UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 20–F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________________ to ___________________

 

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report _____________

 

Commission file number 000-31215

 

MIND C.T.I. LTD.

(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)

 

ISRAEL

(Jurisdiction of incorporation or organization)

 

Industrial Park, Building #7, Yoqneam, 2069202, Israel

(Address of principal executive offices)

 

Aviram Cohen
c/o MIND C.T.I. Ltd.
Industrial Park, Building #7
Yoqneam, 2069202, Israel
Tel: +972-4-9936666
investor@mindcti.com

 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class   Name of each exchange on which registered
Ordinary Shares,    
nominal value NIS 0.01 per share   Nasdaq Global Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

As of December 31, 2013, the Registrant had outstanding 18,884,918 Ordinary Shares, nominal value NIS 0.01 per share.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x  International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ Other   ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

 

Unless the context requires otherwise, “MIND”, “us”, “we” and “our” refer to MIND C.T.I. Ltd. and its subsidiaries.

 

 
 

 

FORWARD LOOKING STATEMENTS

 

Statements in this Annual Report concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; introductions and advancements in development of products, and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are “forward-looking statements” as that term is defined under the United States Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those stated in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under “Risk Factors” in this Annual Report as well as those discussed elsewhere in this Annual Report and in our other filings with the Securities and Exchange Commission.

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data

 

Except as otherwise indicated, all financial statements and other financial information included in this Annual Report are presented solely under U.S. GAAP.

 

The following table presents selected consolidated financial data as of and for each of the five years in the period ended December 31, 2013. The selected consolidated financial data presented below are derived from our audited consolidated financial statements for these periods, and should be read in conjunction with these financial statements and the related notes thereto. Our audited consolidated balance sheets as of December 31, 2012 and 2013 and our audited consolidated statements of operations and cash flows for each of the three years ended December 31, 2013 and the related notes thereto are included elsewhere in this annual report . You should read the selected financial data in conjunction with Item 5 “Operating and Financial Review and Prospects.”

 

2
 

 

    Years ended December 31,  
    2009     2010     2011     2012     2013  
    ($ in thousands, except share and per share data)  
Consolidated Statements of Operations Data:                                        
Total revenues   $ 17,574     $ 19,886     $ 18,913     $ 20,209     $ 18,480  
Gross profit     11,161       13,719       12,437       12,357       10.609  
Operating income (loss)     2,169       4,995       3,935       4,372       2.159  
Auction Rate Securities Settlement     18,500       -       -       -       -  
Impairment of Auction Rate Securities     (941 )     -       -       -       -  
Other Financial income (expenses) - net     256       49       171       298       163  
Net income (loss)     19,787       4,856       4,291       4,278       2,185  
Earnings (loss) per ordinary share:                                        
Basic   $ 1.04     $ 0.26     $ 0.23     $ 0.23     $ 0.12  
Diluted   $ 1.04     $ 0.26     $ 0.23     $ 0.23     $ 0.12  
Weighted average number of ordinary shares used in computation of earnings per ordinary share – in thousands:                                        
Basic     19,012       18,467       18,679       18,767       18,869  
Diluted     19,012       18,613       18,803       18,846       18,890  

  

    As of December 31,  
    2009     2010     2011     2012     2013  
    ($ in thousands)  
Consolidated Balance Sheet Data:                                        
                                         
Cash and cash equivalents   $ 15,995     $ 17,582     $ 13,866     $ 13,310     $ 8,212  
                                         
Working capital     15,315       18,119       16,999       17,179       14,796  
                                         
Total assets     28,951       30,461       30,021       28,731       29,624  
                                         
Share capital and additional paid-in capital     39,159       35,687       30,112       30,192       30,250  
                                         
Treasury Shares     (2,800 )     (2,800 )     (2,401 )     (2,360 )     (2,287 )
                                         
Total shareholders’ equity     22,687       23,983       23,019       23,106       20,989  

 

3
 

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

We believe that the occurrence of any one or some combination of the following factors would have a material adverse effect on our business, financial condition and results of operations.

 

Risks Relating to Our Business

 

If we fail to attract and retain qualified personnel we will not be able to implement our business strategy or operate our business effectively.

 

Our products require sophisticated software development, sales, professional services and technical customer support. Our success depends on our ability to attract, train, motivate and especially retain highly skilled personnel within each of these areas of expertise. Qualified personnel in these areas are in great demand worldwide and are likely to remain a limited resource. We cannot assure you that we will be able to retain the skilled employees we require. In addition, the resources required to retain such personnel may adversely affect our operating margins. The failure to retain qualified personnel may harm our business. In particular, we maintain a large engineering and support center in Iasi, Romania and have encountered many successful attempts from other technology companies to recruit our employees after we have trained them. If this phenomenon continues and increases, we may not be able to retain the highly skilled personnel and may be forced to significantly raise the salaries of our Romanian employees and our results of operations will be consequently harmed.

 

Because our revenues are generated in numerous countries, our results of operations could suffer if we are unable to manage international operations effectively.

 

Our sales are made in many countries, with different legislation and complex taxation rules and in many states in the United States. Managing our existing international operations and additional international markets requires significant management attention and financial resources. Our ability to penetrate some international markets may be limited due to different technical standards, protocols and requirements for our products in different markets. In addition, conducting our business internationally subjects us to a number of risks, including:

 

· the burden of compliance with a wide variety of foreign laws and regulations;

 

· staffing and managing foreign operations;

 

· increased risk of collection;

 

· potentially adverse tax consequences;

 

· burdens that may be imposed by tariffs and other trade barriers; and

 

· adverse effects of political and economic instability.

 

4
 

 

We currently benefit from local tax benefits that may be discontinued or reduced.

 

We derive and expect to continue to derive significant benefits from various programs including Israeli tax benefits relating to our “Approved and Preferred Enterprise” programs.

