax benefits derived from
any certificate of approval relate only to taxable income attributable to the specific
approved enterprise. If a company has more than one approval or only a portion of its
capital investments is approved, its effective tax rate is the result of a weighted
combination of the applicable rates. Income derived from activity which is not integral to
the activity of the enterprise should not be divided between the different approved
enterprises and should not enjoy tax benefits.
Taxable
income of a company derived from an approved enterprise is subject to a reduced corporate
tax rate of 25%. The tax rate is subject to additional reductions depending on the
percentage of foreign investment in the relevant company until the earlier of:
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Seven
consecutive years, or ten years in the case of a foreign investors company as
defined below, starting in the year in which the approved enterprise first generates
taxable income;
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Twelve
years from the start of production; or
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Fourteen
years from the date of approval of the approved enterprise status.
A
company owning an approved enterprise may elect to forego entitlement to grants otherwise
available as a result of an approved enterprise in return for an alternative package of
benefits. Under the alternative package of benefits, 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 the company will be
eligible for a reduced tax rate for the remainder of the benefits period.
We
elected to adopt the Alternative Benefits Program status for our investment
programs. A company that has elected to receive the alternative package of benefits and
that subsequently pays a dividend out of income derived from the approved enterprise
during the tax exemption period will be subject to tax in respect of the amount
distributed, including any company tax on these amounts, at the rate which would have been
applicable had it not elected the alternative package of benefits, generally 10%-25%,
depending on the percentage of the investment in the companys shares held by foreign
shareholders. The dividend recipient is taxed at the reduced rate applicable to dividends
from approved enterprises, which is 15%, if the dividend is distributed during the tax
exemption period or within 12 years after this period. The company must withhold this tax
at source. If classified as a foreign investors company there is no limit on the
period during which a dividend may be distributed from approved enterprise profits and it
should always enjoy the benefits of the law.
73
Subject
to the provisions of the law concerning income under the alternative package of benefits,
all dividends are considered to be attributable to the entire enterprise and their
effective tax rate is the result of a weighted combination of the various applicable tax
rates. Under the Investment Law, a company that has elected the alternative package of
benefits is not obliged to distribute exempt retained profits, and may generally decide
from which years profits to declare dividends. We currently intend to reinvest any
amount derived from our approved enterprise programs and not to distribute the income as a
dividend.
A
company that has an approved enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign investors company is a
company whose investees, comprising non-Israeli residents which: (a) directly or
indirectly hold more than 25% of the companys share capital and combined share and
loan capital; and (b) requires a minimal investment of NIS 5 million by non-Israeli
residents, which include the purchase of shares of a company from another shareholder,
provided that the companys outstanding and paid up share capital exceeds NIS 5
million. A company that qualifies as a foreign investors company and has an approved
enterprise program is eligible for tax benefits for a ten-year benefit period. The company
tax rate applicable to income earned from approved enterprise programs in the benefit
period (following the period, if any, of no tax) by a company meeting these qualifications
is as follows:
For a company with foreign investment of
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Tax Rate
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Over 25% but less than 49%
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|
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25
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%
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49% or more but less than 74%
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|
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20
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%
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74% or more but less than 90%
|
|
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15
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%
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90% or more
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|
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10
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%
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The
Investment Center bases its decision as to whether or not to approve an application on the
criteria set forth in the Investment Law and regulations, the then prevailing policy of
the Investment Center, and the specific objectives and financial criteria of the
applicant. Accordingly, there can be no assurance that any such applications will be
approved. In addition, the benefits available to an approved enterprise are conditional
upon the fulfillment of conditions stipulated in the Investment Law and its regulations
and upon the criteria in the specific certificate of approval, as described above. In the
event that a company does not meet these conditions, it would be required to refund the
amount of tax benefits, with the addition of consumer price index linkage adjustment and
interest.
The
Investment Center has granted approved enterprise status to three of our investment
programs under the alternative benefits option. Taxable income derived from these programs
is tax exempt for a period of ten years beginning with the year in which we first generate
taxable income. We have derived, and expect to continue to derive, a substantial portion
of our revenues from our approved enterprise programs at our manufacturing facility. The
Investment Law also provides that an approved enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program. There is no certainty that the Israeli government will continue to provide the
same or similar tax benefits in the future.
On
March 30, 2005, the Knesset approved a reform of the Encouragement of Capital Investments
Law 1959. The primary changes are as follows:
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Companies
that meet the criteria of the Alternate Path of tax benefits will receive those benefits
without prior approval. In addition there will be no requirement to file reports with the
Investment Center. Audit will take place via the Income Tax Authorities as part of the
tax audits. Request for pre-ruling is possible.
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Tax
benefits of the Alternate Path include lower tax rates or no tax depending on area and
the path chosen, lower tax rates on dividends and accelerated depreciation.
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In
order to receive benefits in the Grant Path or the Alternate Path, the Industrial
Enterprise must contribute to the economic independence of the Countrys economy in
one of the following ways:
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74
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1.
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The
enterprises main activity is in the area of biotechnology or
nanotechnology as approved by the Head of the Administration of Industrial
Research and Development, prior to the approval of the aforementioned
plan.
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|
2.
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The
enterprises revenues during the tax year from the plants sales
in a certain market do not exceed 75% of total revenues from the plants
total sales during that tax year. A market is defined as a
distinct country or customs territory.
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3.
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25%
or more of the enterprises total revenues from the plants sales
during the tax year are from sales to a certain market that numbers at
least 12 million residents.
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Upon
the establishment of an enterprise, an investment of at least NIS 300 thousand in
production machinery and equipment within three years is required.
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For
an expansion, a company is required to invest within three years the greater of NIS 300
thousand in production machinery and equipment or a certain percentage of its existing
production machinery and equipment.
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Grants under the Law for the
Encouragement of Industrial Research and Development, 1984.
Under
the law for the Encouragement of Industrial Research and Development, 1984, commonly
referred to as the Research Law, research and development programs which meet specified
criteria and are approved by a governmental committee of the Office of the Chief Scientist
are eligible for grants of up to 50% of the projects expenditure, as determined by
the research committee, in exchange for the payment of royalties from the sale of products
developed under the program. Regulations under the Research Law generally provide for the
payment of royalties to the Chief Scientist of 3 to 3.5% on sales of products and services
derived from our technology developed using these grants until 100% of the dollar-linked
grant is repaid. For programs approved from 1999 and thereafter, the amount of the grant
to be repaid will include annual interest at LIBOR from the date of approval.
The
terms of the Israeli government participation also require that the manufacture of
products developed with government grants be performed in Israel. However, under the
regulations of the Research Law, if any of the manufacturing is performed outside Israel
by any entity other than us, assuming we receive approval from the Chief Scientist for the
foreign manufacturing, we may be required to pay increased royalties. The increase in
royalties depends upon the manufacturing volume that is performed outside of Israel
follows:
Manufacturing Volume Outside of Israel
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Royalties to the Chief Scientist
as a Percentage of Grant
|
|
|
|
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|
|
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less than 50%
|
|
|
|
120
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%
|
between 50% and less than 90%
|
|
|
|
150
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%
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90% and more
|
|
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300
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%
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If
the manufacturing is performed outside of Israel by us, the rate of royalties payable by
us on revenues from the sale of products manufactured outside of Israel will increase by
1% over the regular rates. If the manufacturing is performed outside of Israel by a third
party, the rate of royalties payable by us on those revenues will be a percentage equal to
the percentage of our total investment in the given system that was funded by grants. In
addition, in recent years the government of Israel has accelerated the rate of royalty
rates for repayment of Chief Scientist grants, and may further accelerate them in the
future.
The
technology developed with Chief Scientist grants may not be transferred to third parties
without the prior approval of a governmental committee under the Research Law, and may not
be transferred to non-residents of Israel (Beginning April 1, 2005, governmental committee
under the Research Law may approve a transfer of technology to non-residents of Israel
under restricted conditions and in accordance with the Research Law). Approval, however,
is not required for the export of products developed using the grants. Approval of the
transfer of technology to residents of Israel may be granted in specific circumstances,
only if the recipient abides by the provisions of the Research Law and related
Regulations, including the restrictions on transfer of know-how and the obligation to pay
royalties in an amount that may be increased. We cannot provide any assurance that
consent, if requested, will be granted.
75
The
funds available for grants from the Chief Scientist depend on several criteria and
prevailing government policy and budget, and may be reduced or eliminated in the future.
Even if these grants are maintained, there is no assurance that we will receive Chief
Scientist grants in the future. In addition, each application to the Chief Scientist is
reviewed separately, and grants are based on the program approved by the research
committee. Expenditures supported under other incentive programs of the State of Israel
are not eligible for grants from the Chief Scientist. We cannot provide any assurance that
applications to the Chief Scientist will be approved and, until approved, the amounts of
any grants are not determinable.
Tax
Benefits for Research and Development
. Israeli tax law allows, under specific
conditions, a tax deduction in the year incurred for expenditures, including capital
expenditures, relating to 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 the deduction. Expenditures not
so approved are deductible over a three-year period. However, expenditures made out of
proceeds made available to us through government grants are not deductible according to
Israeli law.
Tax
Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
. The Law for
the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry
Encouragement Law, provides several tax benefits for industrial companies. An
Industrial Company is defined as a company resident in Israel, at least 90% of
whose income in a given tax year exclusive of income from specified sources, is derived
from an industrial enterprise owned by it. An industrial enterprise is defined
as an enterprise whose major activity in a given tax year is industrial production
activity.
Under
the Industry Encouragement Law, industrial companies are entitled to the following
preferred corporate tax benefits:
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deduction
of purchase of know-how and patents utilized in the development of the company over
an eight-year period;
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deduction
of expenses incurred in connection with a public stock issuance over a three-year
period; and
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right
to elect, under certain conditions, to file a consolidated tax return with additional
related Israeli industrial companies operating a common production line.
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Under
some tax laws and regulations, an industrial enterprise may be eligible for special
depreciation rates for machinery, equipment and buildings. These rates differ based on
various factors including the date operations begin and the number of work shifts. An
industrial company owning an approved enterprise may choose between the depreciation rates
for an industrial company provided for in the Income Tax Regulations (Inflationary
Adjustments) (depreciation rates), 1986 or the regular depreciation rates determined in
the relevant Regulations.
Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We cannot assure you that we will continue to
qualify as an industrial company or that the benefits described above will be available to
us in the future.
Special
Provisions Relating to Taxation under Inflationary Conditions
. The Income Tax Law
(Inflationary Adjustments), 1985, referred to as the Inflationary Adjustments Law,
represents an attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
These are some of its important features:
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There
is a special tax adjustment for the preservation of equity whereby certain corporate
assets are classified broadly into fixed (inflation resistant) assets and non-fixed
assets. Where a companys equity, as defined in the 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 the excess is allowed up to a ceiling of
70% of taxable income in any single tax year, with the unused portion permitted to be
carried forward on a linked basis. If the depreciated cost of fixed assets exceeds a
companys equity, then the excess multiplied by the applicable annual rate of
inflation is added to taxable income.
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Subject
to certain limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the increase in the Israeli consumer price
index.
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Until
December 31, 2006 one of the net effects of the Inflationary Adjustments Law is that our
taxable income for Israeli corporate tax purposes will be different from our dollar income
reflected in our financial statements, which are based on changes in the Shekel exchange
rate with respect to the dollar.
The
Israeli Tax Law and certain regulations promulgated there under allow
Foreign-Invested Companies, which maintain their accounts in U.S dollars in
compliance with the regulations published by the Israeli Minister of Finance to base their
tax returns on their operating results as reflected in the dollar financials statements or
to adjust their tax returns based on exchange rate changes rather than changes in the
Israeli CPI, in lieu of the of the principles set forth by the Inflationary Adjustments
Law, For these purpose, Foreign-Invested company is a company, more than 25% of whose
share capital, in terms of rights to profits, voting and appointment of directors, and of
whose combined share and loan capital is held by persons who are not residents of Israel.
A company that elects to measure its results for tax purpose based on the dollar exchange
rate cannot change that election for the period of three years following the election. The
Company and one of its Israeli subsidiaries are foreign investors companies, and
have elected, commencing January 1, 2007, to keep their books and records in dollars for
tax purposes, as permitted under the tax regulations.
However,
according to a legislation change, as of Mach 2008 the Inflationary Adjustment Law is
cancelled and its provisions are in force until the end of the fiscal year of 2007 (except
for certain specific provisions and regulations which, at this stage, are not yet
cancelled). The decision to cancel the Inflationary Adjustment Law was based on the fact
that the inflation rates in Israel in recent years are very low and are expected to stay
low, whereas originally the law was introduced to cope with the very high inflation rates
which exist in the 80s.
Taxation of our
shareholders
Reform
in Taxation of Capital Market.
As mentioned above, on July 24, 2002 and July 25, 2005,
the Israeli parliament, the Knesset, approved extensive amendments to the Income Tax
Ordinance. The amendments substantially changed the taxation in several areas, including
taxation of the capital market. Generally, the amendments shall become effective regarding
taxation of the capital market on January 1, 2003.
Capital
Gains Tax on Sales of Our Ordinary Shares
. Israeli law imposes a capital gains tax on
the sale of capital assets. The law distinguishes between real gain and inflationary
surplus. The inflationary surplus is a portion of the total capital gain that is
equivalent to the increase of the relevant assets purchase price that is
attributable to the increase in the Israeli consumer price index between the date of
purchase and the date of sale. The real gain is the excess of the total capital gain over
the inflationary surplus. The inflationary surplus accumulated from and after December 31,
1993 is exempt from any capital gains tax in Israel. The real gain is added to ordinary
income, which effective until December 31, 2002 was taxed at ordinary rates of up to 50%
for individuals and 36% for corporations.
Effective
January 1, 2003, when selling our ordinary shares purchased after December 31, 2002, the
capital gains tax rate on the real gain imposed upon sale of capital assets acquired after
that date has been reduced to no more than 20% if the seller is an individual or 25% if an
individual sells shares in a company in which he is or was 12 months prior to sale the
owner of more than 10% of any means of control. The real capital gain tax rate for a
corporation is set at the ordinary corporate tax applicable; capital gains accrued from
assets acquired before that date are subject to a blended tax rate based on the relative
periods of time before and after that date that the asset was held.
Capital
Gains Tax on Sales of Our Ordinary Shares Effective January 1, 2003.
Israeli taxpayers
who are not subject to the Inflationary Adjustments Law or are not entitle to maintain
books in foreign currency shall be subject to 15% tax on the real capital gain in case the
shares were purchased after December 31, 2002, and in case the shares were purchased
before that date the sale will be subject to a blended tax in which the portion of the
gain accrued until December 31, 2002 will be exempt from Israeli capital gains tax and the
portion of the real gain accrued from January 1, 2003 until the date of sale will be
subject to 15% tax. The taxable real gain will be based on the difference between the
adjusted average value of the shares during the last three trading days before January 1,
2003 (or the adjusted original cost if it is higher than the adjusted average value) and
the value of the shares at the date of sale. In the event the above calculation creates a
loss; such loss can only be offset against capital gain from other traded securities
according to the provisions of the Israeli law. The amount of the loss is limited to the
difference between the adjusted average value and the value of the shares at the date of
sale. However, such Israeli tax payers shall be subject to 25% tax on the real capital
gain in the case that they deduct interest expenses and linkage differences.
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Notwithstanding
the foregoing, dealers in securities in Israel and companies taxed under the Inflationary
Adjustment Law or are entitled to maintain books in foreign currency are taxed at regular
tax rates applicable to business income.
Notwithstanding
the above, foreign securities that are bought prior to January 1, 2006 and sold after
January 1, 2006 shall be subject to 35% capital gains tax on the real gains accrued until
January 1, 2005 and 20% or 25% capital gains tax on the real gains accrued thereafter.
However, according to tax legislation our ordinary shares are not considered foreign
traded securities.
Generally
under the amendment losses from tradable shares by payers of Israeli tax who are not
subject to the Inflationary Adjustments Law or have the right to maintain books in foreign
currency can be offset with gains from the same source (e.g., sales of foreign securities,
sales of securities that are not foreign securities). Such losses can be carried forward
indefinitely.
In
addition, since our ordinary shares are traded on a stock exchange outside of Israel,
gains on the sale of ordinary shares held by non-Israeli tax resident investors will be
exempt from Israeli capital gains tax, provided, inter alia, that such capital gains are
not by a permanent establishment in Israel, that such shareholders did not acquire their
shares prior to the public offering and that the shareholders are not subject to the
Inflationary Adjustment law or are entitle to maintain books in foreign currency all
subject to the provision of the Israeli tax legislation.
Under
the convention between the government of the United States of America and the government
of Israel with respect to taxes on income, the sale, exchange or disposition of ordinary
shares by a person who qualifies as a resident of the United States within the meaning of
the U.S.- Israel tax treaty and who is entitled to claim the benefits afforded to the
person by the U.S.-Israel tax treaty generally will not be subject to the Israeli capital
gains tax unless certain exceptions apply, including where the U.S. resident holds,
directly or indirectly, shares representing 10% or more of our voting power during any
part of the 12-month period preceding the sale, exchange or disposition of the shares
subject to certain conditions. A sale, exchange or disposition of ordinary shares by a
treaty U.S. resident who holds, directly or indirectly, shares representing 10% or more of
our voting power at any time during the preceding 12-month period would be subject to
Israeli tax, to the extent applicable unless the aforementioned exemption from capital
gains tax for shares listed on a Stock Exchange outside of Israel applies. However, in any
case, under the U.S.-Israel tax treaty and the Israeli tax law a treaty U.S. resident will
be subject to capital gains tax in Israel, the U.S. resident would be permitted to claim a
credit for the taxes against the U.S. federal income tax imposed with respect to the 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 U.S. state or local taxes.
Capital
gain exemption to non Israeli shareholders which will apply even in circumstances that
Israel could tax according to the relevant tax treaty. Section 97(B3) determines that in
order for a non Israeli resident who is a resident of a contracting state [i.e. a country
with which Israel has a double taxation treaty] to be exempt from Israeli capital
gains on the sale of shares in an Israeli resident company, the seller must comply with
the following:
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The
shares were purchased between 31.7.2005 to 31.12.2008
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A
request must be filed at the time to report the future sale
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The
capital gain is not attributed to a Permanent Establishment the foreign resident has in
Israel
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He
was a resident of a contracting state for a period of at least 10 consecutive years
before the purchase of the shares
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If
the foreign resident is a corporation then it is necessary that at least 75% of the
control in the corporation were held, consecutively by individuals who were
themselves, residents of a contracting state for at least 10 consecutive years
before the shares were purchased
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The
shares were not purchased from a related party
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A
notice on the purchase was given to the Israeli Tax Authorities 30 days from purchase
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A
report on the sale of shares was filed in country of his residency
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Taxation
of Non-Resident Holders of Shares
. Non-residents of Israel are subject to income tax
on income accrued or derived from sources in Israel. Under the amendment, capital gain is
deemed to accrue or derive in Israel in the case of sale of shares of an Israeli company
(see above in Section Capital Gains Tax on Sales of Our Ordinary Shares).
