Our continuing viral
growth could be adversely affected if we do not increase the number of our
registered users or if users stop using our software.
To
date, we have relied primarily on viral growth to increase our user base. This
method is of relatively low cost, while its effectiveness has been decreasing. Other
marketing methods, while effective, are far more costly. If users of our products stop,
reduce, or limit their usage, our viral growth will be diminished because they will no
longer be forwarding links to our site via their emails, and our market share and revenues
may decrease. Our historical experience with usage of our products indicates that usage of
products declines rapidly, currently estimated to be up to six years. Therefore, in order
to induce our existing users to continue to use our products, we must continuously enhance
our existing products and develop new ones. If we cannot offer such products, because of
lack of resources, competition or other reasons described elsewhere in these Risk Factors,
our distribution, revenues and results of operations will be adversely affected.
The market for email software
products and services is highly competitive, and if we cannot compete effectively, our
revenues will decline and we will be unable to gain or retain market share.
Our
products compete in the market for email software products and services that aim to offer
a customized and entertaining email experience for consumers, including features such as
graphic email notifiers, software skins, email backgrounds and multimedia content. Our
main competitors among specialized providers of email services offer the following
products: FunWeb Products, Hotbar
®
and WikMail, all
of which incorporate special features that provide a personalized email experience. In
addition, our products also face competition from general email software programs offered
to the private market by large Internet and software companies, such as AOL9 by America
Online, Inc., Thunderbird
®
by Mozilla Foundation and
Outlook Express and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also
incorporate certain special features that provide a personalized email experience. Many of
the large Internet and software companies offer their email software programs free of
charge. Competition with these products could result in fewer downloads of our product,
reduced prices and margins, fewer purchases of our products and services and loss of
market share.
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
customized and entertaining email experience similar to
IncrediMail
®
. For example, consumers may choose to
receive an extensive package of Internet and email services from a more dominant and
recognized company, such as Microsoft Corporation (Outlook Express or
MSN
®
) or America Online, Inc.
(AOL
®
). If we are unable to achieve continued market
penetration, we will be unable to compete effectively.
In addition, many of our other
current and potential competitors have significantly greater financial, research and
development, manufacturing, and sales and marketing resources than we have. These
competitors could use their greater financial resources to acquire other companies to gain
enhanced name recognition and market share, as well as to develop new technologies,
products or features that could effectively compete with our existing product lines.
Demand for our products could be diminished by equivalent or superior products and
technologies offered by competitors. See Item 4.B Business Overview
Competition for additional discussion of our competitive market. We face significant
competition from large-scale web-based email providers, principally Google, Yahoo and
Microsoft
.
Our
products also compete in the market for web-based email software products and services,
such as Googles Gmail, Yahoo! Mail and Microsofts Hotmail. The web based email
market is characterized with significant competition, changing technologies and evolving
products and services enhancements.
Google,
Yahoo! and Microsoft are each offering a web-based e-mail service in addition to the many
other services they provide, such as desktop search, local search, instant messaging,
photos, maps, video sharing, mobile applications and so on. We expect these competitors to
increasingly use their financial and engineering resources to compete with our
client-based e-mail service, if we are unable to successfully compete with them, our
results of operations may be adversely affected.
We are increasingly relying on the
ability to offer our search properties to users of our software products and subsequently
retain them. Should this offering be blocked, constrained or made redundant, by the
providers of the underlying platform, our ability to generate revenues from search could
be materially reduced.
Over
70% of our revenues for the year ended December 31, 2008 were generated from the
acceptance and subsequent retention of our search properties by the users of our software
products. The market for offering and retaining these search properties is very
competitive. In addition, some companies offer a browser without a homepage, which is one
of our main search properties. Should the companies providing the internet browsers
effectively restrict other companies from offering or changing the search properties, or
should those providing browsers without a homepage increase their market share, there
could be a material adverse affect on our search generating revenue model and our
financial results.
8
The market for wallpapers,
screensavers and photograph management tools is highly competitive, and if we cannot
compete effectively, we may not be able to generate revenues or achieve significant market
share.
Our
Magentic product is a desktop enhancer and offers brand-new graphically enriched ways to
view and enjoy personal photos. Our PhotoJoy product focuses on further enhances the
capability for enjoying personal photos. These products were first introduced in 2006, and
subsequently enhanced in 2008, currently compete in the market for wallpapers,
screensavers and PC software managing and presenting personal photographs, aiming to offer
a creative, personal and entertaining experience for PC users. Our main competitors in
these areas include Screensavers.com and webshots© by American Greetings Corp. (NYSE:
AM). Competition with these products, as well as the new concept, could result in
increased investments in R&D and Marketing expenses as well as fewer downloads and
registrations of our product.
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
similar variety, currently free of charge, such as American Greetings Corp.
(webshots©). If we are unable to achieve continued market penetration, we will not be
able to compete effectively.
In
addition, many of our other current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than
we have. These competitors could use their greater financial resources to acquire other
companies to gain enhanced name recognition and market share, as well as to develop new
technologies, products or features that could effectively compete with our product. Demand
for our products could be diminished by equivalent or superior products and technologies
offered by competitors. See Item 4.B Business Overview Competition for
additional discussion of our competitive market.
The market for creative instant
messaging enrichment tools is highly competitive, and if we cannot compete effectively, we
may not be able to generate revenues or achieve significant market share.
In
May, 2008, we launched HiYo
TM
, our creative enhancement tool for instant
messaging. HiYo is currently available for users of the instant messenger software Windows
Live Messenger
®
, and we believe HiYo will bring in new
customers and demographics into the
IncrediMail
®
experience. Our main competitors in this area include SweetIM, Bandoo and
SmileyCentral by IAC/InterActiveCorp (Nasdaq: IACI) as well as the built in graphic
capabilities, albeit limited, of Windows Live Messenger
®
.
Competition with these products could result in increased investments in R&D and
Marketing expenses as well as fewer downloads and registrations of our product.
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
similar variety, currently free of charge, such as IAC/InterActiveCorp (SmileyCentral). If
we are unable to achieve continued market penetration, we will not be able to compete
effectively.
In
addition, many of our other current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than
we have. These competitors could use their greater financial resources to acquire other
companies to gain enhanced name recognition and market share, as well as to develop new
technologies, products or features that could effectively compete with our product. Demand
for our products could be diminished by equivalent or superior products and technologies
offered by competitors. See Item 4.B Business Overview Competition for
additional discussion of our competitive market.
We may use a substantial portion
of our invested resources to acquire an unspecified business. These acquisitions could
divert our resources, cause dilution to our shareholders and adversely affect our
financial results.
We
may use a portion of our invested resources to acquire complementary products,
technologies or businesses. In December 2006, we acquired the assets of a transaction
processing company called BizChord Consulting Corporation and, although a relatively small
acquisition, in December 2008, we decided to terminate BizChords independent
activities and restrict its activity to processing the Companys own transactions. As
a result, since the acquisition, we have written off our entire investment. Prior to such
acquisition our management had no experience making acquisitions or integrating acquired
businesses. Negotiating potential acquisitions or integrating newly-acquired products,
technologies or businesses could divert our managements attention from other
business concerns and could be expensive and time-consuming. Acquisitions could expose our
business to unforeseen liabilities or risks associated with the business or assets
acquired or with entering new markets. In addition, we might lose key employees while
integrating new organizations. Consequently, we might not effectively integrate any
acquired products, technologies or businesses, and might not achieve anticipated revenues
or cost benefits. In addition, future acquisitions could result in customer
dissatisfaction, performance problems with an acquired product, technology or company, or
issuances of equity securities that cause dilution to our existing shareholders.
Furthermore, we may incur contingent liability or possible impairment charges related to
goodwill or other intangible assets or other unanticipated events or circumstances
relating to the acquisition, and we may not have, or may not be able to enforce, adequate
remedies in order to protect our Company. If any of these or similar risks relating to
acquiring products, technologies or businesses should occur in the future on a scale that
is larger than the effect of the acquisition described above, our business could be
materially harmed.
9
Our investment portfolio may be
impaired by disruptions in the financial and credit markets.
Our
investment portfolio currently consists of securities of US government agencies as well as
corporate debt securities, which the Company classified at December 31, 2008 as
available-for-sale. As of December 31, 2008, we hold approximately $8.4
million in corporate debt securities and and $10.4 million securities of US government
agencies.
Due
to recent significant disruptions in the financial and credit markets, corporate debt
securities in our portfolio are subject to a possible increased risk of default due to
bankruptcy, lack of liquidity, operational failure or other factors affecting the issuers
of those securities. In addition, securities in our portfolio are subject to other
risks, such as credit, liquidity, market and interest rate risks, which may be exacerbated
by the recent market disruptions. We may be required to adjust the carrying value of our
investment securities due to a default, lack of liquidity or other event, if the event
constitutes an impairment which is considered to be other-than-temporary.
Any
such adjustment would be recorded in our consolidated statement of operations which could
materially adversely impact our consolidated results of operations and financial
condition.
If we are deemed to be not in
compliance with applicable data protection laws, our operating results could be materially
affected.
We
collect and maintain certain information about our customers in our database. Such
collection and maintenance of customer information is subject to data protection laws and
regulations in Israel, the United States and other countries. A failure to comply with
applicable regulations could result in class actions, governmental investigations and
orders, and criminal and civil liabilities, which could materially affect our operating
results.
Although
we strive to comply with all applicable regulations and use our best efforts to inform our
customers of our business practices prior to any installations of our software, it is
possible that these laws may be interpreted and applied in a manner that is inconsistent
with our data practices. If so, in addition to the possibility of fines, this could result
in an order requiring that we change our data practices, which in turn could have a
material effect on our business. See Item 4.B Business Overview Government
Regulation for additional discussion of applicable regulations.
If there are privacy or security
concerns regarding our collection, use and handling of personal information, we could
incur substantial expenses.
Although
we take all reasonable steps to insure the security of personal information, concerns may
be expressed, from time to time, about whether our products compromise the privacy or
confidentiality of the information of users and others. Concerns about our collection,
use, sharing or handling of personal information or other privacy related matters, even if
unfounded, could damage our reputation and operating results. See Item 4.B Business
Overview Government Regulation for additional discussion of applicable
regulations.
We rely on online payment for our
products and any limitations imposed on online payment services could increase our costs
associated with the collection of payment and could adversely affect our business.
Payment
for our products is processed online. We engage third parties to process online payment
for our products. Credit card companies could change their policies with respect to
acceptance of online payments, refunds and charge-backs or in response to any change in
government regulations. Any of these changes could result in increased costs for providing
online payment services. Furthermore, implementation of an alternative method for
collection of payment would entail substantial expenses and may not be feasible for our
business.
10
We depend on a third party
Internet and telecommunication provider to operate our website and securing alternate
sources for these services could significantly increase our expenses.
We
depend on Bezeq International Ltd., a third party provider of Internet and related
telecommunication services, including hosting and location facilities, to operate our
website. This company may not continue to provide services to us without disruptions in
services, at the current cost or at all. While we believe that there are many alternative
providers of hosting and other communication services available to us, the costs
associated with any transition to a new service provider could be substantial and require
us to reengineer our computer systems and telecommunications infrastructure to accommodate
a new service provider. This process could be both expensive and time consuming and could
result in lost business both during the transition period and after.
Our
servers and communications systems could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God,
computer viruses, physical or electronic break-ins and similar events or disruptions.
Although we maintain back-up systems for our servers, any of these events could cause
system interruption, delays, loss of critical data and lost registered users and revenues.
We
currently rely solely on the Internet as a means to sell our products. Accordingly, if we,
or our customers, are unable to utilize the Internet due to a failure of technology or
infrastructure, terrorist activity or other reasons, we could lose current or potential
customers and revenues. While we have backup systems for most aspects of our operations,
our systems are not fully redundant and our disaster recovery planning may not be
sufficient for all eventualities. In addition, we may have inadequate insurance coverage
or insurance limits to compensate us for losses from a major interruption. Furthermore,
interruptions in our website could materially impede our ability to attract new companies
to advertise on our website and to maintain relationships with current advertisers.
Difficulties of this kind could damage our reputation, be expensive to remedy and curtail
our growth.
Termination of our agreement with
Commtouch could result in lost revenues and loss of market share.
We
launched our anti-spam solution
JunkFilter Plus
in the third quarter of 2005. This
solution has been providing an increasingly significant portion of our revenues in the
past. If our agreement to use the anti-spam software development kit developed by
Commtouch Ltd. were to terminate, we would be required to redevelop our
JunkFilter Plus
anti-spam product, or retain a new provider of a development kit, and, as a result, we
may have to refund some of the outstanding subscription fees, we would likely suffer lost
revenues and the potential loss of market share.
Our products operate in a variety
of computer configurations and could contain undetected errors or defects that could
result in product failures, lost revenues and loss of market share.
Our
software may contain undetected errors, failures or defects, especially when the products
are first introduced or when new versions are released. Our customers computer
environments are often characterized by a wide variety of standard and non-standard
configurations that make pre-release testing for programming or compatibility errors very
difficult and time-consuming. Therefore, there could be errors or failures in our
products. In addition, despite testing by us and beta testing by some of our registered
users, errors, failures or bugs may not be found in new products or releases until after
commencement of commercial sales. In the past, we have discovered software errors,
failures and defects in certain of our product offerings after their introduction and have
likely experienced delayed or lost revenues during the period required to correct these
errors.
Errors,
failures or defects in products released by us could result in negative publicity, product
returns, loss of or delay in market acceptance of our products, loss of competitive
position or claims by customers. Alleviating any of these problems could require
significant expense and could cause interruptions.
A decline in market acceptance for
Microsoft technologies on which our products rely could have a material adverse affect on
us
.
Our
products currently run on Microsoft Windows operating systems. Our web client interfaces
are supported on certain browsers which run on Windows, Mac and Linux. A decline in market
acceptance for Microsoft technologies or the increased acceptance of other server
technologies could cause us to incur significant development costs and could have a
material adverse effect on our ability to market our current products. Although we believe
that Microsoft technologies will continue to be widely used by businesses, we cannot
assure you that businesses will adopt these technologies as anticipated or will not in the
future migrate to other computing technologies that we do not currently support. In
addition, our products and technologies must continue to be compatible with new
developments in Microsoft technologies. We cannot assure you that we can maintain such
compatibility or that we will not incur significant expenses in connection therewith.
11
More individuals are using non-PC
devices to access the Internet, and our online services may not be accepted by such users.
The
number of individuals who access the Internet through
devices other then personal
computer, such as mobile phones, has increased dramatically. Our products were designed
for rich, graphic environments such as those available on desktop and laptop computers.
The lower resolution, slower communication, functionality and memory associated with
alternative devices currently available may make the use of our products through these
devices difficult. If consumers find our products difficult to access, we may fail to
capture a sufficient share of an increasingly important portion of the market for online
services and may fail to attract advertisers and web traffic.
Exchange rate fluctuations may
decrease our earnings if we are not able to hedge our currency exchange risks effectively.
A
majority of our revenues are denominated in U.S. dollars. However, most of our costs,
mainly personnel expenses, are incurred in New Israeli Shekels (NIS). Inflation in Israel
may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the
U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more
expensive for us to fund our operations in Israel. A revaluation of one percent of the NIS
as compared to the U.S. dollar could reduce our income before taxes by approximately $0.1
million. During 2006 the exchange rate of the U.S. dollar to the New Israeli Shekel
decreased, and continued to further decrease in 2007 and in the first half of 2008, and
this trend reversed in the second half of 2008.
In
addition, a significant portion of our sales is in currencies other than the U.S. dollar.
In 2008, approximately 21% of our revenues were in these currencies. To the extent such
sales are not immediately exchanged for US dollars, we bear a foreign currency fluctuation
risk. As of December 31, 2008, we had a net foreign currency liability of approximately
$2.9 million and our total foreign exchange income was approximately $3 thousand for the
year ended December 31, 2008. In addition, in territories where our prices are based on
local currencies, fluctuations in the dollar exchange rate could affect our gross profit
margin. To assist us in hedging the risks associated with fluctuations in currency
exchange rates, we have contracted a consultant proficient in this area, and are
implementing his proposals. However, due to the market conditions, volatility and other
factors, his proposals occasionally prove to be ineffective or worse, and the
implementation of his proposals ineffective. We may incur losses from unfavorable
fluctuations in foreign currency exchange rates. See Item 11 Quantitative and
Qualitative Disclosure of Market Risks for further discussion of the effects of
exchange rate fluctuations on earnings.
A loss of the services of our
senior management and other key personnel could adversely affect execution of our business
strategy.
We
depend on the continued services of our senior management, particularly Ofer Adler our
Chief Executive Officer, Chief Product Officer and co-founder. Our business and operations
to date have been mainly implemented under the direction of our current senior management.
The loss of the services of these personnel could create a gap in management and could
result in the loss of management and technical expertise necessary for us to execute our
business strategy and thereby, adversely affect execution of our business strategy.
Although we have obtained key person life insurance on the life of Ofer Adler
in the amount of $1.5 million, we do not expect to obtain key person life
insurance with respect to our other officers.
Further,
our ability to execute our business strategy also depends on our ability to continue to
attract, retain and motivate qualified and skilled technical and creative personnel and
skilled management, marketing and sales personnel. If we cannot attract and retain
additional key employees or lose one or more of our current key employees, our ability to
develop or market our products could be adversely affected. See Item 6 Directors,
Senior Management and Employees.
12
Under current U.S. and Israeli
law, we may not be able to enforce covenants not to compete and, therefore, may be unable
to prevent our competitors from benefiting from the expertise of some of our former
employees.
We
have entered into non-competition agreements with all of our professional employees. These
agreements prohibit our employees, if they cease working for us, from competing directly
with us or working for our competitors for a limited period. Under current U.S. and
Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may
be difficult for us to restrict our competitors from gaining the expertise that our former
employees gained while working for us. For example, Israeli courts have recently required
employers seeking to enforce non-compete undertakings of a former employee to demonstrate
that the competitive activities of the former employee will harm one of a limited number
of material interests of the employer which have been recognized by the courts, such as
the secrecy of a companys confidential commercial information or its intellectual
property. If we cannot demonstrate that harm would be caused to us, we may be unable to
prevent our competitors from benefiting from the expertise of our former employees.
Our international operations
involve special risks that could increase our expenses, adversely affect our operating
results and require increased time and attention of our management.
We
derive and expect to continue to derive a substantial portion of our revenues from
customers outside United States. Our international sales and related operations are
subject to a number of inherent risks, including risks with respect to:
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potential
loss of proprietary information due to piracy, misappropriation or laws that may be less
protective of our intellectual property rights than those of the United States;
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costs
and delays associated with translating and supporting our products in multiple
languages;
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foreign
exchange rate fluctuations and economic instability, such as higher interest rates and
inflation, which could make our products more expensive in those countries;
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costs
of compliance with a variety of laws and regulations;
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restrictive
governmental actions such as trade restrictions;
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limitations
on the transfer and repatriation of funds and foreign currency exchange
restrictions;
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compliance
with different consumer and data protection laws and restrictions on
pricing or discounts;
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lower
levels of adoption or use of the Internet and other technologies vital to our
business and the lack of appropriate infrastructure to support
widespread Internet usage;
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lower
levels of consumer spending on a per capita basis and fewer opportunities for growth in
certain foreign market segments compared to the United States;
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lower
levels of credit card usage and increased payment risk;
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changes
in domestic and international tax regulations; and
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geopolitical
events, including war and terrorism.
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Risks Related to Our
Intellectual Property
If we are unable to protect our
intellectual property rights, our competitive position could be harmed.
Our
ability to execute our business strategy and compete depends in part upon our ability to
protect our intellectual property. In 2003, we submitted national
phase patent applications in the United States, the European Community and Israel
with respect to certain processes that we employ in our products. These applications
benefited from a priority date of a provisional application filed in the year
2000. One patent has been issued in the United States under these applications to
date. Our pending and future patent applications may not issue as patents or, if
issued, may not issue in a form that will be advantageous to us. Any issued patents may be
challenged, invalidated or legally circumvented by third parties. We cannot be certain
that our patents will be upheld as valid and enforceable or prevent the development of
competitive products. Consequently, competitors could develop, manufacture and sell
products that directly compete with our products, which could decrease our sales and
diminish our ability to compete. If our intellectual property does not adequately protect
us from our competitors products and methods, our competitive position could be
adversely affected and we could be precluded from operating all or a portion of our
business.
13
In
addition, we exploit our brand name
Incredi
by applying it to products offered
through collaborations with third parties. We have registered INCREDIMAIL as a trademark
only in the United States. Our ownership and use of the
Incredi
brand name may be
challenged, invalidated or legally circumvented by third parties, in which case our
ability to generate revenues from its exploitation will suffer.
We
have registered, or have rights to, various domain names relating to our brand, including
incredimail.com, incredidate.com, incredigames.com magentic.com, photojoy.com and
hiyo.com. If we fail to maintain, or to enforce our rights to these registrations, it will
be difficult for us to implement our strategy to increase recognition of our brand. Third
parties have registered domain names similar to ours and if such parties engage in a
business that may be harmful to our reputation or confusing to our customers, our revenue
may decline and we may incur additional expenses in maintaining our brand.
We
rely on a combination of patent and other intellectual property laws and confidentiality,
non-disclosure and assignment of inventions covenants as appropriate, with our employees
and consultants, to protect and otherwise seek to control access to, and distribution of,
our proprietary information. These measures may not be adequate to protect our property
from unauthorized disclosure, third-party infringement or misappropriation. We also rely
on trade secret protection for our technology, in part through confidentiality covenants
with our employees, consultants and third parties. However, these parties may breach these
covenants and we may not have adequate remedies for any breach. Also, others may learn of
our trade secrets through a variety of methods. In addition, the laws of certain countries
in which we sell our products may not protect our intellectual property rights to the same
extent as the laws of the United States or Israel. See Item 4.B Business Overview
Intellectual Property.
Third party claims of infringement
or other claims against us could require us to redesign our products, seek licenses, or
engage in future costly intellectual property litigation, which could adversely affect our
financial position and our ability to execute our business strategy.
The
appeal of our products is largely the result of the graphics, sound and multimedia content
that we incorporate in our products. We enter into licensing arrangements with third
parties for these uses. However, other third parties may from time to time claim that our
current or future use of content, sound and graphics infringe their intellectual property
rights, and seek to prevent, limit or interfere with our ability to make, use or sell our
products. For example, in 2002 and again in 2004, a third party had contacted us to demand
that we remove certain Smiley graphics from our website, claiming that he had
registered a trademark with respect to these graphics and that our use infringed his
rights. We believe this claim to be without any merit and intend to vigorously defend any
suit filed against us in this matter.
If
it appears necessary or desirable, we may seek to obtain licenses for intellectual
property rights that we are allegedly infringing, may infringe or desire to use. Although
holders of these types of intellectual property rights often offer these licenses, we
cannot assure you that licenses will be offered or that the terms of any offered licenses
will be acceptable to us. Our failure to obtain a license for key intellectual property
rights from a third party for technology or content, sound or graphic used by us could
cause us to incur substantial liabilities and to suspend the development and sale of our
products. Alternatively, we could be required to expend significant resources to re-design
our products or develop non-infringing technology. If we are unable to re-design our
products or develop non-infringing technology, our revenues could decrease and we may not
be able to execute our business strategy.
We
may become involved in litigation not only as a result of alleged infringement of a
third-partys intellectual property rights, but also to protect our own intellectual
property rights. If we do not prevail in any third-party action for infringement, we may
be required to pay substantial damages and be prohibited from using intellectual property
essential to our products.
We
may also become involved in litigation in connection with the brand name rights associated
with our Company name or the names of our products. We do not know whether others will
assert that our Company name or brand name infringes their trademark rights. In addition,
names we choose for our products may be claimed to infringe names held by others. If we
have to change the name of our Company or products, we may experience a loss in goodwill
associated with our brand name, customer confusion and a loss of sales. Any lawsuit,
regardless of its merit, would likely be time-consuming, expensive to resolve and require
additional management time and attention.
14
Unlawful copying of our products
or other third party violations of existing legal protections or reductions in the legal
protection for intellectual property rights of software developers or use of open source
software could adversely affect our revenue.
The
software products that we sell incorporate a technology that reduces the ability of third
parties to copy the software without having paid for it. Unlicensed copying and use of
software and intellectual property rights represents a loss of potential revenue to us,
which could be more significant in countries where laws are less protective of
intellectual property rights. Continued educational and enforcement efforts may not affect
revenue positively and further deterioration in compliance with existing legal protections
or reductions in the legal protection for intellectual property rights of software
developers could adversely affect our revenue.
In
addition, certain of our products or services may now or in the future incorporate open
source software, which are typically distributed as-is without warranties,
such as warranties of performance or ownership or indemnities against intellectual
property infringement claims. Moreover, to the extent that we incorporate open source
software into our products or services, although we do not currently intend ever to
incorporate open source software that would require us to do so, the license for such open
source software may obligate us, among other things, to pass on to our licensees without
charge the rights to use, copy, modify and redistribute the underlying software source
code, both with respect to the original open source code and any modifications to such
code created by us.
If
we fail to detect and stop misrepresentations of our site and products, we could lose
confidence of our customers, thereby causing our business to suffer.
We
are exposed to the risk of domains using our brand names (such as IncrediMail)
in various ways, and attracting in this manner our potential or existing users. Many times
these domains are engaged with fraudulent or spam activities and using our brand names can
result in damaging our reputation and losing our clients confidence in our products.
If we are unable to detect and terminate effectively this misrepresentation activity, we
may lose users and our ability to produce revenues will be harmed.
Risks Related to Our
Industry
The Internet as a medium for
commerce and communication is subject to uncertainty and a decline in the number of
Internet users or users of email could cause our revenues to decrease and our products to
become obsolete.
The
Internet and electronic communication industry is rapidly evolving, as new means for
electronic communication are offered to the public. Our ability to execute our business
strategy is dependent upon the continued predominance of email as a means of electronic
communication and upon the continued use of the Internet.
Although
email software programs and services and instant messaging programs and services currently
enjoy a large market, the development and consumer acceptance of other means of electronic
communication, such as text messaging over phone networks, chat-boards, blogs and
web-based social networks, could result in a substantial decrease in the size of this
market, in which case our revenues could decrease and our products could become obsolete.
In
addition, our products may only be used on personal computers that can be and are
connected to the Internet. While the number of Internet users has been rising, the
Internet infrastructure may not expand fast enough to meet the increased levels of demand.
In addition, activity that diminishes the experience for Internet users, such as spyware,
spoof emails, viruses and spam directed at Internet users, as well as viruses and
denial of service attacks directed at Internet companies and service
providers, may discourage people from using the Internet, including for communications and
commerce. Furthermore, newer users of the Internet could be less active email users
compared to our earlier users. If use of the Internet as a medium for communication and
commerce grows at a slower rate than we anticipate, our sales would be less than expected.
In addition, the development and acceptance of new technologies and platforms could divert
our targeted customers from the use of the Internet, in which case our results of
operations will be adversely affected.
New laws and regulations
applicable to e-commerce, Internet advertising, privacy and data collection, and
uncertainties regarding the application or interpretation of existing laws and
regulations, could harm our business.
Our
business is conducted through the Internet and therefore, among other things, we are also
subject to the laws and regulations that apply to e-commerce. These laws and regulations
are becoming more prevalent in the United States, Israel and elsewhere and may impede the
growth of the Internet or other online services. These regulations and laws may cover
taxation, user privacy, data protection, pricing, content, copyrights, electronic
contracts and other communications, Internet advertising, consumer protection, the
provision of online payment services, broadband residential Internet access, and the
characteristics and quality of products and services.
15
Many
areas of the law affecting the Internet remain largely unsettled, even in areas where
there has been some legislative action. It is difficult to determine whether and how
existing laws, such as those governing intellectual property, privacy and data protection,
libel, data security and taxation, apply to the Internet and our business. New laws and
regulations may seek to impose additional burdens on companies conducting business over
the Internet. We are unable to predict the nature of the limitations that may be imposed.
For
example, legislation has been enacted to regulate the use of cookie
technology. Upon installation of our software, certain cookies generated by us and our
advertisers are placed on our customers computers. It has been argued that Internet
protocol addresses and cookies are intrinsically personally identifiable information that
is subject to privacy standards. We cannot assure you that our current policies and
procedures would meet these restrictive standards.
In
addition, technology is changing constantly and data security regulations and standards
are in a state of flux. Changes in law or regulations may require that we materially
change the way we do business. For example, we may be required to implement physical,
administrative and technological security measures different from those we have now, such
as different data access controls or encryption technology. We may incur substantial
expenses in implementing such security measures.
In
addition, although current decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to sales made over
the Internet, the U.S. Congress and a number of states have been considering or adopted
various initiatives that could limit or supersede these decisions. If any of these
initiatives result in a reversal of the Courts current position, we could be
required to collect sales and use taxes on our U.S. sales. The imposition by state and
local governments of various taxes upon Internet commerce could create administrative
burdens for us and could decrease our future sales.
The
EU has already enacted legislation regarding Value Added Tax imposed on certain software
sold by companies outside the EU to consumers in the EU over the Internet. This
legislation could be interpreted to include other parts of the Companys business not
yet accrued for by the Company, which could result in additional significant tax exposure,
or alternatively, reduce the competitiveness of the Companys pricing of its
products.
The
cost of compliance with taxation, consumer and privacy related regulations could be
material and we may not be able to comply with the applicable regulations in a timely or
cost-effective manner. In response to evolving legal requirements, we may be compelled to
change our business model and practices, which could reduce our sales, and we may not be
able to replace the revenues lost as a consequence of the change. These changes could also
require us to incur significant expenses, subject us to liability and require increased
time and attention of our management. See Item 4.B Business Overview
Government Regulation for additional discussion of applicable regulations affecting
our Company.
Risks Related to Our
Operations in Israel
Political, economic and military
instability in the Middle East may impede our ability to operate and harm our financial
results.
Our
principal executive offices are located in Israel. Accordingly, political, economic and
military conditions in the Middle East may affect our business directly. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have occurred
between Israel and its Arab neighbors. During the winter of 2008, Israel was engaged in an
armed conflict with Hamas, a militia group and political party operating in the Gaza
Strip, and during the summer of 2006, Israel was engaged in an armed conflict with
Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts
involved missile strikes against civilian targets in various parts of Israel, and
negatively affected business conditions in Israel. Any hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading partners could
affect adversely our operations. Although Israel has entered into various agreements with
the Palestinian Authority, Israel has been and is subject to civil unrest and Palestinian
terrorist activity, with varying levels of severity, since October 2000. Tension among the
different Palestinian factions may create additional unrest and uncertainty. Ongoing and
revived hostilities and the attempts to resolve the conflict between Israel and its Arab
neighbors often results in political instability that affects the Israeli capital markets
and can cause volatility in interest rates, exchange rates and stock market quotes. These
or other Israeli political or economic factors could harm our operations and product
development and cause our sales to decrease. Furthermore, several countries, principally
those in the Middle East, still restrict business with Israel and Israeli companies and,
although the impact of these restrictions is not as important for a company such as ours
that sells its products through the Internet, it may nevertheless have an adverse effect
on our results of operations.
16
Our operations may be disrupted by
the obligations of our personnel to perform military service.
Many
of our male employees in Israel, including members of senior management, are obligated to
perform up to 36 days of military reserve duty annually until they reach age 48 and, in
the event of a military conflict, could be called to active duty. Our operations could be
disrupted by the absence of a significant number of our employees related to military
service or the absence for extended periods of military service of one or more of our key
employees.
Investors and our shareholders
generally may have difficulties enforcing a U.S. judgment against us, our executive
officers and our directors or asserting U.S. securities laws claims in Israel.
We
are incorporated in Israel and all of our executive officers and most of our directors
reside outside the United States. Service of process upon them may be difficult to effect
within the United States. Furthermore, all of our assets and most of the assets of our
executive officers and directors are located outside the United States. Therefore, a
judgment obtained against us or any of them in the United States, including one based on
the civil liability provisions of the U.S. federal securities laws may not be collectible
in the United States and may not be enforced by an Israeli court. It also may be difficult
for you to assert U.S. securities law claims in original actions instituted in Israel.
The tax benefits available to us
require us to meet several conditions and may be terminated or reduced in the future,
which would increase our costs and taxes.
We
have generated income and therefore, are able to take advantage of tax exemptions and
reductions resulting from the Approved Enterprise status of our facilities in
Israel. To remain eligible for these tax benefits, we must continue to meet certain
conditions stipulated in the Law for the Encouragement of Capital Investments, 1959 (the
Investment Law), and its regulations and the criteria set forth in the
specific certificate of approval. If we fail to meet the required conditions in the
future, the tax benefits would be canceled and we could be required to refund any tax
benefits we have received with interest and adjustment for change in Israeli consumer
price index. These tax benefits may not be continued in the future at their current levels
or at any level.
Effective
April 1, 2005, the Investment Law was amended. As a result, the criteria for investments
qualified to receive tax benefits as an Approved Enterprise were revised. No assurance can
be given that we will, in the future, be eligible to receive additional tax benefits under
this law. The termination or reduction of these tax benefits would increase our tax
liability in the future, which would reduce our profits or increase our losses.
Additionally, if we increase our activities outside of Israel, for example, by future
acquisitions, our increased activities might not be eligible for inclusion in Israeli tax
benefit programs. As a result of the amendment and recent interpretations, tax-exempt
income generated under the provisions of the new law will subject us to taxes upon
distribution or liquidation and we may be required to record deferred tax liability with
respect to such tax-exempt income, possibly affecting our results in the future. See
Item 10.E Taxation Israeli Taxation Law for the Encouragement of
Capital Investments, 1959 for more information about these programs.
Risks Related to our
Ordinary Shares and their Listing on a Stock Exchange
We incur significant costs as a
result of being a public company.
As
a public company, we incur significant legal, accounting and other expenses. We incur
costs associated with our public company reporting requirements as well as costs
associated with corporate governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002, the rules of the Nasdaq Stock Market, the provisions of the
Israeli Securities Law that apply to dual listed companies (companies that are listed on
the Tel Aviv Stock Exchange (TASE) and another recognized stock exchange) and
the provisions of the Israeli Companies Law that apply to public companies. For example,
as a public company, we have created additional board committees and are required to have
two external directors pursuant to the Israeli Companies Law. We have also contracted an
internal auditor and a consultant for implementation of and compliance with the
requirements under the Sarbanes-Oxley Act. See Item 5 Operating and Financial Review
and Prospects Overview General and Administrative Expenses for a
discussion of our increased expenses as a result of being a public company.
17
A small number of existing
shareholders hold a significant percentage of our outstanding ordinary shares and can
exercise significant influence over our actions.
As
of May 31, 2009, our directors and officers beneficially owned (including shares issuable
upon exercise of options exercisable within 60 days of such date) approximately 42% of our
outstanding ordinary shares in the aggregate. The interests of these shareholders may
differ from your interests. These shareholders, acting together, could exercise
significant influence over our operations and business strategy and will have sufficient
voting power to influence all matters requiring approval by our shareholders, including
the ability to elect or remove directors, to approve or reject mergers or other business
combination transactions, the raising of future capital and the amendment of our articles
of association, which govern the rights attached to our ordinary shares. In addition, this
concentration of ownership may delay, prevent or deter a change in control, or deprive you
of a possible premium for your ordinary shares as part of a sale of our Company.
The rights and responsibilities of
our shareholders are governed by Israeli law and differ in some respects from the rights
and responsibilities of shareholders under U.S. law.
We
are incorporated under Israeli law. The rights and responsibilities of holders of our
ordinary shares are governed by our memorandum of association, our articles of association
and by Israeli law. These rights and responsibilities differ in some respects from the
rights and responsibilities of shareholders in typical U.S. corporations. See Item
16.G Corporate Governance. In particular, a shareholder of an Israeli company has a
duty to act in good faith toward the company and other shareholders and to refrain from
abusing his power in the company, including, among other things, in voting at the general
meeting of shareholders on certain matters. See Item 10.B Memorandum and Articles of
Association Approval of Related Party Transactions for additional information
concerning this duty. Our shareholders generally may find it difficult to comply with the
provisions of Israeli law.
Provisions of our articles of
association and Israeli law may delay, prevent or make difficult an acquisition of our
Company, which could prevent a change of control and, therefore, depress the price of our
shares.
Israeli
corporate law regulates mergers, requires tender offers for acquisitions of shares above
specified thresholds, requires special approvals for transactions involving directors,
officers or significant shareholders and regulates other matters that may be relevant to
these types of transactions. In addition, our articles of association contain provisions
that may make it more difficult to acquire our Company, such as provisions establishing a
classified board. Furthermore, Israeli tax considerations may make potential transactions
unappealing to us or to some of our shareholders. See Item 10.B Memorandum and
Articles of Association Approval of Related Party Transactions and Item
10.E Taxation Israeli Taxation for additional discussion about some
anti-takeover effects of Israeli law.
These
provisions of Israeli law may delay, prevent or make difficult an acquisition of our
Company, which could prevent a change of control and therefore depress the price of our
shares.
Future sales of our ordinary
shares could reduce our stock price.