 

To be eligible for tax benefits as an “Approved and Preferred Enterprise,” we must continue to meet certain conditions. While we believe that we meet the statutory conditions to entitle us to Israeli tax benefits, there can be no assurance that the tax authorities in Israel will concur. Should it be determined that our Approved or Preferred Enterprise programs have not met, or do not meet, the statutory conditions, our income taxes will increase materially. On December 29, 2010, the Israeli parliament approved a further amendment to the law (the “Amendment”) dealing with Approved and Privileged Enterprise programs. This amendment generally abolishes the previous tax benefit routes that were afforded under the law, specifically the tax-exemption periods previously allowed, and introduces certain new tax benefits for industrial enterprises (termed “Preferred Enterprises”) meeting the criteria of the law. We became subject to the Amendment commencing January 1, 2012. We do not believe that the Amendment has had or will have a material effect on our provision for taxes, as long as we meet all of the criteria mentioned therein. There can be no assurance that we will meet such criteria.

 

From time to time, the Israeli Government has discussed reducing or eliminating the availability of these benefits and there can be no assurance that the Israeli Government’s support of these benefits will continue. If benefits available to us or the laws, rules and regulations under which they were granted are eliminated or their scope is further reduced, or if we fail to meet the conditions of existing benefits and are required to refund tax benefits already received (together with interest and certain inflation adjustments) or fail to meet the criteria for “Preferred Enterprises,” our business, financial condition and results of operations could be materially adversely affected, including an increase in our provision for income taxes.

 

Additional tax liabilities could materially adversely affect our results of operations and financial condition.

 

As a global corporation, we are subject to income and other taxes both in Israel and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid or accrued is subject to our interpretation of applicable laws in the jurisdictions in which we do business. From time to time, we are subject to income and other tax audits in various jurisdictions, the timings of which are unpredictable. While we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed additional taxes, there could be a material adverse effect on our results of operations and financial condition.

 

If we experience loss of one or more existing customers, we may suffer a decrease in revenues, reputation and profitability.

 

A significant part of our revenues is derived from maintenance agreements and managed services agreements. We have through the years sold niche solutions to large customers that may decide to unify the various solutions they have into one platform and dismantle niche solutions in the process, ours included, as occurred with respect to a few of our customers in 2011 and 2012. Small services providers may be acquired by larger carriers and replace our solutions with the buyer’s existing billing platform or cease operations due to lack of funding, as occurred with customers of ours over the years. If one or more customers cease using our solutions or services due to replacements or any other reason, our profitability would be seriously harmed and our business and results of operations would suffer.

 

5
 

 

Because some of our customers require highly complex implementations and we sell fixed price projects, we may underestimate the effort and time required to implement such projects, resulting in a lower or negative profit margin for such projects and the incurrence of contractual penalties for late performance. This could materially harm our results of operations.

 

In 2013, we derived 77% of our revenues from the sale of software and related services to telecommunications service providers. As the deal size increases, our projects become more complex and the risk of on-time and on-budget implementation increases. Each such contract includes penalties and potential liability for damages arising from our late performance. These customers conduct a lengthy and complex approval and purchasing process, and the pricing for each project needs to be competitive in order to win. Our cost of sales increases as the length of the approval process increases because we need to support each opportunity during the time required for the customer to determine their specifications and the time required for the customer to receive internal approval to commit significant resources towards acquisition of the billing solution. The project implementation may be delayed due to delays in the build-up of the customer's network infrastructure. Our estimate for the cost includes the effort required to release new versions comprising enhanced functionality specifically requested by the customer.

 

All the delays, either by us or by a third party, increase the cost of supplying the project and expose us to potential claims from customers and may decrease our revenues and could materially harm our profitability, business and results of operations.

 

If we are unable to compete effectively in the marketplace, we may suffer a decrease in market share, revenues and profitability.

 

Competition in our industry is intense and we expect competition to increase. We compete both with established global billing companies such as Amdocs and Comverse as well as with local billing companies. Some of our competitors have greater financial, technical, sales, marketing and other resources and greater name recognition than we do. Some of our competitors, mainly the ones that focus on specific markets, have a lower cost structure and compete with us on pricing. New competitors may emerge and rapidly acquire significant market share. We cannot guarantee that we will be able to compete effectively against current or future competitors or that competitive pressure will not harm our financial results.

 

Our business may be negatively affected by exchange rate fluctuations.

 

Although the majority of our revenues are denominated in U.S. dollars, approximately 30% of our expenses are incurred in New Israeli Shekel, or NIS, and approximately 49% of our expenses are incurred in Euro. As a result, we may be negatively affected by fluctuations in the exchange rates between the Euro or the NIS and the U.S. dollar. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation of the NIS or of the Euro against the U.S. dollar. If the U.S. dollar cost of our operations in Israel and/or Romania increases, our U.S. dollar-measured results of operations will be adversely affected. In addition, some of our revenues are denominated in Euro, some are denominated in Canadian dollar, or CAD and some are denominated in Great Britain Pound, or GBP. As a result, our U.S. dollar-measured results of operations will be adversely affected by devaluation in the GBP, CAD or Euro relative to the U.S. dollar. We may choose to limit these exposures by entering into hedging transactions. However, hedging transactions may not enable us to avoid exchange-related losses, and our business may be harmed by exchange rate fluctuations.

 

6
 

 

Our backlog, revenues and operating results may vary significantly from quarter to quarter.

 

Our backlog, revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including the following:

 

· the timing of orders and/or deliveries for our software may be delayed as customers typically order and/or implement our billing and customer care software only after other vendors have provided the network infrastructure, a process that is subject to delay. It is therefore difficult for us to predict the timing of orders and/or revenue recognition;

 

· the ability of our customers to expand their operations and increase their subscriber base, including their ability to obtain financing;

 

· potential termination of long-term contracts by our customer due to lack of financing, internal changes or any other reason; and

 

· changes in our pricing policies or competitive pricing by our competitors.

 

Due to all of the foregoing, we cannot predict revenues for any future quarter with any significant degree of accuracy. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and you should not rely upon them as indications of future performance. In future quarters, our operating results may be below the expectations of public market analysts and investors, and as a result, the price of our ordinary shares may fall.

 

The customer base for our wireline and wireless billing and customer care products is characterized by small to medium size telephony carriers. If this market segment fails to grow, the demand for our billing and customer care software would diminish substantially.

 

Our traditional wireline and wireless billing and customer care products target small to medium size telephony carriers. Our growth in this field depends on continued growth of these traditional telephony carriers. We cannot be certain that small to medium size telephony carriers will be able to successfully compete with large telephony carriers in existing markets or will successfully develop in new and emerging markets. If this market segment fails to grow, the demand for our billing and customer care software would diminish substantially and our business would suffer. In addition, there may never be significant demand for new billing and customer care software by providers of telecom services.