Non-residents
of Israel are subject to tax on income accrued or derived from sources in Israel. These
sources of income include passive income such as dividends, royalties and interest, as
well as non-passive income, such as income received for services rendered in Israel. On
distribution of dividends other than bonus shares, income tax is withheld at source, at
the rate of 25%, (or 12.5% for dividends not generated by an approved enterprise if the
non-resident is a U.S. corporation and holds at least 10% of our voting power throughout a
certain period, and 15% for dividends generated by an approved enterprise), unless in each
case a different rate is provided in a treaty between Israel and shareholders
country of residence. Under the U.S.-Israel tax treaty, the maximum tax on dividends paid
to a holder of ordinary shares who is a U.S. resident will be 25%. However, under the
Investment Law, dividends generated by an approved enterprise are taxed at the rate of
15%.
Foreign
Exchange Regulations
. We are permitted to pay in Israeli and non-Israeli currency:
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dividends
to holders of our ordinary shares; and
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any
amounts payable with respect to our ordinary shares upon our dissolution, liquidation or
winding up.
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If
we make any payments in Israeli currency, the payments may be converted into freely
repatriable dollars at the rate of exchange prevailing at the time of conversion.
Material United States
Federal Income Tax Consequences
THE FOLLOWING SUMMARY IS INCLUDED
HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO
BE, LEGAL OR TAX ADVICE. EACH U.S. HOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR
AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
Subject
to the limitations described in the next paragraph, the following discussion summarizes
the material U.S. federal income tax consequences to a U.S. Holder arising
from the purchase, ownership and sale of the ordinary shares. For this purpose, a
U.S. Holder is a holder of ordinary shares that is: (1) an individual citizen
or resident of the United States, including an alien individual who is a lawful permanent
resident of the United States or meets the substantial presence residency test under U.S.
federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S.
federal tax purposes) or a partnership (other than a partnership that is not treated as a
U.S. person under any applicable U.S. Treasury Regulations) created or organized under the
laws of the United States or the District of Columbia or any political subdivision
thereof; (3) an estate, the income of which is includable in gross income for U.S. federal
income tax purposes regardless of source; (4) a trust if a court within the United States
is able to exercise primary supervision over the administration of the trust and one or
more U.S. persons have authority to control all substantial decisions of the trust; (5) a
trust that has a valid election in effect to be treated as a U.S. person to the extent
provided in U.S. Treasury regulations, or (6) any person otherwise subject to U.S. federal
income tax on a net income basis in respect of the ordinary shares, if such status as a
U.S. Holder is not overridden pursuant to the provisions of an applicable tax treaty.
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This
summary is for general information purposes only and does not purport to be a
comprehensive description of all of the U.S. federal income tax considerations that may be
relevant to a decision to purchase our ordinary shares. This summary generally considers
only U.S. Holders that will own our ordinary shares as capital assets. Except to the
limited extent discussed below, this summary does not consider the U.S. federal tax
consequences to a person that is not a U.S. Holder, not does it describe the rules
applicable to determine a taxpayers status as a U.S. Holder. This summary is based
on the provisions of the Internal Revenue Code of 1986, as amended (the Code),
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder,
administrative and judicial interpretations thereof, and the U.S./Israel Income Tax
Treaty, all as in effect as of the date hereof and all of which are subject to change,
possibly on a retroactive basis, and all of which are open to differing interpretations.
OTI will not seek a ruling from the U.S. Internal Revenue Service (IRS) with
regard to the U.S. federal income tax treatment of an investment in our ordinary shares by
U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the
conclusions set forth below.
This
discussion does not address all of the aspects of U.S. federal income taxation that may be
relevant to a particular shareholder based on such shareholders particular
circumstances and in particular does not discuss any estate, gift, generation-skipping,
transfer, state, local or foreign tax considerations. In particular, this discussion does
not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank,
life insurance company, regulated investment company, or other financial institution or
financial services entity; (2) a broker or dealer in securities or foreign
currency; (3) a person who acquired our ordinary shares in connection with employment or
other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative
minimum tax; (5) a U.S. Holder that holds our ordinary shares as a hedge or as part of a
hedging, straddle, conversion or constructive sale transaction or other risk-reduction
transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate
investment trusts; (8) a U.S. Holder that expatriates out of the United States or a former
long-term resident of the United States; or (9) a person having a functional currency
other then the U.S. dollar. This discussion does not address the U.S. federal income tax
treatment of a U.S. Holder that owns, directly or constructively, at any time, ordinary
shares representing 10% or more of our voting power. Additionally, the U.S. federal income
tax treatment of persons who hold ordinary shares through a partnership or other
pass-through entity are not considered. Each prospective investor is advised to consult
his or her own U.S. tax advisor with respect to the specific U.S. federal and state income
tax consequences to such person of purchasing, holding or disposing of ordinary shares.
Distributions on
Ordinary Shares
We
do not at this time anticipate paying any dividends. But, if we do distribute property to
you in the future, then subject to the discussion under the heading Passive Foreign
Investment Companies Considerations 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
(including the amount of any Israeli tax withheld on the date of the distribution), 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 capital gain. Corporate holders generally will not be allowed a
deduction for dividends received. In general, preferential tax rates not exceeding 15% for
qualified dividend income and long-term capital gains are applicable for U.S.
Holders that are individuals, estates or trusts (these preferential rates are scheduled to
expire for taxable years beginning after December 31, 2010, after which time dividends are
scheduled to be taxed at ordinary income rates and long-term capital gains are scheduled
to be taxed at rates not exceeding 20%). For this purpose, qualified dividend
income means,
inter alia
, dividends received from a qualified foreign
corporation. A qualified foreign corporation is a corporation that is
entitled to the benefits of a comprehensive tax treaty with the United States which
includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax
Treaty satisfies this requirement and we believe we are eligible for the benefits of that
treaty.
In
addition, our dividends will be qualified dividend income if our shares are readily
tradable on NASDAQ or another established securities market in the United States.
Dividends will not qualify for the preferential rate if we are treated, in the year the
dividend is paid or in the prior year, as a passive foreign investment company
(PFIC). If our beliefs concerning our PFIC status are correct, dividend
distributions with respect to our shares should be treated as qualified dividend income,
subject to the U.S. Holder satisfying the holding period and other requirements. A U.S.
Holder will not be entitled to the preferential rate: (i) if the U.S. Holder has not held
our ordinary shares or ADRs for at least 61 days of the 121 day period beginning on the
date which is 60 days before the ex-dividend date, or (ii) to the extent the U.S. Holder
is under an obligation to make related payments on substantially similar property. Any
days during which the U.S. Holder has diminished its risk of loss on our ordinary shares
are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect
to treat the dividend income as investment income pursuant to Code section
163(d)(4) will not be eligible for the preferential rate of taxation.
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The
amount of a distribution with respect to our ordinary shares will be measured by the
amount of the fair market value of any property distributed, and for U.S. federal income
tax purposes, the amount of any Israeli taxes withheld therefrom. (See discussion above
under Taxation of Non-Resident Holders of Shares.) 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 exchange gain or loss.
Distributions
paid by us will generally be foreign source income for U.S. foreign tax credit purposes.
Subject to the limitations set forth in the 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 the ordinary shares. In general, these rules
limit the amount allowable as a foreign tax credit in any year to the amount of regular
U.S. tax for the year attributable to foreign source taxable income. 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 taxable 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 31-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 his or her risk of loss with
respect to the ordinary shares will not count toward meeting the 16-day holding period. A
U.S. Holder will also be denied a foreign tax credit if the U.S. Holder holds the 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 U.S. foreign tax credit are complex, and U.S.
Holders should consult with their own tax advisors to determine whether, and to what
extent, the are 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 taxes withheld, provided such
U.S. Holders itemize their deductions.
Sale, Exchange or Other
Taxable Disposition of Our Ordinary shares
Except
as provided under the PFIC rules described below, upon the sale, exchange or other
disposition of our ordinary shares, a U.S. Holder 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 or 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 the
disposition.
In
general, gain realized by a U.S. Holder on a sale, exchange or other disposition of
ordinary shares will generally be treated as U.S. source income for U.S. 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, U.S.
Treasury Regulations require such 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.
Passive Foreign
Investment Company Considerations
Special
U.S. federal income tax rules apply to a U.S. Holder who owns shares of a corporation that
was at any time during the U.S. Holders holding period a passive foreign investment
company, or PFIC. A non-U.S. corporation will be classified as a PFIC for U.S. federal
income tax purposes in any taxable year in which, after applying look-through rules for
lower tier affiliates, either:
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75%
or more of our gross income (including our pro rata share of gross income for any
company, U.S. or foreign, in which we are considered to own 25% or more of
the shares by value), in a taxable year is passive (the "Income Test"); or
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At
least 50% of our assets, averaged over the year and generally determined based upon value
(including our pro rata share of the assets of any company in which we are considered to
own 25% or more of the shares by value), in a taxable year are held for the product of,
or produce, passive income (the Asset Test).
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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 are or become a PFIC, each U.S. Holder who has not elected to treat us as a qualified
electing fund by making a QEF election, or who has not elected to mark the
shares to market (as discussed below), would, upon receipt of certain distributions by us
and upon disposition of our ordinary shares at a gain, be liable to pay U.S. federal
income tax at the then prevailing highest tax rates on ordinary income plus interest on
such tax, as if the distribution or gain had been recognized ratably over the
taxpayers holding period for the ordinary shares. In addition, when shares of a PFIC
are acquired by reason of death from a decedent that was a U.S. Holder, the tax basis of
such shares would 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 were recognized by the decedent. Indirect investments in a PFIC may also
be subject to special U.S. federal income tax rules.
The
PFIC rules would not apply to a U.S. Holder who makes a QEF election for all taxable years
that such U.S. Holder has held the ordinary shares while were 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
such U.S. Holders
pro rata
share of our ordinary earnings as ordinary income
and such U.S. Holders
pro rata
share of our net capital gains 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 IRS. Although we have no obligation to do so,
we intend to comply with the applicable information reporting requirements for U.S.
Holders to make a QEF election.
A
U.S. Holder of PFIC shares which are traded on certain public markets, including the
NASDAQ, can elect to mark the shares 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 shares and the U.S. Holders adjusted basis
in the PFIC shares. Loses are allowed only to the extent of net mark-to-market gain
previously included income by the U.S. Holder under the election for prior taxable years.
Based
on our estimated gross income, the average value of our gross assets (assuming that we are
entitled to value our intangible assets using the methods suggested for publicly traded
corporations) and the nature of our business, we believe that we will not be considered a
PFIF for our current taxable year, and there is only a small chance that we will be a PFIC
in the foreseeable future. Since PFIC status is a factual determination that must be made
annually and is therefore subject to change, our status in the current and future years
depends on our assets and activities in those years. Because the market value of our
ordinary shares is likely to fluctuate and because the market price of the shares of a
technology companies has been especially volatile, we cannot assure you whether or not we
will be considered a PFIC for any taxable year. Also, because PFIC status is in part based
on facts on and through December 31 of each year, it is not possible to determine whether
we will have become a PFIC for a calendar year until after the close of the year, when we
finalize our financial information on and through December 31. In addition, we cannot
provide assurance that the applicable tax law will not change in a manner which adversely
affects our PFIC determination. If we were a PFIC for a taxable year, a U.S. Holder could
be subject to interest charges and higher tax rates with respect to any gain from the sale
or exchange of, and certain distributions with respect to our ordinary shares.
If
we are or become a PFIC, as noted above, a U.S. Holder of our ordinary shares could make a
variety of elections (described above) that may alleviate the tax consequences referred to
above. However, it is expected that the conditions necessary for making an election to
treat us as QEF will not be available. You should consult your tax advisor regarding our
potential status as a PFIC and the tax consequences to you that would arise if were
treated as a PFIC.
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Backup Withholding and
Information Reporting
A
U.S. Holder may be subject to backup withholding (currently at a rate of 28%, but
scheduled to increase to 31% for taxable years beginning after December 31, 2010) with
respect to cash dividends and proceed from a disposition of ordinary shares. In general,
back-up 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
timely furnished to the IRS.
Non-U.S. Holders of
Ordinary Shares
Except
as provided below, an individual, corporation, estate or trust 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, our ordinary shares.
A
non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend
paid on our ordinary shares or the proceeds from the disposition of our ordinary shares
if: (i) if such item is effectively connected with the conduct by the non-U.S. Holder of a
trade or business in the United States or, in the case of a non-U.S. Holder that is 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 U.S.; (ii) in the case of a
disposition of our ordinary shares, the individual non-U.S. Holder is present in the U.S.
for 183 days or more in the taxable year of the sale and certain other conditions are met;
(iii) if the non-U.S. Holder is subject to U.S. federal income 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% backup withholding with respect
to the payment of dividends on our ordinary shares if payment is made through a paying
agent, or office of a foreign broker outside the United States. However, if payment is
made in the United States or by a U.S. related person, non-U.S. Holders may be subject to
backup withholding, unless the non-U.S. Holder provides on an applicable Form W-8 (or a
substantially similar form) a taxpayer identification number, certifies to its foreign
status, or otherwise establishes an exemption. 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 may be subject to backup withholding at a rate of 28% on the
payment of the proceeds from the disposition of our ordinary shares to or
through the U.S. office of a broker, whether domestic or foreign, or the office
of a U.S. related person, unless the non-U.S. 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.
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 timely furnished to the IRS.
F.
|
DIVIDENDS
AND PAYING AGENTS
|
Not
applicable.
Not
applicable.
83
We
are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, applicable to foreign private issuers and fulfill the obligation with respect to
such requirements by filing reports with the Securities and Exchange Commission. 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. 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. A copy of each report submitted in accordance with applicable
United States law is also available for public review at our principal executive offices.
In
addition, the Securities and Exchange Commission maintains an Internet website at
http://www.sec.gov that contains reports and other material that are filed through the
Securities and Exchange Commissions Interactive Data Electronic Application.
I.
|
SUBSIDIARY
INFORMATION
|
Not
applicable.
ITEM 11.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We
are exposed to a variety of risks, including changes in interest rates affecting primarily
the interest received on cash equivalents, short-term investments and foreign currency
fluctuations. We may in the future undertake hedging or other similar transactions if our
management determines that it is necessary to offset these risks.
Interest
Rate Risk
Our
exposure to market risks for changes in interest rates relates primarily to our cash and
cash equivalents, short term investments and to loans we take that are based on a
floating/fixed interest rate. Our cash and cash equivalents and short term investments are
held substantially in U.S. dollars with financial banks and bear annual interest of
approximately 1.6%.
Foreign
Currency Exchange Risk
We
generate a significant portion of our revenues in U.S. dollars but we incur a large
portion of our expenses in other currencies, principally some employees salaries in
New Israeli Shekels, and the majority of the expenses of our German, French and Polish
subsidiaries, InterCard, InSeal, PARX France and ASEC, in euros and of our subsidiary in
the Far East, MCT, in Yuan Renminbi. To the extent that we and our subsidiaries based in
Israel, Europe and the Far East conduct our business in different currencies, our revenues
and expenses and, as a result, our assets and liabilities, are not necessarily accounted
for in the same currency. We are, therefore, exposed to foreign currency exchange rate
fluctuations. These fluctuations may negatively affect our results of operations. Our
operations could also be adversely affected if we are unable to limit our exposure to
currency fluctuations in the future. Accordingly, we may enter into currency hedging
transactions to decrease the risk of financial exposure to fluctuations in the exchange
rate of the U.S. dollar against the New Israeli Shekel or other currencies.
However,
these measures may not adequately protect us from material adverse effects resulting from
currency fluctuations. In addition, if we wish to maintain the dollar-denominated value of
sales made in other currencies, any devaluation of the other currencies relative to the
U.S. dollar would require us to increase our other currency denominated selling prices.
That could cause our customers to cancel or decrease orders.
ITEM 12.
|
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
PART II
ITEM 13.
|
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
There
are no defaults, dividend arrearages or delinquencies that are required to be disclosed.
ITEM 14.
|
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
On
January 11, 2009, our board of directors adopted a Shareholder Rights Plan. Pursuant to
the terms of the plan, our board approved a distribution by way of bonus rights, of one
right for each of our outstanding ordinary share. The bonus rights were distributed on
January 12, 2009 to the shareholders of record as of the close of business on January 11,
2009.
The
rights are initially traded with, and are inseparable from our ordinary shares. The rights
are evidenced only by the balances indicated in the book-entry account system of the
transfer agent for our ordinary share or, in the case of certificated shares, the
certificates that represent such ordinary shares and any transfer of ordinary shares will
constitute a transfer of rights. New rights will accompany any new ordinary share we
issues after January 11, 2009 until the Distribution Date described below.
Each
right will allow its holder to purchase from us one ordinary shares when our authorized
share capital is NIS 5,000,000 and three ordinary shares when our authorized share capital
is NIS 20,000,000, at a price of NIS 0.10 per share, once the rights become exercisable.
Prior to exercise, a right does not give its holder any dividend, voting, or liquidation
rights.
84
The
rights will not be exercisable until the earlier of the following (the Distribution
Date):
|
|
Ten
days (or such later date as may be determined by action of our board of directors prior
to such time as any person becomes an Acquiring Person) after the public announcement
that a person or group has become an Acquiring Person by obtaining beneficial
ownership of 15% or more of our outstanding ordinary shares, except if such person or
group has become an Acquiring Person pursuant to an offer approved by the
majority of our board of directors; or
|
|
|
Ten
business days (or a later date determined by our board before any person or group becomes
an Acquiring Person) after a person or group begins a tender or exchange offer (except if
such person or group has become an Acquiring Person pursuant to an offer
approved by the majority of our board of directors) which, if completed, would result in
that person or group becoming an Acquiring Person.
|
After
the Distribution Date, the rights will separate from the ordinary shares and will be
evidenced solely by rights certificates that we will mail to all eligible holders of
ordinary shares. Any rights held by an Acquiring Person or any associate or affiliate
thereof will be void and may not be exercised.
Our
board of directors may reduce the threshold at which a person or group becomes an
Acquiring Person from 15% to not less than 10% of our outstanding ordinary shares.
If
a person or group becomes an Acquiring Person, all holders of rights, except for the
Acquiring Person or any associate or affiliate thereof may, for NIS0.10 per share (subject
to adjustment as provided in the plan), purchase one or three ordinary shares, in
accordance with ratio mentioned above. In addition, if, after a person or group becomes an
Acquiring Person, we are later acquired in a merger or similar transaction after the
Distribution Date, all holders of rights, except for the Acquiring Person, or any
associate or affiliate thereof may, for NIS0.10 per share (subject to adjustment as
provided in the plan), purchase one or three ordinary shares, as specified above of the
acquiring corporations common stock.
The
rights will expire on January 11, 2012, unless previously redeemed, or such later date as
determined by our board of directors (so long as such determination is made prior to the
earlier of the Distribution Date or January 11, 2012).
Our
board of directors may redeem the rights for no consideration at any time prior to ten
days after such time that any person or group becomes an Acquiring Person. If our board of
directors redeems any rights, it must redeem all of the rights.
