PART
I
ITEM
1.
Identity
of Directors, Senior Management and Advisors.
Not
applicable.
ITEM
2.
Offer
Statistics and Expected Timetables.
Not
applicable.
ITEM
3.
Key
Information.
A. Selected
Financial Data
The
following selected consolidated financial data as of December 31, 2004, 2005,
2006 and 2007 and for the years ended December 31, 2003, 2004, 2005 2006 and
2007 have been derived from our audited consolidated financial statements.
These
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States, or U.S. GAAP, and audited by Fahn
Kanne & Co., a member of Grant Thornton International. The selected
consolidated financial data set forth below should be read in conjunction with
and are qualified by reference to Item 5, "Operating and Financial Review and
Prospects" and the consolidated financial statements and notes thereto and
other
financial information included elsewhere in this Annual Report. Historical
results are not necessarily indicative of future results.
SUMMARY
OF CONSOLIDATED FINANCIAL DATA
YEAR
ENDED DECEMBER 31,
|
|
Audited
|
|
|
|
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
SUMMARY
OF STATEMENT OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
7,244
|
|
|
7,344
|
|
|
8,462
|
|
|
8,795
|
|
|
12,961
|
|
Cost
of Revenues
|
|
|
3,102
|
|
|
3,730
|
|
|
4,293
|
|
|
3,494
|
|
|
5,600
|
|
Inventory
write-off
|
|
|
—
|
|
|
—
|
|
|
287
|
|
|
—
|
|
|
—
|
|
Gross
Profit
|
|
|
4,142
|
|
|
3,614
|
|
|
3,882
|
|
|
5,301
|
|
|
7,361
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development
|
|
|
918
|
|
|
845
|
|
|
1,182
|
|
|
1,362
|
|
|
1,716
|
|
Selling
and Marketing
|
|
|
3,026
|
|
|
2,445
|
|
|
3,003
|
|
|
5,619
|
|
|
9,041
|
|
General
and Administrative
|
|
|
1,829
|
|
|
1,955
|
|
|
2,968
|
|
|
2,737
|
|
|
3,192
|
|
Restructuring
expenses
|
|
|
—
|
|
|
—
|
|
|
496
|
|
|
—
|
|
|
—
|
|
Litigation
settlement expenses
|
|
|
—
|
|
|
—
|
|
|
129
|
|
|
108
|
|
|
34
|
|
Total
Operating Expenses
|
|
|
5,773
|
|
|
5,245
|
|
|
7,778
|
|
|
9,826
|
|
|
13,983
|
|
Capital
gain from the sale of the E-ID Division
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,536
|
|
|
—
|
|
Operating
Income (Loss)
|
|
|
(1,631
|
)
|
|
(1,631
|
)
|
|
(3,896
|
)
|
|
6,011
|
|
|
(6,622
|
)
|
Financial
Income (Expenses), Net
|
|
|
(233
|
)
|
|
(214
|
)
|
|
(25
|
)
|
|
(204
|
)
|
|
(4,652
|
)
|
OTHER
INCOME (EXPENSES), NET
|
|
|
(83
|
)
|
|
(27
|
)
|
|
(30
|
)
|
|
(367
|
)
|
|
—
|
|
Income
Loss before Taxes on Income
|
|
|
(1,947
|
)
|
|
(1,872
|
)
|
|
(3,951
|
)
|
|
5,440
|
|
|
(11,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
in Earnings (Loss) of an Affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
and impairment, Net of taxes
|
|
|
(48
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Taxes
on income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
Net
Income (Loss) from continuing operations
|
|
|
(1,995
|
)
|
|
(1,872
|
)
|
|
(3,951
|
)
|
|
5,440
|
|
|
(11,311
|
)
|
Loss
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
(1,995
|
)
|
$
|
(1,872
|
)
|
$
|
(3,951
|
)
|
$
|
5,440
|
|
$
|
(11,311
|
)
|
PER
SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earning (loss) from continuing
operations
|
|
$
|
(0.92
|
)
|
$
|
(0.75
|
)
|
$
|
(1.25
|
)
|
$
|
1.37
|
|
$
|
(2.57
|
)
|
Diluted
earning (loss) from continuing operations
|
|
$
|
(0.92
|
)
|
$
|
(0.75
|
)
|
$
|
(1.25
|
)
|
$
|
1.31
|
|
$
|
(2.57
|
)
|
Basic
and Diluted loss from Discontinued
operations
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Basic
earning (loss) per share
|
|
$
|
(0.92
|
)
|
$
|
(0.75
|
)
|
$
|
(1.25
|
)
|
$
|
1.37
|
|
$
|
(2.57
|
)
|
Diluted
earning (loss) per share
|
|
$
|
(0.92
|
)
|
$
|
(0.75
|
)
|
$
|
(1.25
|
)
|
$
|
1.31
|
|
$
|
(2.57
|
)
|
SUMMARY
OF BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
1,729
|
|
|
2,894
|
|
|
2,294
|
|
|
2,444
|
|
|
2,114
|
|
Short
term deposit
|
|
|
697
|
|
|
353
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Marketable
debt securities
|
|
|
117
|
|
|
—
|
|
|
650
|
|
|
11,077
|
|
|
4,054
|
|
Trade
receivables (net of allowance for doubtful accounts of $
3,487 and $ 3,500
as of December 31, 2006 and 2007,
respectively)
|
|
|
1,808
|
|
|
1,463
|
|
|
1,053
|
|
|
2,625
|
|
|
2,463
|
|
Inventories
|
|
|
3,236
|
|
|
2,165
|
|
|
2,205
|
|
|
270
|
|
|
566
|
|
Total
Current Assets
|
|
|
9,881
|
|
|
9,254
|
|
|
8,023
|
|
|
17,992
|
|
|
14,769
|
|
TOTAL
ASSETS
|
|
|
12,685
|
|
|
13,938
|
|
|
12,276
|
|
|
23,098
|
|
|
20,952
|
|
Total
Current Liabilities
|
|
|
4,450
|
|
|
4,259
|
|
|
3,218
|
|
|
5,452
|
|
|
8,916
|
|
Accrued
Severance Pay
|
|
|
436
|
|
|
564
|
|
|
616
|
|
|
323
|
|
|
362
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
7,612
|
|
|
9,115
|
|
|
8,247
|
|
|
15,001
|
|
|
9,233
|
|
|
B.
|
Capitalization
and Indebtedness
|
Not
applicable.
|
C.
|
Reasons
for the Offer and Use of
Proceeds
|
Not
applicable.
You
should carefully consider the following risks together with the other
information in this Annual Report in evaluating our business, financial
condition and prospects. The risks and uncertainties described below are not
the
only ones that we face. Additional risks and uncertainties not presently known
to us or that we consider immaterial may also impair our business operations,
financial results and prospects. If any of the following risks actually occur,
our business, financial results and prospects could be harmed. In that case,
the
trading price of our ordinary shares could decline. You should also refer to
the
other information set forth in this Annual Report, including our financial
statements and related notes and the Section captioned “Note Regarding
Forward-Looking Statements”.
We
have a history of operating losses and negative cash flows and may not be
profitable in the future.
We
have
incurred substantial losses and negative cash flows since our inception. We
had
an operating cash flow deficit in each of 2004, 2005, 2006 and 2007. As of
December 31, 2007, we had an accumulated deficit of approximately $29,936,000.
We incurred net losses of approximately $3,951,000 and $11,311,000 in the years
ended December 31, 2005 and 2007, respectively. For the year ended December
31,
2006, we would have incurred a net loss of $5,096,000, but for the $10,536,000
capital
gain from the sale of the E-ID Division
.
We
expect to spend significant amounts of capital to enhance our products and
services, develop further sales and operations and fund expansion; and
therefore, we may continue to have net operating losses and negative cash flows
for the foreseeable future. As a result, we will need to generate significant
revenue to achieve profitability. Even if we do achieve profitability, we may
not be able to sustain or increase profitability on a quarterly or annual
basis.
Parts
of
our operating expense levels are based on internal forecasts for future demand
and not on firm customer orders for products or services. Our results may be
negatively affected by fluctuating demand for our products and services from
one
quarter to the next and by increases in the costs of components and raw
materials acquired from suppliers.
We
will face a need for additional capital and may need to curtail our operations
if it is not available.
We
have
partially funded our operations through the issuance of equity securities and
convertible bonds to investors and may not be able to generate a positive cash
flow from operations in the future. If we are unable to generate sufficient
cash
flow from operations, we will need to seek additional funds through the issuance
of additional equity or debt securities or other sources of financing. We may
not be able to secure such additional financing on favorable terms, or at all.
Any additional financings will likely cause substantial dilution to existing
stockholders. If we are unable to obtain necessary additional financing, we
may
be required to reduce the scope of, or cease, our operations. We believe that,
as of the
filing
date of
this Annual Report, our working capital (including current cash and cash
equivalents and marketable securities, in addition to revenues expected to
be
generated from our business operations) is sufficient for the Company’s present
requirements. However, we may need additional capital even to satisfy our
present requirements if we undertake large projects or have a delay in one
of
our anticipated projects. If we fail to raise such additional capital, we may
need to implement certain operational changes in order to decrease our
expenditure level. Our need for additional capital to finance our operations
and
growth will be greater should, among other things, our revenue or expense
estimates prove to be incorrect.
We
derive a substantial portion of our revenue from a small number of customers,
and the reduction of sales to any one of those customers could adversely impact
our operating results by causing a drop in revenues.
We
depend
on a limited number of customers for a substantial portion of our revenue.
In
the years 2005, 2006 and 2007, we derived 66%, 80% and 79%, respectively, of
our
consolidated net revenue from four individual customers. In the year ended
December 31, 2007, four of our customers accounted for 79% of our consolidated
net revenues as follows: the government of a European country, European
International Airport, China Travel Services (CHK) Ltd. and an African
governmental agency accounted for 50%, 17%, 8% and 4%, respectively, of our
consolidated net revenues. A substantial reduction in sales to, or loss of,
any
of our significant customers would adversely affect our business unless we
were
able to replace the revenue we received from those customers, which replacement
we may not be able to find. Specifically, changes that may negatively impact
the
political or economic stability and environment of the European country, from
which we derive 50% of our consolidated net revenues under a 10-year contract,
could adversely affect our business and future operations in such country.
As
a
result of this concentration of revenue from a limited number of customers,
our
revenue has experienced wide fluctuations, and we may continue to experience
wide fluctuations in the future. Part of our sales is not recurring sales,
therefore quarterly and annual sales levels could fluctuate. Sales in any period
may not be indicative of sales in future periods.
We
are relying on On Track Innovations Ltd. as a subcontractor in projects not
transferred as part of the sale of our E-ID Division.
On
December 31, 2006 we sold our E-ID Division to On Track Innovations Ltd.
(“OTI”), an Israeli public company (NASDAQ: OTIV). Simultaneously, we entered
into a service and supply agreement with OTI under which OTI agreed to act
as
our subcontractor and provide services, products and materials necessary to
carry out and complete our obligations with regard to certain projects that
were
not transferred to OTI (the”Existing Projects”) (see description of this
transaction under the caption “The OTI Transaction” in Item 4.A).
We
will
be dependent on OTI to adequately provide such services, products, and materials
in order for us to be in good standing under, and successfully complete, these
projects. If OTI fails to fulfill its obligations and provide such services
and
products as necessary for the Existing Projects, it could delay our receipt
of
revenues for these projects, subject us to certain remedies available to our
customers in the Existing Projects, and damage our business reputation, and
therefore could have a material adverse effect on our business, operating
results and financial condition.
Our
reliance on third party technologies, raw materials and components for the
development of some of our products and our reliance on third parties for
manufacturing may delay product launches, impair our ability to develop and
deliver products or hurt our ability to compete in the
market
.
Most
of
our products integrate third-party technology that we license and/or raw
materials and components that we purchase or otherwise obtain the right to
use,
including: operating systems, microchips, security and cryptography technology
for card operating systems, which prevents unauthorized parties from tampering
with our cards, and dual interface technology, which enables cards to operate
in
both contact and contactless mode. Our ability to purchase and license new
technologies and components from third parties is and will continue to be
critical to our ability to offer a complete line of products that meets customer
needs and technological requirements. We may not be able to renew our existing
licenses or to purchase components and raw materials on favorable terms, or
at
all. If we lose the rights to a patented technology, we may need to stop selling
or may need to redesign our products that incorporate that technology, and
we
may lose the potential competitive advantage such technology gave us. In
addition, competitors could obtain licenses for technologies for which we are
unable to obtain licenses, and third parties may develop or enable others to
develop a similar solution to security issues, either of which could adversely
affect our results of operations. Also, dependence on the patent protection
of
third parties may not afford us any control over the protection of the
technologies upon which we rely. If the patent protection of any of these third
parties were compromised, our ability to compete in the market could also be
impaired.
We
usually do not have minimum supply commitments from our vendors for our raw
materials or components and generally purchase raw materials
and
components on a purchase order basis. Although we generally use standard raw
materials and components for our systems, some of the key raw materials or
components are available only from a single source or from limited sources.
Many
of our various chips and toners are only available from limited sources. Even
where multiple sources are available, we typically obtain components and raw
materials from only one vendor to ensure high quality, prompt delivery and
low
cost. If one of our suppliers were unable to meet our supply demands and we
could not quickly replace the source of supply, it could have a material adverse
effect on our business, operating results and financial condition, for reasons
including a delay of receipt of revenues and damage to our business reputation.
Delays
in deliveries from our suppliers or defects in goods or components supplied
by
our vendors or delays in projects that are performed by our subcontractors
could
cause our revenues and gross margins to decline.
We
rely
on a limited number of vendors and subcontractors for certain components of
the
products we are supplying and projects we perform. In some cases, we rely on
a
single source vendor or subcontractor. Any undetected flaws in components or
other materials to be supplied by our vendors could lead to unanticipated costs
to repair or replace these parts or materials. Even though there are multiple
suppliers, we purchase some of our components from single suppliers to take
advantage of volume discounts, which presents a risk that the components may
not
be available in the future on commercially reasonable terms or at all. Although
we believe that there are additional suppliers for the equipment and supplies
that we require, we may not be able to make such alternative arrangements
promptly. If one of our suppliers were unable to meet our supply demands and
we
could not quickly replace the source of supply, it could cause a delay of
receipt of revenues and damage our business reputation. We depend on
subcontractors to adequately perform a substantial part of our projects. If
a
subcontractor fails to fulfill its obligations under a certain project, it
could
delay our receipt of revenues for such project and damage our business
reputation, and therefore could have a material adverse effect on our business,
operating results and financial condition.
We
suffered and may continue to suffer a loss on our investment in the OTI
Transaction due to a decrease in the price of OTI’s
shares.
As
of
December 31, 2007, our investment in OTI’s ordinary shares consisted of
$4,054,000 in marketable securities (current assets). We recognized a loss
realized in 2007 from the sale of OTI's shares in the amount of $1,116,000
and
a
decrease in value of marketable securities, n
et
in the
amount of $2,699,000. The shares were restricted and are subject to a lock-up
agreement, where one-seventh of the shares (403,885 ordinary shares) are
released from the lock-up restrictions every three months beginning on the
closing date, December 31, 2006 (see description of this transaction under
the
caption “The OTI Transaction” in Item 4.A). As of December 31, 2007,
two-sevenths of the OTI shares were still subject to the lock-up restriction.
OTI shares are traded on The NASDAQ Global Market.
Profitability of our investment in OTI’s ordinary shares will depend on the
share price and our ability to sell the OTI ordinary shares.
We
have entered into an agreement to acquire all of the issued and outstanding
stock capital of Security Holding Corporation. Certain unexpected outcomes
of
this acquisition are not yet known and there is still no assurance that the
business combination will result in all of the benefits which we
anticipated.
In
July
2007, we entered into an agreement to acquire all of the issued and outstanding
stock capital of Security Holding Corp. (“SHC”). The main reason behind the
acquisition of SHC
is
our
belief that the combined company would be better positioned to offer competitive
RFID security solutions to existing and prospective customers. It is not yet
clear whether all of the expected benefits of this business combination will
be
achieved. We believe that the following are among the factors that may affect
whether such benefits will indeed be achieved, and when such results will be
known:
|
·
|
our
ability to maintain and increase the sale of SHC
products;
|
|
·
|
our
ability to combine the operating activities of SHC’s subsidiaries with
those of our U.S. subsidiary, Vuance,
Inc.;
|
|
·
|
our
ability to sell our products to SHC’s existing customers;
and
|
|
·
|
our
ability to maintain key employees of
SHC;
|
SHC
had
substantial operation expenses; if we will not be able to increase revenues
of
the combined company, we will not be able to achieve profitability.
Prior
to
completion of the acquisition, we have conducted a due diligence review of
SHC;
however, we cannot guarantee that all contingent liabilities were brought to
our
knowledge. A material liability that had not been discovered in the due
diligence process might affect our business.
In
addition, this acquisition may result in the recording and later amortization
of
amounts related to goodwill and certain purchased intangible assets, or later
impairment charges arising out of the write-off of such goodwill and intangible
assets, which could negatively impact our business, financial condition and
results of operations and cause the price of our ordinary shares to
decline.
We
may pursue acquisitions or investments in complementary technologies and
businesses. We may be unsuccessful in integrating the acquired businesses and/or
assets of SHC and other complementary technologies and businesses the
acquisition of which we may pursue in the future, and such integrations could
divert our resources and adversely affect our financial results.
Before
the acquisition of SHC, we have not made any other acquisitions and our
management has not had significant experience making acquisition or integrating
acquired business. Integrating the newly acquired business or technologies
into
our business could divert our management’s attention from other business
concerns and could be expensive and time consuming. Acquisitions, such as our
recent agreement to acquire the issued and outstanding stock capital of SHC,
could expose our business to unforeseen liabilities or risks associated with
entering new markets. Consequently, we might not be successful in integrating
the acquired businesses, technologies or products into our existing business
and
products, and might not achieve anticipated revenue or cost benefits. In the
future, we may pursue acquisitions of, or investments in, additional
complementary technologies and businesses. We may be unable to identify suitable
acquisition candidates in the future or to make these acquisitions on a
commercially reasonable basis, or at all. Acquisitions present a number of
potential risks and challenges that could, if not met, disrupt our business
operations, increase our operating costs and reduce the value to us of the
acquired company. For example, if we identify an acquisition candidate, we
may
not be able to successfully negotiate or finance the acquisition on favorable
terms. In addition, future acquisitions could result in customer
dissatisfaction, performance problems with an acquired company, or require
us to
issue equity securities, incur debt, assume contingent liabilities or have
amortization expenses and write-downs of acquired assets, which could adversely
affect our profitability.
Our
dependence on third party distributors, sales agents, and value-added resellers
could result in marketing and distribution delays, which would prevent us from
generating sales revenues.
We
market
and sell some of our products using a network of distributors covering the
United States.
We
establish relationships with distributors and resellers through agreements
that
provide prices, discounts and other material terms and conditions under which
the reseller is eligible to purchase our systems and products for resale. These
agreements generally do not grant exclusivity to the distributors and resellers
and, as a general matter, are not long-term contracts, do not have commitments
for minimum sales and could be terminated by the distributor. We do not have
agreements with all of our distributors.
We are
currently engaged in discussions with other potential distributors, sales
agents, and value-added resellers. Such arrangements may never be finalized
and,
if finalized, such arrangements may not increase our revenues or enable us
to
achieve profitability.
Our
ability to terminate a distributor who is not performing satisfactorily may
be
limited. Inadequate performance by a distributor could adversely affect our
ability to develop markets in the regions for which the distributor is
responsible and could result in substantially greater expenditures by us in
order to develop such markets. Our operating results will be highly dependent
upon: (i) our ability to maintain our existing distributor arrangements; (ii)
our ability to establish and maintain coverage of major geographic areas and
establish access to customers and markets; and (iii) the ability of our
distributors, sales agents, and value-added resellers to successfully market
our
products. A failure to achieve these objectives could result in lower
revenues.
Third
parties could obtain access to our proprietary information or could
independently develop similar technologies.
Despite
the precautions we take, third parties may copy or obtain and use our
technologies, ideas, know-how and other proprietary information without
authorization or may independently develop technologies similar or superior
to
our technologies. In addition, the confidentiality and non-competition
agreements between us and most of our employees, distributors and clients may
not provide meaningful protection of our proprietary technologies or other
intellectual property in the event of unauthorized use or disclosure. If we
are
not able to defend successfully our industrial or intellectual property rights,
we might lose rights to technologies that we need to develop our business,
which
may cause us to lose potential revenues, or we might be required to pay
significant license fees for the use of such technologies. To date, we have
relied primarily on a combination of patent, trade secret and copyright laws,
as
well as nondisclosure and other contractual restrictions on copying, reverse
engineering and distribution to protect our proprietary technology. Our patent
portfolio currently consists of one issued U.S. patent, two U.S. patent
applications and two PCT applications. Generally, these patents and patent
applications cover inventions relating to our products.
Our
patent applications may not result in issued patents, and even if they result
in
issued patents, the patents may not have claims of the scope we seek. Even
in
the event that these patents are not issued, the applications may become
publicly available and proprietary information disclosed in the applications
will become available to others. In addition, any issued patents may be
challenged, invalidated or declared unenforceable. Our present and future
patents may provide only limited protection for our technology and may not
be
sufficient to provide competitive advantages to us. For example, competitors
could be successful in challenging any issued patents or, alternatively, could
develop similar or more advantageous technologies on their own or design around
our patents
.
Any
inability to protect intellectual property rights in our technology could enable
third parties to compete more effectively with us and/or could reduce our
ability to compete. In addition, these efforts to protect our intellectual
property rights could require us to incur substantial costs even when our
efforts are successful.
In
addition, the laws of certain foreign countries may not protect our intellectual
property rights to the same extent as do the laws of Israel or the United
States. Our means of protecting our intellectual property rights in Israel,
the
United States or any other country in which we operate may not be adequate
to
fully protect our intellectual property rights. For instance, the intellectual
property rights of our Asian subsidiary, SuperCom Asia Pacific Ltd., may not
be
fully protected by the laws of Hong Kong and the People’s Republic of China
(“PRC”). The PRC does not yet possess a comprehensive body of intellectual
property laws. As a result, the enforcement, interpretation and implementation
of existing laws, regulations or agreements may be sporadic, inconsistent and
subject to considerable discretion. The PRC’s judiciary has not had sufficient
opportunity to gain experience in enforcing laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. As the
legal system develops, entities such as ours may be adversely affected by new
laws, changes to existing laws (or interpretations thereof) and preemption
of
provincial or local laws by national laws. Even when adequate law exists in
the
PRC, it may not be possible to obtain speedy and equitable enforcement of the
law.
Third
parties may assert that we are infringing their intellectual property
rights
We
may
face intellectual property litigation, which could be costly, harm our
reputation, limit our ability to sell our products, force us to modify our
products or obtain
appropriate licenses
,
and
divert the attention of management and technical personnel
.
Our
products employ technology that may
infringe
on the proprietary rights of others, and, as a result, we could become liable
for significant damages and suffer other harm to our business. Other than the
ongoing litigation with Secu-Systems Ltd., as described in Item 8 below under
the caption “Legal Proceedings,” we have not been subject to intellectual
property litigation to date. On August 8, 2003, we received a letter stating
that we may be infringing certain patents of third parties with respect to
our
hot lamination process for plastic cards. We reviewed the claims made in the
letter and we do not believe that our products or technology infringe any third
party's patents as claimed in the letter. Since the initial letter, we received
another letter dated July 13, 2004 from the same party requesting that we
respond to their claim and stating that attractive licenses are available.
On
August 11, 2004, we responded to this letter and indicated
that we
were not infringing upon such parties’ patents. To date, no infringement claims
have been filed against us in connection with the foregoing letters. We believe
that hot lamination of plastic cards is a widely known process that is used
by
most card manufacturers. Even if it were determined that we are infringing
such
third party’s patents, we feel that we could use another process to laminate
plastic cards and our business would not be materially affected. On December
2,
2005, we received a letter stating that we may be infringing certain patents
of
third parties with respect to our Smart DSMS product for incident response
management. We reviewed the claims made in the letter and we do not believe
that
our products or technology infringe any third party's patents as claimed in
the
letter. On February 21, 2006, after thorough investigation which included legal
counseling, we responded to the letter while declining the claims in the letter.
Since the initial letter, we received another letter dated August 1, 2007 from
the same party stating that "at least on the surface" it appears that we are
infringing one of their patent based on a line written in our website. On
September 6, 2007, we responded to this letter and indicated that we were not
infringing upon such parties’ patents. To date, no infringement claims have been
filed against us in connection with the foregoing letters. We believe that
the
Smart DSMS product lacks key features recited in each of the claims mentioned
since the product does not perform steps of assigning and recording as recited
in the party's patent.
Litigation
may be necessary in the future to enforce any patents we may obtain and/or
any
other intellectual property rights, to protect our trade secrets, to determine
the validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity, and we may not prevail in any such future
litigation. Litigation, whether or not determined in our favor or settled,
could
be costly, could harm our reputation and could divert the efforts and attention
of our management and technical personnel from normal business operations.
In
addition, adverse determinations in litigation could result in the loss of
our
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties, prevent us from licensing our technology or selling
or manufacturing our products, or require us to expend significant resources
to
modify our products or attempt to develop non-infringing technology, any of
which could seriously harm our business.
Our
products may contain technology provided to us by third parties. Because we
did
not develop such technology ourselves, we may have little or no ability to
determine in advance whether such technology infringes the intellectual property
rights of any other party. Our suppliers and licensors may not be required
to
indemnify us in the event that a claim of infringement is asserted against
us,
or they may be required to indemnify us only with respect to intellectual
property infringement claims in certain jurisdictions, and/or only up to a
maximum amount, above which we would be responsible for any further costs or
damages. In addition, we have indemnification obligations to certain customers,
as well as to OTI with respect to any infringement of third-party patents and
intellectual property rights by our products. If litigation were to be filed
against these parties in connection with our technology, we will be required
to
defend and indemnify such customers.
A
security breach of our internal systems or those of our customers could harm
our
business by adversely affecting the market's perception of our products and
services, thereby causing our revenues to decline.
For
us to
further penetrate the marketplace, the marketplace must be confident that we
provide effective security protection for national and other secured
identification documents and cards. Although we have not experienced any act
of
sabotage or unauthorized access by a third party of our software or technology
to date, if an actual or perceived breach of security occurs in our internal
systems or those of our customers, regardless of whether we caused the breach,
it could adversely affect the market's perception of our products and services.
This could cause us to lose customers, resellers, alliance partners or other
business partners thereby causing our revenues to decline. If we or our
customers were to experience a breach of our internal systems, our business
could be severely harmed by adversely affecting the market's perception of
our
products and services.
We
may be exposed to significant liability for actual or perceived failure to
provide required products or services which could damage our reputation and
adversely affect our business by causing our revenues to decline and our costs
to rise.
Products
as complex as those we offer may contain undetected errors or may fail when
first introduced or when new versions are released. Despite our product testing
efforts and testing by current and potential customers, it is possible that
errors will be found in new products or enhancements after commencement of
commercial shipments. The occurrence of product defects or errors could result
in adverse publicity, delay in product introduction, diversion of resources
to
remedy defects, loss of or a delay in market acceptance, or claims by customers
against us, or could cause us to incur additional costs or lose revenues, any
of
which could adversely affect our business.
Because
our customers rely on our products for critical security applications, we may
be
exposed to claims for damages allegedly caused to a customer as a result of
an
actual or perceived failure of our products. An actual or perceived breach
of
security systems of one of our customers, regardless of whether the breach
is
attributable to our products or solutions, could adversely affect our business
reputation. Furthermore, our failure or inability to meet a customer's
expectations in the performance of our services, or to do so in the time frame
required by the customer, regardless of our responsibility for the failure,
could result in a claim for substantial damages against us by the customer,
discourage other customers from engaging us for these services, and damage
our
business reputation. We carry product liability insurance, but existing coverage
may not be adequate to cover potential claims.
We
carry
a combined products liability and professional liability insurance. We believe
that this insurance coverage is comparable to that of other similar companies
in
our industry. However, that insurance may not continue to be available to us
on
reasonable terms or in sufficient amounts to cover one or more large claims,
or
the insurer may disclaim coverage as to any future claim. We do not maintain
insurance coverage for theft by employees, nor do we maintain specific insurance
coverage for any interruptions in our business operations. The successful
assertion of one or more large claims against us that exceed available insurance
coverage, or changes in our insurance policies, including premium increases
or
the imposition of large deductibles or co-insurance requirements, could
adversely affect our business by significantly increasing our
costs.
Our
efforts to expand our international operations are subject to a number of risks,
any of which could adversely reduce our future international sales and increase
our losses.
Most
of
our revenues to date have been generated in jurisdictions other than the United
States. Our inability to obtain or maintain federal or foreign regulatory
approvals relating to the import or export of our products on a timely basis
could adversely affect our ability to expand our international business.
Additionally, our international operations could be subject to a number of
risks, any of which could adversely affect our future international sales and
operating results, including:
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increased
collection risks;
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export
duties and tariffs;
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uncertain
political, regulatory and economic
developments;
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inability
to protect our intellectual property rights;
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highly
aggressive competitors;
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lower
gross margins in commercial sales in Hong Kong and
China;
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business
development issues in Hong Kong and China, where business development
is
time consuming and risky due to the uncertain political, regulatory
and
legal environment;
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if
we do not generate additional sales from the expansion, our losses
may
increase; and
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In
addition, in many countries the national security organizations require our
employees to obtain clearance before such employees can work on a particular
transaction. Failure to receive, or delays in the receipt of, relevant foreign
qualifications could also have a material adverse effect on our ability to
obtain sales at all or on a timely basis. Additionally, as foreign government
regulators have become increasingly stringent, we may be subject to more
rigorous regulation by governmental authorities in the future. If we fail to
adequately address any of these regulations, our business will be
harmed.
We
have sought in the past and may seek in the future to enter into contracts
with
the U.S. government as well as state and local governmental agencies and
municipalities, which subjects us to certain risks associated with such types
of
contracts.
Most
contracts with the U.S. government or state or local agencies or municipalities
(“Governmental Contracts”) are awarded through a competitive bidding process,
and some of the business that we expect to seek in the future will likely be
subject to a competitive bidding process. Competitive bidding presents a number
of risks, including:
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the
frequent need to compete against companies or teams of companies
with more
financial and marketing resources and more experience than we have
in
bidding on and performing major
contracts;
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the
need to compete against companies or teams of companies that may
be
long-term, entrenched incumbents for a particular contract we are
competing for and which have, as a result, greater domain expertise
and
established customer relations;
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the
substantial cost and managerial time and effort necessary to prepare
bids
and proposals for contracts that may not be awarded to
us;
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the
need to accurately estimate the resources and cost structure that
will be
required to service any fixed-price contract that we are
awarded;
and
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the
expense and delay that may arise if our competitors protest or challenge
new contract awards made to us pursuant to competitive bidding or
subsequent contract modifications, and the risk that any of these
protests
or challenges could result in the resubmission of bids on modified
specifications, or in termination, reduction or modification of the
awarded contract.
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We
may
not be afforded the opportunity in the future to bid on contracts that are
held
by other companies, and are scheduled to expire, if the U.S. government or
the
applicable state or local agency or municipality determines to extend the
existing contract. If we are unable to win particular contracts that are awarded
through the competitive bidding process, we may not be able to operate in the
market for the products and services that are provided under those contracts
for
a number of years. If we are unable to win new contract awards or retain those
contracts, if any, that we are awarded over any extended period, our business,
prospects, financial condition and results of operations will be adversely
affected.
In
addition, Governmental Contracts subject us to risks associated with public
budgetary restrictions and uncertainties, actual contracts that are less than
awarded contract amounts, and cancellation at any time at the option of the
governmental agency. Any failure to comply with the terms of any Governmental
Contracts could result in substantial civil and criminal fines and penalties,
as
well as suspension from future contracts for a significant period of time,
any
of which could adversely affect our business by requiring us to pay significant
fines and penalties or prevent us from earning revenues from Governmental
Contracts during the suspension period. Cancellation of any one of our major
Governmental Contracts could have a material adverse effect on our financial
condition.
The
U.S.
government may be in a position to obtain greater rights with respect to our
intellectual property than we would grant to other entities. Governmental
agencies also have the power, based on financial difficulties or investigations
of their contractors, to deem contractors unsuitable for new contract awards.
Because we will engage in the government contracting business, we will be
subject to audits, and may be subject to investigation, by governmental
entities. Failure to comply with the terms of any Governmental Contracts could
result in substantial civil and criminal fines and penalties, as well as
suspension from future contracts for a significant period of time, any of which
could adversely affect our business by requiring us to pay the fines and
penalties and prohibiting us from earning revenues from Governmental Contracts
during the suspension period.
Furthermore,
governmental programs can experience delays or cancellation of funding, which
can be unpredictable. For example, the U.S. military’s involvement in Iraq has
caused the diversion of some Department of Defense funding away from certain
projects in which we participate, thereby delaying orders under certain of
our
governmental contracts. This makes it difficult to forecast our revenues on
a
quarter-by-quarter basis.
The
markets that we target for a substantial part of our future growth are in very
early stages of development, and if they do not develop our business might
not
grow as much or as profitably as we hope.
Many
of
the markets that we target for our future growth are small or non-existent
and
need to develop if we are to achieve our growth objectives. If some or all
of
these markets do not develop, or if they develop more slowly than we anticipate,
then we will not grow as quickly or as profitably as we hope. In February 2006,
we announced the introduction of a new technology and solution for actively
tracking people, objects and assets, Active RFID Tracking Systems (PureRF).
This
new technology, which expanded our homeland security offerings, was developed
in
response to growing market demand for asset tracking solutions in the homeland
security and commercial markets. While the incident management and homeland
security benefits provided by PureRF, are relatively obvious we have also
identified other market opportunities in the public and private sectors of
the
economy.
Our
Credentialing suite has not been widely adopted by state and local governments,
largely due to the dependency on federal grants, the cost of the necessary
infrastructure and the relatively limited capabilities of previous solutions.
We
are investing in credentialing, identification, active RFID and security
networks products and services, but so far we have not deployed our systems
on a
widespread basis, other than to meet a growing demand from our existing customer
base.
In
2007,
our revenues from the government market totaled approximately $10,904,000
compared to $2,057,000 from the commercial market. Although we believe the
government market is critical to our success in the short term, we believe
that
both the government and commercial markets will be critical to our long-term
success.
The
development of these markets will depend on many factors that are beyond our
control, including the
following
factors (and
other
factors discussed
elsewhere
in the
Risk Factors): (i) there can be no assurances that we will be able to continue
to apply our expertise and solutions developed for the government market to
the
commercial market; (ii) the ability of public safety and other government
agencies to access U.S. Department of Homeland Security and other homeland
security-related grants for incident management and related purposes; (iii)
the
ability of the commercial markets to adopt and implement the active RFID
solutions; and (iv) the ability of our management to successfully market our
technologies to such government and/or commercial entities.
The
success of our new business lines, comprising of the active RFID, CSMS and
RAPTOR products, is dependent on several factors.
The
success of
our
active RFID, CSMS and RAPTOR products is dependent on several factors, including
proper new product definitions, product costs, timely completion and
introduction of the new products,
differentiation
of the new products from those of our competitors, and market acceptance of
these products, as well as our existing and potential customers’ varying budgets
for capital expenditures and new product introduction. We have addressed the
need to develop
new
products through our internal development efforts and joint development efforts
with other companies. In light of the OTI Transaction, the active RFID, CSMS
and
RAPTOR product lines will be our main revenue growth generators in the future.
There can be no assurance that we will successfully identify new product
opportunities and/or develop and bring
new
products to market in a timely manner, or that the products and technologies
developed by others will not render our products or technologies obsolete or
noncompetitive. The failure of
our
new
product development efforts could have a material adverse effect on our
business, results of operations and future growth.
If
our technology and solutions ceases to be adopted and used by government and
commercial organizations, we may lose some of our existing customers and
increase our losses.
Our
ability to grow depends significantly on whether governmental and commercial
organizations adopt our technology and solutions as part of their new standards
and whether we will be able to leverage our expertise with government products
into commercial products
.
If
these organizations do not adopt our technology, we might not be able to
penetrate some of the new markets we are targeting, or we might lose some of
our
existing customer base. There also can be no assurances that we will be able
to
continue to apply our expertise and solutions developed for the public sector
to
the commercial market.
In
order
for us to achieve our growth objectives, our RFID and Credentialing technologies
must be adapted to and adopted in a variety of areas, including:
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public
safety and emergency;
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patient
and critical equipment tracking in the health care sector;
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monitoring
and control of evidence in a crime scene
environment;
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transportation
applications using active RFID as method of monitoring and control;
and
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access
control in such fields as education and health
care.
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Any
or
all of these areas may not adopt our RFID and Credentialing technologies.
We
cannot
accurately predict the future growth rate, if any, or the ultimate size of
the
RFID and credentialing technology markets. The expansion of the market for
our
products and services depends on a number of factors such as:
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the
cost, performance and reliability of our products and services compared
to
the products and services of our
competitors;
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customer
perception of the benefits of our RFID based
solutions;
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public
perception of the intrusiveness of these solutions and the manner
in which
organizations use the information
collected;
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public
perception of the confidentiality of private
information;
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customer
satisfaction with our products and services;
and
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marketing
efforts and publicity for our products and
services.
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Even
if
RFID and Credentialing solutions gain wide market acceptance, our products
and
services may not adequately address market requirements and may not gain wide
market acceptance. If our solutions or our products and services do not gain
wide market acceptance, our business and our financial results will
suffer.
We
need to develop our position as a provider of RFID and Credentialing systems
and
services to earn high margins from our technology, and if we are unable to
develop such position, our business will not be as profitable as we hope, if
at
all.
The
increasing sophistication of our RFID and Credentialing technologies places
a
premium on providing innovative software systems and services to customers,
in
addition to manufacturing and supplying RFID and Credentialing technologies.
While we have had some early success positioning ourselves as a provider of
such
services and systems, we may not continue to be successful with this strategy
and we may not be able to capture a significant share of the market for the
sophisticated services and systems that we believe are likely to produce
attractive margins in the future. A significant portion of the value of our
RFID
and Credentialing technologies lies in the development of software and
applications that will permit the use of RFID and Credentialing technologies
in
new markets. In contrast, the margins involved in manufacturing and selling
RFID
and Credentialing technologies can be relatively small, and may not be
sufficient to permit us to earn an attractive return on our development
investments.
The
time from our initial contact with a customer to a sale may be long and subject
to delays, which could result in the postponement of our receipt of revenues
from one accounting period to the next, increasing the variability of our
results of operations and causing significant fluctuations in our revenue from
quarter to quarter.
The
period between our initial contact with a potential customer and the purchase
of
our products and services is often long and subject to delays associated with
the budgeting, approval and competitive evaluation processes that frequently
accompany significant capital expenditures, particularly by governmental
agencies. The typical sales cycle for our government customers has, to date,
ranged from three to 24 months and the typical sales cycle for our commercial
customers has ranged from one to six months. A lengthy sales cycle may have
an
impact on the timing of our revenue, which may cause our quarterly operating
results to fall below investor expectations. We believe that a customer's
decision to purchase our products and services is discretionary, involves a
significant commitment of resources, and is influenced by customer budgetary
cycles. To successfully sell our products and services, we generally must
educate our potential customers regarding their use and benefits, which can
require significant time and resources. This significant expenditure of time
and
resources may not result in actual sales of our products and
services.
Due
to the nature of our business, our financial and operating results could
fluctuate
Our
financial and operating results have fluctuated in the past and could fluctuate
in the future from quarter to quarter and from year to year for the following
reasons:
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long
customer sales cycles;
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reduced
demand for our products and
services;
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new
competitors, or the introduction of enhanced products or services
from new
or existing competitors;
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changes
in the mix of products and services we or our customers and distributors
sell;
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contract
cancellations, delays or amendments by
customers;
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the
lack of government demand for our products and services or the lack
of
government funds appropriated to purchasing our products and
services;
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unforeseen
legal expenses, including litigation
costs;
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expenses
related to acquisitions;
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fluctuations
in OTI's share price;
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other
non-recurring financial charges;
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the
lack of availability, or increased cost, of key components and
subassemblies; and
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the
inability to successfully manufacture in volume, and reduce the price
of,
certain of our products.
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The
lead-time for ordering parts for and manufacturing our products can be
significantly long and therefore based on forecasted demands rather than actual
orders received.
The
lead-time for ordering parts and materials and building many of our products
can
be many months. As a result, we must order parts and materials and build our
products based on forecasted demand. If demand for our products lags
significantly behind our forecasts, we may produce more products than we can
sell, which can result in cash flow problems and write-offs or write-downs
of
obsolete inventory.
Our
markets are highly competitive and competition could harm our ability to sell
products and services and could reduce our market share.
The
market for RFID enabled products and Credentialing is intensely competitive.
We
expect competition to increase as the industry grows and as RFID and
Credentialing technology begins to converge with the access control and
information technology industry. We may not be able to compete successfully
against current or future competitors. We face competition from technologically
sophisticated companies, many of which have substantially greater technical,
financial, and marketing resources than we do. In some cases, we compete with
entities that have pre-existing relationships with potential customers. As
the
active RFID enabled solutions market expands, we expect additional competitors
to enter the market.
Some
of
our competitors and potential competitors have larger technical staffs, larger
customer bases, more established distribution channels, greater brand
recognition and greater financial, marketing and other resources than we do.
Our
competitors may be able to develop products and services that are superior
to
our products and services, that achieve greater customer acceptance or that
have
significantly improved functionality as compared to our existing and future
products and services. In addition, our competitors may be able to negotiate
strategic relationships on more favorable terms than we are able to negotiate.
Many of our competitors may also have well established relationships with our
existing and prospective customers. Increased competition may result in our
experiencing reduced margins, loss of sales or decreased market
share.
We
rely on the services of certain executive officers and key personnel, the loss
of which could adversely affect our operations by causing a disruption to our
business.
Our
future success depends largely on the efforts and abilities of our executive
officers and senior management and other key employees, including technical
and
sales personnel. The loss of the services of any of these persons could disrupt
our business until replacements, if available, can be found. We do not maintain
any key-person insurance for any of our employees.
Our
ability to remain competitive depends in part on attracting, hiring and
retaining qualified technical personnel and, if we are not successful in such
hiring and retention, our business could be disrupted.
Our
future success depends in part on the availability of qualified technical
personnel, including personnel trained in software and hardware applications
within specialized fields. As a result, we may not be able to successfully
attract or retain skilled technical employees, which may impede our ability
to
develop, install, implement and otherwise service our software and hardware
systems and to efficiently conduct our operations.
The
information technology and network security industries are characterized by
a
high level of employee mobility and the market for technical personnel remains
extremely competitive in certain regions, including Israel. This competition
means that (i) there are fewer highly qualified employees available for hire,
(ii) the costs of hiring and retaining such personnel are high, and (iii) highly
qualified employees may not remain with us once hired. Furthermore, there may
be
pressure to provide technical employees with stock options and other equity
interests in us, which may dilute our shareholders and increase our
expenses.
The
additions of new personnel and the departure of existing personnel, particularly
in key positions, can be disruptive, might lead to additional departures of
existing personnel and could have a material adverse effect on our business,
operating results and financial condition.
Our
planned growth will place significant strain on our financial and managerial
resources and may negatively affect our results of operations and ability to
grow more.
Our
ability to manage our growth effectively will require us:
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to
continue to improve our operations, financial and management controls,
reporting systems and procedures;
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to
train, motivate and manage our employees;
and
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as
required, to install new management information
systems.
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Our
existing management and any new members of management may not be able to augment
or improve existing systems and controls, or implement new systems and controls,
in response to anticipated future growth. If we are successful in achieving
our
growth plans, such growth is likely to place a significant burden on the
operating and financial systems, resulting in increased responsibility for
our
senior management and other personnel.
Some
of our products are subject to government regulation of radio frequency
technology which could cause a delay or inability to introduce such products
in
the United States and other markets.
The
rules
and regulations of the United States Federal Communications Commission (the
"FCC") limit the radio frequency used by and level of power emitting from
electronic equipment. Our readers, controllers and other radio frequency
technology scanning equipment are required to comply with these FCC rules which
may require certification, verification or registration of the equipment with
the FCC. Certification and verification of new equipment requires testing to
ensure the equipment's compliance with the FCC's rules. The equipment must
be
labeled according to the FCC's rules to show compliance with these rules.
Testing, processing of the FCC's equipment certificate or FCC registration
and
labeling may increase development and production costs and could delay
introduction of our verification scanning device and next generation radio
frequency technology scanning equipment into the U.S. market. Electronic
equipment permitted or authorized to be used by us through FCC certification
or
verification procedures must not cause harmful interference to licensed FCC
users, and may be subject to radio frequency interference from licensed FCC
users. Selling, leasing or importing non-compliant equipment is considered
a
violation of FCC rules and federal law, and violators may be subject to an
enforcement action by the FCC. Any failure to comply with the applicable rules
and regulations of the FCC could have a material adverse effect on our business,
operating results and financial condition by increasing our compliance costs
and/or limiting our sales in the United States.
Conditions
in Israel affect our operations in Israel and may limit our ability to sell
our
products and services.
We
are
incorporated under Israeli law and we also facilitate offices located in Israel.
Political, economic and military conditions in Israel may directly affect our
operations and business. Since the establishment of the State of Israel in
1948,
a number of armed conflicts have taken place between Israel and its Arab
neighbors and a state of hostility, varying from time to time in degree and
intensity, has led to security and economic problems for Israel.
Although
Israel has entered into various agreements with its Arab neighbors
and the
Palestinian Authority, there has been an increase in unrest and terrorist
activity in Israel, in varying levels of severity, since September 2000. The
election in early 2006 of representatives of Hamas, an Islamic resistance
movement, to a majority of seats in the Palestinian Legislative Council and
the
resulting tension among the different Palestinian functions has created
additional unrest and uncertainty. Furthermore, several countries still restrict
trade with Israeli companies and additional countries may impose such
restrictions as a result of changes in the military and/or political conditions
in Israel, which may limit our ability to make sales in, or purchase components
from, those countries. Any future armed conflict, such as the armed conflict
that occurred during July and August 2006 between Israel and Hezbollah, a
Lebanese Islamist Shiite militia group and political party, which involved
rocket attacks on populated areas in Northern Israel, or political instability,
continued violence in the region or restrictions could have a material adverse
effect on our business, operating results and financial condition. No
predictions can be made as to whether or when a final resolution of the area’s
problems will be achieved or the nature thereof and to what extent the situation
will impact Israel’s economic development or our operations.
Our
operations could be disrupted as a result of the obligation of management or
key
personnel to perform military service in Israel.
Generally,
all nonexempt male adult citizens and permanent residents of Israel under the
age of 40, or older for reserves officers or citizens with certain occupations,
are obligated to perform annual military reserve duty and are subject to being
called for active duty at any time under emergency circumstances. Generally,
between five and ten, representing approximately 8% to 17%, of our officers
and
employees are at any one time obligated to perform annual reserve duty. We
believe that a maximum of approximately 6% of our employees at any one time
could be called for active duty under emergency circumstances. While we have
operated effectively under these requirements since our incorporation, we cannot
predict the full impact of such conditions on us in the future, particularly
if
emergency circumstances occur. If many of our employees are called for active
duty, our operations in Israel and our business, operating results and financial
condition may be adversely affected.
Your
rights and responsibilities as a shareholder will be 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 and Articles
of Association, and by Israeli law. These rights and responsibilities differ
in
some respects from the rights and responsibilities of shareholders in typical
U.S. corporations. In particular, a shareholder of an Israeli company has a
duty
to act in good faith and customary manner, and to refrain from misusing his
power in exercising his or her rights and fulfilling his or her obligations
toward the company and other shareholders and to refrain from abusing his power
in the company, including, among other things, when voting at the general
meeting of shareholders on certain matters. Israeli law provides that these
duties are applicable to shareholder votes on, among other things, amendments
to
a company’s articles of association, increases in a company’s authorized share
capital and mergers and interested party transactions requiring shareholder
approval. A shareholder also has a general duty to refrain from oppressing
any
other shareholder of his or her rights as a shareholder. In addition, a
controlling shareholder of an Israeli company or a shareholder who knows that
it
possesses the power to determine the outcome of a shareholder vote or who,
under
our Articles of Association, has the power to appoint or prevent the appointment
of a director or executive officer in the company, has a duty of fairness toward
the company. Israeli law does not define the substance of this duty of fairness,
but provides that remedies generally available upon a breach of contract will
apply also in the event of a breach of the duty to act with fairness. Because
Israeli corporate law has undergone extensive revision in recent years, there
is
little case law available to assist in understanding the implications of these
provisions that govern shareholder behavior.
Provisions
of Israeli law may delay, prevent or otherwise encumber a merger with or an
acquisition of our company, which could prevent a change of
control
,
even when the terms of such transaction are favorable to us and our
shareholders.
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. For example, a
merger may not be completed unless at least 50 days have passed from the
date that a merger proposal was filed by each merging company with the Israel
Registrar of Companies and at least 30 days from the date that the
shareholders of both merging companies approved the merger. In addition, a
majority of each class of securities of the target company is required to
approve a merger. Furthermore, Israeli tax considerations may make potential
transactions unappealing to us or to some of our shareholders whose country
of
residence does not have a tax treaty with Israel exempting such shareholders
from Israeli tax. For example, Israeli tax law does not recognize tax-free
share
exchanges to the same extent as U.S. tax law. With respect to mergers,
Israeli tax law allows for tax deferral in certain circumstances but makes
the
deferral contingent on the fulfillment of numerous conditions, including a
holding period of two years from the date of the transaction during which time
sales and dispositions of shares of the participating companies are restricted.
Moreover, with respect to certain share swap transactions, the tax deferral
is
limited in time, and when the time expires, tax then becomes payable even if
no
actual disposition of the shares has occurred. These provisions of Israeli
law
could delay, prevent or impede a merger with or an acquisition of our company,
which could prevent a change of control, even when the terms of such transaction
are favorable to us and our shareholders and therefore potentially depress
the
price of our shares.
Our
shareholders may face difficulties in the enforcement of civil liabilities
against Vuance Ltd. and its officers and directors.
Certain
of our officers and directors and our professional advisors are residents of
Israel or otherwise reside outside of the U.S.. Vuance Ltd. is incorporated
under Israeli law and its principal office and facilities are located in Israel.
All or a substantial portion of the assets of such persons are or may be located
outside of the U.S.. It may be difficult to effect service of process within
the
U.S. upon us or upon any such officers and directors or professional advisors
or
to realize in the U.S. upon judgments of U.S. courts predicated upon the civil
liability of Vuance Ltd. or such persons under U.S. federal securities laws.