 

From time to time, our software and the systems into which it is integrated contain undetected errors. This may cause us to experience a significant decrease in market acceptance and use of our software products and we may be subject to warranty and other liability claims.

 

From time to time, our software, as well as the systems into which it is integrated, contains undetected errors. Because of this integration, it can be difficult to determine the source of the errors. Also, from time to time, hardware systems we resell contain certain defects or errors. As a result, and regardless of the source of the errors, we could experience one or more of the following adverse results:

 

· diversion of our resources and the attention of our personnel from our research and development efforts to address these errors;

 

7
 

 

· negative publicity and injury to our reputation that may result in loss of existing or future customers; and

 

· loss of or delay in revenue and loss of market share.

 

In addition, we may be subject to claims based on errors in our software or mistakes in performing our services. Our licenses and agreements generally contain provisions such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages, designed to limit our exposure to potential claims. However, not all of our contracts contain these provisions and we cannot assure you that the provisions that exist will be enforceable. In addition, while we maintain product liability and professional indemnity insurance, we cannot assure you that this insurance will provide sufficient, or any, coverage for these claims. A product liability or professional indemnity claim, whether or not successful, could adversely affect our business by damaging our reputation, increasing our costs, and diverting the attention of our management team.

 

We may expand our business through acquisitions that could result in diversion of resources and extra expenses, and which may involve other risks that could disrupt our business and harm our financial condition.

 

We may pursue acquisitions of business, products and technologies, or the establishment of joint venture arrangements, that could expand our business. The negotiation of potential acquisitions or joint ventures as well as the integration of an acquired or jointly developed business, technology or product could cause diversion of management's attention from the day-to-day operation of our business. This could impair our relationships with our employees, customers, distributors, resellers and marketing allies. Future acquisitions could result in:

 

· potentially dilutive issuances of equity securities;

 

· the incurrence of debt and contingent liabilities;

 

· amortization of intangible assets;

 

· changes in our business model and margins;

 

· research and development write-offs; and

 

· other acquisition-related expenses.

 

In addition, we have limited experience with respect to negotiating an acquisition and operating an acquired business. If future acquisitions disrupt our operations, our business may suffer.

 

We depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, our business will be harmed.

 

Because our markets are constantly changing, the success of our business depends in large part upon the continuing contributions of our senior management. Specifically, continued growth and success largely depend on the managerial and technical skills of our founder and CEO, Monica Iancu, and other members of senior management. Because the demand for highly qualified senior personnel exceeds the supply of this type of personnel, it will be difficult to replace members of our management if one or more of them were to leave us. If either Mrs. Iancu or other members of the senior management team are unable or unwilling to continue their employment with us, our business will be harmed.

 

8
 

 

Our success depends on our ability to continually develop and market new and more technologically advanced products and enhancements.

 

The market for our products and the services they are used to support is characterized by:

 

· rapid technological advances like the development of new standards for communications protocols;

 

· frequent new service offerings and enhancements by our customers, such as value-added IP-based services and new rating plans; and

 

· changing customer needs.

 

We believe that our future success will largely depend upon our ability to continue to enhance our existing products and successfully develop and market new products on a cost-effective and timely basis. We cannot assure you that we will be successful in developing and marketing new products that respond adequately to technological change. Our failure to do so would have a material adverse effect on our ability to market our own products.

 

If we are unable to adequately protect our intellectual property or become subject to a claim of infringement, our business may be materially adversely affected.

 

Our success and ability to compete depend substantially upon our internally developed or acquired technology. Any misappropriation of our technology could seriously harm our business. In order to protect our technology and products, we rely on a combination of trade secret, copyright and trademark law. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our software or technology or to develop software with the same functionality. Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent misappropriation, particularly in foreign countries where the laws may not protect our intellectual property rights as fully as in the United States.

 

If anyone asserts a claim against us relating to proprietary technology or information, we might seek to license his intellectual property or to develop non-infringing technology. We might not be able to obtain a license on commercially reasonable terms or on any terms. Alternatively, our efforts to develop non-infringing technology could be unsuccessful. Our failure to obtain the necessary licenses or other right or to develop non-infringing technology could prevent us from selling our software and could therefore seriously harm our business.

 

Breaches in the security of the data collected by our systems could adversely affect our reputation and hurt our business.

 

Customers rely on third-party security features to protect privacy and integrity of customer data. Our products may be vulnerable to breaches in security due to failures in the security mechanisms, the operating system, the hardware platform or the networks linked to the platform. All our solutions provide web access to information, presenting additional security issues for our customers. Security vulnerabilities could jeopardize the security of information stored in and transmitted through the computer systems of our customers. A party that is able to circumvent our security mechanisms could misappropriate proprietary information or cause interruptions in the operations of our customers. Security breaches could damage our reputation and product acceptance would be significantly harmed, which would cause our business to suffer.

 

9
 

 

We are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.

 

As an Israeli company subject to U.S. federal securities laws, we spend a significant amount of management time and resources to comply with laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations, Nasdaq listing rules and the Israeli Companies Law. In connection with our compliance with Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a substantial amount of time, and we may need to hire additional accounting and financial staff, to assure that we continue to comply with these requirements. There is no guarantee that these efforts will result in management assurance that our internal control over financial reporting is adequate in future periods. If our internal controls are found to be ineffective in future periods, it could harm our operations, financial reporting or financial results. 

 

Risks Relating to the Market of our Ordinary Shares

 

Our share price has fluctuated and could continue to fluctuate significantly.

 

The market for our ordinary shares, as well as the prices of shares of other technology companies, has been volatile. The price of our ordinary shares has fluctuated significantly since our initial public offering in August 2000. A number of factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly, such as:

 

· sales of a substantial number of our ordinary shares;

 

· fluctuations in our quarterly revenues and earnings and those of our publicly held competitors;

 

· public announcements concerning us or our competitors;

 

· changes in pricing policies by us or our competitors;

 

· market conditions in our industry; and

 

· the general state of the securities market (particularly the technology sector).