After
a person or group becomes an Acquiring Person, but before an Acquiring Person owns 50% or
more of our outstanding ordinary shares, our board of directors may extinguish the rights
by exchanging each right for ordinary shares at an exchange ratio equal to the effective
exercise ratio or an equivalent security for each right, other than rights held by the
Acquiring Person and its associates and affiliates.
The
terms of the plan may be amended (including terminated) by our board of directors without
the consent of the holders of the rights. However, our board of directors may not amend
the plan to lower the threshold at which a person or group becomes an Acquiring Person to
below 10% of our outstanding Ordinary Shares. In addition, our board of directors may not
cause a person or group to become an Acquiring Person by lowering this threshold below the
percentage interest that such person or group already owns. After a person or group
becomes an Acquiring Person, the board may not amend the plan in a way that adversely
affects holders of the rights.
ITEM 15T.
|
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
Our
management, including our chief executive officer, or CEO, and chief financial officer, or
CFO, are responsible for establishing and maintaining our disclosure controls and
procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of
1934). These controls and procedures were designed to ensure that information required to
be disclosed in the reports that we file under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the
SEC and that such information was made known to our management, including our CEO and CFO,
by others within the Company, as appropriate to allow timely decisions regarding required
disclosure. We evaluated these disclosure controls and procedures under the supervision of
our CEO and CFO as of December 31, 2008. Based upon that evaluation, our management,
including our CEO and CFO, concluded that our disclosure controls and procedures are
effective.
85
Managements
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange
Act. Our internal control over financial reporting policies and procedures are designed
under the supervision of the CEO and CFO to provide reasonable assurance regarding the
reliability of the financial reporting and preparation of the financial statements for the
external reporting purposes in accordance with U.S. GAAP. Under the supervision and with
the participation of our management, including our chief executive officer and chief
financial officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in
Internal ControlIntegrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Based
on our evaluation under the framework in
Internal ControlIntegrated
Framework
, our management concluded that our internal control over financial reporting
was effective as of December 31, 2008.
This
annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report
regarding internal control over financial reporting 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.
Changes
in Internal Control Over Financial Reporting
There
has been no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal year ended
December 31, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 16A.
|
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our
board of directors has determined that Eli Akavia, a member of its audit committee, is an
audit committee financial expert, pursuant to Rule 10A-3 under the Securities Exchange Act
of 1934, as amended. Mr. Akavia qualifies as an independent director under the
applicable NASDAQ Marketplace Rules.
We
have adopted a Code of Business Conduct and Ethics that applies to our directors,
executive and financial officers and all of our employees. The Code of Business Conduct
and Ethics is publicly available on our website at
www.otiglobal.com
and we will
provide persons with a written copy upon written request made to us. If we make any
substantive amendments to the Code of Business Conduct and Ethics or grant any waivers,
including any implicit waiver, from a provision of these codes to our chief executive
officer, chief financial officer or corporate controller, we will disclose the nature of
such amendment or waiver on our website.
ITEM 16C.
|
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Policy on Pre-Approval of Audit
and Non-Audit Services of Independent Auditors
Our
audit committee is responsible for the oversight of our independent auditors work.
The audit committees policy is to pre-approve all audit and non-audit services
provided by Somekh Chaikin (a member of KPMG International). These services may include
audit services, audit-related services, tax services and other services, as further
described below. The audit committee sets forth the basis for its pre-approval in detail,
listing the particular services or categories of services which are pre-approved, and
setting forth a specific budget for such services. Additional services may be pre-approved
by the audit committee on an individual basis. Once services have been pre-approved,
Somekh Chaikin and our management then report to the audit committee on a periodic basis
regarding the extent of services actually provided in accordance with the applicable
pre-approval, and regarding the fees for the services performed.
86
Principal Accountant
Fees and Services
The
following fees were billed by KPMG International for professional services rendered
thereby for the years ended December 31:
|
2007
|
2008
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Audit fees (1)
|
|
|
$
|
519
|
|
$
|
301
|
|
|
|
|
|
|
Tax fees (2)
|
|
|
$
|
17
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
536
|
|
$
|
314
|
|
|
|
|
|
|
(1)
The audit fees for the years ended December 31, 2008 and 2007, are the
aggregate fees billed or billable (for the year) for the professional services
rendered for the audits of our 2008 and 2007 annual consolidated financial
statements, review of consolidated quarterly financial statements of 2008 and
2007, and services that are normally provided in connection with statutory
audits of us and our subsidiaries, consents and assistance with review of
documents filed with the SEC.
(2)
Tax fees are the aggregate fees billed (in the year) for professional services
rendered for tax compliance and tax advice other than in connection with the
audit.
Pre-Approval Policies
and Procedures
Our
audit committee pre-approved all audit and non-audit services provided to us and to our
subsidiaries during the periods listed above. The committee approves discrete projects on
a case-by-case basis that may have a material effect on our operations and also considers
whether proposed services are compatible with the independence of the public accountants.
ITEM 16D.
|
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
None.
ITEM 16E.
|
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
None.
ITEM 16F.
|
|
CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
|
Note
applicable
ITEM 16G.
|
|
CORPORATE GOVERNANCE
|
As
a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are
permitted to follow certain home country corporate governance practices instead of certain
requirements of the NASDAQ Marketplace Rules.
87
As
a foreign private issuer listed on the NASDAQ Global Market, we may follow home country
practice with regard to, among other things, composition of the board of directors,
directors nomination process and regularly scheduled meetings at which only independent
directors are present. In addition, we may follow our home country practice, instead of
the NASDAQ Marketplace Rules, which require that we obtain shareholder approval for
certain dilutive events, such as for the establishment or amendment of certain equity
based compensation plans, an issuance that will result in a change of control of the
company, certain transactions other than a public offering involving issuances of a 20%
or more interest in the company and certain acquisitions of the stock or assets of
another company. A foreign private issuer that elects to follow a home country practice
instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from
an independent counsel in such issuers home country certifying that the issuers
practices are not prohibited by the home countrys laws. In addition, a foreign
private issuer must disclose in its annual reports filed with the Securities and Exchange
Commission or on its website each such requirement that it does not follow and describe
the home country practice followed by the issuer instead of any such requirement.
Accordingly, our shareholders may not be afforded the same protection as provided under
NASDAQs corporate governance rules.
See
Item 6 Directors, Senior Management and Employees E. Share Ownership
2001 Share Option Plan and Item 6 Directors, Senior Management and Employees
C. Board Practices Board Committees Compensation Committee for
a detailed description of the significant ways in which our corporate governance practices
differ from those followed by U.S. companies under the listing standards of the NASDAQ
Global Market.
PART III
ITEM 17.
|
|
FINANCIAL
STATEMENTS
|
The
Company has elected to furnish financial statements and related information specified in
Item 18.
ITEM 18.
|
|
FINANCIAL STATEMENTS
|
Index to the Financial
Statements of the Registrant
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Balance Sheets
|
F-3-F-4
|
Consolidated Statements of Operations
|
F-5
|
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Loss
|
F-6
|
Consolidated Statements of Cash Flows
|
F-7-F-8
|
Notes to the Consolidated Financial Statements
|
F-9-F-43
|
|
|
1
|
|
Articles
of Association (4)
|
2
|
|
Shareholders
Rights Agreement, dated as of January 12, 2009, between the Registrant and Continental
Stock Transfer & Trust Company (4)
|
4.1
|
|
Original
Section 102 Share Option Plan of the Registrant.(2)
|
4.2
|
|
Stock
Compensation Program and Stock Award Agreement of OTI America, Inc.(1)
|
4.3
|
|
2008
Employee Stock Purchase Plan of the Registrant. (3)
|
4.4
|
|
2001
Employee Share Purchase Plan of the Registrant.(1)
|
4.5
|
|
2001
Share Option Plan of the Registrant.(1)
|
4.6
|
|
Application
to Approve a Trustee for an Option Plan pursuant to Section 102 of the Income Tax
Ordinance; and Deed of Trust. (2)
|
4.7
|
|
Long
Term Lease Agreement, dated as of March 6, 2002 by and between the Israel Lands Authority
and the Registrant.(1)
|
4.8
|
|
Form of Letter of Exemption and
Indemnification between the Registrant and its directors and officers. (5)
|
4.9
|
|
Form of Securities Purchase Agreement
between the Registrant and various investors, dated as of October 27, 2005. (6)
|
88
8.
|
|
List
of subsidiaries (filed herewith).
|
12.1
|
|
Certification
of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934 (filed herewith).
|
12.2
|
|
Certification
of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934 (filed herewith).
|
13.1
|
|
Certification
of Chief Executive Officer, pursuant Rule 13a-14(b) under the Securities Exchange Act of
1934, and 18 U.S.C. Section 1350 (filed herewith).
|
13.2
|
|
Certification
of Chief Financial Officer, pursuant Rule 13a-14(b) under the Securities Exchange Act of
1934, and 18 U.S.C. Section 1350 (filed herewith).
|
15
|
|
Consent
of Independent Registered Public Accounting Firm (filed herewith).
|
(1)
|
Previously
filed with the Companys Registration Statement on Form F-1, filed on
June 14, 2002.
|
(2)
|
Previously
filed with an amendment to the Companys Registration Statement
on Form F-1, filed with the SEC on September 11, 2002.
|
(3)
|
Previously
filed with the Companys Registration Statement on Form S-8, filed
with the SEC on March 6, 2008.
|
(4)
|
Previously
filed with the Companys Registration Statement on Form 8-A/A
(Amendment No. 1), filed with the SEC on January 12, 2009
|
(5)
|
Previously
filed with the Companys report on Form 6-K, as Schedule B to such report,
filed with the SEC on June 25, 2008.
|
(6)
|
Previously
filed with the Companys report on Form 6-K filed with SEC on November 8,
2005.
|
89
On Track Innovations
Ltd.
and its Subsidiaries
Consolidated Financial Statements
As of December 31, 2008
|
On Track Innovations
Ltd.
and its Subsidiaries
|
Consolidated Financial
Statements as of December 31, 2008
|
|
Contents
Report of Independent
Registered Public Accounting Firm
To the Board of
Directors and Shareholders
On Track Innovations Ltd.:
We have audited the accompanying
consolidated balance sheets of On Track Innovations Ltd. (the Company) and its
subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of
operations, shareholders equity and comprehensive loss and cash flows for each of
the years in the three-year period ended December 31, 2008. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the board of directors and management, as well as evaluating
the overall financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of the Company and its subsidiaries as of December 31, 2008 and 2007
and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 2 to the
consolidated financial statements, effective January 1, 2006, the Company changed its
method of accounting for stock-based compensation upon adoption of Statement of Financial
Accounting Standards No. 123(R),
Share-Based Payment.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
A Member Firm of KPMG International
Tel Aviv, Israel
June 29, 2009
F - 2
On Track Innovations Ltd.
and its Subsidiaries
Consolidated
Balance Sheets
|
US dollar in thousands except share and per share data
|
December 31
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
Cash and cash equivalents
|
|
|
$
|
35,470
|
|
$
|
27,196
|
|
Short-term investments
|
|
|
|
6,379
|
|
|
904
|
|
Trade receivables (net of allowance for doubtful
|
|
|
accounts of $2,767 and $3,315 as of December 31, 2007
|
|
|
and 2008, respectively)
|
|
|
|
8,028
|
|
|
4,567
|
|
Other receivables and prepaid expenses
|
|
|
|
3,636
|
|
|
2,994
|
|
Inventories
|
|
|
|
13,242
|
|
|
12,343
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
66,755
|
|
|
48,004
|
|
|
|
|
|
|
|
|
|
Severance pay deposits fund
|
|
|
|
1,576
|
|
|
1,189
|
|
|
|
|
Investment in an affiliated company
|
|
|
|
1,382
|
|
|
-
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
20,851
|
|
|
18,613
|
|
|
|
|
Intangible assets, net
|
|
|
|
4,509
|
|
|
2,503
|
|
|
|
|
Goodwill
|
|
|
|
23,387
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
118,460
|
|
$
|
70,309
|
|
|
|
|
|
|
F - 3
On Track Innovations Ltd.
and its Subsidiaries
Consolidated
Balance Sheets
|
US dollar in thousands except share and per share data
|
December 31
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
Short-term bank credit and current maturities
|
|
|
of long-term bank loans
|
|
|
$
|
5,336
|
|
$
|
4,984
|
|
Trade payables
|
|
|
|
10,291
|
|
|
8,071
|
|
Other current liabilities
|
|
|
|
5,344
|
|
|
3,517
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
20,971
|
|
|
16,572
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
Long-term loans, net of current maturities
|
|
|
|
2,432
|
|
|
1,762
|
|
Accrued severance pay
|
|
|
|
3,981
|
|
|
3,672
|
|
Deferred tax liability
|
|
|
|
728
|
|
|
202
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
|
7,141
|
|
|
5,636
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
28,112
|
|
|
22,208
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
Minority interests
|
|
|
|
-
|
|
|
415
|
|
|
|
|
Shareholders' Equity
|
|
|
Ordinary shares of NIS 0.1 par value: Authorized -
|
|
|
50,000,000 shares as of December 31, 2007 and
|
|
|
December 31, 2008; issued 19,627,068 and 21,534,788
|
|
|
shares as of December 31, 2007 and December 31, 2008,
|
|
|
respectively; outstanding 19,434,011 and 21,495,409 shares
|
|
|
as of December 31, 2007 and December 31, 2008, respectively
|
|
|
|
454
|
|
|
508
|
|
Additional paid-in capital
|
|
|
|
174,494
|
|
|
182,944
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
846
|
|
|
(325
|
)
|
Accumulated deficit
|
|
|
|
(85,446
|
)
|
|
(135,441
|
)
|
|
|
|
|
|
|
|
|
Total shareholder's equity
|
|
|
|
90,348
|
|
|
47,686
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
|
$
|
118,460
|
|
$
|
70,309
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 4
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Operations
|
US dollar in thousands except share and per share data
|
Year ended December 31
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
$
|
35,171
|
|
$
|
40,854
|
|
$
|
37,582
|
|
Licensing and transaction fees
|
|
|
|
5,382
|
|
|
2,631
|
|
|
2,635
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
40,553
|
|
|
43,485
|
|
|
40,217
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
Sales
|
|
|
|
21,871
|
|
|
25,918
|
|
|
24,743
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
|
21,871
|
|
|
25,918
|
|
|
24,743
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
18,682
|
|
|
17,567
|
|
|
15,474
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
Research and development
|
|
|
|
7,065
|
|
|
12,265
|
|
|
11,129
|
|
Selling and marketing
|
|
|
|
7,072
|
|
|
9,670
|
|
|
11,875
|
|
General and administrative
|
|
|
|
11,948
|
|
|
17,593
|
|
|
14,274
|
|
Amortization and impairment of intangible assets
|
|
|
|
821
|
|
|
1,314
|
|
|
2,794
|
|
Impairment of goodwill
|
|
|
|
-
|
|
|
-
|
|
|
24,217
|
|
Gain on sale of subsidiaries
|
|
|
|
(122
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
26,784
|
|
|
40,842
|
|
|
64,289
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
(8,102
|
)
|
|
(23,275
|
)
|
|
(48,815
|
)
|
|
|
|
Financial income
|
|
|
|
2,459
|
|
|
2,800
|
|
|
561
|
|
Financial expenses
|
|
|
|
(747
|
)
|
|
(938
|
)
|
|
(1,089
|
)
|
|
|
|
|
|
|
|
Financial income (expenses), net
|
|
|
|
1,712
|
|
|
1,862
|
|
|
(528
|
)
|
Other expenses, net
|
|
|
|
(75
|
)
|
|
(136
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes on income
|
|
|
|
(6,465
|
)
|
|
(21,549
|
)
|
|
(49,343
|
)
|
Income tax benefit
|
|
|
|
323
|
|
|
226
|
|
|
675
|
|
Equity in loss of affiliated company
|
|
|
|
(1,087
|
)
|
|
(358
|
)
|
|
(1,270
|
)
|
Minority share in loss (income) of subsidiaries
|
|
|
|
625
|
|
|
1,038
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
|
$
|
(6,604
|
)
|
$
|
(20,643
|
)
|
$
|
(49,995
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per ordinary
|
|
|
share
|
|
|
$
|
(0.47
|
)
|
$
|
(1.09
|
)
|
$
|
(2.45
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary
|
|
|
shares used in computing basic and
|
|
|
diluted net loss per ordinary share
|
|
|
|
13,919,958
|
|
|
18,896,214
|
|
|
20,413,578
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 5
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Loss
|
US dollar in thousands except share and per share data
|
Number of
Shares
issued
|
Share
capital
|
Additional
paid-in
capital
|
Deferred
stock
compensation
|
Accumulated
other
comprehensive
income
|
Accumulated
deficit
|
Total
shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
|
11,932,074
|
|
$
|
274
|
|
$
|
128,761
|
|
$
|
(833
|
)
|
$
|
232
|
|
$
|
(58,199
|
)
|
$
|
70,235
|
|
|
|
|
Changes during the year ended
|
|
|
December 31, 2006:
|
|
|
|
|
|
Reclassification upon adoption of SFAS
|
|
|
123 (R)
|
|
|
|
-
|
|
|
-
|
|
|
(833
|
)
|
|
833
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock-based compensation related to
|
|
|
options warrants and shares issued to
|
|
|
employees and others
|
|
|
|
192,393
|
|
|
6
|
|
|
5,362
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,368
|
|
Exercise of options and warrants
|
|
|
|
748,338
|
|
|
17
|
|
|
3,231
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,248
|
|
Issuance costs
|
|
|
|
-
|
|
|
-
|
|
|
(214
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(214
|
)
|
Shares issued under Alternative Option
|
|
|
Exercise Mechanism
|
|
|
|
2,437,075
|
|
|
56
|
|
|
(56
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issued in connection with the
|
|
|
purchase of business operations
|
|
|
|
3,083,000
|
|
|
73
|
|
|
23,651
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
23,724
|
|
Shares issued in connection with the
|
|
|
purchase of property plant and equipment
|
|
|
|
200,000
|
|
|
5
|
|
|
3,200
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,205
|
|
Foreign currency translation adjustments
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
106
|
|
|
-
|
|
|
106
|
|
Net unrealized gain on available-for-sale
|
|
|
securities
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