Sales
by shareholders of substantial amounts of our ordinary shares, or the perception that
these sales may occur in the future, could materially and adversely affect the market
price of our ordinary shares. In addition, our executive officers, directors and certain
large shareholders are no longer subject to contractual restrictions on the sale by them
of shares, resulting in a substantial number of shares held by them or issuable upon
exercise of options currently eligible for sale in the public market. Furthermore, the
market price of our ordinary shares could drop significantly if our executive officers,
directors, or certain large shareholders sell their shares, or are perceived by the market
as intending to sell them.
Although we have paid dividends in
the past, and we expect to pay certain dividends in the future, our ability to pay
dividends may be adversely affected by the risk factors described in this report; if we
fail to, or to extent we do not, pay dividends the return on investment will be limited to
the value of our stock.
We
have paid dividends in the past, and on March 25, 2009, we announced that our board of
directors had approved a cash dividend of approximately $4.6 million, or $0.50 per share,
subject to Israeli court approval and a tax pre-ruling from the Israeli Tax Authority as
required by Israeli law. Our ability to declare a dividend, and the amount of any dividend
if declared, may be adversely affected by the risk factors described in this report. The
declaration of a dividend and the amount of any dividend will depend on our earnings,
financial condition and other business and economic factors affecting us at the time as
our board of directors may consider relevant. We may pay dividends in any fiscal year only
out of profits, as defined by the Israeli Companies Law, unless otherwise
authorized by an Israeli court, and provided that the distribution is not reasonably
expected to impair our ability to fulfill our outstanding and expected obligations. If we
do not pay dividends, our stock may be less valuable because a return on your investment
will only occur if our stock price appreciates. See Item 8.A Consolidated Statements
and Other Financial Information Policy on Dividend Distribution for
additional information regarding the payment of dividends.
18
U.S.
investors in our Company could suffer adverse tax consequences if we are
characterized as a passive foreign investment company.
If,
for any taxable year, our passive income or our assets that produce passive income exceed
levels provided by law, we may be characterized as a passive foreign investment company,
or PFIC, for U.S. federal income tax purposes. This characterization could result in
adverse U.S. tax consequences to our shareholders. If we were classified as a passive
foreign investment company, a U.S. holder of our ordinary shares could be subject to
increased tax liability upon the sale or other disposition of ordinary shares or upon the
receipt of amounts treated as excess distributions. Under these rules, the
excess distribution and any gain would be allocated ratably over the U.S. holders
holding period for the ordinary shares, and the amount allocated to the current taxable
year and any taxable year prior to the first taxable year in which we were a passive
foreign investment company would be taxed as ordinary income. The amount allocated to each
of the other taxable years would be subject to tax at the highest marginal rate in effect
for the applicable class of taxpayer for that year, and an interest charge for the deemed
deferral benefit would be imposed on the resulting tax allocated to such other taxable
years. The tax liability with respect to the amount allocated to years prior to the year
of the disposition, or excess distribution, cannot be offset by any net
operating losses. In addition, holders of shares in a passive foreign investment company
may not receive a step-up in basis on shares acquired from a decedent. U.S.
shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax
consequences of investing in our ordinary shares, as well as the specific application of
the excess distribution and other rules discussed in this paragraph. For a
discussion of how we might be characterized as a PFIC and related tax consequences, please
see Item 10.E Taxation United States Federal Income Tax Considerations
Passive Foreign Investment Company Considerations.
ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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HISTORY
AND DEVELOPMENT OF THE COMPANY
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Our History
We
were incorporated in the State of Israel in November 1999 under the name Verticon Ltd. We
changed our name to IncrediMail Ltd. in November 2000 to better reflect the nature of our
business. We operate under the laws of the State of Israel. Our headquarters are located
at 4 HaNechoshet Street,
Tel-Aviv 69710, Israel. Our phone number is (972-3)
769-6100. Our agent for service of process in the United States is Puglisi &
Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19715. Our website
addresses are
www.incredimail-corp.com
and
www.incredimail.com
. The
information on our websites does not constitute part of this annual report.
We
completed the initial public offering of our ordinary shares in the United States on
February 3, 2006, whereby we became a limited liability public company under
the Israeli Companies Law. The registration statement on Form F-1 relating to our initial
public offering became effective on January 30, 2006. Immediately prior to the
effectiveness of our registration statement, we increased our authorized share capital to
15 million ordinary shares and completed a 38-for-one ordinary share split affected as a
dividend on our ordinary shares. In addition, upon the closing of our initial public
offering, our then outstanding redeemable convertible preferred shares were automatically
converted, on a 38-for-one basis, into an aggregate of 1,764,948 ordinary shares.
Since
November 20, 2007 the Companys ordinary shares are also traded on the Tel Aviv Stock
Exchange.
Principal Capital
Expenditures
We
had capital expenditures of $0.6 million in 2008, $1.4 million in 2007 and $0.8 million in
2006. We currently expect that our capital expenditures will be approximately $0.5 million
in 2009. We have financed our capital expenditures with cash generated from operations.
Our
capital expenditures during 2006, 2007 and 2008 consisted primarily of leasehold
improvements and furnishings, as well as investments in computer hardware and software. In
2009, we expect these investments to consist primarily of acquiring computer hardware,
software, peripheral equipment and installation, all which are expected to be financed by
the Companys resources.
19
Recent Developments
On
February 5, 2009, we entered into an amendment to our licensing and promotion agreement
with Oberon Media Inc. relating to the use of our brand name and marketing of their
products and services to revise the terms of payment and extend the agreement until July
14, 2011. See Item 4.B Business Overview Advertising and Search
Generated Revenue.
On
March 25, 2009, we announced that our board of directors had approved a cash dividend of
approximately $4.6 million, or $0.50 per share, subject to Israeli court approval and a
tax pre-ruling from the Israeli Tax Authority as required by Israeli law. Previously, on
March 12, 2009, we announced that our board of directors and management determined that
the Companys interest for enhancing shareholder value is best served by changing our
dividend policy and instituting a revised dividend policy whereby at least 50% of annual
net income of the Company will be paid out as a dividend beginning with the net income for
2009. According to our dividend policy, the declaration and issuance of the dividend will
be subject to our boards review of the Companys financial conditions at the
time. See Item 1A Risk Factors Although we have paid dividends in the
past, and we expect to pay certain dividends in the future, our ability to pay dividends
may be adversely affected by the risk factors described in this report; if we fail to pay
dividends the return on investment will be limited to the value of our stock.
On
January 23, 2008 the Company announced that its Board of Directors had resolved to adopt a
share buyback plan, and on March 25, 2009, the Company announced that it had elected to
continue with the second phase of this plan that authorizes the purchase of up to an
additional $1 million of its ordinary shares, subject to approval from the Israeli Tax
Authority which has not yet been received. As of May 31, 2009, the Company repurchased
346,019 ordinary shares in open market transactions.
On
June 2, 2009, the Company provided notice to its shareholders of an extraordinary general
meeting to approve a proposal to elect an external director of the Company in the place of
an external director whose term had expired, and to amend the terms of options granted to
the external directors and the directors of the Company. The meeting is scheduled to be
held on July 9, 2009 with such terms as provided in the Notice of Meeting filed on Form
6-K with the SEC. See Item 10.H Documents on Display for information on
accessing the Companys SEC filings. If the proposals relating to compensation of our
directors are approved, our directors recurring annual stock option grants will have
a vesting period of three years (instead of four years) from the date of their annual
stock option grant. Also, upon termination or expiration of the applicable directors
service with the Company, provided that the termination or expiration is not for
Cause and not resulting from the directors resignation, the stock options
granted to such director shall retain their original termination dates, and shall not
terminate 90 days after the applicable termination date, and the next upcoming tranche of
stock options, of each grant, that are scheduled to vest immediately subsequent to the
termination date, if any, shall automatically vest and become exercisable immediately
prior to the termination date. In addition, to avoid a possible conflict of interest while
discussing a Change of Control of the Company (which may result in the termination of the
directors term of office), all unvested options held by the director, shall
automatically vest and become exercisable upon such Change of Control event.
Change of Control is defined for these purposes as: (i) merger, acquisition or
reorganization of the Company with one or more other entities in which the Company is not
the surviving entity, (ii) a sale of all or substantially all of the assets of the
Company; (iii) a transaction or a series of related transactions as a result of which more
than 50% of the outstanding shares or the voting rights of the Company are held by any
party (whether directly or indirectly).
Overview
We
are an Internet content and media company, whose products we believe bring a new level of
fun, personality and convenience to email, desktops and screen savers, and have been
downloaded more than eighty million times. Having secured a large active email user base,
IncrediMail is now branching out into Instant Messaging, using its unique content and
approach to enhance the user experience.
Since
we began operations in 2000, our products have been downloaded in more than 100 countries,
and in 2008 we recorded on average approximately 1.7 million registered downloads each
month. As of December 31, 2008, we had approximately 11 million active users, and
currently, more than 350 million IncrediMail
®
emails are
sent by our users each month. Our users typically use our products for as long as six
years. Through December 31, 2008, we have sold more than 1.7 million products and content
licenses worldwide to our registered users. We believe our historical track record of
converting registered users to purchasing customers represents a convincing validation of
our business strategy.
20
We
generate revenue primarily by:
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advertising, including primarily generating searches and sharing in the revenues with the
provider of the search engine; and
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selling our premium software products.
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For
a breakdown of total revenues by category of activity, see Item 5.A Operating
Results Revenues.
To
date, we have relied primarily on viral growth to grow our user base. Our
viral growth has resulted from recipients of our users emails clicking
on the link at the bottom of emails sent with
IncrediMail® Xe
and then
downloading our products and also from word of mouth. Our revenues were $10.9 million in
2006, $18.7 million in 2007 and $21.9 million in 2008. Our operations have been profitable
since 2002, with a gross profit margin of over 90% .
When
we use the term registered user in this annual report, we mean an
IncrediMail® user who has downloaded one of our products and completed the
registration process. Registrations are not necessarily indicative of the number of
individual users as a user may register more than one time. In addition, the term
active user as used in this annual report means a registered user who has
performed any activity using any IncrediMail® product or service, including opening or
sending emails using IncrediMail®, logged into his instant messaging with a HiYo
client, downloading content or updating the product, in the 90 days prior to the
measurement date.
Our Market
Email
Market Opportunity
. In recent years, email has become one of the most important forms
of electronic communication worldwide. The email market may be divided into two segments:
the consumer, or home user, market and the business, or corporate, market. Our products
target the consumer market. Both the consumer and the business markets are serviced by
many of the same popular email software programs, such as Microsoft Outlook, and by
web-based email services, such as Hotmail, Yahoo!
®
Mail
and Gmail.
Security
remains a critical concern for the consumer market as viruses, worms and identity theft
continue to grow. Spam also continues to rise. Any new email software product should
provide an effective and secure product that satisfies users concerns.
Evolution
of the Specialized Email Software Programs.
In order to be viable, email systems must
function as an effective means of communication. In addition, we believe that many in the
consumer or home user market are seeking an entertaining experience and a way to express
their creativity and individual personalities. We believe that consumer email users are
ready to accept email software products that offer users a customizable and entertaining
email experience together with security and anti-spam features.
The IncrediMail Solution
We
employ an innovative approach to enhancing our users email experience. Our
IncrediMail products provide the following benefits:
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Variety
and Amount of Content.
Our products offer users access to an extensive and
continually growing pool of content that we believe is one of the largest collections of
creative and diverse graphics, sound and multimedia content available online for email
communications. We began assembling our content in 1999.
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Creative
Technology.
Our proprietary
technology, which is based on advanced software
development standards, is designed to produce robust quality products that provide the
functionality expected in an email client packaged in a friendly, less
technologically-oriented and entertaining environment.
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Customization
.
The diversity of our graphics, sound and multimedia content enables our users to
customize and personalize their email messages and letters easily and quickly.
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Flexibility
and Ease of Use for Both Sender and Recipient.
We strive to offer a simple and
intuitive user interface that enables our users to create different experiences depending
on the nature or recipient of the email or letter. Users can easily change one or more
features for a specific email. Further, recipients of
IncrediMail®
emails can
easily open them, using most available email clients and can see all the features without
the need for special software.
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21
Our Strategy
Our
objective is to become the market leader in entertaining and creative email systems for
the consumer and home user market. Based on our survey of downloads of our products and
those of competitors from third party websites, we believe that
IncrediMail
®
Xe
is one of the most downloaded free products
providing an entertaining and creative email system, and our strategy will include
building on its popularity and seeking to convert free users to paying customers. The key
elements of our strategy are to:
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Maintain
and grow our user base.
Our effective viral marketing has resulted in millions of
registered users who spread the word about our products and services at relatively low
marketing costs to us. For that reason, we expect a significant part of our products and
services offering will remain free. In order to increase the size of our user base, we
have broadened our product offering to instant messaging with new demographics and intend
to supplement the viral growth of our products with media buying and other advertising
and marketing activities, primarily online. We plan to continue, and further increase the
size of the team charged with optimizing the marketing of our products, increasing the
effectiveness of our online marketing activity, and monetize user registrations and
active user base.
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Increase
the use of our products by our users and the searches performed by them through our
products.
With the increasing monetization possibilities of search generation, the
strategic importance of enabling search through and because of our products has grown
significantly. This is further emphasized by the demographics of our users and the
relatively high revenues they generate while searching over the Internet. We therefore
intend to increase the availability of search generating channels to our users through
numerous points in each and throughout our products and to leverage the large active user
base, primarily, those that are using our free products.
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Enhance
product offerings and increase user sales.
We plan to stimulate growth of our sales
and enhance our cross-sale capabilities by improving our existing product and service
offering. We will continue to seek to convert free users into paying customers by
marketing the paid products and services to our large user base.
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Avoid
offensive market tools.
We design our products to address usersaversion to
spam, spyware and other perceived offensive Internet marketing tools, which we believe
encourages more use of them and increases user loyalty.
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Continue
to focus on the online consumer market.
Email and instant messaging continue to grow
as communication mediums. The Internet allows us to reach potential users throughout the
world quickly and easily as well as reduces the costs associated with sales and
distribution of our products and services.
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Advertising
and search generated revenues
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Advertising
revenues consist almost entirely of revenues generated through search. We offer our users
the ability to search by collaborating with premium search companies, primarily Google
Inc., and receive a portion of the revenues generated by these companies through the
search process.
On
March 19, 2008 we also signed a search distribution agreement with InfoSpace Inc. and most
recently signed an amendment to that agreement on December 24, 2008, which automatically
renews the agreement for one year terms unless either party gives the required notice of
termination prior to the end of the applicable term.
In
addition, we have licensing and promotion arrangements with Oberon Media Inc. for the use
of our brand name and marketing of their products and services.
Under
our agreement with Oberon Media Inc., effective since 2004 Oberon Media sells its gaming
software through a website using our
Incredi
brand for the domain name
IncrediGames
and our websites graphical external envelop. In addition, we
market and promote the
IncrediGames
website, among other things, through a
link in our websites main toolbar. In consideration for our brand and promotional
activity, we share the net license fees (as defined in the agreement) Oberon Media
receives from end-users in connection with the purchase of its software through the
IncrediGames website. We have since amended the original agreement enabling us to broaden
the cooperation between the companies, incorporating our HiYo product as well as our
search properties. We expect these features to begin contributing revenues in 2009.
22
Our
products are currently available in nine languages in addition to English. Prices and
license fees for our premium products range between $10 and $60, varying based on market,
length of license period and whether the products are offered together. We offer the
following products, all of which may be downloaded over the Internet through a personal
computer running on a Microsoft Windows operating system:
IncrediMail
®
Xe
, launched in September 2000, is our flagship product that is available over the
Internet free of charge. It offers a variety of features that the user can apply to email
messages including:
|
|
pre-prepared
backgrounds and letterheads;
|
|
|
animated
notifiers (animated indications that mail has been received);
|
|
|
emoticons
(animations that are intended to convey emotions);
|
|
|
handwritten
signatures;
|
|
|
a
web gallery with additional animations, notifiers and email backgrounds;
|
IncrediMail
®
Premium
, launched in the first quarter of 2001, is an enhanced version
of
IncrediMail® Xe
. Users who upgrade their free version of
IncrediMail
®
Xe
through the purchase of
IncrediMail
®
Premium
benefit from the
following features:
|
|
no
advertising banners displayed in the product;
|
|
|
the
ability to change the appearance of the product through the use of software skins;
|
|
|
voice
message recorder;
|
|
|
no
promotional link at the bottom of outgoing emails;
|
|
|
a
web gallery with additional animations, notifiers and email backgrounds;
|
|
|
advanced
account access; and
|
|
|
email-based
user support.
|
The
advanced account access system allows a user to download a specific email from an account
without necessarily downloading all emails that have been delivered to the account. In
addition, it allows a user to preview the email details residing on the server and delete
email messages from the account without first having to download them. This software
feature is built into
IncrediMail
®
Premium
and does not require the user to download or install any additional software. Users
are therefore able to remove undesirable emails that they suspect may be infected with
viruses or that may otherwise compromise their computers without downloading them.
IncrediMail
®
Letter Creator
, also launched in the first quarter of 2001, is an
application that enables
IncrediMail
®
Xe
and
IncrediMail®
Premium
users to design and create their own personalized email letters and ecards.
Such users can create their own letterheads, customize their emails with 3D effects, font
styles, images and pictures and add personalized backgrounds.
Emoticon Super Pack,
launched in the first quarter of 2005, is a special package of emoticons sold
separately.
Through
December 31, 2008, we have sold approximately 1.1 million licenses for
IncrediMail®
Premium,
IncrediMail
®
Letter Creator,
or up-sale downloads, or combinations of this products.
The
Gold Gallery
, launched in February 2004, is a license-based content product. It offers
additional IncrediMail
®
content files in the form of
email backgrounds, animations, sounds, graphics and email notifiers. Through December 31,
2008, we have sold approximately 0.3 million licenses for
The Gold Gallery
of which
approximately two thirds were for a one year license and one third for a lifetime license
for use of the content database.
23
JunkFilter
Plus
, launched in July 2005, is an advanced anti-spam product, based on the Recurrent
Pattern Detection Technology (RPD) that we license from Commtouch Ltd.
JunkFilter
Plus
offers a filtering technique to manage unwanted email, including offensive
content, viruses, hoax emails and identity theft scams. This anti-spam product is designed
to automatically identify and block undesirable mail from the users inbox and
protect against fraudulent and malicious emails. It detects and blocks spam in the first
few minutes of an outbreak, unlike other anti-spam approaches. Through December 31, 2008,
we have sold approximately 0.3 million licenses for
JunkFilter Plus.
Magentic,
was launched as a Beta in April 2006 and fully released a few months later.
Magentic
enhances and enriches the computer desktop by adding enhanced graphics
enabling users to easily personalize the working environment.
Magentic
offers
hundreds of high quality wallpapers and screensavers and has already over 8.5 million
registered downloads. In 2008 we suspended further development marketing of this product,
although we continue to support it and may renew marketing efforts in the future. In
addition, the Company has developed
PhotoJoy
a product entirely focused on
providing brand-new graphically enriched ways to view and enjoy personal photos.
PhotoJoy
provides 3D Photo Screensavers enriched with a variety of styles and
designs, fun desktop widgets that display photos in the most creative and playful ways
(named PhotoToys), and Collage Wallpapers presenting photos within various
themes, sceneries, and illustrations.
PhotoJoy
is designed to reveal on a
users desktop all chosen photos saved on a users personal computer. In
addition, the software allows users to take photos from photo hosting web sites (such as
Flickr and Picasa) and continue viewing new photos once uploaded to these sites directly
in
PhotoJoy
as well, thereby enabling the user to enjoy photos on the computer
desktop.
HiYo
,
launched in May 2008, is a graphic enhancement tool for enriching instant messaging
products, by adding enhanced graphics and enabling users to personalize their messages.
Such users can customize their messages with 3D effects, font styles, images and pictures
and add personalized backgrounds content.
HiYo
is available for users of the
instant messenger tool, Windows Live Messenger
®
and we
believe
HiYo
will bring in new users and demographics into the
IncrediMail
®
experience.
Products under
Development
Our
research and development activities are conducted internally by our Chief Technology
Officer and a 47-person research and development staff. Our research and development
efforts are focused on the development of upgraded software, new features and the
enhancement of our existing product suite.
In
the past we had initiated numerous other projects such as branded content and a social
community site for
IncrediMail
®
users, however, these
efforts have been discontinued while we focus on our core competencies. Recently we have
also suspended further development of our Magentic and PhotoJoy products. Management is
constantly reassessing its initiatives, in an effort to optimize and leverage its added
value and competitive advantages. Although the above projects are the initiatives
currently identified by our management, we cannot assure you that these projects will be
completed as currently contemplated or at all. In addition, future initiatives may take
priority over the development of these projects.
Sales, Marketing and
Distribution
Our
products are sold throughout the world in more than 100 countries. The following table
shows the distribution of our registered email users and products sold by territory in
2008:
|
|
Registrations
|
Products Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
53
|
%
|
|
36
|
%
|
|
|
|
|
|
North America
|
|
|
|
22
|
%
|
|
52
|
%
|
|
|
|
|
|
South America
|
|
|
|
11
|
%
|
|
2
|
%
|
|
|
|
|
|
Oceania
|
|
|
|
2
|
%
|
|
6
|
%
|
|
|
|
|
|
Other
|
|
|
|
11
|
%
|
|
4
|
%
|
24
To
date, we have relied mainly on viral growth, arising from recipients of our
users emails clicking on the link at the bottom of emails sent with
IncrediMail
®
Xe
and then downloading our
products and from word-of-mouth. In addition, during 2008 we employed traditional
marketing strategies, consisting primarily of online advertising, which efforts were met
to our satisfaction. In 2009 in light of the current market conditions and our focus on
profitability, we plan to reduce employing these marketing efforts. We have designed our
products to address users aversion to spam, spyware and other perceived offensive
Internet marketing tools. To date, we have not been affected by the growing number of
installations by Internet users of filter software programs that allow them to
block pop up advertisements or to prevent installation of software components
that act as spying agents. The growth of our revenues would be adversely affected if our
products, while not doing any of these things, were subject to being filtered
by consumers.
During
2006 we opened an office in the United States, which is charged with local corporate
communications, business development efforts and our marketing effort in China. In 2008 as
we suspended business development activity in general and in China in particular, in order
to focus on our core competencies the US office has been reduced accordingly.
We
have typically experienced stronger sales in the first and fourth quarters, principally
because our products are purchased in holiday sales in December or in the after-holiday
sales in January. This is in addition to the general seasonality of the Internet as well
as e-commerce, being more active in the winter months. However, as search generated
revenues account for a growing and now dominant portion of our revenues, the seasonality
of our revenues has decreased.
We
currently have a Vice President Marketing and 11 employees in our sales and
marketing department.
Intellectual Property
We
rely on a combination of patent, copyright, trademark and trade secret laws and
confidentiality and invention assignment agreements to protect our intellectual property
rights.
Most
of the components of our software products were developed solely by us. We have licensed
certain components of our software, such as a speller function, from third parties. Except
for our agreement with Commtouch Ltd. (described below), all of these licenses entailed a
one-time fee or are freeware. We believe that these components are not material to the
overall performance of our software and may be replaced without significant difficulty.
In
2001, we submitted patent applications in the United States, Europe and Israel for the
following two inventions:
|
|
system
and method for visual feedback of command execution in electronic mail systems; and
|
|
|
system
and method for intelligent transmission of digital content embedded in electronic mail
messages.
|
In 2003,
we submitted national phase patent applications in the United States, the
European Community and Israel with respect to these processes that we employ in our
products.
In
July 2006, a patent was awarded in the US for the first invention; a patent has not yet
been issued for the second invention.
In
2007 an international application was filed for the invention interactive message
editing system and method.
We
enter into licensing arrangements with third parties for the use of graphic, sound and
multimedia content integrated into our products.
We
have registered INCREDIMAIL as a trademark in the United States. All other trademarks,
trade names and service marks appearing in this annual report are the property of their
respective owners.
All
professional employees and technical consultants are required to execute confidentiality
covenants in connection with their employment and consulting relationships with us. We
also require them to agree to disclose and assign to us all inventions conceived in
connection with their services to us. However, there can be no assurance that these
arrangements will be enforceable or that they will provide us with adequate protection.
JunkFilter
Plus
was developed using an anti-spam software development kit developed by Commtouch
Ltd. Under our December 2004 agreement with Commtouch, Commtouch granted us a nonexclusive
right and license to copy the software development kit and related software and
documentation for purposes of further development or modification in connection with the
design, development and sale of products that integrate the spam identification and
classification services of Commtouchs Detection Center, and to sell products
incorporating such software and documentation. Under the agreement, we pay Commtouch an
annual fee for each customer who purchases
JunkFilter Plus
based on the number of
purchasers. The agreement had a one-year initial term, beginning with the commercial
launch date of the
JunkFilter Plus
in July 2005 and was extended most recently for
another two years, ending July 2010. Commtouch will continue to provide customers with
accessibility to its software and our integrated products following termination of the
agreement, and the licenses granted to our customers will also survive such termination.
25
Competition
Our
industry is subject to intense competition. Our products compete in the specialized market
for email software products and services that aim to offer a personalized and entertaining
email experience for consumers. IncrediMail was among the first companies to offer to the
consumer email market a solution that combines an email product with an online gallery of
creative content. Compiling content is a lengthy process and we have been doing it since
1999. We consider ourselves a pioneer in this market and we believe that we have an
early mover advantage over many of our competitors. We believe that
IncrediMail has one of the largest collections of creative and diverse graphics, sound and
multimedia content available online for email communications.
Our
ability to compete effectively depends upon our ability to distinguish our Company and our
products from our competitors and their products, and includes the following factors:
|
|
the
creativity, variety and volume of content accessible through our software;
|
|
|
success
and timing of new product development and introductions;
|
|
|
quality
of customer support;
|
|
|
maintaining
our reputation for fighting spam and offering spyware-free products;
|
|
|
intellectual
property protection; and
|
|
|
development
of successful marketing channels.
|
Our
main competitors among specialized providers of email services offer the following
products: Arcsoft Multimedia Email 3, LetterMark email, FunWeb Products,
Hotbar
®
and WikMail 2005. In addition, our products also
face competition from general email software programs offered to the private market by
large Internet and software companies, such as AOL9 by America Online, Inc.,
Eudora
®
by QUALCOMM Incorporated (Nasdaq: QCOM),
Thunderbird
®
by Mozilla Foundation and Outlook Express
and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also incorporate
certain special features that provide a personalized email experience. Many of the large
Internet and software companies offer their email software programs free of charge. Our
Magentic and PhotoJoy products main competitors, in area of providers of wallpapers
and screensaver offer the following products: webshots.com and screensavers.com, which
offer wallpapers and screensavers both free and premium products for a fee. Our HiYo
products main competitors in the area of creative instant messenger tools, are
SweetIM and SmileyCentral by IAC/InterActiveCorp. Competition with these products could
result in reduced prices and margins, fewer purchases of our products and services,
increased research and development costs as well as marketing expenses and loss of market
share with regard to our traditional products, or not achieving adequate market share with
our new products and those currently being developed.
Our
products also compete in the market for web-based email software products, such as
Googles Gmail, Yahoo! Mail and Microsofts Hotmail. The web based email market
is characterized with significant competition, changing technologies and evolving products
and services enhancements.
Google,
Yahoo! and Microsoft are each offering a web-based e-mail service in addition to the many
other services they provide, such as desktop search, local search, instant messaging,
photos, maps, video sharing, mobile applications and so on. We expect these competitors to
increasingly use their financial and engineering resources to compete with our
client-based e-mail service, if we are unable to successfully compete with them, our
results of operations may be adversely affected.
26
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
customized and entertaining email experience similar to
IncrediMail
®
. For example, consumers may choose to
receive an extensive package of Internet and email services from a more dominant and
recognized company, such as Microsoft Corporation (Outlook Express or
MSN
®
) or America Online, Inc.
(AOL
®
). If we are unable to achieve continued market
penetration, we will be unable to compete effectively.
In
addition, many of our other current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than
we have. These competitors could use their greater financial resources to acquire other
companies to gain enhanced name recognition and market share, as well as to develop new
technologies, products or features that could effectively compete with our existing
product lines. Demand for our products could be diminished by products and technologies
offered by competitors, whether or not their products and technologies are equivalent or
superior.
Government Regulation
Our
database, which includes a database of registered users, falls within the definition of a
database that requires registration under the Israeli Protection of Privacy Law 1981.
Maintaining a database other than in compliance with this law may subject the owner,
holder, manager and operator to criminal liability and civil liability. We registered our
database with the Data Base Registrar on June 20, 2004. BizChords database has been
registered and is in the process of completing additional aspects of its database
registration.
There
are still relatively few laws or regulations specifically addressing the Internet. As a
result, the manner in which existing laws and regulations should be applied to the
Internet in general, and how they relate to our business in particular, is unclear in many
cases. Such uncertainty arises under existing laws regulating matters, including user
privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions,
content regulation, quality of products and services, and intellectual property ownership
and infringement.
However,
to resolve some of the current legal uncertainty, it is possible that new laws and
regulations will be adopted that will be directly applicable to our activities. Any
existing or new legislation applicable to us could expose us to liability, including
significant expenses necessary to comply with such laws and regulations, and could dampen
the growth in use of the Internet in general. Several new U.S. federal laws have already
been adopted that could have an impact on our business. The CAN-SPAM Act of 2003 is
intended to regulate spam and create criminal penalties for unmarked sexually-oriented
material and emails containing fraudulent headers. The USA Patriot Act is intended to give
the government greater ability to conduct surveillance on the Internet by allowing it to
intercept communications regarding terrorism and computer fraud and abuse. The Digital
Millennium Copyright Act is intended to reduce the liability of online service providers
for listing or linking to third-party Websites that include materials that infringe
copyrights or other rights of others. The Childrens Online Protection Act, the
Childrens Online Privacy Protection Act, and the Prosecutorial Remedies and Other
Tools to End Exploitation of Children Today Act of 2003, are intended to restrict the
distribution of certain materials deemed harmful to children and impose additional
restrictions on the ability of online services to collect user information from minors. In
addition, the Protection of Children from Sexual Predators Act of 1998 requires online
service providers to report evidence of violations of federal child pornography laws under
certain circumstances. Under the U.K. Data Protection Act and the European Union Data
Protection Directive, a failure to ensure that personal information is accurate and secure
or a transfer of personal information to a country without adequate privacy protections
could result in criminal or civil penalties. Such legislation may impose significant
additional costs on our business or subject us to additional liabilities. When users visit
our website or install and use our software, certain cookies (pieces of
information sent by a web server to a users browser) may be generated by us and our
advertisers and may be placed on our customers computers. While we believe that our
use of cookies does not result in personal identification, it has been argued that
Internet protocol addresses and cookies are intrinsically personally identifiable
information that is subject to privacy standards. We cannot assure you that our current
policies and procedures would meet these restrictive standards. We post our privacy policy
and practices concerning the use and disclosure of user data. Any failure by us to comply
with our posted privacy policy, Federal Trade Commission requirements or other domestic or
international privacy-related laws and regulations could result in proceedings by
governmental or regulatory bodies that could potentially harm our business, results of
operations and financial condition. In this regard, there are a large number of
legislative proposals before the European Union, as well as before the United States
Congress and various state legislative bodies regarding privacy issues related to our
business. It is not possible to predict whether or when such legislation may be adopted,
and certain proposals, if adopted, could harm our business through a decrease in user
registrations and revenues. These decreases could be caused by, among other possible
provisions, the required use of disclaimers or other requirements before users can utilize
our services.
27
C.
|
ORGANIZATIONAL
STRUCTURE
|
During
2006, we formed a wholly-owned subsidiary in Delaware, operating out of New York, for
marketing and other activities, and formed another wholly owned subsidiary in Israel to
acquire the business of our transaction processing provider, operating primarily out of
Israel. The current activity in these subsidiaries is minimal. Except for such
subsidiaries, we do not have other subsidiaries.
D.
|
PROPERTY,
PLANTS AND EQUIPMENT
|
We
lease our facility, located in Tel Aviv, Israel, pursuant to a lease that was entered into
during 2006 and expires in 2011, with an option to extend the lease for 2 more years. The
lease is for a total area of 2,300 square meters, at a monthly rent of approximately $22.9
per square meter.
We
own 63 servers that are hosted in a server farm by Bezeq International Ltd., which we
refer to herein as Bezeq. Our servers include mainly web servers, application
servers, ad servers, mail servers and database servers. Bezeq provides the Internet and
related telecommunications services, including hosting and location facilities, needed to
operate our website. Bezeq is Israels largest provider of such services and is a
member of Bezeq Group, Israels national telecommunications provider. Bezeq provides
these services through standard purchase orders and invoices. We add servers and expand
our systems located at their facilities as our operations require. We have no current
intention to replace Bezeq or to employ an additional provider for these services. We
believe there are many alternative providers of these services both within and outside of
Israel.
ITEM 4.A
|
|
UNRESOLVED STAFF COMMENTS
|
Not
applicable.
ITEM 5.
|
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The
following discussion of our financial condition and results of operations should be read
in conjunction with our financial statements and the related notes to the financial
statements included elsewhere in this annual report. In addition to historical financial
information, the following discussion and analysis contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including, without limitation, statements regarding the
Companys expectations, beliefs, intentions, or future strategies that are signified
by the words expects, anticipates, intends,
believes, or similar language.These forward looking statements involve risks,
uncertainties and assumptions. Our actual results and timing of selected events may differ
materially from those anticipated in these forward looking statements as a result of many
factors, including those discussed under Item 3.D Risk Factors and elsewhere
in this annual report.
Overview
We
design and market an integrated suite of customized and entertaining email software
products for the consumer or home user markets. We believe we are a global technology
leader in enriching email interactions by offering users the ability to design highly
personalized email presentations. We believe that our innovations in entertaining email
technology, along with our large collection of multimedia content for email communication,
have made our website one of the top Internet destinations in the world for downloading
entertaining email solutions.
Since
we began operations in 2000, we have recorded approximately 110 million registered
downloads of our free products in more than 100 countries, and in 2008, we recorded an
average of approximately 1.7 million registered downloads each month. As of December 31,
2008, we had approximately 11 million active users, and currently, our email users send
over 300 million IncrediMail® emails each month. We define an active user
as any user who has performed any activity using any IncrediMail® product or service,
including opening or sending emails using IncrediMail®, sending a message utilizing
our HiYo tool, downloading content or updating the product, in the 30 days prior to the
measurement date. Our users typically use our products for as long as five years, based on
current statistics (this was estimated in the past as three years). Through December 31,
2008, we have sold over 1.7 million products and content licenses worldwide to our
registered users. We believe our historical track record of converting registered users to
purchasing customers, as well as the use of our search properties, represent a convincing
validation of our business strategy.
28
Prices
and license fees for our products vary based on market, length of license period and
whether the products are offered together. Our prices and fees range from less than $10 to
about $60. These prices can vary in currencies, other than the US dollar.
Revenues
We
generate our revenues primarily from two major sources: (i) advertising, primarily through
search generated revenues and other services, and (ii) software products and solutions;
licensing our
IncrediMail® Premium,
email software,
The Gold Gallery
,
our content database and
JunkFilter Plus
, our anti-spam solution. In addition, we
generate revenues from advertising in our email client, our content database and on our
website, as well as a collaboration arrangement with a websites operator who uses our
Incredi
brand name and to whom we refer users, IncrediGames.com, an online computer
games site. The following table shows our revenues by category (in thousands of US
Dollars):
|
Year Ended December 31,
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, primarily through search, and other services
|
|
|
$
|
3,066
|
|
$
|
9,597
|
|
$
|
12,748
|
|
Products
|
|
|
|
7,785
|
|
|
9,078
|
|
|
9,158
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
$
|
10,851
|
|
$
|
18,675
|
|
$
|
21,906
|
|
|
|
|
|
|
|
|
Cost of Revenues
Our
cost of revenues consists primarily of salaries and related expenses, license fees and
payments for content and server maintenance, all related to our product revenues. Our
revenues relating to advertising, primarily search, do not have direct cost associated
with them.
Research and Development
Expenses
Our
research and development expenses consist primarily of salaries and other
personnel-related expenses for employees primarily engaged in research and development
activities. We expect our research and development expenditures to remain at their current
level as our current strategy is to focus on our core competencies and continue enhancing
our existing suite of products.
Selling and Marketing
Expenses
Our
selling and marketing expenses consist of salaries and other personnel-related expenses
for employees primarily engaged in marketing activities, media buying, payments to our PR
firm, credit card commissions and fees to our payment gateway providers that provide
secure Internet payment processes. Credit card commissions vary between 1.9% and 3.0%
based on the credit card, currency of payment and location of clearing agency. We expect
our selling and marketing expenses to decrease as we reduce our investment in media buying
from their current level of investment in the last quarter of 2008. During 2008 we
employed traditional marketing strategies, including primarily online advertising, which
efforts were met to our satisfaction, and in light of the current market conditions and
our increasing focus on profitability, we plan to reduce this investment in 2009.
General and
Administrative Expenses
Our
general and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive, accounting and administrative personnel,
professional fees and other general corporate expenses. We do not currently expect a
significant increase in our general and administrative expenses in 2009.