We
have been advised by our Israeli counsel that there is doubt as to whether
Israeli courts would (i) enforce judgments of U.S. courts obtained against
Vuance Ltd. or such officers and directors or professional advisors predicated
solely upon the civil liabilities provisions of U.S.’ federal securities laws,
or (ii) impose liabilities in original actions against Vuance Ltd. or such
officers and directors and professional advisors predicated solely upon such
U.S. laws. However, in accordance with the Israeli Law on Enforcement of Foreign
Judgments, 1958-5718, and subject to certain time limitations, an Israel court
may declare a foreign (including U.S.) civil judgment enforceable if it finds
that:
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the
judgment was rendered by a court which was, according to the laws
of the
state of the court, competent to render the
judgment;
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the
judgment may no longer be appealed;
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the
judgment is executory in the jurisdiction in which it was
given;
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due
process has been observed;
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such
judgment was rendered by a court which was competent to render such
judgment according to the rules of private international law, as
applicable in Israel, and is not contrary to public
policy;
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such
judgment was not obtained by fraud and does not conflict with any
other
valid judgment in the same matter between the same parties;
and
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an
action between the same parties in the same matter is not pending
in any
Israeli court or tribunal at the time the law suit is instituted
in the
foreign court.
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Even
if
these conditions are satisfied, an Israeli court will not enforce a foreign
judgment if it was given in a state whose laws do not provide for the
enforcement of judgments of Israeli courts (subject to exceptional cases) or
if
its enforcement is likely to prejudice the sovereignty or security of the State
of Israel. The term “prejudice the sovereignty or security of the State of
Israel” as used in the Israeli Law on Enforcement of Foreign Judgments has
rarely been interpreted by Israeli courts; therefore, there is only limited
guidance as to what criteria will be considered by an Israeli court in
determining whether the enforcement of a foreign judgment would prejudice the
sovereignty or security of the State of Israel.
An
investor may also find it difficult to bring an original action in an Israeli
court to enforce liabilities based upon U.S. federal securities laws against
us
or against our directors or officers. Israeli courts may refuse to hear a claim
based on a violation of U.S. securities laws and rule that Israel is not the
most appropriate forum in which to bring such a claim. In addition, even if
an
Israeli court agrees to hear such a claim, it may determine that Israeli law
and
not U.S. law is applicable to the claim. If U.S. law is found to be applicable,
the content of applicable U.S. law must be proved as a fact, which can be a
time
consuming and costly process. Certain matters of procedure will also be governed
by Israeli law. There is little binding case law in Israel addressing these
matters.
Fluctuations
in the exchange rate between the U.S. dollar and foreign currencies may affect
our operating results.
We
incur
expenses for our operations in Israel in New Israeli Shekels ("NIS") and
translate these amounts into U.S. dollars for purposes of reporting consolidated
results. As a result, fluctuations in foreign currency exchange rates may
adversely affect our expenses and results of operations, as well as the value
of
our assets and liabilities. Fluctuations may adversely affect the comparability
of period-to-period results. In addition, we hold foreign currency balances,
primarily NIS, that will create foreign exchange gains or losses, depending
upon
the relative values of the foreign currency at the beginning and end of the
reporting period, affecting our net income and earnings per share. Although
we
may use hedging techniques in the future (which we currently do not use), we
will not be able to eliminate the effects of currency fluctuations. Thus,
exchange rate fluctuations could have a material adverse impact on our operating
results and stock price. (See also Item 15, "Impact of Inflation and Currency
Fluctuations")
We
are exposed to special risks in foreign markets which may make operating in
those markets difficult and thereby force us to curtail our business
operations.
In
conducting our business in foreign countries, we are subject to political,
economic, legal, operational and other risks that are inherent in operating
in
other countries. For instance, business development in Hong Kong and China
is
time consuming and risky due to the uncertain political, regulatory and legal
environment. Other risks inherent to operating in other countries range from
difficulties in settling transactions in emerging markets to possible
nationalization, expropriation, price control and other restrictive governmental
actions. We also face the risk that exchange controls or similar restrictions
imposed by foreign governmental authorities may restrict our ability to convert
local currency received or held by it in their countries into U.S. dollars
or
other currencies, or to take those dollars or other currencies out of those
countries.
The
terrorist attacks of September 11, 2001, and the continuing threat of global
terrorism, have increased financial expectations in our industries that may
not
materialize.
The
September 11, 2001 terrorist attacks, and continuing concerns about global
terrorism, may have created an increased awareness for smart card security
solutions generally. However, it is uncertain whether the actual level of demand
for our products and services will grow as a result of such increased awareness.
Increased demand may not result in an actual increase in our revenues. In
addition, it is uncertain which security solutions, if any, will be adopted
as a
result of terrorism and whether our products will be a part of those solutions.
The efforts of the U.S. in the war against terrorism, the war in Iraq, and
the
post-war reconstruction efforts in Iraq, may actually delay funding for the
implementation of security solutions generally in the U.S.. Even if our products
are considered or adopted as solutions to terrorism concerns, the level and
timeliness of available funding are unclear. These factors may adversely impact
us and create unpredictability in our revenues and operating
results.
We
are unlikely to pay dividends in the foreseeable future and any return on
investment may be limited to the value of our ordinary
shares.
We
distributed a cash dividend to our shareholders on one occasion on August 26,
1997 in the aggregate amount of NIS 1 million and prior to that dividends in
the
form of bonus shares were distributed on two other occasions. We do not expect
to declare or pay cash dividends in the foreseeable future and intend to retain
future earnings, if any, to finance the growth and development of our business.
If we do not pay dividends, our ordinary shares may be less valuable because
a
return on your investment will only occur if our share price
appreciates.
Servicing
our debt obligations requires a significant amount of cash, and our ability
to
obtain or generate cash depends on many factors beyond our
control.
Our
ability to satisfy our debt service obligations, including making the payments
under the convertible bonds we issued in November 2006, to
a
financial investor and to Special Situation Funds
(the
“Convertible Bonds”), will depend, among other things, upon our future operating
performance and our ability to refinance indebtedness when necessary. Each
of
these factors is to a large extent dependent on economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
If,
in
the future, we cannot generate sufficient cash from our operations to meet
our
debt service obligations, we may need to reduce or delay capital expenditures
or
curtail research and development efforts. In addition, we may need to refinance
our debt, obtain additional financing or sell assets, which we may not be able
to do on commercially reasonable terms, if at all. We cannot assure you that
our
business will generate sufficient cash flow, or that we will be able to obtain
funding, sufficient to satisfy our debt service obligations. We believe that,
as
of the filing date of this Annual Report, our working capital (including current
cash, cash equivalents and marketable securities, in addition to the revenues
generated from our business operations) is sufficient for the Company’s present
requirements. However, we may need additional capital even to satisfy our
present requirements if we undertake large projects or have a delay in one
of
our anticipated projects. If we fail to raise such additional capital, we may
need to implement certain operational changes in order to decrease our
expenditure level. Our need for additional capital to finance our operations
and
growth will be greater should, among other things, our revenue or expense
estimates prove to be incorrect.
Restrictions
imposed by our Convertible Bonds and other debts instruments may limit our
ability to finance future operations or capital needs or engage in other
business activities that may be in our interest. Our failure to comply with
our
obligations under these instruments could lead to an acceleration of our
indebtedness.
The
indenture governing the Convertible Bonds contains certain covenants that will,
among other things, limit our ability and the ability of our restricted
subsidiaries to: (i) create liens; (ii) sell or otherwise dispose of assets;
(iii) engage in transactions with our affiliates; and (iv) merge or consolidate
with another entity or transfer all or substantially all of our assets. In
addition, we undertook to maintain a certain level of EBITDA for as long as
the
Convertible Bonds are outstanding. These restrictions could limit our ability
to
obtain future financing, make acquisitions or capital expenditures, withstand
economic downturns in our business, industry or the economy in general, conduct
operations or otherwise take advantage of business opportunities that
arise.
Our
failure to make any payments due under our debt instruments, or to otherwise
comply with any of the restrictions or our obligations there under, could result
in an event of default under such instruments and lead to an acceleration of
our
related indebtedness. We are not certain whether we would have, or be able
to
obtain, sufficient funds to make these accelerated payments. In that event,
certain lenders could proceed against those of our assets that secure their
debt. See Item 5.B, “Liquidity and Capital Resources,” regarding recent
amendments to our agreements with the holders of the Convertible
Bonds.
The
number of ordinary shares that are available for sale upon exercise of our
outstanding warrants, options and convertible bonds is significant in relation
to our currently outstanding ordinary shares. Sales of a significant number
of
our ordinary shares in the public market, or the perception that they may occur,
may depress the market price for our ordinary shares.
The
number of ordinary shares available for sale upon the exercise of our
outstanding warrants, options and convertible bonds is significant in relation
to the number of ordinary shares currently outstanding. As of May 31, 2008,
5,151,269 of our ordinary shares were outstanding. In addition, we had a total
of 1,035,252 ordinary shares issuable upon the exercise of outstanding options,
which we have issued to our employees and certain other persons at various
prices, some of which have exercise prices below the current market price for
our ordinary shares.
As
of May
31, 2008, we had a total of 782,685 ordinary shares issuable upon the exercise
of outstanding warrants issued to investors and consultants, at various prices,
which expire between 2009 and 2012. As of May 31, 2008, we had a total of
654,486 ordinary shares issuable upon the conversion of convertible bonds.
As of
December 31, 2007, our registered capital permitted us to issue up to additional
4,361,294 ordinary shares in connection with future grants of options, warrants,
shares and other financial instruments.
If
our
warrant or option holders exercise their warrants or options, or holders of
convertible bonds covert their bonds into ordinary shares, and determine to
sell
a substantial number of shares into the market at any given time, there may
not
be sufficient demand in the market to purchase the shares without a decline
in
the market price for our ordinary shares. Moreover, continuous sales into the
market of a number of shares in excess of the typical trading volume for our
ordinary shares, or even the availability of such a large number of shares
or
the perception that these sales could occur, could cause substantial dilution
to
existing shareholders, decrease the market price of our ordinary shares, and
impair our ability to raise capital in the future.
Our
ordinary shares may be delisted from The NASDAQ Capital Market, which could
negatively impact the price of our ordinary shares
Our
ordinary shares are listed on The NASDAQ Capital Market. The listing standards
of The NASDAQ Capital Market provide, among other things, that a company may
be
delisted if the bid price of its stock drops below $1.00 for a period of 30
consecutive business days. Recently our shares have traded at about $3 per
share. If we fail to comply with the listing standards applicable to issuers
listed on The NASDAQ Capital Market, our ordinary shares may be delisted from
The NASDAQ Capital Market. Such delisting of our ordinary shares would
significantly affect the ability of investors to trade our securities and would
negatively affect the value and liquidity of our ordinary shares. In addition,
the delisting of our ordinary shares could also have a material adverse affect
our ability to raise capital on terms acceptable to us or at all. Delisting
from
The NASDAQ Capital Market could also have other negative results, including
the
potential loss of confidence by customers and employees, the loss of
institutional investor interest and fewer business development opportunities.
"Penny
stock" rules may make buying or selling our ordinary shares difficult, severely
limiting the market price of our ordinary shares and the liquidity of our shares
in the U.S..
Trading
in our ordinary shares may be subject to the "penny stock" regulations adopted
by the SEC. These regulations generally define a "penny stock" to be any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. These rules require that any broker-dealer who recommends
our securities to persons other than prior customers and accredited investors
must, prior to the sale, make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to execute the
transaction. Unless an exception is available, the regulations require delivery,
prior to any transaction involving a "penny stock," of a disclosure schedule
explaining the penny stock market and the risks associated with trading in
the
penny stock market. In addition, broker-dealers must disclose commissions
payable to both the broker-dealer and registered representative and current
quotations for the securities they offer. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from effecting
transactions in our stock, which could severely limit the market price and
liquidity of our stock.
Our
ordinary shares are traded on more than one market and this may result in price
variations.
Our
ordinary shares are traded primarily on The NASDAQ Capital Market in the U.S.
and on the Euronext Brussels stock market in Belgium. Trading in our ordinary
shares on these markets is made in different currencies (U.S. dollars on The
NASDAQ Capital Market Board and Euro on Euronext Brussels) and at different
times (resulting from different time zones, different trading days and different
public holidays in the U.S. and Belgium). Consequently, the trading prices
of
our ordinary shares on these two markets often differ. Any decrease in the
trading price of our ordinary shares on one of these markets could cause a
decrease in the trading price of our ordinary shares on the other market. We
applied for delisting of our shares from the Euronext Brussels stock market,
and
our application was approved on May 6, 2008, effective August 4, 2008. Once
our
shares are traded only on The NASDAQ Capital Market, this risk of price
variations will no longer be applicable to our shares.
Our
default under certain registration rights agreements may result in liquidated
damages.
In
connection with private placements completed in September 2004 and December
2005, in which we issued to the investors ordinary shares and warrants to
purchase our ordinary shares, we entered into registration rights agreements
pursuant to which we undertook to register such ordinary shares in accordance
with the Securities Act of 1933. Accordingly, we filed Forms F-1 on November
2004 and January 5, 2006. Our failure to properly update the Forms (and to
make
subsequent registrations) in accordance with the registration rights agreements
could result in an event of default under such agreements and subject us to
liquidated damages.
We
have a shareholder that is able to exercise substantial influence over us and
all matters submitted to our shareholders which may make us difficult to be
acquired and less attractive to new investors.
Special
Situations Fund III, L.P. and its affiliates (collectively, “SSF”) beneficially
own 1,076,269 of our ordinary shares, representing approximately 20.89% of
our
outstanding ordinary shares, based on 5,151,269 ordinary shares currently
outstanding. In addition, SSF own warrants exercisable for an additional 267,823
ordinary shares and Convertible Bond for additional 154,486 ordinary shares.
Such ownership interest gives SSF substantial influence over the outcome of
all
matters submitted to our stockholders, including the election of directors
and
the adoption of a merger agreement, and such influence could make us a less
attractive acquisition or investment target. In addition, our officers and
directors beneficially own a significant amount of our ordinary shares, which
may have a similar effect to SSF's ownership of our ordinary
shares.
If
persons engage in short sales of our ordinary shares, including sales of shares
to be issued upon the exercise of our outstanding warrants, options and
convertible bonds, the price of our ordinary shares may
decline.
Selling
short is a technique used by a stockholder to take advantage of an anticipated
decline in the price of a security. In addition, holders of options, warrants
and convertible bonds will sometimes sell short knowing they can, in effect,
cover the sale through the exercise of an option, warrant or convertible bond,
thus locking in a profit. A significant number of short sales or a large volume
of other sales within a relatively short period of time can create downward
pressure on the market price of a security. Further sales of ordinary shares
issued upon exercise of our outstanding warrants, options or convertible bonds
could cause even greater declines in the price of our ordinary shares due to
the
number of additional shares available in the market upon such exercise or
conversion, which could encourage short sales that could further undermine
the
value of our ordinary shares. You could, therefore, experience a decline in
the
value of your investment as a result of short sales of our ordinary
shares.
Being
a foreign private issuer exempts us from certain SEC
requirements.
We
are a
foreign private issuer within the meaning of rules promulgated under the U.S.
Securities and Exchange Act of 1934, as amended (the “Exchange Act”). As such,
we are exempt from certain provisions applicable to U.S. public companies
including:
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the
rules under the Exchange Act requiring the filing with the
SEC
of
quarterly reports on Form 10-Q or current reports on Form
8-K;
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the
sections of the Exchange Act regulating the solicitation of proxies,
consents or authorizations in respect of a security registered under
the
Exchange Act;
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the
provisions of Regulation FD aimed at preventing issuers from making
selective disclosures of material information;
and
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the
sections of the Exchange Act requiring insiders to file public reports
of
their stock ownership and trading activities and establishing insider
liability for profits realized from any “short-swing” trading transaction
(i.e., a purchase and sale, or sale and purchase, of the issuer’s equity
securities within less than six
months).
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Because
of these exemptions, investors are not afforded the same protections or
information generally available to investors holding shares in public companies
organized in the U.S..
ITEM
4.
Information
on the Corporation.
A. History
and Development of the Corporation
History
of the Company
Vuance
Ltd. was incorporated in Israel, as a company limited by shares, on July 4,
1988, under the provisions of the then-current Israeli Companies Ordinance.
We
now operate under the Israeli Companies Law, 5759-1999 (the “Israeli Companies
Law”), which became effective on February 1, 2000, and the Israeli Companies
Ordinance (New Version) 1983, as amended.
From
our
incorporation in 1988 until 1999, we were a development-stage company primarily
engaged in research and development, establishing relationships with suppliers
and potential customers and recruiting personnel with a focus on the
governmental market. In 2001, we implemented a reorganization plan, which we
completed in 2002. As a result of the reorganization, we expanded our marketing
and sales efforts to include the commercial market with a new line of advanced
smart card and identification technologies products, while maintaining our
governmental market business.
During
2002, we sold, in three separate transactions with third party purchasers,
our
entire equity interest in a U.S. subsidiary, InkSure Technologies, Inc., for
which we received aggregate proceeds of approximately $6,600,000. In December
2002, we discontinued the operations, disposed of all of the assets and
terminated the employees of two U.S. subsidiaries, Genodus Inc. and Kromotek,
Inc.
We
became
a publicly-traded company on NASDAQ Europe stock market (Formerly EASDAQ) on
April 19, 1999. On October 23, 2003, following the closing of the NASDAQ Europe
stock market, we transferred the listing of our ordinary shares to the Euronext
Brussels stock market under the symbol “SUP”, which became “VUNC” after our
corporate name change on May 14, 2007. We applied for delisting of our shares
from the Euronext Brussels stock market, and our application was approved on
May
6, 2008, effective August 4, 2008.
On
July
29, 2004, we filed a Registration Statement on Form 20-F under the Exchange
Act.
When the Registration Statement became effective on September 29, 2004, we
became a foreign private issuer reporting company under the Exchange Act. On
November 5, 2004, our ordinary shares began trading in the U.S. on the OTC
Bulletin Board under the symbol “SPCBF.OB," which following our name change on
May 14, 2007 became “VUNCF.OB.” On August 23, 2007, our ordinary shares were
approved for trading on The NASDAQ Capital Market under the symbol “VUNC” and
the trading of our shares on the OTC Bulletin Board ceased.
During
the fourth quarter of 2005, we established a new Delaware subsidiary (of which
we initially owned 80%), Vuance-RFID Inc. (formerly, Pure RF Inc.), which began
operations during the first quarter of 2006. During the first quarter of 2006,
Vuance-RFID Inc. established a wholly-owned Israeli subsidiary, Vuance RFID
Ltd.
(formerly, Pure RF Ltd.). Vuance-RFID Inc. and Vuance RFID Ltd. focus on new
technologies and solutions for active tracking of people and objects. In
February 2007, we purchased the remaining 20% of the stock of VUANCE - RFID
Inc.
from its minority stockholders for an amount of $100,000, whereupon it became
our wholly-owned subsidiary. On August 2007, all the employees of Vuance RFID
Ltd. were transferred to Vuance Ltd., and on December 31, 2007 we purchased
all
the assets and liabilities of Vuance RFID Ltd.
During
the fourth quarter of 2006, we established a new wholly-owned subsidiary, S.B.C.
Aviation Ltd., (incorporated in Israel) which began operations in 2007 and
is
focused on executing information technology and security projects.
The
OTI Transaction
In
2006
we decided to sell our E-ID Division in order to focus on opportunities in
the
U.S. for our CSMS and active RFID tracking businesses, and on December 31,
2006,
we sold the E-ID Division to On Track Innovations Ltd., for 2,827,200 restricted
ordinary shares of OTI (of which 212,040 shares are related to consultants,
as
part of the direct expenses of this transaction). The ordinary shares were
issued to us subject to a lock-up agreement, where one-seventh of the shares
(403,885 ordinary shares) are released from the lock-up restrictions every
three
months beginning on December 31, 2006. We executed an irrevocable proxy
appointing OTI's chairman, on behalf of the Board of Directors, or a person
the
Board of Directors will instruct to vote the 2,827,200 ordinary shares issued
to
us in connection with the transaction. Under the terms of our agreement with
OTI, OTI committed to file with the SEC a registration statement covering these
ordinary shares and made such filing on April 24, 2007. During 2007, we sold
1,414,716, shares. We may gradually dispose of all of the OTI shares in order
to
finance our operation and in order to finance future acquisitions.
Simultaneously,
we entered into a service and supply agreement with OTI under which (i) OTI
agreed to act as our subcontractor and provide services, products and materials
necessary to carry out and complete certain projects that were not transferred
to OTI (the “Existing Projects”), and (ii) OTI granted us an irrevocable,
worldwide, non-exclusive, non-assignable and non-transferable license to use
in
connection with our Existing Projects, certain intellectual property rights
transferred to OTI as part of the OTI Transaction, for the duration of such
projects. We expect that due to the revenues from the Existing Projects, our
income in the short term will not be materially adversely affected. The sale
of
our E-ID division and the services and supply agreement are collectively
referred to herein as the “OTI Transaction.”
On
July
3, 2007, we entered, through our wholly-owned subsidiary, Vuance, Inc., into
an
agreement (the “SHC Purchase Agreement”) to acquire all of the issued and
outstanding stock capital of Security Holding Corp. (“SHC”) from Homeland
Security Capital Corporation (OTCBB: HMSC.OB) (“HMSC”) and other minority
shareholders (collectively, “Sellers”) for approximately $4,335,000 in our
ordinary shares and direct expenses of approximately $600,000 in our ordinary
shares. The closing date of this transaction was August 28, 2007 (“SHC Closing
Date”). SHC is a Delaware corporation engaged in the business of manufacturing
and distributing RFID-enabled solutions, access control and security management
systems. As consideration for the acquisition of the stock capital of SHC,
1,097,426 ordinary shares of the Company were issued to the Sellers. Subject
to
certain terms and conditions, in the event that we seek to register any of
our
ordinary shares under the Securities Act of 1933 for sale to the public, for
our
own account or the account of others, then at HMSC’s request, we will use our
reasonable best efforts to include our shares owned by HMSC in such
registration. The Sellers agreed to a lock-up period during which, subject
to
certain exceptions, they will not sell or otherwise dispose of our shares.
The
restrictions on making such transactions will expire for HMSC in eight equal
installments, commencing on the end of the first calendar quarter following
the
SHC Closing Date and each of the seven calendar quarters thereafter, and for
the
other Sellers, in twelve equal installments, commencing on the end of the first
calendar quarter following the SHC Closing Date and each of the eleven calendar
quarters thereafter. HMSC also agreed that during such restriction period,
upon
the occurrence of any sale by HMSC of our shares due to HSMC’s bankruptcy,
insolvency or otherwise by operation of law, Vuance Inc. and the Company will
have a right of first refusal to purchase all (but not less than all) of our
shares held by HSMC on certain terms and conditions. HMSC further agreed that
at
the SHC Closing Date it will grant an irrevocable power of attorney to the
Chairman of the Board of Directors of the Company to exercise all voting rights
related to its Vuance shares until the sale or transfer of such Vuance shares
by
HMSC to an unaffiliated third party in an arm’s-length transaction. As part of
the SHC Purchase Agreement, certain Sellers will assume, subject to certain
exceptions, certain non-competition and employee non-solicitation undertakings
for a period of two years commencing on the SHC Closing Date. We guaranteed
all
of the obligations of Vuance Inc. under the SHC Purchase Agreement.
During
the fourth quarter of 2007 SHC and its subsidiaries were merged into Vuance
Inc.
In
September 2007, we announced that we had entered into a definitive agreement
to
acquire, through our U.S. subsidiary, Vuance Inc., the credentialing division
of
Disaster Management Solutions Inc., for approximately $100,000 in cash and
up to
$650,000 in royalties that will be paid upon sales of the advanced first
responder credentialing system (named “RAPTOR”) during the first twelve months
following the acquisition (the closing was in August 2007). This acquisition
complemented our incident management solutions business and added the RAPTOR
to
our Credentialing & Incident Management Suite.
Recent
Developments
In
June
2008,
we
reached
an
agreement
with one of the investor (with a principle amount of $2,500,000)
,
under
which, among other things, the investor waived
our
compliance with certain covenants under its Convertible Bond
,
in
exchange for:
1.
|
Increasing
the interest rate to 10% starting March 31, 2008. Any withholding
and
other taxes payable with respect to the interest will be grossed
up and
paid by us (approximately 3% of the principal of the
bond).
|
2.
|
Reducing
the exercise price of the bond and the warrants to $3 and $2.8,
respectively.
|
3.
|
We
undertake to place a fixed charge on all incomes and/or rights
in
connection with certain European Airport Project. This charge shall
be
senior to any indebtedness and/or other pledge and encumbrance,
but shall,
however, be subject to certain rights of the Company to use part
of the
income.
|
4.
|
Certain
anti-dilution rights with respect to the warrants held by the single
investor.
|
In
addition, under certain circumstances the investor might have the right to
demand an early payment of partial or full amount of the Convertible Bonds
(up
to the $2,500,000 as mentioned above).
As
of
June 30, 2008, we may be deemed not to be in compliance with certain covenants
under our Convertible Bond with SSF in which case SSF could seek to accelerate
payment of the unpaid principal amount and accrued interest under its
Convertible Bond (an aggregate of approximately $740,000 as of June 30,
2008).
In
June
2008, we announced that we have been awarded a $1.4 million contract from
the
Racine (WI) Unified School District, to install our MASC (Managed Automated
Security Controls) security solution into 31 school buildings, and two
administrative buildings, in the district. The school district is contemplating
additional buildings with the potential to expand this initial
project
In
May
2008, we announced that Eyal Tuchman, our Chief Executive Officer, had purchased
$15,000 worth of shares.
In
December 2007, we announced that we had recently entered into amendment
agreements with holders of our Convertible Bonds to modify certain terms of
such
bonds.
In
November 2007,
we
reached an agreement with our investors whereby one investor waived our
compliance with certain covenants under the Convertible Bond in exchange
for a
one-time
payment
by
us
totaling
$276,000 (before gross-up for withheld taxes
)
and to
the other holder, modification of the conversion ratio of the bonds
to
$4.25.
We accounted for the amendment as a modification of the
bond.
In
September 2007, we announced that we had moved our corporate headquarters to
U.S, in order to better serve the U.S. market.
In
September 2007, we announced that we had entered into a definitive agreement
to
acquire, through our U.S. subsidiary, Vuance Inc., the credentialing division
of
Disaster Management Solutions Inc., ("DMS") for approximately $100,000 in cash
and up to $650,000 in royalties that will be paid upon sales of the advanced
first responder credentialing system (named “RAPTOR”) during the first twelve
months following the acquisition (the closing was in August 2007). This
acquisition complemented our incident management solutions business and added
the RAPTOR to our Credentialing & Incident Management Suite.
On
September 9, 2007, we announced that we had entered into a definitive agreement
with a European international airport to provide an integrated perimeter
security system and a border control system for a total of $13.8 million. The
establishment of the security and control system began during the third quarter
of 2007. While revenues from the contract are expected to be recognized over
the
next two years, we have already received a substantial portion of it as an
advance payment. Once the system has been implemented, there is likely to be
an
additional maintenance agreement that could generate additional annual
revenues.
In
August
2007, we announced that our ordinary shares had been approved for listing on
The
NASDAQ Capital Market and would begin trading on Thursday, August 23, 2007.
The
shares trade on the NASDAQ Capital Market under the symbol “VUNC.”
On
August
15, 2007, at an extraordinary general meeting of our shareholders, the
shareholders resolved:
|
·
|
To
re-elect Eli Rozen, Avi Landman and Jaime Shulman to our Board of
Directors;
|
|
·
|
To
ratify and approve the grant to Mr. Jaime Shulman of options to purchase
20,400 of our ordinary shares, at an exercise price of $5.00 per
ordinary
share, under the terms of the our 2003 Israeli Share Option Plan,
which
options vest in three consecutive, equal yearly installments commencing
on
November 15, 2006;
|
|
·
|
To
approve our 2007 U.S. Stock Option
Plan;
|
|
·
|
To
approve the purchase agreement, dated July 3, 2007, between Vuance
Inc.
and the shareholders of SHC;
|
|
·
|
To
increase the Company’s authorized share capital to NIS 705,882, consisting
of 12,000,000 ordinary shares, par value NIS 0.0588235
each;
|
|
·
|
To
replace our then-existing Articles of Association of us with new
Articles
of Association ; and
|
|
·
|
To
appoint Fahn Kanne & Co. as our independent external
accountant-auditor for fiscal year 2007 and to authorize our Board
of
Directors (or, the Audit Committee, if authorized by the Board of
Directors) to fix the remuneration of such independent accountant-auditor
in accordance with the volume and nature of their
services.
|
In
addition, during this meeting, our audited financial statements as of December
31, 2006 were presented to and discussed by our shareholders.
On
August
28, 2007, we completed the acquisition of all of the issued and outstanding
stock capital of SHC from HMSC and other minority shareholders for approximately
$4,335,000 in our ordinary shares and direct expenses of approximately $600,000.
As consideration for the acquisition of the stock capital of SHC, 1,097,426
ordinary shares of the Company were issued to the Sellers. (See “History and
Development of the Corporation” above)
On
June
14, 2007, we announced that Mr. Lior Maza has joined the Company’s executive
management team as Chief Financial Officer. Mr. Maza replaced Mr. Yaron Shalom.
In
May
2007, we announced that a
t
an
extraordinary general meeting held on April 29, 2007, our shareholders approved
(1) a change of our name from SuperCom Ltd. to Vuance Ltd., and (2) a
1-for-5.88235 ‘reverse split’ of our ordinary shares. Our name change and the
reverse share split became
effective
for trading purposes on May 14, 2007.
In
April
2007, we announced that Oliver “Buck” Revell, former Associate Deputy Director
in charge of Criminal Investigations, Counter-Terrorism and Counter-Intelligence
at the Federal Bureau of Investigation, joined our Advisory Board. (See the
section captioned “Enhancing Our Presence” in Item 4.B for more information on
our Advisory Board).
Principal
capital expenditures and divestitures
From
January 1, 2007 to December 31, 2007, our capital expenditures totaled
approximately $116,000 (compared to $93,000 during 2006 and $315,000 during
2005), of which approximately $62,000 (compared to $69,000 during 2006 and
$293,000 during 2005) can be attributed to our facilities in Israel, and
approximately $54,000 (compared to $24,000 during 2006 and $22,000 during 2005)
can be attributed to various facilities of our subsidiaries outside of Israel.
During the first financial quarter of 2008, our capital expenditures totaled
approximately $44,000.
Corporate
information
Our
U.S.
headquarters are located at 15850 Crabbs Branch Way, Suite 120, Rockville,
MD
20850 and our telephone number is +1-240-268-1125. Our Israeli headquarters
are
located at Sagid House “Ha’Sharon Industrial Park,” Qadima 60920, Israel and our
telephone number is +972-9-889-0800. Our Internet website address is
http://www.vuance.com. The information contained on our corporate websites
is
not a part of this prospectus.
Our
agent
for SEC matters in the U.S. is our subsidiary, Vuance, Inc., whose address
is
15850 Crabbs Branch Way, Suite 120, Rockville, MD 20850.
B. Business
Overview
From
1988
through 2006, our principal business was the design, development and marketing
of advanced smart card and identification technologies and products for
governmental and commercial customers in Europe, Asia and Africa. As described
above, in 2006 we decided to sell our E-ID Division in order to focus on
opportunities for our RFID and Credentialing businesses. On December 31, 2006,
we completed the OTI Transaction. (See full description above) We expect to
continue to receive revenues from the Existing Projects, which were not
transferred to OTI, until 2016.
On
August
28, 2007, we completed the acquisition of all of the issued and outstanding
stock capital of SHC from HMSC and other minority shareholders for approximately
$4,335,000 in our ordinary shares and direct expenses of approximately $600,000.
As consideration for the acquisition of the stock capital of SHC, 1,097,426
ordinary shares of the Company were issued to the Sellers. (See “History and
Development of the Corporation” above)
We
believe that our exposure to the governmental market and experience in
customizing solutions in our former E-ID Division, the acquisition of SHC and
the acquisition of the assets of DMS will contribute to our ability to develop
and market products in our RFID and Credentialing businesses. We currently
concentrate our marketing efforts for our RFID and Credentialing systems on
U.S.
distributers, state and local government agencies that are also seeking to
comply with U.S. Department of Homeland Security requirements.
We
currently operate in the U.S. through our wholly-owned subsidiary, Vuance,
Inc,.
We
currently operate in Asia Pacific through our wholly-owned subsidiary, Supercom
Asia Pacific Limited.
We
develop and market innovative, end-to-end security solutions in a wide range
of
applications for improved credentialing, accountability, electronic access
control, and tracking of assets and personnel. Our solutions encompass access
control, urban security, and critical situation management systems (CSMS) as
well as long-range active RFID in the public safety, education, commercial,
and
government sectors.
Our
Products
We
offer
three principal products suites to our customers:
Active
RFID
Active
RFID is long, active radio frequency identification equipment that utilizes
active radio frequency communications to track assets, people and objects for
potential governmental agency and commercial customers. Our solutions are
programmable, small, sensitive and relatively cheap, providing significant
competitive advantages. Our branded active RFID solution, AAID, purchased in
the
SHC transaction, is established and well-known in the market for tracking
vehicle and personnel.
Passive
RFID
Electronic
Access Control (“EAC”) Suite
EAC
applications provide increased security for enterprises, schools, office
buildings, warehouses and government facilities. Our solutions provide
credentials (secure badges), readers, door hardware, sensing devices, alarms,
controllers and host hardware and software to help maintain security at these
facilities. We provide these solutions through several branded
offerings:
COMPAS
is
used by schools and universities, (Columbine, Virginia Tech and Rutgers, among
others) and by governmental agencies and commercial enterprises (such as Prince
Williams County).
Managed
Automated Security Controls is an integrated solution designed for larger
commercial enterprises. MASC helps organizations (such as banks, hospitals,
and
correctional facilities) to control access, communications, and other security
solutions from an integrated platform.
Insignia
and Clarity together constitute a software hardware solutions sold by
distributors to smaller businesses.
Credentialing
& Incident Management Suite:
|
·
|
Credentialing
("RAPTOR")
|
Cutting-edge
storage and secure retrieval system for credentialing, authenticating,
verifying, validating, and managing personnel, advanced tracking and logistics,
designed especially for state and local governments, critical infrastructure,
and first responders.
|
·
|
Critical
Situation Management System ("CSMS")
|
Management
system, for first responders currently in use in the U.S., CSMS offers a
customizable solution for credentialing, incident management, accountability
and
virtual access control. We have an extensive product line, with smart cards,
both standalone and handheld readers, and interoperable communications
equipment. Credentialing and Incident Management systems utilize both passive
and active RFID technology, creating a unique and comprehensive solution
unmatched in the industry. CSMS applications target the following industries:
Law Enforcement, Fire Rescue, Homeland and Site Security and Emergency
Management.
Our
Strategy
In
2006,
we decided to sell our E-ID division in order to focus on opportunities mainly
in the U.S. for our active and passive RFID enabled solutions and CSMS
businesses. The sale was completed on December 31, 2006 (see section captioned
“The OTI Transaction” in this Item 4.A). In August 2007, we completed the
acquisition of SHC. SHC is a Delaware corporation engaged in the business of
manufacturing and distributing RFID-enabled solutions, access control and
security management systems. (See “History and Development of the Corporation”
above) We currently concentrate our marketing efforts for our active and passive
RFID enabled solutions and CSMS to U.S. distributers, state and local government
agencies.
Our
two-pronged sales strategy is to:
|
·
|
Develop
strong strategic relationships with our business partners, including
our
systems integrators and distributors who introduce our solutions
into
their respective markets. These include: Graybar, NControl Security
Integration Northern Video Nexus, Metroplex and Toshiba’s
CDS.
|
|
·
|
Employ
dedicated sales teams to work closely with these business partners.
Each
of the teams is responsible for one of the
following:
|
|
1.
|
Active
RFID sales through leading system integrators. This team customizes
and
adapts solutions that can then be installed and supported by these
business partners.
|
|
2.
|
EAC
systems sold through regional system integrators (e.g., Compass,
MASC and
other defined products). The team provides needed product support.
|
|
3.
|
CSMS
and RAPTOR sales to government agencies and commercial enterprises.
This
team responds to bids through system integrators involving requests
for
proposal (RFPs) from these clients requiring commercial off-the-shelf
solutions for many challenging applications.
|
We
have a
multi-pronged approach to growth:
|
1.
|
Increase
existing products’ value (e.g., offer products which are smaller, better
and cost less);
|
|
2.
|
Identify
new applications for existing products and solutions;
and
|
|
3.
|
Develop
new products/solutions that meet client's
needs.
|
|
4.
|
Build
a superior sales force. We are dedicating sales teams, coordinated
through
our U.S. corporate office to sell more products/solutions through
our
growing number of business partners. Cross-selling products and solutions
will increase sales to existing customers and open new
opportunities
|
|
·
|
Make
synergistic acquisitions. Continue to “leapfrog” growth through strategic
acquisitions of companies with complementary products and/or relations
with business partners, as we have with SHC and
RAPTOR.
|
Enhancing
Our Presence
We
decided to establish an advisory board (the “Advisory Board”)
to
assist us in broadening our presence in the government, military, and law
enforcement sectors and to identify the core technology needs of the homeland
security and related markets, as well as new applications for our technologies.
We have sought preeminent authorities to serve on the Advisory Board
and
in
February 2006 we announced the creation of the Advisory Board and the
appointment of R. James Woolsey, former Director of Central Intelligence and
one
of America’s preeminent authorities on security issues, as its Chairman. In
August 2006, we announced that Neil C. Livingstone, one of America’s preeminent
authorities on security issues was appointed to the Advisory Board. In April
2007, we announced that Oliver "Buck" Revell, former Associate Deputy Director
in charge of Criminal Investigations, Counter-Terrorism and Counter-Intelligence
at the Federal Bureau of Investigation , and one of the world's most recognized
experts in the fight against terrorism, has joined our Advisory Board. On March
2008, Morris A. Sandler, who has been a Managing Partner in a number of
merchant-banking and investment companies and has more than twenty years
experience in financial services, venture capital and merchant banking and
more
than twelve years experience in the telecom industry, joined our Advisory
Board.
We
currently concentrate our marketing efforts for our RFID and Credentialing
systems on U.S. distributers, state and local government agencies that are
also
seeking to comply with U.S. Department of Homeland Security requirements. To
date, our Credentialing suite has been acquired and successfully deployed in
Los
Angeles, CA (by the city and police department), in Columbus, OH (first
responders), in three Pennsylvania counties (first responders) and by the U.S.
Army in IRAQ (mobile access control unit). We also plan to market our CSMS
and
active RFID tracking systems to commercial customers.
In
order
to expand our U.S. presence, we acquired SHC, and we may pursue acquisitions
of
one or more companies which have an existing customer base and revenues in
the
U.S. or that can otherwise offer business synergies to us.
Identifying
New Applications for Our Technologies
Our
management and its external advisors are working to identify new applications
for our technologies in the homeland security, defense, healthcare, educational
and other markets. At a time when both government and the private sector are
faced with unprecedented challenges to protect public safety and personal
privacy, we expect our Advisory Board to help extend our forward-looking
technologies to the U.S. market.
Leveraging
Knowledge and Experience
We
believe that our exposure to the governmental market and experience in
customizing solutions in our former E-ID Division will contribute to our ability
to develop and market products in our RFID and Credentialing businesses. We
intend to leverage such knowledge and experience in order to respond to the
needs of existing and potential customers in the homeland security, healthcare,
educational and other markets.
Seeking
Partnerships With Other Relevant Companies
To
bolster our sales and marketing efforts, we may seek to partner with
distributors that can offer us new relationships within the homeland security
sector and with government agencies as well as with the commercial sector and
help us increase our geographic breadth and penetrate other selected vertical
markets. In addition, we may seek to partner with system integrators experienced
in handling large-scale governmental projects under government contracts,
since
we
believe such partners
,
by
virtue of their recognition by government agencies, may have an advantage in
securing government contracts. Finally, we may seek to enter into strategic
partnerships with companies that offer technologies that complement
ours.
Current
Businesses
Active
RFID Business
In
February 2006, we introduced our active RFID technology, which utilizes active
radio frequency communications to track people and objects. We developed this
new technology to meet the growing market demand for asset and person tracking
solutions. The new technology expands our wide range of products aimed at the
homeland security market through a wireless asset tracking system.
In
order
to focus on the growing market for this technology we acquired SHC, which owned
the AAID long range Active RFID security solution.
The
readers and tags have been sold by AAID since 1999. Currently the majority
of
the sales are vehicle related including gated-communities, employee parking
lots, and fleet management. We believe that the future of this technology in
personnel and asset tracking and we will leverage AAID's market positioning
to
introduce our Pure-RF technologies. Our AAID movement detection solution can
monitor and track a number of items simultaneously, providing an active set
of
different signals and alerts. The software and hardware solution employs small,
low-powered RFID tags attached to an object or a person. License-free radio
bands are used to track the RFID tag from a base transmitter that is
programmable for periodic or event-driven transmissions.
Current
activities in our active RFID business involve the development and marketing
of
a new product, the AAID Suite, which is described below. We plan to market
the
AAID Suite in the industrial, healthcare, security and homeland security
sectors, and to further develop, improve and customize the AAID Suite to meet
customers’ needs in niche sectors.
Product
We
expect
our AAID Suite, a complete location position (LP) system solution based on
active RFID tag technology, to offer commercial customers and governmental
agencies enhanced asset management capabilities. The system can be deployed
in
physical security applications. The basic components of our AAID Suite
include:
|
·
|
an
active tag, which contains a microchip equipped transponder, an antenna
and a capacitor, attached to the item to be identified, located or
tracked;
|
|
·
|
a
web-based management system, which captures and processes the signal
from
the active tag, and may be configured to provide an alert upon the
occurrence of a trigger event;
|
|
·
|
one
or more wireless receivers; and
|
|
·
|
the
tag's initializer, which is used to configure the AAID
tags.
|
The
AAID
Suite provides a secure, precise and cost-effective means to positively
identify, locate, track, monitor, count and protect people and objects,
including inventory and vehicles. The ability to reliably identify and track
the
movement of people and objects in real-time will enable AAID Suite customers
to
detect unauthorized movement of vehicles, trace packages and containers, control
personnel and vehicle access to premises, and protect personnel in hazardous
working environments and disaster management situations.
Customers
Our
customers are also our business partners, i.e system integrators and
distributors who introduce our solutions into their perspective markets. These
include: Graybar, NControl Security Integration Northern Video Nexus, Metroplex
and Toshiba’s CDS etc.
Market
Opportunity
Radio
frequency identification, or RFID, is a widely adopted technology in the
auto-identification market, which addresses electronic identification and
location of objects. Typically, an RFID tag or transponder is attached to or
incorporated into a product or person. A handheld or stationary device that
receives the radio frequency waves from these tags is used to determine their
locations. Prior to the adoption of RFID, users identified and tracked assets
manually as well as through the use of bar code technology. These solutions
were
limited because of the need for ongoing human intervention and the lack of
instantaneous location capabilities. RFID technology possesses greater range,
accuracy, speed and lower line−of−sight requirements than bar code
technology.
Our
AAID
Suite can track items simultaneously, providing an alert when a tagged item
is
removed from a pre-determined area, passes through a marked checkpoint or
otherwise moves. We believe that potential customers for our AAID Suite include
the following:
|
·
|
Civil
and Military Governments
.
Our AAID Suite can provide secure access control into restricted
areas and
map and track visitors throughout a facility. Many high security
facilities, including governmental and industrial facilities, need
access
monitoring. For example, nuclear power plants, national research
laboratories and correctional facilities need to accurately and securely
monitor inbound and outbound activity. Line of sight identifiers,
such as
identification cards, suffer from problems that our RFID technology
readily overcomes, including reliance on human visual identification,
forgery and tampering. Our AAID Suite also enables identification
and
location of individuals in restricted areas in real
time.
|
|
·
|
Airport
and Port Security Infrastructure Providers
.
Our AAID Suite can offer solutions for the transportation sector
by
enabling common carriers to monitor, track, locate and manage multiple
baggage items simultaneously, thereby reducing risk of lost baggage,
increasing customer service and improving
security.
|
|
·
|
Businesses
and Industrial Companies
.
Our AAID Suite can be used by businesses, shippers and warehouse
operators
to manage and track cartons, pallets, containers and individual items
in
order to facilitate movement, order picking, inventory verification
and
reduce delivery time. In addition, industrial companies can manage
and
track their mobile equipment and tools. We believe that our AAID
Suite can
increase efficiency at every stage of asset, inventory and supply
chain
management by enabling long-range identification and location of
products
and removing the need for their human visual identification. Our
products
also work in conjunction with existing bar coding and warehouse systems
to
reduce the risk of loss, theft and slow speed of
transfer.
|
|
·
|
Hospitals
and Care Homes
.
The healthcare sector has successfully utilized RFID technologies
for the
purposes of infant protection in maternity wards and wander prevention
in
care homes similar to our asset and personnel location and identification
system targeted at the secure facility and hazardous business sectors.
Our
AAID Suite can provide solutions for the healthcare sector for asset,
staff, patient and medical record location and identification. We
believe
that as hospitals continue to upgrade their security measures, RFID
technology will be utilized in real-time location systems that are
designed to immediately locate persons, equipment and objects within
the
hospital.
|
|
·
|
Livestock
Owners
.
Our AAID Suite can be used as a livestock identification, tracking
and
safeguarding system.
|
Credentialing
- CSMS and RAPTOR Suite Business
Our
CSMS
and RAPTOR suite represent a completely integrated solution for multiple
applications. The applications include enabling state and local public safety
agencies, such as police, fire and emergency medical services departments,
and
other governmental agencies to comply with U.S. Department of Homeland Security
requirements regarding national incident management systems, security,
protection of infrastructure and incident command systems.
Product
We
have a
range of access control, RFID, and credentialing product lines which are
integrated to an end-to-end comprehensive solution.
Credentialing:
CSMS
and
RAPTOR.
These
products are designed to meet the need for comprehensive and mutually compatible
credentials that governments and first responders have noted as important in
both the fight against terrorism and the need to respond to any catastrophe.
This market suffered from low expenditure levels due to a lack of clearly
defined product requirements. Now that these requirements are not only defined,
but also codified into law, the purchasing decisions are returning to standard
procedures. CSMS is an existing product with a full range of accessories, which
was designed primarily for temporary credentials created at the scene of an
incident. RAPTOR is a newer product targeted more specifically to use
credentials that meet the full range of government specifications with user
verification as well as identification. RAPTOR has been recently updated to
use
the latest technology and its RAPTOR Express version is attracting a lot of
attention and demand. The first RAPTOR Express systems will be provided within
few months. In order to better respond to the emerging need we have combined
the
CSMS function into RAPTOR to deliver the more comprehensive CSMS. The target
market for CSMS currently is the state and local governments.
Communications
Interoperability.
Our
interoperability bridges link mobile and portable radios of all kinds, military
and civilian, as well as cell/satellite/direct-connect and land-line
telephones, allowing responders to communicate across technological and
organizational boundaries, without changing equipment or monopolizing their
communications systems. These bridges are P25 and VoIP compatible,
allowing users the ability of utilizing our robust 900 MHz tripods as repeaters
if no other communication networks are available.
Customers
Our
first
customer for our CSMS products was the City of Columbus, Ohio, which deployed
the SmartDSMS system in April 2005 and subsequently expanded its capabilities.
In July 2006, we entered into an agreement with H.M.S. Telecom, LLC, a leading
oil and gas industry consulting group from Houston, Texas to represent and
market our CSMS products to the oil and gas industry. In November 2006, we
entered into a contract to provide a CSMS system to the City of Los Angeles,
CA
for the Department of General Services—Office of Public Safety, the Office of
Personnel and the Police Department (Mobile Command Post Unit). In January
2007,
we entered into two additional contracts for the deployment of CSMS systems
with
county governments in Pennsylvania.
Market
Opportunity
In
2002,
following the terrorist attacks on September 11, 2001, and in accordance with
The National Strategy for Homeland Security and the Homeland Security Act of
2002, the U.S. Department of Homeland Security, (“DHS”) was formed. The main
objective of the DHS is
to
provide the unifying core for the vast nationwide network of organizations
and
institutions involved in efforts to provide national security. DHS initiatives
have emphasized “interoperability”—the implementation of new systems that
facilitate interaction between government agencies, including first responders
such as police, fire and emergency medical services departments, in anticipation
of and response to incidents that threaten public safety. Presidential
directives concerning homeland security call for the development
of:
|
·
|
a
National Incident Management System that will provide a consistent
framework for incident management at all jurisdictional levels regardless
of the cause, size or complexity of the incident and provide first
responders with a common foundation for incident management of terrorist
attacks, natural disasters and other emergencies;
and
|
|
·
|
a
National Response Plan that will provide the structure and mechanisms
to
coordinate and integrate incident management activities and emergency
support functions across federal, state, local and tribal government
entities, the private sector and non-governmental
agencies.
|
The
activities and projects necessary to achieve these goals are accomplished by
furnishing federal funding to state and local government agencies. Since 2002,
the DHS has allocated over $20 billion in grants and awards to state and local
government agencies for the implementation of a broad range of security projects
throughout the U.S. Much of the grants have not yet been spent by the recipient
government agencies. In January 2007, the DHS announced plans to grant an
additional $1.7 billion for specified security programs.
We
believe that we are positioned to take advantage of the market opportunity
presented by DHS-funded security projects of state and local government agencies
throughout the U.S. Our CSMS systems can be used as standalone solutions for
the
access control, accountability and credentialing needs of law enforcement and
first responder governmental agencies managing disaster sites, including sites
of natural disasters, terrorist attacks, crime scenes or large scale accidents.
The individual components of the CSMS system could also be marketed to the
U.S.
military or the DHS for more general perimeter security applications.
Passive
RFID
Electronic
Access Control (“EAC”) Suite
Product
EAC
applications provide increased security for enterprises, schools, office
buildings, warehouses and government facilities. Our solutions provide
credentials (secure badges), readers, door hardware, sensing devices, alarms,
controllers and host hardware and software to help maintain security at these
facilities. We provide these solutions through several branded
offerings:
COMPASS
is used by schools and universities, (Columbine, Virginia Tech and Rutgers,
among others) and by governmental agencies and commercial enterprises (such
as
Prince Williams County).
Managed
Automated Security Controls, is an integrated solution designed for larger
commercial enterprises. MASC helps organizations to control access,
communications, and other security solutions from an integrated platform (such
as banks, hospitals, and correctional facilities).