 

We do not control these matters and any of them may adversely affect our share price. In addition, trading in shares of companies listed on the Nasdaq Global Market in general and trading in shares of technology companies in particular has been subjected to extreme price and volume fluctuations that have been unrelated or disproportionate to operating performance. These broad market and industry factors may depress our share price, regardless of our actual operating results. Given the likely volatility that exists for our ordinary shares, sales of a substantial number of our ordinary shares could cause the market price of our ordinary shares to decline.

 

10
 

 

If we are characterized as a passive foreign investment company, our U.S. shareholders will be subject to adverse tax consequences.

 

If, for any taxable year, either, (1) 75% or more of our gross income is passive income or (2) 50% or more of our assets, averaged over the year and generally determined based upon value, including cash (even if held as working capital), produce or are held to produce passive income, we may be characterized as a "passive foreign investment company", or PFIC for United States federal income tax purposes. As a result of our cash position and the value of our assets, we may be deemed to be a PFIC for U.S. federal income tax purposes.

 

If we are characterized as a PFIC, our shareholders who are residents of the United States will be subject to adverse U.S. tax consequences. Our treatment as a PFIC could result in a reduction in the after-tax return to shareholders resident in the United States and may cause a reduction in the value of our shares. If we were to be treated as a PFIC, our shareholders will be required, absent certain elections, to pay an interest charge together with tax calculated at the then prevailing highest tax rates on ordinary income on certain "excess distributions" including any gain on the sale of Ordinary Shares. The consequences of holding shares in a PFIC are described below under "Additional Information - United States Federal Income Tax Consequences - Passive Foreign Investment Companies." Prospective investors should consult with their own tax advisors with respect to the tax consequences applicable to them of investing in our Ordinary Shares.

 

Risks Relating to Our Location in Israel

 

Potential political, economic and military instability in Israel may harm our operating results.

 

We are organized under the laws of the State of Israel and most of our senior management is located in Israel. Accordingly, our operating results are directly influenced by economic, political and military conditions in and relating to Israel. Since the establishment of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon). Recent political uprisings, social unrest and violence in various countries in the Middle East and North Africa, including Israel’s neighbors Egypt and Syria, are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries and have raised concerns regarding security in the region and the potential for armed conflict. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among parties hostile to Israel in areas that neighbor Israel, such as the Syrian government, Hamas in Gaza and Hezbollah in Lebanon. Any armed conflicts or political instability in the region could negatively affect business conditions and harm our results of operations. We cannot predict the effect on the region of the increase in the degree of violence between Israel and the Palestinians. Furthermore, several countries and trade groups restrict business with Israel and Israeli companies, and additional countries and trade groups may restrict doing business with Israel and Israeli companies for political reasons. These restrictive laws and policies may seriously harm our operating results, financial condition or the expansion of our business. In addition, the current situation in Israel could adversely affect our operations if our customers and/or strategic allies believe that instability in the region could affect our ability to fulfill our commitments.

 

It may be difficult to enforce a U.S. judgment against us, our officers and directors or to assert U.S. securities laws claims in Israel.

 

We are incorporated in the State of Israel. Substantially most of our executive officers and directors are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for a shareholder, or any other person or entity, to collect a judgment obtained in the United States against us or any of these persons, or to effect service of process upon these persons in the United States.

 

11
 

 

We have been informed by our legal counsel in Israel that it may be difficult to bring original actions in Israel to enforce civil liabilities under the Securities Act and the Exchange Act. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear 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.

 

Subject to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel, Israeli courts may enforce a U.S. judgment in a civil matter, including judgments based upon the civil liability provisions of the U.S. securities laws and including a monetary or compensatory judgment in a non-civil matter, provided that the following key conditions are met:

 

· subject to limited exceptions , the judgment is final and non-appealable;

 

· the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state;

 

· the judgment was rendered by a court competent under the rules of private international law applicable in Israel;

 

· the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts;

 

· adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;

 

· the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;

 

· the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and

 

· an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the U.S. court.

 

Provisions of Israeli law and our articles of association may delay, prevent or make difficult a change of control and therefore may depress the price of our stock.

 

Some of the provisions of our articles of association and Israeli law could, together or separately:

 

· discourage potential acquisition proposals;

 

· delay or prevent a change in control; and

 

· limit the price that investors might be willing to pay in the future for our ordinary shares.

 

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In particular, our articles of association provide that our board of directors will be divided into three classes that serve staggered three-year terms and authorize our board of directors to adopt protective measures to prevent or delay a coercive takeover, including without limitation the adoption of a “Shareholder Rights Plan”. In addition, Israeli corporate law regulates mergers and acquisitions of shares through tender offers, requires approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. See Item 10.B “Memorandum and Articles of Associations- Mergers and Acquisitions under Israeli Law.” Furthermore, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such stock-for stock swap.

 

Item 4. Information on the Company

 

A. History and Development of the Company.

 

General

 

Our name is MIND C.T.I. Ltd. for both legal as well as commercial purposes. We were incorporated under the laws of the State of Israel on April 6, 1995 as a company with limited liability, and we are subject to the Israeli Companies Law, 1999 and the regulations promulgated thereunder. Our principal executive offices are located at Industrial Park, Building 7, Yoqneam 2069202, Israel. Our telephone number is +972 4 993 6666. Our agent in the United States is MIND Software Inc. and its principal offices are located at 12520 Prosperity Drive, Suite 220, Silver Spring, MD 20904, USA.

 

Principal Capital Expenditures

 

During 2011, 2012 and 2013, the aggregate cash amount of our capital expenditures were $0.4 million, $0.2 million and $0.2 million, respectively. These expenditures were mainly for the purchase of equipment and licenses for software tools to be used by our engineering teams. We currently have no material commitments for capital expenditures.

 

B. Business Overview

 

Overview

 

We develop, manufacture and market real-time and off-line billing and customer care software for various types of communication providers, including traditional wireline and wireless, voice over IP, or VoIP, and broadband IP network operators, WiMAX operators, cable operators, 3G / 4G operators and mobile virtual network operators, or MVNOs.