29
Income Tax Expense
(Benefit)
In
2001 and 2003, we were granted the status of Approved Enterprise and in 2008
we received approval for continued Privileged Enterprise status, all with
respect to three separate investment programs, entitling us to a tax exemption for a
period of two years and to a reduced tax rate of 10%-25% for an additional period of five
to eight years (depending on the level of foreign investment in our Company). The
Approved Enterprise status and the Privileged Enterprise status
allow for 0% corporate tax for a limited period of time on undistributed profits generated
from operations, and preferential taxation of the distributed portion, requiring regular
Israeli corporate tax on income generated from other sources. To the extent the Company
distributes dividends from profits generated under this program, the distributed sum would
not benefit from this program. See Israeli TaxationLaw for the Encouragement
of Capital Investments, 1959 and Item 8. Financial Information A. Consolidated
Statements and Other Financial Information Policy on Dividend Distribution, for
more information about these programs and the Companys dividend policy.
Critical Accounting
Policies and Estimates
The
discussion and analysis of our financial condition and results of operation are based on
our financial statements, which have been prepared in conformity with U.S. GAAP. The
preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We evaluate these estimates on an
on-going basis. We base our estimates on our historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. Under U.S. GAAP, when more
than one accounting method or policy or its application is generally accepted, our
management selects the accounting method or policy that it believes to be most appropriate
in the specific circumstances. Our management considers some of these accounting policies
to be critical.
A
critical accounting policy is an accounting policy that management believes is both most
important to the portrayal of our financial condition and results and requires
managements most difficult subjective or complex judgment, often as a result of the
need to make accounting estimates about the effect of matters that are inherently
uncertain. While our significant accounting policies are discussed in Note 2 to our
financial statements, we believe the following accounting policies to be critical:
Revenue recognition
Revenues
from email software license sales are recognized when all criteria outlined in Statement
of Position (SOP) 97-2, Software Revenue Recognition (as amended),
are met. Revenues from software license are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or determinable
and collectability is probable.
For
substantially all of our software arrangements, we evaluate each of these criteria as
follows:
Evidence
of an arrangement
: We consider a clicking on acceptance of the agreement
terms to be evidence of an arrangement.
Delivery
:
Delivery is considered to occur when the license key is sent via email to the customer or
alternatively the customer is given access to download the licensed key.
Fixed
or determinable fee
: Fees are determinable at the time of sale. Customers are charged
immediately through credit cards. In addition, the fees are subject to a refund policy
period, currently up to 30 days, and we consider collection to be probable as our
historical experience shows that refunds are less than 5% of our revenues.
Collection
is probable
: We are subject to a minimal amount of collection risk related to our
customers as these are either from very profitable global market leader or obtained
through credit card sales.
Revenues
from licensing
The Gold Gallery
content database are recognized over the term of
the licensing period. We offer one year, two year and lifetime licenses for
The Gold
Gallery
content database for a one-time, upfront payment. The different term licenses
constituted less than 8% of our revenues in 2008. Our estimation of the lifetime usage of
The Gold Gallery
is based on historical data collected. We continually track usage
patterns, and as we gather more user information, we may update this estimated useful
life. If the lifetime usage of
The Gold Gallery
is demonstrated to be shorter or
longer than the current estimate, we would recognize revenues earlier or later. Based on
our current revenue streams, such an adjustment would not have a significant effect on our
revenues.
30
Revenues
from our
JunkFilter Plus
solution are recognized over one year, which is the term
of the license period.
Our
deferred revenue consists of the unamortized balance of
The Gold Gallery
and the
JunkFilter Plus
license fees, which totaled $4.3 million as of December 31, 2008,
of which $2.6 million was classified as short-term deferred revenues and the balance as
long-term deferred revenue on our balance sheet.
Revenues
from advertising, whether from keyword search, advertising on our website or in our email
client, are recognized when we are entitled to receive the fee. Advertisers are charged
and pay monthly, based on the number of clicks generated by users clicking on these ads.
In
accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendors Product, the Company accounts for
cash consideration given to customers, for which it does not receive a separately
identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue
rather than as an expense.
Collaboration
arrangements are established with other websites who use our brand name
Incredi
and
to whom we refer users. Under the agreement the collaborators provide their products and
services and manage, host and maintain the websites that provide games or matchmaking
services to Internet users, using our
Incredi
brand for the domain names
IncrediGames.com and IncrediMailPersonals.com and our websites graphical external
envelop. We promote these websites, among other things, through promotions on our website
and email client. In consideration for our brand and promotional activity, we are entitled
to share the net or gross revenues, (as provided in each agreement) generated from these
websites, including subscription and advertising fees. Revenues from these collaboration
arrangements are recognized when earned and based on reports received from the
collaborating party.
With
regard to arrangements involving multiple elements, the Company's revenues should be
allocated to the different elements in the arrangement under the "relative fair value
method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all
elements in accordance with SOP No. 97-2. Under the relative fair value method, we
allocate revenue proportionally based on the fair value of its delivered and
undelivered elements. Any discount in the arrangement is allocated pro rata to
the different elements in the arrangements.
Stock-Based Compensation
On
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)) which requires the
measurement and recognition of compensation expense based on estimated fair values for all
share-based payment awards made to employees and directors. As of December 31, 2008, the
total compensation cost, related to options granted to employees, not yet recognized,
amounted to $1.2 million. This cost is expected to be recognized over a weighted average
period of 2.43 years. Our stock-based compensation to employees was allocated as follows
(in thousands):
|
Year Ended December 31,
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
$
|
7
|
|
$
|
11
|
|
$
|
16
|
|
Research and development
|
|
|
|
94
|
|
|
79
|
|
|
293
|
|
Selling and marketing
|
|
|
|
53
|
|
|
60
|
|
|
137
|
|
General and administrative
|
|
|
|
371
|
|
|
524
|
|
|
584
|
|
Other charges
|
|
|
|
-
|
|
|
-
|
|
|
135
|
|
We
selected the Binomial method option-pricing model as the most appropriate fair value
method for our stock-options awards. The option-pricing model requires a number of
assumptions, of which the most significant are expected stock price volatility and
the expected option term. Expected volatility was calculated based upon an average
between historical volatilities of the Company, similar entities and industry sector
index similar to the Company's characteristics, since it does not have sufficient
company specific data. The expected option term was calculated based on the
Company's assumptions of early exercise multiples which were calculated based on
comparable companies and termination exit rate which was calculated based on actual
historical data. The expected option term represents the period that the Company's
stock options are expected to be outstanding. The risk-free interest rate is based on
the yield from U.S. Treasury zero-coupon bonds with an equivalent term.
Taxes on Income
We
record income taxes using the asset and liability approach. Management judgment is
required in determining our provision for income taxes. The provision for income tax is
calculated based on our assumptions as to our entitlement to various benefits under the
applicable tax laws. The entitlement to such benefits depends upon our compliance with the
terms and conditions set out in these laws. Although we believe that our estimates are
reasonable and that we have considered future taxable income and ongoing prudent and
feasible tax strategies in estimating our tax outcome, there is no assurance that the
final tax outcome will not be different than those which are reflected in our historical
income tax provisions and accruals. Such differences could have a material effect on our
income tax provision, net income and cash balances in the period in which such
determination is made.
31
On
January 1, 2007, we adopted FIN No. 48, Accounting for Uncertainty in Income
Taxes (FIN No. 48), which contains a two-step approach to recognizing
and measuring uncertain tax positions accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). The first step is
to evaluate the tax position taken or expected to be taken in a tax return by determining
if the weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely to be realized upon
ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax
obligations in accordance with SFAS No. 109 and SFAS No. 5 Accounting for
Contingencies.
We
recorded interest on late paid taxes as tax expenses. Our policy for interest related to
income tax exposures was not impacted as a result of the adoption of the recognition and
measurement provisions of FIN No. 48.
As
a result of the implementation of FIN No. 48, the Company recognized a $83 thousand
increase in liability for unrecognized tax benefits, which was accounted for as an
decrease to the January 1, 2007 balance of retained earnings.
Impairment of investments
in marketable securities.
We
regularly review our investments for factors that may indicate that a decline in the fair
value of an investment below its cost or amortized cost is other-than-temporary. Some
factors considered in evaluating whether or not a decline in fair value is
other-than-temporary include: our ability and intent to retain the investment for a period
of time sufficient to allow for a recovery in value; the duration and extent to which the
fair value has been less than cost; and the financial condition and prospects of the
issuer. Such reviews are inherently uncertain in that the value of the investment may not
fully recover or may decline further in future periods resulting in realized losses.
Impairment of Long-Lived
Assets.
Our
long-lived assets include property and equipment, goodwill and other intangible assets. In
assessing the recoverability of our property and equipment and other intangible assets, we
make judgments regarding whether impairment indicators exist based on legal factors,
market conditions and operating performances of our business and products. Future events
could cause us to conclude that impairment indicators exist and that the carrying values
of the intangible assets or goodwill are impaired. Any resulting impairment loss could
have a material adverse impact on our financial position and results of operations.
We
are required to assess the impairment of long-lived assets, tangible and intangible, other
than goodwill, under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, on a periodic basis, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Impairment indicators include any
significant changes in the manner of our use of the assets or the strategy of our overall
business, significant negative industry or economic trends and significant decline in our
share price for a sustained period. For the year ended December 31, 2007 and the year
ended December 31, 2008, we recorded an impairment charge resulting from technology
associated with BizChord in the amount of $153 and $44 thousand , respectively
Upon
determination that the carrying value of a long-lived asset may not be recoverable based
upon a comparison of aggregate undiscounted projected future cash flows to the carrying
amount of the asset, an impairment charge is recorded for the excess of fair value over
the carrying amount. We measure fair value using discounted projected future cash flows.
Statement
of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142), prescribes a two-phase process for impairment testing of
goodwill. The first phase screens for impairment, while the second phase (if necessary)
measures impairment. In the first phase of impairment testing, goodwill attributable to
each of the reporting units is tested for impairment by comparing the fair value of each
reporting unit with its carrying value. We operate in two operating segments, IncrediMail
and BizChord, and these segments comprise our reporting units. Goodwill is allocated to
the reporting unit of BizChord. If the carrying value of the reporting unit exceeds its
fair value, the second phase is then performed. The second phase of the goodwill
impairment test compares the implied fair value of the reporting units goodwill with
the carrying amount of that goodwill. If the carrying amount of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized
in an amount equal to that excess. Fair value is determined using discounted cash flows.
Significant estimates used in the fair value methodologies include estimates of future
cash flows, future growth rates and the weighted average cost of capital of the reporting
unit. In 2007 and 2008, the Company recorded an impairment loss in the amounts of $163,000
and $125,000 in respect of BizChord reporting unit, respectively.
32
Recently issued
accounting pronouncements:
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), to delay the
effective date of FASB Statement 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in financial
statements at fair value on a recurring basis (that is, at least annually). For
purposes of applying the FSP 157-2, nonfinancial assets and nonfinancial liabilities
include all assets and liabilities other than those meeting the definition of a financial
asset or a financial liability in FASB Statement 159. FSP 157-2 defers the effective date
of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP 157-2. The adoption of FAS 157 to nonfinancial assets and nonfinancial liabilities
under the scope of FSP 157-2 did not have a material impact on the Company's financial position, results
of operations or cash flows.
In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No. 133. This
statement changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how and
why and entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged. The adoption of SFAS 161 did not have a material impact on the Company's financial position, results of
operations or cash flows.
In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 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 SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The adoption of FSP 142-3 did not have a material
impact on the Companys financial position, results of operations or cash flows.
In
April 2009, the FASB issued FSP, No. FAS 115-2 and FAS 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments, or the FSP. The FSP is
intended to provide greater clarity to investors about the credit and noncredit
component of an other-than-temporary impairment event and to more effectively
communicate when an other-than-temporary impairment event has occurred. The FSP
applies to fixed maturity securities only and requires separate display of losses
related to credit deterioration and losses related to other market factors. When an
entity does not intend to sell the security and it is more likely than not that an entity
will not have to sell the security before recovery of its cost basis, it must recognize
the credit component of an other-than-temporary impairment in earnings and the
remaining portion in other comprehensive income. upon adoption of the FSP, an entity
will be required to record a cumulative-effect adjustment as of the beginning of the
period of adoption to reclassify the noncredit component of a previously
recognized other-than-temporary impairment from retained earnings to accumulated other
comprehensive income. The FSP will be effective for us for the quarter ending June 30,
2009. The Company is currently evaluating the impact of adopting the FSP.
In
April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, or FSP 157-4. FSP 157-4 provides
additional authoritative guidance to assist both issuers and users of financial
statements in determining whether a market is active or inactive, and whether a
transaction is distressed. The FSP will be effective for us for the quarter ending
June 30, 2009. The Company does not expect the adoption of FSP 157-4 to have a material
impact on our consolidated financial position and results of operations.
33
The
following table sets forth, for the periods indicated, our statements of operations
expressed as a percentage of total revenues (the percentages may not equal 100% because of
the effects of rounding):
|
Year Ended December 31,
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from advertising, primarily search, and other services
|
|
|
|
28
|
%
|
|
51
|
%
|
|
58
|
%
|
Revenues from products
|
|
|
|
72
|
|
|
49
|
|
|
42
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost of revenues
|
|
|
|
8
|
|
|
9
|
|
|
8
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
92
|
|
|
91
|
|
|
92
|
|
Operating expenses
|
|
|
Research and development costs
|
|
|
|
30
|
|
|
33
|
|
|
35
|
|
Selling and marketing expenses
|
|
|
|
16
|
|
|
25
|
|
|
34
|
|
General and administrative expenses
|
|
|
|
25
|
|
|
20
|
|
|
17
|
|
Goodwill impairment and other charges
|
|
|
|
-
|
|
|
1
|
|
|
5
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
71
|
|
|
79
|
|
|
91
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
21
|
|
|
12
|
|
|
1
|
|
Financial income (expense) and other, net
|
|
|
|
9
|
|
|
(19
|
)
|
|
21
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
|
30
|
|
|
(7
|
)
|
|
22
|
|
Income tax expense
|
|
|
|
7
|
|
|
8
|
|
|
1
|
|
Net income (loss)
|
|
|
|
23
|
%
|
|
(15
|
)%
|
|
21
|
%
|
|
|
|
|
|
|
|
As
shown in the above table, our operations are characterized by high margins, which are
attributable mainly to two factors: (i) we do not have manufacturing costs for our
products, and (ii) we sell our products online and rely primarily on viral marketing,
although in 2007 and 2008, we increased our investment in non-viral marketing. The
continued decrease in our operating margin in 2008 compared to 2007 and 2006, resulted
primarily from our increased investment in media buying marketing expenses and goodwill
impairment and other charges, as a result of our refocusing on our core competencies,
terminating and suspending others. If our revenues increase (as we expect), and we
maintain a lower level of operating expenses, as a result of the measures taken on 2008
and the subsequent reduction of our investment in media buying, we expect our operating
margins to increase already in 2009, although they may not reach the levels we had
experienced in the past.
Year Ended December 31,
2008 Compared to Year Ended December 31, 2007
Revenues
from advertising, primarily search, and other services
. These revenues increased by
33%, from $9.6 million in 2007 to $12.7 million in 2008. The increase in revenues was due
to a $3.9 million increase in search generated revenues, partially offset by a $0.8
million decrease in other advertising and other revenues. In 2008 we diversified our
collaboration with search providers, with approximately 90% of search generated revenues
being provided by our partnership with Google and the remaining 10% coming from other
search providers, primarily InfoSpace. The continued increase in search generated
revenues, reflect the success of our strategy to leverage our large user base, primarily
those using our free products. In 2009 we expect to further increase our search generated
revenues through our new HiYo user base, which in 2008 did not generate revenues and by
further optimizing our offering to our IncrediMail and Magentic users.
Revenues
from products.
These revenues remained relatively stable, increasing less than $0.1
million. We believe the decrease in growth is attributable to decreasing popularity in
purchasing downloadable software, general market conditions and the need to offer a more
current application. A new version of our backbone IncrediMail Xe product is expected to
be fully released in 2009.
Cost
of Revenues
. Cost of revenues from products in 2008 was $1.8 million, increasing by
less than $0.1 million, compared to 2007 and as a result, the gross profit margin in 2008
increased to 92%, as compared to 91% in 2007. The increased gross profit margin was a
result of the increased portion of search generated revenues, which have no direct costs
associated with it, as part of total sales. As search generated revenues continue to
account for a growing portion of our revenues, we expect the gross profit margin to remain
at its current level and as long as this remains the trend, possibly further improve.
34
Research
and Development Expenses (R&D)
. R&D increased by $1.5 million,
from $6.1 million in 2007 to $7.6 million in 2008. The increase was primarily attributable
to an increased investment in products introduced in 2008 as well as in products that
further development was recently suspended. In 2006 we released
Magentic
, a desktop
enhancing solution, currently providing wallpapers and screensavers. In 2007 we began
developing a new version of
Magentic
, dramatically enhancing its personal
photograph tools, and released
PhotoJoy
in 2008. Although Magentic has
accumulated over 8 million registered downloads since introduction, it is not as viral as
we had expected, with the average number of downloads increasing less than 300,000 a
month. We therefore decided to suspend our R&D and marketing efforts for these
products. In December 2008 we did a Beta release of a totally new version of our back-bone
email client product IncrediMail
®
. We expect a full
release of this new version in the first half of 2009. Although we have released numerous
upgrades to this product in the past, this is the first full makeover, improving the
graphics and numerous user friendly functions, bringing a much more graphically advanced
user interface. As a result of our suspending certain development initiatives as well as
completing the major makeover of our IncrediMail product, we expect R&D to decrease in
2009, after continuing to increase in 2008. As a percentage of revenues, R&D increased
from 33% in 2007 to 35% in 2008.
Selling
and Marketing Expenses
. Selling and marketing expenses, increased by $2.6 million, or
57%, from $4.7 million in 2007, to $7.3 million in 2008. This increase was primarily
attributable to the increase in our investment in media buying which accounted for $3.5
million in 2008, compared to $1.4 million in 2007. We expect to reduce this investment
significantly in 2009 and as a result, reduce selling and marketing expenses.
General
and Administrative Expenses (G&A).
G&A increased marginally from
$3.7 million in 2007 to $3.8 million in 2008. As a percentage of sales, G&A decreased
from 20% in 2007 to 17% in 2008. We expect to be able to maintain this level of G&A
expenditure as a percentage of sales in 2009.
Goodwill
impairment and other charges
. In 2008 the Company realigned its strategy and decided
to focus on its core competencies. As a result it reorganized and suspended certain
activities. These expenses included $0.5 million compensation expenses, $0.1 million
goodwill impairment and $0.5 million of other expenses related to activities suspended.
Financial
Income (Expense), net
. We recorded $4.8 million, net, in financial income from
receiving in October 2008 the proceeds from the sale of an Auction Rate Security, which
had been written-off in the fourth quarter of 2007. This income was partially offset by
$0.3 million of finance expenses, resulting primarily from negative net returns on our
investments in 2008. In light of the current economic situation in general and the
financial markets in particular, we have further tightened our investment policy so that a
majority of our investments are in US treasury or US government backed securities, with
the balance in debentures of a limited sum and relatively short-term maturity, rated at AA
and higher and dollar denominated or linked. We are gradually changing our portfolio to
reflect this new policy, however, given the current interest rates, we expect this policy
to produce minimum returns, if at all, in 2009.
Income
(Loss) before Tax.
The income before tax in 2008 was $4.7 million, compared to a loss
before tax of $1.4 million in 2007. The income in 2008 was primarily attributable to the
aforementioned $4.8 million financial income, while the loss in 2007 was primarily
attributable to the write-down of that investment, as described above, partially offset by
other financial income.
Taxes
on Income.
Income tax in 2008 was $0.3 million, compared to $1.4 million in 2007.
Although the Company had a loss before tax in 2007, it still recorded a tax expense. This
is due to our recording a valuation allowance with respect to deferred tax assets related
to other-than-temporary impairment on marketable securities and ARS, due to current
uncertainty of whether we will produce sufficient capital gains in the future, which are
considered a source of income required to offset losses from marketable securities under
the Israeli Tax Law. Similarly, in 2008, being that the income before tax was primarily
due to the proceeds from selling this same ARS at cost, there was no tax incurred. In
addition, in 2007, the effective tax rate on the other income increased, as the benefits
from the Companys Approved Enterprise program were greatly reduced in 2007. As the
Privileged Benefit Program for 2008 has already been approved, we expect these benefits to
return to a great extent in 2009.
Net
Income (Loss).
The Net Income in 2008 was $4.4 million, compared to a Net Loss of $2.8
million in 2007. The Net Income in 2008 was primarily attributable to the aforementioned
financial income from the sale of our auction rate security. The cause of the Net Loss in
2007, was primarily attributable to the aforementioned $4.9 million other-than-temporary
loss from our investment, and creating valuation allowance against the deferred tax asset
from that expense.
35
Year Ended December 31,
2007 Compared to Year Ended December 31, 2006
Revenues
from advertising, primarily search and other services
. These revenues increased three
fold, from $3.1 million in 2006 to $9.6 million in 2007. The increase in revenues was
primarily due to a $6.4 million increase in search generated revenues, as well as a $0.1
million increase in other advertising and other revenues. The increase in search generated
revenues reflects the success of our strategy to migrate from product sales to
subscriptions and leverage the growth potential of search generated revenues and our large
user base, comprised primarily of those using our free products. As our products mature
and search availability expands, we expect search generated revenues to increase in the
future at a faster pace than our other revenue streams, and as such, to account for a
larger portion of our revenues.
Revenues
from products
. These revenues increased by $1.3 million, or 17%, from $7.8 million in
2006, to $9.1 million in 2007. This was achieved by a 39% increase in our
Gold
Gallery
and
JunkFilter Plus
subscription revenues, partially offset by a 10%
decrease in our revenues from product sales of
IncrediMail
®
Premium.
Cost
of Revenues
. Cost of revenues from products increased by $0.9 million, from $0.9
million in 2006 to $1.8 million in 2007. The increase was primarily due to a $0.8 million
increase in salaries and related expenses, caused by the increase in support and creative
staff, as well as a $0.2 million increase in payments for our anti-spam software, as
JunkFilter Plus sales increased. As a result, in parallel with the increase in revenues,
our gross profit margin was 91% in 2007, compared to 92% in 2006. Together with the growth
in our search generated revenues, we expect the gross profit margin to remain at its
current level and as long as this remains the trend, possibly improve. The entire cost of
revenues is associated with revenues from our software products and solutions, as there
are no direct costs associated with revenues from search, advertising and other services.
Research
and Development Expenses (R&D)
. R&D increased $2.8 million, from
$3.3 million in 2006 to $6.1 million in 2007. The increase was primarily attributable to
an increased investment in products recently introduced and those planned for future
release in 2008. In 2006 we released
Magentic
, a desktop enhancing solution,
currently providing wallpapers and screensavers. As of the end of March 2008,
Magentic
has drawn over 6.0 million registered users. In 2007 we began developing a
new version of
Magentic
, dramatically enhancing its personal photograph tools, and
we expect to release
Magentic2
during the second quarter of 2008. In addition, we
are working on a totally new version of our back-bone email client product
IncrediMail
®
. Although we have released numerous upgrades
to this product, this will be the first full makeover, improving the graphics and numerous
user friendly functions, bringing a much more graphically advanced user interface. These
initiatives, together with our ongoing effort to continuously improve our existing suite
of products, are expected to cause our R&D expenses to further increase in 2007. As a
percentage of revenues, R&D increased from 30% in 2006 to 33% in 2007.
Selling
and Marketing Expenses
. We more than doubled our selling and marketing expenses,
increasing them from $1.8 million in 2006, to $4.7 million in 2007. The increase in
selling and marketing expenses was primarily attributable to new marketing initiatives,
including media buying which accounted for $1.4 million in 2007, and we expect to further
increase the expenditure in this venue significantly in 2008. In 2007, we also invested in
numerous other online marketing initiatives, such as branded content, our social community
website
IncrediWorld
, as well as off-line marketing and advertising. These
other online and offline initiatives have been since curtailed, as we focus on our core
competencies for growing our user base and revenues in the future. In 2007 we continued to
increase the staffing of our marketing department, and we expect to continue and do so in
2008, focusing on optimization and media buying proficiencies.
General
and Administrative Expenses (G&A).
G&A increased by $1 million,
from $2.7 million in 2006 to $3.7 million in 2007. This increase was caused primarily due
to increased staffing to accommodate the Companys growth; as well as a $0.2 million
increase in costs of investor relations and other public company-related professional
fees. Finally, the Company incurred in 2007 a $0.5 million expense incurred by stock based
compensation in accordance with FASB 123(R), compared to $0.4 million in 2006. As a
percentage of revenues, G&A decreased from 25% in 2006 to 20% in 2007.
Financial
Expense, net
. The financial expense was due to our recording a $4.9 million expense
from the other-than-temporary impairment of our investment in Auction Rate Securities
currently not liquid. Recent uncertainties in the credit markets have adversely affected
the liquidity of auction rate securities as potential buyers have been unwilling to
purchase these securities, adversely affected by the existing conditions in the mortgage
securities market. The liquidity of these investments has been significantly impacted by
these conditions, and the specific security held by the Company was recently downgraded
from AAA to CCC by S&P, although we continue to receive interest payments every 28
days. During recent months, the Company tried to sell such security, with no success. The
Company received from its banker a valuation of this security, resulting in it recording
an, other-than-temporary impairment of $4.9 million. The Company has no other auction rate
securities. This expense was partially offset by financial income of $1 million of
interest income and net return on our investments. Our investment policy was updated in
2007 so as to purchase debentures of a limited sum and relatively short-term maturity,
rated at A and higher, dollar denominated or linked. This policy was further updated in
2008 as indicated above and in addition, we sold the ARS for its cost in the fourth
quarter of 2008 as mentioned above.
36
Income
(Loss) before Tax.
The loss before tax in 2007 was $1.4 million, compared to income
before tax of $3.2 million in 2006. The loss in 2007 was primarily attributable to the
$4.9 million expense to the write-down of our investment, as described above, partially
offset by other financial income.
Taxes
on Income.
Income tax in 2007 was $1.4 million, compared to $0.8 million in 2006.
Although the Company had a loss before tax in 2007, it still recorded a tax expense. This
is due to our recording a valuation allowance with respect to deferred tax assets related
to other-than-temporary impairment on marketable securities and ARS, due to current
uncertainty of whether we will produce sufficient capital gains in the future, which are
considered a source of income required to offset losses from marketable securities under
the Israeli Tax Law. In addition, the effective tax rate on the other income increased,
compared to 2006, as the benefits from the Companys Approved Enterprise program were
greatly reduced in 2007, compared to 2006. As the Approved Benefit Program for 2008 has
already been approved, we expect these benefits to return to a great extent in 2008.
Net
Income (Loss).
The Net Loss in 2007 was $2.8 million, compared to Net Income of $2.5
million in 2006. The Net Loss in 2007 was primarily attributable to the aforementioned
$4.9 million other-than-temporary loss from our investment, and creating valuation
allowance against the deferred tax asset from that expense.
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
From
inception until consummation of our initial public offering we funded our operations
principally from private placements of ordinary and preferred shares that resulted in
aggregate net proceeds of approximately $3.3 million and cash flow from operations. We
received net proceeds of $16.8 million from our initial public offering, consummated in
February 2006.
As
of December 31, 2008, we had working capital of $25.1 million and our primary source of
liquidity was $26.6 million in cash, cash equivalents, deposits and marketable securities.
As of December 31, 2007, we had working capital of $19.8 million, and our primary source
of liquidity was $23.4 million in cash, cash equivalents and marketable securities. The
increase in working capital and cash, cash equivalents and marketable securities was
primarily due to the $4.8 million net proceeds from the sale of our Auction Rate Security
in October 2008, previously written-off in 2007 as described above, in addition to working
capital generated by our operations.
We
believe that our cash balances and cash generated from operations will be more than
sufficient to meet our anticipated cash requirements for at least the next 12 months.
Net
Cash Provided By Operating Activities
. Net cash provided by operating activities was
$5.2 million, $4.0 million and $0.9 million for 2006, 2007 and 2008, respectively. The
change in net cash provided by operating activities reflects primarily a $3.8 million net
change in the carrying value of marketable securities.
Net
Cash Provided By (Used In) Investing Activities
. Net cash provided by (used in)
investing activities was ($16.1) million, ($7.9) million and $3.0 million in 2006, 2007
and 2008, respectively. In 2008, net cash provided by investing activities consisted
primarily from the net proceeds from the sale of marketable securities and short term
deposits of $3.8 million, net of $0.6 million investment in property and equipment.
Net
Cash Provided by (Used In) Financing Activities.
Net cash provided by (used in)
financing activities was $16.8 million in 2006 resulting from issuance of shares in our
initial public offering in January 2006, $0.3 million in 2007, and ($0.7) million used in
2008, primarily for the repurchase of the Companys shares
.
37
C.
|
RESEARCH,
DEVELOPMENT, PATENTS AND LICENSES, ETC.
|
Our
research and development activities are conducted internally by our Chief Technology
Officer and a 47-person research and development staff. Our research and development
efforts are currently focused on the completing the development of new products and
upgrading the software and new features for existing products. In 2008 this included
developing a new version of
Magentic
,
PhotoJoy
, development activity which
has been substantially completed and continuing development efforts have been currently
suspended in order to focus on our core competencies. In addition, in 2008 we launched
HiYo
, our graphic and communication enhancement tool for instant messaging
products. In December 2008, we also released the Beta of a new version of our back-bone
email client product IncrediMail
®
. Although we have
released numerous upgrades to this product, this will be the first full makeover,
improving the graphics and numerous user- friendly functions, bringing a much more
graphically advanced user interface.
Our
research and development expenditures were $3.2 million, $6.1 million and $7.6 million, in
the years ended December 31, 2006, 2007 and 2008, respectively. Although we intend to
continue our investment in product development, with the suspension of continued
development of some of our products and the completion of others, we expect our
expenditures on research and development to decrease in 2009.
Sales.
The
increase in sales in 2008 compared to 2007 was due to the continued increase in
search generated revenues. We continue to believe that the potential for growth
in search generated revenues is much greater than product sales. This is based
on the introduction of our search model in our recently introduced HiYo product
as well as optimizing these revenues from our other products. These revenues
are less seasonal than revenue from products and we therefore expect that our
total revenues will be less seasonal than in past years. In June 2008 we
launched
HiYo
, our graphic and instant messaging enhancement tool, and
in December 2008 we also released the Beta of a new version of our back-bone
email client product IncrediMail
®
, with a
prospective launch in 2009. We expect these products to contribute to our
revenues in the upcoming year.
R&D
.
R&D expenses have increased over the last few years. We expect this trend
to slightly reverse next year as we have discontinued some of our development
efforts and will have completed some of the others. We currently do not intend
to develop new products, so that future R&D investments will be devoted to
further enhancing and improving our existing products.
Sales
and Marketing Expenses
. Our sales and marketing expenses increased significantly in
2007 and even more so in 2008. The increase in 2008 was primarily a result of media buying
expenses, which totaled $3.5 million in 2008, as well as increasing the marketing staff.
The investment in media buying was to jump-start registrations in our recently
released HiYo product as well as maintain the registration level of our IncrediMail email
product. In 2009 we have discontinued all media buying for our HiYo product, having
achieved the goals set out and able to rely on entirely viral marketing. In addition we
have reduced our investment in media buying for our IncrediMail email product in light of
the current economic conditions and our increased focus on profitability. As a result, we
can expect selling and marketing expenses to decrease in 2009.
General
and Administrative expenses
. G&A expenses increased over the last few years,
however, in 2008 we have succeeded in maintaining the same level of expenditure as in
2007, and as a percentage of sales, these expenses decreased from 20% in 2007 to 17% in
2008. We expect to be able to maintain the 2008 level of expenditure in 2009, so that
G&A expenses will continue to representing a decreasing percentage of our revenues.
Industry
trends expected to affect our revenues, income from continuing operations, profitability
and liquidity or capital resources
:
|
1.
|
In
recent years, we have witnessed an increase in the use of web-based e-mail
solutions such as MSN Hotmail and Yahoo! Mail. Googles Gmail, a
relatively new addition to this market, is becoming increasingly popular,
and home users are gradually choosing Gmail as their preferred web-based
solution over other solutions. Unlike Hotmail and Yahoo! Mail, which do
not support the POP3 mail protocol and are therefore not compatible with
e-mail clients, Gmail fully supports POP3 and is compatible with e-mail
clients such as IncrediMail
®
. We believe
that IncrediMail will benefit from Gmails growing popularity, as
users are able to access their Gmail accounts via IncrediMail
®
and
are likely to choose this option.
|
|
2.
|
The
storing of digital photos on personal computers, and on photo hosting sites
such as Flickr.com, has increased substantially in recent years. The
convenience of such online storage of photos has caused a decrease in
usage of regular printed picture albums. However, a problem often
experienced by people that store their photos on their hard disk or on a
photo-hosting site is that they simply do not enjoy their photos as they
had previously. In the past, people spent time looking through their photo
albums, but today photos are saved in a computer folder and easily
forgotten about or lost. Access to photos saved on personal computers is
not immediate and is somewhat tedious; hence, old favorite photos are
neglected over time.
PhotoJoy
, which we have completed developing,
is aimed to address this problem, by enabling users to enjoy all the
photos that they have stored on their computer or online using new
capabilities, with no effort from the user. Photos can be revealed on the
users desktop constantly, in more creative and high-quality ways
than those available on the web. Some examples of
PhotoJoys
features
are 3D Photo Screensavers showing the users photos and enriched with
a variety of styles and designs, fun desktop widgets that display users photos
in creative and playful ways (nicknamed PhotoToys), and
Collage Wallpapers presenting photos within various themes, sceneries, and
illustrations. In addition, the software lets users take photos stored on
other photo web sites (such as Flickr and Picasa) and enjoy them using
PhotoJoys
fun
capabilities.
|
38
|
3.
|
In
recent years, we have witnessed an increased use
by younger customers
of Instant Messaging and various social networks as their preferred means
of communication. In May 2008 we launched
HiYo
, a graphic and
communication enhancement tool for instant messaging products, which is
aimed to enhance the Instant Messaging experience and make it much more
enjoyable for todays teens and young adults.
HiYo
offers
IncrediMails high-quality creative content incorporated seamlessly
within
Windows Live Messenger
, thus enabling users to customize and
personalize their conversations, express themselves and most importantly
generate enjoyment from chatting with friends on
Windows Live Messenger
. We
believe that
HiYo
, which is aimed to the younger audience, will
enable us to effectively reach this significant demographic segment. Since
its launch in May 2008, the number of registered downloads has passed 4.5
million.
|
|
4.
|
With
the growing usage of e-mail as a form of daily communication, Spam has
become a major threat to home users, and as a result methods of blocking
and avoiding Spam have become commonly used by home users. As e-mail usage
is continuing to grow with time, so is the usage of Anti-Spam mechanisms.
IncrediMails subscription-based Anti-Spam tool,
JunkFilter Plus
created especially for IncrediMails e-mail client, blocks such
Spam from entering
IncrediMail®
users Inboxes.
As Spam threats are consistently rising, we believe that the need to
purchase IncrediMails Anti-Spam mechanism will sustain the current
level of revenue from sales of our
JunkFilter Plus
product.
|
|
5.
|
As
part of the Companys strategy to focus on its core competencies, we
decided in December 2008 to discontinue BizChords independent
activities and restrict its activity to processing the Companys own
transactions. As a result we expect to be able to further reduce our
operating expenses in 2009.
|
E.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
We
do not have off-balance sheet arrangements (as such term is defined by applicable SEC
regulations) that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial conditions, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are material to
investors.
F.
|
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
The
following table summarizes our contractual commitments as of December 31, 2008 and the
effect those commitments are expected to have on our liquidity and cash flow in future
periods:
|
|
Payments Due by Period
|
Contractual Commitments
|
Total
|
Less
than
1 year
|
1-3
Years
|
3-5 Years
|
More than
5 Years
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued severance pay
|
|
|
$
|
1,385
|
|
|
|
|
|
|
|
|
|
|
$
|
1,385
|
|
Uncertain Income Tax Positions(*)
|
|
|
$
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
$
|
1,738
|
|
$
|
490
|
|
$
|
1,248
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
4,480
|
|
$
|
490
|
|
$
|
1,248
|
|
$
|
-
|
|
$
|
1,385
|
|
(*)
|
Uncertain
income tax positions under FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), are due upon
settlement and we are unable to reasonably estimate the ultimate amount or
timing of settlement. See Note 9(f) of our Consolidated Financial Statements
for further information regarding our liability under FIN No. 48.
|
39
ITEM 6.
|
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
The
following table sets forth information regarding our executive officers and directors as
of May 31, 2009:
Name
|
Age
|
|
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ofer Adler
|
38
|
|
Chief Executive Officer and Director
|
Yaron Adler
|
38
|
|
Director and President
|
Dan Blumenfeld
|
35
|
|
Vice President - Marketing
|
Keren Elkin
|
34
|
|
Vice President - Human Resources and Administration
|
Tamar Gottlieb
|
52
|
|
Director and Chairperson of the Board
|
Yuval Hamudot
|
35
|
|
Chief Technologies Officer
|
Jeff Holzmann
|
34
|
|
Executive Vice President - Delaware subsidiary
|
David Jutkowitz *
|
58
|
|
External Director, member of Audit Committee
|
Yacov Kaufman
|
51
|
|
Chief Financial Officer
|
Arik Ramot
|
57
|
|
Director, member of the Audit Committee
|
Yair M. Zadik
|
52
|
|
Director, member of Audit Committee
|
*
Independent for Nasdaq Stock Market purposes.
|
Ofer
Adler and Yaron Adler are cousins. There are no other familial relationships among our
executive officers and directors. Yair M. Zadik was initially appointed to the board by
our founders, Ofer Adler and Yaron Adler, pursuant to provisions of the articles of
association that were in effect prior to our initial public offering. Tamar Gottlieb was
initially appointed to the board by the board of directors, and David Jutkowitz were
elected to serve as our external directors by our shareholders as required by Israeli law.