86
|
|
|
-
|
|
|
86
|
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,604
|
)
|
|
(6,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
18,592,880
|
|
$
|
431
|
|
$
|
163,102
|
|
$
|
-
|
|
$
|
424
|
|
$
|
(64,803
|
)
|
$
|
99,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the year ended
|
|
|
December 31, 2007:
|
|
|
|
|
|
Stock-based compensation related to options and
|
|
|
shares issued to employees and others
|
|
|
|
-
|
|
|
-
|
|
|
7,797
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,797
|
|
Exercise of options and warrants
|
|
|
|
458,788
|
|
|
11
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11
|
|
Shares, warrants and options issued in
|
|
|
connection with the purchase of property
|
|
|
plant and equipment
|
|
|
|
575,400
|
|
|
12
|
|
|
3,595
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,607
|
|
Foreign currency translation adjustments
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
487
|
|
|
-
|
|
|
487
|
|
Net unrealized loss on available-
|
|
|
for-sale securities
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(65
|
)
|
|
-
|
|
|
(65
|
)
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(20,643
|
)
|
|
(20,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
19,627,068
|
|
$
|
454
|
|
$
|
174,494
|
|
$
|
-
|
|
$
|
846
|
|
$
|
(85,446
|
)
|
$
|
90,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the year ended
|
|
|
December 31, 2008:
|
|
|
|
|
|
Stock-based compensation related to options and
|
|
|
shares issued to employees and others
|
|
|
|
-
|
|
|
-
|
|
|
6,460
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,460
|
|
Exercise of options, warrants and
|
|
|
receipts in respect of employee share
|
|
|
purchase plan
|
|
|
|
1,607,022
|
|
|
45
|
|
|
1,111
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,156
|
|
Receipt on account of shares
|
|
|
|
-
|
|
|
-
|
|
|
308
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
308
|
|
Shares and options issued in connection
|
|
|
with the purchase of a subsidiary
|
|
|
|
300,698
|
|
|
9
|
|
|
916
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
925
|
|
Adjustment to contingent consideration
|
|
|
in connection with the purchase of a
|
|
|
subsidiary
|
|
|
|
-
|
|
|
-
|
|
|
(345
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(345
|
)
|
Foreign currency translation adjustments
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,144
|
)
|
|
-
|
|
|
(1,144
|
)
|
Net unrealized loss on available-
|
|
|
for-sale securities
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27
|
)
|
|
-
|
|
|
(27
|
)
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(49,995
|
)
|
|
(49,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
|
21,534,788
|
|
$
|
508
|
|
$
|
182,944
|
|
$
|
-
|
|
$
|
(325
|
)
|
$
|
(135,441
|
)
|
$
|
47,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
$
|
(6,604
|
)
|
$
|
(20,643
|
)
|
$
|
(49,995
|
)
|
Foreign currency translation adjustments
|
|
|
|
106
|
|
|
487
|
|
|
(1,144
|
)
|
Net unrealized gain (loss) on available- for- sale securities
|
|
|
|
86
|
|
|
43
|
|
|
(14
|
)
|
Reclassification adjustment for realized gain (loss) on
|
|
|
available-for-sale securities
|
|
|
|
-
|
|
|
(108
|
)
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
$
|
(6,412
|
)
|
$
|
(20,221
|
)
|
$
|
(51,166
|
)
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Cash Flows
|
US dollar in thousands except share and per share data
|
Year ended December 31
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
$
|
(6,604
|
)
|
$
|
(20,643
|
)
|
$
|
(49,995
|
)
|
Adjustments required to reconcile net loss to
|
|
|
net cash used in operating activities:
|
|
|
Stock-based compensation related to options and shares issued
|
|
|
to employees and others
|
|
|
|
3,783
|
|
|
6,947
|
|
|
6,253
|
|
Gain on sale of subsidiaries
|
|
|
|
(122
|
)
|
|
-
|
|
|
-
|
|
Loss on sale of property and equipment
|
|
|
|
44
|
|
|
13
|
|
|
25
|
|
Amortization and impairment of intangible assets
|
|
|
|
821
|
|
|
1,314
|
|
|
2,794
|
|
Impairment of goodwill
|
|
|
|
-
|
|
|
-
|
|
|
24,217
|
|
Depreciation
|
|
|
|
1,862
|
|
|
2,580
|
|
|
3,044
|
|
Equity in net losses of an affiliated company
|
|
|
|
1,087
|
|
|
358
|
|
|
1,270
|
|
|
|
|
Accrued severance pay, net
|
|
|
|
796
|
|
|
283
|
|
|
78
|
|
Minority share in income (loss) of subsidiaries
|
|
|
|
(625
|
)
|
|
(1,038
|
)
|
|
57
|
|
Accrued interest and linkage differences on long-term loans
|
|
|
|
(254
|
)
|
|
(294
|
)
|
|
(27
|
)
|
Decrease in deferred tax liability
|
|
|
|
(216
|
)
|
|
(262
|
)
|
|
(711
|
)
|
Decrease (increase) in trade receivables
|
|
|
|
(1,873
|
)
|
|
104
|
|
|
2,702
|
|
Increase (decrease) in allowance for doubtful account
|
|
|
|
(551
|
)
|
|
2,533
|
|
|
548
|
|
Decrease (increase) in other receivables and prepaid expenses
|
|
|
|
1,142
|
|
|
(686
|
)
|
|
567
|
|
Decrease (increase) in inventories
|
|
|
|
(3,204
|
)
|
|
(2,776
|
)
|
|
869
|
|
Increase (decrease) in trade payables
|
|
|
|
2,558
|
|
|
3,314
|
|
|
(1,859
|
)
|
Increase (decrease) in other current liabilities
|
|
|
|
(2,147
|
)
|
|
1,966
|
|
|
(2,008
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
|
(3,503
|
)
|
|
(6,287
|
)
|
|
(12,176
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Receipts on account of loans and receivables
|
|
|
|
350
|
|
|
837
|
|
|
-
|
|
Acquisition of business operations and consolidated subsidiary, net of
|
|
|
cash acquired (Supplement C)
|
|
|
|
(23
|
)
|
|
-
|
|
|
(565
|
)
|
Sale of a consolidated subsidiary, net of cash disposed of
|
|
|
(Supplement D)
|
|
|
|
(105
|
)
|
|
-
|
|
|
-
|
|
Purchase of property and equipment
|
|
|
|
(3,107
|
)
|
|
(6,190
|
)
|
|
(1,518
|
)
|
Purchase of available-for-sale securities
|
|
|
|
(23,643
|
)
|
|
(136,094
|
)
|
|
(29,068
|
)
|
Proceeds from maturity of available-for-sale securities
|
|
|
|
25,446
|
|
|
148,049
|
|
|
34,551
|
|
Other, net
|
|
|
|
(9
|
)
|
|
-
|
|
|
30
|
|
|
|
|
|
|
|
|
Net cash provide by (used in) investing activities
|
|
|
|
(1,091
|
)
|
|
6,602
|
|
|
3,430
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
Increase (decrease) in short-term bank credit, net
|
|
|
|
(231
|
)
|
|
4,804
|
|
|
(358
|
)
|
Proceeds from long-term bank loans
|
|
|
|
978
|
|
|
739
|
|
|
-
|
|
Repayment of long-term bank loans
|
|
|
|
(570
|
)
|
|
(495
|
)
|
|
(508
|
)
|
Proceeds from minority in subsidiary
|
|
|
|
1,548
|
|
|
-
|
|
|
-
|
|
Proceeds from receipt on account of shares, exercise of options and
|
|
|
warrants and receipts in respect of employee share purchase plan, net
|
|
|
|
3,196
|
|
|
11
|
|
|
1,464
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
4,921
|
|
|
5,059
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
65
|
|
|
47
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
392
|
|
|
5,421
|
|
|
(8,274
|
)
|
Cash and cash equivalents at the beginning of the year
|
|
|
|
29,657
|
|
|
30,049
|
|
|
35,470
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
$
|
30,049
|
|
$
|
35,470
|
|
$
|
27,196
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 7
On Track Innovations Ltd.
and its Subsidiaries
Consolidated Statements of Cash Flows
|
US dollar in thousands except share and per share data
|
|
Year ended December 31
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flows activities:
|
|
|
|
|
|
|
A.
|
Cash paid during the period for:
|
|
|
|
Interest
|
|
|
$
|
132
|
|
$
|
112
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
$
|
101
|
|
$
|
19
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
Non-cash transactions:
|
|
|
|
Purchase of property and equipment
|
|
|
$
|
3,511
|
|
$
|
3,607
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
$
|
-
|
|
$
|
850
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
Issuance expenses
|
|
|
$
|
62
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
Acquisition of consolidated subsidiaries:
|
|
|
|
Assets acquired and liabilities assumed of the
|
|
|
|
subsidiaries at date of acquisition:
|
|
|
|
Working capital surplus, excluding cash
|
|
|
|
and cash equivalents
|
|
|
$
|
(460
|
)
|
$
|
-
|
|
$
|
-
|
|
|
Property and equipment
|
|
|
|
(1,293
|
)
|
|
-
|
|
|
(31
|
)
|
|
Goodwill
|
|
|
|
(19,241
|
)
|
|
-
|
|
|
(830
|
)
|
|
Customer contracts and relationships
|
|
|
|
(3,874
|
)
|
|
-
|
|
|
(561
|
)
|
|
Non competition agreement
|
|
|
|
-
|
|
|
-
|
|
|
(194
|
)
|
|
Technology
|
|
|
|
(855
|
)
|
|
-
|
|
|
(59
|
)
|
|
Long term liabilities
|
|
|
|
120
|
|
|
-
|
|
|
-
|
|
|
Deferred tax liability
|
|
|
|
855
|
|
|
-
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,748
|
)
|
|
-
|
|
|
(1,490
|
)
|
|
|
|
|
|
Issuance of shares in consideration for the acquisition
|
|
|
|
23,587
|
|
|
-
|
|
|
775
|
|
|
Direct costs of acquisitions paid via grant of options
|
|
|
|
1,138
|
|
|
-
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(23
|
)
|
$
|
-
|
|
$
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
Sale of a consolidated subsidiary:
|
|
|
|
Assets and liabilities of the previously consolidated
|
|
|
|
Subsidiary at the time it ceased being consolidated:
|
|
|
|
Working capital surplus, excluding cash
|
|
|
|
and cash equivalents
|
|
|
$
|
(247
|
)
|
$
|
-
|
|
$
|
-
|
|
|
Long-term receivables
|
|
|
|
27
|
|
|
-
|
|
|
-
|
|
|
Intangible assets
|
|
|
|
146
|
|
|
-
|
|
|
-
|
|
|
Deferred tax liability
|
|
|
|
(26
|
)
|
|
-
|
|
|
-
|
|
|
Minority interests
|
|
|
|
(127
|
)
|
|
-
|
|
|
-
|
|
|
Gain and deferred gain on sale of the subsidiary
|
|
|
|
122
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(105
|
)
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 8
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 1 General
|
On Track Innovations Ltd. (the
Company) was founded in 1990 under the laws of the State of Israel. The
Company and its subsidiaries (together the Group) are principally engaged in
the field of design, development, manufacture and sale of contactless microprocessor-based
smart card systems. In November 2002, the Companys shares began trading on NASDAQ.
|
|
$
- United States Dollars
NIS - New Israeli Shekel
|
|
B.
|
Acquisition
of subsidiaries and business operations:
|
|
1.
|
In
June 2008, the Company completed, through its subsidiary PARX Ltd, the
purchase of 100% of the share capital of ID Parking, a France-based
company that provides electronic parking solutions across France
(hereinafter- the ID Parking Transaction).
|
|
ID Parking was purchased for a
purchase price of euro 750 and $319 transaction costs, comprised of euro 250 ($396) in
cash and euro 500 ($775) in the Companys ordinary shares. The aggregate share
consideration was 300,698 ordinary shares of the Company that were issued in June 2008.
The ID Parking Transaction shares are subject to a lock-up arrangement, under which one
third of those shares (approximately 100,233 ordinary shares) are released from lock-up
every six months for an aggregate period of 18 months following June 30, 2008 (closing
date). According to the lock up arrangement, the final number of shares will be calculated
according to the actual share price at the time of their release. In the case that the
aggregate share value exceeds euro 500, a respective amount of shares will be forfeited,
and if the value is less than euro 500, the Company will pay the difference in cash.
|
|
The acquisition was accounted for as
a purchase and the Company allocated the purchase price according to the fair value of the
tangible and intangible assets acquired and liabilities assumed.
|
|
ID Parking operations have been
included in the Companys consolidated financial statements since June 30, 2008. In
connection with the acquisition the Company recognized three intangible assets (net of
deferred taxes): customer contract, fair value of $455, non competition agreement, fair
value of $127 and technology, fair value of $48. The Company also recognized goodwill in
the amount of $830.
|
|
2.
|
International
Project Solution operations (IPS)
|
|
On
December 31, 2006, pursuant to an asset purchase agreement (the Agreement)
dated as of November 7, 2006 between the Company and Vuance Ltd. (formerly SuperCom
Ltd.), an Israeli corporation (Vuance), the Company completed the acquisition
of the main assets of Vuance, including the International Project Solution (IPS)
division of Vuance. Vuance is an Israeli based company, which through its IPS division
developed and provided a wide-range of complementary technologies and solutions for the
smart card market. The acquisition provided the Company with accesses to new growing
markets and complementary security technologies that safeguard against counterfeit and
forgery.
|
F - 9
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 1 General
(contd)
|
B.
|
Acquisition
of subsidiaries and business operations: (contd)
|
|
2.
|
International
Project Solution operations (IPS) (contd)
|
|
The
aggregate purchase price for the acquisition was paid through the issuance of an
aggregate of 2,827,200 of the Companys ordinary shares. The 2,827,200 ordinary
shares issued to Vuance were subject to a lock-up agreement, where one-seventh of the
shares (403,885 ordinary shares) will be released from the lock-up restrictions every
three months beginning on the closing date, December 31, 2006, for an aggregate period of
eighteen months. Vuance executed an irrevocable proxy appointing the Companys
Chairman, on behalf of the Board of Directors, or a person instructed by the Board of
Directors, to vote the 2,827,200 ordinary shares issued to Vuance in connection with the
transaction.
|
|
The
parties also entered into a service and supply agreement giving Vuance a license to use
applicable Vuance intellectual property transferred to the Company for the duration of
certain existing contracts and projects.
|
|
The
acquisition was accounted for as a purchase and the Company allocated the purchase price
according to the fair value of the tangible and intangible assets acquired and
liabilities assumed. The purchase price was calculated in accordance with EITF No. 99-12
Determination of the Measurement Date for the Market Price of Acquirer Securities
Issued in a Purchase Business Combinations (EITF No. 99-12), based on
the date the business combination was announced and was $20,639 and $701 of transaction
costs. The results of operation acquired are included in the consolidated financial
statements of the Company commencing January 1, 2007.
|
|
Based
upon a fair value valuation of assets acquired and liabilities assumed, the Company has
allocated the total cost of acquisition to IPS assets and liabilities as follows:
|
|
|
At December 31
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
$
|
303
|
|
|
Property and equipment
|
|
|
|
1,277
|
|
|
Technology (useful life of 6 years)
|
|
|
|
691
|
|
|
Customer relationships (useful life of 5 years)
|
|
|
|
1,448
|
|
|
Goodwill
|
|
|
|
17,621
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
$
|
21,340
|
|
|
|
|
|
|
Goodwill included but was not limited
to the synergistic value, accesses to new growing markets and potential competitive
benefits that could have been realized by the Company from the acquisition.
|
|
Hereafter
are certain unaudited pro forma combined statements of operations data for the year ended
December 31, 2006, as if the acquisition of the IPS occurred on January 1, 2005, after
giving effect to purchase accounting adjustments, including amortization of certain
identifiable intangible assets and the issuance of the 2,827,200 of the Companys
ordinary shares.
|
F - 10
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 1 General
(contd)
|
B.
|
Acquisition
of subsidiaries and business operations: (contd)
|
|
2.
|
International
Project Solution operations (IPS) (contd)
|
|
The
pro forma financial information is not necessarily indicative of the combined results
that would have been attained had the acquisition taken place and the beginning of 2005,
nor is it necessarily indicative of future results.
|
|
|
December 31
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
48,941
|
|
|
|
|
|
|
Net loss
|
|
|
$
|
(9,409
|
)
|
|
|
|
|
|
Basic and diluted net loss per ordinary share
|
|
|
$
|
(0.56
|
)
|
|
In
May 2006, the Company completed the acquisition of 100% of the outstanding share capital
of InSeal SAS (InSeal). InSeal is a France-based company that provides
contactless applications to a variety of customers in the payments market in Europe.
|
|
Pursuant
to the share purchase agreement entered into with InSeals shareholders, the
purchase price for the acquisition was paid to InSeals shareholders through the
issuance of an aggregate of 243,800 of the Companys ordinary shares.
|
|
The
acquisition was accounted for as a purchase and the Company allocated the purchase price
according to the fair value of the tangible and intangible assets acquired and
liabilities assumed. The purchase price was calculated in accordance with EITF No. 99-12
and was $2,948 and $661 of transaction costs. InSeals operations have been included
in the Companys consolidated financial statements since May 2006. In connection
with the acquisition the Company recognized two intangible assets: customer contracts,
fair value of $2,426, and technology, fair value of $164. The Company also recognized
goodwill in the amount of $1,620.
|
|
In addition to the foregoing
consideration, in connection with the acquisition, the Company also issued warrants to
purchase up to 180,000 of its ordinary shares to two of InSeals shareholders and one
employee. The warrants, which have a nominal exercise price of NIS 0.10 per share, are
fully exercisable in May 2007, and have a term of four years. However, each of the warrant
holders has made a lock-up undertaking to the Company, pursuant to which one
quarter of the warrants becomes freely transferable commencing in May 2007 and the
remaining warrants become freely transferable in three equal annual installments
thereafter (with all of the warrants becoming freely transferable on May 2010).
|
F - 11
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 1 General
(contd)
|
B.
|
Acquisition
of subsidiaries and business operations: (contd)
|
|
In
the event that the warrant holders service with the Company or its subsidiaries is
terminated, for whatever reason, all of the holders warrant shares that are free
from the lock-up undertaking discussed above will be exercisable within 60 days from such
termination, and the balance of the portion of warrants not previously exercised will
become void. These warrants, with a fair value of $2,104 as of the closing date, have
been accounted for in accordance with EITF No 95-8, Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination, and are being recorded as compensation expense over the lock-up
undertaking period.
|
|
4.
|
Acquisitions
in the Far East
|
|
Pioneer
Oriental International Ltd
|
|
In
July 2005, the Company completed the acquisition of Pioneer Oriental International Ltd. (POI),
a Hong Kong company and a subsidiary of Pioneer Oriental Engineering Ltd., a Hong Kong
company (POE). POI is an engineering company that develops and manufactures
machinery used to create smart card inlays for smart cards and other products, as well as
to manufacture contact and/or contactless smart cards themselves. Pursuant to the Asset
Purchase Agreement dated June 16, 2005, among POE, its shareholders (together the Sellers)
and OTI (as amended, the POI Purchase Agreement), the aggregate purchase price for the
acquisition was paid to the Sellers through the issuance of an aggregate 40,441 of the
Companys ordinary shares.
|
|
In
July 2005, the Companys new, wholly-owned subsidiary, POI, completed the
acquisition of substantially all of the assets of POE relating to the design and
manufacture of machinery for the manufacture of smart cards, including certain
proprietary technologies related to the manufacturing process. Pursuant to the Asset
Purchase Agreement dated June 16, 2005 between POI and POE (as amended, the POE
Purchase Agreement), POI also agreed to make offers of employment to each of the
employees of POE. The aggregate purchase price for the acquisition was paid to POE
through the issuance of an aggregate of 41,788 of the Companys ordinary shares.
|
|
The
acquisitions were accounted for as a purchase and the Company allocated the purchase
price according to the fair value of the tangible assets and intangible assets acquired
and liabilities assumed. The purchase price was calculated in accordance with EITF No.