Insignia
and Clarity together constitute a software hardware solutions sold by
distributors to smaller businesses.
Customers
Our
customers are distributors, regional system integrators (e.g. Compass, MASC)
and
dealers (e.g., Insignia Security Systems, Clarity Security and other providers
of security solutions). On rare occasions where the conditions allows we may
sell directly to large organizations such as local municipalities and large
organizations which requires the direct intervention of our subject matter
experts.
Market
Opportunity
Our
EAC
suite targets wide range of customers from challenging environments through
the
commercial sectors to small businesses and private sector. This can be achieved
by presenting three product lines:
EAC
for
education and commercial sector
EAC
for
correctional facilities, airports, cities, and challenging
environments.
EAC
for
small businesses and the commercial and private sector
Sectors
targeted include:
Health
Care
From
clinics in shopping malls to sprawling medical campuses, the challenges facing
the health care industry go beyond anything people could have imagined. From
coordinating access to secure areas such as operating rooms and nurseries to
preventing theft of valuable equipment and monitoring corridors, stairways
and
departments, health care management requires reliable solutions to meet the
needs in a complex and rapidly changing environment.
Education
Today’s
school campuses rival their counterparts in business and health care in terms
of
sophistication and security requirements.
From
providing automated access control for sporting events and concerts to
credentialing and verifying faculty, staff (and students) to tracking equipment
from building to building or throughout districts , from identifying vehicles
to
securing buildings and facilities in the event of disaster; educators are no
longer “just teachers” and administrators must enforce any number of
requirements in place to keep students and assets safe.
Transportation
Identifying
drivers, and controlling access to parking garages, parking lots or special
parking zones are only part of the challenges facing the transportation
industry. From connecting drivers to specific vehicles or connecting pilots
with
specific aircrafts to monitoring fleet vehicles, to reducing theft and vandalism
in parking garages, transportation management involves more than just getting
from place to place.
Correctional
Facilities, Airports, Municipalities Facilities
From
correctional facilities to airports and municipalities facilities, the
challenges facing environments which require high security are enormous and
ever-changing. Coordinating access to secure areas, monitor these environments
efficiently despite multiple events, challenging environment requires reliable
intuitive solutions to meet the needs in a complex and highly security sites.
Former
E-ID Division
From
1988
to 2006, our principal business was the design, development and marketing of
advanced smart card and identification technologies and products for
governmental and commercial customers in Europe, Asia and Africa. Our
applications and solutions included e-passports, visas and other border entry
documents, national identification and military, police and commercial access
identification. As detailed above, in 2006, we decided to sell our E-ID division
in order to focus on opportunities in the U.S. for our CSMS and RAPTOR and
active RFID businesses.
In
our
E-ID Division, we developed a fully automated production line for picture
identification contactless smart cards, and offered our customers raw materials
and maintenance and service agreements. We provided identification solutions
and
contactless smart card production equipment for governmental and commercial
customers. The customers and contracts of our E-ID Division in 2005, 2006 and
2007 included the following:
National
Multi ID with a European Country
In
2006,
we entered into an agreement with a European country which we estimate will
generate approximately $50 million in revenues during the 10-year term of the
project. Under the agreement we will provide the end-to-end system for a
national multi-ID issuing and control system. There can be no assurance,
however, that we will realize the full estimated value of this
agreement.
The
project, which commenced during the third quarter of 2006, involves the
implementation of an end-to-end national ID issuing and control system based
on
our Magna system and includes the supply of digital enrollment and production
equipment, software, maintenance and supply of secured raw material for the
production of various national ID cards. In 2006 and 2007, we recognized revenue
of $4,569,000 and $5,826,000, respectively, under this agreement.
Perimeter
Security and Border Control at European International
Airport
In
2007,
we entered into a definitive agreement (the “Agreement”) with a European
international Airport to provide an integrated perimeter security system and
a
border control system for a total of $13.8 million. The establishment of the
security and control system began during the third quarter of 2007. While
revenues from the contract are expected to be recognized over the next two
years, we have already received a substantial portion of it as an advance
payment. Once the system has been implemented, there is likely to be an
additional ten-year maintenance agreement that could generate an additional
$620,000 in annual revenues. In 2007, we recognized revenue of $2,182,000,
under
this agreement.
Other
Projects
During
the years 2005, 2006 and 2007 we had the following projects:
|
·
|
Passports
and ID Card - Africa
|
|
·
|
National
Documentation - Moldova
|
|
·
|
Hong
Kong - China Re-Entry Cards
|
|
·
|
Passports
- United Kingdom
|
|
·
|
Biometric
Visa system to a European
Government
|
|
·
|
National
ID card deal with an African Governmental
Agency
|
|
·
|
Automated
Smart Card Production System to a European Government
|
|
·
|
Biometric
passport issuing and control system for a western European
country
|
|
·
|
E-Passport
with a European Country
|
During
the years ended 2005, 2006 and 2007 we generated revenues from the above
mentioned project, in the total amount of, $7,186,000, $2,846,000 and
$2,618,000, respectively.
Research
and Development
Our
past
research and development efforts helped us to achieve the goal of offering
our
customers a complete line of products and solutions. We spent $1.2 million,
$1.4
million and $1.7 million on research and development in 2005, 2006 and 2007,
respectively. These amounts were spent on the development or improvement of
our
technologies and products, primarily in the areas of RFID and Credentialing
. We
will continue to research and develop new technologies for RFID and
Credentialing. There can be no assurance that we can achieve any or all of
our
research and development goals.
Sales
and Marketing
We
sell
our systems and products worldwide through distribution channels that include
direct sales and traditional distributor or reseller sales. We have
approximately 28 employees that are directly engaged in the sale, distribution
and support of our products through centralized marketing offices in distinct
world regions, including the employees of Vuance, Inc., which markets our
products in the U.S. and of SuperCom Asia Pacific, which markets our products
in
Asia. We are also represented by several independent distributors and resellers
with which we have distribution agreements.
Our
distributors and resellers sell our systems and products to business enterprises
and government agencies and act as the initial customer service contact for
the
systems and products they sell. We establish relationships with distributors
and
resellers through written agreements that provide prices, discounts and other
material terms and conditions under which the reseller is eligible to purchase
our systems and products for resale. These agreements generally do not grant
exclusivity to the distributors and resellers and, as a general matter, are
not
long-term contracts, do not have commitments for minimum sales and could be
terminated by the distributor. We do not have agreements with all of our
distributors.
Sales
Analysis
Sales
By Geographic Destination:
The
following table provides a breakdown of total revenue by geographic market
(all
amounts in thousands of dollars):
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Total
|
|
Total
|
|
Total
|
|
|
|
revenues
|
|
revenues
|
|
revenues
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
3,719
|
|
$
|
5,877
|
|
$
|
8,650
|
|
Asia
Pacific
|
|
|
2,173
|
|
|
1,730
|
|
|
1,330
|
|
Africa
|
|
|
2,158
|
|
|
621
|
|
|
823
|
|
United
States
|
|
|
202
|
|
|
373
|
|
|
1,787
|
|
Israel
|
|
|
210
|
|
|
194
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,462
|
|
$
|
8,795
|
|
$
|
12,961
|
|
The
following table provides a breakdown of total revenue by product category (all
amounts in thousands of dollars):
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Raw
materials and equipment
|
|
$
|
6,538
|
|
$
|
6,529
|
|
$
|
9,315
|
|
Maintenance,
royalties and project management
|
|
|
1,924
|
|
|
2,266
|
|
|
3,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,462
|
|
$
|
8,795
|
|
$
|
12,961
|
|
Customer
Service
We
believe that customer support plays a significant role in our sales and
marketing efforts and in our ability to maintain customer satisfaction, which
is
critical to our efforts to build our reputation and grow in our existing
markets,
as well as to our efforts to penetrate and grow in new
markets.
In addition, we believe that our interaction
with
our
customers and the customers’
feedback
involved in our ongoing support functions provide us with information on
customer needs and contribute to our product development efforts. We generally
provide maintenance services under
separate,
tailor made
agreements. We provide our service through customer training, local third-party
service organizations, our subsidiaries, or our personnel, including appropriate
personnel sent from any of our offices in U.S., Israel or Hong-Kong. We
generally provide our customers with a warranty for our products, varying in
length from 12 to 36 months. Costs incurred annually by Vuance for product
warranties have to date been insignificant; however, there can be no assurance
that these costs will not increase significantly in the future.
Manufacturing
and Availability of Raw Materials
Our
manufacturing operations consist primarily of materials planning and
procurement, quality control of components, kit assembly and integration, final
assembly, and testing of fully-configured systems. A significant portion of
our
manufacturing operations consists of the integration and testing of
off-the-shelf components. All of our products and systems, whether or not
manufactured by us, undergo several levels of testing, including configuration
to customer orders and testing with current release software, prior to
delivery.
Our
manufacturing consists of systems for the electronic security industries and
includes a range of access control, RFID and credentialing solutions. We
outsource the manufacturing for our PCB panels to a number of different
suppliers. We usually commit to a long-term relationship with such suppliers
in
exchange for receiving competitive pricing. All panels and enclosures are built
to our engineering's specifications. All panels are received in our
manufacturing facilities in the U.S. and then tested, assembled, and retested.
Other products are off-the-shelf products, which we purchase from a number
of
different suppliers.
All
activities for
Existing
Projects
,
such as
purchasing, logistics, making integration, installation and testing, are done
by
third parties according to our instructions and under our supervision. Moreover,
we continue to be responsible to the customers of the Existing Projects.
Competition
We
assess
our competitive position from our experience and market intelligence, and from
reviewing third party competitive research materials.
While
many companies are active in the homeland security market, few companies offer
products similar to RAPTOR and CSMS in the area of access control/perimeter
security for incident management. Additionally, there are many companies in
the
broader security market that may offer competing products, but these companies
do not target governmental customers. We believe that Enterprise Air, Salamander
Technologies, Raytheon and Corestreet may offer products that compete with
RAPTOR and CSMS in the governmental market, and that Zebra, RF Code, Axcess,
Ekahau, Pango Networks and Aeroscout are potential competitors, in niche areas,
to us with respect to our active RFID tracking products, The EAC market is
also
crowded with large companies like Lenel, Honeywell Stanley Works, UTC, Assa
Abloy and HIRSCH, as well as certain smaller companies. We offer unique
capability of having the main ingredients (Active RFID, EAC and Credentialing)
in-house to provide day-to-day as well as emergency situation
solutions.
Our
management expects competition to intensify as the markets in which our products
and services compete continue to develop. Some of our competitors may be more
technologically sophisticated or have substantially greater technical,
financial, or marketing resources than we do, or may have more extensive
pre-existing relationships with potential customers. Although we believe that
our products combine technologies and features that provide customers with
complete and comprehensive solutions, we cannot assure you that other companies
will not offer similar products in the future or develop products and services
that are superior to our products and services, achieve greater customer
acceptance or have significantly improved functionality as compared to our
products and services. Increased competition may result in our experiencing
reduced margins, loss of sales or decreased market shares.
Due
to
the developing nature of the markets for our
CSMS
and
RAPTOR and active RFID tracking products and the ongoing changes in this market,
the above-mentioned list might not constitute a full list of all of our
competitors and additional companies may be considered our competitors.
Intellectual
Property
Our
ability to compete is dependent on our ability to develop and maintain the
proprietary aspects of our technology. We rely on a combination of trademark,
copyright, trade secret and other intellectual property laws, employee and
third-party nondisclosure agreements, licensing and other contractual
arrangements and have also applied for patent protection to protect our
proprietary technology and intellectual property. However, these legal
protections afford only limited protection for our proprietary technology and
intellectual property.
In
addition, the laws of certain foreign countries may not protect our intellectual
property rights to the same extent as do the laws of Israel or the U.S.. Our
means of protecting our intellectual property rights in Israel, the U.S. or
any
other country in which we operate may not be adequate to fully protect such
rights. For instance, the intellectual property rights of our Asian subsidiary,
SuperCom Asia Pacific may not be fully protected by the laws of Hong Kong and
the People’s Republic of China.
Patents
As
part
of the OTI Transaction, we transferred our entire portfolio of patents related
to the E-ID Division to OTI.
Our
patent portfolio currently consists of one issued patent, two U.S patent
application and two PCT applications. Generally, these patents and patent
applications cover inventions relating to our products.
We
intend
to file additional patent applications when and if appropriate. There is no
guarantee that patentable inventions will arise from our research and
development efforts and, if we do apply for patent protection for such
inventions, there is no guarantee that it will be granted.
In
addition, not all countries provide legal protection of proprietary technology
to the same extent. There can be no assurance that the measures taken by us
to
protect our proprietary technologies are or will be sufficient to prevent
misappropriation of our technologies or portions thereof by unauthorized third
parties or independent development by others of similar technologies or
products. In addition, regardless of whether our products infringe on the
proprietary rights of third parties, infringement or invalidity claims may
be
asserted or prosecuted against us and we could incur significant expenses in
defending them. Our costs could also increase if we become obligated to pay
license fees as a result of these claims.
Licenses
We
license technology and software, such as operating systems and database
software, from third parties for incorporation into our systems and products
and
we expect to continue to enter into these types of agreements for future
products. Our licenses are either perpetual or for specific terms.
As
part
of the OTI Transaction, we received an irrevocable, worldwide, non-exclusive,
non-assignable and non-transferable license to use, in connection with the
Existing Projects, the intellectual property that we transferred to OTI.
Generally
speaking,
the
license will be valid for the duration of all Existing Projects.
Government
Regulation
We
are
subject to certain labor statutes and to certain provisions of collective
bargaining agreements between the Histadrut (the General Federation of Labor
in
Israel) and the Coordinating Bureau of Economic Organizations, including the
Industrialists’ Association, with respect to our Israeli employees. In addition,
some of our Israeli employees are also subject to minimum mandatory military
service requirements. (See the discussion under the caption “Employees” in
Section D of Item 6.)
Generally,
we are subject to the laws, regulations and standards of the countries in which
we operate and/or sell our products, which vary substantially from country
to
country. The difficulty of complying with these laws, regulations and standards
may be more or less difficult than complying with applicable U.S. or Israeli
regulations, and the requirements may differ.
Employees
As
of
December 31, 2007 we had 67 full-time employees, compared to 56 full-time
employees as of December 31, 2006. (See the discussion under the caption
“Employees” in Item 6.D)
Our
ability to succeed depends, among other things, upon our continuing ability
to
attract and retain highly qualified managerial, technical, accounting, sales
and
marketing personnel.
Seasonality
Our
financial and operating results have fluctuated in the past and our financial
and operating results could fluctuate in the future.
The
period
between our initial contact with a potential customer and the sale of our
products and services is often long and subject to delays associated with the
budgeting, approval and competitive evaluation processes that frequently
accompany significant capital expenditures, particularly by governmental
agencies. The typical sales cycle for our government customers has to date
ranged from three to 36 months and the typical sales cycle for our commercial
customers has ranged from one to six months. A lengthy sales cycle may have
an
impact on the timing of our revenue, which may cause our quarterly operating
results to fall below investor expectations. We believe that a customer's
decision to purchase our products and services is discretionary, involves a
significant commitment of resources, and is influenced by customer budgetary
cycles or federal and state grants. To successfully sell our products and
services, we generally must educate our potential customers regarding their
use
and benefits, which can require significant time and resources. This significant
expenditure of time and resources may not result in actual sales of our products
and services.
The
lead-time for ordering parts and materials and building many of our products
can
be many months. As a result, we must order parts and materials and build our
products based on forecasted demand. If demand for our products lags
significantly behind our forecasts, we may produce more products than we can
sell, which can result in cash flow problems and write-offs or write-downs
of
obsolete inventory.
C. Organizational
Structure
Vuance
- RFID Inc.
Vuance
-
RFID Inc. (formerly, Pure RF Inc.) incorporated in Delaware in November 2005.
Upon its incorporation we owned 80% of its shares. During January 2006, Vuance
-
RFID Inc. established a wholly owned Israeli subsidiary, Vuance RFID Ltd.
(formerly, Pure RF Ltd.), which focuses on new technologies and solutions for
the tracking of people and assets. During February 2007, we purchased the
remaining 20% of Vuance - RFID Inc. for $100,000, whereupon Vuance - RFID Inc.
became our wholly-owned subsidiary. In August 2007, all the employees of Vuance
RFID Ltd. were transferred to us, and on December 31, 2007 we purchase all
the
assets and liabilities of Vuance RFID Ltd.
SuperCom
Asia Pacific Limited (“SuperCom Asia Pacific”)
SuperCom
Asia Pacific, incorporated in Hong Kong, has been our wholly-owned subsidiary
since November 2003, and is responsible for our sales and marketing efforts
in
Asia Pacific.
SuperCom
Slovakia A.S. (“SuperCom Slovakia”)
SuperCom
Slovakia, incorporated in Slovakia, was established to implement a national
documentation project in the Republic of Slovakia. SuperCom Slovakia is 66%
owned by us and 34% owned by EIB Group a.s., a privately held Czech company.
Despite our ownership of almost two-thirds of the economic interests of SuperCom
Slovakia, our voting power in SuperCom Slovakia is 50%.
Vuance,
Inc. (formerly, SuperCom Inc.)
Vuance,
Inc., incorporated in Delaware, is our wholly-owned subsidiary, and is
responsible for our sales and marketing efforts in the U.S.
SBC
Aviation Ltd.
SBC
Aviation Ltd., incorporated in Israel in the fourth quarter of 2006, is our
wholly-owned subsidiary, which commenced operations in 2007, and focuses on
executing information technology and security projects.
D. Property,
Plants and Equipment
We
do not
own any real estate property.
We
lease
approximately 2,224 square meters of facilities in Qadima, Israel under a
five-year lease contract, currently expiring on October 31, 2010. We have an
option to renew the lease for an additional period of five years. According
to
the agreement, the monthly fee is approximately $16,000. As a result of the
OTI
Transaction, we leased to OTI certain portions of our leased facilities for
a
monthly fee of $11,000, for a period of one year, commencing on December 31,
2006. During the first quarter of 2008, OTI moved out and we subleased a portion
of its space.
Vuance,
Inc. leases approximately 214 square meters of office space in Rockville,
Maryland, U.S. As a result of the acquisition of SHC, Vuance Inc. now leases
several additional facilities in Franklin, Wisconsin, Peachtree City, Georgia
and Exton, Pennsylvania of approximately 391, 465 and 258 square meters,
respectively. Also, as a result of the acquisition of the assets of DMS, a
lease
of a facility in Gardner, Massachusetts was transferred to Vuance Inc. the
lease
is of approximately 441 square meters. The monthly fee of the facility in
Franklin, Wisconsin is $5,000 and the total monthly fee of all such other
facilities is $14,500.
SuperCom
Asia Pacific leases approximately 300 square meters of office space in Hong
Kong.
All
such
leased properties in the U.S. and Hong Kong consist of office space for
management, administrative and marketing activities.
The
total
annual rental fees for 2005, 2006 and 2007 were $369,560, $354,530 and $376,295,
respectively. The total annual lease commitments for 2008 are
$602,803.
All
assets are held in the name of Vuance Ltd. and its subsidiaries.
The
following table details our fixed assets as of December 31, 2006 and
2007:
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In thousands of US Dollars)
|
|
Cost:
|
|
|
|
|
|
|
|
Computers
and peripheral equipment
|
|
$
|
300
|
|
$
|
287
|
|
Office
furniture and equipment
|
|
|
211
|
|
|
193
|
|
Leasehold
improvements
|
|
|
75
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
|
513
|
|
Accumulated
depreciation:
|
|
|
|
|
|
|
|
Computers
and peripheral equipment
|
|
|
259
|
|
|
183
|
|
Office
furniture and equipment
|
|
|
92
|
|
|
92
|
|
Leasehold
improvements
|
|
|
75
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
426
|
|
|
295
|
|
|
|
|
|
|
|
|
|
Depreciated
cost:
|
|
$
|
160
|
|
$
|
218
|
|
Depreciation
expenses for the years ended December 31, 2005, 2006 and 2007 were $746,000,
$335,000 and $38,000, respectively.
During
fiscal year 2005, the Company relocated its offices from Ra'anana to Qadima.
As
a result the Company wrote down an unamortized balance of leasehold improvement
in the amount of $471,000. This expense was recorded in the statement of
operations as part of “Restructuring expenses.”
On
December 31, 2006, as part of the OTI Transaction, all property and equipment
related to the E-ID Division were transferred to OTI.
ITEM
4A.
Unsolved
Staff Comments.
Not
applicable.
ITEM
5.
Operating
and Financial Review and Prospects.
A. Operating
results
The
following section should be read in conjunction with our consolidated financial
statements and the related notes thereto, which have been prepared in accordance
with U.S. GAAP and which are included in Item 18. Some of the statements
contained in this section constitute “forward-looking statements.” These
statements relate to future events or to our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or
achievements expressed or implied by such forward-looking statements. (See
“Note
Regarding Forward Looking Statements” at the beginning of this report, and “Risk
Factors” In Item 3.D)
Overview
We
were
established in 1988 in Israel under the name “SuperCom Ltd.” On April 29, 2007
our shareholders approved the change of the Company’s name to Vuance Ltd.,
effective as of May 14, 2007. Our ordinary shares have been listed for trading
on the Euronext Brussels stock market since October 23, 2003, initially under
the symbol “SUP,” and following our name change, under the symbol “VUNC.” . From
November 5, 2004 to August 23, 2007, the Company’s ordinary shares traded on the
OTC Bulletin Board, initially under the symbol "SPCBF.OB" and following our
name
change, under the symbol, “VUNCF.OB.” Since August 23, 2007, our ordinary shares
have been listed for trading on the NASDAQ Capital Market under the symbol
“VUNC.” Upon the commencement of trading of our ordinary shares on The NASDAQ
Capital Market, our ordinary shares ceased to trade on the OTC Bulletin
Board.
We
develop and market incident response management and tracking solutions for
public safety agencies, commercial customers and governmental organizations.
We
offer three principal suite to our customers, as follow:
Active
RFID
Active
RFID is long, active radio frequency identification equipment that utilizes
active radio frequency communications to track assets, people and objects for
potential governmental agency and commercial customers. Our solutions are
programmable, small, sensitive and relatively cheap, providing significant
competitive advantages. Our branded active RFID solution, AAID, purchased in
the
SHC transaction, is established and well-known in the market for tracking
vehicle and personnel.
Passive
RFID
Electronic
Access Control (“EAC”) Suite
EAC
applications provide increased security for enterprises, schools, office
buildings, warehouses and government facilities. Our solutions provide
credentials (secure badges), readers, door hardware, sensing devices, alarms,
controllers and host hardware and software to help maintain security at these
facilities. We provide these solutions through several branded
offerings:
COMPAS
is
used by schools and universities, (Columbine, Virginia Tech and Rutgers, among
others) and by governmental agencies and commercial enterprises (such as Prince
Williams County).
Managed
Automated Security Controls, is an integrated solution designed for larger
commercial enterprises. MASC helps organizations to control access,
communications, and other security solutions from an integrated platform (such
as banks, hospitals, and correctional facilities).
Insignia
and
Clarity together constitute a software hardware solutions sold by distributors
to smaller businesses.
Credentialing
& Incident Management Suite:
|
·
|
Credentialing
("RAPTOR")
|
Cutting-edge
storage and secure retrieval system for credentialing, authenticating,
verifying, validating, and managing personnel, advanced tracking and logistics,
designed especially for state and local governments, critical infrastructure,
and first responders.
|
·
|
Critical
Situation Management System ("CSMS")
|
Management
system, for first responders currently in use in the U.S., a customizable
solution for credentialing, incident management, accountability and virtual
access control. We have an extensive product line, with smart cards, both
standalone and handheld readers, and interoperable communications equipment.
Credentialing and Incident Management systems utilize both passive and active
RFID technology, creating a unique and comprehensive solution unmatched in
the
industry. CSMS applications target the following industries: Law Enforcement,
Fire Rescue, Homeland and Site Security and Emergency Management.
In
addition, we have several continuing projects relating to the E-ID Division
we
sold to OTI (See the section captioned “The OTI Transaction” in Item 4.A and the
section captioned “Former E-ID Division” in Item 4.B).
We
sell
our products through centralized marketing offices in different regions of
the
world. We have two wholly-owned marketing subsidiaries: Vuance Inc. in the
U.S.
and SuperCom Asia Pacific Limited in Hong Kong.
During
the fourth quarter of 2005, we established a new Delaware subsidiary in which
we
initially owned 80% of the shares, Vuance - RFID Inc. (formerly, Pure RF Inc.),
which began operations during the first quarter of 2006. During the first
quarter of 2006, Vuance - RFID Inc. established a wholly-owned Israeli
subsidiary, Vuance RFID Ltd. (formerly, Pure RF Ltd.). Vuance - RFID Inc. and
Vuance RFID Ltd. focus on new technologies and solutions for active tracking
of
people and objects. During February 2007, we purchased the remaining 20% of
Vuance - RFID Inc. from its minority shareholder for $100,000, whereupon Vuance
- RFID Inc. became our wholly-owned subsidiary. On August 2007, all the
employees of Vuance RFID Ltd. were transferred to Vuance, and on December 31,
2007, we purchased the assets and liabilities of Vuance RFID Ltd.
During
the fourth quarter of 2006, we established a new wholly-owned Israeli
subsidiary, S.B.C. Aviation Ltd., which commenced operations in 2007, and
focuses on executing information technology and security projects.
On
November 8, 2006, we announced the execution of the OTI Transaction (see Item
4.A above under the caption “The OTI Transaction”). As a result of the OTI
Transaction, we recognized $10,536,000 as capital gain on the sale of the E-ID
Division in fiscal year 2006. The capital gain was calculated based on OTI’s
share price on the closing date of the transaction, less a discount due to
the
lock-up restrictions on the shares (based on an independent appraisal), the
carrying value of the assets that were transferred to OTI and direct expenses
(in an amount of $1,550) associated with the sale.
As
a
result of the OTI Transaction, we terminated the employment of certain employees
that were employed by us in the E-ID Division.
On
July
3, 2007, we entered, through our wholly-owned subsidiary, Vuance, Inc., into
an
agreement (the “SHC Purchase Agreement”) to acquire all of the issued and
outstanding stock capital of Security Holding Corp. (“SHC”) from Homeland
Security Capital Corporation (OTCBB: HMSC.OB) (“HMSC”) and other minority
shareholders (collectively, “Sellers”) for approximately $4,335,000 in our
ordinary shares and direct expenses of approximately $600,000. The closing
date
of this transaction was August 28, 2007 (“SHC Closing Date”). SHC is a Delaware
corporation engaged in the business of manufacturing and distributing
RFID-enabled solutions, access control and security management systems. As
consideration for the acquisition of the stock capital of SHC, 1,097,426
ordinary shares of the Company were issued to the Sellers. Subject to certain
terms and conditions, in the event that we seek to register any of our ordinary
shares under the Securities Act of 1933 for sale to the public, for our own
account or the account of others, then at HMSC’s request, we will use our
reasonable best efforts to include our shares owned by HMSC in such
registration. The Sellers agreed to a lock-up period during which, subject
to
certain exceptions, they will not sell or otherwise dispose of our shares.
The
restrictions on making such transactions will expire for HMSC in eight equal
installments, commencing on the end of the first calendar quarter following
the
SHC Closing Date and each of the seven calendar quarters thereafter, and for
the
other Sellers, in twelve equal installments, commencing on the end of the first
calendar quarter following the SHC Closing Date and each of the eleven calendar
quarters thereafter. HMSC also agreed that during such restriction period,
upon
the occurrence of any sale by HMSC of our shares due to HSMC’s bankruptcy,
insolvency or otherwise by operation of law, Vuance Inc. and the Company will
have a right of first refusal to purchase all (but not less than all) of our
shares held by HSMC on certain terms and conditions. HMSC further agreed that
at
the SHC Closing Date it will grant an irrevocable power of attorney to the
Chairman of the Board of Directors of the Company to exercise all voting rights
related to its Vuance shares until the sale or transfer of such Vuance shares
by
HMSC to an unaffiliated third party in an arm’s-length transaction. As part of
the SHC Purchase Agreement, certain Sellers will assume, subject to certain
exceptions, certain non-competition and employee non-solicitation undertakings
for a period of two years commencing on the SHC Closing Date. We guaranteed
all
of the obligations of Vuance Inc. under the SHC Purchase Agreement. During
the
fourth quarter of 2007 SHC and its subsidiaries were merged into Vuance Inc.
In
September 2007, we announced that we had entered into a definitive agreement
to
acquire, through our U.S. subsidiary, Vuance Inc., the credentialing division
of
Disaster Management Solutions Inc., for approximately $100,000 in cash and
up to
$650,000 in royalties that will be paid upon sales of the advanced first
responder credentialing system (named “RAPTOR”) during the first twelve months
following the acquisition (the closing was in August 2007). This acquisition
complemented our incident management solutions business and added the RAPTOR
to
our Credentialing & Incident Management Suite.
Revenues
The
Company and its subsidiaries generate their revenues from the sale of products,
maintenance, royalties and long term contracts including training and
installation. The sale of products involves the sale of active and passive
RFID
products, CSMS and raw materials.
Following
delivery of such systems, the majority of revenues generated from the agreement
results from ongoing maintenance fees and support.
Our
systems are tailored to meet the specific needs of our customers. In order
to
satisfy these needs, the terms of each agreement, including the duration of
the
agreement and prices for our products and services differ from agreement to
agreement.
Operating
Expenses
Our
costs
associated with a particular project may vary significantly depending on the
specific requirements of the customer, the terms of the agreement, as well
as on
the extent of the technology licensing. As a result, our gross profits from
each
project may vary significantly.
Our
research and development expenses consist of salaries, raw material,
subcontractors, equipment costs and rent allocated to research and development
activities, as well as related supplies and travel and entertainment
costs.
Our
selling and marketing expenses consist primarily of salaries and commissions
earned by sales and marketing personnel, trade show, promotional expenses and
rent allocated to selling and marketing activities, as well as related supplies
and travel and entertainment costs.
Our
general and administrative expenses consist primarily of salaries, benefits,
allocated rent and supplies, and related costs for our executive, finance,
legal, human resource, information technology and administrative personnel,
and
professional service fees, including legal counsel insurance and audit
fees.
Net
Income
Our
operating results are significantly affected by, among other things, the timing
of contract awards and the performance of agreements. As a result, our revenues
and income may fluctuate substantially from quarter to quarter, and comparisons
over longer periods of time may be more meaningful. The nature of our expenses
is mainly fixed or semi-fixed and any fluctuation in revenues will generate
a
significant variation in gross profit and net income.
Critical
Accounting Policies and Estimates
The
preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the
disclosure of contingent liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
On an
ongoing basis, we evaluate our estimates and judgments, including those related
to revenue recognition, allowance for bad debts, and valuation of inventories
and impairment of long-lived assets.
We
base
our estimates and judgments on historical experience and on various other
factors that we believe to be reasonable under the circumstances, the results
of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Under
different assumptions or conditions, actual results may differ from these
estimates.
Our
discussion and analysis of our financial condition and results of operations
are
based on our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the U.S. ("US
GAAP"). Our significant accounting principles are presented within Note 2 to
our
Consolidated Financial Statements. While all the accounting policies impact
the
financial statements, certain policies may be viewed to be critical. These
policies are those that are most important to the portrayal of our financial
condition and results of operations. Actual results could differ from those
estimates. Our management believes that the accounting policies which affect
the
more significant judgments and estimates used in the preparation of our
consolidated financial statements and which are the most critical to fully
understanding and evaluating our reported results include the
following:
·
|
Allowance
for doubtful accounts;
|
·
|
Stock
Based Compensation; and
|
·
|
Other
than temporary impairment of Available for sale
securities.
|
·
|
Goodwill
and other intangible assets
|
Revenue
Recognition
We
generate our revenues from the sale of products, maintenance, royalties and
long
term contracts including training and installation. The sale of products
involves the sale of active and passive RFID products, CSMS and raw materials.
We sell our products in the U.S. through distributors, through our local
subsidiary in Asia Pacific and directly in the rest of the world.
Product
sales are recognized in accordance with Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB No. 104”), when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable, collectability is probable, and inconsequential or perfunctory
performance obligations remain. If the product requires specific customer
acceptance, revenue is deferred until customer acceptance occurs or the
acceptance provision lapses.
We
are
not obligated to accept returned products or issue credit for returned products,
unless a product return has been approved by us in advance and according to
specific terms and conditions. As of December 31, 2007 we had an allowance
for
customer's returns in the amount of $57,000.
Based
on
past experience, we do not provide for warranty costs when revenue is
recognized.
We
applied the provisions of EITF Issue No. 00-21 “Revenue Arrangements with
Multiple Deliverables” for multiple element arrangements. EITF Issue No. 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets.
For
such arrangements, each element of the contract is accounted for as a separate
unit when it provides the customer value on a stand-alone basis and there is
objective evidence of the fair value of the related unit.
Maintenance
and support revenues included in multiple-element arrangements are deferred
and
recognized on a straight-line basis over the term of the maintenance and support
agreement. For these multiple element arrangements, we account for each unit
of
the contract (maintenance, support and services) as a separate unit, when each
unit provides value to the customer on a stand-alone basis and there is
objective evidence of the fair value of the stand-alone unit.
Deferred
revenues and customer advances include amounts received from customers for
which
revenues have not been recognized.
We
are
entitled to royalties upon of the issuance of certificate. Such royalties are
recognized when the sales are reported to the Company (usually on a monthly
basis).
We
recognize certain long-term contract revenues in accordance with Statement
of
Position (“SOP”) 81-1, “Accounting for Performance of Construction-Type and
Certain Production Type Contracts”.
Pursuant
to SOP 81-1, revenues from these contracts are recognized under the percentage
of completion method. We measure the percentage of completion based on output
or
input criteria, such as contract milestones, percentage of engineering
completion or number of units shipped, as stipulated in each
contract.
Provisions
for estimated losses on uncompleted contracts are made during the period in
which such losses are first identified, in the amount of the estimated loss
on
the entire contract. As of December 31, 2007, no such estimated losses were
identified.
We
believe that the use of the percentage of completion method is appropriate,
since we have the ability, using also independent subcontractor's evaluation,
to
make reasonably dependable estimates of the extent of progress made towards
completion, contract revenues and contract costs. In addition, contracts
executed include provisions that clearly specify the enforceable rights of
the
parties to the contract, the consideration to be exchanged and the manner and
terms of settlement. In all cases, we expect to perform our contractual
obligations and the parties are expected to satisfy their obligations under
the
contract.
In
contracts that do not meet all the conditions mentioned above, we utilize zero
estimates of profits; equal amounts of revenue and cost are recognized until
results can be estimated with sufficient accuracy.
Revenues
and costs recognized pursuant to SOP 81-1 on contracts in progress are subject
to management estimates. Actual results could differ from these
estimates.
We
derive
our revenues mainly from sale of hardware products and long term contracts
that
include embedded software that management considers to be incidental. Such
revenues are recognized in accordance with SAB No. 104 and SOP 81-1, as
mentioned above. However, in limited circumstances, we provide software upgrades
in respect of the embedded software of hardware products sold to our customers
in the past. Such revenues are recognized when all criteria outlined in
Statement of Position No. 97-2 “Software Revenue Recognition” (“SOP No. 97-2”)
(as amended) are met: when persuasive evidence of an agreement exists, delivery
of the product has occurred (i.e. the services have been provided), no
significant obligations under the agreement remain, the fee is fixed or
determinable and collectability is probable.
Allowance
for doubtful accounts
The
allowance for doubtful accounts is determined with respect to specific debts
that we have determined to be of doubtful collection.
We
perform ongoing credit evaluations of our customers' financial conditions and
we
require collateral as we deem necessary. An allowance for doubtful accounts
is
determined with respect to those accounts that we have determined to be doubtful
of collection. If the financial conditions of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required.
The
allowance for doubtful accounts was $3,487,000 and $3,500,000 at December 31,
2006 and 2007, respectively.
Contingencies
From
time
to time, we are the defendant or plaintiff in various legal actions, which
arise
in the normal course of business. We are required to assess the likelihood
of
any adverse judgments or outcomes to these matters as well as potential ranges
of probable losses. A determination of the amount of reserves required for
these
contingencies, if any, which would be charged to earnings, is made after careful
and considered analysis of each individual action with our legal advisors.
The
required reserves may change in the future due to new developments in each
matter or changes in circumstances, such as a change in settlement strategy.
A
change in the required reserves would affect our earnings in the period the
change is made. Other than as described under the heading “Legal Proceedings” in
Item 8, there are no material pending legal proceedings in which we are a party
or of which our property is subject.
Stock-Based
Compensation
Until
December 31, 2005, we applied the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related interpretations including Financial
Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain
Transactions involving Stock Compensation,” an interpretation of APB Opinion No.
25 issued in March 2000 to account for our employee stock options. Under this
method, compensation expense was recognized only if the current market price
of
the underlying stock exceeded the exercise price on the date of grant. SFAS
No.
123, “Accounting for Stock-Based Compensation, (SFAS 123)” and FASB Statement
No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” an
amendment to FASB Statement No. 123, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As permitted, through December 31, 2005, we elected
to apply the intrinsic-value-based method of accounting described above, and
have adopted only the disclosure requirements of SFAS No. 123, as amended.
However,
as more fully described in note 2(w) to the accompanying financial statement,
on
January 1, 2006 we adopted SFAS No. 123R, “Share-Based Payment” (SFAS 123R), a
revision of SFAS 123. Among other items, SFAS 123R eliminated the use of APB
25
and the intrinsic value method of accounting, and requires companies to
recognize in their financial statements the cost of employee services received
in exchange for awards of equity instruments, based on the fair value of those
awards at the grant date.
We
adopted SFAS 123R, using the modified prospective method, as permitted under
the
standard. Accordingly, prior period amounts have not been restated. Under
this method, the Company is required to record compensation expense for all
awards granted after the date of adoption in accordance with the provisions
of
SFAS 123R and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption in accordance with the original provisions
of SFAS 123.
Other
than temporary impairment of Available for sale
securities
The
Company applies the provisions of SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities", SAB 59, "Noncurrent Marketable Equity
Securities" and other related pronouncements with respect to its available
for
sale securities. These pronouncements require companies to perform periodic
reviews of individual securities in its investment portfolio to determine
whether a decline in the value of a security is other than temporary. A review
for other than temporary impairment requires companies to make certain
forward-looking assumptions regarding the probability, extent and timing of
a
valuation recovery, the materiality of the decline and its effect on the
financial statements, and the Company's ability and intent to hold the security.
Specifically, impairment of the value of an investment may be indicated by
conditions such as a prolonged period during which the quoted market value
of
the investment is less than its original cost, severe losses by the investee
in
the current year or current and prior years, continued losses by the investee
for a period of years, suspension of trading in the securities, liquidity or
going concern problems of the investee or a current fair value of the investment
that is less than its carrying value.
When
persuasive evidence exist that causes the Company to determine that a decline
in
market value of equity securities is other than temporary, the unrealized losses
that are considered to be other than temporary are charged to income as an
impairment charge.
Goodwill
and other intangible assets
Under
SFAS No. 142, Goodwill and Other Intangible Assets, goodwill acquired in a
business combination is deemed to have indefinite life and is not be amortized.
SFAS No.142 requires goodwill to be tested for impairment at least annually
or
between annual tests in certain circumstances, and written down when impaired,
rather than being amortized. Goodwill is tested for impairment by comparing
the
fair value of the reporting unit with its carrying value. Fair value is
determined using the income approach. Significant estimates used in the
methodologies included estimates of future cash flows and estimates of discount
rates. On December 31, 2007, we had total goodwill of $3,644,000 on our balance
sheet (such goodwill resulted from the acquisition of SHC during August 2007).
In assessing the recoverability of our goodwill and other intangible assets,
we
must make assumptions regarding the estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets. No impairment losses of goodwill or other
intangible assets have been recognized during the reported periods.
Results
of Operations
The
following table sets forth selected consolidated income statement data for
Vuance for each of the three years ended December 31, 2005, 2006 and 2007
expressed as a percentage of total revenues.
|
|
2005
|
|
2006
|
|
2007
|
|
Revenues
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost
of revenues
|
|
|
50.7
|
|
|
39.7
|
|
|
43.2
|
|
Inventory
write-off
|
|
|
3.4
|
|
|
—
|
|
|
—
|
|
Gross
profit
|
|
|
45.9
|
|
|
60.3
|
|
|
56.8
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
14.0
|
|
|
15.5
|
|
|
13.2
|
|
Selling
and marketing, net
|
|
|
35.5
|
|
|
63.9
|
|
|
69.8
|
|
General
and administrative
|
|
|
35.0
|
|
|
31.1
|
|
|
24.6
|
|
Restructuring
expenses
|
|
|
5.9
|
|
|
—
|
|
|
—
|
|
Litigation
settlement expenses
|
|
|
1.5
|
|
|
1.2
|
|
|
0.3
|
|
Total
operating expenses
|
|
|
91.9
|
|
|
111.7
|
|
|
107.9
|
|
Capital
gain from the sale of the E-ID Division
|
|
|
—
|
|
|
119.7
|
|
|
—
|
|
Operating
income (loss)
|
|
|
(46.0
|
)
|
|
68.3
|
|
|
(51.1
|
)
|
Financial
income (expenses), net
|
|
|
(0.3
|
)
|
|
(2.3
|
)
|
|
(35.8
|
)
|
Other
income (expenses), net
|
|
|
(0.4
|
)
|
|
(4.2
|
)
|
|
—
|
|
Income
(loss) before income taxes
|
|
|
(46.7
|
)
|
|
61.8
|
|
|
(86.9
|
)
|
Taxes
on income
|
|
|
—
|
|
|
—
|
|
|
(
0.3
|
)
|
Loss
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
|
(46.7
|
)
|
|
61.8
|
|
|
(87.2
|
)
|
Operating
Results
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Revenues
Our
revenues in 2007 were $12,961,000, compared to $8,795,000 in 2006, an increase
of 47%. The increase in our revenues is primarily due to our new project with
a
European air port for which we recognized revenues in 2007 in the amount of
$2,181,000, compared to $0 in 2006, our revenues from our National Multi ID
project with a European country which were $5,826,000 in 2007 compared to
$4,569,000 in 2006, and due to the SHC transaction. We anticipate that our
revenues in 2008 will continue to increase primarily due to the SHC transaction
and the airport project. We believe that the Existing Projects are critical
to
our success in the short-term and that the active RFID and Credentialing
businesses will be critical to our long-term success.
Gross
Profit
Our
gross
profits in 2007 were $7,361,000 compared to gross profits of $5,301,000 in
2006,
an increase of 38.9%. The gross profit margin for the year 2007 decreased by
3.5%, compared to 60.2% in 2006. The decrease in our 2007 gross profit margin
was primarily due to different mix of products, which carry lower margins.
Expenses
Our
operating expenses in 2007 were $13,983,000, compared to $9,826,000 in 2006,
an
increase of 42%. The increase in operating expenses was mainly due to the SHC
transaction and an increase in selling and marketing expenses related to
commissions due to the increase in revenues.
Research
and development expenses consist primarily of salaries, benefits, subcontractors
allocated rent expense, supplies and equipment for software developers and
architects, hardware engineers and program managers, as well as legal fees
associated with our intellectual property. Our research and development expenses
in 2007 were $1,716,000, compared to $1,362,000 in 2006, an increase of 26%.
The
increase in the research and development expenses was primarily due to research
and development expenses associated with our new technologies, CSMS and RAPTOR
and active RFID and due to the SHC transaction.
Selling
and marketing expenses consist primarily of salaries and commission earned
by
sales and marketing personnel, trade show and promotional expenses, allocated
rent and supplies and travel and entertainment costs. Our selling and marketing
expenses in 2007 were $9,041,000, compared to $5,619,000 in 2006, an increase
of
60.9%. The increase in the sales and marketing expenses was primarily due to
the
increase in sales promotion expenses related to the increase in revenues, labor
expenses, an increase in sales and marketing activities in the U.S. due to
the
SHC transaction and different mix of projects.
General
and administrative expenses consist primarily of salaries, benefits, allocated
rent and supplies, and related costs for our executive, finance, legal, human
resource, information technology and administrative personnel, and professional
service fees, including legal counsel insurance and audit fees. Our general
and
administrative expenses in 2007 were $3,192,000, compared to $2,737,000 in
2006,
an increase of 16.6%. This increase was primarily due to the SHC transaction.
Additionally,
litigation settlement expenses consist of one-time expenses that relate to
litigations that settled during the reported periods as described in "Legal
Proceedings" in Item 8. . Our litigation settlement expenses in 2007 were
$34,000, compared to $108,000 in 2006.
Financial
Expenses, net
Financial
expenses for the twelve months ended December 31, 2007 and 2006, were $4,652,000
and $204,000, respectively. The increase in financial expenses is mainly due
to
a decrease in our marketable securities related to OTI's shares. During 2007,
we
realized
losses from the sale of marketable securities
in the
amount of $1,116,000, compared to $0 during 2006 and
decrease
in value of marketable securities, net
in the
amount of $2,699,000 and $0 during the year ended 31, December 2007 and 2006
respectively and due to financial expenses with respect to convertible bond
that
commenced in November 2006 in the amount of $75,000 and $745,000 in 2006 and
2007, respectively.
Other
Expenses, Net
Other
expenses, net for the twelve months ended December 31, 2007, and 2006, were
$0
and $367,000, respectively. Other expenses, net during 2006 consisted of the
write-down of a loan relating to an investment in an affiliated company and
other trade receivables in the amount of $321,000, compared to $0 during the
year 2007.
Net
Loss
As
a
result of the factors described above, our net loss in 2007 was $11,311,000,
compared to a net income of $5,440,000 in 2006.
Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues
Our
revenues in 2006 were $8,795,000 compared to $8,462,000 in 2005, an increase
of
4%.
Gross
Profit
Our
gross
profits in 2006 were $5,301,000 compared to gross profits of $3,882,000 in
2005,
an increase of 36.6%. The gross profit margin for the year 2006 increased by
14.4% as compared to 46% in 2005. The increase in our 2006 gross profit margin
was primarily due to different mix of products, which carry higher margins.
Expenses
Our
operating expenses in 2006 were $9,826,000 compared to $7,778,000 in 2005,
an
increase of 26%. The increase in operating expenses was mainly due to the
increase in selling and marketing.
Selling
and marketing expenses consist primarily of salaries and commission earned
by
sales and marketing personnel, trade show and promotional expenses, allocated
rent and supplies and travel and entertainment costs. Our selling and marketing
expenses in 2006 were $5,619,000 compared to $3,003,000 in 2005, an increase
of
87%. The increase in the sales and marketing expenses was primarily due to
the
increase in sales promotion expenses related to the increase in revenues, labor
expenses, an increase in sales and marketing activities in the U.S. and
different mix of projects.
General
and administrative expenses consist primarily of salaries, benefits, allocated
rent and supplies, and related costs for our executive, finance, legal, human
resource, information technology and administrative personnel, and professional
service fees, including legal counsel insurance and audit fees. Our general
and
administrative expenses in 2006 were $2,737,000 compared to $2,968,000 in 2005,
a decrease of 7.8%.
Research
and development expenses consist primarily of salaries, benefits, allocated
rent
expense, supplies and equipment for software developers and architects, hardware
engineers and program managers, as well as legal fees associated with our
intellectual property. Our research and development expenses in 2006 were
$1,362,000 compared to $1,182,000 in 2005, an increase of 15%. The increase
in
the research and development expenses was primarily due to research and
development expenses associated with our new technologies, CSMS and active
RFID.
Restructuring
expenses contains certain financial measures related to expenses totaling
$496,000 that are associated with cost-cutting measures implemented by us in
2005.
Additionally,
litigation settlement expenses consist of one time expenses that relate to
litigations that settled during the years 2005 and 2006, as described in "Legal
Proceedings" in Item 8. Our litigation settlement expenses in 2006 were $108,000
compared to $129,000 in 2005.
Capital
gain from the OTI Transaction
As
a
result of the OTI Transaction, we recognized $10,536,000 as a capital gain
on
the sale of the E-ID Division in fiscal year 2006. The capital gain was
calculated based on OTI’s share price on the closing date, less a discount due
to the lock up restrictions of the shares, the carrying value of the assets
that
were transferred to OTI and direct expenses (in an amount of $1,550,000)
associated with the sale.
The
direct expenses included, inter alia, the fair value of 212,040 shares out
of
the shares we received from OTI that were partly transferred to consultants,
as
a finder and legal fee, in connection with the transaction (Our investment
in
OTI’s shares includes the shares held by us, net of the shares that will be
transferred to the consultants).
Financial
Interest Expense, net
Financial
expense for the twelve months ended December 31, 2006, and 2005, were $204,000
and $25,000, respectively. The increase in financial expense is mainly due
to
the financial expenses with respect to convertible bond that were issued in
November 2006 in the amount of $75,000.
Other
Expenses, Net
Other
expenses, net for the twelve months ended December 31, 2006, and 2005, was
$
367,000 and $30,000, respectively. Other expenses, net during the year 2006
consisted write down of loan regarding an investment in an affiliated company
and other trade receivables in the amount of $321,000 compared to $0 during
the
year 2005.
Net
Loss
As
a
result of the factors described above, our net income in 2006 was $5,440,000
compared to a net loss of $3,951,000 in 2005.
Impact
of Inflation and Currency Fluctuations
Because
the majority of our revenue is paid in or linked to the U.S. dollar, we believe
that inflation and fluctuation in the NIS/dollar exchange rate has limited
effect on our results of operations. However, a portion of the cost of our
Israeli operations, mainly personnel, is incurred in NIS. Because some of our
costs are in NIS, inflation in NIS/dollar exchange rate fluctuations do have
some impact on expenses and, as a result, on net income. Our NIS costs, as
expressed in dollars, are influenced by the extent to which any increase in
the
rate of inflation in Israel is not offset, or is offset on a delayed basis,
by a
devaluation of the NIS in relation to the dollar.
Historically,
the New Israeli Shekel, has been devalued in relation to the U.S. dollar and
other major currencies principally to reflect the extent to which inflation
in
Israel exceeds average inflation rates in western economies. Such devaluations
in any particular fiscal period are never completely synchronized with the
rate
of inflation and therefore may lag behind or exceed the underlying inflation
rate.
In
2007,
the rate of evaluation of the NIS against the U.S. dollar was 8.9% and the
rate
of inflation, in Israel, was 3.4%. It is unclear what the devaluation/evaluation
and inflation rates will be in the future, and we may be materially adversely
affected if inflation in Israel exceeds the devaluation of the NIS against
the
U.S. dollar or the evaluation of the NIS against the U.S. Dollar, or if the
timing of the devaluation lags behind increases in inflation in
Israel.