No shareholder has special voting rights with respect to the election of directors or
otherwise.
Ofer
Adler
co-founded IncrediMail and has been our Chief Product Officer and a director
since our incorporation. Since February 5, 2008 Ofer Adler serves as the Companys
Chief Executive Officer. As a Chief Executive Officer he is responsible for our day-to-day
operations, business development and the overall management of IncrediMail. As a Chief
Product Officer he had overall responsibility for the design and development of
IncrediMail products, website and graphic content. Mr. Adler had direct
responsibility for the design of all major IncrediMail applications and websites. Before
co-founding IncrediMail, Mr. Adler worked as a trader and portfolio manager at Clal
Insurance from 1997 to 1999, and as a trader and technical analysis expert at Batucha,
Israels largest private brokerage firm, from 1994 to 1997.
Yaron
Adler
co-founded IncrediMail in November 1999. Has served as a director since our
incorporation, as our Chief Executive Officer since our incorporation and until February
5, 2008, and since February 5, 2008 serves as the Companys President. In 1999, prior
to founding IncrediMail, Mr. Adler consulted Israeli startup companies regarding
Internet products, services and technologies. Mr. Adler served as a Product Manager
from 1997 to 1999, and as a software engineer from 1994 to 1997, at Tecnomatix
Technologies Ltd., a software company that develops and markets production-engineering
solutions to complex automated manufacturing lines that fill the gap between product
design and production, and which was acquired by UGS Corp. in April 2005. In 1993,
Mr. Adler held a software engineer position at Intel Israel. He has a B.A. in
computer sciences and economics from Tel-Aviv University.
Dan
Blumenfeld
joined us in May 2004 and serves as our Vice President Marketing. He
is responsible for in-depth analysis of our market and industry, implementation of
appropriate market positioning, development of pricing and overall marketing strategies.
Prior to joining us Mr. Blumenfeld gained more than ten years experience, working
primarily as a Product Manager or a Creative Manager, in planning, designing and marketing
of computer software in several positions including at Hotbar Ltd. from 2003 to 2004, at
DVDemand Ltd. from 2000 to 2003 and at Waves Ltd. from 1997 to 1999.
Keren
Elkin
has been the Vice President of HR and Administration since 2000. She is
responsible for the planning, recruitment, organizational development, training,
compensation, benefits, and social activities of company personnel. Keren also served as
IncrediMails Purchase Manager for several years. Keren Elkin holds a B.A in Business
Administration, majoring in Human Resources, from Ruppin College.
40
Tamar
Gottlieb
has served as our director since 2001 and became Chair of the Board of
Directors on February 3, 2006, the closing date of our initial public offering. She is a
Managing Director of Harvest Capital Markets Ltd., an investment banking and financial
consulting firm that she founded in January 2001. Prior to 2001, Ms. Gottlieb held
Managing Director or Senior Manager positions in several investment banking institutions,
including Investec Clali Management & Underwriting Ltd. (from July 1997 to
January 2001), Oscar Gruss (1996) Ltd. (from February 1996 to May 1997) and Leumi &
Co. Investment Bankers Ltd. (from 1980 to 1991). From August 1991 to June 1994,
Ms. Gottlieb served as the Founding Managing Director of Maalot The Israeli
Securities Rating Company Ltd., Israels first credit rating agency. She currently
serves as a board member of several Israeli public and private companies, including Emilia
Development Ltd., Leumi Mortgage Bank Ltd., Hasin-Esh Ltd., N.R. Spuntech Industries Ltd.,
Reit 1 Ltd. and T.R.A Radio Tel Aviv Ltd. In the past she has also served as a director
of, among others, El Al Israeli Airlines Ltd. and Dan the Company for Public
Transport Ltd. Ms. Gottlieb public service activities include serving as a member of
the Statutory Committee for the approval of Directors and General Managers of Israeli
Government Companies and Statutory Authorities and until 2007 as a member of the Advisory
Committee to the Israeli Anti-Trust Authority. Ms. Gottlieb has a B.A. in
international relations from the Hebrew University of Jerusalem and an M.A. in economics
from Indiana University.
Yuval
Hamudot
is our Chief Technology Officer since March 2007, and is responsible for the
technological design and development of our products and online system. In that capacity
he manages our research and development team as well as our quality assurance and
information technology departments. Mr. Hamudot joined us in 2000, and since 2003, and
until his recent appointment, was Vice President Research and Development. Prior to
joining us, Mr. Hamudot worked for two years in the research and development at
Commonsense Ltd., a software company that outsourced hi-end technology solutions. Mr.
Hamudot served in the IDF computer unit (Mamram) and has a B.Sc. in Computer
Science from Tel Aviv University and an M.B.A. from Bar-Ilan University.
Jeff
Holzmann
was engaged as Executive Vice President and General Manager of IncrediMail
USA in April 2006. Prior to joining IncrediMail Mr. Holzmann was the CEO of Genius
Technologies, a high tech venture capital fund. Mr. Holzmann also served as the CEO of
GREY Interactive in Israel, an interactive advertising agency, as Vice Chairman of the
board of M.L.L Software (TASE:MLL), an Israeli publicly traded IT software company, and a
director with a venture capital fund at Koor Technologies (NYSE:KOR), an Israeli publicly
traded holding company. Mr. Holzmann is a certified systems analyst and holds a B.A in
Business Administration and Information Technologies from the Interdisciplinary Center
Herzliya.
David
Jutkowitz
was elected to serve as an external director at our shareholders
meeting on December 27, 2007. David Jutkowitz serves as a director of Arad Investment and
Industrial Development since 2006. From 2001 until October 2007, Mr. Jutkowitz has served
as an external director of Carmel Investment Group Ltd., and was a member of the audit,
investment and portfolio committees of Carmel Investment Group Ltd. Between 2000 and 2003,
Mr. Jutkowitz held the position of CEO at BXS Ltd., where his responsibilities
included managing all stages in development of the business, including the raising of
funds from investors and building a local and international distribution. From 1995 until
2002, Mr. Jutkowitz held the position of CEO at E.L. Advanced Science Ltd., where his
responsibilities included identifying and acquiring appropriate companies and taking an
active part in the management of such companies. From 1976 to 2001, Mr. Jutkowitz held the
position of CFO at Etz Lavud Ltd.
Yacov
Kaufman
was engaged to serve as our Chief Financial Officer in 2005. From 1996 to
November 2005, Mr. Kaufman was the Chief Financial Officer of Data Systems & Software
Inc. (OTCBB: DSSI.OB) that, through its subsidiaries, provides software consulting and
development services and serves as an authorized dealer and a value-added-reseller of
computer hardware. At Data Systems, Mr. Kaufman established and subsequently managed the
accounting and financial departments of the company and its subsidiaries. His
responsibilities included financial analysis and implementation of procedures for internal
control over financial reporting. Mr. Kaufman also served as the comptroller of dsIT
Technologies Ltd., a subsidiary of Data Systems since 1986 and as its Chief Financial
Officer since 1990. From 1993 to 1999, Mr. Kaufman served as a director of Tower
Semiconductor Ltd. (Nasdaq: TSEM), an integrated circuits manufacturer and then subsidiary
of Data Systems & Software Inc. Mr. Kaufman is an Israeli Certified Public Accountant
and has a B.A. in accounting and economics from the Hebrew University of Jerusalem and an
M.B.A. in business finance from Bar-Ilan University.
41
Mr.
Arik Ramot
was elected as a director at our annual meeting of
shareholders held on December 24, 2008. Mr. Ramot is the founder and has been
the CEO of Ramot & Co, Investment House since 1996. From 1988 to 1996, Mr.
Ramot served as legal advisor and manager at Kaszierer International, working
in more than 20 countries. Prior to that, Mr. Ramot practiced law in Israel.
Mr. Ramot is also the founder of Hayoman Ltd., an Israeli internet company. Mr.
Ramot holds LLB and LLM degrees from Tel Aviv University.
Yair
M. Zadik
has served as our director since 2001. He is the Co-Chief Executive Officer
of Arrow Ecology & Engineering Overseas (1999) Ltd., a company that provides
environmental solutions, and of Eshet Y.E.Z Technologies (2001) Ltd., an investment
company. In 2000 Mr. Zadik founded B-Knowledge Investments Ltd., an investment
company, and has served as its Chief Executive Officer until 2001. He currently serves as
a board member of the Israeli Export Institute, Environmental Branch. Mr. Zadik has a
B.Sc. in physics and computer sciences from Bar Ilan University. He is a Colonel (Reserve)
in the Israeli Air Force. He is the recipient of the Israeli Presidential National Defense
Award for his leadership and management of a major defense project in the Ministry of
Defense as well as a recipient of numerous military decorations.
The
aggregate direct compensation we paid to our officers as a group (eight persons) for the
year ended December 31, 2008 was approximately $2 million, which included approximately
$0.7 million that was set aside or accrued to provide for pension, retirement, severance
or similar benefits. This amount does not include expenses we incurred for other payments,
including dues for professional and business associations, business travel and other
expenses, and other benefits commonly reimbursed or paid by companies in Israel. We did
not pay our officers who also serve as directors any separate compensation for their
directorship during 2008, other than reimbursements for travel expenses.
The
aggregate direct compensation we paid to our directors who are not officers for their
services as directors as a group (five of the seven directors who served during 2007) for
the year ended December 31, 2008 was approximately $445 thousand. Directors are also
reimbursed for expenses incurred in order to attend board or committee meetings.
As
of May 31, 2009, there were outstanding options to purchase 691,400 ordinary shares
granted to eleven of our directors and officers, at a weighted average exercise price of
$4.1 per share. These options were granted under our 2003 employees share option plan.
The
compensation of our directors who are not officers of our Company, including our external
directors, was approved by our audit committee, board of directors and shareholders. In
accordance with these resolutions, (i) annual gross compensation for independent directors
is $25,000, and $500 per meeting, while other directors, who are not officers, receive
$18,000, and $500 per meeting (plus V.A.T, if applicable) to be paid in four equal
quarterly installments; (ii) a grant of options to purchase 10,000 of our ordinary shares,
with the following terms: (a) each option shall be exercisable for one ordinary share at
an exercise equal to the closing price on the date of grant of the options, as reported by
the Nasdaq Capital Market; (b) the options shall vest in four equal parts; and (c) any and
all other terms and conditions pertaining to the grant of the options shall be in
accordance with, and subject to, the 2003 Israeli Share Option Plan adopted by
IncrediMail in 2003 and our standard Option Agreement executed by each director and by
IncrediMail promptly after the date of grant.
In
accordance with the shareholders approval of December 27, 2007 each of the directors who
is not an employee of the Company, receives for each year of service by such person as a
director of the Company, an option to purchase 10,000 Ordinary Shares of the Company (in
this subsection the Annual Grant), under the following terms: (a) the
Annual Grant shall be made immediately following the annual general meeting of the
shareholders of the Company in the relevant year, commencing with the shareholders meeting
held on December 27, 2007; (b) each option shall be exercisable for one Ordinary Share at
an exercise price equal to the closing price of an Ordinary Share on the date of the
annual general meeting of the shareholders of the Company upon which such option was
granted, as reported by the Nasdaq Global Market; and (c) the options shall vest in four
equal portions on each anniversary of the Annual Grant, commencing with the first
anniversary. Any and all other terms and conditions pertaining to the grant of the options
shall be in accordance with, and subject to, the 2003 Israeli Share Option Plan adopted by
IncrediMail in 2003 and our standard Option Agreement. In accordance with this resolution,
all directors that are not officers were granted 10,000 options on December 24, 2008 after
the 2008 annual general meeting.
42
On
December 27, 2007, and following approval by our audit committee and board of directors,
our shareholders approved a grant to each of Mr. Ofer Adler and Mr. Yaron Adler, of
options to purchase 50,000 Ordinary Shares of the Company, under the following terms: (a)
each option shall be exercisable for one Ordinary Share at an exercise price equal to the
closing price of an Ordinary Share on December 27, 2007, as reported by the Nasdaq Global
Market; and (b) the options shall vest in four equal portions on each anniversary of the
date of approval of the grant, commencing with the first anniversary. Any and all other
terms and conditions pertaining to the grant of the options hereunder shall be in
accordance with, and subject to, the 2003 Israeli Share Option Plan adopted by the Company
in 2003 and the Companys standard Option Agreement
1
. See Item 6.E
Share Ownership Employee Benefit Plans The 2003 Plan below.
On
July 17, 2008, and following approval by our audit committee and board of directors, our
shareholders approved a grant to Ms. Tamar Gottlieb of options to purchase 10,000 Ordinary
Shares of the Company, under the following terms: (a) each option shall be exercisable for
one Ordinary Share at an exercise price equal to the closing price of an Ordinary Share on
July 17, 2008, as reported by the Nasdaq Global Market; and (b) the options shall vest in
three equal portions on each anniversary of the date of approval of the grant, commencing
with the first anniversary. Any and all other terms and conditions pertaining to the grant
of the options hereunder shall be in accordance with, and subject to, the 2003 Israeli
Share Option Plan adopted by the Company in 2003 and the Companys standard Option
Agreement. See Item 6.E Share Ownership Employee Benefit Plans The
2003 Plan below.
Also
on July 17, 2008, following approval by our audit committee and board of directors, our
shareholders approved a re-pricing of options to purchase Ordinary Shares, previously
granted to Mr. Yaron Adler, the Companys President and a member of the board of
directors of the Company, such that the exercise price of any previously granted options
that exceeded $3.00 per Ordinary Share were reduced to $3.00 per share. The Company
undertook to re-price Mr. Adlers options as part of the terms of service of Mr.
Yaron Adler as the Companys President, which terms were approved at the shareholders
meeting of the Company held on April 9, 2008. On June 2, 2009, we provided notice to our
shareholders of an extraordinary general meeting to, among other things, vote on
amendments to the terms of options granted to the external directors and the directors of
the Company. The meeting is scheduled to be held on July 9, 2009 with such terms as
provided in the Notice of Meeting filed on Form 6-K with the SEC. If the proposals
relating to compensation of our directors are approved, our directors recurring
annual stock option grants will have a vesting period of three years (instead of four
years) from the date of their annual stock option grant. Also, upon termination or
expiration of the applicable directors service with the Company, provided that the
termination or expiration is not for Cause and not resulting from the
directors resignation, the stock options granted to such director shall retain their
original termination dates, and shall not terminate 90 days after the applicable
termination date, and the next upcoming tranche of stock options, of each grant, that are
scheduled to vest immediately subsequent to the termination date, if any, shall
automatically vest and become exercisable immediately prior to the termination date. In
addition, to avoid a possible conflict of interest while discussing a Change of Control of
the Company (which may result in the termination of the directors term of office),
all unvested options held by the director, shall automatically vest and become exercisable
upon such Change of Control event. Change of Control is defined
for these purposes as: (i) merger, acquisition or reorganization of the Company with one
or more other entities in which the Company is not the surviving entity, (ii) a sale of
all or substantially all of the assets of the Company; (iii) a transaction or a series of
related transactions as a result of which more than 50% of the outstanding shares or the
voting rights of the Company are held by any party (whether directly or indirectly).
1
The
50,000 options granted to Yaron Adler shall remain in full force and effect in
accordance with the terms of the Option Agreement following the execution of
the Amended Agreement. According to the Amended Agreement, despite anything to
the contrary contained in the Option Agreement or in the Companys 2003
Share Option Plan, if Yaron Adlers employment with the Company is
terminated for any reason prior to the date on which all of the options have
become fully vested, the vesting of all of the unvested options shall be
immediately accelerated and all of such unvested options shall become fully
vested and exercisable in accordance with their terms. In addition, upon the
termination of Yaron Adlers employment with the Company for any reason,
the expiration date of the options shall be extended to 12 months following the
date of such termination. In the event that the Company shall re-price
downwards the exercise price of the options granted by it to its executive
officers, the Company shall treat the options equally and shall re-price
downwards the exercise price of the options to the same new exercise price of
the options held by its executive officers. The Amended Agreement was approved
by the shareholders at the Extraordinary General Shareholder meeting held on
April 9, 2008.
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43
Board of Directors and
Executive Officers
We
are deemed a limited liability public company under the Israeli Companies Law.
As a limited liability public company, we are managed by a board of directors and by our
executive officers. Under the Israeli Companies Law and our articles of association, the
board of directors is responsible, among other things, for:
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establishing
our policies and overseeing the performance and activities of our chief
executive officer;
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convening
shareholders' meetings;
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preparing
and approving our financial statements;
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determining
our plans of action, principles for funding them and the priorities among them, our
organizational structure and wage policy and examining our financial status;
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issuing
securities and distributing dividends.
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Our
board of directors also appoints and may remove our chief executive officer and may
appoint or remove other executive officers, subject to any rights that the executive
officers may have under employment agreements.
Upon
the closing of our initial public offering (meaning, January 30, 2006), all previously
existing special rights to appoint or serve as directors had terminated and our articles
of association were amended to remove these special rights.
Our
board of directors generally consists of seven directors, two of whom qualify as
external directors for Israeli law purposes and have been determined by our
board of directors to qualify as independent for Nasdaq Stock Market Purposes
as well. Other than external directors, who are subject to special election requirements
under Israeli law, our directors are elected in three staggered classes by the vote of a
majority of the ordinary shares present and entitled to vote at meetings of our
shareholders at which directors are elected. The members of only one staggered class will
be elected at each annual meeting for a three-year term, so that the regular term of only
one class of directors expires annually. At our annual general meeting held in 2007, the
term of the second class, consisting of Ofer Adler and Yair M. Zadik, expired and they
were re-elected at that meeting for a three-year term. At our annual general meeting held
in 2008, the term of the third class, consisting of Gittit Guberman, expired and she did
not stand for reelection. Arik Ramot was elected in her place for a three-year term. At
our annual general meeting to be held in 2009, the term of the first class, consisting of
Tamar Gottlieb and Yaron Adler, will expire and the directors elected at that meeting will
be elected for a three-year term. The external directors will not be assigned a class and
will serve in accordance with Israeli law. On March 30, 2009 the term of one of our
external directors, Mr. James H. Lee, expired. Since then the board of directors consists
of six directors, only one of whom qualifies as an external director. The Company has
scheduled an extraordinary shareholder meeting for approving the nomination of another
director that qualifies as an external director. See Item 4.A. Recent
Developments.
If
the number of directors constituting the board is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of directors in each class
as nearly equal as possible, but in no case will a decrease in the number of directors
constituting the board shorten the term of any incumbent director.
The
board may appoint any other person as a director, whether to fill a vacancy or as an
addition to the then current number of directors, provided that the total number of
directors shall not at any time exceed seven directors. Any director so appointed shall
hold office until the annual general meeting of our shareholders at which the term of his
or her class expires, unless otherwise stated in the appointing resolution.
There
is no limitation on the number of terms that a director may serve. As described below,
external directors may serve two terms of three years each and, subject to certain
conditions, an unlimited number of subsequent three-year terms.
Nominations
for the election of directors may be made by our board of directors in view of the
recommendation of the nominating and governance committee or, subject to the Companies
Law, by any of our shareholders. However, any shareholder or shareholders holding at least
5% of the voting rights in our issued share capital may nominate one or more persons for
election as directors at a general meeting only if a written notice of such
shareholders intent to make such nomination or nominations has been given to our
secretary and each such notice sets forth all the details and information as required to
be provided under our articles of association.
Shareholders
may remove a director who is not an external director from office only by a resolution
approved by shareholders holding more than two-thirds of the voting power of the issued
and outstanding share capital of IncrediMail.
44
The
board of directors appoints its chairperson from among its members in accordance with our
articles of association and subject to the provisions of the Companies Law. Pursuant and
subject to our articles of association, the chairperson convenes and presides over the
meetings of the board. The quorum required for meetings of the board is a majority of the
members of the board who are lawfully entitled to participate and vote at the meeting, and
resolutions are approved by a vote of the majority of the members present. If the board of
directors meeting is adjourned for failure to obtain a quorum and at the adjourned meeting
a quorum is not present, then the quorum shall be constituted by the presence of two
directors then in office who are lawfully entitled to participate and vote at that
meeting. A director may appoint an alternate director to attend a meeting in his or her
place, but an alternate director so appointed must be approved by the board prior to the
relevant meeting.
Pursuant
to the requirements of the Israeli Companies Law, our board has determined that at least
one of our directors must have accounting and financial expertise (in addition to the
external director that must have accounting and finance expertise). In determining such
number of directors, the board considered, among other things, the business of our
Company, our size and the scope and complexity of our operations. Such determination also
took into account our total number of directors as set forth in the articles of
association in accordance with the Israeli Companies Law.
We
have agreed to permit a designee of Maxim Group, the lead underwriter of our initial
public offering, for a period of no less than three years following the completion of the
Companys public offering and subject to certain exceptions, to be an observer on our
board of directors. The observer may attend meetings of the board and shall receive all
notices and other correspondence and communications sent by us to members of our board of
directors. Such observer shall be entitled to reimbursement for costs as provided to the
other members of our board of directors. Maxim Group has not yet designated an observer.
Each
of our executive officers serves at the discretion of our board of directors and holds
office until his or her successor is elected or his or her earlier resignation or removal.
External Directors
Under
the Israeli Companies Law, Israeli companies whose shares have been offered to the public
in or outside of Israel are required to appoint at least two external directors to serve
on their board of directors for a three year term. Mr. James H. Lee was appointed as an
external director on March 30, 2006 and his term expired on March 30, 2009. In addition
Mr. David Jutkowitz was appointed as an external director on December 27, 2007, in for
three years. The Company has scheduled an extraordinary shareholder meeting for approving
the nomination of another director that qualifies as an external director in place of Mr.
Lee. See Item 4.A. Recent Developments.
Each
committee of the board of directors entitled to exercise any powers of the board is
required to include at least one external director. The audit committee must include all
the external directors.
An
amendment to the Israeli Companies Law in January 2006 provides that a person may be
appointed as an external director if he or she has professional qualifications or if he or
she has accounting and financial expertise. In addition, at least one of the external
directors must have accounting and financial expertise. A person may not serve as an
external director if at the date of his or her appointment or within the prior two years,
that person, or his or her relatives, partners, employers or entities under his or her
control, have or had any affiliation with us or any entity or person controlling us at the
time of appointment or an entity that is controlled, at the time of appointment or the
prior two years, by us or by the person or entity controlling us. Under the Companies Law,
affiliation is defined in this context to include an employment relationship,
a business or professional relationship maintained on a regular basis, control or service
as an office holder. However, the service of a director who was appointed for the purpose
of being an external director in a company that intends to first offer its shares to the
public is not considered a prohibited affiliation. An office holder is defined in the
Companies Law as any director, general manager, chief business manager, deputy general
manager, vice general manager, other manager directly subordinate to the general manager
or any other person assuming the responsibilities of any of these positions regardless of
that persons title.
A
person may not serve as an external director if that persons position or other
activities create, or may create, a conflict of interest with the persons service as
a director or may otherwise interfere with the persons ability to serve as a
director. If at the time any external director is appointed, all members of the board are
the same gender, then the external director to be appointed must be of the other gender.
External
directors are elected by a majority vote at a shareholders meeting, as long as
either:
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the
majority of shares voted for the election includes at least one-third of the shares of
non-controlling shareholders voted at the meeting (excluding abstaining votes); or
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45
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the
total number of shares of non-controlling shareholders voted against the election of the
external director does not exceed one percent of the aggregate voting rights in the
company.
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The
Israeli Companies Law provides for an initial three-year term for an external director,
which may be extended for one additional three-year term. Thereafter (with respect to
companies whose securities are listed on certain designated stock exchange, including the
Nasdaq Global Market), he or she may be reelected by our shareholders for additional
periods of up to three years each, in each case provided that the audit committee and the
board of directors confirm that, in light of the external directors expertise and
special contribution to the work of the board of directors and its committees, the
reelection for such additional period(s) is beneficial to the company. External directors
may be removed only:
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by
a court, and then only if
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the
external directors cease to meet the statutory qualifications for their
appointment;
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they
violate their duty of loyalty to the company;
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the
director is unable to perform his or her post on a regular basis; or
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during
his or her tenure, the director was convicted in a court outside of the State of Israel
on accounts of bribery, deceit, offenses by managers of a corporate body or offenses
involving misuse of inside information; or
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If
the board of directors determines that the external director has ceased to meet the
statutory qualification for appointment or that the external director has violated his or
her duty of loyalty to the company, the board shall call a general meeting of the
shareholders and any such external director may be removed for such reason(s) by a
resolution of the general meeting approved by the same special majority as required for
such external directors election.
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In
the event of a vacancy created by an external director, our board of directors is required
under the Companies Law to call a shareholders meeting to appoint a new external
director as soon as practicable.
External
directors may be compensated only in accordance with regulations adopted under the Israeli
Companies Law. The regulations provide three alternatives for cash compensation to
external directors: a fixed amount determined by the regulations, an amount within a range
set in the regulations, or an amount that shall not be lower than the compensation
received by another director nor higher than the average compensation to other directors.
Another or other directors are defined in the applicable
regulations as directors of the company that are not external directors and who are not
(1) controlling shareholders of the company or (2) employees or service providers of the
company on a regular basis or (3) serving at, or providing services on a regular basis, to
a company that controls the company or to a company that is under common control with the
company or (4) directors who do not receive compensation from the company. A company also
may issue shares or options to an external director at an amount not lower than that
received by another director (as defined in the applicable regulations) nor higher than
the average amount granted to other directors (as defined in the applicable regulations).
Cash compensation at the fixed amount determined by the regulations does not require
shareholder approval. Compensation determined in any other manner requires the approval of
the companys audit committee, board of directors and shareholders, in that order.
Compensation of external directors must be determined prior to their consent to serve as
external directors.
Nasdaq Market Governance
Requirements for Foreign Private Issuers
Assuming
that we maintain our status as a foreign private issuer, under the Nasdaq Market Rules, a
foreign private issuer may generally follow its home country rules of corporate governance
except for certain matters such as composition of the audit committee (as discussed
below). Nasdaq Marketplace Rules specify that the board of directors must contain a
majority of independent directors and that the independent directors must have regularly
scheduled meetings at which only independent directors are present. Our board contains two
independent directors in accordance with the provisions contained in Sections 239-249 of
the Israeli Companies Law 1999 and Rule 10A-3 of the general rules and regulations
promulgated under the Securities Act of 1933, rather than a majority of independent
directors. Israeli law does not require, nor do our independent directors conduct,
regularly scheduled meetings at which only they are present. See Item 10.B
Memorandum and Articles of Association Nasdaq Marketplace Rules and Home Country
Practices and Item 16G Corporate Governance for a summary of the
significant ways in which our corporate governance practices follow the requirements of
Israeli law rather than Nasdaq governance requirements for domestic companies. Investors
are cautioned that there are other Nasdaq governance requirements with which, as a foreign
private issuer, we may elect not to comply. If we so elect, we will provide
disclosure of any Nasdaq governance requirements we elect not to comply with in
accordance with Nasdaqs disclosure requirements, as may be in effect from time to
time.
46
Committees of the Board
of Directors
Our
board of directors has established an audit committee, a compensation committee and a
nominating and governance committee.
Audit Committee
Our
audit committee is comprised of David Jutkowitz and Arik Ramot and operates pursuant to a
written charter. The second external director will be a member of the Audit Committee upon
being elected by our shareholders at our extraordinary general meeting. See Item 4.A.
Recent Developments.
Nasdaq Requirements
Under
the listing requirements of the Nasdaq Stock Market, a foreign private issuer is required
to maintain an audit committee that has certain responsibilities and authority (such as
being directly responsible for the appointment, compensation, retention and oversight of
the work of the issuers public accountants). In addition, applicable Nasdaq
Marketplace Rules require that a foreign private issuer can maintain an audit committee
that meets the requirements of Rule 10A-3(b)(subject to the exemptions provided in Rule
10A-3(c)) under the Exchange Act, instead of an audit committee composed solely of
independent directors. We currently maintain a board of audit in accordance with Israeli
home country regulations, meeting these requirements of Rule 10A-3, in that our audit
committee complies with the requirements under Israeli law. We are currently have
scheduled a extraordinary general meeting to elect an external director in place of one
whose term has expired. See Item 4.A. Recent Developments.
Israeli Companies Law
Requirements
Under
the Israeli Companies Law, the board of directors of a public company must establish an
audit committee. The audit committee must consist of at least three directors and must
include all of the external directors. The audit committee may not include the chairman of
the board, any director employed by the company or providing services to the company on an
ongoing basis, a controlling shareholder or any of the controlling shareholders
relatives.
The
audit committee provides assistance to the board of directors in fulfilling its legal and
fiduciary obligations in matters involving our accounting, auditing, financial reporting,
internal control and legal compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our accounting practices and
systems of internal accounting controls. The audit committee also oversees the audit
efforts of our independent accountants and takes those actions as it deems necessary to
satisfy itself that the accountants are independent of management. Under the Israeli
Companies Law, the audit committee is also required to monitor and approve remedial
actions with respect to deficiencies in the administration of the company, including by
consulting with the internal auditor and recommend remedial actions with respect to such
deficiencies, and to review and approve related party transactions.
Compensation Committee
As
a foreign private issuer, we comply with our home country regulations with respect to
compensation committee. Under Israeli Companies Law, independent members of our board are
not required to determine the compensation of an executive officer, provided that the
executive officer does not serve on our board. Therefore our practices differ from those
under Nasdaq Marketplace Rules applicable to domestic issuer which require a determination
by a majority of the independent directors on the board or a compensation committee
comprised solely of independent directors. Our compensation committee is comprised of
Tamar Gottlieb and Yair M. Zadik, and operates pursuant to a written charter. The
compensation committee will make recommendations to the board of directors regarding the
issuance of employee share options under our share option and benefit plans and will
determine salaries and bonuses for our chief executive officer and our other executive
officers and incentive compensation for our other employees.
47
Nominating and Governance
Committee
Our
nominating and governance committee is comprised of Tamar Gottlieb and Yair M. Zadik, and
operates pursuant to a written charter. It is responsible for making recommendations to
the board of directors regarding candidates for directorships and the size and composition
of the board. In addition, the committee is responsible for overseeing our corporate
governance guidelines and reporting and making recommendations to the board concerning
corporate governance matters. Under Israeli Companies Law, the nominations for director
are generally made by our directors but may be made by one or more of our shareholders.
However, any shareholder or shareholders holding at least 5% of the voting rights in our
issued share capital may nominate one or more persons for election as directors at a
general meeting only if a written notice of such shareholders intent to make such
nomination or nominations has been given to our secretary and each such notice sets forth
all the details and information as required to be provided under our articles of
association.
Internal Auditor
Under
the Israeli Companies Law, the board of directors of a public company must appoint an
internal auditor nominated by the audit committee. The role of the internal auditor is to
examine whether a companys actions comply with the law and proper business
procedure. The internal auditor may be an employee of the company employed specifically to
perform internal audit functions but may not be an interested party or office holder, or a
relative of any interested party or office holder, and may not be a member of the
companys independent accounting firm or its representative. The Israeli Companies
Law defines an interested party as a holder of 5% or more of the shares or voting rights
of a company, any person or entity that has the right to nominate or appoint at least one
director or the general manager of the company or any person who serves as a director or
as the general manager of a company. The internal auditor shall not be terminated without
his or her consent, nor shall he or she be suspended from such position unless the board
of directors has so resolved after hearing the opinion of the audit committee and after
giving him or her opportunity to present his or her case to the board and to the audit
committee. In August 2006 the Board of Directors approved the appointment of the firm of
Yardeni-Gelfand as internal auditor of the Company, and they have been acting as such
since.
Certain Employment
Agreements with Directors
We
have entered into employment agreements, effective February 3, 2006, with our co-founder,
Chief Executive Officer and Chief Product Officer, Ofer Adler, and our co-founder and
President, Yaron Adler, to retain their continuing services. The employment agreements do
not provide for a specified term and may be terminated by either party upon ninety
days prior notice. Upon termination by us of the employment of either of these
executives other than for cause (as set forth in the agreements), we are
required to continue to pay the terminated executive his salary, benefits and bonus until
the end of the 90 day notice period. However, we will have the option to pay the
terminated executive a lump sum equal to all amounts due as of the notice date. As
required by Israeli law, we will also remit severance payment to the terminated executive
in an amount equal to one months salary for each year of employment with us
following the first year of employment (and a pro rata portion of such monthly salary for
each portion of a year of employment following the first year of employment). Such amount
of severance payment will be remitted to the executives even if they voluntarily terminate
their employment with us. In the event that we terminate the employment of either of Mr.
Yaron Adler or Mr. Ofer Adler for cause, we will not be required to give prior
notice and/or to pay the executive severance payment, except for payment required by
Israeli law. In the event that the executive resigns without giving the required notice
period, we may deduct from the money that we owe the executive an amount equal to the
wages to which he would have been entitled had he worked during the notice period.
On
February 5, 2008, the board of directors of the Company has resolved to appoint Mr. Yaron
Adler as the Companys President, and approved the amendment to Mr. Yaron
Adlers Employment Agreement, which was subsequently approved by our Shareholders at
an Extraordinary General Meeting held on April 9, 2008 (the
Amended
Agreement
). According to the Amended Agreement in rendering the services of
President, as set forth below, Mr. Yaron Adler shall be subordinate to the Companys
Chief Executive Officer. The Company shall have the right to terminate the Amended
Agreement at any time by providing Yaron Adler with a 30 days prior notice of termination,
provided however, that the Company may not provide Yaron Adler with such prior notice
before July 1, 2008. In the event that the Company shall provide Yaron Adler with a notice
of termination of the Amended Agreement after July 1, 2008 but prior to May 1, 2009, the
Company and Yaron Adler shall enter into an alternative employment agreement pursuant to
which Yaron Adler shall provide the Company with consulting services on terms similar to
the terms of the Amended Agreement (but in which Yaron Adler shall not be the
Companys President), which agreement may be terminated by the Company upon a 30 days
prior notice which may be provided on or after (but in no event before) April 1, 2009.
Yaron Adler may terminate the Amended Agreement at any time upon providing the Company
with a 30 days prior notice. Upon termination of Yaron Adlers employment with the
Company, by either party, Yaron Adler shall be entitled to all social benefits, including
among others, severance payment in accordance with applicable law, from the date of Yaron
Adlers first day of employment with the Company until the date of termination of his
employment.
48
Ofer
Adler has agreed not to compete with us during the term of the agreement and for a period
of two years thereafter and Yaron Adler agreed to do so during the term of the Amended
Agreement and for a period of one year thereafter. The agreements also contain customary
confidentiality and intellectual property assignment provisions.
We
also have existing employment agreements with our other executive officers. These
agreements do not contain any change of control provisions and otherwise contain salary,
benefit and non-competition provisions that we believe to be customary in our industry.
As
of December 31, 2008 we had 119 employees, including 118 employees based in Israel and 1
employee based in the US. The breakdown of our employees by department and fiscal period
is as follows:
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December 31,
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2006
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2007
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2008
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|
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Management and administration
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|
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|
9
|
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|
17
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16
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|
Support and creative
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|
25
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|
32
|
|
|
21
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Research and development
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|
52
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|
68
|
|
|
64
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Selling and marketing
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15
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31
|
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18
|
|
|
|
|
|
|
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Total
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|
|
101
|
|
|
148
|
|
|
119
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Some
provisions of the collective bargaining agreement between the Histadrut, which is the
General Federation of Labor in Israel, and the Coordination Bureau of Economic
Organizations, including the Industrialists Association of Israel, apply to our
Israeli employees by virtue of extension orders of the Israeli Ministry of Industry, Trade
and Labor. These provisions concern the length of the workday and the work-week,
recuperation pay and commuting expenses, compensation for working o n the day before and
after a holiday and payments to pension funds. Furthermore, these provisions provide that
the wages of most of our employees are adjusted automatically. The amount and frequency of
these adjustments are modified from time to time. Additionally, pursuant to an expansion
order, dated as of May 7, 2006, which applies to the software field we are required to
insure all of our employees by a comprehensive pension plan or a senior employees
insurance according to the terms and the rates detailed in the order. In addition, Israeli
law determines minimum wages for workers, minimum paid leave or vacation, sick leave,
working hours and days of rest, insurance for work-related accidents, determination of
severance pay, the duty to give notice of dismissal or resignation and other conditions of
employment. In addition, certain laws prohibit or limit the employers ability to
dismiss its employees in special circumstances. We have never experienced a work stoppage,
and we believe our relations with our employees are good.
Israeli
law generally requires the payment of severance by employers upon the retirement or death
of an employee or termination of employment. The Companys agreements with employees
in Israel, joining the Company since February 2, 2008, are in accordance with section 14
of the Severance Pay Law -1963, whereas, the Companys contributions for severance
pay shall be instead of its severance liability. Upon contribution of the full amount of
the employees monthly salary, and release of the policy to the employee, no
additional calculations shall be conducted between the parties regarding the matter of
severance pay and no additional payments shall be made by the Company to the employee.