99-12, and was $1,041. The sum of the fair values of the assets acquired less liabilities
assumed exceeded the acquisition cost. Accordingly, the Company reduced the purchase
price allocated to the acquired non-current assets to zero. After the above allocation,
negative goodwill in the amount of $444 remained. In accordance with SFAS No. 141 Business
combinations, this amount was recognized in 2005 as an extraordinary gain.
|
F - 12
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 1 General
(contd)
|
B.
|
Acquisition
of subsidiaries and business operations: (contd)
|
|
4.
|
Acquisitions
in the Far East (contd)
|
|
In July 2005, the Company completed
the acquisition of a 71.5% interest in e-Pilot Group Limited (e-Pilot), a
British Virgin Islands company, from three of e-Pilots shareholders (collectively,
the e-Pilot Shareholders). e-Pilot, which is headquartered in Hong Kong,
develops, manufactures and markets smart card inlays for smart cards and other products.
Pursuant to share purchase agreements (as amended, the e-Pilot Purchase
Agreements) entered into with each of the e-Pilot Shareholders, the aggregate
purchase price for the acquisition was paid to the e-Pilot Shareholders through the
issuance of an aggregate of 52,572 of the Companys ordinary shares.
|
|
The
acquisition was accounted for as a purchase and the Company allocated the purchase price
according to the fair value of the tangible assets and intangible assets acquired and
liabilities assumed. The purchase price in the amount of $661 was calculated in
accordance with EITF No. 99-12.
|
|
In
connection with the acquisition, the Company recognized an intangible asset in the amount
of $1,183, which was assigned to customer relationships and is being amortized over five
years.
|
|
Millennium
Cards Technology Limited
|
|
On
September 1, 2006, the Company completed a structural change in the Far-East, under which
the operations of POI and of e-Pilot were transferred to Millennium Cards
Technology Limited (MCT), a subsidiary which was established during 2006.
|
|
Following
the structural change, the Company sold POI and e-Pilot for total consideration of $200
and recorded a $122 as gain on sale of subsidiaries.
|
|
In September 2008, MCT allotted an
additional 3,000 shares of HK$1.00 each to the Company against the waiver of a debt of MCT
to the Company in a principal amount of $6,900, so that such loan was converted into
MCTs 3,000 shares. Following the share allotment, the Company increased its share in
MCTs share capital from 60% to 90%. The increase was accounted for as step
acquisition in accordance with FASB Statement No. 141,
Business
Combinations
. As a result, the Company recognized minority interests and inventory in
the amount of $352 each.
|
F - 13
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 1 General
(contd)
|
B.
|
Acquisition
of subsidiaries and business operations: (contd)
|
|
In
October 2004, the Company completed the acquisition of ASEC Spolka Akcyjna (ASEC)
from Nextel Spolka Akcyjna (Nextel), headquartered in Krakow, Poland. ASEC
develops, manufactures and markets card readers and reader modules based on radio
frequency identification technologies, including high-end programmable smart card as well
as economically priced readers. Pursuant to the Preliminary Share Purchase Agreement,
dated September 2004, as amended in October 2004, between Nextel and the Company (the
Agreement), the aggregate purchase price for the acquisition was $1,600,
which was paid to Nextel through the issuance of 186,264 of the Companys ordinary
shares, based on a market price of US $8.59 per share, which was the average closing
price of the Companys ordinary shares for the last ten trading days prior to
September 14, 2004. The acquisition was accounted for as a purchase and the Company
allocated the purchase price according to the fair value of the tangible assets and
intangible assets acquired and liabilities assumed. As of October 2004, the purchase
price was re-calculated in accordance with EITF No. 99-12, based on the date the business
combination was consummated, and was in the amount of $1,245.
|
|
In
addition, the Agreement provides for an additional consideration of up to $350 to be paid
to Nextel (the earn-out right) in the form of the Companys ordinary
shares pursuant to the earn-out formula based on ASECs 2004 and 2005 results.
Accordingly, as of December 31, 2004, the Company recorded $175 from the earn-out right
against a liability in accordance with SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which
was settled by 14,298 ordinary shares at the fair market value of $175 that were issued
by the Company to Nextel in June 2005. Based on ASECs 2005 results, the Company did
not incur any further liability in connection with the earn-out formula.
|
|
In
connection with the acquisition, the Company recognized goodwill of $167. Out of $1,437
of acquired intangible assets, $579 was assigned to a brand, $406 was assigned to
contracts with customers which are both being amortized over up to five years and $452
was assigned to know how, which is being amortized over one-and-a-half years.
|
|
C.
|
Selling
of Intercard Gmbh Kartensysteme
|
|
On
September 14, 2004, the Company entered into an agreement under which, in October 2004,
the Company sold its wholly-owned German subsidiary InterCard GmbH Kartensysteme (KS)
in consideration of $2,500, payable in two installments. The first installment in the
amount of $1,250 was paid by receiving $685 in cash, offsetting an amount of euro 325
($432) against a loan granted to the buyer, which is repayable in 32 monthly installments
of euro 10 and a final installment of euro 5, beginning on February 1, 2005 and that is
interest-free and offsetting an amount of euro 100 ($133) against a loan granted to the
buyer, which is repayable in 12 monthly installments of euro 9, beginning on February 1,
2005.
|
F - 14
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 1 General
(contd)
|
C.
|
Selling
of Intercard Gmbh Kartensysteme (contd)
|
|
The
second installment in the amount of $1,250 was to be paid in 25 quarterly payments
beginning on April 1, 2005. The total present value of the purchase price amounted to
$2,178. In October 2005, the Company entered into a settlement agreement according to
which the outstanding balances of the two loans were reduced by euro 115 ($136) and
combined into one loan which is payable in 24 monthly installments of euro 10 each and a
final installment of Euro 5. During 2007 the Buyer settled the entire remainder loan.
|
|
The
gain on the sale of KS including the effect of the aforesaid deduction from the proceeds
was $374 and was recognized in 2005.
|
|
The
Companys control over KS ceased on the closing date, which was October 1, 2004, and
therefore the Company ceased to consolidate the financial statements of KS effective
October 1, 2004.
|
|
D.
|
Investment
in affiliated company
|
|
During 2005, an affiliated company
was established together with a Chinese government entity, in the form of a joint venture,
for the manufacture and sale of OTI-based travel document inlays for such government. The
joint venture was approved for establishment by the Chinese government authorities. During
2008 the investment was fully written off (see Note 2H).
|
Note 2
Significant Accounting Policies
|
The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP). The
significant accounting policies followed in the preparation of the financial statements,
applied on a consistent basis, are as follows:
|
|
A.
|
Financial
statements in U.S. dollars
|
|
Substantially
all of the Companys and certain of its subsidiaries revenues are in U.S.
dollars. A significant portion of purchases of materials and components and most
marketing costs are denominated in U.S. dollars. Therefore, both the functional and
reporting currencies of the Company and certain of its subsidiaries are the U.S. dollar.
|
|
Transactions
and balances denominated in U.S. dollars are presented at their original amounts.
Transactions and balances in other currencies are remeasured into U.S. dollars in
accordance with the principles set forth in the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 52, Foreign
Currency Translation. All exchange gains and losses from remeasurement of balance
sheet items denominated in non U.S. dollar currencies are reflected in the consolidated
statements of operations.
|
|
The
functional currencies of the remaining subsidiaries are their local currencies. The
financial statements of those companies are translated into U.S. dollars in accordance
with SFAS No. 52, using the exchange rate at the balance sheet date for assets and
liabilities, and weighted average exchange rates for revenues and expenses. Translation
adjustments resulting from the process of the aforesaid translation are included as a
separate component of shareholders equity (accumulated other comprehensive income
(loss)).
|
F - 15
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
B.
|
Principles
of consolidation
|
|
The
consolidated financial statements include the financial statements of the Company and its
majority owned subsidiaries. When the Company does not have a controlling interest in an
entity or joint venture, but exerts a significant influence over the entity or joint
venture, the Company applies the equity method of accounting. InterCompany transactions
and balances have been eliminated in consolidation.
|
|
C.
|
Estimates
and assumptions
|
|
The
preparation of the consolidated financial statements requires management of the Company
to make a number of estimates and assumptions relating to the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses
during the period. Such estimates include the valuation of useful lives of long-lived
assets, valuation of accounts receivable and allowance for doubtful accounts, inventory,
investments, legal contingencies, share- based compensation, the assumptions used in the
calculation of income taxes and other contingencies. Estimates and assumptions are
periodically reviewed by management and the effects of any material revisions are
reflected in the period that they are determined to be necessary. Actual results,
however, may vary from these estimates. The current economic environment has increased
the degree of uncertainty inherent in those estimates and assumptions.
|
|
Cash
equivalents are short-term highly liquid investments and debt instruments that are
readily convertible to cash with original maturities of three months or less from the
date of purchase.
Cash equivalents include $18,900 and
$29,120 of U.S. Treasury securities with an original term of less than three months at
December 31, 2008 and 2007, respectively.
|
|
E.
|
Short-term
investments
|
|
The
Company accounts for investments in U.S. Treasury securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities.
|
|
Management
determines the appropriate classification of its investments in debt securities at the
time of purchase and reevaluates such determinations at each balance sheet date. At
December 31, 2007 and 2008, the Companys investments were classified as
available-for-sale and are stated at market value. Unrealized gains and losses, net of
tax are reported as a separate component of shareholders equity (accumulated other
comprehensive income (loss)) until realized. Interest income is recognized when earned
and included in the consolidated statement of operation in financial income. Realized
gains and losses are included in financial income or expenses.
|
|
On
December 31, 2008, there was an unrealized gain on the Companys investment in
fixed-rate treasury securities in the amount of $6 the contractual maturity of all debt
securities is within one year.
|
|
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts
collected on trade accounts receivable are included in net cash provided by operating
activities in the consolidated statements of cash flows. The consolidated financial
statements include an allowance for loss from receivables for which collection is in
doubt. In determining the adequacy of the allowance consideration is given to the
historical experience, aging of the receivable, adjusted to take into account current
market conditions and to information available about specific debtors, including their
financial situation, the volume of their operations, and evaluation of the security
received from them or their guarantors.
|
F - 16
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
Inventories
are stated at the lower of cost or market value. Cost is determined by calculating raw
materials, work in process and finished products on a moving average basis.
Inventory write-offs are provided to cover risks arising from slow moving items or
technological obsolescence. Such write-offs, which were not material for 2006, 2007 and
2008, have been included in cost of revenues.
|
|
The
Company applies FASB Statement No. 151,
Inventory Costs an Amendment
of ARB No. 43, Chapter 4
(SFAS 151). Statement 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) requiring that those items be recognized as current-period charges. In
addition, SFAS 151 requires that allocation of fixed production overheads be based on the
normal capacity of the production facilities.
|
|
H.
|
Investment
in an affiliated company
|
|
In the financial statements the term
affiliated company means a company held to the extent of 49%. The investment in an
affiliated company is accounted for under the equity method. Profits not yet realized on
transactions with the Group are eliminated at the same rate as the percentage holding in
the affiliated company. During 2008 the Company has fully written off its investment in
the affiliated company, its Chinese joint venture, resulted from uncertainty in future
revenues timing. As of December 31, 2007 and 2008 the investment in the affiliated company
amounted to $1,382 and $0, and includes the elimination of profits not yet realized of
$599 and $0, respectively, on the sale of equipment from the Group to the affiliated
company in 2006.
|
|
I.
|
Property,
plant and equipment, net
|
|
Property,
plant and equipment are stated at cost less accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the assets as
follows:
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold land (over the terms of the lease, see note 6A(1))
|
|
|
|
49
|
|
|
Buildings
|
|
|
|
25
|
|
|
Computers, software and manufacturing equipment
|
|
|
|
3-5
|
|
|
Office furniture and equipment
|
|
|
|
5-16
|
|
|
Motor vehicles
|
|
|
|
6
|
|
|
J.
|
Impairment
of long-lived assets
|
|
In
accordance with FASB Statement No. 144 (SFAS 144), Accounting for the Impairment or
Disposal of Long-Lived Assets, long-lived assets, such as property, plant, and
equipment, and purchased intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If circumstances require a long-lived asset be tested
for possible impairment, the Company first compares undiscounted cash flows expected to
be generated by an asset to the carrying value of the asset. If the carrying value of the
long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is
recognized to the extent that the carrying value exceeds its fair value. Fair value is
determined through various valuation techniques including discounted cash flow models,
quoted market values and third-party independent appraisals, as considered necessary.
|
|
The Company recorded an
impairment loss of $1,427 in 2008. See Note 5B. No impairment losses were recoded in 2007 and 2006.
|
F - 17
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
K.
|
Goodwill
and purchased intangible assets
|
|
Goodwill represents the excess of the
aggregate purchase price over the fair value of the net assets acquired in a purchase
businesses combination. Goodwill is reviewed for impairment at least annually, as of December
every year, in accordance with the provisions of FASB Statement No. 142,
Goodwill and Other Intangible Assets.
The goodwill impairment test is a two-step
test. Under the first step, the fair value of the reporting unit is compared with its
carrying value (including goodwill). If the fair value of the reporting unit is less than
its carrying value, an indication of goodwill impairment exists for the reporting unit and
the enterprise must perform step two of the impairment test (measurement). Under step two,
an impairment loss is recognized for any excess of the carrying amount of the reporting
units goodwill over the implied fair value of that goodwill. The implied fair value
of goodwill is determined by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation, in accordance with FASB Statement
No. 141,
Business Combinations
. The residual fair value after this allocation
is the implied fair value of the reporting unit goodwill. If the fair value of the
reporting unit exceeds its carrying value, step two does not need to be performed.
|
|
The Company recorded an impairment loss of $24,217 in 2008. See Note No. 5A. No impairment losses were
recorded in 2007 and 2006.
|
|
Purchased intangible assets are
carried at cost, less accumulated amortization. Amortization is computed over the
estimated useful lives of the respective assets, generally three to seven years (see Note
2J).
|
|
The
Group generates revenues from product sales, licensing and transaction fees. Revenues are
also generated from non-recurring engineering, customer services and technical support.
|
|
Revenues
from products sales and non-recurring engineering are recognized in accordance with Staff
Accounting Bulletin (SAB) No. 104 Revenue Recognition, when
delivery has occurred provided there is persuasive evidence of an agreement, the fee is
fixed or determinable and collection of the related receivable is probable and no further
obligations exist. In the case of non-recurring engineering, revenue is recognized on
completion of testing and approval of the customization of the product by the customer
and provided that no further obligation exists.
|
|
Technology
license revenues are recognized at the time the technology and license is delivered to
the customer, collection is probable, the fee is fixed and determinable, a persuasive
evidence of an agreement exists, no significant obligation remains under the sale or
licensing agreement and no significant customer acceptance requirements exist after
delivery of the technology.
|
|
Transaction
fees are recognized as earned based on actual usage. Usage is determined by receiving
confirmation from the users.
|
|
Revenues
relating to customer services and technical support are recognized as the services are
rendered ratably over the term of the related contract.
|
|
M.
|
Research
and development costs
|
|
Research
and development costs are charged to operations as incurred.
|
|
Participation
and grants from the Government of Israel (Office of the Chief Scientist OCS)
in approved programs for research and development are recognized as a reduction of a
research and development expense as the related costs are incurred.
|
F - 18
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
N.
|
Stock-based
compensation
|
|
Prior
to January 1, 2006, the Company accounted for stock based employee and directors
compensation by using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Accordingly, compensation cost for stock options was
measured as the excess of the market price of the underlying stock on the date of grant
over the exercise price and was recognized over the scheduled vesting.
|
|
Effective
January 1, 2006, the Company has adopted SFAS 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 based on
estimated fair values. The Company adopted SFAS 123(R) using the
modified-prospective-transition method. Under the modified-prospective-transition method,
compensation cost is recognized on a prospective basis for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123. For share-based
payment awards granted after January 1, 2006, the Company recognizes compensation cost
based on estimated grant date fair value using the Black-Scholes option pricing model. In
accordance with the modified prospective method, the Companys consolidated
financial statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R).
|
|
Upon
adoption of SFAS 123(R), in 2006, the $833 in Additional Paid-In Capital and the
offsetting amount in Deferred Stock-Based Compensation, that are both reflected in
shareholders equity at December 31, 2005, have been reversed as required by SFAS
123 (R). The net effect has no change in total shareholders equity.
|
|
During
2007 and 2008 most of the options were granted with a par value exercise price and during
2006 all options were granted with a par value exercise price. Due to the par value
nominal amount of NIS 0.1, the fair value of these options was estimated to be equal to
the Companys market share price at the grant date.
|
|
The
fair value of each option granted during 2007 and 2008, for which the exercise price was
greater than par value, was estimated on the date of grant, using the Black-Scholes model
using the following assumptions:
|
|
1.
|
Dividend
yield of zero percent for all periods.
|
|
2.
|
Risk-free
interest rate of 2.93% and 1.63% for, 2007 and 2008, respectively.
|
|
3.
|
Estimated
expected lives of 2.5-5 years for all periods.
|
|
4.
|
Expected
average volatility of 46% and 44%-53% for 2007 and 2008, respectively,
which represent a weighted average standard deviation rate for the
price of the Companys Ordinary Shares in the NASDAQ Global
Market.
|
|
For
additional information see Note 10C.
|
|
The
Company applies SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services with respect to options issued to non-employees. SFAS No. 123 requires
use of an option valuation model to measure the fair value of these options at the grant
date. During 2007 and 2008 all options were granted with a par value exercise price. Due
to the par value nominal amount of NIS 0.1, the fair value of these options was estimated
to be equal to the Companys market share price at the grant date.
|
F - 19
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
O.
|
Basic
and diluted net loss per share
|
|
Basic
and diluted net loss per ordinary share is computed based on the weighted average number
of ordinary shares outstanding during each year.
|
|
All outstanding stock options and
warrants (3,488,145, 5,394,790 and 6,210,112 for December 31, 2006, 2007 and 2008,
respectively), have been excluded from the calculation of the diluted net loss per
ordinary share because all such securities are anti-dilutive for all periods presented.
|
|
P.
|
Fair
value of financial instruments
|
|
Effective
January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair
Value Measurements, (SFAS 157), for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are
recognized or disclosed at fair value in the financial statements on a recurring basis.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date.
|
|
SFAS
157 also establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FASB Staff Position FAS 157-2, Effective Date of FASB
Statement No. 157, delays the effective date of SFAS 157 until fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis.
|
|
On January 1, 2009, the Company will
be required to apply the provisions of SFAS 157 to fair value measurements of nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. The Company is in the process of evaluating
the impact, if any, of applying these provisions on its financial position and results of
operations. In October 2008, the FASB issued FASB Staff Position FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset is
Not Active, which was effective immediately. FSP FAS 157-3 clarifies the application
of SFAS 157 in cases where the market for a financial instrument is not active and
provides an example to illustrate key considerations in determining fair value in those
circumstances. The adoption of SFAS 157 and FSP FAS 157-3 did not have an impact on
the Companys consolidated results of operations and financial position.
|
|
The
Company, in estimating fair value for financial instruments, used the following methods
and assumptions:
|
|
The carrying amounts of cash and cash equivalents, trade receivables, short-term bank credit and trade
payables are equivalent to, or approximate their fair value due to the short-term maturity of these
instruments.
|
|
The
fair value of marketable securities is based on quoted market prices.
|
|
The carrying amounts of long-term loans are equivalent or approximate to their fair value as they bear
interest at approximate market rates.
|
F - 20
On Track Innovations Ltd.
and Subsidiaries
Notes to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
The
Company accounts for taxes on income in accordance with SFAS No. 109, Accounting
for Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the consolidated
statement of operations in the period that includes the enactment date. The Company
provides a valuation allowance to reduce deferred tax assets to the amount that is more
likely than not to be realized.
|
|
The
Companys liability for severance pay for some of its Israeli employees is
calculated pursuant to Israeli severance pay law based on the most recent salary of the
employee multiplied by the number of years of employment, as of the balance sheet date.