 

Our convergent billing and customer care solution supports multiple services, including voice, data and content services as well as both prepaid and postpaid payment models in a single platform. Prepaid subscribers can enjoy the full range of services offered by the provider, with their special bundles, rating plans and limits. The prepaid solution authorizes each service and controls each session in real time, taking care that the balance is not exceeded. Postpaid subscribers, including credit-limited and non-limited, retail or business customers, represent the loyal and the higher average revenue per user, or ARPU, market. All services used by a postpaid subscriber appear in a single bill, which includes all charges, including one-time, recurring and usage-related charges. Our billing solution is unique as it is truly convergent and it includes our own integrated real-time mediation product that provides interfaces with IP, Intelligent Networks, or IN, and traditional telecommunication equipment, as well as our own point-of-sale solution.

 

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Our billing and customer care solution includes a powerful workflow engine to support the creation and execution of business processes such as order management, trouble ticket and debt collection. It also includes an integral point of sale solution that covers all dealer, store and cashier management and sales processes. We base our solution on a multi-layered architecture supporting real-time distributed processing, achieving performance, scalability and high availability. It uses an open architecture, including Service Oriented Architecture (SOA) and Document Oriented Architecture (DOA), thus enabling fast and seamless integration with other systems and third party applications. The MIND solution is built using standardized best-of-breed object-oriented technologies such as Java and XML, and it is J2EE compatible as it is powered by a commercial application server.

 

We also provide professional services, primarily to our billing and customer care customers, consisting of installation, turnkey project implementation services, customer support, training and maintenance services, customization and project management. Our professional services also include enhanced support options, known as managed services, which are mainly offered to customers in the United States and Europe and are performed from our offices. These managed services include performing day to day billing operational tasks.

 

In addition to our billing and customer care solutions, we offer unified communications solutions call management systems used by organizations for call accounting, telecom expense management, traffic analysis and fraud detection. Our enterprise software product has been installed on about 20,000 switches around the world, for traditional telephony, for IP switches and hybrid networks. Our latest product, PhonEX-ONE, delivers one unified solution for all voice communication expenses including traditional, IP and mobile telephony. The flexible and scalable architecture of PhonEX-ONE meets the needs of large enterprises, supporting an unlimited number of extensions and sites, it introduces full functionality through a web browser, based on Microsoft SQL database and enhanced by the advanced ASP.NET technology.

 

Our Market Opportunity

 

Billing and Customer Care Industry

 

Billing and customer care are critical to telecommunications service providers as they enable them to manage customer relations, track and bill for usage, and launch, deploy and charge new services, marketing programs and rate plans. The need for comprehensive billing solutions is driven by the market trend that requires service providers to introduce new services, to be innovative in creating new product offerings and to optimize business processes for maximum efficiency. We provide tier 2 and tier 3 service providers with flexible, easy to deploy, truly convergent and scalable billing solutions.

 

From time to time, telecommunications service providers initiate searches for billing solutions to replace existing ones in order to offer additional services, reduce costs and improve service. In addition, our existing customers occasionally consider adding new modules that we developed to their existing platform, replacing other vendors or migrating to a newer version with up-to-date technology and enhanced functionality.

 

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Also, from time to time, new providers surface and introduce new offering to the market or try to attract a specific targeted customer base. They build new infrastructure or resell traffic and initiate searches for billing solutions.

 

An additional market opportunity is the trend towards all-IP networks, offering multiple next generation services. New billing solutions are required to enable the new services, and we are well positioned to support this need. As a pioneer in VoIP billing since 1997, we have the experience and the solution portfolio that is proven to be capable of delivering these technically demanding projects for all-IP networks.

 

Convergence

 

The convergent billing solution in the telecommunications industry enables common management of all users and all services for operators. It includes convergence of payment methods like prepaid and postpaid, as well as access methods and services like fixed telephony, mobile telephony, broadband and TV.

 

Implementation of convergent solutions has become a key factor to carriers’ success and we encounter opportunities as carriers seek to replace multiple existing solutions with one convergent platform.

 

Mobile Market

 

The two niches in the mobile market in which we see opportunities are the rural mobile carriers market in the United States and the MVNO (Mobile Virtual Network Operator) market. We have a number of such carriers as customers and we are focused on delivering solutions that address these particular markets.

 

Voice over IP Industry

 

Many service providers are moving towards networks in which IP-based equipment will carry a large proportion, if not all, of their traffic. These next generation networks, or NGNs, offer cost savings over traditional switched networks, as well as the potential to offer new services like VoIP. We have a strong reputation in areas such as mediation and VoIP billing, and our products are designed to work with NGNs.

 

Providers of multiple IP-based services typically require billing and customer care products that can handle authentication, authorization and accounting needs in real-time in order to determine the types of services to which the subscriber is entitled, as well as any applicable limits to the availability of the services. This real-time functionality is particularly important for prepaid billing plans. Finally, billing and customer care software products need to be easily adaptable to changes in the size and configuration of an IP provider's system, to new products and services and to enable rapid growth in subscriber base. Our proven solutions cover all these needs, as described below.

 

Our Billing and Customer Care Solution

 

We develop, market and support real-time and off-line, scalable billing and customer care software, including mediation and rating, for providers of voice, data and content services that are designed to meet their complex, mission-critical provisioning, authentication, authorization, accounting and reporting needs. Our billing and customer care software provides our customers with the following benefits:

 

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· Real-Time Solution . Service providers require a system that enables authentication, authorization and accounting and, if needed, cut-off, all in real-time. We believe that the MIND solution is one of the few billing and customer care products that offers real-time functionality for both prepaid and postpaid billing plans, and that has a real-time rating engine able to support rating of voice, data and content services simultaneously;

 

· Mediation and Service Fulfillment . IP and traditional networks that can offer voice, data, video and content services are based on various network elements each of which generates billable information. We believe that the MIND solution is one of the few billing and customer care products that provide real-time collection and correlation of various events from multiple sources that relate to the same session and convert them into billable records. In addition, the MIND solution enables end-to-end automated flow for service creation and activation, meaning that from the order for service handled by the customer care representative until the service activation, the activities that need to be completed are automatically fulfilled by MIND;

 

· Scalability . Our billing solutions are designed to support millions of subscribers and at the same they enable service providers to grow from accommodating a small number of subscribers to a large number of subscribers, primarily through the addition of hardware and licenses. Our solutions’ design allows a service provider to expand its infrastructure, business model and subscriber base without the need to replace its billing and customer care software; and

 

· Improved Time to Market . Our billing solutions are modular, extensible software products, based on software architecture designed for easy adaptability and implementation. These features allow each of our customers to tailor our products to meet their individual needs in terms of the number of subscribers serviced and the variety of services provided. In addition our products can be customized relatively quickly, enabling our customers to improve their time to market as they initially implement their networks and, later, as they add and modify the services they provide.