We
do not
engage in any hedging or other transactions intended to manage risks relating
to
foreign currency exchange rate or interest rate fluctuations. At December 31,
2007, we did not own any market risk sensitive instruments except for our
revolving line of credit. However, we may in the future undertake hedging or
other similar transactions or invest in market risk sensitive instruments if
management determines that it is necessary or advisable to offset these
risks.
Seasonality
Our
quarterly operations are subject to fluctuations due to several factors,
including the factors discused under the caption “Risk Factors—The time from our
initial contact with a customer to a sale is long and subject to delays which
could result in the postponement of our receipt of revenues from one accounting
period to the next, increasing the variability of our results of operations
and
causing significant fluctuations in our revenue from quarter to quarter” in Item
3.D. It is our experience that, as a general matter, a majority of our sales
are
made during the latter half of the calendar year consistent with the budgetary,
approval and order processes of our governmental customers.
Additionally, the
period
between our initial contact with a potential customer and the purchase of our
products and services is often long and subject to delays associated with the
budgeting, approval and competitive evaluation processes that frequently
accompany significant capital expenditures, particularly for government
organizations. A lengthy sales cycle may have an impact on the timing of our
revenue, which may cause our quarterly operating results to fall below investor
expectations. We believe that a customer's decision to purchase our products
and
services is discretionary, involves a significant commitment of resources,
and
is influenced by customer budgetary cycles. To successfully sell our products
and services, we generally must educate our potential customers regarding their
use and benefits, which can require significant time and resources. This
significant expenditure of time and resources may not result in actual sales
of
our products and services, which could have an adverse effect on our results
of
operations.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
“
Fair
Value Measurements”. This Statement clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands the disclosures
on
fair value measurements. However, SFAS No. 157 does not require any new
fair value measurement. FAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years and
its provisions should be applied prospectively (with a limited retrospective
application). The Company chose to early apply the provisions of SFAS
No. 157 beginning January 1, 2007.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
SFASB
Statement No. 115” (“SFAS 159”). This pronouncement permits all entities to
choose to elect, at specified election dates, to measure eligible financial
instruments at fair value. An entity shall report unrealized gains and losses
on
items for which the fair value option has been elected in earnings at each
subsequent reporting date, and recognize upfront costs and fees related to
those
items in earnings as incurred and not deferred. SFAS 159 applies to fiscal
years beginning after November 15, 2007, with early adoption permitted for
an entity that has also elected to apply the provisions of SFAS No. 157. An
entity is prohibited from retrospectively applying SFAS No. 159, unless it
chooses early adoption of SFAS 157 also. The Company is currently assessing
the
impact of SFAS No. 159 , if any on its financial position and results of
operations.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”.
This Statement will replace SFAS No. 141, “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) retains the fundamental requirements of SFAS 141 with
respect to the implementation of the acquisition method of accounting ("the
purchase method") for all business combinations and for the identification
of
the acquirer for each business combination. This Statement also establishes
principles and requirements for how the acquirer recognizes and measures in
its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, how the acquirer recognizes
and
measures the goodwill acquired in a business combination and the disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination.
SFAS
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after December 15, 2008 (January 1, 2009 for the
Company). Early adoption of SFAS 141(R) is prohibited. The Company has not
yet
evaluated this statement for the impact, if any, that SFAS 141(R) will have
on
its financial position and results of operations.
In
December 2007, the SFASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). This Statement amends ARB 51
and establishes accounting and reporting standards for the noncontrolling
(minority) interest in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008 (January 1, 2009 for the
Company). Early adoption of SFAS 160 is prohibited. The Company has not yet
determined the impact, if any, that SFAS No. 160 will have on its financial
position and results of operations.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”)
regarding the use of a "simplified" method, as discussed in SAB No. 107 ("SAB
107"), in developing an estimate of expected term of "plain vanilla" share
options in accordance with SFAS No. 123 (revised 2004), "Share-Based
Payment". Until December 31, 2007, SAB 107 allowed the use of the
simplified method. SAB 110 allows, under certain circumstances, to continue
to
accept the use of the simplified method beyond December 31, 2007. The
Company believes that the adoption of SAB 110 will not have a material impact
on
its financial position and results of operations.
In
May
2008, the FASB issued SFAS No.162”The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
U.S. (the GAAP hierarchy).
SFAS
162
iS effective sixty days following the SEC’s approval of PCAOB amendments to AU
Section 411, “The Meaning of “Present Fairly in Conformity With Generally
Accepted Accounting Principles””. The company is currently evaluating the
potential impact, if any, of the adoption of SFAS 162 on its condensed
consolidated financial statements.
|
B.
|
Liquidity
and Capital Resources
|
Net
cash
used in operating activities for the twelve months ended December 31, 2007
was
$4,890,000 compared to $3,047,000 during the period ended December 31, 2006,
an
increase of $1,843,000 or 60%. Our net loss for 2007 was $11,311,000, less
other
adjustments reached to net cash used in operating activities for the year 2007
of $4,890,000, compared to a net income for 2006 of $5,440,000, less a capital
gain from the OTI Transaction in the amount of $10,536,000 and other adjustments
reached to net cash used in operating activities in 2006 of
$3,047,000.
Net
cash
provided by investing activities during the period ended December 31, 2007
was
$4,774,000, compared to $476,000, during the period ended December 31, 2006,
an
increase of $4,298,000. This increase was primarily due to the proceeds from
the
sale of marketable securities of other companies in the amount of $7,639,000
during 2007, compared to $0 during 2006, the decrease in severance pay fund
of
$278,000 during 2007, compared to an increase of $95,000 during 2006. The
increase was to a certain extent offset by an investment in restricted cash
deposit, net of $2,313,000 during 2007, compared to proceeds of $229,000 during
2006 and capitalization of software and intangible assets during 2007 in the
amount of $509,000, compared to $0 during 2006.
Net
cash
used in financing activities during the year ended December 31, 2007 was
$214,000, compared to net cash provided by financing activities of $2,721,000
during the year ended December 31, 2006, a decrease of $2,935,000. This decrease
was primarily due to proceeds from the issuance of convertible bonds and
warrants, net during 2006 of $3,139,000, compared to $0 during 2007.
As
of
December 31, 2007, our cash and cash equivalents totaled $2,114,000, compared
to
$2,444,000 as of December 31, 2006. Restricted cash totaled $3,172,000 as of
December 31, 2007, compared to $859,000 as of December 31, 2006. The main
increase in restricted cash deposit is related to a bank deposit in the amount
of $2,590,000 to secure a guarantee to a supplier, related to a certain project
of the Company with a European country. Restricted cash is invested in
certificates of deposits, which mature within one year, and is used to secure
agreements with a customer or a bank. Marketable securities totaled $4,054,000
as of December 31, 2007, compared to $11,077,000 as of December 31, 2006. The
majority of the decrease in the marketable securities on December 31, 2007
was
due to a decline in the price of OTI shares and the sale of a portion of our
OTI
shares.
We
have
accumulated net losses of approximately $29,936,000 from our inception through
December 31, 2007, and we have continued to accumulate net losses since December
31, 2007. Since May 1999, we have funded operations primarily through cash
generated from our initial public offering on NASDAQ Europe in April 1999,
which
resulted in total net proceeds of approximately $23,600,000 (before offering
expenses), from our sale of the shares of our
former
subsidiary, InkSure Technologies, Inc.,, and, to a lesser extent, from
borrowings from financial institutions, from private placements of our ordinary
shares and warrants to purchase our ordinary shares, in 2004 and 2005, from
issuance of convertible bonds and warrants in 2006 and in 2007 from the sale
of
OTI shares that were received from the sale of the E-ID Division to
OTI.
As of
December 31, 2007, our principal source of liquidity was $2,114,000 of cash
and
cash equivalents. As of December 31, 2007, we had $478,000 of debt outstanding
relating to obligations under our credit facility, an obligation for severance
pay to Israeli employees of $362,000, of which $309,000 is provided by monthly
deposits to severance pay funds, insurance policies and Convertible bonds of
$2,441,000.
During
June and July 2004, we received aggregate gross proceeds of $1,225,000 from
the
private placement of 265,001 ordinary shares and five-year warrants to purchase
106,001 ordinary shares at an exercise price of $6.47 per share. In connection
with the private placement, our placement advisors received warrants to purchase
77,941 ordinary shares at an exercise price of $6.47 per share.
In
August
and September 2004, we received gross proceeds of $2,200,000 from a private
placement to accredited investors of 420,000 ordinary shares and five-year
warrants to purchase 168,000 ordinary shares at an exercise price of $6.47
per
share. In connection with the private placement, our placement agent received
warrants to purchase 30,240 ordinary shares at an exercise price of $6.47 per
share and 75,601 ordinary shares at an exercise price of $5.00 per share. All
of
such warrants issued in this private placement, except 75,601 warrants with
an
exercise price of $5.00, were called by us at a redemption price of $0.0588
per
warrant pursuant to our right to do so if the closing price (or closing bid
price) of our ordinary shares on an U.S. stock exchange, NASDAQ or the OTC
Bulletin Board was equal to or greater than $14.70 per share for 10 out of
any
15 consecutive trading days. The investors exercised warrants to purchase an
aggregate of 194,627 ordinary shares. During the fourth quarter of 2004, 120,176
warrants were exercised for an aggregate amount of approximately $778,000,
and
approximately $130,000 was received in respect of shares to be allotted in
2005.
During the year 2005, 54,451 warrants were exercised for an aggregate amount
of
approximately $352,000.
In
November and December of 2005, we received aggregate gross proceeds of
$3,050,000 from a private placement by certain investors of 836,292 ordinary
shares (of which, 150,807 shares were issued after December 31, 2005.) and
five-year warrants to purchase 292,701 ordinary shares at an exercise price
of
$3.53 per share. The private placement was made to accredited investors pursuant
to Rule 506 of Regulation D, promulgated under the Securities Act of 1933,
as
amended (the “Securities Act”) and to foreign private investors in offshore
transactions in reliance on Regulation S promulgated under the Securities Act.
In connection with the private placement, our placement agent received a cash
fee of $150,000 and our placement advisors received five-year warrants to
purchase 8,446 ordinary shares at an exercise price of $3.53 per share. The
investors that participated in this private placement were granted the right,
for one year following the closing of the private placement and subject to
certain limitations, to participate in future issuances of our capital stock
or
securities (a “Subsequent Financing”) up to an amount which would permit each
investor to maintain its fully diluted percentage equity ownership at the same
level existing prior to the Subsequent Financing (after giving effect to such
Subsequent Financing). The warrants are callable, subject to certain
limitations, at our option if the closing bid price per ordinary share of our
ordinary shares equals or exceeds $7.06 for 20 trading days during the term
of
the warrants. We may however only call, in any 3-month period, the lesser of
(i)
20% of the aggregate amount of the warrants initially issued to a warrant
holder, or (ii) the total number of warrants then held by such
holder.
In
November 2006, we raised $3,156,500 through
issuances
of
two
classes of
units
,
each
consisting of convertible bonds and warrants (the “Convertible Bonds
Transaction”). Units valued at $2,500,000 were issued to
one
investor
,
and
units valued at $656,500 were issued to Special Situation Funds (SSF), based
on
the participation rights provided in private placement during the year 2005,
as
described above, who
are
our
existing shareholders. The Convertible Bonds
of
both
classes
mature
three years from the date of issuance and
bear
interest
at an annual rate of 8%. Any withholding and other taxes payable with respect
to
the interest will be grossed up and paid by us (approximately 3% of the
principal of the bond). Payment of interest will be net of any tax. Subject
to
certain redemption provisions, as described below, the Convertible Bonds
were
convertible
at any
time, at the option of the investors, into our ordinary shares at
an
initial
conversion price of $5.00 per share
.
The
purchasers of the Convertible Bonds were also granted warrants entitling
them to
acquire a total of 134,154 ordinary shares at an exercise price of $5.00
per
share during the next five years. In respect of this transaction, we paid
approximately $215,000 cash, as issuance expenses and granted an option to
acquire up to 25,000 shares of the Company to a third party, exercisable
at $5
per share. The fair market value of this grant
was
$40,000.
Between
February 10, 2008 and February 16, 2008, we had the option to call and redeem
100% of the Convertible Bonds at a price equal to (i) the aggregate principal
amount of the bonds plus (ii) a redemption premium equal to fifteen percent
(15%) of the aggregate principal amount plus (iii) any accrued but unpaid
interest on the aggregate principal amount, calculated through the date of
redemption. We
didn't
exercise
our
options to redeem the Convertible Bonds.
We
have
considered the provisions of EITF Issue No.00-19, “The Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock”, and
have
determined
that the embedded conversion feature should not be separated from the host
instrument because it is qualified for equity classification in paragraphs
12-32
of EITF Issue No.00-19. Therefore the transaction was accounted for in
accordance with EITF 00-27, "
Application
of Issue No. 98-5 to Certain Convertible Instruments" and APB 14, "Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants". The fair
market value of the Warrants was determined based on the fair value of the
instruments issued using the Black-Scholes pricing model, assuming a risk
free
rate of 5%, a volatility factor of 78.21%, dividend yields of 0% and an expected
life of 2 years. The expiration date of the Warrants is November 2011.
As
a
result of the Convertible Bonds Transaction, we recorded an amount of $282,000
in respect of the warrants and an amount of $632,000 as a beneficial conversion
feature in respect of the Convertible Bonds, as a credit to shareholders'
equity
(additional paid in capital).
The
discount of the bonds as a result of the value assigned to the warrants and
the
beneficial conversion feature is amortized during the contractual term of
the
bonds.
In
November 2007,
we
reached an agreement with our investors whereby one investor waived our
compliance with certain covenants under the Convertible Bond in exchange
for a
one-time
payment
by
us
totaling
$276,000 (before gross-up for withheld taxes
)
and to
the other holder, modification of the conversion ratio of the bonds
to
$4.25.
We accounted for the amendment as a modification of the
bond.
As
of
December 31, 2007, we were in compliance with the
amended
terms
of the
Convertible Bonds
.
In
June
2008,
we
reached
an
agreement
with one of the investor (with a principle amount of $2,500,000)
,
under
which, among other things, the investor waived
our
compliance with certain covenants under its Convertible Bond
,
in
exchange for:
1.
Increasing
the interest rate to 10% starting March 31, 2008. Any withholding and other
taxes payable with respect to the interest will be grossed up and paid by
us
(approximately 3% of the principal of the bond).
2.
Reducing
the exercise price of the bond and the warrants to $3 and $2.8,
respectively.
3.
We
undertake to place a fixed charge on all incomes and/or rights in connection
with certain European Airport Project. This charge shall be senior to any
indebtedness and/or other pledge and encumbrance, but shall, however, be
subject
to certain rights of the Company to use part of the income.
4.
Certain
anti-dilution rights with respect to the warrants held by the single
investor.
In
addition, under certain circumstances the investor might have the right to
demand an early payment of partial or full amount of the Convertible Bonds
(up
to the $2,500,000 as mentioned above).
As
of
June 30, 2008, we may be deemed not to be in compliance with certain covenants
under our Convertible Bond with SSF in which case SSF could seek to accelerate
payment of the unpaid principal amount and accrued interest under its
Convertible Bond (an aggregate of approximately $740,000 as of June 30,
2008).
On
December 31, 2006, we concluded the OTI Transaction for 2,827,200 restricted
ordinary shares of OTI. One seventh of the restricted ordinary shares vest
at
the end of each calendar quarter, beginning with the quarter ended December
31,
2006.
As
a
result of the OTI Transaction, we recognized $10,536,000 as a capital gain
on
the sale of the E-ID Division in fiscal year 2006.
The
capital gain was calculated based on OTI’s share price on the closing date, less
a discount due to the lock up restrictions of the shares (based on an
independent appraisal), the carrying value of the assets that were transferred
to OTI and direct expenses (in an amount of $1,550,000) associated with the
sale.
The
direct expenses included, inter alia, the fair value of 212,040 shares out
of
the shares received by us from OTI that will be transferred to consultants,
as a
finder and legal fee, in connection with the transaction.
In
connection with the completion of the sale, during January 2007, a financial
institution extended a $2,500,000 loan to us. In order to secure this loan
we
deposited our OTI shares in favor of the financial institution.
During
2007, we sold 1,414,716 shares of OTI for a total consideration of
$7,639,000.
Our
budget relies on the Existing Projects for which OTI agreed to act as
subcontractor, on the new project with a European airport and on estimated
revenues from our new technologies and acquisitions.
As
of
December 31, 2007, we had credit lines from several banks in an aggregate amount
of $550,000 including long-term loans (from time to time the bank may increase
our credit line for a limited period), of which $120,000 is denominated in
NIS
and bears interest at the Prime rate plus 0.5% to 2.5%, and $430,000 is
denominated in dollars and bears interest at a rate of LIBOR plus 2.5% to 2.9%
(as of December 31, 2007, the rates of the U.S LIBOR and Prime were around
4.5%
and 5.75%, respectively) The weighted average interest rate on the credit lines
as of December 31, 2006 and 2007 was approximately 7.85% and 6.95%,
respectively.
We
had an
unused credit facility in the amount of approximately $100,000 as of December
31, 2007. There is no fee for the unused portion of the credit facility.
During
the period from January 1, 2007 to December 31, 2007, our capital expenditures
totaled approximately $116,000 (compared to $93,000 during 2006 and $315,000
during 2005), of which approximately $62,000 (compared to $69,000 during 2006
and $293,000 during 2005) was expended at or upon Vuance's facilities in Israel,
and approximately $54,000 (compared to $24,000 during 2006 and $22,000 during
2005) was expended upon various facilities of Vuance's subsidiaries outside
Israel. During the first financial quarter of 2008, our capital expenditures
totaled approximately $44,000.
We
believe that our existing capital resources together with revenue from
operations and amounts available under our credit facility will be sufficient
for the Company’s present requirements and will satisfy the operating capital
needs at least till the end of 2008 based upon our anticipated business
activities. However, we may need additional capital within 2008, if it will
undertake large projects or have a delay in one of the anticipated projects.
If
we fail to raise such additional capital, there might be need to implement
certain operational changes in order to decrease the expenditure level.
|
C.
|
Research
and Development
|
Our
past
research and development efforts have helped us to achieve our goal of offering
our customers a complete line of products and solutions. As of December 31,
2007
the number of employees in our research and development activities was 12.
We
focus on the new technology of our RFID and Credentialing, and expect to
maintain our current research and development efforts. We spent $1.2 million,
$1.4 million and $1.7 on research and development in 2005, 2006 and 2007,
respectively. These amounts were spent on the development or improvement of
our
technologies and products, primarily in the areas of RFID and Credentialing
in
2007 and during 2006 and 2005 in the areas of automatic contactless smart card
production line, data capture, management software, population registry software
packages, security printing, and document authentication. We will continue
to
research and develop our RFID, Credentialing and EAC. There can be no assurance
that we can achieve any or all of our research and development
goals.
See
-
“Results of operations” in Item 5.A for additional information.
Industry
Trends
The
increased demand for better security systems and services has positively
affected trends within the industry. Access control and asset management are
now
leading security concerns in commercial and governmental enterprises. This
has
created an increasing demand, both for physical security access to buildings
and
logical security access to corporate networks, combined with real time tracking
and monitoring assets. Our mobile (CSMS and RAPTOR) and fixed access control
solutions, jointly with our RFID enabled security and asset management
solutions, provide an optimal solution to these problems as they deliver
stronger authentication of network users and store personal data for highly
secure physical access control.
Market
and Operational Trends
Our
quarterly operations results may be subject to significant fluctuations due
to
several factors. Some of these factors are based primarily on the timing of
large orders, which represent a significant percentage of our revenues, customer
budget cycles and impact on the timing for buying decisions, as well as
competitive pressures and the ability of our partners, distributors and system
integrators to become effective in selling and marketing our products, as well
as other factors.
We
have
also observed a considerable increase in marketing leads from our growing
partnerships, distributions and systems integration network, and a particular
interest by federal as well as local government customers in public safety
or
incident management. We expect to continue to benefit from marketing programs
and leads generated by this network, as well as sales opportunities identified
by them. We intend to expand our marketing and implementation capacity through
these third parties, including vendors of complementary products and providers
of service applications. By employing third parties in the marketing and
implementation process, we expect to enhance sales by taking advantage of their
market presence.
A
significant portion of our 2007 revenues was derived from our governmental
projects and the remainder was derived from commercial products. Historically,
our revenues have been concentrated in a few large orders and in a relatively
small number of customers, a trend that has been increasing over time. We expect
this trend to change and in the future revenues will come from larger number
of
orders and customers.
Our
revenues from the government market for 2006 and 2007 totaled $7,947,000 and
$10,904,000, respectively. In comparison our revenues from the commercial market
for 2006 and 2007 totaled $848,000 and $2,057,000, respectively. We anticipate
that our mix of revenues from government and commercial markets for 2008 will
be
consistent with our mix of revenues in 2007.
For
more
information about our expectations regarding future cost of revenues, future
operating expenses and liquidity and capital resources, please refer to the
section
captioned
“Risk
Factors” in Item 3
.D.
the
sections
captioned “Results of Operations” in Item 5.A and
“Liquidity
and Capital Resources”
in
Item
5.B
.
Our
development and marketing efforts for the solution and product platforms are
aimed at addressing several systems and service trends that we see developing
in
the industry:
In
December 2006 we concluded the sale of our E-ID Division to OTI. The sale allows
management to focus primarily on the substantial market opportunities we have
identified for our Credentialing and active RFID solutions. Following the events
of September 11, 2001, and major disasters it has become increasingly important
for agencies to track personnel, assets, and other objects on a local
positioning basis. Our CSMS solutions can fulfill critical homeland security
requirements for public safety and emergency services agencies and local
counter-terrorism task forces. In recent months, we have announced contracts
for
the deployment of our CSMS in a number of counties in the U.S., including Los
Angeles, and we are currently discussing CSMS deployments with additional
governmental agencies in North America.
As
a
result of these trends and combined with our core strengths, we are focusing
on
products and solutions that we believe will be significantly influential in
the
present and future markets. As of the date of this Annual Report, we expect
that
our 2008 revenues will be primarily derived from:
|
·
|
Passive
RFID - Electronic Acces Control;
|
|
·
|
High
security solution integration.
|
Recent
Developments and Outlook
We
expect
revenues to continue to be derived from one-time sales and recurring fees,
sales
of high-end solutions, sales of products, consumables and technology. Sales
are
expected to continue through OEM partnerships and continual upgrades,
maintenance and support will continue to be provided to customers. For more
information see the section captioned “
Recent
Developments
”
in
Item
4.
Off
Balance Sheet Arrangements
We
do not
have any off-balance sheet transactions that have or are reasonably likely
to
have a material effect on our current or future financial condition, changes
in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
|
E.
|
Tabular
Disclosure of Contractual
Obligations
|
Contractual
Obligations
The
following table summarizes our contractual obligations and commitments as of
December 31, 2007, which will require significant cash outlays in the
future:
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Long-term
debt obligations
|
|
$
|
82,000
|
|
$
|
82,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital
(finance) lease obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
lease obligations
|
|
$
|
1,542,000
|
|
$
|
603,000
|
|
$
|
939,000
|
|
|
—
|
|
|
—
|
|
Unconditional
purchase obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Convertible
bonds
|
|
$
|
3,156,566
|
|
|
—
|
|
$
|
3,156,566
|
|
|
—
|
|
|
—
|
|
Total
contractual cash obligations
|
|
$
|
4,780,566
|
|
$
|
685,000
|
|
$
|
4,095,566
|
|
|
—
|
|
|
—
|
|
Long-term
debt consists of amounts due on loans from banks, which is described in Item
18,
Note 9 to the financial statements included in this Annual Report. Operating
lease obligations represent commitments under several lease agreements for
our
facilities and the facilities of certain subsidiaries. Convertible bonds
represent the amount due to the investors under the convertible bonds assuming
there will no conversion to shares, which is described in Item 18, Note 13
to
the financial statements included in this Annual Report. Total contractual
cash
obligations represent outstanding commitments for loans from banks and lease
agreement for facilities. We are not a party to any capital leases.
ITEM
6.
Directors,
Senior Management and Employees.
|
A.
|
Directors
and Senior Management.
|
Board
of Directors
We
are
managed by our Board of Directors which, pursuant to our Articles of
Association, the number of directors may be determined from time to time by
the
Board of Directors, and unless otherwise determined, the number of directors
comprising the Board of Directors will be between four and ten. Directors are
elected for a one year term ending at the following annual general meeting
of
shareholders, except for our external directors, who are elected for three
year
terms in accordance with the
Israeli
Companies Law. However, if no directors are elected at an annual meeting, then
the persons who served as directors immediately prior to the annual meeting
shall be deemed reelected at the same meeting, The General Meeting may resolve
that a director be elected for a period longer than by the next annual meeting
but not longer than the third next annual meeting. The Board of Directors elects
one of its members to serve as the Chairman.
The
Board
of Directors is composed as follows (as of the date of this Annual Report):
Name
|
|
Age
|
|
Position
|
Eli
Rozen
|
|
54
|
|
Director,
Chairman of the Board
|
Avi
Landman
|
|
54
|
|
Director
|
Ilan
Horesh
|
|
56
|
|
External
Director (1)
|
Jaime
Shulman
|
|
65
|
|
Director
|
Michal
Brikman
|
|
38
|
|
External
Director - October 28, 2004- October 27, 2007
(2)
|
(1)
“External Director” as defined in the Israeli Companies Law (see explanation
below).
(2)
The
reelection of Michal Brikman, who was elected as an external director on October
28, 2004 for a period of three years, was inadvertently left off the agenda
of our 2007 annual general meeting of shareholders, and
under
Israeli law, an external director cannot be deemed reelected or continue in
office until a successor is elected. Due to this oversight, since October 28,
2007, Ms. Brikman, has not qualified as our “external director,” but has
continued to function as such and as a member of certain committees of our
board
of directors. Ms. Brikman has agreed to be reelected as our external director
and to apply such election retroactively since October 28, 2007. Accordingly,
we
intend to propose to our forthcoming annual general meeting of shareholders
to
reelect Ms. Brikman as an external director for an additional period of three
years commencing as of October 28, 2007. We also intend to have our board of
directors and such committees ratify all of the actions that have been taken
by
them since the expiration of Ms. Brikman's initial term as our external
director.
Eli
Rozen
is one
of our co-founders and serves as a director and as Chairman of our Board of
Directors. Mr. Rozen has served as Chairman since 2000. From 1988 until 2000,
Mr. Rozen served as our Chief Executive Officer and President. Mr. Rozen has
a
Bachelor of Science in Industrial Engineering and Management from the Israel
Institute of Technology.
Avi
Landman
is one
of our co-founders and serves as a member of the Board of Directors and as
our
Research Manager. Prior to joining us in 1988, Mr. Landman worked as a computer
engineer at Gal Bakara Ltd. and prior to that as an electrical engineer at
Eltam
Ltd. Mr. Landman has a Bachelor of Science degree in Computer Engineering from
the Technion - Israel Institute of Technology'.
Ilan
Horesh
,
an
external director, became a member of the Board of Directors on September 17,
2006 and is a member of the audit committee. Mr. Horesh was also a board member
of Retalix Ltd. From 1998 to 2006 and since 2007 is a board member of Taldor
Computer System (1986) Ltd,, an external Director of Rekah Pharmaceutical
Industry Ltd,. Mr. Horesh was a department manager at Pelephone Communication
Ltd. From 1997 to 1998, Mr. Horesh served as the Chief Executive Officer of
"SHEFFA consumer club" a subsidiary of Macabi Health Services. From 1994 to
1997, Mr. Horesh was the manager of the Planning and Projects Department at
Paz
Oil Corp. From 1994 to 1999, Mr. Horesh was a director of Hed-Artzi Ltd. Mr.
Horesh holds Bachelor of Arts degrees in Business Administration and in History
& Geography and a Master of Arts in Political Science.
Jaime
Shulman
,
became
a member of the Board of Directors on September 17, 2006. From 2001 to 2003
Mr.
Shulman was president and C.E.O of Logisticare, Ltd. From 1998 to 2000, Mr.
Shulman was the president and CEO of the Amcor Group. From 1993 to 1997, Mr.
Shulman was the president and CEO of the Magam Enterprises Group. From 1991
to
1998, Mr. Shulman was the active Chairman of the board (part time) of Tana
Industries. From 1991 to 1992, Mr. Shulman was a foreign Consultant to and
subsequently CEO of Metrometer, Inc. (New York). From 1978 to 1991, Mr. Shulman
was in Electra Israel. From 1970 to 1977, Mr. Shulman was Production Manager
at
Tadiran, Plastic and Metal Plant. Mr. Shulman is an Electromechanical Engineer
(equivalent to M.Sc. in Israel) from Buenos Aires University,
Argentina.
Michal
Brikman
,
an
external director, became a member of the Board of Directors on October 28,
2004. Ms. Brikman is a Certified Public Accountant with extensive management
and
accounting experience. Since 2000, Ms. Brikman has been a business consultant
at
Daniel Doron Business Consulting. Ms. Brikman received her Masters in Finance
from Baruch College in New York City and later relocated to Israel.
Executive
Officers and Key Employees
As
of
June 2, 2008, our
executive officers and certain key employees who are not also directors are:
Name
|
|
Age
|
|
Position
|
Eyal
Tuchman
|
|
40
|
|
Chief
Executive Officer
|
Ron
Peer
|
|
58
|
|
Deputy
CEO, Marketing, Technology and Business Development
|
Lior
Maza
|
|
37
|
|
Vice
President of Corporate Finance, Chief Financial Officer
|
Joel
Konicek*
|
|
58
|
|
Chief
Operating Officer
|
Jim
Peroutka*
|
|
54
|
|
Chief
Technology Officer
|
Pete
Martin*
|
|
62
|
|
Vice
President, Vuance USA & President AAID Security Solutions
|
Kyle
John
|
|
41
|
|
Vice
President Sales, North America.
|
Thomas
W. Connell II
|
|
41
|
|
Vice
President Government Solutions
|
*Joined
the Company as a result of the SHC transaction
Eyal
Tuchman
,
Chief
Executive Officer. In April 2006, Mr. Tuchman became Vuance’s Chief Executive
Officer, after 4 years of service as Vuance’s Chief Financial Officer and Chief
Operational Officer. Mr. Tuchman brings to Vuance years of experience in
business development, finance and operational management in publicly traded
companies. Prior to joining us in 2002, he served as Chief Financial Officer
of
Magam Group, a company traded on the Tel-Aviv Stock Exchange, from 1996 to
2002,
and before that, was a Senior Auditor at Kesselman & Kesselman (today,
PriceWaterhouseCoopers). Mr. Tuchman holds a Bachelor of Arts in Economics
&
Accounting from Ben Gurion University and is a certified public
accountant.
Ron
Peer,
Deputy
CEO, Marketing, Technology and Business Development. Mr. Peer has over 30 years
of experience in the technology industry, where he has held top management
positions. Mr. Peer has proved to be a successful leader in the Israeli and
U.S.
high-tech industries with broad and in-depth marketing and business vision.
With
proven experience and expertise in brand counterfeiting and document security
solutions, he has directed startup and turnaround situations and also recruited
and developed strong management teams. With his technological and operational
experience foundations, rooted in the Israel Defense Forces as a Lieutenant
Colonel, Mr. Peer maintains a successful international business and management
career. Mr. Peer holds a Bachelor of Science degree in Electronic Engineering,
and Business and Marketing Diplomas from Tel-Aviv University
Lior
Maza,
Chief
Finance Officer. Mr. Maza has over 10 years of financial management
experience, having served, from 2004 to 2007, as Director of Finance at
PowerDsine, Ltd. (NASDAQ: PDSN), a pioneer in Power over Ethernet (PoE)
solutions that was acquired by Microsemi Corporation (NASDAQ: MSCC). Prior
to
PowerDsine, Mr. Maza served for four years as the Corporate Controller of Invoke
Solutions, a leading innovator of real-time, interactive research technology.
Mr. Maza holds a Masters degree in Business Administration, graduate with
distinction, from Heriot-Watt University, Edinburgh Business School. Mr. Maza
is
a certified public accountant.
Joel
Konicek,
Chief
Operating Officer. Mr. Konicek was the former CEO and President of Security
Holding Corp., and joined Vuance when SHC was acquired in 2007. He published
Security, ID systems and Locks, the Book on Electronic Access Control in
1998.
Jim
Peroutka,
Chief
Technology Officer. Mr. Peroutka was the former CTO of Security Holding Corp.,
and joined Vuance in 2007. As a 30 year veteran of the security industry, Mr.
Peroutka is a specialist in RFID empowered electronic access control for wide
area networks. Previously, he founded and led JRP Data Systems.
Pete
Martin,
Vice
Presidet, Vuance USA and President AAID Security Solutions. Mr. Martin joined
the Company in 2007. As a pioneer in the development of Intelligent Gate Control
and Long Range Active RFID Systems, Mr. Martin has been involved with RFID
applications and security for over 20 years. As a recognized industry leader,
he
has been a featured speaker at association events by ASIS, AFA, National Cargo
Security Council (NCSC), American Association of Airport Executives (AAAE),
RFID
World Boston, Vartech, and the Americas’ Fire and Security Expo
(AFSE).
Kyle
John,
Vice
President Sales, North America. With over 14 years of security industry
experience, Mr. John joined the Company in 2007. He previously served as
Regional Sales Manager for two Fortune 500 companies, ADT Security Services
and
Cintas Corporation.
Thomas
W. Connell II,
Director,
Government Solutions. Mr. Connell was the former CEO of Special Rescue Services
and COO of Disaster Management Solutions, and joined Vuance in 2007. As a 15
year veteran of emergency services, he served on national standards committees
such as National Fire Protection Association (NFPA), and worked with the Federal
Emergency Management Agency, DHS, the Department of Justice, and the Department
of Health and Human Services on multiple domestic preparedness initiatives
after
the September 11 terror attacks.
The
aggregate amount of compensation paid by us to our board members, our Chief
Executive Officer, Deputy CEO, Marketing, Technology and Business Development,
Vice President, Chief Financial Officer, Chief Operating Officer and Chief
Technology Officer (collectively, the "Named Executive Officers") as a group
for
the twelve months ended December 31, 2007 was approximately $959 This sum
includes amounts paid for salary and social benefit. In addition, we have
provided automobiles to our executive officers at our expense.
In
accordance with the requirements of Israeli law, we determine our directors’
compensation in the following manner. First, our audit committee reviews the
proposal for compensation; second, provided that the audit committee approves
the proposed compensation, the proposal is then submitted to our board of
directors for review, except that a director who is the beneficiary of the
proposed compensation does not participate in any discussion or voting with
respect to such proposal; and finally, if our board of directors approves the
proposal, it must then submit its recommendation to our shareholders, which
is
done in the forum of our shareholders’ general meeting. The approval of a
majority of our shareholders is required for any such compensation
proposal.
On
January 26, 2003, at a special general meeting, our shareholders approved the
grant to each of our directors who is not an external director, commencing
on
October 1, 2002, a monthly $1,000 fee and participation remuneration per meeting
of the Board of Directors, provided however, that each of the directors who
is
not an external director shall be entitled to an aggregate sum of monthly
remuneration and participation remuneration of not more than $18,000 per
year.
As
of
December 31, 2007, we had set aside approximately $13,200 to provide pension,
retirement or similar benefits for our board of directors and Named Executive
Officers.
Option/SAR
Grants during the Year Ended December 31, 2007
During
the twelve months ended December 31, 2007, we granted options to purchase
267,600 ordinary shares under our Option Plan (as defined in “Share Options
Plans” below) to nine of our Named Executive Officers at an average exercise
price of $4.667. 61,200 options will expire in 2012 and of the remaining 206,400
options will expire in 2017.
Please
refer to the Section captioned “Share Option Plan” under Item 6. E below for a
description of our Option Plans.
C. Board
Practices
Our
Board
of Directors and senior management consider good corporate governance to be
central to our effective and efficient operations. The following table lists
our
directors, the positions they hold with us and the dates the directors were
first elected or appointed:
Name
|
|
Position
|
|
Period
Served in Office
|
Eli
Rozen
|
|
Director
Chairman
of the Board
|
|
1988-present
July
25, 2000-present
|
Avi
Landman
|
|
Director
|
|
1988-present
|
Ilan
Horesh
|
|
External
Director
|
|
September
17, 2006-present
|
Jaime
Shulman
|
|
Director
|
|
September
17, 2006-present
|
Michal
Brikman
|
|
External
Director
|
|
October
28, 2004 - October 27, 2007 *
|
*
The
reelection of Michal Brikman, who was elected as an external director on October
28, 2004 for a period of three years, was inadvertently left off the agenda
of our 2007 annual general meeting of shareholders, and
under
Israeli law, an external director cannot be deemed reelected or continue in
office until a successor is elected. Due to this oversight, since October 28,
2007, Ms. Brikman, has not qualified as our “external director,” but has
continued to function as such and as a member of certain committees of our
board
of directors. Ms. Brikman has agreed to be reelected as our external director
and to apply such election retroactively since October 28, 2007. Accordingly,
we
intend to propose to our forthcoming annual general meeting of shareholders
to
reelect Ms. Brikman as an external director for an additional period of three
years commencing as of October 28, 2007. We also intend to have our board of
directors and such committees ratify all of the actions that have been taken
by
them since the expiration of Ms. Brikman's initial term as our external
director.
Our
Articles of Association provide that the number of
d
irectors
may be determined from time to time by the Board of Directors, and unless
otherwise determined, the number of directors comprising the Board of Directors
will be between four and ten. The Board of Directors is presently comprised
of
four members, one of whom was elected as external director under the provisions
of the
Israeli
Companies Law (discussed below).
All
directors hold office until their successors are elected at the next annual
general meeting of shareholders, except for our external director Ilan Horesh,
who shall hold office until September 2009.
Under
the
Israeli Companies Law and the regulations promulgated pursuant thereto, Israeli
public companies, namely companies whose shares have been offered to the public,
or that are publicly traded are required to appoint at least two natural persons
as “external directors”. A person may not be appointed as an external director
if the person, or a relative, partner or employer of the person, or any entity
under the person’s control, has or had, on or within the two years preceding the
date of the person’s appointment to serve as an external director, any
affiliation with the company to whose board the external director is proposed
to
be appointed, with the controlling shareholder of such company or with any
entity controlling or controlled by such company or by the controlling
shareholder of such company. The term “affiliation” includes an employment
relationship, a business or professional relationship maintained on a regular
basis, control and service as an office holder (which term includes a director).
In
addition, no person may serve as an external director if the person’s position
or other business activities create, or may create, a conflict of interest
with
the person’s responsibilities as an external director or interfere with the
person’s ability to serve as an external director or if the person is an
employee of the Israel Securities Authority or of an Israeli stock exchange.
If,
at the time of election of an external director, all other directors are of
the
same gender, the external director to be elected must be of the other gender.
Pursuant
to the Israeli Companies Law, at least one of the external directors, as well
as
a number of the non-external directors to be determined by the board of
directors, are required to have “accounting and financial expertise” and the
other external directors are required to have "professional skills", as such
terms are defined in regulations recently promulgated under the Israeli
Companies Law.
Each
committee of a company’s board of directors that has the authority to exercise
powers of the board of directors is required to include at least one external
director and its audit committee must include all external directors.
External
directors are elected at the general meeting of shareholders by a simple
majority, provided that the majority includes at least one-third of the
shareholders who are not controlling shareholders, who are present and voting,
or that the non-controlling shareholders who vote against the election hold
one
percent or less of the voting power of the company.
At
our
2003 Annual General Meeting held on June 30, 2003, Esther Koren and Avi Elkind
were each re-elected to serve as external directors for an additional term
of
three years ending on June 30, 2006. However, Esther Koren resigned as a member
of our Board of Directors due to personal reasons effective July 14, 2004.
Ms.
Michal Brikman was subsequently appointed to our Board of Directors as an
External Director, which appointment was approved by our shareholders at a
special general shareholder meeting on October 28, 2004. In addition, Ms.
Brikman has been appointed to the Audit Committee and several other committees.
Ms. Brikman's term as External Director, and consequently as a member of such
committees expired on October 27, 2007, but we intend to propose to our
forthcoming annual general meeting of shareholders to reelect Ms. Brikman as
an
external director for an additional period of three years commencing as of
October 28, 2007. We also intend to have our board of directors and such
committees ratify all of the actions that have been taken by them since the
expiration of Ms. Brikman's initial term as external director. On September
17,
2006, our general meeting appointed Mr. Ilan Horesh as an External Director.
In
addition, Mr. Horesh has been appointed to the audit committee.
Under
the
Israeli Companies Law, an external director cannot be dismissed from office
unless: (i) the board of directors determines that the external director no
longer meets the statutory requirements for holding the office, or that the
external director has breached the external director's fiduciary duties and
the
shareholders vote, by the same majority required for the appointment, to remove
the external director after the external director has been given the opportunity
to present his or her position; (ii) a court determines, upon a request of
a
director or a shareholder, that the external director no longer meets the
statutory requirements of an external director or that the external director
has
breached his or her fiduciary duties to the company; or (iii) a court
determines, upon a request of the company or a director, shareholder or creditor
of the company, that the external director is unable to fulfill his or her
duty
or has been convicted of specified crimes.
We
have
the following committees:
Audit
Committee
The
Israeli
Companies
Law requires public companies to appoint an audit committee comprised of at
least three directors, including all of the external directors, and further
stipulates that the chairman of the board of directors of a public company,
any
director employed by or providing other services on a regular basis to the
company and the controlling shareholder or any relative of the controlling
shareholder of such company may not be members of the audit committee of the
company. Since the expiration of Ms. Brikman's term as an external director
(on
October 27, 2007) and due to the oversight omission of her reelection for an
additional term of three years, we have not had an audit committee (the "Audit
Committee") which complies with the requirements of Israeli law. During that
period our “audit committee” continued to operate, however no event or action
which under the Israeli Companies Law requires approval by the Audit Committee
has occurred or been taken. We intend to propose to our forthcoming annual
general meeting of shareholders to reelect Ms. Brikman as an external director
for an additional period of three years commencing as of October 28, 2007.
We
also intend to have our board of directors and Audit Committee ratify all of
the
actions that have been taken by them since the expiration of Ms. Brikman's
initial term as external director. In 2007 the Audit Committee adopted an audit
committee charter which regulates its operations. According to our Audit
Committee charter, the objective of the Audit Committee is to assist the Board
of Directors’ oversight of: the Company’s accounting practices; the integrity of
the Company’s financial statements; the Company’s accounting and financial
reporting processes; the Company’s compliance with legal and regulatory
requirements; the independent auditors’ qualifications, independence, and
performance; audits of the Company’s financial statements; the internal audit
function, and to locate deficiencies in the business management of the Company,
among other things, in consultation with the Company’s independent auditors and
internal auditors and to suggest to the Board of Directors the measures to
be
taken regarding such deficiencies. Mr. Ilan Horesh Mr. Jaime Shulman and, until
October 27, 2007, Ms. Brikman were the members of the Audit
Committee.
Compensation
(
Remuneration)
Committee
We
have a
compensation committee (the "Compensation Committee"). In 2007 the Compensation
Committee adopted a Compensation Committee charter, which regulates its
operations. According to the Compensation Committee charter it is responsible
for determining the compensation (including salaries, bonuses and equity
incentive compensation awards) of executive officers, including the Chief
Executive Officer, other senior management and members of the Board of
Directors. Mr. Ilan Horesh and Mr. Jaime Shulman are at the present time the
members of the Compensation Committee.
Nominating
and Corporate Governance Committee Charter
On
May
15, 2007, our Board of Directors approved the establishment of a Nominating
and
Corporate Governance Committee (the "Nominating and Corporate Governance
Committee"). The Nominating and Corporate Governance Committee is responsible
for identifying individuals qualified to become board members, consistent with
criteria approved by the Board of Directors, and recommending that the Board
of
Directors select the director nominees for election at the general meeting
of
shareholders. The Committee is also responsible for developing and recommending
to the Board of Directors a set of corporate governance guidelines applicable
to
the Company, periodically reviewing such guidelines, recommending any changes
thereto, and overseeing the evaluation of the Board of Directors. The Nominating
and Corporate Governance Committee is currently comprised of Mr. Ilan Horesh
and
Mr. Jaime Shulman.
Management
Employment
Agreements
We
maintain written employment agreements with substantially all of our key
employees. These agreements provide, among other matters, for monthly salaries,
our contributions to Managers’ Insurance and an Education Fund and severance
benefits. All of our agreements with our key employees are subject to
termination by either party upon the delivery of notice of termination as
provided therein.
Internal
Auditor
Under
the
Israeli Companies Law, the board of directors must appoint an internal auditor,
proposed by the audit committee. The role of the internal auditor is to examine,
among other matters, whether the company’s activities comply with the law and
orderly business procedure. Under the Israeli Companies Law, the internal
auditor may be an employee of the company 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 company’s independent accounting firm or its
representative. We have appointed the office of Rozenblum-Holtzman as our
internal auditor in accordance with the requirements of the Israeli Companies
Law.
D. Employees
As
of
December 31, 2007 and 2006, we had 67 and 56 full-time employees, respectively.
The following table describes our employees and the employees of our
subsidiaries by department.
|
|
Dec. 31,
2005
|
|
Dec. 31,
2006
|
|
Dec. 31,
2007
|
|
|
|
|
|
|
|
|
|
Research,
Development & Manufacturing
|
|
|
24
|
|
|
26
|
|
|
23
|
|
Marketing
and Sales
|
|
|
23
|
|
|
20
|
|
|
34
|
|
Administration
|
|
|
10
|
|
|
10
|
|
|
13
|
|
Total
|
|
|
57
|
|
|
56
|
|
|
70
|
|
Over
the
past three years, the number of our employees by geographic area was as follows:
|
|
Dec. 31,
2005
|
|
Dec. 31,
2006
|
|
Dec. 31,
2007
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
38
|
|
|
38
|
|
|
22
|
|
United
states
|
|
|
5
|
|
|
5
|
|
|
43
|
|
Rest
of the world
|
|
|
14
|
|
|
13
|
|
|
5
|
|
Total
|
|
|
57
|
|
|
56
|
|
|
70
|
|
From
time
to time, we have engaged temporary employees to fill open positions. These
temporary employees, however, historically have not comprised a material number
of our employees.
As
a
result of the OTI Transaction we terminated the employment of approximately
19
employees that were employed by us in the E-ID Division (the above table
includes, as of December 31, 2006, also the employees of the E-ID Division).
Our
current total number of employees is 66.
Vuance’s
Israeli employees are not part of a collective bargaining agreement. However,
in
Israel we are subject to certain labor statutes, and to certain provisions
of
collective bargaining agreements between the Histadrut, the General Federation
of Labor in Israel, and the Coordinating Bureau of Economic Organizations,
including the Industrialists' Association. These are applicable to our employees
by virtue of expansion orders of the Israeli Ministry of Labor and Welfare.
These statutes and provisions principally concern the length of the workday,
minimum daily wages for professional workers, procedures for dismissing
employees, determination of severance pay, annual and other vacations, sick
pay
and other conditions for employment. In addition, by virtue of such expansion
order all employees in Israel
are
entitled to automatic adjustment of wages relative to increases in the Consumer
Price Index in Israel. The amount and frequency of these adjustments are
modified from time to time. We provide our employees with benefits and working
conditions that comply with the required minimum.
Generally,
all nonexempt male adult citizens and permanent residents of Israel, under
the
age of 40, or older for reserves officers or citizens with certain occupations,
are obligated to perform annual military reserve duty and are subject to being
called for active duty at any time under emergency circumstance
s
.
Some of
our officers and employees are obligated to perform annual reserve duty. While
we have operated effectively under these requirements since we began operations,
no assessment can be made as to the full impact of such requirements on our
workforce or business if conditions should change, and no prediction can be
made
as to the effect on us of any expansion of such obligations.
All
of
our employees have entered into confidentiality agreements. We have also granted
certain employees options to purchase shares of our ordinary shares under our
option plan. We consider our relationship with our employees to be good and
have
never experienced a strike or work stoppage.
E. Share
Ownership
The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares by our directors and Named Executive Officers
as of May 31, 2008. As of that date, we had 5,151,269 ordinary shares
outstanding.
Name
|
|
Ordinary
Shares held
directly and
beneficially
|
|
% of
Outstanding
Ordinary
Shares as of
May 31, 2008
|
|
Number of
options
outstanding
|
|
Exercise
price
|
|
Expiration date
|
|
Eli
Rozen
|
|
|
675,128
|
(1)
|
|
12.47
|
%
|
|
109,817
8,500
42,500
85,000
51,000
|
|
|
2.4706
5.0000
5.0000
4.1180
5.0000
|
|
|
January
26, 2013
January
11, 2015
January
11, 2015
April
27, 2012
January
19, 2017
|
|
Avi
Landman
|
|
|
422,580
|
(2)
|
|
8.17
|
%
|
|
8,500
8,500
20,400
|
|
|
2.4706
5.0000
5.0000
|
|
|
January
26, 2013
January
11, 2015
January
19, 2017
|
|
Eyal
Tuchman
|
|
|
120,550
|
(3)
|
|
2.29
|
%
|
|
5,100
12,750
25,500
21,250
51,000
|
|
|
2.4706
2.4706
14.8235
5.000
4.4118
|
|
|
June
19, 2012
March
28, 2014
November 11, 2014
October 4, 2014
May
29, 2016
|
|
James
Pertuka
|
|
|
131,153
|
(4)
|
|
2.55
|
%
|
|
8,000
|
|
|
4.64
|
|
|
December 18, 2017
|
|
Joel
Konicek
|
|
|
131,153
|
(5)
|
|
2.55
|
%
|
|
8,000
|
|
|
4.64
|
|
|
December 18, 2017
|
|
Directors
and Named Executive Officers as a Group ([10] persons)(7)
|
|
|
1,547,144
|
(6)
|
|
27.10
|
%
|
|
561,017
|
|
|
2.4709
– 14.8235
|
|
|
January
2013 –
February
2018
|
|
(1)
Includes (a) 412,311 shares held directly by Eli Rozen, and (b) options to
purchase 262,817 ordinary shares which are currently exercisable or exercisable
within 60 days of May 31, 2008, of which 135,317 ordinary shares are held by
Finel Architecture and Engineering Ltd., a company owned solely by Mr. Rozen
(“Finel”).
(2)
Includes (a) 398,780 ordinary shares held by Avi Landman, of which 85,000 shares
are held by Ashland Investments LLC, a limited liability company solely owned
by
Mr. Landman (“Ashland”), and (b) options to purchase 23,800 ordinary shares
which are currently exercisable or exercisable within 60 days of May 31,
2008.