Further, the related obligation and amounts deposits on behalf of such obligation are not
stated on the balance sheet, as they are legally released from obligation to employees
once the deposit amounts have been paid.
We
currently fund most of our ongoing severance obligations through insurance policies. As of
December 31, 2008, our net accrued unfunded severance obligations totaled $0.4 million.
Furthermore,
Israeli employees and employers are required to pay predetermined sums to the National
Insurance Institute. These amounts also include payments for national health insurance.
The payments to the National Insurance Institute can equal up to approximately 16.0% of
wages, of which the employee contributes approximately 10.0% and the employer contributes
approximately 6.0%.
49
Security Ownership of
Directors and Executive Officers
The
following table sets forth information regarding the beneficial ownership of our ordinary
shares as of May 31, 2009 by:
|
|
each
of our executive officers;
|
|
|
each
of our directors; and
|
|
|
all
of our directors and officers as a group.
|
Beneficial
ownership of shares is determined in accordance with the rules of the SEC and generally
includes any shares over which a person exercises sole or shared voting or investment
power. Ordinary shares that are subject to warrants or stock options that are presently
exercisable or exercisable within 60 days of a specified date are deemed to be outstanding
and beneficially owned by the person holding the stock options for the purpose of
computing the percentage ownership of that person, but are not treated as outstanding for
the purpose of computing the percentage of any other person.
Except
as indicated in the footnotes to this table, each shareholder in the table has sole voting
and investment power for the shares shown as beneficially owned by them. Percentage
ownership is based on 9,259,949 ordinary shares outstanding on May 31, 2009.
Name
|
Number of Ordinary Shares
Beneficially Owned
|
Percentage of Ordinary
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Ofer Adler (1)
|
|
|
|
2,149,072
|
|
|
23.18
|
%
|
Yaron Adler (2)
|
|
|
|
1,410,933
|
|
|
15.16
|
%
|
Yair M. Zadik (3)
|
|
|
|
126,800
|
|
|
1.4
|
%
|
Tamar Gottlieb (4)
|
|
|
|
126,634
|
|
|
1.4
|
%
|
Yuval Hamudot (5)
|
|
|
|
97,500
|
|
|
1.1
|
%
|
Yacov Kaufman (6)
|
|
|
|
79,500
|
|
|
*
|
|
Dan Blumenfeld (7)
|
|
|
|
55,500
|
|
|
*
|
|
Jeff Holzmann (8)
|
|
|
|
26,500
|
|
|
*
|
|
Keren Elkin (9)
|
|
|
|
20,916
|
|
|
*
|
|
David Jutkowitz (10)
|
|
|
|
2,500
|
|
|
*
|
|
All directors and officers as a group (11 persons) (11)
|
|
|
|
4,095,855
|
|
|
42.4
|
%
|
* Represents less than one percent.
(1)
|
Includes
options to purchase 12,500 ordinary shares at an exercise price of $5.21 per
share, exercisable within 60 days of this Annual Report.
|
(2)
|
Includes
options to purchase 50,000 ordinary shares at an exercise price of $3.00 per
share, exercisable within 60 days of this Annual Report.
|
(3)
|
Includes
options to purchase 60,000 ordinary shares at an exercise price of $7.86 per
share and 2,500 ordinary shares at an exercise price of $5.21 per share,
exercisable within 60 days of this Annual Report.
|
(4)
|
Includes
options to purchase 60,000 ordinary shares at an exercise price of $7.86 per
share, 2,500 ordinary shares at an exercise price of $5.21 per share and 3,334
at an exercise price of $2.30 per share, exercisable within 60 days of this
Annual Report.
|
(5)
|
Includes
options to purchase 7,600 ordinary shares at an exercise price of $1.72 per
share, options to purchase 12,500 ordinary shares at an exercise price of $3.00
per share and 10,000 ordinary shares at an exercise price of $3.51 per share,
exercisable within 60 days of this Annual Report.
|
(6)
|
Represents
options to purchase 69,500 ordinary shares at an exercise price of $3.00 per
share and 10,000 ordinary shares at an exercise price of $3.51 per share,
exercisable within 60 days of this Annual Report.
|
50
(7)
|
Represents
options to purchase 28,000 ordinary shares at an exercise price of $1.72 per
share, options to purchase 17,500 ordinary shares at an exercise price of $3.00
per share and 10,000 ordinary shares at an exercise price of $3.51 per share,
exercisable within 60 days of this Annual Report.
|
(8)
|
Includes
options to purchase 15,000 ordinary shares at an exercise price of $3.00 per
share and 10,000 ordinary shares at an exercise price of $3.51 per share,
exercisable within 60 days of this Annual Report.
|
(9)
|
Includes
options to purchase 3,800 ordinary shares at an exercise price of $1.72 per
share, options to purchase 6,250 ordinary shares at an exercise price of $3.00
per share and 10,000 ordinary shares at an exercise price of $3.51 per share,
exercisable within 60 days of this Annual Report.
|
(10)
|
Represents
options to purchase 2,500 ordinary shares at an exercise price of $5.21 per
share within 60 days of this Annual Report.
|
(11)
|
Includes
options to purchase 403,484 ordinary shares, exercisable within 60 days of this
Annual Report.
|
Employee Benefit Plans
Our
current equity incentive plan was adopted in 2003 under Section 102 of the Israeli Income
Tax Ordinance, providing certain tax benefits in connection with share-based compensation.
Please also see Note 10 of our financial statements included in this annual report for
information on the options issued under our plan.
Under
the 2003 Plan, we may grant to our directors, officers, employees, service providers and
controlling shareholders options to purchase our ordinary shares. Following an increase in
the number of shares available for grant approved by our board of directors and
shareholders in December 2007, a total of 2,203,235 ordinary shares are subject to the
2003 Plan. Any expired or cancelled options are available for reissuance under the 2003
Plan. Our employees, officers and directors may only be granted options under Section 102
of the Israeli Income Tax Ordinance (the
Tax Ordinance
), which provides
for a beneficial tax treatment, and our non-employees (such as service providers) and
controlling shareholders may only be granted options under another section of the Tax
Ordinance, which does not provide for similar tax benefits. To be eligible for tax
benefits under Section 102, options or ordinary shares must be issued through a trustee,
and if held by the trustee for the minimum required period, the employees and directors
are entitled to defer any taxable event with respect to the options until the earlier of
(i) the transfer of the options or underlying shares from the trustee to the employee or
director or (ii) the sale of the options or underlying shares to any other third party.
Based on elections made by us, our employees and directors will only be subject to capital
gains tax of 25% on the sale of the options or the underlying shares, provided the trustee
holds their options or, upon their exercise, the underlying shares for the lesser of (i)
30 months, or (ii) 24 months following the repricing of any options and for options
without repricing for 24 months following the end of the calendar year in which the
options were granted, and if otherwise granted after January 1, 2006, for only 24 months.
We may not deduct expenses pertaining to the options for tax purposes.
The
tax treatment with respect to options granted to employees and directors under the 2003
Plan is the result of our election of the capital gains tax track under Section 102 of the
Tax Ordinance. Section 102 also provides for an income tax track, under which, among other
things, the benefit to the employees will be taxed as income, the issuer will be allowed
to recognize expenses for tax purposes, and the minimum holding period for the trustee
will be 12 months from the date upon which such options are granted. We are able to change
our election with respect to future grants under the 2003 Plan as of the close of 2004.
Our
board of directors has the authority to administer the 2003 Plan and to grant options
under the plan. However, the compensation committee appointed by the board provides
recommendations to the board with respect to the administration of the plan and also has
full power, among other things, to alter any restrictions and conditions of the options,
accelerate the rights of an optionee to exercise options and determine the exercise price
of the options.
Options
granted to date under the 2003 Plan in past vested over three years from the grant date so
that 40% vest after 12 months and an additional 30% vest after each 12 months thereafter.
Alternatively, these options may vest in 4 equal parts annually. Options under the 2003
Plan prior our initial public offering were generally granted at an exercise price of
$1.72 per share. Since the Companys initial public offering all options are granted
with an exercise price equal to the closing market price, on the day the grant is
approved. However, on February 21, 2008 the board of directors of the Company approved the
re-pricing of all the existing options, granted to employees under the 2003 Plan and with
an exercise price greater than $3.00, to $3.00, which was confirmed by the Israeli Tax
Authorities on July 3, 2008. See Note 10 to the Companys Consolidated Financial
Statements. These changes did not apply to the options held by our directors except for
Mr. Yaron Adler, the Companys President and a member of the board of directors of
the Company. See Item 6.B Compensation for a description of options granted
under the 2003 Plan to our directors.
51
Options
granted to date under the 2003 Plan generally expire within five years of the grant date
unless extended as provided by the plan. Options may be exercised only if vested and
provided that the holder is employed by us or provides us services continuously from the
time of granting of the option until the date of exercise. However, if termination of
employment is without cause, vested options may be exercised for a period of 90 days from
the date of termination of employment; and if termination is the result of death or
disability, vested options may be exercised for a period of 12 months after the date of
termination. In addition, the board or a compensation committee may extend the exercise
period of options held by employees whose employment was terminated for a period not
exceeding their expiration date.
The
2003 Plan does not provide for acceleration of the vesting period upon the occurrence of
certain corporate transactions. However, the board or compensation committee may provide
in individual option agreements that if the options are not substituted or exchanged by a
successor company, then the vesting of the options shall accelerate.
Adjustments
to the number of options or exercise price shall not be made in the event of rights
offering on outstanding shares.
ITEM 7.
|
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The
following table sets forth information regarding the beneficial ownership of our ordinary
shares as of May 31, 2009 by each person or group of affiliated persons that we know
beneficially owns more than 5% of our outstanding ordinary shares. Other than with respect
to our directors and officers, we have relied on public filings with the SEC. Unless
otherwise stated herein, each shareholders address is c/o IncrediMail Ltd., 4
HaNechoshet
Street, Tel Aviv 69710, Israel.
Beneficial
ownership of shares is determined in accordance with the rules of the SEC and generally
includes any shares over which a person exercises sole or shared voting or investment
power. Ordinary shares that are subject to warrants or stock options that are presently
exercisable or exercisable within 60 days of a specified date are deemed to be outstanding
and beneficially owned by the person holding the stock options or warrants for the purpose
of computing the percentage ownership of that person, but are not treated as outstanding
for the purpose of computing the percentage of any other person.
Except
as indicated in the footnotes to this table, each shareholder in the table has sole voting
and investment power for the shares shown as beneficially owned by such shareholder.
Percentage ownership is based on 9,259,949 ordinary shares outstanding on May 31, 2009.
Our major shareholders do not have different voting rights than our other shareholders.
Name
|
Number of Ordinary Shares
Beneficially Owned
|
Percentage of Ordinary
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Ofer Adler
|
|
|
|
2,149,072
|
|
|
23.18
|
%
|
Yaron Adler
|
|
|
|
1,410,933
|
|
|
15.16
|
%
|
Mahoney Associates Inc.
|
|
|
|
879,192
|
|
|
9.5
|
%
|
Alpha Capital Anstalt
|
|
|
|
722,364
|
|
|
7.8
|
%
|
To
our knowledge, as of May 31, 2009, we had 11 stockholders of record of which 3* were
registered with addresses in the United States. These United States holders were, as of
such date, the holders of record of approximately 69%* of our outstanding shares.
* Includes the Depository Trust Company
|
52
B.
|
RELATED
PARTY TRANSACTIONS
|
It
is our policy that transactions with office holders or transactions in which an office
holder has a personal interest (Affiliated Transactions) will be on terms
that, on the whole, are no less favorable to us than could be obtained from independent
parties.
Generally,
Affiliated Transactions which are extraordinary transactions (as such term is
defined in the Companies Law), must be approved by a majority of our disinterested
directors; nevertheless under Israeli law, under certain circumstances, such transactions
(i) must be approved by the audit committee and the board of directors and, in certain
circumstances, the shareholders; or (ii) may be approved by a simple majority of the board
(and by a simple majority of the audit committee if required), and interested directors
may participate in the deliberations and the voting with respect to such transactions if
the majority of the members of the board (or the audit committee, if such approval is
required) have a personal interest in the approval of the transaction; provided that in
such circumstances the approval of such Affiliated Transaction shall also require the
approval of the shareholders.
See
Item 10.B Memorandum and Articles of Association Approval of Related Party
Transactions for a discussion of the requirements of Israeli law regarding special
approvals for transactions involving directors, officers or controlling shareholders.
On
July 17, 2008, and following approval by our audit committee and board of directors, our
shareholders approved a grant to Ms. Tamar Gottlieb of options to purchase 10,000 Ordinary
Shares of the Company, under the following terms: (a) each option shall be exercisable for
one Ordinary Share at an exercise price equal to the closing price of an Ordinary Share on
July 17, 2008, as reported by the Nasdaq Global Market; and (b) the options shall vest in
four equal portions on each anniversary of the date of approval of the grant, commencing
with the first anniversary. Any and all other terms and conditions pertaining to the grant
of the options hereunder shall be in accordance with, and subject to, the 2003 Israeli
Share Option Plan adopted by the Company in 2003 and the Companys standard Option
Agreement. See Item 6.E Share Ownership Employee Benefit Plans The
2003 Plan below.
Also
on July 17, 2008, following approval by our audit committee and board of directors, our
shareholders approved a re-pricing of options to purchase Ordinary Shares, previously
granted to Mr. Yaron Adler, the Companys President and a member of the board of
directors of the Company, such that the exercise price of any previously granted options
that exceeded $3.00 per Ordinary Share were reduced to $3.00 per share. The Company
undertook to re-price Mr. Adlers options as part of the terms of service of Mr.
Yaron Adler as the Companys President, which terms were approved at the shareholders
meeting of the Company held on April 9, 2008.
On
June 2, 2009, we provided notice to our shareholders of an extraordinary general meeting
to approve a proposal to elect an external director of the Company in the place of an
external director whose term had expired, and to amend the terms of options granted to the
external directors and the directors of the Company. The meeting is scheduled to be held
on July 9, 2009 with such terms as provided in the Notice of Meeting filed on Form 6-K
with the SEC. See Item 4.A Recent Developments for a description of the
terms of these amendments.
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
ITEM 8.
|
|
FINANCIAL INFORMATION
|
A.
|
CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|
Our
audited consolidated financial statements for the year ended December 31, 2008 are
included in this annual report pursuant to Item 18.
Legal Proceedings
On
November 3, 2008, a complaint was filed against the Company in the United States District
Court for the Southern District of New York in a purported class action regarding our
IncrediMail Premium product. In the suit, Mark Lucas, on behalf of himself and the
purported classes, seeks injunctive relief, an unspecified amount of damages, plus costs
and attorney fees for alleged claims that components of our IncrediMail Premium product
were rendered inoperable by a software update or updates. We believe that the allegations
against us are without merit and we intend to vigorously defend against the
plaintiffs claims. We further believe that the outcome of these claims should not
have a significant impact on the Companys financial condition.
53
Policy on Dividend
Distribution
On
March 12, 2009 we announced that our board of directors and management determined that the
Companys interest for enhancing shareholder value is best served by changing our
dividend policy and instituting a revised dividend policy whereby at least 50% of annual
net income of the Company will be paid out as a dividend beginning with the net income for
2009. Declaring and issuing the dividend will be subject to the boards review of the
Companys financial conditions at the time. See Item 1A Risk Factors
Although we have paid dividends in the past, and we expect to pay certain dividends
in the future, our ability to pay dividends may be adversely affected by the risk factors
described in this report; if we fail to pay dividends the return on investment will be
limited to the value of our stock. On March 25, 2009, we announced that our board of
directors had approved a cash dividend of approximately $4.6 million, or $0.50 per share,
subject to Israeli court approval and a tax pre-ruling from the Israeli Tax Authority as
required by Israeli law.
All
of the ordinary shares of the Company are entitled to an equal share in any dividends
declared and paid. We have decided to reinvest the remaining profits, particularly the
tax-exempt income derived from our Approved Enterprise status and first
distribute other income as dividends.
On
January 23, 2008 the Company announced that its Board of Directors had resolved to adopt a
share buyback plan, and on March 25, 2009, the Company announced that it had elected to
continue with the second phase of this plan that authorizes the purchase of up to an
additional $1 million of its ordinary shares, subject to approval from the Israeli Tax
Authority which has not yet been received. As of May 31, 2009, the Company repurchased
approximately 346,019 ordinary shares in open market transactions.
The
distribution of dividends and the buy-back plan is subject to limitations under Israeli
law, including permitting the distribution of dividends (and a purchasing the
companys own shares) only out of profits. See Item 10.B Memorandum and
Articles of Association Dividend and Liquidation Rights. In addition, the
payment of dividends may be subject to Israeli withholding taxes. See Item 10.E
Taxation Israeli Taxation Taxation of our ShareholdersTaxation of
Non-Israeli Shareholders on Receipt of Dividends.
Since
the date of our audited financial statements included elsewhere in this report, there have
not been any significant changes other than as set forth in this report under Item 4.A.
Recent Developments.
ITEM 9.
|
|
THE OFFER AND LISTING
|
A.
|
OFFER
AND LISTING DETAILS
|
Our
ordinary shares have been listed on the Nasdaq Capital Market since January 31, 2006 and
since June 27, 2007 on the NASDAQ Global Market, under the symbol MAIL. Our
ordinary shares commenced trading as a dual listed company on the Tel Aviv Stock Exchange
on December 4, 2007 under the symbol EMAIL.
54
The
following table shows, for the periods indicated, the high and low closing sale prices of
our Ordinary Shares as reported on the Nasdaq Capital Market or the Nasdaq Global Market,
as applicable, and the Tel Aviv Stock Exchange:
|
Nasdaq Capital Market or
Nasdaq Global Market
|
Tel Aviv Stock Exchange
|
|
High ($)
|
Low ($)
|
High (NIS)
|
Low (NIS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five most recent full financial years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
5.17
|
|
|
2.00
|
|
|
20.39
|
|
|
8.23
|
|
2007
|
|
|
|
9.99
|
|
|
4.94
|
|
|
25.50
|
**
|
|
19.57
|
**
|
2006
|
|
|
|
8.65
|
*
|
|
4.00
|
*
|
|
-
|
|
|
-
|
|
|
|
|
Financial quarters during the
|
|
|
past two recent full financial
|
|
|
years
|
|
|
First Quarter 2009
|
|
|
|
3.66
|
|
|
2.30
|
|
|
15.88
|
|
|
9.11
|
|
Fourth Quarter 2008
|
|
|
|
3.60
|
|
|
1.86
|
|
|
11.93
|
|
|
8.22
|
|
Third Quarter 2008
|
|
|
|
3.62
|
|
|
3.03
|
|
|
12.68
|
|
|
10.02
|
|
Second Quarter 2008
|
|
|
|
4.30
|
|
|
2.94
|
|
|
14.25
|
|
|
10.20
|
|
First Quarter 2008
|
|
|
|
5.58
|
|
|
2.50
|
|
|
20.39
|
|
|
10.12
|
|
Fourth Quarter 2007
|
|
|
|
9.15
|
|
|
4.94
|
|
|
25.50
|
**
|
|
19.57
|
**
|
Third Quarter 2007
|
|
|
|
9.99
|
|
|
6.72
|
|
|
-
|
|
|
-
|
|
Second Quarter 2007
|
|
|
|
8.50
|
|
|
7.22
|
|
|
-
|
|
|
-
|
|
|
|
|
Most recent six months
|
|
|
May 2009
|
|
|
|
4.96
|
|
|
3.55
|
|
|
21.00
|
|
|
16.03
|
|
April 2009
|
|
|
|
3.99
|
|
|
3.53
|
|
|
16.03
|
|
|
15.35
|
|
March 2009
|
|
|
|
3.66
|
|
|
2.55
|
|
|
15.88
|
|
|
11.00
|
|
February 2009
|
|
|
|
2.99
|
|
|
2.52
|
|
|
11.50
|
|
|
10.00
|
|
January 2009
|
|
|
|
2.70
|
|
|
2.30
|
|
|
10.19
|
|
|
9.11
|
|
December 2008
|
|
|
|
2.69
|
|
|
2.10
|
|
|
9.70
|
|
|
8.66
|
|
|
*
Since our IPO on January 31, 2006.
|
|
**
Since our listing on the Tel Aviv Stock Exchange on December 4, 2007.
|
The
closing prices of our Ordinary Shares, as reported on the Nasdaq Global Market on June 23,
2009 and on the Tel Aviv Stock Exchange on June 23, 2009, which are the last full trading
days before filing of this annual report, were $4.81 and NIS 20.02, (equal to $5.04 based
on the Bank of Israel representative exchange rate as of such date), respectively.
Not
applicable.
Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol MAIL,
and on the Tel Aviv Stock Exchange under the symbol EMAIL.
Not
applicable.
Not
applicable.
Not
applicable.
55
ITEM 10.
|
|
ADDITIONAL INFORMATION
|
Not
applicable.
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
Registration Number and
Purposes
Our
registration number with the Israeli Companies Registrar is 51-284949-8. Pursuant to
Section 3 of our articles of association, our objectives are the development, manufacture
and marketing of software and any other objective as determined by our board of directors.
Dividend and Liquidation
Rights
The
holders of the ordinary shares are entitled to their proportionate share of any cash
dividend, share dividend or dividend in kind declared with respect to our ordinary shares
on or after the date of this annual report. We may declare dividends out of profits
legally available for distribution. Under the Israeli Companies Law, a company may
distribute a dividend only if the distribution does not create a reasonable risk that the
company will be unable to meet its existing and anticipated obligations as they become
due. A company may only distribute a dividend out of the companys profits, as
defined under the Israeli Companies Law. If the company does not meet the profit
requirement, a court may allow it to distribute a dividend, as long as the court is
convinced that there is no reasonable risk that such distribution might prevent the
company from being able to meet its existing and anticipated obligations as they become
due.
Under
the Israeli Companies Law, the declaration of a dividend does not require the approval of
the shareholders of a company unless the companys articles of association provide
otherwise. Our articles of association provide that the board of directors may declare and
distribute dividends without the approval of the shareholders. In the event of our
liquidation, holders of our ordinary shares have the right to share ratably in any assets
remaining after payment of liabilities, in proportion to the paid-up par value of their
respective holdings.
These
rights may be affected by the grant of preferential liquidation or dividend rights to the
holders of a class of shares that may be authorized in the future.
Voting, Shareholder
Meetings and Resolutions
Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. This right may be changed if shares with special voting rights are
authorized in the future.
Our
articles of association and the laws of the State of Israel do not restrict the ownership
or voting of ordinary shares by non-residents of Israel, except with respect to citizens
of countries that are in a state of war with Israel.
Under
the Israeli Companies Law, an annual general meeting of our shareholders should be held
once every calendar year, but no later than 15 months from the date of the previous annual
general meeting. The quorum required for a general meeting of shareholders consists of at
least two shareholders present in person or by proxy holding in the aggregate at least 33
1/3% of the voting power. A meeting adjourned for lack of a quorum generally is adjourned
to the same day in the following week at the same time and place or any time and place as
the chairperson of the board of directors designates in a notice to the shareholders with
the consent of the holders of the majority voting power represented at the meeting voting
on the question of adjournment. In the event of a lack of quorum in a meeting convened
upon the request of shareholders, the meeting shall be dissolved. At the reconvened
meeting, the required quorum consists of any number of shareholders present in person or
by proxy.
Our
board of directors may, in its discretion, convene additional meetings as special
general meetings. In addition, the board must convene a special general meeting upon
the demand of two of the directors, one fourth of the nominated directors, one or more
shareholders having at least 5% of outstanding share capital and at least 1% of the voting
power in the company, or one or more shareholders having at least 5% of the voting power
in the company. The chairperson of the board of directors presides at each of our general
meetings. The chairperson of the board of directors is not entitled to a vote at a general
meeting in his capacity as chairperson.
Most
shareholders resolutions, including resolutions to:
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amend
our articles of association (except as set forth below);
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make
changes in our capital structure such as a reduction of capital, increase of capital or
share split, merger or consolidation;
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authorize
a new class of shares;
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elect
directors, other than external directors;
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approve
most transactions with office holders;
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will be deemed adopted if approved by
the holders of a majority of the voting power represented at a shareholders meeting,
in person or by proxy, and voting on that resolution. Except as set forth in the following
sentence none of these actions require the approval of a special majority. Amendments to
our articles of association relating to the election and vacation of office of directors,
the composition and size of the board of directors and the insurance, indemnification and
release in advance of the companys office holders with respect to certain
liabilities incurred by them require the approval at a general meeting of shareholders
holding more than two-thirds of the voting power of the issued and outstanding share
capital of the company.
Notices
Under
the Israeli Companies Law, shareholders meetings generally require prior notice of
at least 21 days, or 35 days if the meeting is adjourned for the purpose of voting on any
of the following matters:
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(1)
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appointment
and removal of directors;
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(2)
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approval
of certain matters relating to the fiduciary duties of office holders) and of
certain transactions with interested parties;
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(3)
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approval
of certain mergers; and
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(4)
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any
other matter in respect of which the articles of association provide that
resolutions of the general meeting may be approved by means of a voting
document.
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Modification of Class
Rights
The
Israeli Companies Law provides that, unless otherwise provided by the articles of
association, the rights of a particular class of shares may not be adversely modified
without the vote of a majority of the affected class at a separate class meeting.
Election of Directors
Our
ordinary shares do not have cumulative voting rights in the election of directors.
Therefore, the holders of ordinary shares representing more than 50% of the voting power
at the general meeting of the shareholders, in person or by proxy, have the power to elect
all of the directors whose positions are being filled at that meeting, to the exclusion of
the remaining shareholders. External directors are elected by a majority vote at a
shareholders meeting, provided that either:
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the
majority of shares voted for the election includes at least one-third of the shares of
non-controlling shareholders voted at the meeting (excluding abstaining votes); or
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the
total number of shares of non-controlling shareholders voted against the election of the
external director does not exceed one percent of the aggregate voting rights in the
company.
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See
Item 6.C Board Practices regarding our staggered board.
Transfer Agent and
Registrar
American
Stock Transfer and Trust Company is the transfer agent and registrar for our ordinary
shares.
Approval of Related
Party Transactions
Office Holders
The
Israeli Companies Law codifies the fiduciary duties that office holders owe to a company.
An office holder is defined in the Israeli Companies Law as any director, general manager,
chief business manager, deputy general manager, vice general manager, other manager
directly subordinate to the general manager or any other person assuming the
responsibilities of any of these positions regardless of that persons title. Each
person listed in the table under Management Executive Officers and
Directors is an office holder under the Israeli Companies Law.
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Fiduciary
duties.
An office holders fiduciary duties consist of a duty of loyalty and a
duty of care. The duty of loyalty requires the office holder to act in good faith and to
the benefit of the company, to avoid any conflict of interest between the office
holders position in the company and any other of his or her positions or personal
affairs, and to avoid any competition with the company or the exploitation of any business
opportunity of the company in order to receive personal advantage for himself or others.
This duty also requires him or her to reveal to the company any information or documents
relating to the companys affairs that the office holder has received due to his or
her position as an office holder. The duty of care requires an office holder to act with a
level of care that a reasonable office holder in the same position would employ under the
same circumstances. This includes the duty to use reasonable means to obtain information
regarding the advisability of a given action submitted for his or her approval or
performed by virtue of his or her position and all other relevant information pertaining
to these actions.
Compensation.
Under the Israeli Companies Law, all compensation arrangements for office
holders who are not directors require approval of the board of directors,
unless the articles of association provide otherwise. Our compensation
committee will be required to approve the compensation of all office holders.
Arrangements regarding the compensation of directors (including officers who
are also directors) require audit committee, board and shareholder approval, in
such order.
Disclosure
of personal interest.
The Israeli Companies Law requires that an office holder
promptly disclose to the company any personal interest that he or she may have and all
related material information known to him or her, in connection with any existing or
proposed transaction by the company. Personal interest, as defined by the
Israeli Companies Law, includes a personal interest of any person in an act or transaction
of the company, including a personal interest of his relative or of a corporate body in
which that person or a relative of that person is a 5% or greater shareholder, a holder of
5% or more of a companys outstanding shares or voting rights, a director or general
manager, or in which he or she has the right to appoint at least one director or the
general manager. Personal interest does not apply to a personal interest
stemming merely from the fact that the office holder is also a shareholder in the company.
The
office holder must make the disclosure of his personal interest without delay and no later
than the first meeting of the companys board of directors that discusses the
particular transaction. This duty does not apply to the personal interest of a relative of
the office holder in a transaction unless it is an extraordinary transaction.
The Israeli Companies Law defines an extraordinary transaction as a transaction not in the
ordinary course of business, not on market terms or that is likely to have a material
impact on the companys profitability, assets or liabilities, and defines a relative
as a spouse, sibling, parent, grandparent, descendent, spouses descendant and the
spouse of any of the foregoing.
Approvals.
The Israeli Companies Law provides that a transaction with an office holder
or a transaction in which an office holder has a personal interest may not be
approved if it is adverse to the companys interest. In addition, such a
transaction generally requires board approval, unless the transaction is an
extraordinary transaction or the articles of association provide otherwise. If
the transaction is an extraordinary transaction, or if it concerns exculpation,
indemnification or insurance of an office holder, then in addition to any
approval stipulated by the articles of association, approval of the
companys audit committee and the board of directors is required.
Exculpation, indemnification, insurance or compensation of a director also
would require shareholder approval. A director who has a personal interest in a
matter that is considered at a meeting of the board of directors or the audit
committee may not attend that meeting or vote on that matter, unless a majority
of the board of directors or the audit committee also has a personal interest
in the matter. If a majority of the board of directors or the audit committee
has a personal interest in the transaction, shareholder approval is also
required.
Shareholders
The
Israeli Companies Law imposes the same disclosure requirements, as described above, on a
controlling shareholder of a public company that it imposes on an office holder. For these
purposes, a controlling shareholder is any shareholder that has the ability to direct the
companys actions, including any shareholder holding 25% or more of the voting rights
if no other shareholder owns more than 50% of the voting rights in the company. Two or
more shareholders with a personal interest in the approval of the same transaction are
deemed to be one shareholder.
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Approval
of the audit committee, the board of directors and our shareholders is required for:
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extraordinary
transactions with a controlling shareholder or in which a controlling
shareholder has a personal interest; and
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employment
of a controlling shareholder or a relative of a controlling shareholder.
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The
shareholder approval must include the majority of shares voted at the meeting. In
addition, either:
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the
majority must include at least one-third of the shares of the voting shareholders who
have no personal interest in the transaction voted at the meeting (excluding abstaining
votes); or
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the
total shareholdings of those who have no personal interest in the transaction and who
vote against the transaction must not represent more than 1% of the aggregate voting
rights in the company.
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Under
the Israeli Companies Law, a shareholder has a duty to act in good faith towards the
company and other shareholders and to refrain from abusing his or her power in the company
including, among other things, when voting in a general meeting of shareholders or in a
class meeting on the following matters:
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any
amendment to the articles of association;
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an
increase in the company's authorized share capital;
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approval
of related party transactions that require shareholder approval.
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A
shareholder has a general duty to refrain from depriving any other shareholder of their
rights as a shareholder. In addition, any controlling shareholder, any shareholder who
knows that it possesses the power to determine the outcome of a shareholder or class vote
and any shareholder who, pursuant to the companys articles of association has the
power to appoint or prevent the appointment of an office holder in the company is under a
duty to act with fairness towards the company. The Companies Law does not describe the
substance of this duty of fairness.
Anti-Takeover
Provisions; Mergers and Acquisitions
Merger.
The Israeli Companies Law permits merger transactions with the approval of
each partys board of directors and shareholders, except that when the
merger involves one of the following companies, the approval of the
shareholders of these companies is not required:
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an
absorbed company which is under the full control and ownership of the surviving
company; or
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a
surviving company, if all of the following conditions are met: (i) the merger does not
entail an amendment of the articles of association or memorandum of association of the
surviving company, (ii) the surviving company does not issue in the course of the merger
more than twenty percent of the voting rights in the company, and as a result of the
share issuance no person shall become a controlling shareholder in the surviving company,
and (iii) circumstances that would otherwise mandate an approval by a special majority of
the shareholders (as described in the following paragraph) do not exist.
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At
the general meeting of a merging company which shares are held by the other party to the
merger or by any person holding at least 25% of any control measures of the other party to
the merger, a merger shall not be deemed approved if the shareholders holding the majority
of the voting power present at the meeting object to the merger. In calculating this
majority, (i) the abstaining shareholders and (ii) shareholders that are part of the other
party to the merger or hold 25% or more of any control measures of the other party to the
merger are excluded. Shares held by relatives or companies controlled by a person are
deemed held by that person. The term control measures of a company includes,
among other things, voting power or means of appointing the board of directors.
Under
the Israeli Companies Law, a merging company must inform its creditors of the proposed
merger. Any creditor of a party to the merger may seek a court order to delay or block the
merger, if there is a reasonable concern that the surviving company will not be able to
satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be
completed until all of the required approvals have been filed by both merging companies
with the Israeli Registrar of Companies and (i) 30 days have passed from the time both
companies shareholders resolved to approve the merger, and (ii) at least 50 days
have passed from the time that the merger proposal was filed with the Israeli Registrar of
Companies.
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Tender
Offer.
The Israeli Companies Law requires a purchaser to conduct a tender offer in
order to purchase shares in publicly held companies, if as a result of the purchase the
purchaser would hold more than 25% of the voting rights of a company in which no other
shareholder holds more than 25% of the voting rights, or the purchaser would hold more
than 45% of the voting rights of a company in which no other shareholder holds more than
45% of the voting rights. The requirement to conduct a tender offer shall not apply to (i)
the purchase of shares in a private placement, provided that such purchase was approved by
the companys shareholders as a private placement that is intended to provide the
purchaser with more than 25% of the voting rights of a company in which no other
shareholder holds more than 25% of the voting rights, or with more than 45% of the voting
rights of a company in which no other shareholder holds more than 45% of the voting
rights; (ii) a purchase from a holder of more than 25% of the voting rights of a company
that results in a person becoming a holder of more than 25% of the voting rights of a
company, and (iii) a purchase from the holder of more than 45% of the voting rights of a
company that results in a person becoming a holder of more than 45% of the voting rights
of a company.
Under
the tender Companies Law, a person may not purchase shares of a public company if,
following the purchase of shares, the purchaser would hold more than 90% of the
companys shares or of any class of shares unless the purchaser makes a tender offer
to purchase all of the target companys shares or all the shares of the particular
class, as applicable. If, as a result of the tender offer, the purchaser would hold more
than 95% of the companys shares or a particular class of shares, the ownership of
the remaining shares will be transferred to the purchaser. However, if the purchaser is
unable to purchase 95% or more of the companys shares or class of shares, the
purchaser may not own more than 90% of the shares or class of shares of the target
company.
Tax
Law.
Israeli tax law treats some acquisitions, such as a stock-for-stock swap between
an Israeli company and a foreign company, less favorably than U.S. tax law. For example,
Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in
a foreign corporation to immediate taxation. Please see Item 10.E Taxation
Israeli Taxation.
Exculpation,
Indemnification and Insurance of Directors and Officers
Our
articles of association allow us to indemnify, exculpate and insure our office holders,
which includes our directors, to the fullest extent permitted by the Israeli Companies
Law, provided that procuring this insurance or providing this indemnification or
exculpation is approved by the audit committee and the board of directors, as well as by
the shareholders if the office holder is a director. Our articles of association also
allow us to insure or indemnify any person who is not an office holder, including any
employee, agent, consultant or contractor who is not an office holder.
Under
the Israeli Companies Law, a company may indemnify an office holder in respect of some
liabilities, either in advance of an event or following an event. If a company undertakes
to indemnify an office holder in advance against monetary liability incurred in his or her
capacity as an office holder whether imposed in favor of another person pursuant to a
judgment, a settlement or an arbitrators award approved by a court, the
indemnification must be limited to foreseeable events in light of the companys
actual activities at the time of the indemnification undertaking and to a specific sum or
a reasonable criterion under such circumstances, as determined by the board of directors.
However, as described below, an undertaking to indemnify an office holder in advance of an
event need not be limited with respect to reasonable litigation expenses, including
attorneys fees.
Under
the Israeli Companies Law, only if and to the extent provided by its articles of
association, a company may indemnify an office holder against the following liabilities or
expenses incurred in his or her capacity as an office holder:
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any
monetary liability whether imposed on him or her in favor of another person pursuant to a
judgment, a settlement or an arbitrators award approved by a court;
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reasonable
litigation expenses, including attorneys fees, incurred by him or her as a result
of an investigation or proceedings instituted against him or her by an authority
empowered to conduct an investigation or proceedings, which are concluded either (i)
without the filing of an indictment against the office holder and without the levying of
a monetary obligation in lieu of criminal proceedings upon the office holder, or (ii)
without the filing of an indictment against the office holder but with levying a monetary
obligation in substitute of such criminal proceedings upon the office holder for a crime
that does not require proof of criminal intent; and
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reasonable
litigation expenses, including attorneys fees, in proceedings instituted against
him or her by the company, on the companys behalf or by a third-party, or in
connection with criminal proceedings in which the office holder was acquitted, or as a
result of a conviction for a crime that does not require proof of criminal intent.