 

Our Strategy

 

Our objective is to be a leader in the market for convergent billing and customer care software for tier 2 and tier 3 service providers and to maintain and increase profitability.

 

As we increase our focus on end-to-end billing solutions for tier 2 and tier 3 service providers, projects are now generally more complex in nature, with revenue recognized over longer periods. These factors typically extend the recognition period of both license and service revenue streams and have some balance sheet impacts. We consider this a normal and expected development for our business as it grows and matures. We continue to build the professional services team required to support the growth in services offered to customers. Our long-term business model contemplates that licenses, maintenance and services will each represent approximately 30-40% of revenues and gross margins will be around 60%. The key elements of our strategy to become a leader in the market for convergent billing and customer care software for tier 2 and tier 3 service providers include:

 

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· Leverage our brand name recognition and technical expertise . We introduced our billing and customer care software in 1997. We believe that our early position in the market and our reputation for offering high quality, reliable billing and customer care software has provided us with brand name recognition. We intend to leverage our reputation, brand name and recognition in the wireline and wireless markets;

 

· Maintain and expand our technological expertise . We believe that our reputation in the market is due in large part to our technological expertise. We make significant investments in our research and development to continually enhance our products to meet the changing needs in the telecom industry. We intend to continue our commitment to technology, both to enhance our existing products and to develop new products for growing markets; and

 

· Expand professional services opportunities . As our projects are of larger scale and as convergent service offerings become more complex, our customers increasingly require consulting services, especially for customization, as well as for project management, installation and training, technical support and maintenance. This provides us with the opportunity to increase our revenue base from existing customers. We have begun to capitalize on this opportunity and, as a result, fees from providing professional services have increased.

 

Our Products and Services

 

Billing and Customer Care Solutions

 

Our billing solutions include real-time and off-line mediation, provisioning, rating, billing and customer care software for voice, data, video and content services that meet the mission-critical needs of convergent IP, Cable TV, Wireline and Wireless service providers.

 

Our highly functional and adaptable products enable our customers to quickly deploy new services as well as to rapidly grow and add new services. Our solutions support both prepaid billing plans, in which customers prepay for the services, or postpaid billing plans, in which customers pay for the services after using them, on the basis of either limited or unlimited credit lines. The key functionalities of our solutions are as follows:

 

· Mediation . Our mediation platform provides real-time and batch event collection interfacing with the voice, content, data, service delivery and routing network elements . It incorporates an intelligent processing engine to correlate, aggregate, merge and filter raw events into a single valuable usage event;

 

· Provisioning . Provisioning involves setting up the ability of a subscriber to use services. The customer database includes information regarding customers' personal data, identification parameters and the services provided. This information can be provided in real time or on demand to any external system, such as network elements and legacy billing solutions. The data provided includes service parameters such as enabled features and quantitative limits;

 

· Authentication . Our real-time mediation module authenticates subscribers who connect to the network to use the service. Authentication is based on a number of methods, including user codes, passwords and caller line identification. The identification information is passed to the system, where the subscriber is authenticated and then permitted to use the service;

 

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· Authorization . Our systems authorize a particular usage, among other ways, by reviewing the type of service to determine whether the service is permitted or by reviewing the existing balance, pre-rating the service, using the rating engine described below and calculating the resulting cut-off parameters, if any, of the call or data session. Multiple parallel sessions are supported using our Balance manager, implementing quota allocation logic;

 

· Accounting . When each session is completed, the rating engine described below is used to determine the amount to be charged to the subscriber and update the balance of the account in real-time. In addition, the usage detail records are stored for invoicing and reporting;

 

· Interconnect Billing . The networks operated by our customers are typically interconnected with the networks of other telecommunications service providers. Interconnecting providers need to charge other providers for carrying each other's services over their networks. Our billing solutions generate reports that enable providers to bill for traffic and services that are being transported across their networks by other providers;

 

· Roaming . Our solutions support the ability to provide services to visiting subscribers, on the one hand, and to roam both prepaid and postpaid subscribers in other networks, on the other hand. Our billing system provides the ability to define and manage the required roaming contract terms and the applicable tariff plan (IOT) for each roaming partner;

 

· Virtual Providers . MIND offers a solution that enables a carrier to have resellers of traffic under different brand names, while it is still managed from the same billing platform, as a separate entity known as Virtual Provider. This model enables the carriers that own the networks, to lease its network equipment and its billing system to other providers;

 

· Multiple Services and Products Support . Our billing solutions allow service providers to take advantage of their convergent networks by providing their customers with advanced voice, data, content and video services. The MIND Product Catalog allows service providers to bundle groups of services into tailor-made packages for which they can offer special rates, discounts and promotions. There are different classes of customers with respect to the availability, bandwidth, and quality of service requirements for these services. Our billing solutions offer an easy way to define these services, combine them into products, and rate each service and product differently;

 

· Rating . Our billing solutions include a real-time and flexible rating engine that allows service providers to offer subscribers a wide variety of billing plans. This flexibility also allows service providers to set different tariff parameters. For example, our billing and customer care software can support different rates for various content and video streaming services and for different customer groups, rates based on the day of the week and time of the day and rates based on the origin and destination of the call. International service providers may define rates in different currencies using the product's multi-currency functionality. An unlimited number of free-unit and money-bundle is supported. Voucher based payment models are supported;

 

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· Invoicing . Our billing solutions include a high-capacity invoice server that handles all stages of invoice generation. It supports multiple billing cycles and bill production on demand. The invoice includes the customer details and information, such as usage details, monthly recurring charges, discounts and taxes, which are gathered throughout the billing period. This module creates the original bills to be printed locally or exported to bill printing service bureaus, using a customizable invoice layout;

 