(3)
Includes (a) 4,950 shares held directly by Eyal Tuchman, and (b) options to
purchase 115,600 ordinary shares which are currently exercisable or exercisable
within 60 days of May 31, 2008.
(4)
Includes 131,153 shares held directly by James Pertuka.
(5)
Includes 131,153 shares held directly by Joel Konicek.
(6)
Includes options to purchase 435,364 ordinary shares which are currently
exercisable or exercisable within 60 days of May 31, 2008.
(7)
See
notes 1, 2, 3, 4, 5 and 6. Each of the directors and executive officers not
separately identified in the above table beneficially owns less than 1% of
our
outstanding ordinary shares (including options held by each such party, and
which are exercisable or exercisable within 60 days of May 31, 2008) and has
therefore not been separately disclosed.
All
of
our ordinary shares have identical voting rights.
Share
Option Plans
On
February 14, 1999, the Board of Directors adopted, and our shareholders
subsequently approved, the 1999 Employee Stock Option Plan, which was amended
and restated in March 2002 (the "1999 Option Plan"). We no longer use the 1999
Option Plan to issue stock options. In 2003, we adopted a new stock option
plan
under which we now issue stock options (the “Option Plan”). In December 2004, we
filed a Registration Statement on Form S-8 with the SEC registering (i) 170,000
ordinary shares available for issuance upon exercise of stock options reserved
for grant under the Option Plan, (ii) 594,034 ordinary shares issued or issuable
upon exercise of options previously granted under the Option Plan, and (iii)
109,412 ordinary shares issued or issuable upon exercise of options previously
granted under the 1999 Option Plan. The Option Plan is intended to provide
incentives to our employees, officers, directors and/or consultants by providing
them with the opportunity to purchase our ordinary shares. The Option Plan
is,
subject to the provisions of the Israeli Companies Law, administered by the
Compensation Committee, and is designed: (i) to comply with Section 102 of
the
Israeli Tax Ordinance or any provision which may amend or replace it and the
rules promulgated thereunder and to enable us and grantees thereunder to benefit
from Section 102 of the Israeli Tax Ordinance and the Commissioner’s Rules; and
(ii) to enable us to grant options and issue shares outside the context of
Section 102 of the Israeli Tax Ordinance. Options granted under the Option
Plan
will become exercisable ratably over a period of three to five years or
immediately in certain circumstances, commencing with the date of grant. The
options generally expire no later than 10 years from the date of grant. Any
options, which are forfeited or canceled before expiration, become available
for
future grants. As of December 31, 2007, 4,361,294 ordinary shares are available
for future grants of options, warrants, shares and other financial instruments.
As
a
result of an amendment to Section 102 of the Israeli Tax Ordinance as part
of
the 2003 Israeli tax reform, and pursuant to an election made by us thereunder,
capital gains derived by optionees arising from the sale of shares issued
pursuant to the exercise of options granted to them under Section 102 after
January 1, 2003, will generally be subject to a flat capital gains tax rate
of
25%. Previously, such gains were taxed as salary income at the employee’s
marginal tax rate (which could be up to 50%). However, as a result of this
election, we will no longer be allowed to claim as an expense for tax purposes
the amounts credited to such employees as a benefit when the related capital
gains tax is payable by them, as we had previously been entitled to do under
Section 102. For certain information as to the Israeli tax reform, see
“Taxation.” in Item 10.
On
June
27, 2007, our Compensation Committee and board of directors approved a
new option plan under which the Company may grant stock options to the U.S.
employees of the Company and its subsidiaries. Under this new option plan,
the Company may grant both qualified (for preferential tax treatment) and
non-qualified stock options. On August 15, 2007 the new option plan was approved
by the shareholders of the Company at the general shareholders
meeting.
During
2005, the Board of Directors approved a grant of options to acquire up to 15,300
and 8,500 ordinary shares to certain employees at exercise prices of $5.24,
and
$4.18 per share, respectively. An additional 68,001 options were granted during
2005 to related parties.
On
December 29, 2005, our Board of Directors and Audit Committee approved the
acceleration of the vesting schedule for certain of the stock options granted
to
our employees and officers as an incentive. As a result, options to purchase
a
total of 121,126 ordinary shares became exercisable at the date of the approval.
The acceleration did not have any effect on the financial statements since
the
options had a zero intrinsic value at the original date of grant and at the
date
of acceleration.
On
May
30, 2006, the Board of Directors approved a grant of options to acquire up
to
93,501 ordinary shares to certain employees and officers. The exercise price
of
these options is $4.42 per share.
During
2007, the board of Directors approved grants of options as follows:
Number of options
granted
|
|
Exercise
price
|
|
|
|
|
|
37,400
|
|
|
4.412
|
|
71,500
|
|
|
5.100
|
|
21,000
|
|
|
4.900
|
|
62,333
|
|
|
0.014
|
|
47,372
|
|
|
0.058
|
|
5,500
|
|
|
4.850
|
|
141,500
|
|
|
4.640
|
|
34,000
|
|
|
4.120
|
|
An
additional 217,600 options were granted during 2007 to related parties including
directors.
A
summary
of our stock option activity, and related information is as follows:
|
|
Year
ended December 31
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Outstanding
at beginning of year
|
|
|
569,905
|
|
$
|
5.71
|
|
|
595,971
|
|
$
|
5.77
|
|
|
553,902
|
|
$
|
5.12
|
|
Granted
|
|
|
91,801
|
|
$
|
4.95
|
|
|
93,501
|
|
$
|
4.42
|
|
|
638,205
|
|
$
|
3.86
|
|
Exercised
|
|
|
(37,684
|
)
|
$
|
2.48
|
|
|
(43,152
|
)
|
$
|
2.48
|
|
|
(25,968
|
)
|
$
|
3.16
|
|
Canceled
and forfeited
|
|
|
(28,051
|
)
|
$
|
5.53
|
|
|
(92,418
|
)
|
$
|
9.95
|
|
|
(89,383
|
)
|
$
|
5.06
|
|
Outstanding
at end of year
|
|
|
595,971
|
|
$
|
5.77
|
|
|
553,902
|
|
$
|
5.12
|
|
|
1,076,756
|
|
$
|
4.43
|
|
Exercisable
at end of year
|
|
|
515,504
|
|
$
|
6.06
|
|
|
481,651
|
|
$
|
5.18
|
|
|
591,485
|
|
$
|
4.81
|
|
The
weighted average fair value of options granted during the reported period was
$3.08, $1.89 and $2.87, per option, for the years ended December 31, 2005,
2006
and 2007, respectively.
The
fair
value of these options was estimated on the date of grant using the Black &
Scholes option pricing model. The following weighted average assumptions were
used for the 2006 and 2007 grants: risk free rate of 5%, dividend yield of
0%,
expected volatility factor of 57.14% and 57.20% respectively, and expected
term
of 3.09 and 3.64 years respectively.
Regarding
the assumptions used for the proforma information required under FAS 123 in
2005
see Note 2w in the financial reports below.
The
expected volatility was based on the historical volatility of our stock. The
expected term was based on the historical behavior of the employees and based
on
Management estimate.
Compensation
expenses recognized by us related to our share-based employee compensation
awards were $47,000 based on the provisions of APB 25, 225,000 and $1,032,000
based on the provisions of SFAS 123R for the years ended December 31, 2005,
2006 and 2007, respectively.
The
options outstanding and exercisable as of December 31, 2007, have been separated
into ranges of exercise prices as follows:
Range of exercise
price
|
|
Options
outstanding
as of
December 31,
2007
|
|
Weighted
average
remaining
contractual
life (years)
|
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic
value
|
|
Options
exercisable
as of
December 31,
2007
|
|
Weighted
average
exercise price
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.01 - $ 0.06
|
|
|
109,705
|
|
|
9.63
|
|
$
|
0.03
|
|
$
|
511
|
|
|
23,686
|
|
$
|
0.06
|
|
$
|
110
|
|
$
2.47 - $ 3.06
|
|
|
184,243
|
|
|
4.69
|
|
$
|
2.56
|
|
$
|
392
|
|
|
184,243
|
|
$
|
2.56
|
|
$
|
392
|
|
$
4.18 - $ 4.90
|
|
|
376,900
|
|
|
7.81
|
|
$
|
4.42
|
|
$
|
102
|
|
|
174,248
|
|
$
|
4.21
|
|
$
|
84
|
|
$
5.00 - $ 5.89
|
|
|
347,050
|
|
|
6.65
|
|
$
|
5.05
|
|
|
-
|
|
|
150,450
|
|
$
|
5.07
|
|
|
-
|
|
$11.76
- $ 14.83
|
|
|
57,800
|
|
|
4.62
|
|
$
|
14.69
|
|
|
-
|
|
|
57,800
|
|
$
|
14.69
|
|
|
-
|
|
$
23.64
|
|
|
1,058
|
|
|
0.25
|
|
$
|
23.64
|
|
|
-
|
|
|
1,058
|
|
$
|
23.64
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076,756
|
|
|
|
|
$
|
4.43
|
|
|
|
|
|
591,485
|
|
$
|
4.81
|
|
|
|
|
The
aggregate intrinsic value of the above table represents the total intrinsic
value, based on the Company’s stock price of $4.69 as of December 31, 2007, less
the weighted average exercise price per range. This represents the potential
amount received by the option holders had all option holders exercised their
options as of that date.
A
summary
of the status of the Entity’s non-vested options granted to employees as of
December 31, 2007 and changes during the year ended December 31, 2007 is
presented below:
|
|
Options
|
|
Weighted–average
grant-date fair
value
|
|
|
|
|
|
|
|
Non-vested
at January 1, 2007
|
|
|
72,251
|
|
$
|
2.29
|
|
Granted
|
|
|
638,205
|
|
$
|
2.87
|
|
Vested
|
|
|
(190,853
|
)
|
$
|
3.02
|
|
Forfeited
|
|
|
(34,332
|
)
|
$
|
2.23
|
|
Non-vested
at December 31, 2007
|
|
|
485,271
|
|
$
|
2.77
|
|
As
of
December 31, 2007, there was $967,000 total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
stock option plans, of which, $626,000 is expected to be recognized during
the
year 2008.
ITEM
7.
Major
Shareholders And Related Party Transactions.
The
following table lists the beneficial ownership of our securities as of May
31,
2008 by each person known by us to be the beneficial owner of more than 5%
of
the outstanding shares of any class of our securities.
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. The principal
address of our directors and executive officers listed below (all but Jacob
Hassan, Special Situations Fund III, L.P., Special Situations Fund III, Q.P,
Special Situations Cayman Fund, L.P. and Homeland Security Capital Corporation)
is c/o Vuance Ltd., Sagid House “Hasharon Industrial Park” P.O.B 5039, Qadima
60920 Israel. We believe that all persons named in the table have sole voting
and sole investment power with respect to all shares beneficially owned by
them.
All figures include ordinary shares issuable upon the exercise of convertible
bonds, options and warrants exercisable within 60 days of May 31, 2008 and
deemed to be outstanding and beneficially owned by the person holding those
bonds, options or warrants for the purpose of computing the percentage ownership
of that person, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. None of the following
major shareholders have different voting rights from the other holders of our
ordinary shares.
Name of Beneficial Owner
|
|
Number of Shares
Beneficially Owned
|
|
Percentage of Shares
Outstanding
|
|
Jacob
Hassan (1)
|
|
|
398,881
|
|
|
7.74
|
%
|
Avi
Landman (2)
|
|
|
422,580
|
|
|
8.17
|
%
|
Eli
Rozen (3)
|
|
|
675,128
|
|
|
12.47
|
%
|
Special
Situations Fund III, L.P. (“SSF”)(4)
|
|
|
|
|
|
|
|
Special
Situations Fund III, Q.P. (“SSFQP”)(5)
|
|
|
1,498,578
|
|
|
26.89
|
%
|
Special
Situations Cayman Fund, L.P. (“Cayman”)(6)
|
|
|
|
|
|
|
|
Homeland
Security Capital Corporation ("HMSC") (7)
|
|
|
692,660
|
|
|
13.44
|
%
|
Investor
through convertible bond (8)
|
|
|
606,250
|
|
|
10.53
|
%
|
|
(1)
|
Mr.
Hassan’s address is 21 Shnat Hayovel, Hod Hasharon ,
Israel.
|
|
(2)
|
Includes
(a) 398,780 ordinary shares held by Avi Landman, of which 85,000
shares
are held by Ashland, and (b) options to purchase 23,800 ordinary
shares
which are currently exercisable or exercisable within 60 days of
May 31,
2008.
|
|
(3)
|
Includes
(a) 412,311 shares held directly by Eli Rozen, and (b) options to
purchase
262,817 ordinary shares which are currently exercisable or exercisable
within 60 days of May 31, 2008, of which 118,317 ordinary shares
are held
by Finel.
|
|
(4)
|
Includes
(a) 63,646 ordinary shares, (b) warrants to purchase 16,871 ordinary
shares which are currently exercisable or exercisable within 60 days
of
May 31, 2008, (c) convertible bond which can be convert into 7,765
ordinary shares (d) 727,599 shares held by its affiliate, SSFQP,
(e)
warrants held by SSFQP to purchase 197,292 ordinary shares which
are
currently exercisable or exercisable within 60 days of May 31, 2008,
(f)
convertible bond which can be convert into 115,294 ordinary shares
(g)
200,143 ordinary shares held by its affiliate, Cayman, (h) warrants
held
by Cayman to purchase 53,660 ordinary shares which are currently
exercisable or exercisable within 60 days of May 31, 2008 and (i)
convertible bond which can be convert into 31,427 ordinary
shares.
|
|
(5)
|
Includes
(a) 727,599 ordinary shares, (b) warrants to purchase 197,292 ordinary
shares which are currently exercisable or exercisable within 60 days
of
May 31, 2008, (c) convertible bond which can be convert into 115,294
ordinary shares, (d) 63,646 shares held by its affiliate, SSF, (e)
warrants held by SSF to purchase 16,871 ordinary shares which are
currently exercisable or exercisable within 60 days of May 31, 2008,
(f)
convertible bond which can be convert into 7,765 ordinary shares,
(g)
200,143 ordinary shares held by its affiliate, Cayman, and (h) warrants
held by Cayman to purchase 53,660 ordinary shares which are currently
exercisable or exercisable within 60 days of May 31, 2008 and (i)
convertible bond which can be convert into 31,427 ordinary
shares..
|
|
(6)
|
Includes
(a) 200,143 ordinary shares, (b) warrants to purchase 53,660 ordinary
shares which are currently exercisable or exercisable within 60 days
of
May 31, 2008, (c) convertible bond which can be convert into 31,427
ordinary shares, (d) 727,599 shares held by its affiliate, SSFQP,
(e)
warrants held by SSFQP to purchase 197,292 ordinary shares which
are
currently exercisable or exercisable within 60 days of May 31, 2008,
(f)
convertible bond which can be convert into 115,294 ordinary shares,
(g)
63,646 ordinary shares held by its affiliate, SSF, and (h) warrants
held
by SSF to purchase 16,871 ordinary shares which are currently exercisable
or exercisable within 60 days of May 31, 2008 and (i) convertible
bond
which can be convert into 7,765 ordinary
shares.
|
|
(7)
|
HMSC
granted an irrevocable power of attorney to our Chairman of the Board
of
Directors, to exercise all voting rights related to its Vuance Shares
until the sale or transfer of such Vuance Shares by HMSC to an
unaffiliated third party in an arm’s-length transaction. (the shares are
subject to a lock-up and are not registered (See note 1a to the financial
reports below)
|
|
(8)
|
Includes
(a) warrants to purchase 106,250 ordinary shares which are currently
exercisable or exercisable within 60 days of May 31, 2008, (b) convertible
bond which could be convert into 500,000 ordinary
shares.
|
To
the
best of our knowledge based on the information known to us, there has not been
any significant change in the percentage ownership of the our major shareholders
during the last three years other than changes resulting from our private
placements in 2004 and 2005, the issuance of convertible bonds in November
2006,
the shares issued according to the acquisition of SHC, the exercise of warrants
issued in those offerings, and the grant of options to Messrs. Rozen and
Landman.
As
of
December 31, 2007, to the best of our knowledge based on the information
available to us, we had approximately 23 registered holders of our ordinary
shares.
To
the
best of our knowledge based on the information available to us, there are no
existing arrangements that may at a future date result in a change of control
of
Vuance.
|
B.
|
Related
Party Transactions
|
It
is our
policy to enter into transactions with related parties on terms that, on the
whole, are no less favorable than those that would be available from
unaffiliated parties. Based on our experience in the business segments in which
we operate and the terms of our transactions with unaffiliated third parties,
we
believe that all of the transactions described below met our policy standards
at
the time they occurred.
On
October 1, 2001, we entered into a consulting agreement with a company owned
by
the Chairman of our Board of Directors who was one of our co-founders. In
consideration of these consulting services, we have undertaken to pay $ 10,500
per month plus motor vehicle expenses. In addition, we pay $1,500 per month
as a
director’s fee. During 2007 we paid $ 144,000 pursuant to this
agreement.
On
October 1, 2001, we entered into a consulting agreement with a company owned
by
a member of our Board of Directors, who was also one of our co-founders and
a
principal shareholder. On January 13 2005, the general shareholders meeting
approved the following amendments to the consulting agreement:
|
·
|
As
of the date of the approval of the General Shareholders Meeting,
to
increase the consideration set forth in the said agreement to an
amount of
$ 7,000 per month.
|
|
·
|
Upon
the termination of the then exciting car lease agreement, to increase
the
car lease, to a price of up to NIS 4,200 (approximately $ 1,100 as
of
December 31, 2007), (excluding tax) per
month.
|
|
·
|
To
grant a one-time bonus of NIS 130,000 including VAT
which was paid during the year 2005
.
|
In
addition the Company pays $ 1,500 per month as a director’s fee. In 2007 we paid
$102,000 pursuant to this agreement. Also, on January 21, 2007, the General
Shareholders Meeting approved the grant of options to acquire up to 20,400
ordinary shares of the Company at an exercise price of $5 per share under the
Option Plan.
On
October 1, 2001, we entered into a consulting agreement with a company owned
by
one of the co-founders of the Company. In consideration for these services,
we
have undertaken to pay $ 4,600 per month plus motor vehicle expenses. During
2007 we paid $71,000, pursuant to this agreement.
On
January 21, 2007, the General Meeting of Shareholders approved the grant of
options to the Chairman of the Board of Directors and to a director who is
one
of the co-founders to acquire up to 51,000 and 20,400, respectively ordinary
shares of the Company, at an exercise price of $5.
On
April
29, 2007, the General Meeting of Shareholders approved the grant of options
to
the Chairman of the Board of Directors and to two external directors to acquire
up to 85,000 and 40,800, respectively ordinary shares of the Company, at an
exercise price of$4.118 and $5 respectively.
On
August
15, 2007, the General Meeting of Shareholders approved the grant of options
to a
director to acquire up to 20,400 ordinary shares of the Company, at an exercise
price of $5.
|
C.
|
Interests
of Experts and
Counsel
|
Not
applicable.
ITEM
8.
|
Financial
Information.
|
|
A.
|
Consolidated
Statements and Other Financial Information (Audited)
|
Refer
to
Item 18, which contains the following financial statements:
|
•
|
|
Consolidated
Balance Sheets
|
|
•
|
|
Consolidated
Statements of Operations
|
|
•
|
|
Statements
of Changes in Shareholders’ Equity
|
|
•
|
|
Consolidated
Statements of Cash Flows
|
|
•
|
|
Notes
to Consolidated Financial Statements
|
Export
Sales
Sales
in
Israel during each of the years 2005, 2006 and 2007 was $210,000, $194,000
and
$371,000, respectively. Export sales during each of the years 2005, 2006 and
2007 was $8,252,000 (98% of the total sales volume), $8,601,000 (98% of the
total sales volume) and $12,590,000 (97% of the total sales volume),
respectively.
Legal
Proceedings
We
are
party to legal proceedings in the normal course of our business. Other than
as
described below, there are no material pending legal proceedings to which we
are
a party or of which our property is subject. Although the outcome of claims
and
lawsuits against us cannot be accurately predicted, we do not believe that
any
of the claims and lawsuits described in this paragraph, individually or in
the
aggregate, will have a material adverse effect on our business, financial
condition, results of operations or cash flows for any quarterly or annual
period.
On
January 20, 2008, the Manufacturers Association of Israel (the "Plaintiff")
filed a lawsuit with the labour court in Tel Aviv-Jaffa (the "Court") against
us, seeking an amount of NIS 82,789 + VAT (as of June 20, 2008 approximately
$25,700 + VAT) for service fees for the years 2001-2007, as well as legal
expenses and attorney
'
s
fees of
the Plaintiff. In addition, the Plaintiff has asked the Court to instruct us
to
submit the necessary documentation, certified by the Company
'
s
accountant, needed to calculate the service fees sought by the
Plaintiff.
The
service fees sought by the Plaintiff are allegedly required on the basis of
certain Collective Agreements that according to the Plaintiff apply to us
through Extension Orders. On May 15, 2008, we submitted a statement of defense.
On June 1, 2008, we sent the plaintiff a questionnaire. The lawsuit is scheduled
for early hearing on November 9, 2008. At this point, we cannot estimate the
outcome of the lawsuit.
On
May 1,
2006, Evilia Investments Ltd. ("Evilia") filed in the Magistrate's Court in
Tel-Aviv-Jaffa a claim for damages against InkSure and against us, jointly
and
severally, for payment of NIS 2,366,868 (as of June 15, 2006, approximately
$530,000) plus interest allegedly, due as rent payments and related management
fees for a certain real estate property in Rehovot, leased to InkSure under
a
lease agreement entered into between Evilia and InkSure on October 10, 2000,
as
amended on May 25, 2001 (the "Agreement"), as to which we are a
guarantor.
A
motion
for leave to defend the lawsuit was filed with the Magistrate’s Court by both
InkSure and us on June 15, 2006. On August 6, 2006, a settlement agreement
was
submitted to the Magistrate’s Court, pursuant to which InkSure agreed to pay
Evilia the amount of $130,000 plus VAT. On August 13, 2006, the Magistrate’s
Court approved the settlement agreement. We agreed to pay (and paid) InkSure
half of the settlement amount.
In
April
2004, the Department for Resources Supply of the Ministry of Ukraine filed
with
the International Commercial Arbitration Court at the Ukrainian Chamber of
Commerce and Industry (the “Arbitration Court”) a claim to declare Contract No.
10/82 (the “Contract”), dated April 9, 2002, between us and the Ministry of
Internal Affairs of Ukraine, as void due to defects in the proceedings by which
we were awarded the Contract. In July 2004 the Arbitration Court declared the
Contract as void. On April 27, 2005 we appealed the decision in the High
Commercial Court of Ukraine. In May 2005 the Department for Resources Supply
of
the Ministry filed with the Arbitration Court a new statement of claim for
restitution of $1,047,740, paid to us by the Department for Resources Supply
of
the Ministry under the contract. On September 27, 2005, we received a negative
award issued by the Arbitration Court in the second claim. On December 12,
2005
we were informed that the Supreme Court of Ukraine had dismissed our appeal
regarding the July 2004 decision. On June 29, 2006, the Supreme Court of Ukraine
held that the Arbitration Court award was valid and legal under applicable
law.
During February 2007, we received from the management body of the courts of
Israel documents that were sent from the Ministry of Internal Affairs of Ukraine
regarding the claim for restitution of $1,047,740. Our legal advisors have
advised us that the documents were improperly sent and not in compliance with
Israeli law. We intend to vigorously defend any motion to enforce the
Arbitration Court award in Israel, and if necessary, to assert claims that
the
Ukrainian proceedings were legally defective and that no judgment based on
these
proceedings can be enforced in Israel.
Based
on
the opinion of our legal advisors, we believe that the above mentioned Ukraine
Arbitration Court decision is incorrect, as a matter of law, that the Ukrainian
government’s claim has no merit and that the Ukrainian Arbitration Proceedings
were legally defective. Therefore no provision has been made in the financial
statements in respect of the claim for restitution of $1,047,740. However,
due
to the developments described above, we wrote off inventory in an amount of
approximately $287,000 in the fourth quarter of 2005, and took possession of
the
remaining inventory that was previously delivered to the customer. In 2003,
we
increased the allowance for doubtful accounts in an aggregate amount of
$2,133,000 for the debt the Ukrainian government owes to us.
We
did
not have any revenues from this project in 2005, 2006 and 2007.
On
October 30, 2003, SuperCom Slovakia, a subsidiary (66%) of Vuance Ltd., received
an award from the International Arbitral Centre of the Austrian Federal Economic
Chamber ("IAC"), in a case against the Ministry of Interior of the Slovak
Republic relating to the agreement on delivery of Technology, Cooperation and
Services signed on March 17, 1998. Upon the Arbitral Award, the Ministry of
Interior of the Slovak Republic was ordered to pay SuperCom Slovakia the amount
of SKK 80,000,000 (approximately $3,476,000 as of December 31, 2007) plus
interest accruing from March, 1999. In addition, the Ministry of Interior of
the
Slovak Republic was ordered to pay the costs of arbitration in the amount of
EUR
42,716 (approximately $63,000 as of December 31, 2007) and SuperCom Slovakia's
legal fees in the amount of EUR 63,611 (approximately $94,000 as of December
31,
2007). We have begun an enforcement proceeding to collect the arbitral award.
The Ministry of Interior of the Slovak Republic filed a claim with the
Commercial Court in Vienna, Austria on February 10, 2004, whereby it challenged
and requested to set aside the arbitral award. During September 2005 the
commercial court of Vienna dismissed the claim. On October 21, 2005 the Ministry
of the Interior of the Slovak Republic filed an appeal. On August 25, 2006,
the
Austrian Appellate Court rejected the appeal and ordered the Ministry to
reimburse Supercom Slovakia´s costs of the appellate proceeding in the amount of
EUR 6,688.50 within 14 days. On October 3, 2006, we were informed that the
Ministry had decided not to file an extraordinary appeal to the Austrian Supreme
Court’s decision rejecting its appeal. To date, our efforts to enforce the
Commercial Court’s decision have been unsuccessful.
On
July
14, 2003, Mr. Yaacov Pedhatzur, filed a lawsuit against us, in the Magistrate’s
Court in Tel Aviv, Israel, claiming the we owe him commissions in respect of
transactions between us and certain third parties On September 29, 2005 we
reached a settlement agreement with Mr. Yaacov Pedhatzur in which we agreed
to
pay Mr. Pedhatzur the NIS equivalent of $ 129,000. The settlement agreement
has
been approved by the court. This amount was recorded in the statement of
operations of fiscal year 2005, as litigation settlement expenses.
On
December 16, 1999, Secu-Systems Ltd. ("Secu-systems" or the "Plaintiff") filed
a
lawsuit with the District Court in Tel-Aviv-Jaffa jointly and severally against
us and InkSure Ltd. ("InkSure") (our former subsidiary, which became a
subsidiary of InkSure Technologies, Inc.) seeking a permanent injunction and
damages arising from the printing method applied to certain products developed
by Inksure. In its lawsuit, the plaintiff asserted claims of breach of a
confidentiality agreement between the plaintiff and us, unjust enrichment by
us
and InkSure, breach of fiduciary duties owed to the plaintiff by us and InkSure,
misappropriation of trade secrets by us and InkSure, and damage to the
plaintiff’s property. On March 15, 2006, the Court denied the breach of contract
claim, but upheld the claim for misappropriation of trade secrets and ordered
InkSure and us to cease all activity involving the use of the confidential
knowledge and/or confidential information of the plaintiff. In addition, the
court ordered us and Inksure to provide a report certified by an accountant
setting forth in full the income and/or benefit received by InkSure and us
as a
result of the misappropriation activity through the date of the judgment, and
ordered us and Inksure, jointly and severally, to pay to the plaintiff
compensation in the sum of NIS 100,000 ($26,000 as of December 31, 2007) and
legal expenses as well as attorney’s fees in the sum of NIS 30,000 ($8,000 as of
December 31, 2007). The plaintiff has filed an appeal, and we and InkSure filed
a counter-appeal, on the ruling above. On November 1, 2007, the Supreme Court
accepted the Plaintiff's appeal, and stated that Inksure and us have breached
the confidentiality agreement. Consequently, the appeal that had been filed
by
Inksure and us was dismissed. The Supreme Court instructed that the case will
be
returned to the District Court for determining the remedies to which
Secu-Systems is entitled.
On
February 18, 2008, the Plaintiff filed a petition with the District Court asking
the court to allow the Plaintiff to amend the amount for which it sued as stated
in the Statement of Claims to NIS 25,000,000 (approximately $6,500,000 as of
December 31, 2007). The petition is mainly based on the fact that in 2002
Inksure was sold by us to a third party for a consideration of approximately
$6,000,000 and upon the Plaintiff's assertion that such amount of consideration
constitutes a benefit and/or profit which seems to have been derived from the
breach of the confidentiality agreement and upon the assertion that the
Plaintiff is entitled, in light of the Supreme Court's ruling with respect
to
the breach of the confidentiality agreement, to receive such amount. Another
argument made by the Plaintiff relates to the profit which Inksure, allegedly,
generated from the breach of the confidentialityagreement; this argument is
based on a gross profit of $6,400,000 according to the financial statements
of
Inksure for the years 2002-2007. The Company's answer to the said petition
has
been filed but time has not been set yet for hearing of the
petition.
On
March
24, 2008, we provided our lawyers with an opinion of subject matter consultant,
according to which, the following conclusions can be drawn:
|
a.
|
In
light of the costs analysis, we had no economical profit from the
sale of
Inksure's shares.
|
|
b.
|
The
consideration received from the sale of Inksure's shares in 2002,
incorporates the value of the cash flow of Inksure following the
sale.
Therefore, a calculation based upon both the sale price and the future
cash flow of Inksure is not accurate and does not reflectcustomary
accountant standards, since it calculates the factor of the future
cash
flow twice.
|
|
c.
|
The
examination of the results of Inksure's business activity in 2002-2007,
as
reflected in its financial reports, show that Inksure has not made
any
profits, and even suffered losses in the said period. The financial
reports also show that Inksure had a negative cash flow in these
years,
which was financed by bank loans and fund
raising.
|
In
light
of the above, provided that the subject matter consultant's opinion is adopted
by the court, and further provided that Inksure's financial reports indeed
reflect its business results, our lawyers are of the opinion that no material
amounts will be awarded to the Plaintiff in these proceedings.
Due
to
the circumstances described above, we made an allowance of $100,000 that is
reflecting the expected legal expenses related to this litigation.
Dividend
Policy
We
have not distributed a cash dividend since August 27, 1997 and we do not
anticipate any dividend distribution in the foreseeable future. Under the
Israeli Companies Law, dividends may only be paid out of profits legally
available for distribution (the “Profits Criteria”) and provided that there is
no reasonable concern that such payment will prevent us from satisfying our
existing and foreseeable obligations as they become due. In addition, a
competent court may approve, as per a motion to be filed by a company in
accordance with the Israeli Companies Law requirements, a payment which does
not
meet the Profit Criteria, provided that the court was convinced that there
is no
reasonable concern that such payment will prevent the company from satisfying
its existing and foreseeable obligations as they become due.
In
accordance with our Articles of Association, out Board of Directors may from
time to time declare and cause the Company to pay to the shareholders such
interim or final dividend as the Board of Directors deems appropriate
considering the profits of the Company and in compliance with the provisions
of
the Israeli Companies Law.
Subject
to the rights of the holders of shares as to dividends, and to the provisions
of
our Articles of Association, dividends, whether in cash or in bonus shares,
shall be paid or distributed, as the case may be, to shareholders pro rata
to
the amount paid up or credited as paid up on account of the of their shares,
without taking into consideration any premium paid thereon.
There
have not been any significant changes since the date of the annual financial
statements included under Item 18 of this Annual Report.
ITEM
9.
|
The
Offer And Listing.
|
|
A.
|
Offer
and Listing Details
|
The
tables included below set forth information regarding the price history
of
the ordinary shares on the Euronext Brussels stock market and the
OTC
Bulletin Board/NASDAQ Capital Market for the periods indicated.
|
We
were
traded on the NASDAQ Europe stock market since April 19, 1999. On October 23,
2003, following the closing of the NASDAQ Europe stock market, we transferred
the listing of our shares to Euronext Brussels stock market where we are
currently traded under the symbol “VUNC”.
We
applied for delisting of our shares from the Euronext Brussels stock market,
and
our application was approved on May 6, 2008, effective August 4,
2008.
Our
ordinary shares were quoted on the OTC Bulletin Board Market under the symbol
“VUNC.OB”, from November 5, 2004
Until
August 22, 2007.
Our
ordinary shares approved for listing on the NASDAQ Capital Market and began
trading effective August 23, 2007. The shares are traded on the NASDQ Capital
Market under the symbol “VUNC”.
The
following table shows, for the periods indicated, the high and low closing
prices of our ordinary shares in euros as reported on the NASDAQ Europe stock
market or the Euronext Brussels stock market, as applicable. (conversion to
U.S.
dollars is based on the exchange rate published by the Bank of Israel).. The
following table also shows, for the periods indicated since November 5, 2004,
the high and low closing prices of our ordinary shares on the OTC Bulletin
Board
Market or the NASDQ Capital Market, as applicable.
The
Company has not issued any securities in connection with a pre-emptive
issue.
|
|
European market (1)
|
|
US market (2)
|
|
|
|
Per share ($)
|
|
Per share ($)
|
|
Period
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
4.41
|
|
|
1.65
|
|
|
N/A
|
|
|
N/A
|
|
2004
|
|
|
15.65
|
|
|
3.24
|
|
|
15.59
|
|
|
12.59
|
|
2005
|
|
|
16.41
|
|
|
3.12
|
|
|
15.06
|
|
|
3.29
|
|
2006
|
|
|
6.71
|
|
|
3.18
|
|
|
6.59
|
|
|
3.24
|
|
2007
|
|
|
5.28
|
|
|
3.58
|
|
|
6.18
|
|
|
3.82
|
|
Financial
quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
5.12
|
|
|
3.18
|
|
|
6.47
|
|
|
3.59
|
|
Second
quarter
|
|
|
4.59
|
|
|
3.29
|
|
|
5.18
|
|
|
3.53
|
|
Third
quarter
|
|
|
6.71
|
|
|
3.29
|
|
|
6.59
|
|
|
3.24
|
|
Forth
quarter
|
|
|
6.00
|
|
|
4.71
|
|
|
5.88
|
|
|
3.94
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
5.24
|
|
|
3.58
|
|
|
5.41
|
|
|
3.82
|
|
Second
quarter
|
|
|
5.28
|
|
|
3.58
|
|
|
6.18
|
|
|
5.10
|
|
Third
quarter
|
|
|
4.97
|
|
|
4.21
|
|
|
5.22
|
|
|
4.42
|
|
Forth
quarter
|
|
|
5.11
|
|
|
3.74
|
|
|
5.15
|
|
|
4.11
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
|
4.15
|
|
|
2.81
|
|
|
4.69
|
|
|
2.94
|
|
Most
recent six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
2007
|
|
|
4.22
|
|
|
3.74
|
|
|
4.80
|
|
|
4.11
|
|
January
2008
|
|
|
4.15
|
|
|
3.16
|
|
|
4.69
|
|
|
3.39
|
|
February
2008
|
|
|
3.18
|
|
|
2.97
|
|
|
4.20
|
|
|
3.19
|
|
March
2008
|
|
|
3.09
|
|
|
2.81
|
|
|
3.60
|
|
|
2.94
|
|
April
2008
|
|
|
2.91
|
|
|
2.83
|
|
|
3.60
|
|
|
2.88
|
|
May
2008
|
|
|
2.85
|
|
|
2.47
|
|
|
3.50
|
|
|
3.00
|
|
(1)
Our
shares were quoted on the NASDAQ Europe stock market since April 19, 1999 and
since October 23, 2003
on
the
Euronext Brussels stock market.
(2)
Our
ordinary shares were quoted on the OTC bulletin board from November 5, 2004
and
since August 23, 2007, our ordinary shares were approved for trading on the
NASDAQ Capital Market under the symbol “VUNC” and the trade on the OTC Bulletin
Board ceased.
(3)
Share
prices are adjusted to give effect to our 1-for-5.88235 reverse share split
effective for trading purposes on May 14, 2007.
On
June
20, 2008, the last reported sale price of our ordinary shares on the Euronext
Brussels stock market was 1.56 Euro equivalent to 2.424$ per share and on the
Nasdaq Capital Market 3.10$ per share.
Not
applicable.
Our
ordinary shares have been listed for trade on the Euronext Brussels stock
market, since October 23, 2003 under the symbol “SUP”, which became “VUNC”
after our corporate name change on May 14, 2007. We applied for delisting of
our
shares from the Euronext Brussels stock market, and our application was approved
on May 6, 2008, effective August 4, 2008.
Since
November 5, 2004, our ordinary shares have also traded on the OTC Bulletin
Board
under the symbol "SPCBF.OB" which following our recent name change became
“VUNCF.OB”. Since August 23, 2007, our ordinary shares were approved for trading
on the Nasdaq Capital Market under the symbol “VUNC” and the trade on the OTC
Bulletin Board ceased.
Not
applicable.
Not
applicable.
Not
applicable.
ITEM
10.
|
Additional
Information.
|
Not
applicable.
B. Memorandum
and Articles of Association
Our
memorandum of association and articles of association are attached hereto as
noted in Item 19.
We
are a
public company organized in the State of Israel under the Israeli Companies
Law.
We are registered with the Registrar of Companies of the State of Israel and
we
have been assigned company number 52-00-4407-4.
Set
forth
below is a summary of certain provisions of our Memorandum of Association (the
"Memorandum"), the Articles of Association (the "Articles") and the Companies
Law. This description does not purport to be complete and is qualified in its
entirety by reference to the full text of the Memorandum and Articles and by
Israeli law. The Memorandum, which integrates into the text all amendments
thereto since our incorporation, and
the
Articles, which were adopted in August 2007, are exhibits to this Form 20-F.
OBJECTS
OF THE COMPANY
Pursuant
to Section 2 of the Memorandum, the principal object for which we were
established is to engage in the development, manufacture, implementation and
marketing of computerized systems in general and computerized systems for
producing tags, computerized photograph databases for the purpose of
identification and for issuing various certificates in particular; consultation
in the above fields; development, manufacture, implementation and marketing
of
any product based on the knowledge and expertise of the parties; and the
purchase, sale, import, export and implementation of any action required to
realize the above objectives.
DIRECTORS
Our
Articles provide that the number of directors may be determined from time to
time by the board of directors, and unless otherwise determined, the number
of
directors comprising the board of directors will be between four and ten. With
the exception of our external directors, who are elected for three year terms
in
accordance with the Israeli Companies Law, our directors are elected for a
one
year term ending at the following annual general meeting of shareholders,
However, if no directors are elected at an annual meeting, then the persons
who
served as directors immediately prior to the annual meeting shall be deemed
reelected at the same meeting. The general meeting may resolve that a director
be elected for a period longer than by the next annual general meeting, but
not
longer than the third next annual meeting. Directors may resign or in certain
circumstances be removed by our general meeting prior to the expiration of
his
term.
The
board
may appoint additional directors (whether to fill a vacancy or create new
directorship) to serve until the next annual shareholders meeting. In case
an
office of a director has been vacated, the remaining directors may continue
to
act in every matter so long as the number of its members is not less than the
quorum required at the time for meetings of the board. If the number of members
of the board decreases below said quorum, the board will not be entitled to
act
except in case of emergency or for appointing additional directors in order
to
fill vacant positions on the board or to call a general meeting of the
shareholders. The board of directors elects one of its members to serve as
the
Chairman.
The
board
of directors may meet and adjourn its meetings as it deems fit, provided,
however, that the board must meet at least once in every three months period.
A
meeting of the board may be called at the request of each director. The quorum
required for a meeting of the board is not less than 30% of the number of
directors and in any event not less than two directors. Issues arising at any
board of directors’ meeting are decided by a majority of votes cast at the
meeting. In lieu of a board meeting a resolution may be adopted in writing
if
signed by all directors, and a meeting may also be held through telephone
conference or other communications means, provided however that all participants
may hear each other simultaneously.
Subject
to the Companies Law, the board may delegate any of its powers to committees
consisting of at least three directors, provided that each such committee shall
include at least one external director. The board of directors may from time
to
time revoke such delegation or alter the composition of any such committee.
Any
committee so formed must exercise its powers in accordance with any directions
given to it by the board. Under the Companies Law the board of directors must
appoint an audit committee, comprised of at least three directors and including
all of the external directors. The function of the audit committee is to review
irregularities in the management of our business and recommend remedial
measures. The committee is also required, under the Companies Law, to approve
certain related party transactions.
FIDUCIARY
DUTIES OF OFFICERS
The
Companies Law codifies the fiduciary duties that "office holders," including
directors and executive officers, owe to a company. An office holder's fiduciary
duties consist of a duty of care and a duty of loyalty. The duty of loyalty
includes avoiding any conflict of interest between the office holder's position
in the company and his personal affairs, avoiding any competition with the
company, avoiding exploiting any business opportunity of the company in order
to
receive personal advantage for himself or others, and revealing to the company
any information or documents relating to the company's affairs which the office
holder has received due to his position as an office holder.
APPROVAL
OF CERTAIN TRANSACTIONS
Under
the
Companies Law, all arrangements as to compensation of office holders who are
not
directors, or controlling parties, require approval of the board of directors.
Arrangements regarding the compensation of directors also require approval
by
the audit committee and the shareholders.
The
Companies Law requires that an office holder of the company promptly disclose
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. In addition, if the transaction is an extraordinary
transaction as defined under Israeli law, the office holder must also disclose
any personal interest held by the office holder's spouse, siblings, parents,
grandparents, descendants, spouse's descendants and the spouses of any of the
foregoing. In addition, the office holder must also disclose any interest held
by any corporation in which the office holder is a 5% or greater shareholder,
director or general manager or in which he or she has the right to appoint
at
least one director or the general manager. An extraordinary transaction is
defined as a transaction other than in the ordinary course of business,
otherwise than on market terms, or that is likely to have a material impact
on
the company's profitability, assets or liabilities.
In
the
case of a transaction which is not an extraordinary transaction, after the
office holder complies with the above disclosure requirement, only board
approval is required unless the articles of association of the company provide
otherwise. The transaction must not be adverse to the company's interest.
Furthermore, if the transaction is an extraordinary transaction, then, in
addition to any approval stipulated by the articles of association, it also
must
be approved by the company's audit committee and then by the board of directors,
and, under certain circumstances, by a meeting of the shareholders of the
company. An office holder 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
be present at the deliberations or vote on this matter. If a majority of the
directors has a personal interest in a transaction with us, such directors
may
be present at the deliberations and vote in this matter, and shareholder
approval of the transaction is required.
The
Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which includes a shareholder that holds 25%
or
more of the voting rights if no other shareholder owns more than 50% of the
voting rights in the company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest,
and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and the
shareholders of the company by simple majority, provided that either such
majority vote must include at least one-third of the shareholders who have
no
personal interest in the transaction and are present at the meeting (without
taking into account the votes of the abstaining shareholders), or that the
total
shareholdings of those who have no personal interest in the transaction who
vote
against the transaction represent no more than one percent of the voting rights
in the company.
In
addition, a private placement of securities that will increase the relative
holdings of a shareholder that holds five percent or more of the company's
outstanding share capital (assuming the exercise or conversion of all securities
held by such person that are exercisable for or convertible into shares) or
voting rights or that will cause any person to become, as a result of the
issuance, a holder of more than five percent of the company's outstanding share
capital or voting rights, requires approval by the board of directors and the
shareholders of the company. However, if the receiving party is not a director
in the company, its CEO, or a controlling shareholder, and will not become
a
controlling shareholder as a result of the private placement, shareholder
approval is not required if the allotted securities amount to less than twenty
percent of the company's outstanding voting rights before the allotment. Since
our shares are traded and were offered to the public only outside of Israel,
and
as long as our shares are not offered to the public or registered for trade
in
Israel, we are exempted from these limitations concerning private placements.
Under
the
Companies Law and as long as our Articles are not amended to determine
otherwise, certain resolutions, such as resolutions regarding mergers, and
windings up, require approval of the holders of 75% of the shares represented
at
the meeting and voting thereon.
DUTIES
OF SHAREHOLDERS
Under
the
Companies Law, a shareholder has a duty to act in good faith and in a customary
way 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 on the following matters:
|
·
|
any
amendment to the articles of association;
|
|
·
|
an
increase of the company's authorized share capital;
|
|
·
|
approval
of interested party transactions which require shareholder approval.
|
In
addition, any controlling shareholder, any shareholder who knows that it
possesses power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of a company's 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 but provides
that
a breach of his or her duty is tantamount to a breach of fiduciary duty of
an
officer of the company.
EXEMPTION,
INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS EXEMPTION OF OFFICE
HOLDERS
Under
the
Companies Law, an Israeli company may not exempt an office holder from liability
for breach of his duty of loyalty, but may exempt in advance an office holder
from liability to the company, in whole or in part, for a breach of his duty
of
care, provided the articles of association of the company allow it to do so.
Our
Articles allow us to exempt our office holders
from
liability towards us for breach of duty of care to the maximum extent permitted
by law.
OFFICE
HOLDER INSURANCE
Our
Articles provide that, subject to the provisions of the Companies Law, we may
enter into a contract for the insurance of the liability of any of our office
holders for any act done by him or her by virtue of being an office holder,
in
respect of any of the following:
|
·
|
a
breach of duty of care towards us or any other person,
|
|
·
|
a
breach of fiduciary obligations towards us, provided that the office
holder acted in good faith and had reasonable grounds to assume that
his
or her act would not be to our detriment,
|
|
·
|
a
financial liability imposed on him or her in favor of another person,
or
|
|
·
|
any
other event for which insurance of an office holder is or may be
permitted.
|
INDEMNIFICATION
OF OFFICE HOLDERS
Our
Articles provide that we may indemnify an office holder for the following cases
of liability and expenses incurred by him or her as a result of an act done
by
him or her by virtue of being an office holder:
|
·
|
financial
liability imposed upon said office holder in favor of another person
by
virtue of a decision by a court of law, including a decision by way
of
settlement or a decision in arbitration which has been confirmed
by a
court of law;
|
|
·
|
reasonable
expenses of the proceedings, including lawyers’ fees, expended by the
office holder or imposed on him by the court
for:
|
|
(1)
|
proceedings
issued against him by or on behalf of the Company or by a third
party;
|
|
(2)
|
criminal
proceedings in which the office holder was acquitted;
or
|
|
(3)
|
criminal
proceedings in which he was convicted in an offense, which did not
require
proof of criminal intent; or
|
|
·
|
any
other liability or expense for which the indemnification of an officer
holder is not precluded by law.
|
We
have
obtained directors and officers liability insurance for the benefit of our
office holders.
LIMITATIONS
ON EXEMPTION, INSURANCE AND INDEMNIFICATION
The
Israeli Companies Law provides that a company may not exempt or indemnify an
office holder, or enter into an insurance contract, which would provide coverage
for any monetary liability incurred as a result of any of the following:
|
·
|
a
breach by the office holder of his or her duty of loyalty towards
the
company unless, with respect to insurance coverage, the office holder
acted in good faith and had a reasonable basis to believe that the
act
would not prejudice the company;
|
|
·
|
a
breach by the office holder of his or her duty of care if the breach
was
done intentionally or recklessly;
|
|
·
|
any
act or omission done with the intent to derive an illegal personal
benefit; or
|
|
|
any
fine levied against the office holder.
|
REQUIRED
APPROVALS
In
addition, under the Companies Law, any exemption of, indemnification of, or
procurement of insurance coverage for, our office holders must be approved
by
our audit committee and our board of directors and, if the beneficiary is a
director, an additional approval by our shareholders is required.
RIGHTS
OF ORDINARY SHARES
Our
Ordinary Shares confer upon our shareholders the right to receive notices of,
and to attend, shareholder meetings, the right to one vote per Ordinary Share
at
all shareholders' meetings for all purposes, and to share equally, on a per
share basis, in such dividends as may be declared by our board of directors;
and
upon liquidation or dissolution, the right to participate in the distribution
of
any surplus assets of the Company legally available for distribution to
shareholders after payment of all debts and other liabilities of the Company.
All Ordinary Shares rank pari passu in all respects with each other. Our board
of directors may, from time to time, make such calls as it may think fit upon
a
shareholder in respect of sum unpaid in respect of shares held by such
shareholder which is not payable at a fixed time, and each shareholder shall
pay
the amount of every call so made upon him (and of each installment thereof
if
the same is payable in installments).
MEETINGS
OF SHAREHOLDERS
An
annual
general meeting of our shareholders shall be held once in every calendar year
not later than 15 months after the last annual general meeting at such time
and
at such place either within or without the State of Israel as may be determined
by our board of directors.
Our
board
of directors may, whenever it deems fit, convene a special general meeting.
Special general meetings may also be convened upon requisition in accordance
with the Companies Law.
MERGERS
A
merger
of the Company shall require resolution adopted by a simple vote cast at a
general meeting, not taking into account abstentions.
Except
for the material contracts described under the sections captioned “Employment
Agreements, Termination of Employment and Change-In-Control Arrangements” and
“Share Option Plans” under Sections B and E, respectively, under Item 6, we are
not a party to any other material contracts outside of the ordinary course
of
business.
Pursuant
to a general permit issued in 1998 by the Israeli Controller of Foreign Exchange
under the Currency Control Law, 1978 (the "Currency Control Law"), there are
virtually no restrictions on foreign exchange in the State of Israel, except
for
certain reporting obligations.
To
the
extent that the following discussion is based on new or existing tax or other
legislation that has not been subject to judicial or administrative
interpretation, there can be no assurance that the views expressed herein will
be accepted by the tax or other authorities in question. This discussion is
not
intended, nor should it be construed, as legal or professional tax advice and
it
is not exhaustive of all possible tax considerations.
Israeli
Taxation
The
following is a summary of the current material Israeli tax laws applicable
to
companies in Israel with special reference to its effect on us. This section
also contains a discussion of certain Israeli government programs from which
we
may benefit. 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. Some parts of this discussion are based on new
tax
legislation that has not been subject to judicial or administrative
interpretation. Accordingly, we cannot assure you that the views expressed
in
the discussion will be accepted by the tax authorities in question. The
discussion is not intended and should not be construed as legal or professional
tax advice and does not 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.
The
following discussion describes the material Israeli tax consequences regarding
ownership and disposition of Vuance’s ordinary shares applicable to non-Israeli
shareholders, including U.S. shareholders.