Those employees are entitled to one months salary for each year of employment or a
portion thereof. Certain senior executives are entitled to receive additional severance
pay. The Companys liability for those Israeli employees is partially provided for
by monthly deposits for insurance policies and by an accrual. The value of these policies
is recorded as an asset in the Companys balance sheet.
|
|
The
deposited funds include profits and losses accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to
Israeli Severance Pay Law or labor agreements. The value of the deposited funds is based
on the cash redemption value of these policies.
|
|
In
respect of other Israeli employees, the Company has an approval from the Israeli Ministry
of Labor and Welfare, pursuant to the terms of Section 14 of the Israeli Severance Pay
Law, 1963, according to which the current deposits in the pension fund and/or with the
insurance company exempt the Company from any additional obligation to these employees
for whom the said depository payments are made.
|
|
Severance
pay expenses for the years ended December 31, 2006, 2007 and 2008 amounted to
approximately $816, $304 and $715, respectively.
|
|
Advertising
expenses are charged to the statements of operations as incurred. Advertising expenses
for the years ended December 31, 2006, 2007 and 2008 amounted to approximately $662, $780
and $1,059, respectively.
|
|
T.
|
Concentrations
of credit risk
|
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash equivalents, U.S. treasury securities, long-term receivables and
trade receivables.
|
|
Cash
equivalents are invested mainly in U.S. dollars with major banks in Israel and Canada.
Management believes that the financial institutions that hold the Groups
investments are financially sound and, accordingly, minimal credit risk exists with
respect to these investments.
|
|
U.S.
treasury securities are denominated in U.S. dollars. Management
believes that minimal credit risk exists with respect to these
securities.
|
F - 21
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
T.
|
Concentrations
of credit risk (contd)
|
|
Most
of the Companys trade receivables are derived from sales to large and financially
secure organizations located mainly in the United States, Far East, Africa and Europe. An
allowance for doubtful accounts is determined on the basis of specific identification of
balances, the collection of which, in managements opinion, is doubtful. In
determining the adequacy of the provision, management bases its opinion, inter alia, on
the estimated risks, current market conditions, in reliance on available information with
respect to the debtors financial position. As for major customers, see Note 13.
|
|
The
activity in the allowance for doubtful accounts for the years ended December 31, 2006,
2007 and 2008 is as follows:
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts at beginning of year
|
|
|
$
|
785
|
|
$
|
234
|
|
$
|
2,767
|
|
|
Additions charged to provision doubtful accounts
|
|
|
|
84
|
|
|
2,560
|
|
|
535
|
|
|
Write-downs charged against the allowance
|
|
|
|
(639
|
)
|
|
(29
|
)
|
|
-
|
|
|
Translation differences
|
|
|
|
4
|
|
|
2
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts at end of year
|
|
|
$
|
234
|
|
$
|
2,767
|
|
$
|
3,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
|
Commitments
and contingencies
|
|
Liabilities
for loss contingencies arising from claims, assessments, litigations, fines and penalties
and other sources are recognized when it is probable that a liability has been incurred
and the amount of the assessment can be reasonably estimated.
|
|
V.
|
Accumulated
other comprehensive loss
|
|
The
Companys comprehensive loss consists of net loss, net unrealized gains (losses) on
available for sale securities and on the change in foreign currency translation
adjustments, and is presented in the consolidated statement of comprehensive income
(loss).
|
|
W.
|
Accounting
pronouncements adopted in 2008
|
|
1.
|
Refer
to Note 2 (P) for Fair Value measurement of financial instruments.
|
|
2.
|
In
February, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities Including an amendment of
FASB Statement No. 115 (FAS 159). The statement allows the Company to
irrevocably choose to measure many financial assets and liabilities at fair
value that are not currently required to be measured at fair value. This
Statement is effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007. The adoption of FAS 159 did not have
an impact on the Companys consolidated results of operations and
financial position.
|
F - 22
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
W.
|
Accounting
pronouncements adopted in 2008 (contd)
|
|
3.
|
In
June 2007, the FASB reached a final consensus on Emerging Issues Task Force
Issue 07-3, Accounting for Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities (EITF
07-03). The consensus reached by the FASB requires companies involved in
research and development activities to capitalize such non-refundable advance
payments for goods and services pursuant to an executory contractual
arrangement because the right to receive those services in the future
represents a probable future economic benefit. Those advance payments will be
capitalized until the goods have been delivered or the related services have
been performed. The consensus on EITF 07-03 is effective prospectively for
financial statements issued for fiscal years beginning after December 15,
2007, and interim periods within those fiscal years. The adoption of the
provisions of EITF 07-03 did not have an impact on its financial position,
results of operations or cash flows.
|
|
X.
|
Recently
issued accounting pronouncements not yet adopted
|
|
1.
|
In
December 2007, the FASB issued FASB Statement No. 141R, Business Combinations
(Statement 141R) and FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment to ARB No. 51 (Statement
160). Statements 141R and 160 require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at full fair value and require noncontrolling interests
(previously referred to as minority interests) to be reported as a component of
equity, which changes the accounting for transactions with noncontrolling
interest holders. Both Statements are effective for periods beginning on or
after December 15, 2008, and earlier adoption is prohibited. Statement 141R
will be applied to business combinations occurring after the effective date.
Statement 160 will be applied prospectively to all noncontrolling interests,
including any that arose before the effective date. The Company will adopt the
guidance in statement 141R and statement 160 to future transactions. The
Company will follow upon adoption the presentation and disclosure requirements
with respect to minority interests in subsidiaries, this will result in
a reclassification of immaterial amounts from minority interest liability
classified balance to an equity account.
|
|
2.
|
In
March 2008, the FASB issued FASB Statement No. 161,
Disclosures about
Derivative Instruments
and Hedging Activitiesan amendment of FASB
Statement No. 133
. Statement 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their
objectives and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. Statement
161 also requires entities to disclose additional information about the amounts
and location of derivatives located within the financial statements, how the
provisions of Statement 133 have been applied, and the impact that hedges have
on an entitys financial position, financial performance, and cash flows. Statement
161 is effective for fiscal years and interim periods beginning after November
15, 2008. The Company believes that the impact, if any, of adopting
Statement 161 will not have a material Impact on the Companys financial
statements.
|
|
3.
|
In
April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination
of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under Statement 142.
FSP FAS 142-3 is effective for fiscal years beginning after December 15,
2008. The Company believes that the impact, if any, of adopting FSP FAS 142-3
will not have a material Impact on the Companys financial statements.
|
F - 23
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 2
Significant Accounting Policies (contd)
|
X.
|
Recently
issued accounting pronouncements not yet adopted (contd)
|
|
4.
|
In
June 2008, the FASBs Emerging Issues Task Force reached a consensus on
EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entitys Own Stock. This EITF Issue
provides guidance on the determination of whether such instruments are
classified in equity or as a derivative instrument. The Company will adopt the
provisions of EITF 07-5 on January 1, 2009 and expect that the impact, if any,
of adopting EITF 07-5 will not have a material Impact on the Companys
financial statements.
|
|
5.
|
In
November 2008, the FASBs Emerging Issues Task Force reached a consensus
on EITF Issue No. 08-6, Equity Method Investment Accounting
Considerations. EITF 08-6 continues to follow the accounting for the
initial carrying value of equity method investments in APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock, which is
based on a cost accumulation model and generally excludes contingent
consideration. EITF 08-6 also specifies that other-than-temporary
impairment testing by the investor should be performed at the investment
level and that a separate impairment assessment of the underlying assets
is not required. An impairment charge by the investee should result in an
adjustment of the investors basis of the impaired asset for the
investors pro-rata share of such impairment. In addition, EITF 08-6
reached a consensus on how to account for an issuance of shares by an
investee that reduces the investors ownership share of the investee.
An investor should account for such transactions as if it had sold a
proportionate share of its investment with any gains or losses recorded
through earnings. EITF 08-6 also addresses the accounting for a change in
an investment from the equity method to the cost method after adoption of
Statement 160. EITF 08-6 affirms the existing guidance in APB 18, which
requires cessation of the equity method of accounting and application of
FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities, or the cost method under APB 18, as appropriate. EITF
08-6 is effective for transactions occurring on or after December 15,
2008. The Company does not anticipate that the adoption of EITF 08-6 will
materially impact the Companys financial position or results of
operations.
|
|
6.
|
In
May 2009, the FASB issued Statement No. 165, Subsequent Events, addressing
accounting and disclosure requirements related to subsequent events.
Statement 165 requires management to evaluate subsequent events through
the date the financial statements are either issued or available to be
issued, depending on the companys expectation of whether it will
widely distribute its financial statements to its shareholders and other
financial statement users. Companies will be required to disclose the date
through which subsequent events have been evaluated. Statement 165 is
effective for interim or annual financial periods ending after June 15,
2009 and should be applied prospectively. The adoption of Statement 165 is
not expected to have a material effect on the Companys financial
statements.
|
Note 3 Other
Receivables and Prepaid Expenses
|
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government institutions
|
|
|
$
|
678
|
|
$
|
591
|
|
|
Prepaid expenses
|
|
|
|
282
|
|
|
546
|
|
|
Other receivables
|
|
|
|
2,676
|
|
|
1,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,636
|
|
$
|
2,994
|
|
|
|
|
|
|
|
|
|
|
|
F - 24
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 4 Inventories
|
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
$
|
4,697
|
|
$
|
4,435
|
|
|
Work in progress
|
|
|
|
5,530
|
|
|
3,747
|
|
|
Finished products
|
|
|
|
3,015
|
|
|
4,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,242
|
|
$
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Goodwill
and Intangible Assets, Net
|
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1
|
|
|
$
|
23,387
|
|
$
|
23,387
|
|
|
Changes during the year - Goodwill resulting from business
|
|
|
|
combination
|
|
|
|
-
|
|
|
830
|
|
|
Impairment loss*
|
|
|
|
|
|
|
(24,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
|
$
|
23,387
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The
Company conducted its annual goodwill impairment test on the goodwill acquired. The test
was based on the Companys single reporting unit structure. As a result of the
decrease in the Companys market capitalization in 2008 and deteriorating global
economy, the Company determined that the carrying value of the goodwill exceeded its
implied fair value. The Company further concluded that all the goodwill acquired had been
impaired and therefore, in the fourth quarter of 2008, it recorded an impairment charge
of $24.2 million.
|
|
B.
|
Intangible
assets, net
|
|
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
$
|
1,582
|
|
$
|
1,639
|
|
|
Brand
|
|
|
|
579
|
|
|
579
|
|
|
Know-how
|
|
|
|
452
|
|
|
452
|
|
|
Non competition agreement
|
|
|
|
-
|
|
|
194
|
|
|
Customer contracts and relationships
|
|
|
|
5,604
|
|
|
6,141
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
|
8,217
|
|
|
9,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization and impairments
|
|
|
|
Technology*
|
|
|
|
1,044
|
|
|
1,286
|
|
|
Brand
|
|
|
|
348
|
|
|
464
|
|
|
Know-how
|
|
|
|
452
|
|
|
452
|
|
|
Non competition agreement
|
|
|
|
-
|
|
|
34
|
|
|
Customer contracts and relationships**
|
|
|
|
1,864
|
|
|
4,266
|
|
|
|
|
|
|
|
|
Total Accumulated amortization
|
|
|
|
3,708
|
|
|
6,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,509
|
|
$
|
2,503
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
include
$78 impairment loss
|
|
**
|
include
$1,349 impairment loss
|
F - 25
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 5 Goodwill
and Intangible Assets, Net (contd)
|
B.
|
Intangible
assets, net (contd)
|
|
i.
|
Amortization
expense amounted to $821, $1,314 and $1,367 for the years ended December 31,
2006, 2007 and 2008, respectively.
|
|
As of December 2008 the Company
conducted an impairment test on the intangible assets recognized in the acquisition of
InSeal, as a result of an uncertainty relating to a customer of InSeal and the future
revenues from that customer. As a result, the Company recorded an impairment charge of
$1,427 in the fourth quarter of 2008.
|
|
Both
amortization expenses and impairment loss of intangible assets were recorded to the
statement of operations in the year incurred
|
|
ii.
|
Estimated
amortization expense for the years ending:
|
December 31
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$
|
960
|
|
2010
|
|
|
|
575
|
|
2011
|
|
|
|
508
|
|
2012
|
|
|
|
199
|
|
2013
|
|
|
|
261
|
|
|
|
Note 6 Property,
Plant and Equipment, Net
|
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
$
|
504
|
|
$
|
482
|
|
|
Leasehold land
(1)
|
|
|
|
272
|
|
|
272
|
|
|
Buildings on leasehold land
(1)
|
|
|
|
4,340
|
|
|
4,355
|
|
|
Buildings
|
|
|
|
7,161
|
|
|
6,960
|
|
|
Computers, software and manufacturing equipment
|
|
|
|
14,577
|
|
|
15,151
|
|
|
Office furniture and equipment
|
|
|
|
1,892
|
|
|
2,206
|
|
|
Motor vehicles
|
|
|
|
607
|
|
|
479
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
|
29,353
|
|
|
29,905
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated depreciation
|
|
|
|
8,502
|
|
|
11,292
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
$
|
20,851
|
|
$
|
18,613
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
leasehold land consists of two plots owned by the Israel Lands Administration.
Rights to leasehold land on the first plot extend over the original period of
49 years ending in the year 2041 with an option to extend for an additional 49
years, and on the second plot for a period of 49 years, which will end in the
year 2047 with an option to extend for a further 49 years. The amount includes
payments on account of land development and payments of the capitalization of
leasing payments. The rent for the initial 49-year term of each of these leases
was prepaid in its entirety at the beginning of the lease terms as is customary
in Israel for leases of property for industrial purposes from the Israel Lands
Authority.
|
F - 26
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 6 Property,
Plant and Equipment, Net (contd)
|
B.
|
As
to liens See Note 9C.
|
|
C.
|
Depreciation
expenses amounted to $1,862, $2,580 and $3,044 for the years ended December 31,
2006, 2007 and 2008, respectively.
|
|
D.
|
During
2005, the Company entered into a Production Line Equipment Supply Agreement
(the Equipment Agreement) with POE, under which POE agreed to
supply the Company with specified equipment and machinery for the manufacture
of smart cards for an aggregate purchase price of $1,700, which was paid to POE
through the issuance of 137,208 of the Companys ordinary shares in August
2005. The equipment and machinery were received during 2006.
|
|
E.
|
Pursuant to an agreement by and among
the Company, InterCard Systemelectronic GmbH (InterCard,), the Companys
wholly owned German subsidiary and Queisser GmbH, as general contractor, during July 2006,
the Company issued to Queisser an aggregate of 200,000 of its ordinary shares, value at
approximately $1.5 million as consideration for Queisser performance as general contractor
under the agreement. The agreement was entered into in connection with our construction of
a new building facility in Germany with production and assembly halls, manufacturing line
equipment and offices.
|
|
F.
|
On
February 16, 2007, the Company completed the acquisition of the smart card
module production line of Barun Electronics Co. Ltd. (Barun), a
Korean company, for consideration of 480,000 of its ordinary shares and 50,000
warrants at par value, valued at approximately $3.3 million. As of December 31,
2008 the equipment has not been commenced operative. Pursuant to the
acquisition agreement, the Company has registered under the Securities Act the
resale of the 480,000 ordinary shares issued to Barun.
|
|
The 480,000 ordinary shares issued to
Barun in connection with the transaction are subject to a lock-up agreement, whereby (i)
126,000 ordinary shares are releasable upon presentation by Barun to the escrow agent of a
confirmation that certain specified machinery has been received by the Company, (ii)
189,000 ordinary shares are releasable in 12 equal monthly installments (of 15,750
ordinary shares each) on the first day of each calendar month following the arrival
confirmation date, and (iii) 165,000 ordinary shares shall be released in 12 equal monthly
installments (of 13,750 ordinary shares each) on the first day of each calendar month
commencing at the end of the 12-month period referred to in the foregoing clause. As of December 31, 2007 and 2008 291,000 and 110,000 ordinary shares are still subject
to the lock-up agreement.
|
|
G.
|
During
2007 and 2008 the Company issued 45,400 and 53,760 options to service providers
at exercise price of par value, valued at approximately $288 and $137,
respectively, in connection with property, plant and equipment.
|
F - 27
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 7 Other
Current Liabilities
|
|
December 31
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees and related expenses
|
|
|
$
|
2,193
|
|
$
|
1,730
|
|
|
Accrued expenses
|
|
|
|
1,403
|
|
|
989
|
|
|
Customer advances
|
|
|
|
1,540
|
|
|
196
|
|
|
Other current liabilities
|
|
|
|
208
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,344
|
|
$
|
3,517
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Long-Term
Loans
|
A.
|
Composition
of Long-Term Loans:
|
|
|
December 31
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term loans
|
|
|
$
|
2,926
|
|
$
|
2,342
|
|
|
Less - current maturities
|
|
|
|
494
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,432
|
|
$
|
1,762
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008, the loans are from banks and are denominated in: U.S. dollars
($703; matures in the years 2010 2012), Euro ($1,429; mature in the years 2010
2012), New Israeli Shekel ($120; matures in 2012) South African Rand ($41; matures
in 2011) and Polish Zloty ($49; matures in 2010). As of December 31, 2008 these loans
bear interest at rates raging from 3.9%-12% (mainly 4.6%) per annum.
|
|
B.
|
Repayment
Dates of Long-Term Loans Subsequent to December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$
|
580
|
|
|
2010
|
|
|
|
528
|
|
|
2011
|
|
|
|
272
|
|
|
2012
|
|
|
|
128
|
|
|
2013
|
|
|
|
81
|
|
|
Thereafter
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
$
|
2,342
|
|
|
|
|
|
|
|
|
|
C.
|
Composition of Short-Term loans, Bank
Credit and Current Maturities of Long-Term Loans:
|
|
|
December 31
|
December 31
|
|
|
2007
|
2008
|
2007
|
2008
|
|
|
%
|
%
|
|
|
|
|
Interest rate
|
|
|
|
|
|
|
|
|
|
In NIS
|
|
|
|
7.85
|
|
|
7.07
|
|
|
1,558
|
|
|
1,850
|
|
|
In USD
|
|
|
|
6.9
|
|
|
6.4
|
|
|
2,033
|
|
|
1,122
|
|
|
In Euro
|
|
|
|
5.5
|
|
|
5.5
|
|
|
1,250
|
|
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,841
|
|
|
4,404
|
|
|
Current maturities of
|
|
|
|
long-term loans
|
|
|
|
|
|
|
|
|
|
495
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,336
|
|
$
|
4,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted average interest rate of the short-term bank credit for the years ended December
31, 2007 and 2008 were 6.8% and 6.4%, respectively.