· Account Receivables (A/R) . MINDBill manages all A/R activities, monitors the A/R status online and ensures a continuous cash flow. Multiple payment methods are supported by the system: cash, check, credit and debit cards, vouchers and more. MINDBill includes a flexible open API for payments interfaces to banks and credit card clearing houses. MINDBill has pre-integrated interfaces with major financial institutions, banks, clearinghouses and credit bureaus. The A/R includes the management of deposits life cycle, including payments and refunds, is easily done. Disputes can be managed and solved, resulting in the appropriate adjustments. MINDBill identifies the ageing debt for every open invoice according to the company policy for classifying to 30-60-90 days and initiating the built in debt collection process;

 

· Collection procedures . The MINDBill collection facility provides flexibility in defining the collection policy using different collection paths. The solution provides full monitoring and control of the collection treatment (dunning process). It identifies customers with past due debts and ensures that they are handled in accordance with the company policy. This increases efficiency through the automation of the majority of the collection functions, and helps maximizing the success ratio. Automating the collection process utilizing the built in work flow engine enables operators to monitor the account receivables and ensure the collection of the entire revenue. All of this is achieved with operational efficiency streamlining the business processes that is fully integrated within the customer suit;

 

· Subscriber Web Interface . Our billing solutions include a user-friendly subscriber web interface that allows subscribers to resolve billing inquiries themselves. Individual customers can obtain real time information about their account, including details of calls made that have not yet been invoiced, like the time, destination, length and cost of each call. The subscriber can also browse invoices, call details and payment history records. This feature is convenient for subscribers and efficient for service providers as it reduces service costs;

 

· Customer Support Representative Web Interface . Our billing solutions include a user-friendly customer support representative web interface that allows operators of the system to perform customer care from any location. This feature is of particular significance to service providers who have remote operations centers and are required to provide support of their system in more than one location;

 

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· Point of Sale (POS). The POS is aimed mostly at the wireless retail market, enabling operators to offer their products and services in retail stores and manage the process within our enhanced solutions. POS is fully integrated into MIND Billing and Customer Care solutions, allowing operators to seamlessly offer services and accessories for new and existing customers and even to non-subscribers. POS integrates with external systems, such as credit card clearinghouses, external taxation engines and address validation systems. POS includes two modules working together:

 

· Resource Management Module – a comprehensive inventory system that supports the operator’s chain of warehouses as well as his stores. It automates the management and tracking of the equipment sold to subscribers. The solution keeps track and manages the equipment by serial number, status, and location, providing the flow management from purchase orders, through the reception of the items shipped, the distribution of the items to the stores and the allocation of the items to the customers. It also supports inventory management functions such as on-hand-counts and catalogue management.

 

· Sales Module – an easy to use cashier station that supports all service activations, phone and accessory sales through one interface on a single receipt. The Sales module enables all payment methods such as cash, check and credit card. It provides full control of the cashier devices such as cash drawer, credit card swipe, bar code reader and ribbon printer. Sales module interacts with the Resource Management module to show the sales clerk available items for sale in the store warehouse, to assign sold items to customer accounts and to enable track of items, such as returns and repairs.

 

· Business Processes Environment . Customer care and billing processes are one of the most significant practices to drive business performance. These processes are fundamental for bringing innovative and competitive ways of delivering products and services to market. MIND’s automated business processes engine allows operators to meet the challenges they confront in today’s business environment. The business processes workflow implemented by the engine provides business intelligence behind day-to-day operations. The engine also automates the interaction with network elements and third party software. This is done in accordance with a uniquely defined set of business rules determined by the customer. MIND is offering in its deployments tailored, fully automated, order management processes, trouble tickets and debt collection processes.

 

The flexible and robust account creation order management process handles the orders from the customer’s contact, through registration, package selection, provisioning and activation. The order management process involves different users from various departments (such as supervisor approval of the contract and technician test), integration with external legacy systems (such as inventory), interaction with third party services (such as address validation) and more. MINDBill uses its inherent workflow capabilities to tailor an order management process that meets the operator’s business model;

 

· Call Management and Traffic Analysis Reports (CMS module). The CMS module allows service providers to generate reports and graphic analyses of usage activity. These reports contain information regarding peak hours, usage loads to different destinations, the number of sessions per minute for a specific gateway or group of gateways, the duration of sessions and other parameters. These features enable service providers to analyze subscriber behavior and use the information to improve their marketing and business development strategies. In addition, the traffic analyses reports assist service providers in planning the growth and development of their networks; and

 

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· Fraud Detection . Our billing solutions include a fraud detection tool that enables detection of “stolen” calls and telephone misuse. It detects, locates and warns of any suspicious activity by activating alarms. It is easily customized to suit the needs of each service provider and allows a provider to build fraud inquiries based on a defined set of parameters. When these specific parameters are violated, alarms at four different alarm levels may be activated. Different actions may be implemented at each level. For instance, the operator may be alerted to possible fraud via e-mail, fax or audio or visual alarms.

 

Enterprise Software

 

Our enterprise products, known as PhonEX, MEIPS, PhonEX-Ten and PhonEX-ONE, are used by corporations for telecom expense management, call accounting, traffic analysis and fraud detection. PhonEX and MEIPS are call management systems that collect, record and store all call information in a customized database. The systems:

 

· allow customers to generate near real-time reports on the enterprise's telephone use;

 

· produce sophisticated reports and graphics for easy and effective analysis of call activity; and

 

· allow customers to allocate telephone expenses to specific departments, individual clients or projects.

 

These functions allow organizations to more effectively manage their telecommunications resources. The systems are easy to install and configure, user-friendly and compatible with any switchboard system, traditional or IP. The systems perform call management and traffic analysis as well as fraud management in the same manner as our billing solutions. In addition, the systems are multi-lingual and multi-currency, which means that reports can be generated in any currency defined in the system, or in two currencies simultaneously.