General
Corporate Tax Structure
Israeli
companies are generally subject, in 2007, to corporate tax at the rate of 29%
on
their taxable income. This rate was 34% in the 2005 tax year, 31% in the 2006
tax year and will be, 27% for the 2008 tax year, 26% for the 2009 tax year
and
25% thereafter.
Special
provisions relating to taxation under inflationary
conditions
The
Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the
Inflationary Adjustments Law, represents an attempt to overcome the problems
presented to a traditional tax system by an economy undergoing rapid inflation.
The Inflationary Adjustments Law is highly complex. The provisions that are
material to us, are summarized as follows:
|
Ø
|
Where
a company’s equity, as calculated under the Inflationary Adjustments Law,
exceeds the depreciated cost of its fixed assets (as defined in the
Inflationary Adjustments Law), a deduction from taxable income is
permitted equal to the above excess multiplied by the applicable
annual
rate of inflation. The maximum deduction permitted in any single
tax year
is 70% of taxable income, with the unused portion permitted to be
carried
forward, linked to the Israeli consumer price
index.
|
|
Ø
|
Where
a company’s depreciated cost of fixed assets exceeds its equity, then the
excess multiplied by the applicable annual rate of inflation is added
to
taxable income.
|
|
Ø
|
Subject
to specified limitations, depreciation deductions on fixed assets
and
losses carried forward are adjusted for inflation based on the change
in
the consumer price index.
|
Under
the
Inflationary Adjustments Law, results for tax purposes are measured in real
terms, in accordance with changes in the Israeli consumer price index. We are
taxed under this law. The difference between the change in the Israeli consumer
price index and the exchange rate of Israeli currency in relation to the dollar
may in future periods cause significant differences between taxable income
and
the income measured in dollars as reflected in our consolidated financial
statements.
Please
note, The Income Tax Law (Inflationary Adjustments), 1985 will be null and
void
at the beginning of 2008 onward, Subject to transitions orders.
Taxation
of Capital Gains Applicable to Israeli Shareholders and Non-Israeli
Shareholders
General
Israeli
law generally imposes a capital gains tax on the sale of any capital assets
by
residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares in Israeli companies, by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder’s country of residence
provides otherwise. The law distinguishes between real gain and inflationary
surplus. The inflationary surplus is a portion of the total capital gain which
is equivalent to the increase of the relevant asset’s purchase price which is
attributable to the increase in the Israeli consumer price index or, in certain
circumstances, a foreign currency exchange rate, between the date of purchase
and the date of sale. The real gain is the excess of the total capital gain
over
the inflationary surplus.
Israeli
residents
The
law in effect until December 31, 2005
Individuals:
Pursuant
to the Tax Reform, generally, capital gains tax is imposed on Israeli residents
at a rate of 15% on real gains derived on or after January 1, 2003, from the
sale of shares in Israeli companies publicly traded on a recognized stock market
in a country that has a treaty for the prevention of double taxation with
Israel. (such as NASDAQ) or companies traded on both the TASE and NASDAQ or
another recognized stock market. This tax rate is contingent upon the
shareholder not claiming a deduction for financing expenses in connection with
such shares, and does not apply to: (i) the sale of shares to a relative (as
defined in the Tax Reform); (ii) the sale of shares by dealers in securities;
(iii) the sale of shares by shareholders that report in accordance with the
Inflationary Adjustments Law; or (iv) the sale of shares by shareholders who
acquired their shares prior to an initial public offering (that are subject
to a
different tax arrangement). The tax basis of shares acquired prior to January
1,
2003 will be determined in accordance with the average closing share price
in
the three trading days preceding January 1, 2003. However, a request may be
made
to the tax authorities to consider the actual adjusted cost of the shares as
the
tax basis if it is higher than such average price.
The
law, commencing January 1, 2006:
Individuals:
Commencing
in January 1, 2006, a real capital gain deriving to an individual will be taxed
at a rate of 20%, on condition that the income is not classified as business
income from the vantage point of the individual. This will apply to the entire
real capital gain accrued since the date of purchase, or since January 1, 2003
if the purchase preceded that date.
Notwithstanding
the above, the real capital gain will be taxed at a rate of 25% in the following
instances:
1.
The
individual deducts interest expenses and linkage differentials.
(i)
2.
The
seller is a "significant shareholder" at the date of the sale of the securities
or at any time during the 12-month period preceding the sale. A "significant
shareholder" is defined in general as shareholder who holds, either directly
or
indirectly, alone or together with another, at least 10% of any form of a means
of control in a company. The term "together with another" means together with
a
relative, or together with someone who is not a relative with which the
individual, either directly or indirectly, has a regular cooperative agreement
regarding the affairs of the company.
Companies
not subject to the provisions of the Adjustment Law:
Companies
not subject to the provisions of the Adjustment Law in 2005, will be taxed
at a
rate of 25% upon the capital gain on the sale of securities in the period 2006
–
2009. In 2010 and thereafter, capital gains will be taxed at a corporate rate,
which in 2010 is expected to be 25%.
Companies
subject to the provisions of the Adjustment Law:
The
real
capital gain on the sale of securities by a company subject to the provisions
of
the Adjustment Law will be taxed at the corporate tax rate applicable during
the
year of sale, as follows: 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26%, 2010 –
25%.
Non-Israeli
residents:
Generally
speaking, Non-residents of Israel will be exempt from capital gain tax in
relation to the sale of ordinary shares traded in a stock exchange as long
as
(a) the capital gains are not accrued or derived by the non resident
shareholder’s permanent establishment in Israel, (b) the ordinary shares in
relation to which the capital gains are derived were acquired by the non
resident after the initial listing of the ordinary shares and (c) neither the
shareholder nor the capital gain is subject to certain sections of the Israeli
income tax ordinance.
However,
non-Israeli corporations will not be entitled to such exemption if an Israeli
resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary or is entitled to 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or
indirectly.
In
addition, pursuant to the Income Tax Treaty between Israel and the U.S., which
we refer to as the Tax Treaty, gains derived from the sale, exchange or
disposition of our ordinary shares by a person who qualifies as a resident
of
the U.S. within the meaning of the Tax Treaty and who is entitled to claim
the
benefits afforded to US residents under the Tax Treaty, referred to as a Treaty
US Resident, would not be subject to Israeli capital gains tax, unless such
Treaty US Resident owned, directly or indirectly, shares representing 10% or
more of the voting power of our company at any time during the 12-month period
preceding such sale, exchange or disposition.
In
some
instances where Vuance 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. However, under the U.S.-Israel Tax
Treaty, such Treaty U.S. Resident would be permitted to claim a credit for
such
taxes against the U.S. federal income tax imposed with respect to such sale,
exchange or disposition, subject to the limitations in U.S. laws applicable
to
foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state
or
local taxes.
Income
Taxes on Dividend Distribution to Israeli and Non-Israeli
Shareholders
Any
distribution of dividend from income, which is not attributed to an “Approved
Enterprise” will be subject to tax in Israel at the rate of 20%, except for
dividend distributed, to Individual deemed “a substantial shareholder” which
will be subject to tax at the rate of 25%.
Under
the
Tax Treaty, the maximum Israeli withholding tax on dividends paid to a holder
of
shares who is a Treaty US Resident is 25%.
The
Tax
Treaty further provides that a 12.5% Israeli withholding tax would apply to
dividends paid to a US corporation owning 10% or more of an Israeli company’s
voting stock during, in general, the current and preceding tax years of the
Israeli company. The lower 12.5% rate applies only to dividends from income
not
derived from an Approved Enterprise in the applicable period and provided that
not more than 25% of the Israeli company’s gross income consists of interest or
dividend.
Generally
speaking, a non-resident of Israel who has dividend income derived from or
accrued in Israel, from which tax was withheld at source, is generally exempt
from the duty to file tax 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 non-resident has no other sources of income in Israel.
Residents
of the U.S. generally will have withholding tax in Israel deducted at source.
As
discussed below, they may be entitled to a credit or deduction for U.S. federal
income tax purposes in the amount of the taxes withheld, subject to detailed
rules contained in U.S. tax legislation.
U.S.
Federal Income Taxation
General
The
following is a summary of the material U.S. federal income tax consequences
of
the ownership and disposition of our ordinary shares and warrants. The following
discussion is not exhaustive of all possible tax considerations. This summary
is
based upon the Internal Revenue Code of 1986, as amended (the “Code”),
regulations promulgated under the Code by the U.S. Treasury Department
(including proposed and temporary regulations), rulings, current administrative
interpretations and official pronouncements of the Internal Revenue Service
(the
“IRS”), and judicial decisions, all as currently in effect and all of which are
subject to differing interpretations or to change, possibly with retroactive
effect. Such change could materially and adversely affect the tax consequences
described below. No assurance can be given that the IRS would not assert, or
that a court would not sustain, a position contrary to any of the tax
consequences described below.
This
discussion does not address state, local, or foreign tax consequences of the
ownership and disposition of ordinary shares and warrants. (See “Israeli
Taxation” above).
This
summary is for general information only and does not address all aspects of
the
U.S. federal income taxation that may be important to a particular holder in
light of its investment or tax circumstances or to holders subject to special
tax rules, such as: banks; financial institutions; insurance companies; dealers
in stocks, securities, or currencies; traders in securities that elect to use
a
mark-to-market method of accounting for their securities holdings; tax-exempt
organizations; real estate investment trusts; regulated investment companies;
qualified retirement plans, individual retirement accounts, and other
tax-deferred accounts; expatriates of the U.S.; persons subject to the
alternative minimum tax; persons holding ordinary shares or warrants as part
of
a straddle, hedge, conversion transaction, or other integrated transaction;
persons who acquired ordinary shares or warrants pursuant to the exercise of
any
employee stock option or otherwise as compensation for services; persons
actually or constructively holding 10% or more of our voting stock; and U.S.
Holders (as defined below) whose functional currency is other than the U.S.
dollar.
This
discussion is not a comprehensive description of all of the U.S. federal tax
consequences that may be relevant with respect to the ownership and disposition
of our ordinary shares and warrants. We urge you to consult your own tax advisor
regarding your particular circumstances and the U.S. federal income and estate
tax consequences to you of owning and disposing of our ordinary shares and
warrants, as well as any tax consequences arising under the laws of any state,
local, or foreign or other tax jurisdiction and the possible effects of changes
in U.S. federal or other tax laws.
This
summary only addresses ordinary shares and warrants that are held as capital
assets within the meaning of Section 1221 of the Code, which generally means
as
property held for investment, and were acquired upon original issuance at their
initial public offering price. For purposes of this discussion, the term “U.S.
Holder” means a beneficial owner of our ordinary shares and warrants that is any
of the following:
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a
citizen or resident of the U.S. or someone treated as a U.S. citizen
or
resident for U.S. federal income tax
purposes;
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a
corporation (or other entity taxable as a corporation for U.S. federal
income tax purposes) created or organized in or under the laws of
the
U.S., any state thereof, 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;
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a
trust if a U.S. court can exercise primary supervision over the trust’s
administration and one or more U.S. persons are authorized to control
all
substantial decisions of the trust;
or
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a
trust in existence on August 20, 1996 that has a valid election in
effect
under applicable Treasury Regulations to be treated as a U.S.
person.
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The
term
“Non-U.S. Holder” means a beneficial owner of our ordinary shares and warrants
that is not a U.S. Holder. As described in “Taxation of Non-U.S. Holders” below,
the tax consequences to a Non-U.S. Holder may differ substantially from the
tax
consequences to a U.S. Holder.
If
a
partnership (including for this purpose any entity treated as a partnership
for
U.S. federal income tax purposes) is a beneficial owner of our ordinary shares
and warrants, the U.S. federal income tax consequences to a partner in the
partnership will generally depend on the status of the partner and the
activities of the partnership. A holder of our ordinary shares and warrants
that
is a partnership and the partners in such partnership should consult their
own
tax advisors regarding the U.S. federal income tax consequences of the ownership
and disposition of our ordinary shares and warrants.
Taxation
of U.S. Holders
The
discussion in “Distributions on Ordinary Shares” and “Dispositions of Ordinary
Shares or Warrants” below assumes that we will not be treated as a passive
foreign investment company (“PFIC”) for U.S. federal income tax purposes. For a
discussion of the rules that apply if we are treated as a PFIC, see the
discussion in “Passive Foreign Investment Company” below.
Distributions
on Ordinary Shares
General.
Subject
to the discussion in “Passive Foreign Investment Company” below, if you actually
or constructively receive a distribution on ordinary shares, you must include
the distribution in gross income as a taxable dividend on the date of your
receipt of the distribution, but only to the extent of our current or
accumulated earnings and profits, as calculated under U.S. federal income tax
principles. Such amount must be included without reduction for any Israeli
tax
withheld. Dividends paid by us generally will not be eligible for the dividends
received deduction allowed to corporations with respect to dividends received
from certain domestic corporations. Dividends paid by us may or may not be
eligible for preferential rates applicable to qualified dividend income, as
described below.
To
the
extent a distribution exceeds our current and accumulated earnings and profits,
it will be treated first as a non-taxable return of capital to the extent of
your adjusted tax basis in the ordinary shares, and thereafter as capital gain.
Preferential tax rates for long-term capital gain may be applicable to
non-corporate U.S. Holders.
We
do not
intend to calculate our earnings and profits under U.S. federal income tax
principles. Therefore, you should expect that a distribution will generally
be
reported as a dividend even if that distribution would otherwise be treated
as a
non-taxable return of capital or as capital gain under the rules described
above.
Qualified
Dividend Income.
With
respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates),
for taxable years beginning before January 1, 2011, dividends that are treated
as qualified dividend income (“QDI”) are taxable at a maximum tax rate of 15%.
Among other requirements, dividends generally will be treated as QDI if either
(i) our ordinary shares are readily tradable on an established securities market
in the U.S., or (ii) we are eligible for the benefits of a comprehensive income
tax treaty with the U.S. which includes an information exchange program and
which is determined to be satisfactory by the U.S. Treasury. It is expected
that
our ordinary shares will be “readily tradable” as a result of being listed on
The NASDAQ Capital Market.
In
addition, for dividends to be treated as QDI, we must not be a PFIC (as
discussed below) for either the taxable year in which the dividend was paid
or
the preceding taxable year. We do not believe that we will be a PFIC for our
current taxable year.
However,
please see the discussion under “Passive Foreign Investment Company” below.
Additionally, in order to qualify for QDI treatment, you generally must have
held the ordinary shares for more than 60 days during the 121-day period
beginning 60 days prior to the ex-dividend date. However, your holding period
will be reduced for any period during which the risk of loss is
diminished.
Moreover,
a dividend will not be treated as QDI to the extent you are under an obligation
(whether pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property. Since the
QDI
rules are complex, you should consult your own tax advisor regarding the
availability of the preferential tax rates for dividends paid on ordinary
shares.
Foreign
Currency Distributions.
We have
the right to pay dividends in Israeli currency. A dividend paid in Israeli
currency must be included in your income as a U.S. dollar amount based on the
exchange rate in effect on the date such dividend is received, regardless of
whether the payment is in fact converted into U.S. dollars. If the dividend
is
converted to U.S. dollars on the date of receipt, you generally will not
recognize a foreign currency gain or loss. However, if you convert the foreign
currency into U.S. dollars on a later date, you must include in income any
gain
or loss resulting from any exchange rate fluctuations. The gain or loss will
be
equal to the difference between (i) the U.S. dollar value of the amount you
included in income when the dividend was received and (ii) the amount that
you
receive on the conversion of the foreign currency into U.S. dollars. Such gain
or loss will generally be ordinary income or loss and U.S. source for U.S.
foreign tax credit purposes.
In-Kind
Distributions.
Distributions to you of new ordinary shares or rights to subscribe for new
ordinary shares that are received as part of a pro rata distribution to all
of
our shareholders will not be subject to U.S. federal income tax. The adjusted
tax basis of the new ordinary shares or rights so received will be determined
by
allocating your adjusted tax basis in the old ordinary shares between the old
ordinary shares and the new ordinary shares or rights received, based on their
relative fair market values on the date of distribution. However, in the case
of
a distribution of rights to subscribe for ordinary shares, the adjusted tax
basis of the new rights will be zero if the fair market value of the new rights
is less than 15% of the fair market value of the old ordinary shares on the
date
of distribution and you do not make an election to determine the adjusted tax
basis of the rights by allocation as described above. Your holding period for
the new ordinary shares or rights will generally include the holding period
for
the old ordinary shares on which the distribution was made.
Foreign
Tax Credits.
Subject
to certain conditions and limitations, including potential limitations under
the
U.S.-Israel Tax Treaty, Israeli taxes paid on or withheld from distributions
from us and not refundable to you may be credited against your U.S. federal
income tax liability or, alternatively, may be deducted from your taxable
income. This election is made on a year-by-year basis and applies to all foreign
taxes paid by you or withheld from you that year.
Distributions
will constitute foreign source income for foreign tax credit limitation
purposes. The foreign tax credit limitation is calculated separately with
respect to specific classes of income. For this purpose, distributions
characterized as dividends distributed by us will generally constitute “passive
category income” or, in the case of certain U.S. Holders, “general category
income.” Special limitations may apply if a dividend is treated as QDI (as
defined above).
Special
rules may apply to individuals whose foreign source income during the taxable
year consists entirely of “qualified passive income” and whose creditable
foreign taxes paid or accrued during the taxable year do not exceed $300 ($600
in the case of a joint return).
Since
the
rules governing foreign tax credits are complex, you should consult your own
tax
advisor regarding the availability of foreign tax credits in your particular
circumstances.
Exercise
or Lapse of Warrants
Upon
the
exercise of our warrants, a U.S. Holder will not recognize gain or loss and
will
have a tax basis in the ordinary shares received equal to the U.S. Holder’s tax
basis in the warrant plus the exercise price of the warrant. The holding period
for the shares purchased pursuant to the exercise of a warrant will begin on
the
day following the date of exercise and will not include the period during which
the U.S. Holder held the warrant. If a warrant lapses unexercised, a U.S. Holder
will recognize a capital loss in an amount equal to its tax basis in the
warrant. Such loss will be long-term if the warrant has been held for more
than
one year. See “Disposition of Ordinary Shares or Warrants” below for a
discussion of capital gains tax rates and limitations on deductions for losses.
The loss will generally be from U.S. sources, but the loss may be from a
non-U.S. source under some circumstances under the U.S.-Israel Tax Treaty.
U.S.
Holders should consult their own independent tax advisors regarding the sourcing
of any losses due to the lapse of our warrants before exercise.
Dispositions
of Ordinary Shares or Warrants
Subject
to the discussion in “Passive Foreign Investment Company” below, you generally
will recognize taxable gain or loss realized on the sale or other taxable
disposition of ordinary shares or warrants equal to the difference between
the
U.S. dollar value of (i) the amount realized on the disposition (i.e., the
amount of cash plus the fair market value of any property received), and (ii)
your adjusted tax basis in the ordinary shares or warrants. Such gain or loss
will be capital gain or loss.
If
you
have held the ordinary shares or warrants for more than one year at the time
of
disposition, such capital gain or loss will be long-term capital gain or loss.
Preferential tax rates for long-term capital gain (currently, with a maximum
rate of 15% for taxable years beginning before January 1, 2011) will apply
to
non-corporate U.S. Holders. If you have held the ordinary shares or warrants
for
one year or less, such capital gain or loss will be short-term capital gain
or
loss taxable as ordinary income at your marginal income tax rate. The
deductibility of capital losses is subject to limitations.
Generally,
any gain or loss recognized will not give rise to foreign source income for
U.S.
foreign tax credit purposes, unless a different result is achieved under the
U.S.-Israel Tax Treaty. You should consult your own tax advisor regarding the
effect of such treaty on the source of income.
You
should consult your own tax advisor regarding the U.S. federal income tax
consequences if you receive currency other than U.S. dollars upon the
disposition of ordinary shares or warrants.
Passive
Foreign Investment Company
We
generally will be a PFIC under Section 1297 of the Code if, for a taxable year,
either (a) 75% or more of our gross income for such taxable year is passive
income (the “income test”) or (b) 50% or more of the average quarterly
percentage, generally determined by fair market value, of our assets either
produce passive income or are held for the production of passive income (the
“asset test”). “Passive income” includes, for example, dividends, interest,
certain rents and royalties, certain gains from the sale of stock and
securities, and certain gains from commodities transactions.
Certain
“look through” rules apply for purposes of the income and asset tests described
above. If we own, directly or indirectly, 25% or more of the total value of
the
outstanding shares of another foreign corporation, we will be treated as if
we
(a) held directly a proportionate share of the other corporation’s assets, and
(b) received directly a proportionate share of the other corporation’s income.
In addition, passive income does not include any interest, dividends, rents,
or
royalties that are received or accrued by us from a “related person” (as defined
in Section 954(d)(3) of the Code), to the extent such items are properly
allocable to income of such related person that is not passive
income.
Under
the
income and asset tests, whether or not we are a PFIC will be determined annually
based upon the composition of our income and the composition and valuation
of
our assets, all of which are subject to change. In determining that we are
not a
PFIC, we are relying on our projected revenues and projected capital
expenditures. If our actual revenues and capital expenditures do not match
our
projections, we may become a PFIC. For example, if we do not spend enough of
the
cash (a passive asset) we raise from any financing transactions we may
undertake, the relative percentage of our passive assets will increase. In
addition, our determination is based on a current valuation of our assets,
including goodwill. In calculating goodwill, we have valued our total assets
based on our market capitalization, determined using the market price of our
ordinary shares. Such market price may fluctuate. If our market capitalization
is less than anticipated or subsequently declines, this will decrease the value
of our goodwill and we may become a PFIC. Furthermore, we have made a number
of
assumptions regarding the amount of value allocable to goodwill. We believe
our
valuation approach is reasonable. However, it is possible that the IRS will
challenge the valuation of our goodwill, which may result in our being a
PFIC.
We
do not
believe that we are currently a PFIC. However, because the PFIC determination
is
highly fact intensive and made at the end of each taxable year, there can be
no
assurance that we will not be a PFIC for the current or any future taxable
year
or that the IRS will not challenge our determination concerning our PFIC status.
If we determine that we are a PFIC, we will take reasonable steps to notify
you.
Default
PFIC Rules under Section 1291 of the Code.
If we
are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the
ownership and disposition of ordinary shares and warrants will depend on whether
such U.S. Holder makes an election to treat us as a qualified electing fund
(“QEF”) under Section 1295 of the Code (a “QEF Election”) or a mark-to-market
election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S.
Holder owning ordinary shares and warrants while we were or are a PFIC that
has
not made either a QEF Election or a Mark-to-Market Election will be referred
to
in this summary as a “Non-Electing U.S. Holder.”
If
you
are a Non-Electing U.S. Holder, you will be subject to the default tax rules
of
Section 1291 of the Code with respect to:
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any
“excess distribution” paid on ordinary shares and warrants, which means
any distribution received by you which, together with all other
distributions received in the current taxable year, exceeds 125%
of the
average distributions received by you during the three preceding
taxable
years (or during your holding period for the ordinary shares and
warrants,
if shorter); and
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any
gain recognized on the sale or other taxable disposition (including
a
pledge) of ordinary shares and
warrants.
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Under
these default tax rules:
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any
excess distribution or gain will be allocated ratably over your holding
period for the ordinary shares and
warrants;
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the
amount allocated to the current taxable year and any period prior
to the
first day of the first taxable year in which we were a PFIC will
be
treated as ordinary income in the current
year;
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the
amount allocated to each of the other years will be treated as ordinary
income and taxed at the highest applicable tax rate in effect for
that
year; and
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the
resulting tax liability from any such prior years will be subject
to the
interest charge applicable to underpayments of
tax.
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In
addition, notwithstanding any election you may make, dividends that you receive
from us will not be eligible for the preferential tax rates applicable to QDI
(as discussed above in “Distributions on Ordinary Shares”) if we are a PFIC
either in the taxable year of the distribution or the preceding taxable year,
but will instead be taxable at rates applicable to ordinary income.
Special
rules for Non-Electing U.S. Holders will apply to determine U.S. foreign tax
credits with respect to withholding taxes imposed on distributions on ordinary
shares.
If
we are
a PFIC for any taxable year during which you hold ordinary shares or warrants,
we will continue to be treated as a PFIC with respect to you for all succeeding
years during which you hold ordinary shares or warrants, regardless of whether
we actually continue to be a PFIC. You may terminate this deemed PFIC status
by
electing to recognize gain (which will be taxed under the default tax rules
of
Section 1291 of the Code discussed above) as if your ordinary shares or warrants
had been sold on the last day of the last taxable year for which we were a
PFIC.
If
we are
a PFIC in any year with respect to you, you will be required to file an annual
return on IRS Form 8621 regarding distributions received on ordinary shares
and
any gain realized on the disposition of ordinary shares or
warrants.
QEF
Election.
If you
make a QEF Election, you generally will not be subject to the default rules
of
Section 1291 of the Code discussed above. Instead, you will be subject to
current U.S. federal income tax on your pro rata share of our ordinary earnings
and net capital gain, regardless of whether such amounts are actually
distributed to you by us. However, you can make a QEF Election only if we agree
to furnish you annually with certain tax information, and we currently do not
intend to prepare or provide such information.
Mark-to-Market
Election.
U.S.
Holders may make a Mark-to-Market Election, but only if the ordinary shares
are
marketable stock. The ordinary shares will be “marketable stock” as long as they
remain listed on NASDAQ, and are regularly traded. Stock is “regularly traded”
for any calendar year during which it is traded (other than in de minimis
quantities) on at least fifteen days during each calendar quarter. There can
be
no assurances, however, that our ordinary shares will be treated, or continue
to
be treated, as regularly traded.
If
the
ordinary shares are marketable stock and you make a Mark-to-Market Election,
you
generally will not be subject to the default rules of Section 1291 of the Code
discussed above. Rather, you generally will be required to recognize ordinary
income for any increase in the fair market value of the ordinary shares and
warrants for each taxable year that we are a PFIC. You will also be allowed
to
deduct as an ordinary loss any decrease in the fair market value to the extent
of net marked-to-market gain previously included in prior years. Your adjusted
tax basis in the ordinary shares and warrants will be adjusted to reflect the
amount included or deducted.
The
Mark-to-Market Election will be effective for the taxable year for which the
election is made and all subsequent taxable years, unless the ordinary shares
and warrants cease to be marketable stock or the IRS consents to the revocation
of the election. You should consult your own tax advisor regarding the
availability of, and procedure for making, a Mark-to-Market
Election.
Since
the
PFIC rules are complex, you should consult your own tax advisor regarding them
and how they may affect the U.S. federal income tax consequences of the
ownership and disposition of ordinary shares and warrants.
Information
Reporting and Backup Withholding
Generally,
information reporting requirements will apply to distributions on ordinary
shares or proceeds on the disposition of ordinary shares and warrants paid
within the U.S. (and, in certain cases, outside the U.S.) to U.S. Holders other
than certain exempt recipients, such as corporations. Furthermore, backup
withholding (currently at 28%) may apply to such amounts if the U.S. Holder
fails to (i) provide a correct taxpayer identification number, (ii) report
interest and dividends required to be shown on its U.S. federal income tax
return, or (iii) make other appropriate certifications in the required manner.
U.S. Holders who are required to establish their exempt status generally must
provide such certification on IRS Form W-9.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding
from a payment to you may be credited against your U.S. federal income tax
liability and you may obtain a refund of any excess amounts withheld by filing
the appropriate claim for refund with the IRS and furnishing any required
information in a timely manner.
Taxation
of Non-U.S. Holders
Distributions
on Ordinary Shares
Subject
to the discussion in “Information Reporting and Backup Withholding” below, as a
Non-U.S. Holder, you generally will not be subject to U.S. federal income tax,
including withholding tax, on distributions received on ordinary shares, unless
the distributions are effectively connected with a trade or business that you
conduct in the U.S. and (if an applicable income tax treaty so requires)
attributable to a permanent establishment that you maintain in the
U.S..
If
distributions are effectively connected with a U.S. trade or business and (if
applicable) attributable to a U.S. permanent establishment, you generally will
be subject to tax on such distributions in the same manner as a U.S. Holder,
as
described in “Taxation of U.S. Holders – Distributions on Ordinary Shares”
above. In addition, any such distributions received by a corporate Non-U.S.
Holder may also, under certain circumstances, be subject to an additional
“branch profits tax” at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Dispositions
of Ordinary Shares and Warrants
Subject
to the discussion in “Information Reporting and Backup Withholding” below, as a
Non-U.S. Holder, you generally will not be subject to U.S. federal income tax,
including withholding tax, on any gain recognized on a sale or other taxable
disposition of ordinary shares and warrants, unless (i) the gain is effectively
connected with a trade or business that you conduct in the U.S. and (if an
applicable income tax treaty so requires) attributable to a permanent
establishment that you maintain in the U.S., or (ii) you are an individual
and
are present in the U.S. for at least 183 days in the taxable year of the
disposition, and certain other conditions are present.
If
you
meet the test in clause (i) above, you generally will be subject to tax on
any
gain that is effectively connected with your conduct of a trade or business
in
the U.S. in the same manner as a U.S. Holder, as described in “Taxation of U.S.
Holders – Dispositions of Ordinary Shares and Warrants” above. Effectively
connected gain realized by a corporate Non-U.S. Holder may also, under certain
circumstances, be subject to an additional “branch profits tax” at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
If
you
meet the test in clause (ii) above, you generally will be subject to tax at
a
30% rate on the amount by which your U.S. source capital gain exceeds your
U.S.
source capital loss.
Information
Reporting and Backup Withholding
Payments
to Non-U.S. Holders of distributions on, or proceeds from the disposition of,
ordinary shares and warrants are generally exempt from information reporting
and
backup withholding. However, a Non-U.S. Holder may be required to establish
that
exemption by providing certification of non-U.S. status on an appropriate IRS
Form W-8.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding
from a payment to you may be credited against your U.S. federal income tax
liability and you may obtain a refund of any excess amounts withheld by filing
the appropriate claim for refund with the IRS and furnishing any required
information in a timely manner.
|
F.
|
Dividends
and Paying Agent
|
Not
applicable.
Not
applicable.
We
are subject to the informational requirements of the Exchange Act, applicable
to
foreign private issuers. We, as a “foreign private issuer,” are exempt from the
rules under the Exchange Act prescribing certain disclosure and procedural
requirements for proxy solicitations, and our officers, directors and principal
shareholders are exempt from the reporting and “short-swing” profit recovery
provisions contained in Section 16 of the Exchange Act, with respect to their
purchases and sales of shares. In addition, we are not required to file annual,
quarterly and current reports and financial statements with the SEC as
frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act. However, we will file with the SEC, within 180 days
after the end of each fiscal year, an annual report on Form 20-F containing
financial statements audited by an independent accounting firm. We will also
furnish quarterly reports on Form 6-K containing unaudited interim financial
information for the first three quarters of each fiscal year, within 60 days
after the end of such quarter.
You
may read and copy any document we file or furnish with the SEC at reference
facilities at 450 Fifth Street, NW, Washington, DC 20549. You may also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, NW, Washington, DC 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference facilities. You can review our SEC filings and the registration
statement by accessing the SEC’s internet site at
http://www.sec.gov.
|
I.
|
Subsidiary
Information
|
Not
applicable.
ITEM
11.
Quantitative
and Qualitative Disclosures About Market Risk.
Quantitative
and Qualitative Information about Market Risk
The
primary objective of our investment activities is to preserve principal while
at
the same time maximizing the income we receive from investments without
significantly increasing risk. Some of the securities in which we may invest
may
be subject to market risk. This means that a change in prevailing interest
rates
and foreign currency rates against the NIS may cause the value of the investment
to fluctuate. For example, if we purchase a security that was issued with a
fixed interest rate and the prevailing interest rate later rises, the value
of
our investment will probably decline. To minimize this risk, we intend to
maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including U.S. dollars, NIS bank deposits, money market
funds and government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate.
Our
financial market risk includes risks related to international operations and
related foreign currencies. We anticipate that sales outside of North America
will continue to account for a significant portion of our consolidated revenue
in 2008. To date, most of our sales have been valued in dollars. In future
periods, we expect our sales to be principally valued in dollars, eliminating
foreign currency exchange risk.
We
value
expenses of some of our international operations, such as Israel and Hong Kong,
in each country's local currency and therefore are subject to foreign currency
exchange risk. However, through December 31, 2007, we have not experienced
any
significant negative impact on our operations as a result of fluctuations in
foreign currency exchange rates, although we have incurred a loss of $109,000
in
the year ended December 31, 2007 due to fluctuations in foreign exchange rates.
We do not use financial instruments to hedge operating expenses in Israel or
Hong Kong that are valued in local currency. We intend to continue to assess
the
need to utilize financial instruments to hedge currency exposures on an ongoing
basis.
We
do not
use derivative financial instruments for speculative trading purposes, nor
do we
hedge our foreign currency exposure to offset the effects of changes in foreign
exchange rates.
Our
exposure to market risks for changes in interest rates relates primarily to
our
credit facility. At December 31, 2007, our financial market risk related to
this
debt was immaterial. Our general policy is to limit the risk of principal loss
and ensure the safety of invested funds by limiting market and credit
risk.
Foreign
currency risk
Most
of our sales are denominated in U.S. dollars, and we incur most of our expenses
in U.S. dollars, Euros and Israeli Shekels. According to the salient economic
factors indicated in SFAS No. 52, “Foreign Currency Translation,” our cash flow,
sale price, sales market, expense, financing and inter-company transactions
and
arrangement indicators are predominantly denominated in U.S. dollars. In
addition, the U.S. dollar is the primary currency of the economic environment
in
which we operate, and thus the U.S. dollar is our functional and reporting
currency.
In
our balance sheet, we remeasure into U.S. dollars all monetary accounts
(principally cash and cash equivalents and liabilities) that are maintained
in
other currencies. For this remeasurement we use the foreign exchange rate at
the
balance sheet date. Any gain or loss that results from this remeasurement is
reflected in the statement of income as financial income or financial expense,
as appropriate.
We
measure and record non-monetary accounts in our balance sheet (principally
fixed
assets, prepaid expenses and share capital) in U.S. dollars. For this
measurement we use the U.S. dollar value in effect at the date that the asset
or
liability was initially recorded in our balance sheet (the date of the
transaction).
ITEM
12
.
Description
of Securities Other than Equity Securities..
Not
applicable.
PART
III
ITEM
17.
Financial
Statements.
Not
applicable.
ITEM
18.
Financial
Statements.
Report
of
the Independent Registered Public Accounting Firm
To
the Board of Directors of
SuperCom
Asia Pacific Limited
We
have
audited the accompanying balance sheets of SuperCom Asia Pacific Limited (the
“Company”) as of December 31, 2006 and 2005, and the related statements of
income, stockholders’ deficit and cash flows for the years ended December 31,
2006 and 2005. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. Our audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2006
and 2005 and the results of its operations and cash flows for the years ended
December 31, 2006 and 2005 in conformity with accounting principles generally
accepted in the United States of America.
BDO
McCabe Lo Limited
Certified
Public Accountants
Hong
Kong, 22 March 2007
REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors of
SuperCom
Asia Pacific Limited
We
have
audited the accompanying balance sheet of SuperCom Asia Pacific Limited (the
“Company”) as of December 31, 2007, and the related statements of (loss),
stockholders’ deficit and cash flows for the year ended December 31, 2007. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2007, and the results of its operations and cash flows for the year ended
December 31, 2007 in conformity with accounting principles generally accepted
in
the United States of America.
PKF
Certified
Public Accountants
Hong
Kong, China
February
13, 2008
VUANCE
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2007
IN
U.S.
DOLLARS
INDEX
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
96
|
|
|
Consolidated
Balance Sheets
|
97-98
|
|
|
Consolidated
Statements of Operations
|
99
|
|
|
Statements
of Changes in Shareholders' Equity
|
100
|
|
|
Consolidated
Statements of Cash Flows
|
101-102
|
|
|
Notes
to Consolidated Financial Statements
|
103-141
|
-
-
-
-
- - - -
- - - - - - - - - - - - -
|
|
|
Head Office
|
|
Levinstein Tower
|
|
23 Menachem Begin Road
|
|
Tel-Aviv 66184, ISRAEL
|
REPORT
OF INDEPENDENT
|
P.O.B. 36172, 61361
|
REGISTERED
PUBLIC ACCOUNTING FIRM
|
|
TO
THE SHAREHOLDERS OF
|
|
VUANCE
LTD.
|
|
We
have
audited the accompanying consolidated balance sheets of Vuance Ltd. (the
"Company") and its subsidiaries as of December 31, 2006 and 2007, and the
related consolidated statements of operations, changes in shareholders’ equity
and cash flows for each of the three years in the period ended December 31,
2007. These financial statements are the responsibility of the Board of
Directors and management of the Company. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
did
not audit the financial statements of Supercom Asia Pacific Limited, a
subsidiary, whose assets included in the consolidation constituted approximately
2% and 0.4% of total consolidated assets as of December 31, 2006 and 2007,
respectively, and whose revenues included in the consolidation constituted
approximately 26%, 20% and 10% of total consolidated revenues for the years
ended December 31, 2005, 2006 and 2007, respectively. The financial
statements of this subsidiary were audited by another independent registered
public accounting firm, whose report has been furnished to us. Our opinion,
insofar as it relates to the amounts included in respect of this subsidiary,
is
based solely on the report of the other independent registered public accounting
firm.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance as to whether the financial
statements are free of material misstatements. The Company is not required
to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well
as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other independent registered public accounting
firm
provide a reasonable basis for our opinion.
In
our
opinion, based on our audits and the report of the other independent registered
public accounting firm, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of
the Company and its subsidiaries as of December 31, 2006 and 2007, and the
consolidated results of their operations, and their cash flows for each of
the
three years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States.
Fahn
Kanne & Co.
Certified
Public Accountants (Isr.)
Tel-Aviv,
ISRAEL
June
30,
2008
Certified
Public Accountants
Fahn
Kanne & Co. is the Israeli member firm of Grant Thornton International
Ltd
VUANCE
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands
|
|
December
31,
|
|
|
|
2006
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,444
|
|
$
|
2,114
|
|
Restricted
cash deposits
|
|
|
859
|
|
|
3,172
|
|
Marketable
securities
|
|
|
11,077
|
|
|
4,054
|
|
Trade
receivables (net of allowance for doubtful accounts of $ 3,487
and $ 3,500
as of December 31, 2006 and 2007, respectively)
|
|
|
2,625
|
|
|
2,463
|
|
Other
accounts receivable and prepaid expenses
|
|
|
717
|
|
|
2,400
|
|
Inventories,
net
|
|
|
270
|
|
|
566
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
17,992
|
|
|
14,769
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
AND LONG-TERM RECEIVABLES:
|
|
|
|
|
|
|
|
Investment
in restricted marketable securities of other company
|
|
|
4,431
|
|
|
-
|
|
Long-term
trade receivables
|
|
|
79
|
|
|
-
|
|
Severance
pay fund
|
|
|
239
|
|
|
309
|
|
|
|
|
|
|
|
|
|
Total
investments and long-term receivables
|
|
|
4,749
|
|
|
309
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
160
|
|
|
218
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
3,644
|
|
Intangible
assets and deferred charges, net
|
|
|
197
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
197
|
|
|
5,656
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
23,098
|
|
$
|
20,952
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
VUANCE
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands, except share data
|
|
December
31,
|
|
|
|
2006
|
|
2007
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Short-term
bank credit and current maturities of long-term loan
|
|
$
|
668
|
|
$
|
478
|
|
Trade
payables
|
|
|
823
|
|
|
1,498
|
|
Employees
and payroll accruals
|
|
|
533
|
|
|
299
|
|
Accrued
expenses and other liabilities
|
|
|
3,428
|
|
|
6,641
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
5,452
|
|
|
8,916
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Convertible
bonds
|
|
|
2,255
|
|
|
2,441
|
|
Long-term
loan, net of current maturities
|
|
|
67
|
|
|
-
|
|
Accrued
severance pay
|
|
|
323
|
|
|
362
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
2,645
|
|
|
2,803
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Share
capital:
|
|
|
|
|
|
|
|
Ordinary
shares of NIS 0.0588235 par value -
|
|
|
|
|
|
|
|
Authorized
6,800,000 and 12,000,000 shares as of December 31, 2006 and 2007,
respectively;
|
|
|
|
|
|
|
|
Issued
and outstanding: 4,001,126 and 5,124,779 shares as of December 31,
2006 and 2007, respectively
|
|
|
64
|
|
|
80
|
|
Additional
paid-in capital
|
|
|
33,562
|
|
|
39,089
|
|
Accumulated
deficit
|
|
|
(18,625
|
)
|
|
(29,936
|
)
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
15,001
|
|
|
9,233
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
23,098
|
|
$
|
20,952
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
VUANCE
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
U.S.
dollars in thousands, except share data
|
|
Year
ended
December
31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,462
|
|
$
|
8,795
|
|
$
|
12,961
|
|
Cost
of revenues
|
|
|
4,293
|
|
|
3,494
|
|
|
5,600
|
|
Inventory
write-off
|
|
|
287
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,882
|
|
|
5,301
|
|
|
7,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,182
|
|
|
1,362
|
|
|
1,716
|
|
Selling
and marketing
|
|
|
3,003
|
|
|
5,619
|
|
|
9,041
|
|
General
and administrative
|
|
|
2,968
|
|
|
2,737
|
|
|
3,192
|
|
Restructuring
expenses
|
|
|
496
|
|
|
-
|
|
|
-
|
|
Litigation
settlement expenses
|
|
|
129
|
|
|
108
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
7,778
|
|
|
9,826
|
|
|
13,983
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
gain from the sale of the e-ID Division
|
|
|
-
|
|
|
10,536
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(3,896
|
)
|
|
6,011
|
|
|
(6,622
|
)
|
Financial
expenses, net
|
|
|
(25
|
)
|
|
(204
|
)
|
|
(4,652
|
)
|
Other
expenses, net
|
|
|
(30
|
)
|
|
(367
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes on income
|
|
|
(3,951
|
)
|
|
5,440
|
|
|
(11,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income
|
|
|
-
|
|
|
-
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,951
|
)
|
$
|
5,440
|
|
$
|
(11,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
(1.25
|
)
|
$
|
1.37
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$
|
(1.25
|
)
|
$
|
1.31
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares used in computing basic earnings/
loss
per share
|
|
|
3,155,872
|
|
|
3,969,212
|
|
|
4,391,860
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares used in computing diluted earnings/
loss
per share
|
|
|
3,155,872
|
|
|
4,212,791
|
|
|
4,391,860
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
VUANCE
LTD. AND ITS SUBSIDIARIES
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands, except share data
|
|
Ordinary
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Share
capital
|
|
Additional
paid-in
capital
|
|
Deferred
stock
compensation
|
|
Accumulated
Deficit
|
|
Receipt
on
account
of
shares
|
|
Total
comprehensive
income
(loss)
|
|
Total
shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2005
|
|
|
3,009,548
|
|
|
51
|
|
|
29,094
|
|
|
(59
|
)
|
|
(20,114
|
)
|
|
143
|
|
|
-
|
|
|
9,115
|
|
Deferred
stock compensation
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
(11
|
)
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of shares in a private placement, net
|
|
|
685,485
|
|
|
9
|
|
|
2,047
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,056
|
|
Exercise
of warrants and options
|
|
|
112,134
|
|
|
1
|
|
|
550
|
|
|
-
|
|
|
-
|
|
|
(129
|
)
|
|
-
|
|
|
422
|
|
Receipt
on account of shares to be allotted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
550
|
|
|
-
|
|
|
550
|
|
Amortization
of stock compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,951
|
)
|
|
-
|
|
$
|
(3,951
|
)
|
|
(3,951
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,951
|
)
|
|
|
|
Balance
as of December 31, 2005
|
|
|
3,807,167
|
|
$
|
61
|
|
$
|
31,702
|
|
$
|
(15
|
)
|
$
|
(24,065
|
)
|
$
|
564
|
|
|
-
|
|
$
|
8,247
|
|
Reclassification
upon adoption of SFAS 123(R)
|
|
|
-
|
|
|
-
|
|
|
(15
|
)
|
|
15
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Issuance
of shares in a private placement, net
|
|
|
150,807
|
|
|
2
|
|
|
455
|
|
|
-
|
|
|
-
|
|
|
(550
|
)
|
|
-
|
|
|
(93
|
)
|
Exercise
of options
|
|
|
43,152
|
|
|
1
|
|
|
105
|
|
|
-
|
|
|
-
|
|
|
(14
|
)
|
|
-
|
|
|
92
|
|
Amounts
attributed to warrants issued in connection with convertible
bonds
|
|
|
-
|
|
|
-
|
|
|
282
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
282
|
|
Beneficial
conversion feature on convertible bonds
|
|
|
-
|
|
|
-
|
|
|
632
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
632
|
|
Stock-
based compensation
|
|
|
-
|
|
|
-
|
|
|
401
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
401
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,440
|
|
|
-
|
|
$
|
5,440
|
|
|
5,440
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,440
|
|
|
|
|
Balance
as of December 31, 2006
|
|
|
4,001,126
|
|
$
|
64
|
|
$
|
33,562
|
|
$
|
-
|
|
$
|
(18,625
|
)
|
$
|
-
|
|
|
|
|
$
|
15,001
|
|
Issuance
of shares in connection with acquisition of subsidiary (see note
1a)
|
|
|
1,097,426
|
|
|
16
|
|
|
4,319
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,335
|
|
Exercise
of options
|
|
|
25,968
|
|
|
-
|
*
|
|
82
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
82
|
|
Increase
in the fair value of conversion feature of convertible bonds due
to
modification of conversion terms
|
|
|
-
|
|
|
-
|
|
|
84
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
84
|
|
Stock-
based compensation
|
|
|
-
|
|
|
-
|
|
|
1,072
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,072
|
|
Expenses
related to the issuance of shares in a private placement occurred
in the
previous years
|
|
|
-
|
|
|
-
|
|
|
(30
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(30
|
)
|
Issuance
of shares due to reverse split
|
|
|
259
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,311
|
)
|
|
-
|
|
$
|
(11,311
|
)
|
|
(11,311
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,311
|
)
|
|
|
|
Balance
as of December 31, 2007
|
|
|
5,124,779
|
|
$
|
80
|
|
$
|
39,089
|
|
$
|
-
|
|
$
|
(29,936
|
)
|
$
|
-
|
|
|
|
|
$
|
9,233
|
|
*Less
than 1
The
accompanying notes are an integral part of the consolidated financial
statements.
VUANCE
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Cash
flows from operating activities
:
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss)
|
|
$
|
(3,951
|
)
|
$
|
5,440
|
|
$
|
(11,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
772
|
|
|
355
|
|
|
225
|
|
Accrued
severance pay
|
|
|
52
|
|
|
128
|
|
|
(382
|
)
|
Stock-
based compensation
|
|
|
55
|
|
|
361
|
|
|
1,072
|
|
Capital
gain from the sale of the e-ID Division
|
|
|
-
|
|
|
(10,536
|
)
|
|
-
|
|
Amortization
of discount on convertible bonds
|
|
|
-
|
|
|
30
|
|
|
268
|
|
Amortization
of deferred charges
|
|
|
-
|
|
|
6
|
|
|
90
|
|
Write
down of loan regarding an investment in an affiliated
company
|
|
|
-
|
|
|
275
|
|
|
-
|
|
Realized
loss from sale of marketable securities
|
|
|
-
|
|
|
-
|
|
|
1,116
|
|
Decrease
in value of marketable securities, net
|
|
|
-
|
|
|
-
|
|
|
2,699
|
|
Loss
on sale of property and equipment
|
|
|
-
|
|
|
8
|
|
|
58
|
|
Exchange
differences on principle of long-term loan
|
|
|
-
|
|
|
12
|
|
|
9
|
|
Decrease
(increase) in trade receivables
|
|
|
448
|
|
|
(1,442
|
)
|
|
883
|
|
Decrease
(increase) in other accounts receivable and prepaid
expenses
|
|
|
517
|
|
|
254
|
|
|
(1,943
|
)
|
Decrease
(increase) in inventories
|
|
|
(40
|
)
|
|
212
|
|
|
32
|
|
Increase
(decrease) in trade payables
|
|
|
(365
|
)
|
|
53
|
|
|
95
|
|
Increase
(decrease) in employees and payroll accruals
|
|
|
(35
|
)
|
|
211
|
|
|
(234
|
)
|
Increase
(decrease) in accrued expenses and other liabilities
|
|
|
(407
|
)
|
|
1,586
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,954
|
)
|
|
(3,047
|
)
|
|
(4,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(315
|
)
|
|
(93
|
)
|
|
(116
|
)
|
Acquisition
of subsidiaries net of cash acquired.*
|
|
|
-
|
|
|
-
|
|
|
(153
|
)
|
Decrease
(increase) in severance pay fund
|
|
|
(64
|
)
|
|
(95
|
)
|
|
278
|
|
Capitalization
of software and intangible assets
|
|
|
-
|
|
|
-
|
|
|
(509
|
)
|
Restricted
cash deposits, net
|
|
|
41
|
|
|
229
|
|
|
(2,313
|
)
|
Short
term deposits, net
|
|
|
353
|
|
|
-
|
|
|
-
|
|
Proceeds
from (investment in) marketable securities
|
|
|
(650
|
)
|
|
650
|
|
|
-
|
|
Proceeds
from sale of marketable securities
|
|
|
-
|
|
|
-
|
|
|
7,639
|
|
Amounts
carried to deferred charges
|
|
|
-
|
|
|
(163
|
)
|
|
(52
|
)
|
Cash
paid in respect of sale of the e-ID Division
**
|
|
|
-
|
|
|
(52
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(635
|
)
|
|
476
|
|
|
4,774
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
:
|
|
|
|
|
|
|
|
|
|
|
Short-term
bank credit, net
|
|
|
120
|
|
|
(307
|
)
|
|
(336
|
)
|
Proceeds
from issuance of convertible bonds and warrants, net
|
|
|
-
|
|
|
3,139
|
|
|
-
|
|
Issuance
of share capital through a private placement, net of issuance
costs
|
|
|
2,539
|
|
|
(183
|
)
|
|
(30
|
)
|
Proceeds
from exercise of options and warrants, net
|
|
|
422
|
|
|
92
|
|
|
82
|
|
Long-term
loan received
|
|
|
500
|
|
|
204
|
|
|
2,850
|
|
Principal
repayment of long-term loan
|
|
|
(592
|
)
|
|
(224
|
)
|
|
(2,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
2,989
|
|
|
2,721
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(600
|
)
|
|
150
|
|
|
(330
|
)
|
Cash
and cash equivalents at the beginning of the year
|
|
|
2,894
|
|
|
2,294
|
|
|
2,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the end of the year
|
|
$
|
2,294
|
|
$
|
2,444
|
|
$
|
2,114
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
VUANCE
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Cont.)