|
F - 28
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 8 Long-Term
Loans (contd)
|
D.
|
Liens for short-term and long-term borrowings see Note 9C.
|
|
E.
|
As of December 31, 2008, the Group has authorized and used credit lines of
approximately $4.3 million and $3.3 million, respectively.
|
|
F.
|
Agreements that were made with banks,
in order to secure bank services and obtain bank credit and loans, include financial
covenants and restrictive covenants. As of the balance sheet date the Company is in
compliance with all of its covenants.
|
Note 9
Commitments and Contingencies
|
A.
|
Commitments
and Contingencies:
|
|
The
Company and its Israeli subsidiary, EasyPark, have entered into several research and
development agreements, pursuant to which the Company and EasyPark are obligated to pay
royalties to the Government of Israel at a rate of 3% and 3.5% of its sales up to the
amounts granted (linked to the U.S. dollar with annual interest at LIBOR as of the date
of approval, for programs approved from January 1, 1999 and thereafter). As of December
31, 2008, the total amount of grants received, net of royalties paid, was approximately
$5,033 including interest.
|
|
Royalties
paid or accrued amounted to $661, $698 and $640 for the years ended December 31, 2006,
2007 and 2008, respectively, and were charged to cost of revenues.
|
|
The
Group operates from leased facilities in the United States, Israel, Poland, South Africa,
China and France, leased for periods expiring in years 2009 through 2013.
|
|
Minimum
future rentals of premises under non-cancelable operating lease agreements at rates in
effect as of December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$
|
751
|
|
|
2010
|
|
|
|
513
|
|
|
2011
|
|
|
|
464
|
|
|
2012
|
|
|
|
455
|
|
|
2013
|
|
|
|
471
|
|
|
|
|
|
|
|
|
|
$
|
2,654
|
|
|
|
|
|
|
|
|
|
Rent
expense amounted to $1,106, $1,193 and $1,114 for the years ended December 31, 2006, 2007
and 2008, respectively.
|
F - 29
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 9
Commitments and Contingencies (contd)
|
Leasehold
land and a vehicle are pledged in favor of a bank in relation to both long-term and
short-term borrowings.
|
|
The
Company and certain subsidiaries have recorded floating charges on all of its tangible
assets in favor of banks.
|
|
The
Companys manufacturing facilities have been pledged as security in respect of a
loan received from a bank.
|
|
As
of December 31, 2008, the company granted guarantees to third parties in the sum of
$1,368. The expiration dates of the guarantees are from January 2009 to July 2010.
|
|
1.
|
On September 3, 2003, Edi Wuhl (in
this paragraph, the Plaintiff), a former employee of the Company, filed a suit
against the Company in the District Labor Court in Nazareth in the amount of NIS 3,953
(approximately $1,040). The suit is based on the Plaintiffs claims that the Company
breached the employment agreement with him, and that the Company owes him commission
payment for certain sales. On January 10, 2008, the district court has resolved that the
Plaintiff is entitled to approximately $60, therefore, during 2008 the Company paid this
amount and recorded it in the financial statements. On April 28, 2008 the Plaintiff
submitted an appeal to the National Labor Court. A hearing in the appeal was conducted in
June 2009. At this stage, the Company, based on legal advice, is unable to estimate the
chances of the appeal and, therefore, no provision has been made in the financial
statements in respect of the appeal.
|
|
2.
|
In September 2007, a Plaintiff had
filed against one of the subsidiaries of the Company (the Subsidiary) a motion
to approve a class action at the Tel Aviv District Court (the Motion), at the
sum of NIS 67.1 million ($17.6 million). The law suit is based on claims regarding the
performance of certain device product of the Subsidiary. The Subsidiary filed its response
during January 2008. Based on the courts recommendation at the preliminary hearing,
which took place on December 31, 2008, the Plaintiff had filed an application to remove
the Motion on January 21, 2009. The court had accepted this application and the Motion was
removed.
|
|
3.
|
In October 2007, a Plaintiff has
filed against one of the subsidiaries of the Company (the Subsidiary) and
other third parties a motion to approve a class action at the Tel Aviv District Court (the
Motion), at the sum of approximately NIS 2 million ($526). According to the
Plaintiff, the Subsidiary and the other defendants charged via the subsidiarys
product, an amount per hour which exceeds the amount that they are authorize to charge. In
January 2008, the Subsidiary submitted to court a notice in which it joins to the other
defendants application to dismiss the motion. On a preliminary hearing conducted in
September 2008, the court accepted the defense arguments that the Motion should be
dismissed. In addition, the court instructed the parties to submit their summaries only
with respect to the consideration to be paid the plaintiff and his legal counsel. At this
stage, the Company, based on legal advice, is unable to estimate the chances of the Motion
against the Subsidiary and, therefore, no provision has been made in the financial
statements in respect of the Motion.
|
F - 30
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 9
Commitments and Contingencies (contd)
|
4.
|
On May 20, 2008 a plaintiff filed a
complaint against the Company and one of its subsidiaries, in the US District Court for
the District of Delaware (Claim), alleging infringement of two US patents
(Patents) and requesting a declaration that the Company infringes the Patents,
and therefore asking for an injunction, damages and attorneys fees. The Company
filed its response on July 25, 2008, denying infringement, and identifying certain
defenses. Further, the Company has brought a counterclaim against the Plaintiff for
infringement of a Companys U.S. patent, the Company is seeking a declaration that
the Plaintiff is infringing the Companys patent, and therefore asking for an
injunction, damages and attorneys fees. At this stage, the Company, based on legal
advice, is unable to estimate the chances of the Claim and, therefore, no provision has
been made in the financial statements in respect of this Claim.
|
|
5.
|
On June 16, 2008, a plaintiff
(Plaintiff) filed a patent infringement suit in Shenzhen Intermediate Court,
Shenzhen, China (Lawsuit), alleging that one of the Companys
subsidiaries infringes a Chinese patent assigned to the Plaintiff (Patent).
The Plaintiff requested an injunction, a relief of RMB 1 million (approximately $146) for
its damages, the expenses incurred by it in relation to the efforts to stop the
infringement and all court fees of the case. On May 5, 2009, the Shenzhen Intermediate
Court stayed the Lawsuit until a litigation between the Plaintiff and a third party
relating to the assignment of the Patent rights pending in the Beijing 1
st
Intermediate Court is resolved. At this stage, the Company, based on legal advice, is
unable to estimate the chances of the Lawsuit and, therefore, no provision has been made
in the financial statements in respect of this Lawsuit.
|
Note 10
Shareholders Equity
|
1.
|
In
December 2003, pursuant to stock and warrant purchase agreements, the Company
issued to an investor 650,000 ordinary shares in consideration for $3,413.
Concurrently with the above share issuance, the Company issued to the investor
warrants to purchase 325,000 ordinary shares at a per share exercise price of
$6.5. All warrants were already exercised.
|
|
The
Company incurred, in respect of the above, finders fee expenses equivalent to 4% of the
amount raised by the Company and, in addition, issued warrants to purchase 45,500
ordinary shares at a per share exercise price of $6.5. During 2004 15,166 warrants were
exercised into ordinary shares and on December 1, 2008 30,334 warrants were expired.
|
|
2.
|
Following
a private placement agreement signed on October 23, 2003, on January 7, 2004
the Company entered into a stock purchase agreement pursuant to which the
Company issued to investors 100,000 ordinary shares in consideration of $315.
|
|
3.
|
On
April 6, 2004, the Companys shareholders approved the increase of the
Companys authorized share capital by NIS 2,000,000 comprising of
20,000,000 ordinary shares of NIS 0.1 par value each. Following the increase,
the Companys authorized share capital was comprised of 30,000,000
ordinary shares of NIS 0.1 par value each.
|
|
4.
|
On
April 29, 2004, pursuant to a Securities Purchase Agreement, the Company issued
to investors 1,300,000 ordinary shares in consideration for $15,132.
Concurrently, with the above share issuance, the Company issued to the
investors warrants to purchase 780,000 ordinary shares at a per share exercise
price of $13.97. The warrants are fully exercisable and expired in April 2009.
As of December 31, 2008 a total of 738,000 warrants are still exercisable.
The
Company incurred, in respect of the above, finders fee expenses
equivalent to approximately 6% of the amount raised by the Company and, in
addition, issued warrants to purchase 124,800 ordinary shares at a per share
exercise price of $13.97. The warrants are fully exercisable and expired in
April 2009.
|
F - 31
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 10
Shareholders Equity (contd)
|
A.
|
Share
capital (contd)
|
|
5.
|
On
November 1, 2005, the Company issued and sold to certain financial
institutions, in a private placement, 1,828,026 units, 1,544,568 of which
consisted of one ordinary share and a warrant to purchase three-fifths of an
ordinary share and 283,458 of which consisted of one ordinary share and a
warrant to purchase one-half of an ordinary share. The aggregate purchase price
of the units was $22,211, based on a market price of $12.15 per unit, which was
the average closing price of the Companys ordinary shares for the last
five trading days prior to October 24, 2005, the pricing date. The warrants,
which are for the purchase of an aggregate of up to 1,068,471 ordinary shares,
are immediately exercisable, have terms of five years and an exercise price of
$14.58 per share, and may be redeemed by the Company after two years if the
market price of the underlying ordinary shares reaches $26.24 and certain other
conditions are met. The Company did not receive any additional consideration
for its issuance of the warrants to the financial institutions, which purchased
its ordinary shares. In addition to the issuance of warrants to the financial
institutions, the Company issued an aggregate of 127,961 warrants to the
placement agent for the private placement of the units and to certain other
persons who facilitated the offering. In respect of the warrants issued to the
agent, the Company recorded issuance expenses in the amount of $1,048.
|
|
Since
both the shares and the underlying warrants were classified within equity, an allocation
of the proceeds between shares and warrants was not considered necessary.
|
|
6.
|
On
June 18, 2006, the board of directors approved increasing the authorized share
capital from 30,000,000 to 50,000,000 ordinary shares. This increase was
approved by the shareholders on August 24, 2006.
|
|
7.
|
Pursuant
to an agreement dated as of July 10, 2006 by and among OTI, Easy Park Ltd., or
Easy Park, one of the Companys Israeli subsidiaries, and one
of the minority holders, the Company acquired 2,595 ordinary shares, par value
NIS 0.01 per share, of Easy Park for an aggregate consideration of 12,000 of
the Companys ordinary shares. Following the transaction, the Company owns
approximately 94% of the outstanding ordinary shares of Easy Park.
|
|
8.
|
During
2006, warrants to purchase 37,139 ordinary shares were exercised into ordinary
shares in consideration of $44.
|
|
9.
|
During
2007, warrants to purchase 66,438 ordinary shares were exercised into ordinary
shares in consideration of $1.
|
|
10.
|
During
2008, warrants to purchase 90,000 ordinary shares were exercised into ordinary
shares in consideration of $2.
|
F - 32
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 10
Shareholders Equity (contd)
|
B.
|
Options
to non-employees
|
|
The
Company issued options to non-employees, which are accounted for in accordance with SFAS
No. 123R and EITF No. 96-18 Accounting For Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services as
follows:
|
|
1.
|
In
2006, the Company issued 159,675 par value options and shares to non-employees
with respect to services rendered. The aggregate fair value of the options was
$1,251 based on the share market price as of day of grant.
|
|
2.
|
In
2007, the Company issued 637,765 par value options and shares to non-employees
with respect to services rendered. The aggregate fair value of the options was
$2,604 based on the share market price as of day of grant.
|
|
3.
|
In
2008, the Company issued 945,313 par value options and shares to non-employees
with respect to services rendered. The aggregate fair value of the options was
$2,409 based on the share market price as of day of grant.
|
|
1.
|
In
1995, the Companys Board of Directors approved a stock option plan, under
which up to 45,000 share options may be granted to the Groups employees,
directors and consultants. The vesting period for the options ranges from
immediate vesting to ratable vesting over a ten-year period. The exercise price
of options under the plan is at varying prices ranging from $0 to market value
at the date of grant. Those options will expire up to ten years after the date
of the grant. Any options which are forfeited or cancelled before expiration
become available for future grants. During the years 1998 to 2002 the Companys
Board of Directors resolved to expand the plan with an additional 85,300 share
options to be granted.
|
|
2.
|
In
February 2001, the Companys Board of Directors approved an additional
option plan, under which up to 75,000 share options are to be granted to the
Companys employees, directors and consultants and those of the
Companys subsidiaries and affiliates.
|
|
During
the years 2002 to 2007 the Companys Board of Directors approved an increase of
11,175,000 shares options to be reserved under the Companys share option plan.
|
|
The
vesting period for the options ranges from immediate vesting to ratable vesting over a
ten-year period. The exercise price of options under the plan is at varying prices
ranging from $0 to market value at the date of the grant. Those options will expire up to
ten years after the date of the grant. Any options which are forfeited or cancelled
before expiration become available for future grants.
|
|
3.
|
On
April 11, 2006, the Company offered to each of its and its subsidiaries employees,
and its directors and office holders (other than External Directors,
as such term is defined in the Israeli Companies Law of 1999) who held
outstanding vested and unvested options to purchase an aggregate of 4,485,017
of its ordinary shares, which were issued pursuant to the terms of the Companys
2001 Share Option Plan, as amended, to replace all of his or her outstanding
vested and unvested options into a new number of ordinary shares, with the same
fair values, as determined using the Black-Scholes pricing model, and the same
vesting schedules.
|
F - 33
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 10
Shareholders Equity (contd)
|
C.
|
Stock
option plans (contd)
|
|
The
Companys Board of Directors approved the Alternative Option Exercise Mechanism (AOEM),
on February 12, 2006. Further, the Companys shareholders approved the AOEM at an
extraordinary meeting of the shareholders on March 21, 2006. As a result of the AOEM, the
Company issued a total of 2,437,075 ordinary shares in exchange for options to acquire a
total of 3,737,369 ordinary shares. If a holder of options did not participate in the
AOEM, the original terms of his or her option agreement and the Share Option Plan
continue to apply and such option may be exercised in accordance with its terms.
|
|
In
accordance with SFAS 123 (R) the Company considers the AOEM as a short-term inducement.
Since the fair market value of the Companys ordinary shares newly issued to each
employee equals the fair value of the options replaced from him/her, no incremental
compensation cost was recognized pursuant to the AOEM.
|
|
The
Companys options activity (including options to non-employees) and options
outstanding as of December 31, 2006, 2007 and 2008 are summarized in the following table:
|
|
|
Number of
options
outstanding
|
Weighted
average exercise
price per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2005
|
|
|
|
5,340,554
|
|
|
9.24
|
|
|
Options granted
|
|
|
|
336,597
|
|
|
0.02
|
|
|
Options cancelled or forfeited
|
|
|
|
(81,967
|
)
|
|
13.40
|
|
|
Options replaced under the AOEM (see C3 above)
|
|
|
|
(3,737,369
|
)
|
|
10.32
|
|
|
Options exercised
|
|
|
|
(711,199
|
)
|
|
4.50
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2006
|
|
|
|
1,146,616
|
|
|
6.30
|
|
|
Options granted
|
|
|
|
2,102,015
|
|
|
0.31
|
|
|
Options cancelled or forfeited
|
|
|
|
(138,605
|
)
|
|
2.24
|
|
|
Options exercised
|
|
|
|
(457,750
|
)
|
|
0.02
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2007
|
|
|
|
2,652,276
|
|
|
2.85
|
|
|
Options granted
|
|
|
|
1,585,313
|
|
|
0.33
|
|
|
Options cancelled or forfeited
|
|
|
|
(212,491
|
)
|
|
1.20
|
|
|
Options exercised
|
|
|
|
(1,104,217
|
)
|
|
0.02
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2008
|
|
|
|
2,920,881
|
|
|
2.69
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of:
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
895,417
|
|
$
|
6.70
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
1,412,138
|
|
$
|
4.53
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
1,846,024
|
|
$
|
3.71
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2008
|
|
|
|
2,920,881
|
|
$
|
2.69
|
|
|
|
|
|
|
|
|
|
|
|
F - 34
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 10
Shareholders Equity (contd)
|
C.
|
Stock
option plans (contd)
|
|
The
following table summarizes information about options outstanding and exercisable
(including options to non-employees) as of December 31, 2008:
|
|
|
Options outstanding
|
Options Exercisable
|
|
Range of
exercise price
|
Number
outstanding
as of
December 31,
2008
|
Weighted
average
remaining
contractual
life (years)
|
Weighted
Average
Exercise
Price
|
Number
Outstanding
As of
December 31,
2008
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.02
|
|
|
|
1,892,932
|
|
|
3.7
|
|
$
|
0.02
|
|
|
1,112,918
|
|
$
|
0.02
|
|
|
1.4-4.82
|
|
|
|
421,000
|
|
|
4.9
|
|
|
2.87
|
|
|
148,657
|
|
|
3.3
|
|
|
6.11-8.16
|
|
|
|
130,139
|
|
|
0.6
|
|
|
7.76
|
|
|
130,139
|
|
|
7.76
|
|
|
8.56-9.85
|
|
|
|
153,830
|
|
|
0.8
|
|
|
9.70
|
|
|
153,830
|
|
|
9.7
|
|
|
10.00-14.00
|
|
|
|
311,450
|
|
|
1.6
|
|
|
11.80
|
|
|
288,950
|
|
|
11.7
|
|
|
21.00-32.00
|
|
|
|
5,430
|
|
|
2.2
|
|
|
29.19
|
|
|
5,430
|
|
|
29.19
|
|
|
42.50-123.60
|
|
|
|
6,100
|
|
|
0.9
|
|
|
44.01
|
|
|
6,100
|
|
|
44.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,920,881
|
|
|
|
|
|
|
|
|
1,846,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted average fair values of options (including non-employees) granted during the
years ended December 31, 2006, 2007 and 2008 were:
|
|
|
For exercise price on the grant date that:
|
|
|
Equals market price
|
Exceeds market price
|
Less than market price
|
|
|
Year ended December 31
|
Year ended December 31
|
Year ended December 31
|
|
|
2006
|
2007
|
2008
|
2006
|
2007
|
2008
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise prices
|
|
|
$
|
-
|
|
$
|
3.88
|
|
$
|
2.08
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2.00
|
|
$
|
0.02
|
|
$
|
0.02
|
|
$
|
0.02
|
|
|
Weighted average
|
|
|
|
fair values on
|
|
|
|
grant date
|
|
|
$
|
-
|
|
$
|
1.29
|
|
$
|
0.67
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.38
|
|
$
|
7.09
|
|
$
|
5.35
|
|
$
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
total intrinsic value of options exercised during the year ended December 31, 2008, was
$4.2 million. The total intrinsic value of options expected to vest at December 31, 2008,
is $3.9 million. The total intrinsic value of options vested and exercisable at December
31, 2008, is $4.9 million.