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Under
the Israeli Companies Law, a company may obtain insurance for an office holder against
liabilities incurred in his or her capacity as an office holder, if and to the extent
provided for in its articles of association. These liabilities include a breach of duty of
care to the company or a third-party, a breach of duty of loyalty and any monetary
liability imposed on the office holder in favor of a third-party.
A
company may, in advance only, exculpate an office holder for a breach of the duty of care.
However, a company may not so exculpate an office holder for a breach of the duty of care
in connection with a distribution of dividends or a repurchase of the companys
securities. A company may not exculpate an office holder from a breach of the duty of
loyalty towards the company.
Under
the Israeli Companies Law, however, an Israeli company may only indemnify or insure an
office holder against a breach of duty of loyalty to the extent that the office holder
acted in good faith and had reasonable grounds to assume that the action would not
prejudice the company. In addition, an Israeli company may not indemnify, insure or
exculpate an office holder against a breach of duty of care if committed intentionally or
recklessly, or an action committed with the intent to derive an unlawful personal gain, or
for a fine or forfeit levied against the office holder in connection with a criminal
offense.
Our
board of directors and shareholders have resolved to indemnify our directors and our Chief
Financial Officer to the extent permitted by law and by our articles of association for
liabilities not covered by insurance and that are of certain enumerated events, subject to
an aggregate sum equal to 50.0% of the shareholders equity as set forth in the financial
report of the preceding year to which a claim for indemnification is made.
Nasdaq Marketplace Rules
and Home Country Practices
In
accordance with Israeli law and practice and subject to the exemption set forth in Rule
4350(a)(1) of the NASDAQ Marketplace Rules, we follow the provisions of the Israeli
Companies Law 1999, rather than the requirements of Marketplace Rule 4350 with
respect to the following requirements:
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Distribution
of annual and quarterly reports to shareholders Under Israeli law we are not
required to distribute annual and quarterly reports directly to shareholders and the
generally accepted business practice in Israel is not to distribute such reports to
shareholders. We do however make our audited financial statements available to our
shareholders at the Companys offices and to mail such reports to shareholders upon
request. IncrediMail also files its annual reports with the SEC. As a foreign private
issuer, we are generally exempt from the SECs proxy solicitation rules.
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Quorum
Under Israeli law a company is entitled to determine in its articles of
association the number of shareholders and percentage of holdings required for a quorum
at a shareholders meeting. Our Articles of Association provide that a quorum of two or
more shareholders holding at least 33.3% of the voting rights in person or by proxy is
required for commencement of business at a general meeting. However, the quorum set forth
in our Articles of Association with respect to an adjourned meeting, consists of two or
more shareholders in person or by proxy.
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Independence
of Directors Our board contains two independent directors in accordance with the
provisions contained in Sections 239-249 of the Israeli Companies Law 1999 and
Rule 10A-3 of the general rules and regulations promulgated under the Securities Act of
1933, rather than a majority of independent directors. Israeli law does not require, nor
do our independent directors conduct, regularly scheduled meetings at which only they are
present.
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Audit
Committee Our audit committee complies with all of the requirements under Israeli
law, and is composed of two independent directors, which are all of our independent
directors, and one other director. Consistent with Israeli law, the independent auditors
are elected at a meeting of shareholders instead of being appointed by the audit
committee.
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Nomination
of our Directors With the exception of our independent directors, our directors
are elected for terms of one year or until the following annual meeting, by a general
meeting of our shareholders. The nominations for director which are presented to our
shareholders are generally made by our directors but may be made by one or more of our
shareholders. However, any shareholder or shareholders holding at least 5% of the voting
rights in our issued share capital may nominate one or more persons for election as
directors at a general meeting only if a written notice of such shareholders intent
to make such nomination or nominations has been given to our secretary and each such
notice sets forth all the details and information as required to be provided under our
articles of association.
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Compensation
of Officers Provided that the executive officer does not serve on our board,
Israeli law does not require and we do not require that independent members of our board
determine the compensation of an executive officer.
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Approval
of Related Party Transactions All related party transactions are approved in
accordance with the requirements and procedures for approval of interested party acts and
transactions, set forth in sections 268 to 275 of the Israeli Companies Law-1999, and the
regulations promulgated thereunder, which require audit committee approval and
shareholder approval, as well as board approval, for specified transactions, rather than
approval by the audit committee or other independent body of our board are required under
Nasdaq Marketplace Rules. See also Item 10.B Memorandum and Articles of Association
Approval of Related Party Transactions for the definition and procedures for
the approval of related party transactions.
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Shareholder
Approval We seek shareholder approval for all corporate action requiring such
approval, in accordance with the requirements of the Israeli Companies Law 1999,
which are different or in addition to the requirements for seeking shareholder approval
under Nasdaq Marketplace Rule 4350(i).
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Since
the third quarter of 2006, search revenues powered by Googles AdSense program made a
significant contribution to the Companys results. On July 1, 2008, we entered into
an agreement with Google regarding our participation in Googles AdSense program,
which allows us to receive a portion of the amount paid to Google by advertisers for the
activity performed through the Companys applications. See Exhibits 4.1 and 4.4.
Our
OEM Agreement with Commtouch Ltd., effective December 7, 2004 and most recently renewed
effective July 15, 2008, is described under Item 4.B Business Overview
Intellectual Property and a copy of this agreement is included in Exhibit 4.2. The
purchase option granted to the lead underwriter of our initial public offering, are
described under Item 7.B Related Party Transactions Registration
Rights. The employment agreements with our principal officers are described under
Item 6.C Board Practices Employment Agreements.
Non-residents
of Israel who hold our ordinary shares are able to receive any dividends, and any amounts
payable upon the dissolution, liquidation and winding up of our affairs, freely
repatriable in non-Israeli currency at the rate of exchange prevailing at the time of
conversion. However, Israeli income tax is required to have been paid or withheld on these
amounts. In addition, the statutory framework for the potential imposition of exchange
controls has not been eliminated, and may be restored at any time by administrative
action.
The
following is a general summary only and should not be considered as income tax advice or
relied upon for tax planning purposes.
ISRAELI TAXATION
THE
FOLLOWING DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX
CONSEQUENCES RELATING TO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR CONCERNING THE TAX CONSEQUENCES OF YOUR PARTICULAR SITUATION,
AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN
OR OTHER TAXING JURISDICTION.
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The
following is a summary of the material Israeli tax laws applicable to us, and some Israeli
Government programs benefiting us. This section also contains a discussion of some Israeli
tax consequences to persons acquiring our ordinary shares. This summary does not discuss
all the acts of Israeli tax law that may be relevant to a particular investor in light of
his or her personal investment circumstances or to some types of investors subject to
special treatment under Israeli law. Examples of this kind of investor include residents
of Israel or traders in securities who are subject to special tax regimes not covered in
this discussion. Since some parts of this discussion are based on new tax legislation that
has not yet been subject to judicial or administrative interpretation, we cannot assure
you that the appropriate tax authorities or the courts will accept the views expressed in
this discussion.
The
discussion below should not be construed as legal or professional tax advice and does not
cover all possible tax considerations. Potential investors are urged to consult their own
tax advisors as to the Israeli or other tax consequences of the purchase, ownership and
disposition of our ordinary shares, including, in particular, the effect of any foreign,
state or local taxes.
General Corporate Tax
Structure in Israel
Israeli companies are generally
subject to corporate tax at the rate of 26% in 2009. The rate was 27% for 2008, and is
scheduled to decline to 25% in 2010 and thereafter. However, the effective tax rate
payable by a company that derives income from an approved enterprise (as discussed below)
may be considerably less. In March 2006, a new program was approved, to begin in 2008.
Special Provisions Relating to Taxation under Inflationary Conditions
The
Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law,
represents an attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
Until December 31, 2005 we measured our Israeli taxable income in accordance with this
law, but from January 1, 2006 we have elected to measure our Israeli taxable income in
relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation
index. We were permitted to make such a change pursuant to regulations published by the
Israeli Minister of Finance, which provide the conditions for so doing. A company that
elects to measure its results for tax purposes based on the U.S. dollar/NIS exchange rate
cannot change that election for a period of three years following the election. We believe
that we meet the necessary conditions and as such, continue to measure our results for tax
purposes based on the U.S. dollar/NIS exchange rate.
Law for the
Encouragement of Capital Investments, 1959
The
Law for Encouragement of Capital Investments, 1959 (the Investment Law)
provides that capital investments in a production facility (or other eligible assets) may,
upon approval by the Investment Center of the Israel Ministry of Industry and Trade (the
Investment Center), be designated as an Approved Enterprise. Each certificate
of approval for an Approved Enterprise relates to a specific investment program,
delineated both by the financial scope of the investment and by the physical
characteristics of the facility or the asset. The tax benefits from any certificate of
approval relate only to taxable profits attributable to the specific Approved Enterprise.
On
April 1, 2005, a comprehensive amendment to the Investment Law came into effect. The
amendment revised the criteria for investments qualified to receive tax benefits. An
eligible investments program under the amendment will qualify for benefits as a Privileged
Enterprise (rather than the previous terminology of Approved Enterprise). As the amended
Investment Law does not retroactively apply for investments programs having an approved
enterprise approval certificate issued by the Israeli Investment Center prior to December
31, 2005. The Company intends to have the benefits of the Privileged
Enterprise in 2008.
Currently
we have two Approved Enterprise Programs under the Investment Law, which entitle us to
certain tax benefits, and a ruling for one Privileged Enterprise Program, to begin in
2008. The Approved Enterprise Programs granted to us are defined in the Investment Law as
Alternative Benefits Programs, which allow for a two years exemption for undistributed
income and reduced company tax rate of between 10% and 25% for the following five to eight
years, depending on the extent of foreign (non-Israeli) investment in us during the
relevant year. The tax rate will be 20% if the foreign investment level is more than 49%
but less than 74%, 15% if the foreign investment level is more than 74% but less than 90%,
and 10% if the foreign investment level is 90% or more. The lowest level of foreign
investment during a particular year will be used to determine the relevant tax rate for
that year. The period in which we receive these tax benefits may not extend beyond 14
years from the year in which approval was granted and 12 years from the year in which
operations or production by the enterprise began.
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A
company that has elected to participate in the alternative benefits program and that
subsequently pays a dividend out of the income derived from the Approved Enterprise during
the tax exemption period will be subject to corporate tax in respect of the amount
distributed at the rate that would have been applicable had the company not elected the
alternative benefits program (generally 10% to 25%, depending on the foreign (non-Israeli)
investment in it). In addition, such company is required to withhold tax at source from
the dividend amount at the rate of 15%.
The
Investment Law also provides that an Approved Enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program.
The
benefits available to an Approved Enterprise are conditioned upon terms stipulated in the
Investment Law and the regulations thereunder and the criteria set forth in the applicable
certificate of approval. If we do not fulfill these conditions in whole or in part, the
benefits can be canceled and we may be required to refund the amount of the benefits, with
the addition of the Israeli consumer price index linkage differences and interest. We
believe that our Approved Enterprises currently operate in compliance with all applicable
conditions and criteria, but there can be no assurance that they will continue to do so.
Income
derived from sources other than Approved Enterprise programs during the
benefit period will be subject to tax at the regular corporate tax rate.
Pursuant
to the amendment to the Investments Law, only approved enterprises receiving cash grants
require the approval of the Investment Center. Approved enterprises which do not receive
benefits in the form of governmental cash grants, such as benefits in the form of tax
benefits, are no longer required to obtain this approval (such enterprises are referred to
as privileged enterprises). However, a privileged enterprise is required to comply with
certain requirements and make certain investments as specified in the amended Investment
Law. The amendment to the Investment Law addresses benefits that are being granted to
privileged enterprises and the length of the benefits period.
Tax benefits under the
2005 Amendment
A
recent Amendment to the Investment Law, effective as of April 1, 2005 has significantly
changed the provisions of the Investment Law. The amendment includes revisions to the
criteria for investments qualified to receive tax benefits as an Approved Enterprise.
However,
a company that was granted benefits according to section 51 of the Investment Law (prior
the amendment) would not be allowed to choose new tax year as a Year of Election (as
describe below) under the new amendment, for a period of 2 years from the companys
previous Year of Commencement under the old investment law.
This
amendment simplifies the approval process for the approved enterprise. According to the
amendment, only approved enterprises receiving cash grants require the approval of the
Investment Center. The Investment Center will be entitled to approve such programs only
until August 1, 2009.
As
a result of the Amendment, it is no longer necessary for a company to acquire Approved
Enterprise status in order to receive the tax benefits previously available under the
Alternative Route, and therefore such companies need not apply to the Investment Center
for this purpose. Rather, a company may claim the tax benefits offered by the Investment
Law directly in its tax returns or by notifying the Israeli Tax Authority within 12 months
of the end of that year, provided that its facilities meet the criteria for tax benefits
set out by the Amendment (the
Privileged Enterprise
). Companies are
also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding
their eligibility for benefits under the Amendment. The Amendment includes provisions
attempting to ensure that a company will not enjoy both Government grants and tax benefits
for the same investment program.
Tax
benefits are available under the Amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of their business income
from export. In order to receive the tax benefits, the Amendment states that the company
must make an investment in the Privileged Enterprise exceeding a certain percentage or a
minimum amount specified in the Law. Such investment may be made over a period of no more
than 3 years ending at the end of the year in which the company requested to have the tax
benefits apply to the Privileged Enterprise (the
Year of Election
).
Where the company requests to have the tax benefits apply to an expansion of existing
facilities, then only the expansion will be considered a Privileged Enterprise and the
companys effective tax rate will be the result of a weighted average of the
applicable rates. In this case, the minimum investment required in order to qualify as a
Privileged Enterprise is required to exceed a certain percentage or a minimum amount of
the companys production assets at the end of the year before the expansion.
64
The
amended Investment Law specifies certain conditions that a privileged enterprise has to
comply with in order to be entitled to benefits. These conditions include among others:
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that
the privileged enterprise's revenues during the applicable tax year from any single
market (i.e. country or a separate customs territory) do not exceed
75% of the privileged enterprise's aggregate revenues during such year; or
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that
25% or more of the privileged enterprises revenues during the applicable tax year
are generated from sales into a single market (i.e. country or a separate customs
territory) with a population of at least 12 million residents.
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The
duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from
the Commencement Year (Commencement Year defined as the later of: (i) the first tax year
in which the Company had derived income for tax purposes from the Privileged Enterprise or
(ii) the year in which the Company requested to have the tax benefits apply to the
Beneficiary Enterprise Year of Election), or 12 years from the first day of the
Year of Election. The tax benefits granted to a Privileged Enterprise are determined, as
applicable to its geographic location within Israel.
Similar
to the previously available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Privileged Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Privileged Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%) in
respect of the
gross amount
of the dividend that we may be distributed. The company
is required to withhold tax at the source at a rate of 15% from any dividends distributed
from income derived from the Benefited Enterprise.
There
can be no assurance that we will comply with the above conditions in the future or that we
will be entitled to any additional benefits under the amended Investment Law.
The
Amendment changes the definition of foreign investment in the Investments Law
so that the definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of shares of a
company from another shareholder, provided that the companys outstanding and paid-up
share capital exceeds NIS 5 million. Such changes to the aforementioned definition will
take effect retroactively from 2003.
As
a result of the amendment, tax-exempt income generated under the provisions of the
Investments Law, as amended, will subject us to taxes upon distribution or liquidation.
A
substantial portion of our taxable operating income is derived from our approved
enterprise program and we expect that a substantial portion of any taxable operating
income that we may realize in the future will be also derived from such program.
Law for the
Encouragement of Industry (Taxes), 1969
We
believe that we currently qualify as an Industrial Company within the meaning
of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement
Law. The Industry Encouragement Law defines Industrial Company as a company
resident in Israel, of which 90% or more of its income in any tax year, other than of
income from defense loans, capital gains, interest and dividends, is derived from an
Industrial Enterprise owned by it. An Industrial Enterprise is
defined as an enterprise whose major activity in a given tax year is industrial
production.
The
following corporate tax benefits, among others, are available to Industrial Companies:
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amortization
of the cost of purchased know-how and patents, which are used for the
development or advancement of the company, over an eight-year period;
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accelerated
depreciation rates on equipment and buildings;
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under
specified conditions, an election to file consolidated tax returns with additional
related Israeli Industrial Companies; and
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expenses
related to a public offering are deductible in equal amounts over three years.
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65
Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We cannot assure that we qualify or will
continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.
Taxation of our
Shareholders
Taxation
of Non-Israeli Shareholders on Receipt of Dividends.
Non-residents of Israel are
generally subject to Israeli income tax on the receipt of dividends paid on our ordinary
shares at the rate of 20%, which tax will be withheld at source, unless a different rate
is provided in a treaty between Israel and the shareholders country of residence.
With respect to a substantial shareholder (which is someone who alone, or together with
another person, holds, directly or indirectly, at least 10% in one or all of any of the
means of control in the corporation), the applicable tax rate will remain at 25%. Under
the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid
to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel
Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends,
not generated by our Approved Enterprise, that are paid to a U.S. corporation holding 10%
or more of our outstanding voting capital throughout the tax year in which the dividend is
distributed as well as the previous tax year, is 12.5%. Furthermore, dividends paid from
income derived from our Approved Enterprise are subject, under certain conditions, to
withholding at the rate of 15%. We cannot assure you that we will designate the profits
that are being distributed in a way that will reduce shareholders tax liability.
A
non-resident of Israel who receives dividends from which tax was withheld is generally
exempt from the duty to file returns in Israel in respect of such income, provided such
income was not derived from a business conducted in Israel by the taxpayer, and the
taxpayer has no other taxable sources of income in Israel.
Capital
Gains Taxes Applicable to Non-Israeli Resident Shareholders.
Shareholders that are not
Israeli residents are generally exempt from Israeli capital gains tax on any gains derived
from the sale, exchange or disposition of our ordinary shares, provided that (1) such
shareholders did not acquire their shares prior to our initial public offering,
(2) the shares are listed for trading on the Tel Aviv Stock Exchange and/or a foreign
exchange, (3) the provisions of the Income Tax Law (inflationary adjustments), 1985
do not apply to such gain, and (4) such gains did not derive from a permanent
establishment of such shareholders in Israel. However, non-Israeli corporations will not
be entitled to the foregoing exemptions if an Israeli resident (i) has a controlling
interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary
of or is entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly. In certain instances, where our shareholders
may be liable to Israeli tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at the source.
Under
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a
shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding
the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless
either (i) the shareholder holds, directly or indirectly, shares representing 10% or more
of our voting capital during any part of the 12-month period preceding such sale, exchange
or disposition, or (ii) the capital gains arising from such sale are attributable to a
permanent establishment of the shareholder located in Israel.
Transfer Pricing
In
accordance with Section 85A of the Israeli Tax Ordinance, if in an international
transaction (whereby at least one party is a foreigner or all or part of the income from
such transaction is to be taxed abroad as well as in Israel) there is a special
relationship between the parties (including but not limited to family relationship or a
relationships of control between companies), and due to this relationship the price set
for an asset, right, service or credit was determined or other conditions for the
transaction were set such that a smaller profit was realized than what would have been
expected to be realized from a transaction of this nature, then such transaction shall be
reported in accordance with customary market conditions and tax shall be charged
accordingly. This section shall apply solely to transactions that transpire after November
29, 2006, at which time regulations with respect to this section were legislated. The
assessment of whether a transaction falls under the aforementioned definition shall be
implemented in accordance with one of the procedures mentioned in the regulations and is
based, among others, on comparisons of characteristics which portray similar transactions
in ordinary market conditions, such as profit, the area of activity, nature of the asset,
the contractual conditions of the transaction and according to additional terms and
conditions specified in the regulations.
66
U.S. FEDERAL INCOME TAX
CONSIDERATIONS
The
following discussion is a description of the material U.S. federal income tax
considerations applicable to an investment in the ordinary shares by U.S. Holders who
acquire our ordinary shares and hold them as capital assets for U.S. federal income tax
purposes. As used in this section, the term U.S. Holder means a beneficial
owner of an ordinary share who is:
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an
individual citizen or resident of the United States;
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a
corporation created or organized in or under the laws of the United States or of any
state of the United States or the District of Columbia;
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an
estate, the income of which is subject to U.S. federal income taxation regardless of
its source; or
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a
trust if the trust has elected validly to be treated as a United States person for U.S.
federal income tax purposes or if a U.S. court is able to exercise primary
supervision over the trust's administration and one or more United States
persons have the authority to control all of the trust's substantial
decisions.
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The
term Non-U.S. Holder means a beneficial owner of an ordinary share who is not
a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the
tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to
a Non-U.S. Holder also are discussed below.
This
description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended,
referred to in this discussion as the Code, existing and proposed U.S. Treasury
regulations and administrative and judicial interpretations, each as available and in
effect as of the date of this annual report. These sources may change, possibly with
retroactive effect, and are open to differing interpretations. This description does not
discuss all aspects of U.S. federal income taxation that may be applicable to investors in
light of their particular circumstances or to investors who are subject to special
treatment under U.S. federal income tax law, including:
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dealers
in stocks, securities or currencies;
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financial
institutions and financial services entities;
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real
estate investment trusts;
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regulated
investment companies;
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persons
that receive ordinary shares as compensation for the performance of services;
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tax-exempt
organizations;
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persons
that hold ordinary shares as a position in a straddle or as part of a hedging,
conversion or other integrated instrument;
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individual
retirement and other tax-deferred accounts;
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expatriates
of the United States;
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persons
(other than Non-U.S. Holders) having a functional currency other than the U.S.
dollar; and
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direct,
indirect or constructive owners of 10% or more, by voting power or value, of us.
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This
discussion also does not consider the tax treatment of persons or partnerships that hold
ordinary shares through a partnership or other pass-through entity or the possible
application of United States federal gift or estate tax or alternative minimum tax.
We
urge you to consult with your own tax advisor regarding the tax consequences of investing
in the ordinary shares, including the effects of federal, state, local, foreign and other
tax laws.
67
Distributions Paid on
the Ordinary Shares
We
currently do not intend to pay cash dividends in the foreseeable future. However, subject
to the discussion below under Passive Foreign Investment Company
Considerations, a U.S. Holder generally will be required to include in gross income
as ordinary dividend income the amount of any distributions paid on the ordinary shares,
including the amount of any Israeli taxes withheld, to the extent that those distributions
are paid out of our current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Subject to the discussion below under Passive Foreign
Investment Company Considerations, distributions in excess of our earnings and
profits will be applied against and will reduce the U.S. Holders tax basis in its
ordinary shares and, to the extent they exceed that tax basis, will be treated as gain
from a sale or exchange of those ordinary shares. Our dividends will not qualify for the
dividends-received deduction applicable in some cases to U.S. corporations. Dividends paid
in NIS, including the amount of any Israeli taxes withheld, will be includible in the
income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange
rate in effect on the date they are included in income by the U.S. Holder, regardless of
whether the payment in fact is converted into U.S. dollars. Any gain or loss resulting
from currency exchange fluctuations during the period from the date the dividend is
includible in the income of the U.S. Holder to the date that payment is converted into
U.S. dollars generally will be treated as ordinary income or loss.
A
non-corporate U.S. holders qualified dividend income currently is
subject to tax at reduced rates not exceeding 15%. For this purpose, qualified
dividend income generally includes dividends paid by a foreign corporation if
either:
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(a)
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the
stock of that corporation with respect to which the dividends are paid is
readily tradable on an established securities market in the U.S., or
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(b)
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that
corporation is eligible for benefits of a comprehensive income tax treaty with
the U.S. which includes an information exchange program and is determined to be
satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue
Service has determined that the U.S.-Israel Tax Treaty is satisfactory for this
purpose.
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In
addition, under current law a U.S. Holder must generally hold his ordinary shares for more
than 60 days during the 121 day period beginning 60 days prior to the ex-dividend date and
meet other holding period requirements for qualified dividend income.
Dividends
paid by a foreign corporation will not qualify for the reduced rates, if the dividend is
paid in a tax year of the recipient beginning after December 31, 2002, however, if such
corporation is treated, for the tax year in which the dividend is paid or the preceding
tax year, as a passive foreign investment company for U.S. federal income tax
purposes. We do not believe that we will be classified as a passive foreign
investment company for U.S. federal income tax purposes for our current taxable
year. However, see the discussion under Passive Foreign Investment Company
Considerations below.
Subject
to the discussion below under Information Reporting and Back-up Withholding, a
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on
dividends received on ordinary shares unless that income is effectively connected with the
conduct by that Non-U.S. Holder of a trade or business in the United States.
Controlled Foreign
Corporation Considerations
If
more than 50% of either the voting power of all classes of voting stock or the total value
of stock is owned, directly or indirectly, by citizens or residents of the U.S., U.S.
domestic partnerships and corporations or estates or trusts other than foreign estates or
trusts, each of which owns 10% or more of the total combined voting power of all classes
of stock entitled to vote (10-Percent Shareholders), we could be treated as a
controlled foreign corporation (CFC), for U.S. federal income tax purposes.
This classification would, among other consequences, require 10-Percent Shareholders to
include in their gross income their pro rata shares of Subpart F income (as
defined by the Code) and earnings invested in U.S. property (as defined by the Code).
In
addition, gain from the sale or exchange of preferred shares by a U.S. person who is or
was a 10-Percent Shareholder at any time during the five-year period ending with the sale
or exchange is treated as dividend income to the extent of earnings and profits of the
company attributable to the stock sold or exchanged. Under certain circumstances, a
corporate shareholder that directly owns 10% or more of voting shares may be entitled to
an indirect foreign tax credit for income taxes paid by us in connection with amounts so
characterized as dividends under the Code.
68
If
we are classified as both a passive foreign investment company, as described below, and a
CFC, we would generally not be treated as a passive foreign investment company with
respect to 10-Percent Shareholders. We believe that we are not and will not become a CFC.
Foreign Tax Credit
Any
dividend income resulting from distributions we pay to a U.S. Holder with respect to the
ordinary shares generally will be treated as foreign source income for U.S. foreign tax
credit purposes, which may be relevant in calculating such holders foreign tax
credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on
dividends may be deducted from taxable income or credited against a U.S. Holders
U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income. The rules relating to
the determination of foreign source income and the foreign tax credit are complex, and the
availability of a foreign tax credit depends on numerous factors. Each prospective
purchaser who would be a U.S. Holder should consult with its own tax advisor to determine
whether its income with respect to the ordinary shares would be foreign source income and
whether and to what extent that purchaser would be entitled to the credit.
Disposition of Ordinary
Shares
Upon
the sale or other disposition of ordinary shares, subject to the discussion below under
Passive Foreign Investment Company Considerations, a U.S. Holder generally
will recognize capital gain or loss equal to the difference between the amount realized on
the disposition and the holders adjusted tax basis in the ordinary shares. U.S.
Holders should consult their own advisors with respect to the tax consequences of the
receipt of a currency other than U.S. dollars upon such sale or other disposition.
In
the event there is an Israeli income tax on gain from the disposition of ordinary shares,
such tax should generally be the type of tax that is creditable for U.S. tax purposes;
however, because it is likely that the source of any such gain would be a U.S. source, a
U.S. foreign tax credit may not be available. U.S. shareholders should consult their own
tax advisors regarding the ability to claim such credit.
Gain
or loss upon the disposition of the ordinary shares will be treated as long-term if, at
the time of the sale or disposition, the ordinary shares were held for more than one year.
Long-term capital gains realized by non-corporate U.S. Holders are generally subject to a
lower marginal U.S. federal income tax rate than ordinary income, other than qualified
dividend income, as defined above. The deductibility of capital losses by a U.S. Holder is
subject to limitations. In general, any gain or loss recognized by a U.S. Holder on the
sale or other disposition of ordinary shares will be U.S. source income or loss for U.S.
foreign tax credit purposes. U.S. Holders should consult their own tax advisors concerning
the source of income for U.S. foreign tax credit purposes and the effect of the
U.S.-Israel Tax Treaty on the source of income.
Subject
to the discussion below under Information Reporting and Back-up Withholding, a
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on
any gain realized on the sale or exchange of ordinary shares unless:
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that
gain is effectively connected with the conduct by the Non-U.S. Holder of a trade
or business in the United States, or
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in
the case of any gain realized by an individual Non-U.S. Holder, that holder is present in
the United States for 183 days or more in the taxable year of the sale or exchange, and
other conditions are met.
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Passive Foreign
Investment Company Considerations
Special
U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign
investment company. A non-U.S. corporation will be considered a passive foreign investment
company for any taxable year in which, after applying certain look-through rules, 75% or
more of its gross income consists of specified types of passive income, or 50% or more of
the average value of its assets consists of passive assets, which generally means assets
that generate, or are held for the production of, passive income. Passive income may
include amounts derived by reason of the temporary investment of funds. If we were
classified as a passive foreign investment company, a U.S. Holder could be subject to
increased tax liability upon the sale or other disposition of ordinary shares or upon the
receipt of amounts treated as excess distributions. Under these rules, the
excess distribution and any gain would be allocated ratably over the U.S. Holders
holding period for the ordinary shares, and the amount allocated to the current taxable
year and any taxable year prior to the first taxable year in which we were a passive
foreign investment company would be taxed as ordinary income. The amount allocated to each
of the other taxable years would be subject to tax at the highest marginal rate in effect
for the applicable class of taxpayer for that year, and an interest charge for the deemed
deferral benefit would be imposed on the resulting tax allocated to such other taxable
years. The tax liability with respect to the amount allocated to years prior to the year
of the disposition, or excess distribution, cannot be offset by any net
operating losses. In addition, holders of stock in a passive foreign investment company
may not receive a step-up in basis on shares acquired from a decedent. U.S.
Holders who hold ordinary shares during a period when we are a passive foreign investment
company will be subject to the foregoing rules even if we cease to be a passive foreign
investment company.
69
We
believe that we are not a passive foreign investment company for U.S. federal income tax
purposes, but we cannot be certain whether we will be treated as a passive foreign
investment company for the current year or any future taxable year. Our belief that we
will not be a passive foreign investment company for the current year is based on our
estimate of the fair market value of our intangible assets, including goodwill, not
reflected in our financial statements under U.S. GAAP, and our projection of our income
for the current year. If the IRS successfully challenged our valuation of our intangible
assets, it could result in our classification as a passive foreign investment company.
Moreover, because passive foreign investment company status is based on our income and
assets for the entire taxable year, it is not possible to determine whether we will be a
passive foreign investment company for the current taxable year until after the close of
the year. In the future, in calculating the value of our intangible assets, we will value
our total assets, in part, based on our total market value determined using the average of
the selling price of our ordinary shares on the last trading day of each calendar quarter.
We believe this valuation approach is reasonable. While we intend to manage our business
so as to avoid passive foreign investment company status, to the extent consistent with
our other business goals, we cannot predict whether our business plans will allow us to
avoid passive foreign investment company status or whether our business plans will change
in a manner that affects our passive foreign investment company status determination. In
addition, because the market price of our ordinary shares is likely to fluctuate and the
market price of the shares of technology companies has been especially volatile, and
because that market price may affect the determination of whether we will be considered a
passive foreign investment company, we cannot assure that we will not be considered a
passive foreign investment company for any taxable year.
The
passive foreign investment company rules described above will not apply to a U.S. Holder
if the U.S. Holder makes an election to treat us as a qualified electing fund. However, a
U.S Holder may make a qualified electing fund election only if we furnish the U.S. Holder
with certain tax information. We currently do not provide this information, and we
currently do not intend to take actions necessary to permit you to make a qualified
electing fund election in the event we are determined to be a passive foreign investment
company. As an alternative to making this election, a U.S. Holder of passive foreign
investment company stock which is publicly-traded may in certain circumstances avoid
certain of the tax consequences generally applicable to holders of a passive foreign
investment company by electing to mark the stock to market annually and recognizing as
ordinary income or loss each year an amount equal to the difference as of the close of the
taxable year between the fair market value of the passive foreign investment company stock
and the U.S. Holders adjusted tax basis in the passive foreign investment company
stock. Losses would be allowed only to the extent of net mark-to-market gain previously
included by the U.S. Holder under the election for prior taxable years. This election is
available for so long as our ordinary shares constitute marketable stock,
which includes stock of a passive foreign investment company that is regularly
traded on a qualified exchange or other market. Generally, a
qualified exchange or other market includes a national market system
established pursuant to Section 11A of the Exchange Act. A class of stock that is traded
on one or more qualified exchanges or other markets is regularly traded on an
exchange or market for any calendar year during which that class of stock is traded, other
than in de minimis quantities, on at least 15 days during each calendar quarter. We
believe that the Nasdaq Global Market will constitute a qualified exchange or other market
for this purpose. However, no assurances can be provided that our ordinary shares will
continue to trade on the Nasdaq Global Market or that the shares will be regularly traded
for this purpose.
The
rules applicable to owning shares of a passive foreign investment company are complex, and
each prospective purchaser who would be a U.S. Holder should consult with its own tax
advisor regarding the consequences of investing in a passive foreign investment company.
70
Information Reporting
and Back-up Withholding
Holders
generally will be subject to information reporting requirements with respect to dividends
paid in the United States on ordinary shares. In addition, Holders will be subject to
back-up withholding tax on dividends paid in the United States on ordinary shares unless
the holder provides an IRS certification or otherwise establishes an exemption. Holders
will be subject to information reporting and back-up withholding tax on proceeds paid
within the United States from the disposition of ordinary shares unless the holder
provides an IRS certification or otherwise establishes an exemption. Information reporting
and back-up withholding may also apply to dividends and proceeds paid outside the United
States that are paid by certain U.S. payors or U.S. middlemen, as
defined in the applicable Treasury regulations, including:
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(2)
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the
government of the U.S. or the government of any state or political subdivision
of any state (or any agency or instrumentality of any of these governmental
units);
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(3)
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a
controlled foreign corporation;
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(4)
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a
foreign partnership that is either engaged in a U.S. trade or business or whose
Untied States partners in the aggregate hold more than 50% of the income or
capital interests in the partnership;
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(5)
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a
foreign person that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the U.S.; or
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(6)
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a
U.S. branch of a foreign bank or insurance company.
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The
back-up withholding tax rate is 28%. Back-up withholding and information reporting will
not apply to payments made to Non-U. S. Holders if they have provided the required
certification that they are not United States persons.
In
the case of payments by a payor or middleman to a foreign simple trust, foreign grantor
trust or foreign partnership, other than payments to a holder that qualifies as a
withholding foreign trust or a withholding foreign partnership within the meaning of the
Treasury regulations and payments that are effectively connected with the conduct of a
trade or business in the United States, the beneficiaries of the foreign simple trust, the
person treated as the owner of the foreign grantor trust or the partners of the foreign
partnership will be required to provide the certification discussed above in order to
establish an exemption from backup withholding tax and information reporting requirements.
The
amount of any back-up withholding may be allowed as a credit against a U.S. Holders
U.S. federal income tax liability and may entitle the holder to a refund, provided that
required information is furnished to the IRS
F.
|
DIVIDENDS
AND PAYING AGENTS
|
Not
applicable.
Not
applicable.
You
may request a copy of our U.S. SEC filings, at no cost, by writing or calling us at
IncrediMail Ltd., 4 HaNechoshet Street, Tel-Aviv 69710, Israel, Attention: Yacov Kaufman,
Telephone: +972-3-7696100. A copy of each report submitted in accordance with applicable
United States law is available for public review at our principal executive offices. In
addition, our filings with the SEC may be inspected without charge at the SECs
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the
operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to the public from the SECs
website at www.sec.gov.
A
copy of each document (or a translation thereof to the extent not in English) concerning
IncrediMail that is referred to in this annual report on Form 20-F, is available for
public view (subject to confidential treatment of agreements pursuant to applicable law)
at our principal executive offices at IncrediMail Ltd., 4 HaNechoshet
Street,
Tel-Aviv 69710, Israel.
I.
|
SUBSIDIARY
INFORMATION
|
Not
applicable.
71
ITEM 11.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Exchange
Rate Risk.
A significant portion of our revenues and expenses are in foreign
currencies. As a result numerous balances are denominated or linked to these currencies.
In 2007 the related foreign currency fluctuation resulted in $198,000 financial income and
in 2008 resulted in financial income of $3,000. Both sums are components of the exchange
rate differences set forth in Note 11(a) of our financial statements. As of December 31,
2008, our net liability in foreign currencies amounted to approximately $2.9 million.
In
addition, in territories where our prices are based on local currencies, fluctuations in
the dollar exchange rate could affect our gross profit margin. We may compensate for such
fluctuations by changing product prices accordingly. We also hold a small part of our
financial investments in other currencies, mainly New Israeli Shekels and Euro. The dollar
value of those investments may decline. A revaluation of 1% of the foreign currencies
(i.e. other than U.S. dollar) could reduce our income before taxes by approximately $0.05
million.
A
majority of our costs, including salaries, expenses and office expenses are incurred in
New Israeli Shekels. Inflation in Israel may have the effect of increasing the U.S. dollar
cost of our operations in Israel. If the U.S. dollar declines in value in relation to the
New Israeli Shekel, it will become more expensive for us to fund our operations in Israel.
A revaluation of 1% of the NIS will affect our income before tax by less than one percent.