U.S.
dollars in thousands
|
|
Year
ended
December
31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Supplemental
disclosure of cash flows information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Acquisition of subsidiaries net of cash acquired.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities of the subsidiaries, as of date of
purchase:
|
|
|
|
|
|
|
|
|
|
|
Working
capital (excluding cash and cash equivalents)
|
|
|
-
|
|
|
-
|
|
$
|
1,157
|
|
Property
and equipment, net
|
|
|
-
|
|
|
-
|
|
|
(38
|
)
|
Intangible
assets
|
|
|
-
|
|
|
-
|
|
|
(1,531
|
)
|
Goodwill
recognized
|
|
|
-
|
|
|
-
|
|
|
(3,644
|
)
|
Shares
issued
|
|
|
-
|
|
|
-
|
|
|
3,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
$
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
**
***
Cash paid in respect of sale of the e-ID Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities of the division, at the date of sale:
|
|
|
|
|
|
|
|
|
|
|
Working
Capital, net
|
|
|
-
|
|
$
|
2,073
|
|
|
-
|
|
Fixed
assets, net
|
|
|
-
|
|
|
2,800
|
|
|
-
|
|
Intangible
assets
|
|
|
-
|
|
|
47
|
|
|
-
|
|
Fair
value of marketable securities received as proceeds, net
|
|
|
-
|
|
|
(15,508
|
)
|
|
-
|
|
Capital
gain from the sale of the e-ID Division
|
|
|
-
|
|
|
10,536
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
$
|
(52
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for
:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
87
|
|
$
|
76
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
capital issuance against redemption of note payable to former shareholder
of a subsidiary
|
|
$
|
-
|
|
$
|
-
|
|
$
|
432
|
|
Accrued
issuance costs
|
|
$
|
109
|
|
$
|
19
|
|
$
|
-
|
|
Issuance
of warrants to service provider
|
|
$
|
-
|
|
$
|
40
|
|
$
|
-
|
|
The
accompanying notes are an integral part of the consolidated financial
statements
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
|
a.
|
Vuance
Ltd. (formally Supercom Ltd.) (the “Company") was established in 1988 in
Israel. The Company’s ordinary shares have been listed for trade on the
Euronext Brussels stock market, since October 23, 2003 under the
symbol “SUP”, which became “VUNC” after the corporate name change on May
14, 2007. The Company applied for delisting of its shares from the
Euronext Brussels stock market, and its application was approved
on May 6,
2008, effective August 4, 2008. Since November 5, 2004, the Company’s
ordinary shares have also traded on the OTC Bulletin Board under
the
symbol "SPCBF.OB" which following our recent name change became
“VUNCF.OB”. Since August 23, 2007, the ordinary shares of the company were
approved for trade on the NASDAQ Capital Market under the symbol
“VUNC”
and the trade on the OTC Bulletin Board
ceased.
|
The
Company develops and markets state-of-the-art security solutions for viewing,
tracking, locating, credentialing, and managing essential assets and personnel.
The Company's solutions encompass electronic access control, urban security,
and
critical situation management systems as well as long-range Active RFID for
public safety, commercial, and government sectors. The Company’s comprehensive
product line enables end-to-end solutions that can be employed to successfully
overcome the most difficult security challenges. Its Critical Situation
Management System (CSMS) is the industry's most comprehensive mobile
credentialing and access control system, designed to meet the needs of Homeland
Security and other public initiatives. Regarding the e-ID activity after the
closing of the sale of the e-ID Division to OTI, see below.
The
Company is headquartered in Rockville, MD.
|
|
The
Company sells its products through centralized marketing offices
in
different regions of the world. The Company has two wholly-owned
marketing
subsidiaries: Vuance Inc (formally Supercom Inc) in the United States
and
SuperCom Asia Pacific Limited in Hong Kong.
|
During
the fourth quarter of 2005, the Company established a new subsidiary (80%),
Vuance RFID Inc., (formally: Pure RF Inc.,) (incorporated in Delaware) which
began operations during the first quarter of 2006. During the first quarter
of
2006 Vuance RFID Inc., established Vuance RFID Ltd (formally Pure RF Ltd.)
(100%) (incorporated and operating in Israel), and focuses on new technology
and
solutions for active tracking of people and objects. During February 2007,
the
Company purchased the remaining 20% from the minority of Vuance RFID Inc. for
an
amount of $100.
During
the fourth quarter of 2006, the Company established a new wholly-owned
subsidiary, S.B.C. Aviation Ltd., (incorporated in Israel) which began
operations in 2007, and focuses on executing information technology and security
projects.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
On
July
3, 2007, through its wholly-owned subsidiary, Vuance Inc., the Company entered
into an agreement (the “Purchase Agreement”) to acquire all of the issued and
outstanding share capital of Security Holding Corp. (“SHC”) from Homeland
Security Capital Corporation (OTCBB: HMSC.OB) (“HMSC”) and other minority
shareholders (collectively, “Sellers”) for approximately $4,335 in Vuance
ordinary shares, direct expenses of approximately $600 as describe below. The
closing date was August 28, 2007. SHC is a Delaware corporation engaged,
directly and through its subsidiaries in the business of manufacturing and
distributing of RFID enabled solutions, access control and security management
systems. As consideration for the acquisition of SHC, the Company issued to
the
sellers 1,097,426 ordinary shares of the company. Subject to certain terms
and
conditions, in the event that the Company seeks to register any of its ordinary
shares under the Securities Act of 1933 for sale to the public, then at HMSC’s
request, the Company will use its reasonable best efforts to include the
Company's Shares owned by HMSC in such registration. The Sellers agreed to
a
lock-up period during which, subject to certain exceptions, they will not sell
or otherwise dispose of the Company's Shares. The restrictions on making such
transactions will expire for HMSC - in eight equal installments, commencing
on
the end of the first calendar quarter following the Closing and each of the
seven calendar quarters thereafter, and for the other Sellers - in twelve equal
installments, commencing on the end of the first calendar quarter following
the
Closing and each of the eleven calendar quarters thereafter. HMSC also agreed
that during such restriction period, upon the occurrence of any sale by HMSC
of
the Company's Shares due to HSMC’s bankruptcy, insolvency or otherwise by
operation of law, Vuance Inc and the Company will have a right of first refusal
to purchase all (but not less than all) of the Company's Shares held by HSMC
on
certain terms and conditions. HMSC further agreed that at the Closing it will
grant an irrevocable power of attorney to the Chairman of the Board of Directors
of the Company, to exercise all voting rights related to its Vuance Shares
until
the sale or transfer of such Vuance Shares by HMSC to an unaffiliated third
party in an arm’s-length transaction. As part of the Purchase Agreement, certain
Sellers will assume, subject to certain exceptions, certain non-competition
and
employee non-solicitation undertakings for a period of two years commencing
on
the date of Closing. According to the Purchase Agreement, the Company guaranteed
all of the obligations of Vuance Inc under such agreement.
During
the fourth quarter of 2007 the acquired companies were merged to Vuance
Inc.
The
acquisition was accounted for under the purchase method and the Company
allocated the purchase price according to the fair value of the tangible and
intangible assets acquired and liabilities assumed. The purchase price was
calculated in accordance with EITF No 99-12 “Determination of the Measurement
Date for the Market Price of Acquirer Securities Issued in a Purchase Business
Combinations” (“EITF No. 99-12”) after consideration with the lock-up mechanism
of the shares issued to the sellers. The results of operation acquired were
included in the consolidated financial statements of the Company commencing
August 28, 2007. (See also note 8)
The
consideration for the acquisition was attributed to net assets on the basis
of
fair value of assets acquired and liabilities assumed, as follows:
|
|
August
28, 2007
|
|
|
|
|
|
Intellectual
Property
|
|
$
|
525
|
|
Brand
name
|
|
|
500
|
|
Customer
Base
|
|
|
506
|
|
Liabilities
|
|
|
(240
|
)
|
Goodwill
|
|
|
3,644
|
|
|
|
|
|
|
Total
|
|
$
|
4,935
|
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
Goodwill
includes but is not limited to the synergistic value, accesses to new growing
markets and potential competitive benefits that could be realized by the Company
from the acquisition.
Below
are
certain pro forma combined statement of income data for the years ended
December 31, 2007 and 2006, as if the acquisition of SHC had occurred on
January 1, 2007 and 2006, respectively, after giving effect to: purchase
accounting adjustments, including amortization of identifiable intangible
assets;. This pro forma financial information is not necessarily indicative
of
the combined results that would have been attained had the acquisition taken
place at the beginning of 2007 and 2006, respectively, nor is it necessarily
indicative of future results.
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
Unaudited
|
|
Net
sales
|
|
$
|
12,500
|
|
$
|
15,300
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,170
|
|
$
|
(13,950
|
)
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
0.429
|
|
$
|
(2.728
|
)
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$
|
0.423
|
|
$
|
(2.728
|
)
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
On
November 8, 2006, the Company announced that it had entered into an agreement
with On Track Innovations Ltd. ("OTI") (NASDAQ:
OTIV
),
under
which OTI agreed to acquire the assets of the Company’s e-ID Division
(including, inventory, fixed assets and intangible assets) for consideration
consisting of 2,827,200 restricted ordinary shares of OTI. The transaction
was
completed on December 31, 2006. At the closing, the parties entered into a
service and supply agreement pursuant to which the Company agreed to continue
to
provide services and receive revenues under certain existing ID and e-ID
contracts for governmental and commercial projects in Europe, Asia and Africa.
OTI will serve as a subcontractor for these projects. The 2,827,200 ordinary
shares issued to the Company are subject to a lock-up agreement, whereby
one-seventh of the shares (403,885 ordinary shares) will be released from the
lock-up restrictions every three months beginning on the closing date, December
31, 2006, for an aggregate period of eighteen months. On April 24, 2007, OTI
filed a registration Form F-3, for the registration of the above mentioned
shares, which became effective on May 2, 2007. The Company executed an
irrevocable proxy appointing OTI's chairman, on behalf of the Board of
Directors, or a person the Board of Directors will instruct, to vote the
2,827,200 ordinary shares issued to the Company in connection with the
transaction. As a result of the sale of the e-ID Division, the Company
recognized $10,536 as a capital gain on the sale of the e-ID Division in fiscal
year 2006.
The
capital gain was calculated based on OTI’s share price on the closing date, less
a discount due to the lock up restrictions of the shares, the carrying value
of
the assets that were transferred to OTI and direct expenses (in an amount of
$1,550) associated with the sale.
The
direct expenses included, inter alia, the fair value of 212,040 shares out
of
the shares received by the Company from OTI that will be transferred to
consultants, as a finder and legal fee, in connection with the transaction
(the
investment of the Company in OTI’s shares includes the shares held by the
Company, net of the shares that will be transferred to the consultants). As
of
December 31, 2007, the Company holds 1,308,483 shares of OTI of which 108,040
are held by the Company but relate to consultants. See Note 3.
As
a
result of the transaction, the Company terminated the employment of certain
employees that were employed by the Company in the e-ID Division.
In
connection with the completion of the sale, during January 2007, a $2,500 loan
was extended to the Company by a financial institution. In order to secure
this
loan, the Company deposited OTI shares in favor of the financial institution.
The loan was repaid during the year 2007.
|
b.
|
Concentration
of risk that may have a significant impact on the
Company:
|
The
Company derives most of its revenues from several major customers. (As of
December 31, 2007, an amount of $1,496 out of the $2,463 trade receivables
balance consists of one customer) See also Note 16c.
The
Company purchases certain services and products used by the Company to generate
revenues in its projects and sales from several sole suppliers. Although there
are only a limited number of manufacturers of those particular services and
products, management believe that other suppliers could provide similar services
and products on comparable terms without affecting operating
results.
Profitability
of the Company’s investment in OTI’s ordinary shares depends on the share price
and
the
ability to sell the OTI ordinary shares. See Note 3.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
|
c.
|
On November
21, 2006 the Company announced that it had raised $3,156.5 through
the
issuance of Units consisting of Convertible Bonds and Warrants. See
Note
13
|
|
d.
|
The
Company has incurred substantial losses and negative cash flows since
its
inception. The Company had an operating cash flow deficit in each
of 2005,
2006, and 2007. As of December 31, 2007, the Company had an accumulated
deficit of approximately $29,936. The Company incurred net losses
of
approximately $3,951and $11,311in the years ended December 31, 2005
and
December 31, 2007, respectively. For the year ended December 31,
2006 the
Company would have incurred a net loss of $5,096, excluding the $10,536
capital gain from the sale of the e-ID Division. The Company expects
to
have net operating losses and negative cash flows for the foreseeable
future, and expects to spend significant amounts of capital to enhance
its
products and services, develop further sales and operations and fund
expansion. As a result, the Company will need to generate significant
revenue to achieve profitability. Even if the Company does achieve
profitability, the Company may not be able to sustain or increase
profitability on a quarterly or annual basis. However, the company
believes that, the current working capital (including current cash
and
cash equivalents and marketable securities, in addition to revenues
expected to be generated from the business operations) is sufficient
for
the Company’s present requirements and will satisfy the operating capital
needs at least till the end of 2008 based upon the company anticipated
business activities. However, the company may need additional capital
within 2008, if it will undertake large projects or have a delay
in one of
the anticipated projects. If the company fail to raise such additional
capital, there might be need to implement certain operational changes
in
order to decrease the expenditure level.
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
|
The
consolidated financial statements have been prepared in accordance
with
accounting principles generally accepted in the United States.
|
|
|
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:
|
|
|
Most
of the revenues of the Company and its subsidiaries are received
in U.S.
dollars. In addition, a substantial portion of the costs of the Company
and its subsidiaries are incurred in U.S. dollars. Therefore, management
believes that the dollar is the currency of the primary economic
environment in which the Company and its subsidiaries operate. Thus,
the
functional and reporting currency of the Company and its subsidiaries
is
the U.S. dollar.
|
|
|
Monetary
accounts maintained in currencies other than the U.S. dollar are
re-measured into U.S. dollars in accordance with Statement No. 52
of the
Financial Accounting Standards Board ("FASB") "Foreign Currency
Translation" (“SFAS No. 52”). All transaction gains and losses from the
re-measurement of monetary balance sheet items are reflected in the
statements of operations as financial income or financial expenses
as
appropriate.
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
|
c.
|
Principles
of consolidation:
|
|
|
The
consolidated financial statements include the accounts of the Company
and
its subsidiaries (unless the minority shareholders have certain approval
or veto rights) in Israel, the United States and Hong-Kong. Material
intercompany transactions and balances were eliminated upon consolidation.
Material profits from intercompany sales, not yet realized outside
the
group, were also eliminated.
|
|
|
The
Company considers unrestricted short-term highly liquid investments
originally purchased with maturities of three months or less to be
cash
equivalents.
|
|
e.
|
Restricted
cash deposits:
|
Restricted
cash is invested in certificates of deposit, which mature within one year,
and
is used to secure agreements with customers or banks.
|
f.
|
Marketable
securities:
|
The
Company accounts for investments in
marketable
securities
in accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). Management determines the appropriate classification of its investments
in
marketable
securities
and commercial paper at the time of purchase and reevaluates such determinations
at each balance sheet date.
The
entire balance of marketable securities as of December 31, 2006 and 2007,
consists of marketable securities received in connection with the OTI
transaction. Marketable securities of OTI that were considered to be restricted,
because the sale of such securities was prohibited for a period longer than
12
months, were accounted at cost net of write down for any permanent decrease
in
value. These securities were presented in the balance sheets at December 31,
2006 as “Investment in restricted marketable securities of other company”. There
was no such balance at December 31, 2007.
Such
securities that were not considered restricted according to the provisions
of
SFAS No. 115, were classified as available-for-sale and were stated at fair
value, with unrealized gains and losses reported in accumulated other
comprehensive income in a separate component of shareholders’ equity, net of
taxes. Realized gains and losses on the sale of such securities, as determined
on a specific identified basis, are included in the consolidated statement
of
operations. SFAS 115, ", SAB 59, "Noncurrent Marketable Equity Securities"
and
other related pronouncements require the company to perform periodic reviews
of
individual securities to determine whether a decline in the value of a security
is other than temporary. Impairment of the value of an investment may be
indicated by conditions such as a prolonged period during which the quoted
market value of the investment is less than its original cost, severe losses
by
the investee in the current year or current and prior years, continued losses
by
the investee for a period of years, suspension of trading in the securities,
liquidity or going concern problems of the investee or a current fair value
of
the investment that is less than its carrying value.
When
persuasive evidence exists that causes the Company to determine that a decline
in market value of equity securities is other than temporary, the unrealized
losses that are considered to be other than temporary are charged to income
as
an impairment charge.
Since
all
OTI securities were received by the Company on December 31, 2006,(upon the
closing of the OTI transaction) no unrealized gains or losses were recognized
during fiscal 2006. During 2007, the Company recorded write down expenses in
an
amount of $ 2,699 due to a decline in the fair value of OTI securities that
is
considered other than temporary. (See note 3)
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
|
g.
|
Allowance
for doubtful accounts:
|
The
allowance for doubtful accounts is determined with respect to specific amounts
the Company has determined to be doubtful of collection. In determining the
allowance for doubtful accounts, the Company considers, among other things,
its
past experience with such customers and the information available regarding
such
customers.
Inventories
are stated at the lower of cost or market value. Inventory write-offs are mainly
provided to cover risks arising from slow-moving items or technological
obsolescence. Cost is determined as follows:
Raw
materials, parts and supplies - using the “moving average cost"
method.
Finished
products - on the basis of direct manufacturing costs, with the addition of
allocable, indirect manufacturing costs.
|
i.
|
Investment
in certain majority owned
subsidiary:
|
The
investment in a certain majority-owned company is presented using the equity
method of accounting in accordance with Accounting Principle Bulletin No. 18,
“The Equity Method of Accounting for Investments in Common Stock”, due to
substantive participation rights held by the minority, which impact the
Company’s ability to exert control over the subsidiary. See Note 6.
|
j.
|
Property
and equipment:
|
Property
and equipment are stated at cost, net of accumulated depreciation.
|
|
Depreciation
is computed using the straight-line method, over the estimated useful
lives, at the following annual
rates:
|
|
|
%
|
|
|
|
Computers
and peripheral equipment
|
|
33
|
Office
furniture and equipment
|
|
6
-
15
|
Leasehold
improvements
|
|
Over the shorter of the
term of the lease or the
life of the asset
|
|
k.
|
Impairment of
long-lived assets and intangible
assets:
|
The
Company's long-lived assets and certain identifiable intangible assets are
reviewed for impairment in accordance with Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") 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 asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of by sale are
reported at the lower of the carrying amount or fair value, less costs to sell.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
1.
|
Beneficial
conversion feature:
|
|
|
The
Company has considered the provisions of EITF Issue No.00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled
in, a Company’s Own Stock”, and determined that the embedded conversion
feature should not be separated from the host instrument because
it is
qualifies for equity classification in paragraphs 12-32 of EITF Issue
No.00-19. Furthermore, the Company applied Emerging Issues Task Force
Issue No. 00-27 (EITF 00-27). “Application of EITF Issue
No. 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingency Adjustable Conversion Ratios,
to
Certain Convertible Instruments,” which is effective for such instruments.
This EITF Issue clarified the accounting for instruments with beneficial
conversion features or contingency adjustable conversion
ratios.
|
|
|
The
beneficial conversion feature has been calculated by allocating the
proceeds received in financing transactions to the convertible instrument
and to any detachable warrants included in the transaction, and by
measuring their intrinsic value based on the effective conversion
price as
a result of the allocated proceeds.
|
|
|
The
amount of the beneficial conversion feature with respect to convertible
bonds was recorded as a discount on the convertible bonds with a
corresponding amount credited directly to shareholders’ equity as
additional paid in capital. After initial recognition the discount
on the
convertible bonds is amortized as interest expenses over the term
of the
bonds.
|
|
2.
|
Issuance
costs of convertible bonds – deferred
charges:
|
|
|
Costs
incurred in respect of obtaining financing through issuance of convertible
bonds are deferred and expensed as financing expenses over the contractual
term of the bonds.
|
|
3.
|
Modification
(or exchange) of a convertible bonds
|
|
|
The
company applied the provisions of EITF Issue 06-06 "Debtor's Accounting
for a Modification (or Exchange) of Convertible Debt Instruments"
("EITF
No. 06-6") which was reached to a final consensus in November 2006
and the
provisions of EITF No. 96-19, "Debtor's Accounting or a Modification
or
Exchange of Debt Instruments", with respect to the modification
of terms
of convertible debt instruments. According to these pronouncements,
the
Company concluded that the modification of convertible loans that
occurred
during November 2007 did not result in a debt extinguishment (for
subsequent events see note
19).
|
|
m.
|
Long-term
trade receivables:
|
Long-term
receivables represent amounts expected to be collected 12 months or more after
the balance sheet date. Such amounts are initially recorded at fair value
(present value of the face amount to be received). The difference between the
present value and the face amount is treated as a discount and amortized as
interest expense over the term of the receivables.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
|
n.
|
Accrued
severance pay and severance pay
fund:
|
The
liabilities of the Company for severance pay of its Israeli employees are
calculated pursuant to Israel's Severance Pay Law, based on the most recent
salary of the employees, multiplied by the number of years of employment as
of
the balance sheet date. Employees are entitled to one month's salary for each
year of employment, or portion thereof. The Company's liability for all its
employees is fully covered by monthly deposits with severance pay funds,
insurance policies and by an accrual. The value of these policies is presented
as an asset on the Company's balance sheet.
The
deposited funds include accrued income up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the Company’s
obligation pursuant to Israel's Severance Pay Law or labor agreements.
Severance
expenses for the years ended December 31, 2005, 2006 and 2007 amounted to $115,
$159 and $57, respectively.
As
of
December 31, 2006, the severance pay balance and fund relating to employees
whose employment was terminated due to the OTI transaction were presented as
a
current liability and a current asset, as applicable. During fiscal 2007, the
Company paid these liabilities.
|
o.
|
Goodwill
and Intangible assets:
|
Intangible
assets, are amortized over their useful lives using the straight line method
of
amortization that reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise used up, in accordance with SFAS
No.
142, “Goodwill and Other Intangible Assets".
Goodwill
represents the excess of the aggregate purchase price over the fair value of
the
net assets acquired in a purchase business combination. Goodwill is not
amortized, but rather is tested for impairment at least annually or between
annual tests, if certain events or indicators of impairment occur in accordance
with SFAS No. 142. Goodwill is tested for impairment at the reporting unit
level
by comparing the fair value of the reporting unit with its carrying value.
|
|
The
Company and its subsidiaries generate their revenues from the sale
of
products, maintenance, , royalties and long term contracts( including
training and installation).
|
|
|
The
sale of products involves the sale of active and passive RFID products,
CSMS and raw materials. The Company sells its products in the USA
through
distributers and directly, in Asia Pacific through a local subsidiary
and
directly in the rest of the world.
|
Product
sales are recognized in accordance with Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB No. 104”), when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable, collectability is probable, and inconsequential or perfunctory
performance obligations remain. If the product requires specific customer
acceptance, revenue is deferred until customer acceptance occurs or the
acceptance provision lapses.
The
Company is not obligated to accept returned products or issue credit on returned
products, unless such return has been approved by the Company in advance and
according to specific term and conditions. As of December 31, 2007, the Company
had allowance for customers returns in the amount of $57.
Based
on
past experience, the Company does not provide for warranty costs when revenue
is
recognized.
Warranty
period is varying in length from 12 to 36 months.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
The
Company applied the provisions of EITF Issue No. 00-21 “Revenue Arrangements
with Multiple Deliverables” for multiple element arrangements. EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. For such arrangements, each element of the contract, such as
maintenance, support and services is accounted for as a separate unit when
it
provides the customer value on a stand-alone basis and there is objective
evidence of the fair value of the related unit.
|
|
Maintenance
and support revenues included in multiple-element arrangements are
deferred and recognized on a straight-line basis over the term of
the
maintenance and support agreement.
|
Deferred
revenues and customer advances include amounts received from customers for
which
revenues have not been recognized.
The
Company is entitled to royalties upon of the issuance of a certificate. Such
royalties are recognized when the sales are reported to the Company (usually
on
a monthly basis).
The
Company recognizes certain long-term contract revenues, in accordance with
Statement of Position (“SOP”) 81-1, “Accounting for Performance of
Construction-Type and Certain Production Type Contracts”.
Pursuant
to SOP 81-1, revenues from these contracts are recognized under the percentage
of completion method. The Company measures the percentage of completion based
on
output or input criteria, such as contract milestones, percentage of engineering
completion or number of units shipped, as stipulated in each
contract.
Provisions
for estimated losses on uncompleted contracts are made during the period in
which such losses are first identified, in the amount of the estimated loss
on
the entire contract. As of December 31, 2007, no such estimated losses were
identified.
The
Company believes that the use of the percentage of completion method is
appropriate; as the Company has the ability, using also independent
subcontractor's evaluation, make reasonably dependable estimates of the extent
of progress towards completion, contract revenues and contract costs. In
addition, contracts executed include provisions that clearly specify the
enforceable rights of the parties to the contract, the consideration to be
exchanged and the manner and terms of settlement. In all cases, the Company
expects to perform its contractual obligations and the parties are expected
to
satisfy their obligations under the contract.
In
contracts that do not meet all the conditions mentioned above, the Company
utilizes zero estimates of profits; equal amounts of revenue and cost are
recognized until results can be estimated with sufficient accuracy.
Revenues
and costs recognized pursuant to SOP 81-1 on contracts in progress are subject
to management estimates. Actual results could differ from these
estimates.
The
Company derives its revenues mainly from sale of hardware products and long
term
contracts that include embedded software that management considers to be
incidental. Such revenues are recognized in accordance with SAB No. 104 and
SOP
81-1, as mentioned above. However, in limited circumstances, the Company
provides software upgrades in respect of the embedded software of hardware
products sold to its customers in the past. Such revenues are recognized when
all criteria outlined in Statement of Position No. 97-2 “Software Revenue
Recognition” (“SOP No. 97-2”) (as amended) are met: when persuasive evidence of
an agreement exists, delivery of the product has occurred (i.e. the services
have been provided), no significant obligations under the agreement remain,
the
fee is fixed or determinable and collectability is probable.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
|
q.
|
Shipping
and handling costs:
|
Shipping
and handling fees billed to customers are reflected as revenues while the
related shipping and handling costs are included in cost of revenues. To date,
shipping and handling costs have not been material.
|
r.
|
Research
and development costs:
|
Research
and development costs (other than software) are expensed as
incurred.
Research
and development costs incurred in the process of software production before
establishment of technological feasibility, are expensed 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 Company's product development process, technological feasibility is
established upon completion of a detailed program design or a working
model.
Capitalized
software development costs are amortized on a product-by-product basis
commencing with general product release by the greater of the amount computed
using: (i) the ratio that current gross revenues from sales of the software
product bear 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 software product (three years).
The
Company and its subsidiaries account for income taxes in accordance with
Statement of Financial Accounting Standard (SFAS) 109, "Accounting for Income
Taxes". This Statement prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be
in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to reduce deferred
tax
assets to their estimated realizable value.
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes” ("FIN 48 "). FIN 48 prescribes
detailed guidance for the financial statement recognition, measurement and
disclosure of uncertain tax positions recognized in an enterprise’s financial
statements in accordance with SFAS No. 109. According to FIN 48, tax positions
must meet a more-likely-than-not recognition threshold. The Company’s accounting
policy, pursuant to the adoption of FIN 48 is to classify interest and penalties
relating to uncertain tax positions under income taxes, however the Company
did
not recognize such items in its fiscal 2007 financial statements. The adoption
of FIN 48 did not have material effect on the financial position and results
of
operations of the Company.
|
t.
|
Concentrations
of credit risk:
|
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents, restricted cash deposits,
marketable securities and trade receivables. The Company's trade receivables
are
derived from sales to customers located primarily in Europe (including Eastern
Europe), the United States, Asia Pacific, Africa, and Israel. The Company
performs ongoing credit evaluations of its customers' financial conditions.
The
allowance for doubtful accounts is determined with respect to specific debts
that the Company has determined to be doubtful of collection. See Note 2g
above.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
|
|
Cash
and cash equivalents, restricted cash deposits and marketable securities
are deposited with major banks in the United States Israel and Hong-Kong.
Management believes that such financial institutions are financially
sound
and, accordingly, minimal credit risk exists with respect to these
financial instruments.
|
Regarding
marketable securities received in connection with the OTI transaction. See
Note
3.
|
|
The
Company has no significant off-balance-sheet concentration of credit
risk,
such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. See Note 9a regarding bank credit denominated
in
currencies other than U.S. dollars.
|
|
u.
|
Basic
and diluted earnings (loss) per
share:
|
|
|
Basic
earnings (loss) per share are computed based on the weighted average
number of ordinary shares outstanding during each year. Diluted earnings
(loss) per share are computed based on the weighted average number
of
ordinary shares outstanding during each year, plus the dilutive potential
of stock options and warrants outstanding during the year using the
treasury stock method and the dilutive potential of convertible bonds
using the “if-converted method”, in accordance with SFAS No. 128,
"Earnings Per Share".
|
|
|
The
net income (loss) and the weighted average number of shares used
in
computing basic and diluted earning (loss) per share for the reported
periods are as follows:
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Net
income (loss) used for the computation of basic earnings (loss)
per
share
|
|
|
(3,951
|
)
|
|
5,440
|
|
|
(11,311
|
)
|
Interest
expenses on convertible bond
|
|
|
-
|
|
|
75
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) used for the computation diluted earnings (loss)
per
share
|
|
|
(3,951
|
)
|
|
5,515
|
|
|
(11,311
|
)
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Weighted
average number of shares used in the computation of basic earnings
(loss)
per share
|
|
|
3,155,872
|
|
|
3,969,212
|
|
|
4,391,860
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
Additional
shares from the assumed exercise of employee stock options and
warrants,
net
|
|
|
-
|
|
|
164,016
|
|
|
-
|
|
Weighted
average number of additional shares issued upon the assumed conversion
of
convertible bonds
|
|
|
-
|
|
|
79,563
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares used in the computation of diluted earnings
(loss) per share
|
|
|
3,155,872
|
|
|
4,212,791
|
|
|
4,391,860
|
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
All
outstanding stock options, warrants and convertible bonds have been excluded
from the calculation of the diluted net loss per share for the years ended
December 2005 and 2007 since the Company reported losses for those years.
The
number of potential shares from the conversion of convertible bonds options
and
warrants that have been excluded from the calculation were 1,121,083, 795,279
and 2,513,927 for the years ended December 31, 2005, 2006 and 2007 respectively.
|
v.
|
Fair
value of financial
instruments:
|
The
following methods and assumptions were used by the Company and its subsidiaries
in determining their fair value disclosures for financial
instruments:
At
December 31, 2007 and 2006, the carrying amounts of cash and cash equivalents,
restricted cash deposits, m
arketable
securities,
current
trade receivables, other accounts receivable, trade payables, short-term bank
credit and other accounts payable approximate their fair value due to the
short-term maturity of such instruments. Regarding the fair value of marketable
securities received from the OTI transaction, see Notes 2f above and
3.
The
carrying value of convertible bonds, does not approximate their fair value,
since the proceeds received in respect to the issuance of these bonds was
allocated to the convertible bonds and to the detachable warrants that were
included in that issuance. In addition the carrying value of the convertible
bonds was reduced in order to reflect the beneficial conversion feature, in
accordance with the provisions of EITF 00-27.
|
w.
|
Accounting
for stock-based compensation:
|
Until
December 31, 2005, the Company accounted for its employee stock option
plans using the intrinsic value based method of accounting prescribed by
APB 25, “Accounting for Stock Issued to Employees” and related
interpretations. Accordingly, the compensation cost relating to stock
options, measured as the excess of the fair value of the underlying stock over
the exercise price on the date of grant, if any, was charged on the date of
grant of such options, to shareholders’ equity, under deferred compensation, and
was thereafter amortized by the straight-line method and charged against income
over the vesting period.
The
Company applied SFAS No. 123 and Emerging Issue 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” with
respect to options issued to non-employees.
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (SFAS 123R), a revision of SFAS No. 123, “Accounting for
Stock Based Compensation (SFAS 123) and Staff Accounting Bulletin No. 107
(“SAB 107”), which was issued in March 2005 by the SEC.
SFAS
123R
eliminates the use of APB 25 (and related interpretations) and the intrinsic
value method of accounting, and requires to recognize, the cost of employee
services received in exchange for awards of equity instruments, based on the
fair value of those awards at the grant date.
The
Company adopted SFAS 123R (and the relevant principles of SAB 107) using the
modified prospective method, as permitted under FAS 123R.
Accordingly, prior period amounts have not been restated. Under this method,
the
Company is required to record compensation expense for all awards granted after
the date of adoption in accordance with the provisions of SFAS 123R and for
the
unvested portion of previously granted awards that remain outstanding at the
date of adoption (January 1, 2006) in accordance with the original
provisions of SFAS 123.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
As
a
result of adopting SFAS123R, the Company’s net income for 2006 and 2007 is $217
and $1,034 respectively less, than if it had continued to account for
share-based compensation under APB 25. Upon adoption of SFAS 123R, the remaining
balance of the Additional Paid-In Capital and the offsetting amount in Deferred
Stock-Based Compensation ($15), that were both reflected in shareholders’ equity
at December 31, 2005, were reversed, as required by SFAS123 R. There was no
net
effect on total shareholders’ equity.
The
following table summarizes relevant information for the year ended December
31,
2005 (prior to the adoption of SFAS 123R), under the Company's intrinsic value
method of accounting for stock awards, with supplemental information as if
the
fair value recognition provisions of SFAS No. 123 had been applied:
Pro
forma
information under SFAS 123:
|
|
Year ended
December 31,
|
|
|
|
2005
|
|
Net
loss as reported
|
|
$
|
(3,951
|
)
|
Stock
based compensation expenses
determined
under fair value based method
|
|
|
(1,475
|
)
|
Stock
based compensation expenses included in reported net loss
|
|
|
55
|
|
Pro
forma net loss
|
|
$
|
(5,371
|
)
|
Basic
and diluted net loss per share as reported
|
|
$
|
(1.25
|
)
|
Pro
forma basic and diluted net loss
|
|
$
|
(1.70
|
)
|
The
fair
value of these options was amortized over their vesting period and estimated
at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates of 3.68%, with a dividend
yield of 0%, volatility factors of the expected market price of the Company's
ordinary shares of 101.9% and a weighted-average expected life of the option
of
five years.
The
Company expenses advertising costs as incurred. Advertising expenses for the
years ended December 31, 2005, 2006 and 2007, were approximately $ 21,
$ 18 and $139, respectively.
The
Company has no comprehensive income components other than net income (loss)
in
the reporting periods.
|
z.
|
Recently
issued accounting
pronouncements:
|
SFAS
No. 157, “Fair Value Measurements”
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. This Statement clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands the disclosures
on
fair value measurements. However, SFAS No. 157 does not require any new
fair value measurement. FAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years and
its provisions should be applied prospectively (with a limited retrospective
application). The Company chose to apply the provisions of SFAS No. 157
early, beginning January 1, 2007.
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of SFASB Statement No. 115”
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
|
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
SFASB
Statement No. 115” (“SFAS 159”). This pronouncement permits all entities to
choose to elect, at specified election dates, to measure eligible financial
instruments at fair value. An entity shall report unrealized gains and losses
on
items for which the fair value option has been elected in earnings at each
subsequent reporting date, and recognize upfront costs and fees related to
those
items in earnings as incurred and not deferred. SFAS 159 applies to fiscal
years beginning after November 15, 2007, with early adoption permitted for
an entity that has also elected to apply the provisions of SFAS No. 157. An
entity is prohibited from retrospectively applying SFAS No. 159, unless it
chooses early adoption of SFAS 157 also. The Company is currently assessing
the
impact of SFAS No. 159 , if any on its financial position and results of
operations.
SFAS
No.
141(R), “Business Combinations”
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”.
This Statement will replace SFAS No. 141, “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) retains the fundamental requirements of SFAS 141 with
respect to the implementation of the acquisition method of accounting ("the
purchase method") for all business combinations and for the identification
of
the acquirer for each business combination. This Statement also establishes
principles and requirements for how the acquirer recognizes and measures in
its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, how the acquirer recognizes
and
measures the goodwill acquired in a business combination and the disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination.
SFAS
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after December 15, 2008 (January 1, 2009 for the
Company). Early adoption of SFAS 141(R) is prohibited. The Company has not
yet
evaluated this statement for the impact, if any, that SFAS 141(R) will have
on
its financial position and results of operations.
SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial
Statements”
In
December 2007, the SFASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). This Statement amends ARB 51
and establishes accounting and reporting standards for the noncontrolling
(minority) interest in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008 (January 1, 2009 for the
Company). Early adoption of SFAS 160 is prohibited. The Company has not yet
determined the impact, if any, that SFAS No. 160 will have on its financial
position and results of operations.
Staff
Accounting Bulletin No. 110
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”)
regarding the use of a "simplified" method, as discussed in SAB No. 107 ("SAB
107"), in developing an estimate of expected term of "plain vanilla" share
options in accordance with SFAS No. 123 (revised 2004), "Share-Based
Payment". Until December 31, 2007, SAB 107 allowed the use of the
simplified method. SAB 110 allows, under certain circumstances, to continue
to
accept the use of the simplified method beyond December 31, 2007. The
Company believes that the adoption of SAB 110 will not have a material impact
on
its financial position and results of operations.
SFAS
No.162, ”The Hierarchy of Generally Accepted Accounting Principles”
In
May
2008, the FASB issued SFAS No.162”The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy).
SFAS
162
is effective sixty days following the SEC’s approval of PCAOB amendments to AU
Section 411, “The Meaning of “Present Fairly in Conformity With Generally
Accepted Accounting Principles””. The company is currently evaluating the
potential impact, if any, of the adoption of SFAS 162 on its condensed
consolidated financial statements.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
3:-
MARKETABLE
SECURITIES
The
entire balance of marketable securities as of December 31, 2006 and 2007
consists of marketable securities received in connection with the OTI
transaction.
As
stated
in note 1a above, 2,827,200 ordinary shares were issued to the Company in
connection with the OTI transaction (hereinafter – "OTI shares") (of which
212,040 shares were received by the Company but relates to its consultants).
Securities
which were not considered restricted according to the provisions of SFAS No.
115, were classified as available-for-sale and were stated at fair value (after
consideration with the relevant restriction period of each portion).
Marketable
securities of OTI that were considered to be restricted, because the sale of
such securities is prohibited for a period longer than 12 months, were presented
in the balance sheets as of December 31, 2006 as “Investment in restricted
marketable securities of other company" and were accounted at cost, net of
write
down for any permanent decrease in value. There were no securities that are
considered to be restricted under the provisions of SFAS No. 115, as of December
31, 2007.
During
2007, the Company sold 1,414,716 shares of the OTI shares for a total amount
of
$7,639 and recorded net realized losses in an amount of $1,116. The Company
recorded write-down expenses in an amount of $2,699, due to the decline in
the
fair market value of OTI securities that is considered other than
temporary.
As
of
December 31, 2007, the Company held 1,308,483 OTI shares (of which 108,040
are
held by the Company but relate to its consultants in the OTI transaction) of
which 373,594 and 373,594 (excluding the shares related to the consultant as
mentioned above) are subject to the abovementioned lock-up agreement and are
restricted for a three month and six month periods, respectively.
As
required under SFAS No. 115 for available for sale securities, OTI securities
(other than the portions that were considered to be restricted as of December
31, 2006) are stated at fair value. The fair value of OTI shares is measured
on
a recurring basis at each balance sheet date based on the market value of OTI
securities, using quoted prices in active market (Level 1 inputs as defined
in
SFAS 157), and after consideration with the discount.
|
|
December 31
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$
|
11,077
|
|
$
|
4,054
|
|
Investment
in restricted marketable securities of other company
|
|
|
4,431
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
marketable securities
|
|
$
|
15,508
|
|
$
|
4,054
|
|
See
also
note 19
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
4:-
OTHER
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
$
|
178
|
|
$
|
689
|
|
Government
authorities
|
|
|
74
|
|
|
204
|
|
Advance
payment to suppliers
|
|
|
16
|
|
|
1,455
|
|
Severance
pay fund – current (*)
|
|
|
348
|
|
|
-
|
|
Others
|
|
|
101
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
$
|
717
|
|
$
|
2,400
|
|
(*)
The
severance pay fund related to employees that were employed in the e-ID Division.
See Note 1a.
NOTE
5:-
INVENTORIES
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Raw
materials, parts and supplies
|
|
$
|
270
|
|
$
|
94
|
|
Finished
products
|
|
|
-
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
$
|
270
|
|
$
|
566
|
|
On
December 31, 2006, as part of the sale of the e-ID Division to OTI, all
inventory related to the e-ID Division was transferred to OTI. See Note
1a.
As
of
December 31, 2007 the inventory is presented net of allowance of slow inventory
in the amount of approximately $100,
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
6:-
|
INVESTMENT
IN A CERTAIN MAJORITY OWNED SUBSIDIARY
|
|
|
In
December 1997, the Company established SuperCom
Slovakia
, owned equally with another third party investor, in order to execute
a
transaction with the Ministry of Interior of the Slovak
Republic.
|
In
March
2000, the Company purchased an additional 16% of SuperCom
Slovakia,
at a nominal value of $1, and granted such third party investor a loan in an
amount of $275, bearing interest of 0.7% per month, for any amounts outstanding.
Interest is compounded on the outstanding principal balance of the loan and
is
to be repaid under the same conditions as the outstanding principal
balance.
|
|
The
third party investor has an option to buy back 16% of the shares,
for $1,
upon repayment of the loan to the
Company.
|
|
|
The
Company currently owns 66% of SuperCom
Slovakia's
outstanding shares. The Company has accounted for this investment
using
the equity method of accounting, due to the substantive participation
rights held by the minority,
which impacts the Company’s ability to exert control over the
subsidiary
.
|
|
|
During
the fourth quarter of 2006, the Company wrote down the entire loan
balance
in that company due to litigation developments regarding this issue
and
due to low probability of collection. See Note 11c2. During the reported
periods, the subsidiary had no operating
activity.
|
NOTE
7:-
|
PROPERTY
AND EQUIPMENT
|
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
Cost:
|
|
|
|
|
|
|
|
Computers
and peripheral equipment
|
|
$
|
300
|
|
$
|
287
|
|
Office
furniture and equipment
|
|
|
211
|
|
|
193
|
|
Leasehold
improvements
|
|
|
75
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
|
513
|
|
Accumulated
depreciation:
|
|
|
|
|
|
|
|
Computers
and peripheral equipment
|
|
|
259
|
|
|
183
|
|
Office
furniture and equipment
|
|
|
92
|
|
|
92
|
|
Leasehold
improvements
|
|
|
75
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
426
|
|
|
295
|
|
|
|
|
|
|
|
|
|
Depreciated
cost
|
|
$
|
160
|
|
$
|
218
|
|
Depreciation
expenses for the years ended December 31, 2005, 2006 and 2007, were $746
(including write-down of leasehold improvements, see below), $335 and $38,
respectively.
During
fiscal 2005, the Company relocated its offices. As a result, the Company wrote
down the unamortized balance of leasehold improvement in the amount of $471.
This expense was recorded in the statement of operations as part of
“Restructuring expenses”.
On
December 31, 2006, as part of the sale of the e-ID Division to OTI, all property
and equipment related to the Division were transferred to OTI. See Note
1a.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
The
deferred charges were incurred in respect of issuance of convertible bonds
during November,2006 (an additional amount of $52 was recognized during 2007
with respect to that issuance). See Note 13
During
the year 2007, the Company capitalized an amount of $280, related to the
development of its CSMS product.
During
February 2007, the Company purchased the remaining 20% of Vuance RFID, from
the
minority for an amount of $100, which related to patents.
During
the third quarter of 2007, the Company acquired the Credentialing Division
of
Disaster Management Solutions Inc. for an amount of $100. As a result of this
transaction the Company allocated costs to Intellectual Property.
During
the third quarter of 2007, the Company acquired all of the issued and
outstanding stock capital of SHC. As described in note 1a, the Company allocated
cost to:
Intellectual
Property, Brand name, Customer Base and Goodwill.
The
changes in the carrying amount of goodwill for the years ended December 31,
2006
and 2007 are as follows:
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
Balance
as of January 1
|
|
$
|
-
|
|
$
|
-
|
|
Goodwill
resulting from acquisition (see note 1a)
|
|
|
-
|
|
|
3,644
|
|
Balance
as of December 31
|
|
$
|
-
|
|
$
|
3,644
|
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
8:-
|
OTHER
ASSETS (Cont.)
|
b.
Intangible
assets and deferred charges
|
|
|
|
December 31,
|
|
|
|
Amortization
period
|
|
2006
|
|
2007
|
|
Cost
|
|
|
|
|
|
|
|
Deferred
charges
|
|
|
Over
the contractual life of the bond
|
|
$
|
203
|
|
$
|
255
|
|
Capitalized
research and development costs
|
|
|
3
Years
|
|
|
-
|
|
|
280
|
|
Patents
|
|
|
3
Years
|
|
|
-
|
|
|
104
|
|
Intellectual
Property
|
|
|
3
Years (*
)
|
|
|
-
|
|
|
650
|
|
Brand
name
|
|
|
5
Years (*
)
|
|
|
-
|
|
|
500
|
|
Customer
Base
|
|
|
5
Years (*
)
|
|
|
-
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203
|
|
$
|
2,295
|
|
Accumulated
amortization
|
|
|
|
|
|
Deferred
charges
|
|
$
|
6
|
|
$
|
96
|
|
Capitalized
research and development costs
|
|
|
|
|
|
43
|
|
Patent
|
|
|
-
|
|
|
16
|
|
Intellectual
Property
|
|
|
-
|
|
|
61
|
|
Brand
|
|
|
-
|
|
|
33
|
|
Customer
Base
|
|
|
-
|
|
|
34
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
|
283
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$
|
197
|
|
$
|
2,012
|
|
*
Commencing on the closing date of the acquisition of SHC on August 28, 2007.
See
also note 1a.
Amortization
of intangible assets amounted to $26, $20 and $277 for the years ended December
2005, 2006 and 2007, respectively.
Estimated
amortization expenses for the next five years are $643, $632, $403, $200 and
$134 in the years 2008, 2009, 2010, 2011 and 2012,
respectively.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
|
a.
|
As
of December 31, 2007, the Company had credit lines from banks in
an
aggregate amount of $ 550 including long-term loans (from time to
time the banks may increase the Company’s credit line for a limited
period), of which $ 120 is denominated in NIS and bears interest at
the prime rate plus an additional 0.5% - 2.5%, and $ 430 is
denominated in U.S. dollars and bears interest at a rate of LIBOR
plus
2.5% -2.9%. As of December 31, 2007, the U.S. LIBOR and prime rates
were
approximately 4.5% and 5.75%
respectively.
|
The
weighted average interest rates on the credit lines as of December 31, 2006
and
2007, were approximately 7.85% and 6.95%, respectively.
The
Company had an unused credit facility in an amount of approximately $ 100
as of December 31, 2007, for which there is no fee.
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Banks
|
|
$
|
354
|
|
$
|
82
|
|
Less
- current maturities of long-term loans
|
|
|
287
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67
|
|
$
|
-
|
|
As
of
December 31, 2007, a loan in the amount of $ 28 bears annual average interest
at
a rate of LIBOR + 2.875% and a loan in the amount of $54 bears annual average
interest at a rate of PRIME + 2.75%.
|
c.
|
Regarding
guarantees and liens - see Note
11b.
|
NOTE
10:-
|
ACCRUED
EXPENSES AND OTHER
LIABILITIES
|
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Customer
advances (***)
|
|
$
|
310
|
|
$
|
4,334
|
|
Deferred
revenues
|
|
|
285
|
|
|
258
|
|
Accrued
expenses
(*)
|
|
|
2,261
|
|
|
2,024
|
|
Accrued
severance pay – current (**)
|
|
|
421
|
|
|
-
|
|
Other
|
|
|
151
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,428
|
|
$
|
6,641
|
|
|
(*)
As of December 31, 2006 and 2007, includes $450 and $105, respectively,
related to the transaction with OTI and $1,376 and $1,099 related
to
marketing expenses, respectively.
|
|
(**)
The
accrued severance pay related to employees that were employed in
the e-ID
Division. See Note 1a.
|
|
(***)As
of December 31, 2007, an amount of $4,318 relates to advances from
customers with respect to long term
contracts.
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
11:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
The
Company's facilities and those of certain subsidiaries are rented under several
operating lease agreements for periods ending in 2009 - 2010.
On
April
18, 2005, the Company signed a lease for new offices in Kadima, (Israel). The
lease is for a period of five years commencing on November 1, 2005. The Company
has an option to extend the lease period for
an
additional
five
years on similar terms. According to the lease, the monthly fee is
$16.
The
Company subleases a portion of these leased facilities.
As
a
result of the SHC acquisition, as described in note 1(a), the Company's
subsidiary in the USA has several leased facilities in the USA. The main
facility is in Wisconsin. According to the lease, the monthly fee is $5,while
all the monthly fee for the other facilities is $14.5.
Future
minimum lease commitments under non-cancelable operating leases (including
the
portion leased to subsidiary lessees as describe above) for the years ended
December 31, are as follows:
2008
|
|
$
|
603
|
|
2009
|
|
|
494
|
|
2010
|
|
|
445
|
|
|
|
|
|
|
|
|
$
|
1,542
|
|
Rent
expenses for the years ended December 31, 2005, 2006 and 2007, were
approximately $369, $355 and $376, respectively.
|
b.
|
Guarantees,
indemnity and liens:
|
|
1.
|
The
Company issued bank guarantees in the amount of $59 to secure a
certain
lease of the Company. As a condition of these guarantees, the Company
deposited $ 52, which is included as part of the restricted cash
deposits.
|
|
2.
|
In
order to secure bank credit and covenants to the bank, the Company
pledged
deposits in the amount of $481, as of December 31, 2007, in favor
of Bank
Otsar Ha-Hayal Ltd., which are included as part of restricted cash
deposits.
|
|
|
Certain
loan agreements and debentures contain restrictive covenants, mainly
the
requirement to maintain certain financial ratios. As of December
31, 2007,
the Company was in compliance with all of its financial covenants.
|
|
3.
|
In
order to secure an agreement with a customer, the Company provided
bank
guarantees in the amount of $78. As a condition of this guarantee,
the
Company deposited $49 in the bank, which is included as part of
restricted
cash. The Company has granted a pledge in favor of Bank Otsar Ha-Hayal
Ltd. on the funds and rights that are generated from Ethiopian
immigration.
|
|
4.
|
The
Company issued a bank guarantee in the amount of $2,550 to a supplier,
related to a certain project of the Company with a European country.