|
|
Following
is a summary of non-vested options activity as of December 31, 2008, under the Companys
stock-based compensation plans:
|
|
|
Number of
options
|
Weighted
average grant
date fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at January 1, 2008
|
|
|
|
1,240,138
|
|
|
6.53
|
|
|
Granted
|
|
|
|
1,585,313
|
|
|
2.07
|
|
|
Vested
|
|
|
|
(1,643,686
|
)
|
|
3.24
|
|
|
Forfeited
|
|
|
|
(106,908
|
)
|
|
6.53
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
|
1,074,857
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
F - 35
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 10
Shareholders Equity (contd)
|
C.
|
Stock
option plans (contd)
|
|
As
of December 31, 2008, there was $3.5 million of total unrecognized compensation cost
related to non-vested share based compensation arrangements. That cost is expected to be
recognized over a weighted-average period of 2.5 years. The total fair value of shares
vested during the year ended December 31, 2008 was $5.3 million.
|
|
During
2006, 2007 and 2008, the company recorded share-based compensation expenses in the amount
of $3,783, $6,947 and $6,253, respectively, in accordance with SFAS No. 123(R).
|
|
1.
|
The Company issued warrants with
respect to investments made in the Company and property plant and equipment. The number of
warrants issued by the Company during the years ended December 31, 2006, 2007 and 2008
were 226,438, 50,000 and 90,000 respectively, with a per share weighted average exercise
price of NIS 0.1 (par value of approximately $0.02), for each year.
|
|
2.
|
Pursuant to a marketing platform purchase agreement dated as of June 25, 2008,
by and between OTI and Structure Financial Group (SFG), the Company
granted to SFG and TheSpearhead Capital Ltd. (TheSpearhead) equally,
warrants to purchase in aggregate up to 1,000,000 of the Companys ordinary
shares (the Warrants) (500,000 each) as an aggregate consideration
for the Companys purchase of SFGs marketing platform together with
certain consulting services (SFG Transaction). The Warrants shall be
vested in quantities of 100,000 (one hundred thousand) Warrants each time to
each of SFG and TheSpearhead, upon the Companys receiving a firm order or
a tender award, of which SFG has been directly involved in the promotion and/or
funding, in an amount of not less than $1 million and with a potential amount of
no less than $5 million. Notwithstanding the above, upon the Company receiving a
firm order or a tender award, in which SFG has been directly involved in the
promotion and/or funding of, in the amount of at least $60 million, the entire
amount of the Warrants shall become immediately vested.
|
|
In the event that the Warrants shall
be exercised into shares, SFG and/or TheSpearhead may be required to grant proxies for
such shares according to the Companys instructions. In any event, vested Warrants
may not be exercised before May 30, 2010 and following the earlier of (i) the termination
date of the marketing platform purchase agreement, or (ii) 5:00 P.M., New York City time
on May 1, 2018. The exercise price of the Warrants is $3.0 per each Warrant, but if SFG
contributes to a cumulative sum of sales and/or funding and/or proceeds of $10 million to
the Company, the exercise price of the Warrants which have not been exercised by SFG
and/or TheSpearhead shall be reduced by $0.50 per Warrant until the lower limit of the par
value of the Companys ordinary shares which is NIS 0.10. In accordance with the
agreement, the Company granted SFG a right of first refusal for three years from the date
of the agreement to allow SFG sufficient time to procure and secure financing for its
projects contemplated by the agreement. As of December 31, 2008 none of the Warrants were
vested.
|
F - 36
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 10
Shareholders Equity (contd)
|
3.
|
As part of the mediation and consulting services provided by a service provider
to the Company in connection with the SFG Transaction, the Companys board
of directors has approved the issuance of 50,000 warrants to the service
provider as consideration for his services. These warrants shall have the same
terms and conditions (e.g., vesting terms, exercise period, exercise price) as
the Warrants issued in the SFG Transaction. As of December 31, 2008 none of the
warrants were vested.
|
|
The
following table summarizes information about warrants outstanding and exercisable as of
December 31, 2008:
|
|
|
Warrants outstanding
|
|
Range of exercise price
|
Number
Outstanding
as of
December 31
2008
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIS 0.1 (par value)
|
|
|
|
180,000
|
|
|
7.37
|
|
NIS
|
0.1
|
|
|
$ 3.00
|
|
|
|
1,050,000
|
|
|
9.49
|
|
$
|
3.00
|
|
|
$11.42 - $14.58
|
|
|
|
2,059,231
|
|
|
1.21
|
|
$
|
14.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,289,231
|
|
|
|
|
$
|
9.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.
|
Employee
Share Purchase Plan
|
|
1.
|
In
2001, the Company established an Employee Share Purchase Plan pursuant to which
67,500 shares have been reserved for employees including the Companys
subsidiaries who have been employed for at least six months. The purchase price
of the shares will be 85% of the trading price on the date of purchase. As of
the date of these financial statements, no shares have been issued to any
employees under this plan. Subsequent to balance sheet date the board of
directors resolved to terminate this plan.
|
|
2.
|
In
2008, the Company established an Employee Share Purchase Plan pursuant to which
1.5 million shares have been reserved for employees including the Companys
subsidiaries. The purchase price of the shares will be 85% of the trading price
on the date of purchase. During 2008, 480,289 shares have been issued to
employees under this plan in consideration of $1,125.
|
|
As
at December 31, 2008, the Company recorded to shareholders equity an amount of $308
in respect to amounts received from employees on account of shares to be issued (a total
of 254,098 shares were issued subsequently in 2009).
|
|
Total
expenses recognized in the consolidated statement of operating with respect to the 2008
plan amounted to $256.
|
F - 37
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 11 Income
Taxes
|
A.
|
The
Company and its Israeli subsidiaries
|
|
1.
|
Measurement
of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985
|
|
Until
December 31, 2006, the results of the company and its Israeli subsidiaries for tax
purposes were measured and adjusted in accordance with the change in the Israeli Consumer
Price Index (CPI). As explained in Note 2A, the consolidated financial
statements are presented in U.S. dollars. The differences between the change in the
Israeli CPI and in the NIS/U.S. dollar exchange rate causes a difference between the
Companys and its Israeli subsidiaries taxable income or loss and their income
or loss before taxes reflected in the consolidated financial statements. In accordance
with paragraph 9(f) of SFAS No. 109, the Company and its Israeli subsidiaries have not
provided deferred income taxes on this difference between the financial reporting basis
and the tax basis of assets and liabilities.
|
|
The
Company and one of its Israeli subsidiaries are foreign invested companies, and have
elected, commencing January 1, 2007, to maintain their books and records in U.S dollars
for tax purposes, as permitted under the tax regulations.
|
|
2.
|
Tax
benefits under the Law for the Encouragement of Capital Investments, 1959
|
|
The
Company maintains three investment programs in buildings, equipment and production
facilities, which have been granted the status of Approved Enterprise under
the Law for the Encouragement of Capital Investments, 1959. The Company elected to adopt
the Alternative Benefits Program status. This status entitles the Company to
an exemption from taxes on income derived therefrom for a period of 10 years starting in
the year in which the Company first generates taxable income, but not later than 14 years
from the date of approval (the last of which was received in February 2000) or 12 years
from commencement of operations. The tax-exempt profits that are earned by the Companys
Approved Enterprises can be distributed to shareholders, without additional
tax liability on the Company only upon its complete liquidation.
|
|
If
these retained tax-exempt profits are distributed in a manner other than in the complete
liquidation of the Company, they would be taxed at the regular corporate tax rate
applicable to such profits as if the Company had not elected the alternative system of
benefits (depending on the level of foreign investment in the Company) currently between
10% to 25% for an Approved Enterprise. As the Company has not yet reported
any taxable income, the benefit period has not yet commenced as of December 31, 2008.
|
|
Income
from sources other than the Approved Enterprise during the benefit period
will be subject to tax at the regular corporate tax rate (see 4 below).
|
|
The
entitlement to the above mentioned benefits is conditional upon the Companys
fulfilling the conditions stipulated by the above mentioned law, regulations published
thereunder and the certificates of approval for the specific investments in the Approved
Enterprises. In the event of failure to comply with these conditions, the benefits may be
canceled and the Company may be required to refund the amount of the benefits, in whole
or in part, with the addition of linkage differences to the CPI and interest. Management
believes that the Company is in compliance with the above-mentioned conditions as of
December 31, 2008.
|
F - 38
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 11 Income
Taxes (contd)
|
A.
|
The
Company and its Israeli subsidiaries (contd)
|
|
3.
|
The
Law for the Encouragement of Industry (taxes), 1969
|
|
The
Company believes that it qualifies as an Industrial Company under the Law for
the Encouragement of Industry. The principal tax benefits for the Company are the
deductibility of costs in connection with public offerings and accelerated depreciation.
|
|
On
July 25, 2005, the Knesset The Israeli Parliament passed the Law for the
Amendment of the Income Tax Ordinance (No.147 and Temporary Order) 2005. The
Amendment provides for a gradual reduction in the company tax rate in the following
manner: in 2006 -31%, in 2007 29%, in 2008 27%, in 2009 26% and from
2010 onward the tax rate will be 25%. Furthermore, as from 2010, upon reduction of the
company tax rate to 25%, real capital gains will be subject to tax at 25%.
|
|
B.
|
Non-Israeli
subsidiaries are taxed based on the income tax laws in their country of
residence.
|
|
C.
|
Deferred
income taxes:
|
|
|
December 31
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
$
|
16,456
|
|
$
|
23,735
|
|
|
Goodwill
|
|
|
|
-
|
|
|
3,524
|
|
|
Other
|
|
|
|
3,214
|
|
|
3,585
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
|
19,670
|
|
|
30,844
|
|
|
Less - valuation allowance
|
|
|
|
(19,229
|
)
|
|
(30,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
$
|
441
|
|
$
|
-
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
(441
|
)
|
|
-
|
|
|
Intangible assets
|
|
|
|
(728
|
)
|
|
(202
|
)
|
|
|
|
|
|
|
|
Total gross deferred tax liability
|
|
|
|
(1,169
|
)
|
|
(202
|
)
|
|
|
|
|
|
Net deferred tax liability
|
|
|
$
|
(728
|
)
|
$
|
(202
|
)
|
|
|
|
|
|
|
F - 39
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 11 Income
Taxes (contd)
|
C.
|
Deferred
income taxes: (contd)
|
|
The
valuation allowance for deferred tax assets as of December 31, 2007 and 2008 was $19,229
and $30,844, respectively. The net change in the total valuation allowance for each of
the years ended December 31, 2006, 2007 and 2008, was an increase of $1,578, $4,912 and
$11,615, respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets depends on the
generation of future taxable income during the periods in which those temporary
differences are deductible. Based on the level of historical taxable losses, management
believes that it is more likely than not that the Company will not realize the benefits
of these deductible differences.
|
|
Subsequently
recognized tax benefits related to the valuation allowance for deferred tax assets as of
December 31, 2008, will be allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit that would be reported in the consolidated
|
|
|
|
|
|
|
statements of operations
|
|
|
$
|
28,319
|
|
|
Additional paid-in capital
|
|
|
|
2,525
|
|
|
|
|
|
|
Total
|
|
|
$
|
30,844
|
|
|
|
|
|
|
|
|
|
D.
|
As
of December 31, 2008, the net operating loss carryforwards for tax purposes
relating to Israeli companies amounted to approximately $84,400. Tax loss
carryforwards in Israel may be carried forward indefinitely to offset against
future taxable income. Under the Income Tax (Inflationary Adjustments) Law,
1985, tax loss carryforwards are linked to the USD. Tax loss carryforwards
relating to non-Israeli companies aggregate approximately $9,462, which will
expire as follows: 2010 $68, 2012 $668, 2013 $9, 2014- $7,
2025 $395, 2026 $3,206 and 2027- $533. The remaining balance
$4,576 can be utilized with no expiration date.
|
|
E.
|
The Company has not recognized a deferred tax liability for the undistributed
earnings of its foreign subsidiaries that arose in 2008 and prior years, because
the Company considers these earnings to be indefinitely reinvested. A deferred
tax liability will be recognized when the Company can no longer demonstrate that
it plans to indefinitely reinvest these undistributed earnings. As of December
31, 2008, the undistributed earnings of these foreign subsidiaries were
approximately $2,081. It is impracticable to determine the additional taxes
payable when these earnings are remitted.
|
|
F.
|
No current or deferred taxes were recorded in Israel. Non-Israeli income tax
benefit (expense) included in the consolidated statements of operations are as
follows:
|
|
|
Year ended December 31
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
$
|
107
|
|
$
|
(38
|
)
|
$
|
(36
|
)
|
|
Deferred
|
|
|
|
216
|
|
|
264
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
$
|
323
|
|
$
|
226
|
|
$
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 40
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 11 Income
Taxes (contd)
|
Income tax benefit (expense) for the
years ended December 31, 2006, 2007 and 2008, differed from the amounts computed by
applying the Israeli statutory tax rates of 31%, 29% and 27% to loss before taxes on
income as a result of the following:
|
|
|
Year ended December 31
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed "expected" income tax benefit
|
|
|
$
|
2,004
|
|
$
|
6,249
|
|
$
|
13,323
|
|
|
Increase (decrease) in income tax benefit
|
|
|
|
resulting from:
|
|
|
|
Change in valuation allowance, net
|
|
|
|
(1,578
|
)
|
|
(4,912
|
)
|
|
(9,818
|
)
|
|
Stock-based compensation related to options
|
|
|
|
issued to employees
|
|
|
|
(730
|
)
|
|
(1,506
|
)
|
|
(1,078
|
)
|
|
Impairment of goodwill
|
|
|
|
-
|
|
|
-
|
|
|
(1,781
|
)
|
|
Non-deductible expenses
|
|
|
|
(63
|
)
|
|
(18
|
)
|
|
(57
|
)
|
|
Other
|
|
|
|
690
|
|
|
413
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
|
$
|
323
|
|
$
|
226
|
|
$
|
675
|
|
|
|
|
|
|
|
|
|
|
G.
|
Loss
before taxes on income consists of the following:
|
|
|
Year ended December 31
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
$
|
(6,137
|
)
|
$
|
(16,394
|
)
|
$
|
(39,145
|
)
|
|
Non-Israel
|
|
|
|
(328
|
)
|
|
(5,155
|
)
|
|
(10,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,465
|
)
|
$
|
(21,549
|
)
|
$
|
(49,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H.
|
Accounting
for uncertainty in income taxes
|
|
In
June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109. This interpretation prescribes a minimum recognition
threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition of tax positions,
classification on the balance sheet, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 requires significant judgment in
determining what constitutes an individual tax position as well as assessing the outcome
of each tax position.
|
|
The Company adopted the provisions of
FIN 48 as of January 1, 2007, and there was no effect on the financial statements. As
a result, the Company did not record any cumulative-effect adjustment related to adopting
FIN 48.
|
|
As
of January 1, 2007, and for the twelve-month periods ended December 31, 2007 and 2008,
the Company did not have any unrecognized tax benefits. In addition, the Company does not
expect that the amount of unrecognized tax benefits will change significantly within the
next twelve months.
|
F - 41
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 11 Income
Taxes (contd)
|
H.
|
Accounting
for uncertainty in income taxes (contd)
|
|
The
Company accounts for interest and penalties related to unrecognized tax benefits as a
component of income tax expense. As of January 1, 2007 and for the twelve-month periods
ended December 31, 2007 and 2008, no interest and penalties related to unrecognized tax
benefits have been accrued.
|
|
The
Company and its major subsidiaries file income tax returns in Israel, Hong Kong, Poland
and Germany. With few exceptions, the income tax returns of the Company and its major
subsidiaries are open to examination by the Israeli and the respective foreign tax
authorities for the tax years beginning in 2003.
|
Note 12 Related
Party Balances and Transactions
|
|
Year ended December 31
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
*2,925
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses**
|
|
|
$
|
68
|
|
$
|
73
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
|
Cost
and expenses relate to services provided to the Company by related parties.
|
Note 13
Geographic Information and Major Customers
|
The
Company manages its business on the basis of one reportable segment. The data is
presented in accordance with SFAS 131, Disclosures About Segments of an Enterprise
and Related Information.
|
|
|
Year ended December 31
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographical areas from
|
|
|
|
|
|
|
|
|
|
|
|
|
external customers
|
|
|
|
America
|
|
|
$
|
8,174
|
|
$
|
7,569
|
|
$
|
5,100
|
|
|
Far East
|
|
|
|
11,958
|
|
|
9,024
|
|
|
6,364
|
|
|
Africa
|
|
|
|
3,200
|
|
|
4,710
|
|
|
5,423
|
|
|
Europe
|
|
|
|
14,065
|
|
|
17,924
|
|
|
19,258
|
|
|
|
|
|
|
|
|
|
|
Total export
|
|
|
|
37,397
|
|
|
39,227
|
|
|
36,145
|
|
|
Domestic (Israel)
|
|
|
|
3,156
|
|
|
4,258
|
|
|
4,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,553
|
|
$
|
43,485
|
|
$
|
40,217
|
|
|
|
|
|
|
|
|
|
F - 42
On Track Innovations Ltd.
and Subsidiaries
Notes
to the Consolidated Financial Statements
|
In thousands, except
share and per share data
Note 13
Geographic Information and Major Customers (contd)
|
|
December 31
|
December 31
|
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long lived assets by geographical areas
|
|
|
|
|
|
|
|
|
|
Domestic (Israel)
|
|
|
$
|
30,014
|
|
$
|
10,740
|
|
|
Germany
|
|
|
|
8,598
|
|
|
5,019
|
|
|
Poland
|
|
|
|
765
|
|
|
315
|
|
|
France
|
|
|
|
3,504
|
|
|
771
|
|
|
Far East
|
|
|
|
3,960
|
|
|
2,881
|
|
|
Other
|
|
|
|
1,906
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,747
|
|
$
|
21,116
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no major customers (customers representing 10% or more of total revenues) in the
years ended December 31, 2007 and 2008.
|
Note 14
Subsequent Events
|
On
January 12, 2009, the Companys Board of Directors approved the adoption of a
Shareholders Rights Plan, according to which each ordinary share of the Company shall
give its holder one right. Each such right will become exercisable only after a person or
a group becomes an Acquiring Person, by obtaining beneficial ownership of, or
by commencing a tender or exchange offer for, 15% or more of the Companys ordinary
shares (the Board may reduce this percentage to not less than 10%), unless the Board
approves such Acquiring Person or redeems the rights. Each right, once it
becomes exercisable, will generally entitle its holder, other than the Acquiring
Person, to purchase from the Company either one or three ordinary shares (depending on
the Companys registered capital on the date of exercising the rights), at par
value.
|
F - 43
SIGNATURES
The registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
|
|
ON TRACK INNOVATIONS LTD.
By: /s/ Oded Bashan
Oded Bashan
Chief Executive Officer
and Chairman of the Board
|
|
|
By: /s/ Tanir Horn
Tanir Horn
Chief Financial Officer
|
Date: June 29,
2009
90
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