The exchange rate of the U.S. dollar to the New Israeli Shekel, based on exchange rates
published by the Bank of Israel, was as follows:
|
Year Ended December 31,
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate for period
|
|
|
|
4.457
|
|
|
4.108
|
|
|
3.588
|
|
Rate at year-end
|
|
|
|
4.225
|
|
|
3.846
|
|
|
3.802
|
|
Towards
the end of 2006, we engaged a firm to analyze our exposure to the fluctuation in foreign
currency exchange rates and are implementing their recommendations since then. However,
due to the market conditions, volatility and other factors, its proposals and their
implementation occasionally prove to be ineffective or can cause additional finance
expenses.
Interest
Rate Risk
. The primary objective of our investment activities is to preserve principal
while maximizing the interest income we receive from our investments, without increasing
risk. Our current investment policy is to invest in dollar denominated or linked
debentures, of limited sums, rated A or higher and with an average maturity of no more
than 3 years. We are exposed to market risks resulting from changes in interest rates
relating primarily to our financial investments in cash, deposits and marketable
securities. We do not use derivative financial instruments to limit exposure to interest
rate risk. Our interest gains may decline in the future as a result of changes in the
financial markets. However, we believe any such potential loss would be immaterial to us.
ITEM 12.
|
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
72
PART II
ITEM 13.
|
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
Not
applicable.
ITEM 14.
|
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
The
effective date of our first registration statement, filed on Form F-1 under the Securities
Act (File No. 333-129246), relating to the initial public offering of our ordinary shares,
was January 30, 2006.
ITEM 15T.
|
|
CONTROLS AND PROCEDURES
|
(a)
Disclosure Controls and Procedures
. Our management, including our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2008. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2008, our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act and the rules thereunder, is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms and to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
accumulated and communicated to the our management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
(b)
Managements Annual Report on Internal Control Over Financial
Reporting
: Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:
|
|
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets
|
|
|
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors
|
|
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
|
Our management recognizes that there
are inherent limitations in the effectiveness of any system of internal control over
financial reporting, including the possibility of human error and the circumvention or
override of internal control. Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial statement
preparation, and may not prevent or detect all misstatements. Further, because of changes
in conditions, the effectiveness of internal control over financial reporting may vary
over time.
Our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2008. In
making this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Our management has concluded, based
on its assessment, that our internal control over financial reporting was effective as of
December 31, 2008.
Our financial statements have been
audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst & Young Global), an
independent registered public accounting firm.
73
(c)
Attestation Report of Registered Public Accounting Firm:
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide only
managements report in this annual report.
(d)
Changes in Internal Control Over Financial Reporting
: During the period
covered by this report, no changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) have occurred that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 16A.
|
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our
board of directors has determined that Mr. David Jutkowitz, who is an independent director
(as defined under Rule 4200(a)(15) of the NASD market rules) and serves on our audit
committee, qualifies as an audit committee financial expert as defined in Item
16A of Form 20-F.
Our
board of directors has adopted a code of conduct applicable to all of our directors,
officers and employees as required by the Nasdaq Marketplace Rules, which also complies
with the definition of a code of ethics set out in Section 406(c) of the
Sarbanes-Oxley Act of 2002. A copy of the code of ethics is included herein as Exhibit 11.
ITEM 16C.
|
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
We
paid the following fees for the professional services rendered by Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, which have served as our registered public
accounting firm for the last three years in thousands:
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
|
$
|
152
|
|
$
|
128
|
|
Audit Related Fees
|
|
|
|
22
|
|
|
-
|
|
Tax Fees
|
|
|
|
50
|
|
|
83
|
|
|
|
|
|
|
Total
|
|
|
$
|
224
|
|
$
|
211
|
|
|
|
|
|
|
Audit
Fees include audit services, quarterly reviews. Audit related fees includes consultation
regarding financial reporting. Tax fees include: corporate tax returns, international tax,
tax implication regarding our status as a PFIC, VAT advice and tax advice related to
acquisitions.
Our
audit committee is responsible for the establishment of policies and procedures for review
and pre-approval by the committee of all audit services and permissible non-audit services
to be performed by our independent auditor, in order to ensure that such services do not
impair our auditors independence. Pursuant to the pre-approval policy adopted by our
audit committee, certain enumerated audit, audit-related and tax services have been
granted general pre-approval by our audit committee and need not be specifically
pre-approved. Pre-approval fee levels or budgeted amounts for all services to be provided
by the independent auditor will be established annually by the audit committee and the
committee may also determine the appropriate ratio between the total amount of fees for
audit, audit-related, tax services and other services. All requests for services to be
provided by the independent auditor will be submitted to our Chief Financial Officer, who
will determine whether such services are included within the enumerated pre-approved
services. The audit committee will be informed on a timely basis of any pre-approved
services that were performed by the auditor. Requests for services that require specific
pre-approval will be submitted to the audit committee with a statement as to whether, in
the view of the Chief Financial Officer and the independent auditor, the request is
consistent with the SECs rules on auditor independence. The Chief Financial Officer
will monitor the performance of all services and determine whether such services are in
compliance with the policy.
74
ITEM 16D.
|
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
None.
ITEM 16E.
|
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
Issuer Purchases of
Equity Securities (1)
Period
|
(a) Total Number of
Shares (or Units)
Purchased
|
(b) Average Price Paid
per Share (or Unit)
|
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans
|
(d) Approximate Dollar
Value in thousands)
of Shares that
May Yet Be Purchased
Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2009
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
April 2009
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
March 2009
|
|
|
|
2,403
|
|
|
2.69
|
|
|
2,403
|
|
$
|
0
|
|
February 2009
|
|
|
|
18,891
|
|
|
2.74
|
|
|
18,891
|
|
$
|
4
|
|
January 2009
|
|
|
|
24,161
|
|
|
2.58
|
|
|
24,161
|
|
$
|
56
|
|
December 2008
|
|
|
|
76,910
|
|
|
2.37
|
|
|
76,910
|
|
$
|
118
|
|
November 2008
|
|
|
|
44,896
|
|
|
2.71
|
|
|
44,896
|
|
$
|
301
|
|
October 2008
|
|
|
|
93,788
|
|
|
3.14
|
|
|
93,788
|
|
$
|
422
|
|
September 2008
|
|
|
|
26,204
|
|
|
3.42
|
|
|
26,204
|
|
$
|
717
|
|
August 2008
|
|
|
|
39,093
|
|
|
3.32
|
|
|
39,093
|
|
$
|
806
|
|
July 2008
|
|
|
|
19,673
|
|
|
3.25
|
|
|
19,673
|
|
$
|
936
|
|
June 2008
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
(1)
On January 23, 2008 we announced that our board had approved the use of $1
million of our available cash to repurchase our ordinary shares. On March 25,
2009 we announced that our board had elected to continue with the second phase
of this plan that authorizes the purchase of up to an additional $1 million of
our ordinary shares, subject to approval from the Israeli Tax Authority which
has not yet been received. Under the repurchase program, share purchases may be
made from time to time at the discretion of management in the open market or in
privately negotiated transactions depending on market conditions, share price,
trading volume and other factors. Such purchases will be made in accordance with
the requirements of the SEC. For a portion of the authorized repurchase amount,
we may enter into a plan that is compliant with Rule 10b5-1 of the Securities
Exchange Act of 1934 that is designed to facilitate such purchases. The
repurchase program has no time limit, does not require us to acquire a specific
number of shares, and may be suspended from time to time or discontinued.
ITEM 16F.
|
|
CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
|
Not
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.
As
described in Item 10.B Additional Information Nasdaq Marketplace Rules and
Home Country Practices, we do not comply with the Nasdaq requirement that an issuer
listed on the Nasdaq Global Market have a quorum requirement that in no case be less than
33 1/3% of the outstanding shares of the companys common voting stock. However, our
articles of association, consistent with the Israeli Companies Law, provide that the
quorum requirements for an adjourned meeting are the presence of a minimum of two
shareholders present in person. Our quorum requirements for an adjourned meeting do not
comply with the Nasdaq requirements and we instead follow our home country practice.
75
As
a foreign private issuer listed on the Nasdaq Global Market, we may also follow home
country practice with regard to, among other things, distribution of annual and quarterly
reports to shareholders, approval of related party transactions, composition of the board
of directors, approval of compensation of executive officers, director 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. Under Nasdaq
Marketplace Rules, U.S. domestic issuers are required to solicit proxies, provide proxy
statements for all shareholder meetings and provide copies of such proxy materials to
Nasdaq; however, as a foreign private issuer, we are generally exempt from the SECs
rules governing the solicitation of shareholder proxies.
See
Item 6 Directors, Senior Management and Employees Board Practices and
Item 10.B Additional Information Nasdaq Marketplace Rules and Home Country
Practices for a detailed description of the significant ways in which the
registrants corporate governance practices differ from those followed by U.S.
companies under the listing standards of the Nasdaq Global Market.
76
PART III
ITEM 17.
|
|
FINANCIAL STATEMENTS
|
Not
applicable.
ITEM 18.
|
|
FINANCIAL STATEMENTS
|
The
following financial statements and related auditors report are filed as part of this
annual report:
|
Page
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Balance Sheets as of December 31, 2007 and 2008
|
F-3 - F-4
|
Statements of Income for the Years Ended December 31, 2006, 2007 and 2008
|
F-5
|
Statements of Changes in Shareholders' Equity (Deficiency)
|
for the Years Ended December 31, 2006, 2007 and 2008
|
F-6
|
Statements of Cash Flows for the Years Ended December 31, 2006, 2007 and 2008
|
F-7
|
Notes to Financial Statements
|
F-9
|
1.1
|
|
Memorandum
of Association of Registrant (1)
|
1.2
|
|
Certificate
of Change of Name of Registrant (translated from Hebrew) (1)
|
1.3
|
|
Amended
and Restated Articles of Association of Registrant, dated February 3, 2006 (2)
|
4.1
|
|
Google
AdSenseTM Online Standard Terms and Conditions (4)
|
4.2
|
|
OEM
Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant (1)
|
4.3
|
|
The
Registrant's 2003 Israeli Share Option Plan and the form of Option Agreement (1)
|
4.4
|
|
Google
Services Agreement, dated July 1, 2008, by and between the Registrant and Google Ireland
Ltd., a company organized under the laws of Ireland.*
|
8
|
|
List
of all subsidiaries.
|
12.1
|
|
Certification
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive
officer of the Company
|
12.2
|
|
Certification
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial
officer of the Company
|
13.1
|
|
Certification
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United Stated Code
|
13.2
|
|
Certification
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United Stated Code
|
14
|
|
Consent
of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young Global, Independent
Auditors
|
(1)
|
Previously
filed with the SEC on October 25, 2005 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(2)
|
Previously
filed with the SEC on January 5, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(3)
|
Previously
filed with the SEC on January 26, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(4)
|
Previously
filed with the SEC on May 12, 2008 as an exhibit to our annual report on Form
20-F.
|
*
|
Confidential treatment has been
requested with respect to certain portions of this exhibit pursuant to 17.C.F.R.
§200.80(b)(4) . Omitted portions were filed separately with the SEC.
|
77
INCREDIMAIL LTD. AND
ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS
AS OF DECEMBER 31, 2008
IN U.S. DOLLARS
INDEX
F - 1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
and Board of Directors of
INCREDIMAIL LTD.
We
have audited the accompanying consolidated balance sheets of Incredimail Ltd. (the
Company) and its subsidiaries as of December 31, 2007 and 2008, and the related
consolidated statements of operations, changes in shareholders equity and cash flows
for each of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company and its subsidiaries as of
December 31, 2007 and 2008, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2008 in conformity
with U.S. generally accepted accounting principles.
|
|
|
|
|
|
|
|
|
|
Tel-Aviv, Israel
|
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
|
June 24, 2009
|
A Member of Ernst & Young Global
|
F - 2
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands
|
|
December 31,
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
Cash and cash equivalents
|
|
|
$
|
4,611
|
|
$
|
7,835
|
|
Short term bank deposit
|
|
|
|
1,000
|
|
|
-
|
|
Marketable securities
|
|
|
|
17,811
|
|
|
18,790
|
|
Trade receivables
|
|
|
|
1,993
|
|
|
2,194
|
|
Deferred taxes, net
|
|
|
|
368
|
|
|
362
|
|
Other receivables and prepaid expenses
|
|
|
|
2,017
|
|
|
4,941
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
27,800
|
|
|
34,122
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
Severance pay fund
|
|
|
|
1,037
|
|
|
955
|
|
Deferred taxes, net
|
|
|
|
92
|
|
|
328
|
|
Other long-term assets
|
|
|
|
740
|
|
|
619
|
|
Property and equipment, net
|
|
|
|
1,808
|
|
|
1,478
|
|
Other intangible assets, net
|
|
|
|
164
|
|
|
149
|
|
Goodwill
|
|
|
|
125
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
|
3,966
|
|
|
3,529
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
$
|
31,766
|
|
$
|
37,651
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 3
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands (except share and per share data)
|
|
December 31,
|
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
Trade payables
|
|
|
$
|
1,546
|
|
$
|
1,948
|
|
Deferred revenues
|
|
|
|
3,254
|
|
|
2,605
|
|
Accrued expenses and other liabilities
|
|
|
|
3,244
|
|
|
4,426
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
8,044
|
|
|
8,979
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
Deferred revenues
|
|
|
|
1,559
|
|
|
1,743
|
|
Accrued severance pay
|
|
|
|
1,392
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
|
2,951
|
|
|
3,128
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
Share capital -
|
|
|
Ordinary shares of NIS 0.01 par value -
|
|
|
Authorized: 15,000,000 shares as of December 31, 2007 and 2008; Issued and
|
|
|
outstanding: 9,475,943 and 9,271,159 shares at December 31, 2007 and 2008,
|
|
|
respectively
|
|
|
|
20
|
|
|
21
|
|
Additional paid-in capital
|
|
|
|
22,029
|
|
|
23,358
|
|
Accumulated other comprehensive income
|
|
|
|
112
|
|
|
12
|
|
Treasury shares - 0 and 300,564 Ordinary shares as of December 31, 2007 and
|
|
|
2008, respectively
|
|
|
|
-
|
|
|
(882
|
)
|
Retained earnings (accumulated deficit)
|
|
|
|
(1,390
|
)
|
|
3,035
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
|
20,771
|
|
|
25,544
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
|
$
|
31,766
|
|
$
|
37,651
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 4
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
U.S. dollars in thousands (except per share data)
|
|
Year ended December 31,
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and other services
|
|
|
$
|
3,066
|
|
$
|
9,597
|
|
$
|
12,748
|
|
Products
|
|
|
|
7,785
|
|
|
9,078
|
|
|
9,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,851
|
|
|
18,675
|
|
|
21,906
|
|
|
|
|
Cost of Products
|
|
|
|
858
|
|
|
1,740
|
|
|
1,795
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
9,993
|
|
|
16,935
|
|
|
20,111
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
Research and development
|
|
|
|
3,251
|
|
|
6,125
|
|
|
7,589
|
|
Selling and marketing
|
|
|
|
1,767
|
|
|
4,682
|
|
|
7,343
|
|
General and administrative
|
|
|
|
2,717
|
|
|
3,693
|
|
|
3,806
|
|
Goodwill impairment and other charges
|
|
|
|
-
|
|
|
163
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
7,735
|
|
|
14,663
|
|
|
19,891
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
2,258
|
|
|
2,272
|
|
|
220
|
|
Financial income (expenses), net
|
|
|
|
984
|
|
|
(3,641
|
)
|
|
4,494
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
|
3,242
|
|
|
(1,369
|
)
|
|
4,714
|
|
Taxes on income
|
|
|
|
765
|
|
|
1,393
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
2,477
|
|
$
|
(2,762
|
)
|
$
|
4,425
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per Ordinary share:
|
|
|
|
|
|
Basic
|
|
|
$
|
0.27
|
|
$
|
(0.29
|
)
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.27
|
|
$
|
(0.29
|
)
|
$
|
0.46
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 5
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
U.S. dollars in thousands (except per share data)
|
|
Share
capital
|
Additional
paid-in
capital
|
Deferred
stock
compensation
|
Accumulated
other
comprehensive
income
|
Retained
earnings
(accumulated
deficit)
|
Treasury
shares
|
Total
comprehensive
income (loss)
|
Total
shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
$
|
12
|
|
$
|
1,154
|
|
$
|
(257
|
)
|
$
|
78
|
|
$
|
(1,022
|
)
|
$
|
-
|
|
|
|
|
$
|
(35
|
)
|
Issuance of share capital upon initial public offering, net
|
|
|
|
5
|
|
|
16,374
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
16,379
|
|
Conversion of preferred shares
|
|
|
|
3
|
|
|
3,027
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
3,030
|
|
Issuance of shares upon the acquisition of Bizchord
|
|
|
|
*)
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
100
|
|
Issuance of shares to non-employees
|
|
|
|
*)
|
|
|
60
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
60
|
|
Reclassification of deferred stock compensation to
|
|
|
additional paid-in capital upon adoption of SFAS 123R
|
|
|
|
-
|
|
|
(257
|
)
|
|
257
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Stock based compensation
|
|
|
|
-
|
|
|
525
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
525
|
|
Exercise of share options
|
|
|
|
*)
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
10
|
|
Comprehensive income:
|
|
|
Changes in unrealized holding gains on marketable
|
|
|
securities, net
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
31
|
|
|
-
|
|
|
-
|
|
$
|
31
|
|
|
31
|
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,477
|
|
|
-
|
|
|
2,477
|
|
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
20
|
|
|
20,993
|
|
|
-
|
|
|
109
|
|
|
1,455
|
|
|
-
|
|
|
|
|
|
22,577
|
|
Tax benefit in respect of offering expenses
|
|
|
|
|
|
|
143
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
143
|
|
Issuance of shares to non-employees
|
|
|
|
*)
|
|
|
63
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
63
|
|
Stock based compensation
|
|
|
|
|
|
|
706
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
706
|
|
Exercise of share options
|
|
|
|
*)
|
|
|
124
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
124
|
|
FIN 48 opening balance adjustment
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(83
|
)
|
|
-
|
|
|
|
|
|
(83
|
)
|
Comprehensive income:
|
|
|
Changes in unrealized holding gains on marketable
|
|
|
securities, net
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
|
|
$
|
3
|
|
|
3
|
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,762
|
)
|
|
-
|
|
|
(2,762
|
)
|
|
(2,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
20
|
|
|
22,029
|
|
|
-
|
|
|
112
|
|
|
(1,390
|
)
|
|
-
|
|
|
|
|
|
20,771
|
|
Stock based compensation
|
|
|
|
-
|
|
|
1,165
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
1,165
|
|
Exercise of share options
|
|
|
|
1
|
|
|
164
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
165
|
|
Repurchase of Ordinary shares
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(882
|
)
|
|
|
|
|
(882
|
)
|
Comprehensive income:
|
|
|
Changes in unrealized holding gains on marketable
|
|
|
securities, net
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(100
|
)
|
|
-
|
|
|
-
|
|
|
(100
|
)
|
|
(100
|
)
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,425
|
|
|
-
|
|
|
4,425
|
|
|
4,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
$
|
21
|
|
$
|
23,358
|
|
$
|
-
|
|
$
|
12
|
|
$
|
3,035
|
|
$
|
(882
|
)
|
|
|
|
$
|
25,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
Represents
an amount less than $1.
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 6
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
U.S. dollars in thousands
|
|
Year ended December 31,
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
2,477
|
|
$
|
(2,762
|
)
|
$
|
4,425
|
|
Adjustments required to reconcile net income (loss) to net cash
|
|
|
provided by operating activities:
|
|
|
Depreciation and amortization
|
|
|
|
245
|
|
|
510
|
|
|
1,050
|
|
Stock based compensation
|
|
|
|
585
|
|
|
769
|
|
|
1,165
|
|
Impairment of goodwill and other intangible assets
|
|
|
|
-
|
|
|
316
|
|
|
169
|
|
Other-than-temporary impairment on long-term investment and
|
|
|
marketable securities
|
|
|
|
-
|
|
|
5,147
|
|
|
956
|
|
Amortization of premium (accretion of discount) and accrued
|
|
|
interest on marketable securities
|
|
|
|
7
|
|
|
92
|
|
|
55
|
|
Gain from sale of marketable securities, net
|
|
|
|
(226
|
)
|
|
(386
|
)
|
|
(4,774
|
)
|
Deferred taxes, net
|
|
|
|
(290
|
)
|
|
211
|
|
|
(217
|
)
|
Accrued severance pay, net
|
|
|
|
185
|
|
|
91
|
|
|
75
|
|
Decrease (increase) in trade receivables
|
|
|
|
243
|
|
|
(165
|
)
|
|
(201
|
)
|
Increase in other receivables and prepaid expenses
|
|
|
|
(799
|
)
|
|
(1,406
|
)
|
|
(2,924
|
)
|
Decrease (increase) in long-term deposits
|
|
|
|
(258
|
)
|
|
(70
|
)
|
|
26
|
|
Increase in trade payables
|
|
|
|
350
|
|
|
1,082
|
|
|
402
|
|
Increase (decrease) in deferred revenues
|
|
|
|
1,360
|
|
|
159
|
|
|
(465
|
)
|
Increase in accrued expenses and other liabilities
|
|
|
|
1,309
|
|
|
226
|
|
|
1,182
|
|
Other
|
|
|
|
-
|
|
|
7
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
5,188
|
|
|
3,821
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property and equipment
|
|
|
|
(831
|
)
|
|
(1,355
|
)
|
|
(640
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
-
|
|
|
15
|
|
|
-
|
|
Proceeds from short-term bank deposits
|
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
Investment in short-term bank deposits
|
|
|
|
-
|
|
|
(1,000
|
)
|
|
-
|
|
Restricted cash
|
|
|
|
(62
|
)
|
|
(66
|
)
|
|
(5
|
)
|
Capitalization of software development costs, content costs and
|
|
|
domain
|
|
|
|
(76
|
)
|
|
(84
|
)
|
|
(109
|
)
|
Payment for the acquisition of Bizchord (a)
|
|
|
|
(456
|
)
|
|
-
|
|
|
-
|
|
Proceeds from sales of marketable securities
|
|
|
|
5,833
|
|
|
54,369
|
|
|
25,209
|
|
Investment in marketable securities
|
|
|
|
(20,462
|
)
|
|
(59,749
|
)
|
|
(22,438
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
(16,054
|
)
|
|
(7,870
|
)
|
|
3,017
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
Proceeds from issuance of shares upon initial public offering,
|
|
|
net
|
|
|
|
16,798
|
|
|
-
|
|
|
-
|
|
Tax benefit in respect of issuance expenses
|
|
|
|
-
|
|
|
111
|
|
|
-
|
|
Exercise of share options
|
|
|
|
10
|
|
|
124
|
|
|
165
|
|
Reimbursement of issuance costs
|
|
|
|
-
|
|
|
59
|
|
|
-
|
|
Short-term bank credit, net
|
|
|
|
(4
|
)
|
|
-
|
|
|
-
|
|
Repurchase of Ordinary shares
|
|
|
|
-
|
|
|
-
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
16,804
|
|
|
294
|
|
|
(717
|
)
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
5,938
|
|
|
(3,755
|
)
|
|
3,224
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
2,428
|
|
|
8,366
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
$
|
8,366
|
|
$
|
4,611
|
|
$
|
7,835
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 7
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
U.S. dollars in thousands
|
|
Year ended December 31,
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information and disclosures of non-cash investing and
|
|
|
|
|
|
|
|
|
|
|
|
financing activities:
|
|
|
|
|
|
Decrease in deferred issuance costs
|
|
|
$
|
478
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Preferred shares into Ordinary shares
|
|
|
$
|
3,030
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
Income taxes
|
|
|
$
|
275
|
|
$
|
2,019
|
|
$
|
2,832
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Payment for the acquisition of Bizchord:
|
|
|
|
|
|
Estimated fair value of assets acquired at the acquisition date:
|
|
|
Other intangible assets
|
|
|
$
|
268
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556
|
|
|
|
|
|
|
|
Less - issuance of Ordinary shares
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 8
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Incredimail
Ltd. and its wholly-owned subsidiary in the U.S, Incredimail Inc., design develop and
market content and media products, particularly email products, creating an entertaining
experience by offering users the ability to design a customized and personal
presentation, targeting the consumer and home market. Bizchord Ltd., a wholly-owned
subsidiary in Israel, is engaged in transaction processing. Incredimail Ltd (Incredimail)
and its wholly-owned subsidiaries are collectively referred to as the Company.
The Company was incorporated under the laws of Israel in 1999 and commenced operations in
2000.
As for major customer data, see Note 12.
|
|
b.
|
Initial
Public Offering (IPO):
|
|
On
February 3, 2006, the Company affected an Initial Public Offering (IPO) of
its Ordinary shares on the Nasdaq Capital Market. The Company issued 2,500,000 shares at
a price of $7.50 per share before underwriting and issuance expenses. Total net proceeds
from the issuance amounted to approximately $16.4 million. Upon closing of the IPO, each
Preferred share was converted into 38 Ordinary shares. On the closing date of the IPO,
the Company granted to its underwriters an option to purchase 175,000 Ordinary shares at
a price per share of $9.375. The option shall expire five years following the grant date.
|
|
c.
|
Acquisition
of certain assets of Bizchord Consulting Corporation (Bizchord):
|
|
On
December 18, 2006, the Company consummated an agreement to acquire certain assets of
Bizchord Consulting Corporation in consideration of $556,000 including 12,210 Ordinary
shares of the Company valued at $100,000 based on the market price two days before and
after the acquisition date. Bizchord was a provider of online transaction process
solutions, and as such was a significant supplier of the Company. The primary reason for
the acquisition was to ensure the continued availability of these solutions, as well as
the ability to maintain and further improve them in the future.
|
|
Under
the terms of the acquisition agreement, additional contingent payment of up to $250,000
in cash and in shares of Incredimail, equally, was to be paid to the selling shareholders
of Bizchord based on services rendered to the Company by the selling shareholders over
two years. In 2007, one of the selling shareholders ceased rendering services to the
Company and accordingly, $125,000 out of the total amount has been forfeited. The
remaining $125,000 was recognized as an operating expense over the service period in
accordance with Emerging Issue Task Force (EITF) 95-8 Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination.
|
|
The
acquisition was accounted for by the purchase method of accounting in accordance with
SFAS No. 141 and accordingly, the purchase price has been allocated according to the
estimated fair value of the assets acquired. The results of Bizchord operations have been
included in the consolidated financial statements since December 18, 2006.
|
|
The
following table summarizes the estimated fair values of the assets acquired at the
acquisition date:
|
|
|
U.S. dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
$
|
268
|
|
|
Goodwill
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
$
|
556
|
|
|
|
|
|
|
In
2007 and 2008, the Company recorded an impairment loss with respect to core technology
and goodwill acquired on the acquisition of Bizchord, see Notes 2(i) and 2(j).
|
F - 9
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 1:
|
|
GENERAL (Cont.)
|
|
In
December 2008, the Company decided to discontinue BizChords independent activities
and restrict its activity to processing the Companys own transactions. In light of
this the Company recorded an impairment loss for the remaining value of its goodwill and
core technology.
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES
|
|
The
consolidated financial statements have been prepared according to United States
Generally Accepted Accounting Principles ("U.S. GAAP").
|
|
The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
|
|
b.
|
Financial
statements in U.S. dollars:
|
|
The
Company has operations in Israel and most of the Israeli expenses are currently paid in
New Israeli Shekels (NIS); however, the markets for the Companys
products are located outside of Israel and the Company generates most of its revenues in
U.S. dollars (dollars). The Companys management believes that the
dollar is the primary currency of the economic environment in which the Company operates.
Thus, the functional and reporting currency of the Company is the dollar.
|
|
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, Foreign Currency Translation. All transaction gains and losses of the
remeasured monetary balance sheet items are reflected in the statements of operations as
financial income or expenses, as appropriate.
|
|
c.
|
Principles
of consolidation:
|
|
Intercompany
balances and transactions have been eliminated upon consolidation.
|
|
The
Company considers short-term unrestricted highly liquid investments that are readily
convertible into cash, purchased with original maturities of three months or less to be
cash equivalents.
|
|
Restricted
cash is invested in bank deposits, which are pledged in favor of the bank which provides
to the Company guarantees with respect to office lease agreements and business credit.
|
F - 10
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
f.
|
Marketable
securities and long-term investment:
|
|
The
Company accounts for investments in debt securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Management
determines the appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such determinations at each balance
sheet date.
|
|
At
December 31, 2007 and 2008, all marketable securities are designated as
available-for-sale. Marketable securities classified as available-for-sale are
carried at fair value. Unrealized gains and losses, net of tax, are reported in a
separate component of shareholders equity in accumulated other comprehensive
income. Gains and losses are recognized when realized, on a specific identification
basis, in the Companys consolidated statements of operations.
|
|
In
accordance with the Companys policy and FASB Staff Position (FSP) Nos.
SFAS 115-1 (FSP 115-1) and SFAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, the Company recognizes an
impairment charge when a decline in the fair value of its investments below the cost
basis is judged to be other-than-temporary. The Company considers various factors in
determining whether to recognize an impairment charge, including the Companys
intent and ability to hold the investment for a period of time sufficient to allow for
any anticipated recovery in market value, the length of time and extent to which the fair
value has been less than the cost basis, the credit ratings of the securities and the
financial condition and near-term prospects of the issuers. As for other-than temporary
impairment recognized in these financial statements, see note 3a.
|
|
g.
|
Property
and equipment:
|
|
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the assets at
the following annual rates:
|
|
%
|
|
|
|
|
|
|
|
|
Computers and peripheral equipment
|
|
|
|
33
|
|
Office furniture and equipment
|
|
|
|
7 - 15
|
|
Automobiles
|
|
|
|
15
|
|
|
Leasehold
improvements are depreciated by the straight-line method over the term of the lease or
the estimated useful life of the improvements, whichever is shorter.
|
|
Intangible
assets are amortized over their useful lives using a method of amortization that reflects
the pattern in which the economic benefits of the intangible assets are consumed or
otherwise used, in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.
|
|
Amortization
is calculated using the straight-line method over the estimated useful lives at the
following annual rates:
|
|
Weighted average %
|
|
|
|
|
|
|
|
|
Capitalized software development costs (see 2l)
|
|
|
|
33
|
|
Capitalized content costs (see 2o)
|
|
|
|
33
|
|
Core technology
|
|
|
|
25
|
|
Domain
|
|
|
|
33
|
|
F - 11
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
i.
|
Impairment
of long-lived assets:
|
|
The
Companys long-lived assets, tangible and intangible, other than goodwill, are
reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to the future undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell. In 2006, no impairment loss has been identified. In
2007 and 2008, the Company recorded an impairment loss to cost of revenues in the amounts
of $153,000 and $44,000, respectively, in respect of core technology acquired in the
acquisition of Bizchord.
|
|
Goodwill
represents the excess of the cost over the fair value of the net assets of businesses
acquired. Under SFAS No. 142, goodwill is not amortized, but instead is tested for
impairment at least annually (or more frequently if impairment indicators arise).
|
|
Statement
of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets(SFAS
No. 142), prescribes a two-phase process for impairment testing of goodwill. The
first phase screens for impairment, while the second phase (if necessary) measures
impairment. In the first phase of impairment testing, goodwill attributable to each of
the reporting units is tested for impairment by comparing the fair value of each
reporting unit with its carrying value. The Company operates in two operating segments,
Incredimail and BizChord, and these segments comprise its reporting units. Goodwill is
allocated to the reporting unit of BizChord. If the carrying value of the reporting unit
exceeds its fair value, the second phase is then performed. The second phase of the
goodwill impairment test compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting units goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Fair value is determined
using discounted cash flows. Significant estimates used in the fair value methodologies
include estimates of future cash flows, future growth rates and the weighted average cost
of capital of the reporting unit. In 2007 and 2008, the Company recorded an impairment
loss in the amounts of $163,000 and $125,000 in respect of Bizchord reporting unit,
respectively.
|
|
The company derives revenues from: (i) advertising and other services and (ii) from product sales. Revenues from
advertising and other services include search related advertising, other advertising and collaboration arrangements.
Revenues from products include licensing the right to use its email software,
content database and email anti spam.
|
|
The
Company generates revenues from search related advertising, receiving a share of the
advertising revenues from companies providing search capabilities. In addition, the
Company offers advertisers the ability to place text-based ads on its website and banners
in its email clients. Advertisers are charged monthly based on the number of times a user
clicks on the ads. The Company recognizes revenues from direct and third party
advertisement at that time.
|
|
In
accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendors Product, the Company accounts for
cash consideration given to customers, for which it does not receive a separately
identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue
rather than as an expense.
|
F - 12
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Collaboration
arrangements have been established with companies that use the Companys brand name
Incredi for their website and to which the Company refers users. In
consideration of the brand and promotional activity that the Company provides, it is
entitled to a share of the gross revenues generated from the website or to a share of the
net license fees received by the Companys collaborator through its website.
Revenues from these collaboration arrangements are recognized when earned.
|
|
Revenues
from email software license sales are recognized when all criteria outlined in Statement
of Position (SOP) 97-2, Software Revenue Recognition (as
amended), are met. Revenues from software license are recognized when persuasive evidence
of an agreement exists, delivery of the product has occurred, the fee is fixed or
determinable, and collectability is probable. The Companys e-mail users may also
purchase a license to its content database. This content database provides additional
Incredimail content files in the form of email background, animation sounds, graphics and
e-mail notifiers. Licensing fees are recognized over the license period. Lifetime
licensing revenues are recognized over the estimated usage period of the content
database. In accordance with its policy, the Company reviews the estimated usage period
of the lifetime licensing on an ongoing basis.
|
|
Deferred
revenues include upfront payments received from customers, for which revenues have not
yet been recognized.
|
|
Revenues
from email anti-spam license fees are recognized ratably over the term of the license.
|
|
With
regard to arrangements involving multiple elements, the Company revenues should be
allocated to the different elements in the arrangement under the relative fair
value method when Vendor Specific Objective Evidence (VSOE) of fair
value exists for all elements in accordance with SOP No. 97-2. Under the relative fair
value method, the Company allocates revenue proportionally based on the fair value of its
delivered and undelivered elements. Any discount in the arrangement is allocated pro rata
to the different elements in the arrangements.
|
|
l.
|
Research
and development costs:
|
|
Research
and development costs incurred in the process of software production before establishment
of technological feasibility, are charged to expenses as incurred. Costs of the
production of a product master incurred subsequent to the establishment of technological
feasibility are capitalized according to the principles set forth in SFAS No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Based
on the Companys product development process, technological feasibility is
established upon completion of a working model.
|
|
Costs
incurred by the Company between completion of the working model and the point at which
the product is ready for general release, have been capitalized.
|
|
Capitalized
software development costs are amortized commencing with general product release, by the
greater of the amount computed using the: (i) ratio that current gross revenues from
sales of the software to the total of current and anticipated future gross revenues from
sales of that software, or (ii) the straight-line method over the estimated useful life
of the product. The Company assesses the recoverability of this intangible assets on an
annually basis by determining whether the amortization of the asset over its remaining
life can be recovered through undiscounted future operating cash flows from the specific
software product sold. Based on its analyses, management believes that no impairment of
capitalized software development cost exist as of December 31, 2008.
|
F - 13
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. This Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
|
|
On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement.
|
|
The
Company classifies interest as tax expenses. The Companys policy for interest
related to income tax exposures was not impacted as a result of the adoption of the
recognition and measurement provisions of FIN No. 48.
|
|
As
a result of the implementation of FIN No. 48, the Company recognized a $83 increase in
liability for unrecognized tax benefits, which was accounted for as an decrease to the
January 1, 2007 balance of retained earnings.
|
|
Advertising
costs are expensed as incurred. Advertising costs for the years ended December 31, 2006,
2007 and 2008 amounted to $218,000, $1,411,000 and $3,466,000, respectively.
|
|
The
Company assembles content for the use of its customers through purchases of a variety of
creative and diverse graphics, sound and multimedia from third party manufacturers and
through internal creation of such content. In 2006, the Company expensed content costs as
incurred. Effective January 1, 2007, the Company changed its accounting policy for
recognizing costs of database contents acquired from third parties. Under the new policy,
these costs are capitalized and amortized over their estimated useful life of three
years. The Company determined that this change in accounting principle is preferable in
the circumstances from the following reasons: (1) content database is acquired and added
to the Companys library, (2) being developed and subsequently billed by independent
third parties, the market value of this content is easily determined. This content is
being used by the Companys customers over several years and does not get depleted.