As a
condition of these guarantee the Company deposited $2,590, which
is
included as part of the restricted cash
deposits.
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
11:-
COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|
5.
|
Under
the sale agreement of the e-ID Division to OTI, the Company agreed
to
indemnify OTI for any breaches of the Company’s representations,
warranties, covenants and obligations for twelve months from the
closing
date (December 31, 2006). The indemnification also covers any claim
based
on the Company’s alleged infringement on the intellectual property of any
third party. As of the date of these financial statements there was
no
claim for breach from the OTI side.
|
|
1.
|
In
April 2004, the Department for Resources Supply of the Ministry of
Ukraine
filed a claim with the International Commercial Arbitration Court
at the
Ukrainian Chamber of Commerce and Industry (the “Arbitration Court”) to
declare Contract No. 10/82 (the “Contract”), dated April 9, 2002, between
the Company and the Ministry of Internal Affairs of the Ukraine,
as void
due to defects in the proceedings by which the Company was awarded
the
Contract. In July, 2004, the Arbitration Court declared the Contract
as
void. On April 27, 2005, the Company appealed the decision to the
High
Commercial Court of the Ukraine. In May 2005, the Department for
Resources
Supply of the Ministry filed a new statement of claim with the Arbitration
Court for restitution of $1,048 paid to the Company by the Department
for
Resources Supply of the Ministry under the Contract. On September
27,
2005, the Company received a negative award issued by the Arbitration
Court in the second claim. On December 12, 2005, the Company was
informed
that the Ukrainian Supreme Court had dismissed its appeal regarding
the
July 2004 decision. On June 29, 2006, the Ukrainian Supreme Court
held
that the Arbitration Court award was valid and legal under applicable
law.
|
During
February 2007, the Company received from the management body of the courts
of
Israel documents that were sent from the Ministry of Internal Affairs of the
Ukraine regarding the claim for restitution of $1,048. The Company’s legal
advisors have advised the Company that the documents were improperly sent and
not in compliance with Israeli law. The Company intends to vigorously defend
any
motion to enforce the Arbitration Court award in Israel, and if necessary,
to
assert claims that the Ukrainian proceedings were legally defective and that
no
judgment based on these proceedings can be enforced in Israel.
Based
on
the opinion of its legal advisors, the Company believes that the above mentioned
Ukrainian Arbitration Court decision is incorrect, as a matter of law, that
the
Ukrainian government’s claim has no merit and that the Ukrainian Arbitration
Proceedings were legally defective. Therefore no provision has been made in
the
financial statements in respect of the claim for restitution of $1,048. However,
due to the developments described above, the Company wrote off inventory in
an
amount of approximately $287 in the fourth quarter of 2005, and took possession
of the remaining inventory that was previously delivered to the customer. In
2003, the Company increased the allowance for doubtful accounts in an aggregate
amount of $2,133 for the remaining balance of the debt the Ukrainian government
owes the Company.
The
Company did not have any revenues from this project in 2005, 2006 and 2007.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
11:-
COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|
2.
|
On
October 30, 2003, SuperCom Slovakia, a subsidiary (66%) of Vuance
Ltd.,
received an award from the International Arbitral Center of the Austrian
Federal Economic Chamber, in a case against the Ministry of Interior
of
the Slovak Republic (“the Ministry”) relating to the Agreement on Delivery
of Technology, Cooperation and Services signed on March 17, 1998.
Upon the
Arbitral Award, the Ministry of Interior of the Slovak Republic was
ordered to pay SuperCom Slovakia the amount of SKK 80,000,000
(approximately $3,476 as of December 31, 2007) plus interest accruing
from
March 1999. In addition, the Ministry of Interior of the Slovak Republic
was ordered to pay the costs of arbitration in the amount of EUR
42,716
(approximately $63 as of December 31, 2007) and SuperCom Slovakia’s legal
fees in the amount of EUR 63,611 (approximately $94 as of December
31,
2007). The Company has begun an enforcement proceeding to collect
the
arbitral awards. The Ministry of Interior of the Slovak Republic
filed a
claim with the Commercial Court in Vienna, Austria on February 10,
2004,
whereby it challenged and requested to set aside the arbitral award.
During September 2005, the Commercial Court of Vienna dismissed the
claim.
On October 21, 2005, the Ministry of the Interior of the Slovak Republic
filed an appeal. On August 25, 2006, the Austrian Appellate Court
rejected
the appeal and ordered the Ministry to reimburse Supercom Slovakia´s costs
of the appellate proceeding in the amount of EUR 6,688.50 within
14 days.
On October 3, 2006, the Company was informed that the Ministry had
decided
not to file an extraordinary appeal to the Austrian Supreme Court’s
decision rejecting its appeal. To date, the Company’s efforts to enforce
the Commercial Court’s decision have been unsuccessful.
|
|
3.
|
On
July 14, 2003, Mr. Yaacov Pedhatzur, filed a lawsuit against the
Company
in the Magistrate’s Court in Tel Aviv, Israel, claiming that the Company
owes him commissions in respect of transactions between the Company
and
certain third parties. On September 29, 2005, the Company reached a
settlement agreement with Mr. Pedhatzur in which the Company agreed
to pay
Mr. Pedhatzur the NIS equivalent of $129. The settlement agreement
has
been approved by the court. This amount was recorded in the statement
of
operations of fiscal year 2005, as litigation settlement expenses.
|
|
4.
|
On
December 16, 1999, Secu-Systems Ltd. filed a lawsuit with the District
Court in Tel-Aviv-Jaffa jointly and severally against the Company
and its
former subsidiary, InkSure Ltd. (“InkSure”), seeking a permanent
injunction and damages arising from the printing method applied to
certain
products developed by InkSure. In its lawsuit, Secu-Systems asserted
claims of breach of a confidentiality agreement between Secu-Systems
and
the Company, unjust enrichment of the Company and InkSure, breach
of
fiduciary duties owed to Secu-Systems by the Company and InkSure
and
misappropriation of trade secrets and damage to Secu-Systems’ property. On
March 15, 2006, the Court denied the breach of contract claim, but
upheld
the claim for misappropriation of trade secrets and ordered InkSure
and
the Company to cease all activity involving the use of the confidential
knowledge and/or confidential information of Secu-Systems. In addition,
the court ordered the Company and Inksure to provide a report certified
by
an accountant setting forth in full the income and/or benefit received
by
InkSure and the Company as a result of the infringing activity through
the
date of the judgment, and ordered the Company and Inksure, jointly
and
severally, to pay to Secu-Systems compensation in the sum of NIS
100,000
($26 as of December 31, 2007) and legal expenses as well as attorney’s
fees in the sum of NIS 30,000 ($8 as of December 31, 2007). Secu-Systems
has filed an appeal, and the Company and InkSure filed a counter-appeal,
on the ruling above. On November 1, 2007, the Supreme Court accepted
Secu-Systems' appeal and stated that Inksure and the Company have
breached
the confidentiality agreement. Consequently, the appeal that had
been
filed by Inksure and the Comapny was dismissed. The Supreme Court
instructed that the case will be returned to the District Court for
determining the remedies to which Secu-Systems is
entitled.
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
11:-
COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
On
February 18, 2008, Secu-System filed a petition with the District Court asking
that the court allow Secu-System to amend the amount for which it sued as stated
in the Statement of Claims to NIS 25,000,000 (approximately $6,500 as of
December 31, 2007). The petition is mainly based on the fact that in 2002,
Inksure was sold by the Company to a third party for a consideration of
approximately $6,000 and upon Secu-System's assertion that such amount of
consideration constitutes a benefit and/or profit which seems to have been
derived from the breach of the confidentiality agreement and upon the assertion
that Secu-System is entitled, in light of the Supreme Court's ruling with
respect to the breach of the confidentiality agreement, to receive such amount.
Another argument made by Secu-System relates to the profit which Inksure,
allegedly, generated from the breach of the confidentiality agreement; this
argument is based on a gross profit of $6,400 according to the financial
statements of Inksure for the years 2002-2007. The Company's answer to the
said
petition has been filed but a date for the hearing of the petition has not
yet
been set.
On
March
24, 2008, the Company provided its lawyers with an opinion of a consultant
on
the subject matter, whereby the following conclusions can be drawn:
|
4.1.
|
In
light of the costs analysis, the Company had no economic profit from
the
sale of Inksure's shares.
|
|
4.2.
|
The
consideration received from the sale of Inksure's shares in 2002,
incorporates the value of the cash flow of Inksure following the
sale.
Therefore, a calculation based upon both the sale price and the future
cash flow of Inksure is not accurate and is not in line with customary
accountant standards, since it calculates the factor of the future
cash
flow twice.
|
|
4.3.
|
The
examination of the results of Inksure's business activity in 2002-2007,
as
reflected in its financial reports, show that Inksure has not made
any
profits, and even suffered losses in the said period. The financial
reports also show that Inksure had a negative cash flow in these
years,
which was financed by bank loans and fund
raising.
|
In
light
of the above, provided that the subject matter consultant's opinion is adopted
by the court, and provided further that Inksure's financial reports indeed
reflect its business results, the Company's lawyers are of the opinion that
no
material amounts will be awarded to Secu-System in these
proceedings.
Due
to
the circumstances described above, the Company made an allowance of $100 that
reflects the expected legal expenses related to this litigation.
|
5.
|
On
May 1, 2006, Evilia Investments Ltd. (“Evilia”) filed a claim in the Tel
Aviv- Jaffa Magistrate’s Court for damages against InkSure Ltd. and
against the Company, jointly and severally, for payment of NIS 2,366,868
(as of June 15, 2006, approximately $530) plus interest allegedly
due as
rent payments and related management fees for a certain real estate
property in Rehovot, leased to InkSure under a lease agreement entered
into between Evilia and InkSure on October 10, 2000, as amended on
May 25,
2001 (the “Agreement”), as to which Vuance is a guarantor. A motion for
leave to defend the lawsuit was filed with the Court by both InkSure
and
the Company on June 15, 2006. On August 6, 2006, a settlement agreement
was submitted to the Court, pursuant to which InkSure agreed to pay
Evilia
the amount of $130 plus VAT. On August 13, 2006, the Court approved
the
settlement agreement. The Company agreed to pay (and paid) InkSure
half of
the settlement amount.
|
|
6.
|
Regarding
subsequent events see Note 19d.
|
|
d.
|
In
a certain transaction, the Company is obligated to pay a certain
percentage of the revenues to third parties.
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
12:-
|
TAXES
ON INCOME
|
|
a.
|
Measurement
of results of operations for tax purposes under the Israeli Income
Tax Law
(Inflationary Adjustments), 1985.
|
|
|
Results
of operations for tax purposes are measured in terms of earnings
in NIS
after adjustments for changes in Israel's Consumer Price Index ("CPI").
Commencing January 1, 2008, this law is void and in its place there
are
transition provisions, whereby the results of operations for tax
purposes
are to be measured on a nominal basis. As explained in Note 2b, the
financial statements are measured in U.S. dollars. The difference
between
the annual change in Israel's CPI and in the NIS/dollar exchange
rate
causes a further difference between taxable income and income before
taxes
shown in the financial statements. In accordance with paragraph 9(f)
of
SFAS No. 109, the Company has not provided deferred income taxes
on the
above difference between the functional currency and the tax bases
of
assets and liabilities.
|
|
b.
|
Reduction
in corporate tax rates:
|
On
July
25, 2005, the Israeli Parliament passed an amendment to the Income Tax Ordinance
(No. 147) - 2005, gradually reducing the tax rate applicable to the Company
as
follows: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in
2010
and thereafter - 25%.
According
to a previous amendment to the Income Tax Ordinance (No. 140) 2004, the tax
rates were reduced as follows: in 2004 - 35% and in 2005 - 34%.
|
c.
|
Non-Israeli
subsidiaries:
|
Non-Israeli
subsidiaries are taxed according to the tax laws of the country in which they
are located.
|
d.
|
Deferred
income taxes:
|
|
|
Deferred
income taxes reflect the net tax effects of temporary differences
between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant
components of the deferred tax assets of the Company and its subsidiaries
are as follows:
|
|
|
December 31,
|
|
Tax
Benefits:
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Operating
loss carryforward
|
|
$
|
4,958
|
|
$
|
7,951
|
|
Reserves
and allowances
|
|
|
930
|
|
|
2,125
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset before valuation allowance
|
|
|
5,888
|
|
|
10,076
|
|
Valuation
allowance
|
|
|
(5,888
|
)
|
|
(10,076
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes consist of the following:
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,820
|
|
$
|
7,040
|
|
Valuation
allowance
|
|
|
(4,820
|
)
|
|
(7,040
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
1,068
|
|
|
3,036
|
|
Valuation
allowance
|
|
|
(1,068
|
)
|
|
(3,036
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
12:-
|
TAXES
ON INCOME (Cont.)
|
|
|
As
of December 31, 2007, the Company and its subsidiaries have provided
valuation allowances of $ 10,076 in respect of deferred tax assets
resulting from tax loss carryforwards and other temporary differences.
Management currently believes that since the Company and its subsidiaries
have a history of losses, the deferred tax assets are not considered
more
likely than not to be realized in the foreseeable
future.
|
|
e.
|
Net
operating loss carryforwards and loss on marketable
securities:
|
|
|
Vuance
Ltd. has accumulated losses for tax purposes as of December 31, 2007,
in
an amount of approximately $ 19,793, which may be carried forward and
offset against taxable income in the future for an indefinite period.
Vuance
Ltd.
also has a loss on marketable securities in an amount of $4,679 which
may
be carried forward and offset against gains on marketable securities
for
an indefinite period.
|
As
of
December 31, 2007, Vuance's subsidiaries in the United States and Hong Kong
have
estimated total available carryforward tax losses of $8,371 and $ 893,
respectively. In Hong-Kong tax losses are available to offset against taxable
income, if any, for an indefinite period. In the U.S., tax losses can be carried
forward for 20 years. However, utilization of U.S. net operating losses may
be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
These annual limitations may result in the expiration of net operating losses
before utilization. An amount of $3,413, of the carryforward tax losses of
the
Company's subsidiary in the U.S, is subject to such limitation, due to the
SHC
acquisition.
|
f.
|
Vuance
Ltd has received final assessments until the tax year ended December
31,
2001.
|
|
|
Vuance’s
subsidiaries in the United States and Israel have not received final
assessments since their incorporation.
|
|
|
Vuance’s
subsidiary in Hong-Kong has an assessment that is considered to be
final
until the tax year ended December 31, 2000.
|
|
g.
|
Net
income (loss) before taxes on income
consists
of the following:
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Domestic
|
|
$
|
(2,787
|
)
|
$
|
6,250
|
|
$
|
(8,526
|
)
|
Foreign
|
|
|
(1,164
|
)
|
|
(810
|
)
|
|
(2,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,951
|
)
|
$
|
5,440
|
|
$
|
(11,274
|
)
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
12:-
|
TAXES
ON INCOME (Cont.)
|
|
h.
|
Reconciliation
of the theoretical tax expense (benefit) to the actual tax expense
(benefit):
|
|
|
A
reconciliation of theoretical tax expense, assuming all income is
taxed at
the statutory rate applicable to the income of companies in Israel,
and
the actual tax expense, is as
follows:
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Net
income (loss) before taxes on income, as reported in the consolidated
statements of operations
|
|
$
|
(3,951
|
)
|
$
|
5,440
|
|
$
|
(11,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
tax rate in Israel
|
|
|
34
|
%
|
|
31
|
%
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical
tax expenses (benefit)
|
|
$
|
(1,343
|
)
|
$
|
1,686
|
|
$
|
(3,269
|
)
|
Carryforward
losses and other deferred taxes for which a full valuation allowance
was
recorded
|
|
|
1,021
|
|
|
384
|
|
|
3,170
|
|
Decrease
in taxes resulting from utilization of carryforward tax losses
for which
deferred taxes were not created in the past
|
|
|
-
|
|
|
(2,402
|
)
|
|
-
|
|
Differences
in taxes resulting from rate applicable to foreign subsidiary and
others
|
|
|
322
|
|
|
332
|
|
|
62
|
|
Actual
income tax
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(37
|
)
|
NOTE
13:-
|
CONVERTIBLE
BONDS
|
In
November 2006, the Company raised $3,156.5 through the issuance of Units
consisting of Convertible Bonds and Warrants. Units valued at $2,500 were issued
to a single investor, and Units valued at $656.5 were issued to Special
Situation Funds (SSF),
based on
the participation rights provided in private placement during the year 2005,
as
described in note 14d2
,
which
are existing shareholders of the Company. The Convertible Bonds mature three
years from the date of issuance and bear interest at an annual rate of 8%.
Any
withholding and other taxes payable with respect to the interest will be grossed
up and paid by the Company (approximately 3% of the principle of the bond).
Payment of interest will be net of any tax. Subject to certain redemption
provisions, as described below, the Convertible Bonds may be converted at any
time, at the option of the investors, into the Company's ordinary shares at
a
conversion price of $5 per share (see amendment below ). The investors were
also
granted Warrants entitling them to acquire a total of 134,154 ordinary shares
at
an exercise price of $5 per share during the next five years. In respect of
this
transaction, the Company paid approximately $215 cash as issuance expenses
and
granted an option to acquire up to 25,000 shares of the Company to a third
party, exercisable at $5 per share. The fair market value of this grant was
$
40.
If
the
Company fails to fulfill certain conditions, the investors may accelerate
repayment of the principal amount of $3,156.5 of the Convertible Bonds, in
which
case all interest payable until Maturity Date will immediately become due and
payable.
Between
February 10, 2008 and February 16, 2008, the Company has the option to call
and
redeem 100% of the Convertible Bonds at a price equal to (i) the aggregate
principal amount of the bonds plus (ii) a redemption premium equal to fifteen
percent (15%) of the aggregate principal amount plus (iii) any accrued but
unpaid interest on the aggregate principal amount, calculated through the date
of redemption. The Company did not realize its options to redeem the Convertible
Bonds.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE13:-
|
CONVERTIBLE
BONDS (Cont.)
|
The
Company has considered the provisions of EITF Issue No.00-19, “The Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock”, and determined that the embedded conversion feature should
not be separated from the host instrument because it is qualified for equity
classification in paragraphs 12-32 of EITF Issue No.00-19. Therefore
the
transaction was accounted for in accordance with EITF 00-27, " Application
of
Issue No. 98-5 to Certain Convertible Instruments" and APB 14, "Accounting
for
Convertible Debt and Debt Issued with Stock Purchase Warrants". The fair market
value of the Warrants was determined based on the fair value of the
instruments issued using the Black-Scholes pricing model, assuming a risk free
rate of 5%, a volatility factor of 78.21%, dividend yields of 0% and an expected
life of 2 years. The expiration date of the Warrants is November 2011.
As
a
result, the Company recorded an amount of $282 in respect of the Warrants and
an
amount of $632 as beneficial conversion feature in respect of the Convertible
Bonds, as a credit to shareholders' equity (additional paid in capital). The
discount of the bonds as a result of the value assigned to the warrants and
the
beneficial conversion feature is amortized during the contractual term of the
bonds.
In
November 2007, due to a breach of certain conditions of the convertible bond,
the investors had the right to accelerate the repayment of the principal amount
of the bonds with all the interest payable until the maturity date of the bonds.
However, the Company signed an amendment to the agreement with the investors
under which the Company was required to pay to one of the investors the
abovementioned interest amount ($276) (any withholding and other taxes payable
with respect to the interest will be grossed up and paid by the Company,
(approximately 3% of the principle of the bond)) and to the other investors
the
Company changed the conversion ratio of the bond to $4.25. In a consideration
the investors waived their right to accelerate the repayment of the bonds.
The
Company accounted for the amendment as a modification of the bond. As of
December 31, 2007, the Company is in compliance with the amendment conditions
of
the convertible bond.
Regarding
subsequent events see Note 19.
|
a.
|
The
Company’s ordinary shares have been listed for trade on the Euronext
Brussels stock market, under the symbol “SUP”, (since October 23, 2003)
which became “VUNC” after the company name change on May 14, 2007. Since
November 5, 2004, the Company’s ordinary shares have also traded on the
OTC
Bulletin
Board under the symbol "SPCBF.OB" which following the recent name
change
of the Company became “VUNCF.OB”. Since August 23, 2007, the ordinary
shares of the Company were approved for trade on the NASDAQ Capital
Market
under the symbol “VUNC”.
|
On
May,
14 2007 a 1 for 5.88235 reverse split of the Company’s ordinary shares became
effective for trading purpose. Pursuant to this reverse share split each 5.88235
ordinary shares of NIS 0.01 par value became 1 ordinary share of NIS 0.0588235
par value. Unless otherwise noted, all share and per share amounts for all
periods presented (including numbers of options, warrants and convertible bonds)
have been retroactively restated to give effect to this reverse
split.
|
b.
|
During
2007, the Company increased its authorized share capital to 12,000,000
ordinary shares.
|
The
ordinary shares confer upon the holders the right to receive notice to
participate and vote in the general meetings of the Company, and the right
to
receive dividends, if declared.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE14:-
|
SHARE
CAPITAL (Cont.)
|
|
1.
|
On
February 14, 1999, the Board of Directors adopted, and the Company’s
shareholders subsequently approved, the 1999 Employee Stock Option
Plan,
which was amended and restated in March 2002 (the “1999 Option Plan”). The
Company no longer uses the 1999 Option Plan. In 2003, the Company
adopted
a new stock option plan under which the Company issues stock options
(the
“Option Plan”). The Option Plan is intended to provide incentives to the
Company’s employees, officers, directors and/or consultants by providing
them with the opportunity to purchase ordinary shares of the Company.
The
Option Plan is, subject to the provisions of the Israeli Companies
Law,
administered by the Remuneration Committee, and is designed: (i)
to comply
with Section 102 of the Israeli Tax Ordinance or any provision which
may
amend or replace it and the rules promulgated thereunder and to enable
the
Company and grantees thereunder to benefit from Section 102 of the
Israeli
Tax Ordinance and the Commissioner’s Rules; and (ii) to enable the Company
to grant options and issue shares outside the context of Section
102 of
the Israeli Tax Ordinance. Options granted under the Option Plan
will
become exercisable ratably over a period of three to five years or
immediately in certain circumstances, commencing with the date of
grant.
The options generally expire no later than 10 years from the date
of
grant. Any options, which are forfeited or canceled before expiration,
become available for future grants. As of December 31, 2007, 4,361,294
ordinary shares are available for future grants of options, warrants,
shares and other financial instruments.
|
As
a
result of an amendment to Section 102 of the Israeli Tax Ordinance as part
of
the 2003 Israeli tax reform, and pursuant to an election made by the Company
thereunder, capital gains derived by optionees arising from the sale of shares
issued pursuant to the exercise of options granted to them under Section 102
after January 1, 2003, will generally be subject to a flat capital gains tax
rate of 25%. Previously, such gains were taxed as salary income at the
employee’s marginal tax rate (which could be up to 50%). However, as a result of
this election, the Company will no longer be allowed to claim as an expense
for
tax purposes the amounts credited to such employees as a benefit when the
related capital gains tax is payable by them, as the Company had previously
been
entitled to do under Section 102.
On
June
27, 2007, our Compensation Committee and board of directors approved a
new option plan under which the Company may grant stock options to the U.S.
employees of the Company and its subsidiaries. Under this new option plan,
the Company may grant both qualified (for preferential tax treatment) and
non-qualified stock option. On August 15, 2007 the new option plan was approved
by the shareholders of the Company at the general shareholders
meeting.
|
2.
|
During
2005, the Board of Directors approved a grant of options to acquire
up to
15,300 and 8,500 ordinary shares to certain employees at exercise
prices
of $5.24, and $4.18 per share, respectively. An additional 68,001
options
were granted during 2005 to related parties. See Note
15d.
|
On
December 29, 2005, the Board of Directors and the Audit Committee approved
the
acceleration of the vesting schedule for certain of the stock options granted
to
employees and officers as an incentive. As a result, options to purchase a
total
of 121,126 ordinary shares became exercisable at the date of the approval.
The
acceleration did not have any effect on the financial statements since the
options had a zero intrinsic value at the original date of grant and at the
date
of acceleration.
On
May
30, 2006, the Board of Directors approved a grant of options to acquire up
to
93,501 ordinary shares to certain employees and officers. The exercise price
of
these options is $ 4.42 per share.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
14:-
SHARE
CAPITAL (Cont.)
During
2007, the board of Directors approved grants of options as follows:
Number of
Options
granted
|
|
Exercise
price
|
|
|
|
|
|
37,400
|
|
|
4.412
|
|
71,500
|
|
|
5.100
|
|
21,000
|
|
|
4.900
|
|
62,333
|
|
|
0.014
|
|
47,372
|
|
|
0.058
|
|
5,500
|
|
|
4.850
|
|
141,500
|
|
|
4.640
|
|
34,000
|
|
|
4.120
|
|
An
additional 217,600 options were
granted
during 2007 to related parties including directors. See Note 15e.
|
3.
|
A
summary of the Company's stock option activity and related information
is
as follows:
|
|
|
Year ended December 31
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Outstanding at
beginning of year
|
|
|
569,905
|
|
$
|
5.71
|
|
|
595,971
|
|
$
|
5.77
|
|
|
553,902
|
|
$
|
5.12
|
|
Granted
|
|
|
91,801
|
|
$
|
4.95
|
|
|
93,501
|
|
$
|
4.42
|
|
|
638,205
|
|
$
|
3.86
|
|
Exercised
|
|
|
(37,684
|
)
|
$
|
2.48
|
|
|
(43,152
|
)
|
$
|
2.48
|
|
|
(25,968
|
)
|
$
|
3.16
|
|
Canceled
and forfeited
|
|
|
(28,051
|
)
|
$
|
5.53
|
|
|
(92,418
|
)
|
$
|
9.95
|
|
|
(89,383
|
)
|
$
|
5.06
|
|
Outstanding
at end of year
|
|
|
595,971
|
|
$
|
5.77
|
|
|
553,902
|
|
$
|
5.12
|
|
|
1,076,756
|
|
$
|
4.43
|
|
Exercisable
at end of year
|
|
|
515,504
|
|
$
|
6.06
|
|
|
481,651
|
|
$
|
5.18
|
|
|
591,485
|
|
$
|
4.81
|
|
The
weighted average fair value of options granted during the reported periods
was
$3.08, $1.89 and $2.87, per option, for the years ended December 31, 2005,
2006
and 2007, respectively.
The
fair
value of these options was estimated on the date of grant using the Black &
Scholes option pricing model. The following weighted average assumptions were
used for the 2006 and 2007 grants: risk-free rate of 5%, dividend yield of
0%,
expected volatility factor of 57.14% and 57.20% respectively and expected term
of 3.09 and 3.64 years respectively.
Regarding
the assumptions used for the proforma information required under FAS 123 in
2005
see Note 2w above.
The
expected volatility was based on the historical volatility of the Company’s
stock. The expected term was based on the historical behavior of the employees
and based on Management estimate.
Compensation
expenses recognized by the Company related to its share-based employee
compensation awards were $47 based on the provisions of APB 25, $ 225 and $1,032
based on the provisions of SFAS 123R for the years ended December 31, 2005,
2006 and 2007, respectively.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
14:-
SHARE
CAPITAL (Cont.)
The
following table summarizes the allocation of the stock-based compensation
charge
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
$
|
5
|
|
$
|
-
|
|
$
|
5
|
|
Research
and development expenses
|
|
|
3
|
|
|
32
|
|
|
336
|
|
Selling
and marketing expenses
|
|
|
17
|
|
|
90
|
|
|
158
|
|
General
and administrative expenses
|
|
|
22
|
|
|
103
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47
|
|
$
|
225
|
|
$
|
1,032
|
|
The
options outstanding and exercisable as of December 31, 2007, have been separated
into ranges of exercise prices as follows:
Range of exercise
price
|
|
Options
outstanding
as of
December 31,
2007
|
|
Weighted
average
remaining
contractual
life (years)
|
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic
value
|
|
Options
exercisable
as of
December 31,
2007
|
|
Weighted
average
exercise price
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.01 - $ 0.06
|
|
|
109,705
|
|
|
9.63
|
|
$
|
0.03
|
|
$
|
511
|
|
|
23,686
|
|
$
|
0.06
|
|
$
|
110
|
|
$
2.47 - $ 3.06
|
|
|
184,243
|
|
|
4.69
|
|
$
|
2.56
|
|
$
|
392
|
|
|
184,243
|
|
$
|
2.56
|
|
$
|
392
|
|
$
4.18 - $ 4.90
|
|
|
376,900
|
|
|
7.81
|
|
$
|
4.42
|
|
$
|
102
|
|
|
174,248
|
|
$
|
4.21
|
|
$
|
84
|
|
$
5.00 - $ 5.89
|
|
|
347,050
|
|
|
6.65
|
|
$
|
5.05
|
|
|
-
|
|
|
150,450
|
|
$
|
5.07
|
|
|
-
|
|
$11.76
- $ 14.83
|
|
|
57,800
|
|
|
4.62
|
|
$
|
14.69
|
|
|
-
|
|
|
57,800
|
|
$
|
14.69
|
|
|
-
|
|
$
23.64
|
|
|
1,058
|
|
|
0.25
|
|
$
|
23.64
|
|
|
-
|
|
|
1,058
|
|
$
|
23.64
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076,756
|
|
|
|
|
$
|
4.43
|
|
|
|
|
|
591,485
|
|
$
|
4.81
|
|
|
|
|
The
aggregate intrinsic value of the above table represents the total intrinsic
value, based on the Company’s stock price of $4.69 as of December 31, 2007, less
the weighted average exercise price per range. This represents the potential
amount received by the option holders had all option holders exercised their
options as of that date.
The
total
intrinsic value of options exercised during the years ended December 31, 2007,
2006 and 2005 was $62 ,$109 and $424 respectively, based on the Company’s
average stock price of $5.57, $5.38 and $13.72 during the years ended
respectively.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
14:-
SHARE
CAPITAL (Cont.)
A
summary
of the status of the Entity’s non-vested options granted to employees as of
December 31, 2007 and changes during the year ended December 31, 2007 is
presented below:
|
|
Options
|
|
Weighted-average
grant-date fair
value
|
|
|
|
|
|
|
|
Non-vested at January
1, 2007
|
|
|
72,251
|
|
$
|
2.29
|
|
Granted
|
|
|
638,205
|
|
$
|
2.87
|
|
Vested
|
|
|
(190,853
|
)
|
$
|
3.02
|
|
Forfeited
|
|
|
(34,332
|
)
|
$
|
2.23
|
|
Non-vested
at December 31, 2007
|
|
|
485,271
|
|
$
|
2.77
|
|
As
of
December 31, 2007, there was $967 total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the stock
option plans, of which, $626 is expected to be recognized during the year 2008,
$255 during the year 2009 and $ 86 during the year 2010.
|
e.
|
Private
placements and warrants
|
|
1.
|
In
2004, the Company completed private placements of an aggregate of
685,001
of its ordinary shares to institutional and private investors at
an
aggregate purchase price of approximately $3.5 million at a price
of $5
per share. In addition, such investors were issued warrants
exercisable for five years from the closing date of the purchase
of an
aggregate of up to 274,001 ordinary shares at an exercise price of
$6.47
per share.
|
Additionally,
warrants exercisable for a period of 5 years were issued as follows: 75,601
ordinary shares issuable upon the exercise of warrants having an exercise price
of $5 per share to consultants and 30,240 ordinary shares issuable upon the
exercise of warrants having an exercise price of $6.47 per share that were
issued to Broadband Capital LLC as a portion of the placement agent fee issued
in connection with a private placement completed on September 10, 2004; 12,751
ordinary shares issuable upon the exercise of warrants having an exercise price
of $6.47 per share that were issued to Meitav Capital Ltd. as a portion of
the
placement agent fee issued in connection with a private placement completed
on
July 15, 2004; and 500 ordinary shares issuable upon the exercise of warrants
having an exercise price of $6.47 per share that were issued to Max Tech Ltd.
as
a portion of the placement agent fee issued in connection with a private
placement completed on July 15, 2004.
As
part
of the private placement, two consultants received warrants exercisable for
up
to four years for the purchase of an aggregate of up to 4,251 and 17,001
ordinary shares, respectively at an exercise price of $5 per share.
The
warrants granted to the consultants as describe above were fully vested on
the
date of grant. The fair value of the warrants was $ 340 as computed using the
Black & Scholes pricing model with the following weighted average
assumptions: risk-free interest of 4.1%, dividend yield of 0, volatility factor
of the excepted market price of the Company’s ordinary shares of 98.3%, and
expected term of 2 years of the warrants. The Company recorded the issuance
costs that resulted from the issuance of warrants to consultants during the
reported periods, directly to additional paid in capital.
During
the fourth quarter of 2004, 120,176 warrants were exercised for an aggregate
amount of approximately $ 778 and approximately $ 130 was received in respect
of
20,000 shares that were issued in 2005.
During
2005, 54,451 warrants were exercised for an aggregate amount of approximately
$
352.
During
the years 2006 and 2007 no warrants were exercised.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
14:-
SHARE
CAPITAL (Cont.)
|
2.
|
In
November and December of
2005,
the Company received aggregate gross proceeds
of
$3,050 from a private placement of 836,292 ordinary shares (out of
which
150,807 shares were issued after December 31, 2005) and five-year
warrants
to purchase 292,701 ordinary shares at an exercise price of $3.53
per
share. The private placement was made to accredited investors pursuant
to
Rule 506 of Regulation D, promulgated under the Securities Act of
1933, as
amended (the “Securities Act”) and to foreign private investors in
offshore transactions in reliance on Regulation S promulgated under
the
Securities Act. In connection with the private placement, the Company’s
placement agent received a cash fee of $150 and the Company’s placement
advisors received five-year warrants to purchase 8,446 ordinary shares
at
an exercise price of $3.53 per share. The investors that participated
in
this private placement were granted the right, for one year following
the
closing of the private placement and subject to certain limitations,
to
participate in future issuances of the Company’s capital stock or
securities (a “Subsequent Financing”) up to an amount which would permit
each investor to maintain its fully diluted percentage equity ownership
at
the same level existing prior to the Subsequent Financing (after
giving
effect to such Subsequent Financing). The warrants are callable,
subject
to certain limitations, at the option of the Company if the closing
bid
price per ordinary share of the Company's ordinary shares equals
or
exceeds $7.06 for 20 trading days during the term of the warrants.
The
Company may only call, in any 3-month period, the lesser of (i) 20%
of the
aggregate amount of the warrants initially issued to a warrant holder,
or
(ii) the total number of warrants then held by such
holder.
|
The
warrants granted to the placement advisors as described above were fully vested
on the date of grant. The fair value of the warrants was $ 15 as computed using
the Black & Scholes pricing model with the following weighted average
assumption: risk
-
free
interest of 4%, dividend yield of 0, volatility factor of the excepted market
price of the Company’s ordinary shares of 74%, and expected term of 2 years of
the warrants. The Company recorded the issuance costs directly to additional
paid in capital.
As
of
December 31, 2007 no warrants were exercised.
|
3.
|
During
2005, 4,251 warrants were issued to a consultant. The fair value
of the
warrants was $13 as computed using the Black & Scholes pricing model
with the following assumption: risk-free interest of 3.5%, dividend
yield
of 0, volatility factor of the excepted market price of the Company’s
ordinary shares of 117.03%, and expected term of the warrants of
2 years.
During the years 2005 and 2006, the Company recognized $8 and $5,
respectively, as compensation expenses.
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
14:-
SHARE
CAPITAL (Cont.)
|
4.
|
During
2006 and 2007, the Board of Directors approved a grant of options
to
acquire up to 75,651 and 44,000 shares respectively, to certain
consultants. The exercise prices under the terms of the options range
between $ 3.42 to $ 5.47 per share. The fair market value of the
warrants
is $ 162 and $ 55, respectively, as computed using the Black & Scholes
pricing model with the following weighted average assumption: risk-free
interest of 4.00% - 4.25%, dividend yield of 0, volatility factor
of the
excepted market price of the Company’s ordinary shares of 73.46% and 36%,
respectively, and expected term of the warrants of 2.47 and 2.38
average
years respectively. During 2006 and 2007, the Company recognized
$131 and
$38, as compensation expenses,
respectively.
|
|
5.
|
A
summary of the Company's warrants activity to consultants, investors
(including warrants issued in connection with convertible bonds),
and
related information is as follows:
|
|
|
Year ended December 31
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
Outstanding at
beginning of year
|
|
|
294,165
|
|
$
|
6.00
|
|
|
525,111
|
|
$
|
4.53
|
|
|
759,916
|
|
$
|
4.65
|
|
Granted
|
|
|
305,397
|
|
$
|
3.53
|
|
|
234,805
|
|
$
|
4.95
|
|
|
44,000
|
|
$
|
4.72
|
|
Exercised
|
|
|
(74,451
|
)
|
$
|
6.48
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Canceled
and forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(21,231
|
)
|
$
|
5.00
|
|
Outstanding
at end of year
|
|
|
525,111
|
|
$
|
4.53
|
|
|
759,916
|
|
$
|
4.65
|
|
|
782,685
|
|
$
|
4.64
|
|
Exercisable
at end of year
|
|
|
519,446
|
|
$
|
4.48
|
|
|
737,250
|
|
$
|
4.65
|
|
|
747,185
|
|
$
|
4.63
|
|
The
warrants to consultants, investors (including warrants issued in connection
with
convertible bonds), outstanding and exercisable as of December 31, 2007, have
been separated into ranges of exercise prices as follows:
Range
of exercise
price
|
|
Options
outstanding
as
of
December
31, 2007
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic value
|
|
Options
exercisable
as
of
December
31, 2007
|
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
3.42 - $ 3.53
|
|
|
306,252
|
|
|
3.08
|
|
$
|
3.53
|
|
$
|
355
|
|
|
306,252
|
|
$
|
3.53
|
|
$
|
355
|
|
$
4.42 - $ 4.85
|
|
|
71,200
|
|
|
6.33
|
|
$
|
4.67
|
|
$
|
1
|
|
|
44,200
|
|
$
|
4.69
|
|
|
-
|
|
$
5
- $ 5.48
|
|
|
282,355
|
|
|
2.70
|
|
$
|
5.04
|
|
|
-
|
|
|
273,855
|
|
$
|
5.03
|
|
|
-
|
|
$
6.48
|
|
|
122,878
|
|
|
1.69
|
|
$
|
6.47
|
|
|
-
|
|
|
122,878
|
|
$
|
6.47
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
782,685
|
|
|
3.02
|
|
$
|
4.64
|
|
|
|
|
|
747,185
|
|
$
|
4.63
|
|
|
|
|
|
6.
|
The
fair value of all the warrants granted as described above was measured
based on the fair value of the instruments issued on the date of
grant,
since, based on the opinion of Company Management, such measurement
is
more reliable than the fair value of
services.
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
14:-
SHARE
CAPITAL (Cont.)
In
the
event that cash dividends are declared in the future, such dividends will be
paid in NIS. The Company does not intend on paying cash dividends in the
foreseeable future.
|
g.
|
Convertible
bonds and warrants - see Note
13.
|
NOTE
15:-
|
RELATED
PARTY TRANSACTIONS
|
|
a.
|
On
October 1, 2001, the Company entered into a consulting agreement
with a
company owned by the Chairman of the Board of Directors, who was
one of
the co-founders of the Company.
|
In
consideration of these consulting services, the Company has undertaken to pay
$10.5 per month plus motor vehicle expenses. In addition the Company pays $1.5
per month as a director’s fee. During 2005, 2006 and 2007, the Company paid
$144, each year, pursuant to this agreement.
|
b.
|
On
October 1, 2001, the Company entered into a consulting agreement
with a
company owned by a member of the Company's Board of Directors, who
was one
of the Company's co-founders and a principal shareholder. On January
13
2005, the General Shareholders Meeting approved the following amendments
to the consulting agreement:
|
|
·
|
As
of the date of the approval of the General Shareholders Meeting,
to
increase the consideration set forth in the said agreement to an
amount of
$7 per month.
|
|
·
|
Upon
the termination of the car lease agreement, to increase the car lease,
to
a price of up to NIS 4,200 (approximately $ 1 as of December 31,
2007),
(excluding tax) per month.
|
|
·
|
To
grant a one-time bonus of NIS 130,000 including VAT, which was paid
during
the year 2005.
|
In
addition the Company pays $1.5 per month as a director’s fee. During 2005, 2006
and 2007, the Company paid $132, $102 and $102, pursuant to this agreement.
|
c.
|
On
October 1, 2001, the Company entered into a consulting agreement
with a
company owned by one of the co-founders of the Company.
|
In
consideration for these services, the Company has undertaken to pay $ 4.6 per
month plus motor vehicle expenses. During 2005, 2006 and 2007, the Company
paid
$71, $72 and $71 respectively, pursuant to this agreement.
|
d.
|
On
January 13, 2005, the General Shareholders Meeting approved among
other
things the Board of Directors’ decision dated October 4, 2004, to grant
options to acquire up to 51,001 ordinary shares of the Company to
the
Chairman of the Board of Directors and 8,500 ordinary shares of the
Company to each of the two directors of the Company, who are not
“outside
directors”. The exercise price of the options is $ 5 per share. Those
options were granted as compensation for their efforts in completing
a
private placement during 2004.
|
|
e.
|
On
January 21, 2007, the General Shareholders Meeting approved the grant
of
options to the Chairman of the Board of Directors and to a director
who is
one of the co-founders to acquire up to 51,000 and 20,400, respectively
ordinary shares of the Company, at an exercise price of
$5.
|
On
April
29, 2007, the General Shareholders Meeting approved the grant of options to
the
Chairman of the Board of Directors and to two external directors to acquire
up
to 85,000 and 40,800, respectively ordinary shares of the Company, at an
exercise price of$4.118 and $5 respectively.
On
August
15, 2007, the General Shareholders Meeting approved the grant of options to
a
director to acquire up to 20,400, respectively ordinary shares of the Company,
at an exercise price of $5.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
16:-
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
|
a.
|
Summary
information about geographic areas:
|
The
Company manages its business on the basis of one reportable segment (see Note
1
for a brief description of the Company's business) and follows the requirements
of SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information".
|
|
The
following is a summary of operations within geographic areas, based
on the
location of customers and data regarding long-lived
assets:
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Total
|
|
Long-lived
|
|
Total
|
|
Long-lived
|
|
Total
|
|
Long-lived
|
|
|
|
revenues
|
|
assets
|
|
revenues
|
|
assets
|
|
revenues
|
|
Assets(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
3,719
|
|
$
|
-
|
|
$
|
5,877
|
|
$
|
-
|
|
$
|
8,650
|
|
$
|
-
|
|
Asia
Pacific
|
|
|
2,173
|
|
|
16
|
|
|
1,730
|
|
|
18
|
|
|
1,330
|
|
|
13
|
|
Africa
|
|
|
2,158
|
|
|
-
|
|
|
621
|
|
|
-
|
|
|
823
|
|
|
-
|
|
United
States
|
|
|
202
|
|
|
61
|
|
|
373
|
|
|
54
|
|
|
1,787
|
|
|
5,248
|
|
Israel
|
|
|
210
|
|
|
3,133
|
|
|
194
|
|
|
88
|
|
|
371
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,462
|
|
$
|
3,210
|
|
$
|
8,795
|
|
$
|
160
|
|
$
|
12,961
|
|
$
|
5,874
|
|
(*)
Long
lived assets date includes allocation of intangible assets and goodwill
amounts.
|
b.
|
Summary
of operations based on products and
services:
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Raw
materials and equipment
|
|
$
|
6,538
|
|
$
|
6,529
|
|
$
|
9,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance,
royalties and project management
|
|
|
1,924
|
|
|
2,266
|
|
|
3,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,462
|
|
$
|
8,795
|
|
$
|
12,961
|
|
|
c.
|
Major
customer data as a percentage of total
sales:
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
23
|
%
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
B
|
|
|
11
|
%
|
|
10
|
%
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Customer
C
|
|
|
-
|
|
|
-
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Customer
D
|
|
|
22
|
%
|
|
59
|
%
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Customer
E
|
|
|
10
|
%
|
|
-
|
|
|
-
|
|
*)
Less
than
10%.
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
17:-
|
FINANCIAL
EXPENSES, NET
|
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Financial
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
amortization of discount, bank charges and fees (*)
|
|
$
|
(119
|
)
|
$
|
(178
|
)
|
$
|
(962
|
)
|
Exchange
differences
|
|
|
-
|
|
|
(109
|
)
|
|
(109
|
)
|
Decrease
in value of marketable securities, net
|
|
|
-
|
|
|
-
|
|
|
(2,699
|
)
|
Realized
loss from sale of marketable securities
|
|
|
-
|
|
|
-
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
financial expenses
|
|
|
(119
|
)
|
|
(287
|
)
|
|
(4,886
|
)
|
Financial
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
differences
|
|
|
28
|
|
|
-
|
|
|
-
|
|
Interest
|
|
|
66
|
|
|
83
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
financial income
|
|
|
94
|
|
|
83
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
total
|
|
$
|
(25
|
)
|
$
|
(204
|
)
|
$
|
(4,652
|
)
|
*
In 2006
and 2007, includes $75 and $ 745 expenses related to convertible bonds,
respectively.
NOTE
18:-
|
OTHER
EXPENSES, NET
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
Write-
down of loan regarding an investment in an affiliated company and
other
trade receivables
|
|
$
|
-
|
|
$
|
(321
|
)
|
$
|
-
|
|
Loss
on sale of property and equipment, net
|
|
|
-
|
|
$
|
(8
|
)
|
|
-
|
|
Decline
in market value of held-to-maturity securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(30
|
)
|
|
(38
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(30
|
)
|
$
|
(367
|
)
|
$
|
-
|
|
VUANCE
LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
U.S.
dollars in thousands (except per share data)
NOTE
19:-
|
SUBSEQUENT
EVENTS
|
a.
|
After
the balance sheet date the price of OTI share decreased
further.
|
b.
|
In
June 2008,
the
Company reached
an
agreement
with one of the investor (with a principle amount of $2,500)
,
under which, among other things, the investor waived
the
Company's compliance with certain covenants under its Convertible
Bond
,
in exchange for:
1.
Increasing
the interest rate to 10% starting March 31, 2008. Any withholding
and
other taxes payable with respect to the interest will be grossed
up and
paid by the Company (approximately 3% of the principal of the
bond).
2.
Reducing
the exercise price of the bond and the warrants to $3 and $2.8,
respectively.
3.
The
Company undertakes to place a fixed charge on all incomes and/or
rights in
connection with certain European Airport Project. This charge shall
be
senior to any indebtedness and/or other pledge and encumbrance, but
shall,
however, be subject to certain rights of the Company to use part
of the
income.
4.
Certain
anti-dilution rights with respect to the warrants held by the single
investor.
In
addition, under certain circumstances the investor might have the
right to
demand an early payment of partial or full amount of the Convertible
Bonds
(up to the $2,500 as mentioned above).
As
of June 30, 2008, the Company may be deemed not to be in compliance
with
certain covenants under our Convertible Bond with SSF in which case
SSF
could seek to accelerate payment of the unpaid principal amount and
accrued interest under its Convertible Bond (an aggregate of approximately
$740 as of June 30, 2008).
See
also Note 13.
|
c.
|
Regarding
the application of the Company to delist its shares from the
Euronext
Brussels stock market
see note 1a.
|
d.
|
On
January 20, 2008, the Manufacturers Association of Israel (the
"Plaintiff") filed a lawsuit with the labour court in Tel Aviv-Jaffa
(the
"Court") against Vuance Ltd. ("the Company"), seeking an amount of
NIS
82,789 + VAT (as of June 20, 2008 approximately $26 + VAT) for service
fees for the years 2001-2007 as well as legal expenses and
attorney
'
s
fees of the Plaintiff. In addition, the Plaintiff has asked the Court
to
instruct the Company to submit the necessary documentation, certified
by
the Company
'
s
accountant, needed to calculate the service fees sought by the Plaintiff.
The services fees sought by the Plantiff are allegedly required on
the
basis of certain Collective Agreements that according to the Plaintiff
apply on the Company through Extension Orders. On May 15, 2008 the
Company
submitted a statement of defense. On June1, 2008 the Company sent
the
plaintiff a questionnaire. The lawsuit is scheduled for early hearing
on
November 9, 2008. At this point, the Company cannot estimate the
outcome
of the lawsuit.
|
-
- - - -
- - - - - - -
ITEM
19. Exhibits.
|
Memorandum
of Association of the Company.
|
|
|
1.2**
|
Articles
of Association of the Company.
|
|
|
2.1*
|
Forms
of Stock Certificates Representing Ordinary Shares.
|
|
|
4.1*
|
The
Vuance Ltd. 1999 Employee Stock Option Plan (as Amended and Restated
in
2002).
|
|
|
4.1(a)***
|
The
Vuance Ltd. 2003 Israeli Share Option Plan
|
|
|
4.2*
|
Stock
Purchase Agreement between Vuance and Elad Ink, dated as of March
4,
2002.
|
|
|
4.3*
|
Stock
Purchase Agreement between Vuance and ICTS BV, dated as of April
29,
2002.
|
|
|
4.4*
|
Stock
Purchase Agreement between Vuance and ICTS-USA, Inc., dated as of
September 27, 2002.
|
|
|
8
|
List
of Subsidiaries of Vuance Ltd.
|
|
|
11.1
|
Code
of Ethics
|
|
|
12.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
|
12.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
|
13.1
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act.
|
|
|
15.1
|
Consent
of Fahn, Kanne & Co., a member of Grant Thornton, dated June 30,
2008.
|
|
|
15.2
|
Consent
of BDO McCabe Lo & Company, independent public accountants, dated June
26, 2008.
|
|
|
|
Consent
of PKF, independent public accountants, dated June 26,
2008.
|
*
Previously filed as exhibits to, and incorporated herein by reference from,
the
Company’s Registration Statement on Form 20-F filed on September 14, 2004 (File
No.: 0-50790).
**
Previously submitted to the Securities and Exchange Commission on, and
incorporated herein by reference to, Exhibit A to Exhibit 1 to the Company’s
report on Form 6-K submitted on July 5, 2007 (File No.: 000-50790).
***
Previously filed as Exhibit 99.2 to, and incorporated herein by reference from,
the Company’s Registration Statement on Form S-8 (File No. 333-
121231
filed on
December 14, 2004).