The customers cease using the content after several years when it becomes no longer
attractive or innovative. Prior periods have not been restated due to immateriality.
|
|
Content
costs for the year 2006 amounted to $198,000. Content costs in 2007 and 2008 amounted to
$568,000 and $779,000, respectively, of which $84,000 and $74,000 was capitalized and the
remaining expensed as incurred. Amortization of capitalized content costs in 2007 and
2008 amounted to $17,000 and $33,000, respectively.
|
F - 14
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
p.
|
Concentrations
of credit risk:
|
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, short term bank deposits, marketable securities
and trade receivables.
|
|
The
majority of the Companys cash and cash equivalents and short term bank deposits are
invested mainly in dollar instruments with major banks in Israel and the U.S.. Deposits
in the U.S. may be in excess of insured limits and are not insured in other
jurisdictions. Generally, these deposits may be redeemed upon demand and, therefore, bear
minimal risk.
|
|
The
Companys marketable securities consist of investment-grade corporate debentures and
government debentures. The Companys investment policy, approved by the Investment
Committee, limits the amount the Company may invest in any one type of investment or
issuer, thereby reducing credit risk concentrations.
|
|
The
Company is subject to a low amount of credit risk with respect to sales of the Companys
software products and content database, as these sales are primarily obtained through
credit card sales. The Companys major customer is financially sound, and the
Company believes low credit risk is associated with this customer. To date, the Company
has not experienced any material bad debt losses.
|
|
The
Companys liability for severance pay is calculated pursuant to Israeli Severance
Pay Law based on its employees most recent monthly salaries, multiplied by the
number of years of their employment, or a portion thereof, as of the balance sheet date.
This liability is fully provided for by monthly deposits in insurance policies and by an
accrual.
|
|
The
deposited funds include profits (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
Companys agreements with employees in Israel, joining the Company since February 2,
2008, are in accordance with section 14 of the Severance Pay Law -1963, whereas, the
Companys contributions for severance pay shall be instead of its severance
liability. Upon contribution of the full amount of the employees monthly salary,
and release of the policy to the employee, no additional calculations shall be conducted
between the parties regarding the matter of severance pay and no additional payments
shall be made by the Company to the employee. Further, the related obligation and amounts
deposits on behalf of such obligation are not stated on the balance sheet, as they are
legally released from obligation to employees once the deposit amounts have been paid.
|
|
Severance
expenses for the years ended December 31, 2006, 2007 and 2008 amounted to $405,000,
$499,000 and $715,000, respectively.
|
|
r.
|
Net
earnings (loss) per Ordinary share:
|
|
In
2006, the Company applied the two-class method as required by Emerging Issues Task Force (EITF)
No. 03-6, Participating Securities and the Two-Class Method under FASB Statement
No. 128, Earnings per Share (SFAS 128). EITF No. 03-6 requires the income per
share for each class of shares (Ordinary shares and Preferred shares) to be calculated
assuming 100% of the Companys earnings are distributed as dividends to each class
of shares based on their contractual rights. In 2007 and 2008, the Company had only one
class of shares.
|
F - 15
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Basic
net earnings (loss) per Ordinary shares are computed based on the weighted average number
of Ordinary shares outstanding during each year. Diluted net earnings (loss) per Ordinary
share are computed based on the weighted average number of Ordinary shares outstanding
during each year, plus dilutive potential Ordinary shares considered outstanding during
the year, in accordance with SFAS No. 128, Earnings per Share.
|
|
The
total weighted average number of Ordinary shares related to the outstanding options
excluded from the calculations of diluted net earnings per Ordinary share because these
securities are anti-dilutive was 539,609 and 1,205,834 for the years ended December 31,
2006 and 2008. Because of the loss in 2007, all options were excluded from the
calculation of diluted net loss per share.
|
|
s.
|
Accounting
for stock-based compensation:
|
|
The
Company accounts for stock-based compensation under SFAS No. 123(R), Share-Based
Payment (SFAS 123(R)) which requires the measurement and recognition of
compensation expense based on estimated fair values for all share-based payment awards
made to employees and directors.
|
|
SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated statements of operations.
|
|
The
Company recognizes compensation expenses for the value of its awards, which have graded
vesting based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures. Estimated forfeitures are based on actual
historical pre-vesting forfeitures.
|
|
The
Company estimates the fair value of stock options granted using the Binomial method
option-pricing model. The option-pricing model requires a number of assumptions, of which
the most significant are expected stock price volatility and the expected option term.
Expected volatility was calculated based upon an average between historical volatilities
of the Company, similar entities and industry sector index similar to the Companys
characteristics, since it does not have sufficient company specific data.
|
|
The
expected option term was calculated based on the Companys assumptions of early
exercise multiples which were calculated based on comparable companies and termination exit rate which was calculated based on actual historical
data. The expected option term represents the period that the Companys stock options are expected to
be outstanding. The risk-free interest rate is based on the yield from U.S. Treasury
zero-coupon bonds with an equivalent term. The fair value of the Companys stock
options granted to employees and directors was estimated using the following weighted
average assumptions:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
4.8%
|
4.1%
|
2.87%
|
|
Dividend yield
|
0%
|
0%
|
0%
|
|
Expected volatility
|
41%-71.9%
|
46.9%-59.8%
|
43.72%-74.43%
|
|
Weighted average volatility
|
56.3%
|
53.4%
|
59.07%
|
|
Expected term (years)
|
3.95
|
4.175
|
4.051
|
|
t.
|
Derivatives
instruments:
|
|
The
Company uses derivatives instruments to protect against foreign currency fluctuations.
These instruments were not designated as cash flow hedge as defined by SFAS No. 133 and
therefore the Company recognized the changes in fair value of these instruments to the
statements of operations as financial income or expense, as incurred.
|
F - 16
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
u.
|
Fair
value of financial instruments:
|
|
The
carrying amounts of financial instruments carried at cost, including cash and cash
equivalents, short term bank deposits, trade receivables and trade payables approximate
their fair value due to the short-term maturities of such instruments.
|
|
The
Company adopted the provisions of SFAS No. 157, Fair Value Measurements(SFAS
No. 157) and FSP No. SFAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, except as it applies
to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2 effective
January 1, 2008. Under this standard, fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (i.e., the exit price)
in an orderly transaction between market participants at the measurement date.
|
|
In
determining fair value, the Company uses various valuation approaches. SFAS No. 157
establishes a hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability developed based on market data
obtained from sources independent of the Company. Unobservable inputs are inputs that
reflect the Companys assumptions about the assumptions market participants would
use in pricing the asset or liability developed based on the best information available
in the circumstances. The hierarchy is broken down into three levels based on the
observability of inputs as follows:
|
|
|
Level
1 Valuations based on quoted prices in active markets for identical assets that the
Company has the ability to access. Valuation adjustments and block discounts are not
applied to Level 1 instruments. Since valuations are based on quoted prices that are
readily and regularly available in an active market, valuation of these products does not
entail a significant degree of judgment.
|
|
|
Level
2 Valuations based on one or more quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
|
|
|
Level
3 Valuations based on inputs that are unobservable and significant to the overall
fair value measurement.
|
|
The
availability of observable inputs can vary from investment to investment and is affected
by a wide variety of factors, including, for example, the type of investment, the
liquidity of markets and other characteristics particular to the transaction. To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment, and
categorizes as Level 3.
|
|
The
Companys marketable securities trade in markets that are not considered to be
active, but are valued based on quoted market prices, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price transparency, therefore are
categorized as Level 2.
|
|
The
following table presents assets measured at fair value on a recurring basis at December 31,
2008:
|
|
|
Fair value measurements using input type
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury notes
|
|
|
$
|
-
|
|
$
|
2,100
|
|
$
|
-
|
|
$
|
2,100
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
Corporate debentures
|
|
|
|
-
|
|
|
8,419
|
|
|
-
|
|
|
8,419
|
|
|
Government debentures
|
|
|
|
-
|
|
|
10,371
|
|
|
-
|
|
|
10,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financials Assets
|
|
|
$
|
-
|
|
$
|
20,890
|
|
$
|
-
|
|
$
|
20,890
|
|
|
|
|
|
|
|
|
|
|
|
F - 17
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
following table presents the changes in Level 3 instruments measured on a recurring basis
for the year ended December 31, 2008. The Companys Level 3 instrument consists
of an Auction Rate Security (see note 3(b)).
|
|
ARS issued
by Credit
Suisse
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
$
|
100
|
|
Sale of ARS, net
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
Balance, end of period
|
|
|
$
|
-
|
|
|
|
|
|
The
Company repurchases its Ordinary shares from time to time on the open market and holds
such shares as treasury shares. The Company presents the cost to repurchase treasury
shares as a reduction of shareholders equity.
|
|
w.
|
Recently
issued accounting pronouncements:
|
|
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP 157-2), to delay the effective date
of FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, excluding those that are recognized or disclosed in financial statements at
fair value on a recurring basis (that is, at least annually). For purposes of
applying the FSP 157-2, nonfinancial assets and nonfinancial liabilities include all
assets and liabilities other than those meeting the definition of a financial asset or a
financial liability in FASB Statement 159. FSP 157-2 defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of this FSP 157-2. The adoption of FAS 157 to nonfinancial assets and nonfinancial
liabilities under the scope of FSP 157-2 did not have a material impact on the Company's financial
position, results of operations or cash flows.
|
|
In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No. 133. This
statement changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a)
how and why and entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. This
statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Early application is encouraged. The
adoption of SFAS 161 did not have a material impact on the Company's financial position, results of operations or cash flows.
|
|
In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 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 SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The adoption of FSP 142-3 did not have a material
impact on the Companys financial position, results of operations or cash flows.
|
|
In
April 2009, the FASB issued FSP, No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, or the FSP. The FSP is intended
to provide greater clarity to investors about the credit and noncredit component
of an other-than-temporary impairment event and to more effectively communicate when
an other-than-temporary impairment event has occurred. The FSP applies to fixed
maturity securities only and requires separate display of losses related to
credit deterioration and losses related to other market factors. When an entity
does not intend to sell the security and it is more likely than not that an entity
will not have to sell the security before recovery of its cost basis, it must
recognize the credit component of an other-than-temporary impairment in
earnings and the remaining portion in other comprehensive income. upon adoption of
the FSP, an entity will be required to record a cumulative-effect adjustment as of
the beginning of the period of adoption to reclassify the noncredit component of a
previously recognized other-than-temporary impairment from retained earnings to
accumulated other comprehensive income. The FSP will be effective for us for the
quarter ending June 30, 2009. The Company is currently evaluating the impact of
adopting the FSP.
|
|
In
April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly, or FSP 157-4. FSP 157-4 provides
additional authoritative guidance to assist both issuers and users of financial
statements in determining whether a market is active or inactive, and whether a
transaction is distressed. The FSP will be effective for us for the quarter ending
June 30, 2009. The Company does not expect the adoption of FSP 157-4 to have a
material impact on our consolidated financial position and results of operations.
|
F - 18
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 3:
|
-
|
MARKETABLE SECURITIES AND LONG-TERM INVESMENT
|
|
a.
|
Marketable
securities:
|
|
The
Companys marketable securities are classified as available-for-sale securities and
are carried at fair value. The following table summarizes amortized costs, gross
unrealized holding gains and losses and market value of marketable securities as of
December 31, 2007 and 2008:
|
|
|
Amortized cost
|
Gross unrealized
gains
|
Gross unrealized
losses
|
Market value
|
|
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debentures
|
|
|
$
|
17,631
|
|
$
|
8,370
|
|
$
|
135
|
|
$
|
131
|
|
$
|
5
|
|
$
|
82
|
|
$
|
17,761
|
|
$
|
8,419
|
|
|
Government debentures
|
|
|
|
50
|
|
|
10,404
|
|
|
-
|
|
|
8
|
|
|
-
|
|
|
41
|
|
|
50
|
|
|
10,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,681
|
|
$
|
18,774
|
|
$
|
135
|
|
$
|
139
|
|
$
|
5
|
|
$
|
123
|
|
$
|
17,811
|
|
$
|
18,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company reviews various factors in determining whether it should recognize an impairment
charge for its marketable securities, including its intent and ability to hold the
investment for a period of time sufficient for any anticipated recovery in market value,
the length of time and extent to which the fair value has been less than its cost basis,
the credit ratings of the securities, the nature of underlying collateral, as applicable
and the financial condition and near-term prospects of the issuer. Based on the Companys
consideration of these factors, the amortized cost of marketable securities as of
December 31, 2007 and 2008 was reduced by $247,000 and $956,000, respectively, to reflect
other-than-temporary impairment that was recorded in 2007 and 2008 with respect to these
securities.
|
|
As
of December 31, 2008, all marketable securities with unrealized losses, are in a loss
position for less than 12 months.
|
|
The
following table summarizes the carrying amount of available-for-sale debt marketable
securities at December 31, 2008, segregated based on their scheduled maturities:
|
|
|
U.S. dollars in
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
$
|
10,206
|
|
|
Due after one year through five years
|
|
|
|
8,058
|
|
|
Due after ten years
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,790
|
|
|
|
|
|
|
At
December 31, 2007, the Company had $5,000,000 of principal invested in Auction Rate
Security (ARS). The ARS held by the Company is a private placement security
with long-term nominal maturities for which the interest rates are reset through an
auction each month. The monthly auctions historically have provided a liquid market for
these securities. Some of the underlying collateral for the ARS held by the Company
consists of sub-prime mortgages.
|
|
With
the liquidity issues experienced in global credit and capital markets, the ARS held by
the Company at December 31, 2007 had experienced multiple failed auctions as the
amount of securities submitted for sale has exceeded the amount of purchase orders. Based
on valuation models and an analysis of other-than-temporary impairment factors, the
Company has recorded a pre-tax impairment charge of $4,900,000 in the fourth quarter of
2007 in the financial expenses. The estimated market value of the Companys ARS
holdings at December 31, 2007 was $100,000, which is presented in other long-term
assets as of that date.
|
|
On
October 23, 2008 as a result of a general settlement arrangement with the issuer of the
ARS, the Company sold the ARS for its par value and recorded financial income in the
amount of approximately $4.8 million (net off legal expenses in the amount of $0.1
million).
|
F - 19
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 4:
|
-
|
PROPERTY AND EQUIPMENT, NET
|
|
|
December 31,
|
|
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
Computers and peripheral equipment
|
|
|
$
|
2,125
|
|
$
|
2,544
|
|
|
Office furniture and equipment
|
|
|
|
278
|
|
|
365
|
|
|
Leasehold improvements
|
|
|
|
631
|
|
|
516
|
|
|
Automobiles
|
|
|
|
41
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
3,075
|
|
|
3,463
|
|
|
Accumulated depreciation
|
|
|
|
1,267
|
|
|
1,985
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
|
$
|
1,808
|
|
$
|
1,478
|
|
|
|
|
|
|
|
|
Depreciation
expenses totaled $242,000, $402,000 and $970,000 for the years ended December 31, 2006,
2007 and 2008, respectively.
|
NOTE 5:
|
-
|
OTHER INTANGIBLE ASSETS, NET
|
|
Other intangible assets:
|
December 31,
|
|
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Original amounts:
|
|
|
|
|
|
|
|
|
|
Capitalized software development costs
|
|
|
$
|
76
|
|
$
|
76
|
|
|
Capitalized content costs
|
|
|
|
84
|
|
|
158
|
|
|
Core technology
|
|
|
|
115
|
|
|
71
|
|
|
Domain
|
|
|
|
-
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
340
|
|
|
Accumulated amortization
|
|
|
|
111
|
|
|
191
|
|
|
|
|
|
|
|
|
Other intangible assets, net
|
|
|
$
|
164
|
|
$
|
149
|
|
|
|
|
|
|
|
|
b.
|
Amortization
expense amounted to $3,000, $108,000 and $80,000 for the years ended December 31,
2006, 2007 and 2008, respectively.
|
|
c.
|
Estimated
amortization expense for the years ended December 31:
|
|
|
U.S. dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$
|
81
|
|
|
2010
|
|
|
|
51
|
|
|
2011
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
149
|
|
|
|
|
|
|
d.
|
For
impairment losses, see Note 2(i).
|
F - 20
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
The
changes in the carrying amount of goodwill for the years ended December 31, 2007 and 2008
were as follows:
|
|
|
December 31,
|
|
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Goodwill, beginning of the year
|
|
|
$
|
288
|
|
$
|
125
|
|
|
Goodwill impairment
|
|
|
|
(163
|
)
|
|
(125
|
)
|
|
|
|
|
|
|
|
Goodwill, end of year
|
|
|
$
|
125
|
|
$
|
-
|
|
|
|
|
|
|
|
NOTE 7:
|
-
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
December 31,
|
|
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Employees and payroll accruals
|
|
|
$
|
1,443
|
|
$
|
1,467
|
|
|
Government authorities
|
|
|
|
1,296
|
|
|
2,023
|
|
|
Accrued expenses
|
|
|
|
505
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,244
|
|
$
|
4,426
|
|
|
|
|
|
|
|
NOTE 8:
|
-
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
The
Company rents its facilities under an operating lease agreement with an initial term
expiring in 2011, with an option for additional two years.
|
|
Future
minimum lease commitments under non-cancelable operating leases for the years ended
December 31, are as follows:
|
|
|
U.S. dollars in
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$
|
456
|
|
|
2010
|
|
|
|
624
|
|
|
2011
|
|
|
|
624
|
|
|
|
|
|
|
|
|
|
$
|
1,704
|
|
|
|
|
|
|
Total
rent expenses for the years ended December 31, 2006, 2007 and 2008 amounted to $118,000,
$337,000 and $678,000 respectively.
|
|
The
Company leases its motor vehicles under cancelable operating lease agreements. The
minimum payment under these operating leases, upon cancellation of these lease agreements
amounted to $34,000 as of December 31, 2008. Total lease expenses for the years
ended December 31, 2006, 2007 and 2008 amounted to, $206,000, $373,000 and $556,000,
respectively.
|
|
On
November 3, 2008, a complaint was filed against the Company in the United States District
Court for the Southern District of New York in a purported class action regarding one of
the Companys products. The plaintiff, on behalf of himself and the purported
classes, seeks injunctive relief, an unspecified amount for damages, plus costs and
attorney fees for alleged claims that components of the Companys product were
rendered inoperable by a software update or updates. The Company believes that the
allegations have no merit and therefore no provision was recorded as of December 31, 2008.
|
F - 21
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
a.
|
Tax
benefits under the Israel Law for the Encouragement of Capital Investments,
1959 (the Law):
|
|
Two
programs of the Company have been granted Approved Enterprise status under
the Law. For these programs, the Company has elected alternative benefits, waiving grants
in return for tax exemptions. These benefits include a tax-exemption for a period of two
years and taxation at the reduced corporate tax rate of 25% for an additional period of
five to eight years thereafter. The benefit period commenced in 2003 and in 2005 for the
first and second programs, respectively.
|
|
The
period of tax benefits detailed above is subject to limits of the earlier of 12 years
from the commencement of production or 14 years from receiving the approval. The
entitlement to the above benefits is subject to fulfilling the conditions stipulated by
the Law, regulations published thereunder and instruments of approval for the specific
investments in Approved Enterprises. In the event of failure to comply with
these conditions, the benefits may be canceled and the Company may be required to refund
the amount of the benefits, in whole or in part, including interest. As of December 31,
2008, management believes that the Company meets all conditions of the approvals.
|
|
On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed the provisions of the Law. The Amendment limits the scope of
enterprises which may be approved by the Investment Center by setting criteria for the
approval of a facility as
a Privileged Enterprise (rather than the previous terminology of Approved
Enterprise), such as a provision requiring that at least 25% of the Privileged
Enterprise income will be derived from export. Additionally, the Amendment enacted
major changes in the manner in which tax benefits are awarded under the Law so that
companies are no longer required for Investment Center approval in order to qualify for
tax benefits. The period of tax benefits for a new Privileged Enterprisecommences
in the Year of Commencement. This year is the later of: (1) the year in which
taxable income is first generated by the Company, or (2) a year selected by the Company
for commencement, on the condition that the Company meets certain provisions provided by
the Law (Year of Election).
|
|
In
addition, the Law provides that terms and benefits included in any letter of approval
already granted will remain subject to the provisions of the law as they were on the date
of such approval. Therefore, the two existing Approved Enterprises will not be subject to
the provisions of the Amendment.
|
|
The
Company has one Privileged Enterprise plan. The period of benefits under the
Privileged Enterprise first program has commenced in 2008.
|
|
As
a result of the amendment, tax-exempt income generated under the provisions of the
amended law, will subject the Company to taxes upon dividend distribution or complete
liquidation.
|
|
As
of December 31, 2008, approximately $7,954,000 is tax-exempt attributable to its various
Approved Enterprise and Privileged Enterprise programs. If such tax exempt income is
distributed (other than in respect of the first two programs upon the complete
liquidation of the Company), it would be taxed at the reduced corporate tax rate
applicable to such profits (currently 25%) and an income tax liability of up to
approximately $1,989,000 would be incurred as of December 31, 2008. The Company does
not intend to distribute dividend out off tax exempt income incurred up to December 31,
2008, accordingly no deferred tax liability have been provided on income attributable to
the Companys Approved Enterprise and Privileged Enterprise programs. In March 2009,
the Company board of directors approved a cash dividend in the amount of $4.6 million
(see note 14). The amount of tax exempt income will not change as a result of this
dividend, since the distribution is from sources other than tax exempt income.
|
F - 22
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 9:
|
-
|
INCOME TAXES (Cont.)
|
|
Income
of the Company from sources other than the Approved Enterprise and Privileged Enterprise
during the period of benefits is taxable at the regular corporate tax rate.
|
|
b.
|
Corporate
tax rates in Israel:
|
|
Taxable
income of Israeli companies is subject to tax at the rate of 27% in 2008, 26% in 2009 and
25% in 2010 and thereafter.
|
|
c.
|
Deferred
tax assets, net:
|
|
Deferred
taxes reflect the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for tax
purposes. Components of the Companys deferred tax assets are as follows:
|
|
|
December 31,
|
|
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
|
$
|
138
|
|
$
|
304
|
|
|
Research and development expenses
|
|
|
|
181
|
|
|
157
|
|
|
Issuance costs
|
|
|
|
123
|
|
|
-
|
|
|
Other-than-temporary impairment on marketable
|
|
|
|
securities and ARS
|
|
|
|
1,287
|
|
|
301
|
|
|
Impairment of intangible assets and goodwill
|
|
|
|
36
|
|
|
83
|
|
|
Other
|
|
|
|
-
|
|
|
150
|
|
|
|
|
|
|
|
|
Deferred tax assets, before valuation allowance
|
|
|
|
1,765
|
|
|
995
|
|
|
Valuation allowance *)
|
|
|
|
(1,287
|
)
|
|
(301
|
)
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
478
|
|
|
694
|
|
|
Deferred tax liability
|
|
|
|
(18
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
460
|
|
$
|
690
|
|
|
|
|
|
|
|
|
*)
|
The
Company recorded a valuation allowance with respect to deferred tax assets
related to other-than-temporary impairment on marketable securities and ARS,
due to current uncertainty of whether the Company will produce sufficient gains
from marketable securities in the future, which are considered a source of
income required to offset losses from marketable securities under the Israeli
Tax Law.
|
|
All
deferred tax assets and liabilities are domestic.
|
F - 23
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 9:
|
-
|
INCOME TAXES (Cont.)
|
|
d.
|
A
reconciliation of the Companys effective tax rate to the statutory tax
rate in Israel is as follows:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
$
|
3,242
|
|
$
|
(1,369
|
)
|
$
|
4,714
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate in Israel
|
|
|
|
31
|
%
|
|
29
|
%
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical income tax expense
|
|
|
$
|
1,005
|
|
$
|
(397
|
)
|
$
|
1,273
|
|
|
Increase (decrease) in tax expenses resulting
|
|
|
|
from:
|
|
|
|
"Approved Enterprise" benefits
|
|
|
|
(409
|
)
|
|
(77
|
)
|
|
(536
|
)
|
|
Non-deductible expenses
|
|
|
|
234
|
|
|
358
|
|
|
374
|
|
|
Previous years taxes
|
|
|
|
(68
|
)
|
|
-
|
|
|
(234
|
)
|
|
Other-than-temporary impairment on
|
|
|
|
marketable securities and ARS
|
|
|
|
-
|
|
|
1,493
|
|
|
258
|
|
|
Gain on sale of ARS, previously impaired
|
|
|
|
-
|
|
|
-
|
|
|
(1,323
|
)
|
|
Other
|
|
|
|
3
|
|
|
16
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
|
$
|
765
|
|
$
|
1,393
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per Ordinary share - benefit
|
|
|
|
resulting from "Approved Enterprise" status:
|
|
|
|
Basic
|
|
|
$
|
0.05
|
|
$
|
(0.01
|
)
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.04
|
|
$
|
(0.01
|
)
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
e.
|
Income
taxes are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit (expense)
|
|
|
$
|
(70
|
)
|
$
|
106
|
|
$
|
(216
|
)
|
|
Current taxes
|
|
|
|
903
|
|
|
1,191
|
|
|
739
|
|
|
Previous years taxes
|
|
|
|
(68
|
)
|
|
88
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
765
|
|
$
|
1,393
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
f.
|
Uncertain
tax position:
|
|
A
reconciliation of the beginning and ending balances of the total amounts of unrecognized
tax benefits is as follows:
|
|
|
U.S. dollars in
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008
|
|
|
$
|
842
|
|
|
Increases in tax positions for current year*)
|
|
|
|
801
|
|
|
Reductions for prior year tax positions due to settlement
|
|
|
|
(286
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
$
|
1,357
|
|
|
|
|
|
|
*)
|
Includes
additions generated from changes in the Dollar/NIS exchange rate, adjustment to
the CPI and accrued interest in the total amount of $77,000.
|
F - 24
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 9:
|
-
|
INCOME TAXES (Cont.)
|
|
As
of December 31, 2008, the Company is subject to Israeli income tax examinations for the
tax years 2006 through 2008 and to U.S. Federal income tax examinations for the tax years
of 2006 through 2008.
|
|
g.
|
Income
(loss) before taxes on income is comprised as follows:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
$
|
3,222
|
|
$
|
(1,415
|
)
|
$
|
4,676
|
|
|
Foreign - U.S.A
|
|
|
|
20
|
|
|
46
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,242
|
|
$
|
(1,369
|
)
|
$
|
4,714
|
|
|
|
|
|
|
|
|
|
NOTE 10:
|
-
|
SHAREHOLDERS EQUITY
|
|
a.
|
Ordinary
share rights:
|
|
The
Ordinary shares entitle their holders to voting rights, the right to receive cash
dividend and the right to a share in excess assets upon liquidation of the Company.
|
|
b.
|
Shares
granted to non-employees:
|
|
In
August 2006, the Company granted 7,500 restricted Ordinary shares to non-employee in
respect of services granted to the Company. The shares vested on December 1, 2006.
|
|
In
February 2007, the Company granted 7,500 restricted Ordinary shares to non-employee in
respect of services granted to the Company. The shares vested on June 1, 2007.
|
|
The
Company accounted for the grant in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) No. 96-18, Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. Stock based compensation amounted to $60,000, $63,000 and $0 in the years
ended December 31, 2006, 2007 and 2008, respectively.
|
|
In
July 2008, the Companys Board of Directors authorized the repurchase of up to
$3,750,000 in the open market, subject to normal trading restrictions. During 2008, the
Company repurchased 300,564 of its Ordinary shares for a total consideration of $882,000
which were recorded as treasury shares, at cost as part of shareholders equity.
|
|
In
2003, the Company adopted a share option plan (the 2003 Option Plan). Under
the 2003 Option Plan, employees, officers and non-employees may be granted options to
acquire Ordinary shares. Pursuant to the 2003 Option Plan, the Company has reserved for
issuance a total of 2,368,000 Ordinary shares. As of December 31, 2008, 911,195 options
were still available for future grant under the 2003 Option Plan.
|
|
Options
granted under the 2003 Plan vested over three to four years from the grant date. The
options expire no later than five years from the date of grant.
|
|
The
Company recognizes compensation costs using the straight line attribution method, but not
less than the grant date fair value of the options vested at the balance-sheet date.
|
F - 25
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 10:
|
-
|
SHAREHOLDERS EQUITY (Cont.)
|
|
A
summary of the activity in the share options granted to employees and directors as of
December 31, 2008 and related information is as follows:
|
|
|
Number of
options
|
Weighted
average
exercise
price
|
Weighted average
remaining
contractual term
|
Aggregate
intrinsic
value
|
|
|
|
|
(Years)
|
U.S.
dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2008
|
|
|
|
1,109,320
|
|
$
|
4.93
|
*)
|
|
3.58
|
|
$
|
2,128
|
|
|
Granted
|
|
|
|
412,500
|
|
$
|
3.35
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(95,780
|
)
|
$
|
1.72
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
(122,000
|
)
|
$
|
4.92
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(12,000
|
)
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
|
1,292,040
|
|
$
|
4.08
|
|
|
3.28
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
|
529,340
|
|
$
|
4.41
|
|
|
2.40
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
After adjustment with respect to re-pricing, for further information see
below.
|
|
The
weighted-average grant-date fair value of options granted during the years 2006, 2007 and
2008 was $2.57, $2.46 and $1.32, respectively.
|
|
As
of December 31, 2008, the total compensation cost related to options granted to
employees, not yet recognized amounted to $1,157,000. The cost is expected to be
recognized over a weighted average period of 2.43 years.
|
|
Aggregate
intrinsic value of options exercised in 2006, 2007 and 2008 amounted to $39,000, $444,673
and $76,000, respectively.
|
|
In
February 2008, the Companys Board of Directors resolved to re-price 516,100 options
which were previously granted to the Companys employees to the fair market value as
of that date. The Company accounted for the re-pricing as a modification in accordance
with SFAS 123R and recorded an additional compensation expense, in the amount of $309,000
which will be recognized over the remaining vesting period or immediately for vested
options.
|
NOTE 11:
|
-
|
SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
a.
|
Goodwill
impairment and other charges:
|
|
In
2008, the Company terminated certain activities and decided to restrict the business of
its Bizchord subsidiary to exclusively processing the Companys transactions and to
cease investing in the subsidiarys pursuit of other business. As a result of these
actions, the Company reduced its work force and terminated certain contracts.
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
$
|
-
|
|
$
|
163
|
|
$
|
125
|
|
|
Severance and other employee related termination
|
|
|
|
benefit
|
|
|
|
-
|
|
|
-
|
|
|
528
|
|
|
Contract termination costs
|
|
|
|
-
|
|
|
-
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
163
|
|
$
|
1,153
|
|
|
|
|
|
|
|
|
|
F - 26
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 11:
|
-
|
SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS (Cont.)
|
|
b.
|
Financial
income (expenses), net:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Financial income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest from bank deposits and marketable securities
|
|
|
$
|
998
|
|
$
|
1,033
|
|
$
|
883
|
|
|
Gains from marketable securities, net
|
|
|
|
151
|
|
|
-
|
|
|
3,587
|
|
|
Exchange rate differences , net
|
|
|
|
-
|
|
|
39
|
|
|
3
|
|
|
Other
|
|
|
|
-
|
|
|
198
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,149
|
|
|
1,270
|
|
|
4,560
|
|
|
|
|
|
|
|
|
|
|
Financial expenses:
|
|
|
|
Losses from marketable securities and ARS, net
|
|
|
|
-
|
|
|
4,887
|
|
|
-
|
|
|
Exchange rate differences, net
|
|
|
|
68
|
|
|
-
|
|
|
-
|
|
|
Other
|
|
|
|
97
|
|
|
24
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
4,911
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
984
|
|
$
|
(3,641
|
)
|
$
|
4,494
|
|
|
|
|
|
|
|
|
|
|
c.
|
Net
earnings (loss) per Ordinary share:
|
|
Computation
of basic and diluted net earnings (loss) per share is as follows:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
U.S. dollars in thousands
(except share data)
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss) per share -
|
|
|
|
Net income - (loss) as reported
|
|
|
$
|
2,477
|
|
$
|
(2,762
|
)
|
$
|
4,425
|
|
|
Net income attributable to Preferred
|
|
|
|
shareholders
|
|
|
|
(45
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Ordinary
|
|
|
|
shareholders
|
|
|
$
|
2,432
|
|
$
|
(2,762
|
)
|
$
|
4,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Ordinary shares,
|
|
|
|
net of treasury stock
|
|
|
|
8,982,201
|
|
|
9,442,658
|
|
|
9,427,424
|
|
|
Effect of dilutive securities:
|
|
|
|
Add - stock options
|
|
|
|
164,192
|
|
|
-
|
|
|
89,053
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net earnings per share
|
|
|
|
- adjusted weighted average shares
|
|
|
|
9,146,393
|
|
|
9,442,658
|
|
|
9,516,477
|
|
|
|
|
|
|
|
|
|
F - 27
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 12:
|
-
|
MAJOR CUSTOMER DATA
|
|
Major
customer data as a percentage of total revenues:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
|
14
|
%
|
|
42
|
%
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
The
Company relies upon a major customer, a loss of whom could cause a material adverse
effect on the Companys results of operations and financial position. The major
customer has limited termination rights.
|
NOTE 13:
|
-
|
SEGMENT INFORMATION
|
|
a.
|
Reportable
segments information:
|
|
In
2007, following the acquisition of Bizchord, the Company determined that Bizchord is
considered a reportable segment and provided summarized financial information as set
forth below.
|
|
|
Year ended December 31, 2007
|
|
|
Incredimail
|
Bizchord
|
Intercompany
charges
|
Total
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
18,647
|
|
$
|
316
|
|
$
|
(288
|
)
|
$
|
18,675
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
$
|
17,307
|
|
$
|
(84
|
)
|
$
|
(288
|
)
|
$
|
16,935
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
$
|
14,020
|
|
$
|
931
|
|
$
|
(288
|
)
|
$
|
14,663
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$
|
3,287
|
|
$
|
(1,015
|
)
|
$
|
-
|
|
$
|
2,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
Incredimail
|
Bizchord
|
Intercompany
charges
|
Total
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
21,827
|
|
$
|
415
|
|
$
|
(336
|
)
|
$
|
21,906
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
$
|
20,230
|
|
$
|
217
|
|
$
|
(336
|
)
|
$
|
20,111
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
$
|
18,530
|
|
$
|
1,697
|
|
$
|
(336
|
)
|
$
|
19,891
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$
|
1,700
|
|
$
|
(1,480
|
)
|
$
|
-
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
F - 28
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 13:
|
-
|
SEGMENT INFORMATION (Cont.)
|
|
Total
revenues from external customers divided on the basis of the Companys product lines
are as follows:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Search related advertising
|
|
|
$
|
1,464
|
|
$
|
7,855
|
|
$
|
11,745
|
|
|
Advertising and Collaborations
|
|
|
|
1,602
|
|
|
1,714
|
|
|
924
|
|
|
Software license
|
|
|
|
3,494
|
|
|
3,128
|
|
|
3,609
|
|
|
Content database
|
|
|
|
2,463
|
|
|
2,526
|
|
|
1,745
|
|
|
Anti-Spam
|
|
|
|
1,828
|
|
|
3,424
|
|
|
3,804
|
|
|
Bizchord - clearing house services
|
|
|
|
-
|
|
|
28
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,851
|
|
$
|
18,675
|
|
$
|
21,906
|
|
|
|
|
|
|
|
|
|
|
The
following presents long-lived assets of December 31, 2007 and December 31, 2008:
|
|
|
December 31,
|
|
|
2007
|
2008
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Incredimail
|
|
|
$
|
1,798
|
|
$
|
1,519
|
|
|
Bizchord
|
|
|
|
299
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,097
|
|
$
|
1,627
|
|
|
|
|
|
|
|
NOTE 14:
|
-
|
SUBSEQUENT EVENT
|
|
In
March 2009, the Company instituted a dividend policy whereby at least 50% of the Companys
annual net income beginning with the net income for 2009 will be paid out as a dividend.
Declaring and issuing the dividend will be subject to the boards review of the
Companys financial conditions at the time.
|
|
In
March 2009 the Companys board of Directors approved a cash dividend of
approximately $4.6 million, or $0.50 per share, subject to Israeli court approval and a
tax pre-ruling from the Israeli Tax Authority as required by Israeli law.
|
F - 29
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on
its behalf.
|
|
IncrediMail Ltd.
By: /s/ Ofer Adler
Ofer Adler
Chief Executive Officer
|
Date: June 24, 2009
78
EXHIBIT INDEX
1.1
|
|
Memorandum
of Association of Registrant (1)
|
1.2
|
|
Certificate
of Change of Name of Registrant (translated from Hebrew) (1)
|
1.3
|
|
Amended
and Restated Articles of Association of Registrant, dated February 3, 2006 (2)
|
4.1
|
|
Google
AdSenseTM Online Standard Terms and Conditions (4)
|
4.2
|
|
OEM
Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant (1)
|
4.3
|
|
The
Registrant's 2003 Israeli Share Option Plan and the form of Option Agreement (1)
|
4.4
|
|
Google Services Agreement, dated July
1, 2008, by and between the Registrant and Google Ireland Ltd., a company organized under
the laws of Ireland.*
|
8
|
|
List
of all subsidiaries.
|
12.1
|
|
Certification
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive
officer of the Company
|
12.2
|
|
Certification
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial
officer of the Company
|
13.1
|
|
Certification
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United Stated Code
|
13.2
|
|
Certification
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United Stated Code
|
14
|
|
Consent
of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young Global, Independent
Auditors
|
(1)
|
Previously
filed with the SEC on October 25, 2005 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(2)
|
Previously
filed with the SEC on January 5, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(3)
|
Previously
filed with the SEC on January 26, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(4)
|
Previously
filed with the SEC on May 12, 2008 as an exhibit to our annual report on Form
20-F.
|
*
|
Confidential treatment has been requested with respect to certain portions of this exhibit
pursuant to 17.C.F.R. § 200.80(b)(4). Omitted portions were filed separately with the
SEC.
|
79
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