 

PhonEX-ONE, delivers one unified solution for management of all telecom expenses, including traditional voice, IP voice and data, and mobile telephony. The flexible and scalable architecture of PhonEX-ONE meets the needs of large enterprises, supporting an unlimited number of extensions and sites. PhonEX-ONE provides tools to monitor, budget and manage voice traffic in order to achieve maximum control over telecommunication expenses. Some of its major advantages are:

 

· Fully web-based solution. The PhonEX-ONE fully web-based solution enables managers and users to conveniently access their telecom expenses management system anytime and from anywhere, using a web browser without decreasing their control over the traffic;

 

· User centric . The PhonEX-ONE user-centric architecture provides a consolidated solution for the collection, analysis, reporting, and managing of all the telecommunication and data traffic expenses;

 

· Dashboard . A visual representation of the most significant information regarding calls, a useful tool that helps administrators to get a quick and relevant image of the general system activity. The Dashboard can quickly provide - through its graphical and non-graphical monitors - a snapshot over the outgoing and incoming calls, traffic and exceptions as well as several top requested reports;

 

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· Multi-site solution . The PhonEX-ONE scales to support large multi-site organizations using voice and data equipment from multiple vendors. PhonEX-ONE supports complex hierarchies on which any employee can be associated to any branch of the organization and under a separate matrix to any corporate department;

 

· ASP.NET and MS-SQL database . PhonEX-ONE is designed using the Microsoft .Net technology and has extensive configuration capabilities using XML files with server – client interaction;

 

· Certification by IP switch vendors . PhonEX-ONE is interoperable and certified on a timely manner with new releases of IP switch vendors, including Cisco and Microsoft;

 

· Enhanced security. PhonEX-ONE security management includes user authentication, security group restrictions, event log monitoring and encryption methodology of data base entries. This management tool enables a secure and easy control over the system;

 

· Modular architecture supporting high scalability . The PhonEX-ONE’s scalable system architecture supports an unlimited number of sites and extensions;

 

· Guard and Alerter. The PhonEX-ONE Guard and Alerter provide sophisticated tools for fraud prevention, alerting on phone misuse, budget surpass, possible toll fraud or other abnormal behaviors within the organization; and

 

· Multilingual and multicurrency . The built in support of multiple languages and multiple currencies enables telecom expense management for multinational organizations.

 

We intend to further develop and market these products as the market for Voice over IP systems for enterprises grows.

 

Professional Services

 

We provide professional services to our customers, consisting primarily of project management, customization, installations, customer support, training and maintenance services. As our projects become more complex, more customers require customization services to add specialized features to their systems. We also offer enhanced support options, called managed services, which are mainly offered to customers in the United States and are performed from our offices. The managed services include performing day to day billing operational tasks. The managed services contracts are usually for a term of three to five years and are paid on a monthly basis. We also have the ability to implement Software-as-a-Service (SaaS) models in a similar way.

 

Technology

 

Our software products are based on an open architecture, which was developed using industry standard application server programming interfaces that enables it to readily integrate with other software applications. These application program interfaces create an object-oriented, multi-layered architecture that supports a distributed environment. Our object-oriented technology enables the design and implementation of software utilizing reusable business objects rather than complex procedural codes. Our layered architecture organizes these business objects to optimize the interface between the user and the application. We implement our software in a distributed configuration. This allows various modules to be installed on different servers to support the system’s scalability and security. We believe that our technology allows us to offer products with the following benefits:

 

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· fast integration and interoperability with telecommunications equipment of major manufacturers, legacy systems and external software;

 

· modular architecture that allows our products to be easily scalable and enables us to customize our software relatively quickly;

 

· reliable products that support high availability of the service for mission-critical applications. Our automatic fail-over mechanism ensures minimal loss of service in case of a component failure; and

 

· security at all levels of the architecture. Each user of the system may be assigned to different security groups. Service providers are therefore able to determine and audit access to the system. In addition, firewalls can be installed to prevent unauthorized access to the system.

 

Our software products are based on multiple-tier architecture, consisting of the following tiers:

 

· Client Application Tier: This is the top tier graphic user interface between the user and the application. It includes client applications for customer registration, customer care and billing administration. In addition, it includes Web service interfaces that enable external applications to interact with the business tier;

 

· Business Object Tier: This tier includes the business logic and rules of the system. This tier manages accounts, services, events and tariffs. It includes an object request broker that facilitates the transfer of information requested by the client application tier from the database tier; and

 

· Database Tier: This tier includes the Oracle database server and management software where the actual billing and customer care information is stored.

 

Sales and Marketing

 

Sales

 

Billing and Customer Care Solutions

 

We conduct our sales and marketing activities primarily directly as well as through our marketing alliances with network equipment vendors and systems integrators. These marketing allies and resellers provide us with a global extension of our direct sales force. We also engage in joint marketing activities with our allies, including joint responses to requests for proposals. We believe that these relationships also help validate our technology and facilitate broad market acceptance of our software.

 

Our agreements with our marketing allies, distributors and resellers are non-exclusive, do not contain minimum sales or marketing performance requirements and may be terminated at any time with notice.

 

Enterprise Software

 

We conduct our sales and marketing activities primarily directly, by our sales force located in the MIND offices in the United States, the United Kingdom and Israel, as well as through appointed distributors and resellers throughout the world. We engage with our system integrators and PBX equipment vendors for global marketing activities and responses to tenders.

 

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Marketing

 

Our marketing programs are focused on creating awareness, interest and preference for our products and services. We engage in a variety of marketing activities, including:

 

· participating in industry trade shows and special events;

 

· conducting ongoing public and press relations programs; and

 

· conducting training seminars for vendors and system integrators.

 

Principal Markets

 

The following table shows our revenues for each of the past three years classified by activity and geographic region.

 

    Years ended December 31,  
    2011     2012     2013  
The Americas (total)     9,455       10,882       11,809  
Sale of Licenses     1,366       2,174       1,921  
Services     8,089       8,708       9,888  
Asia Pacific and Africa (total)     1,222       1,038       1,145  
Sale of Licenses     510       405       442  
Services     712       633       703  
Europe (total)     6,685       5,244       3,758  
Sale of Licenses     2,565       2,439       1,696  
Services     4,120       2,805       2,062  
Israel (total)     1,551       3,045       1,768  
Sale of Licenses     713       942       554  
Services     838       2,103       1,214  
Total     18,913       20,209       18,480  
Sale of Licenses     5,154       5,960       4,613  
Services     13,759       14,249       13,867  

 

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Customers

 

Billing and Customer Care Solutions

 

Our billing and customer care solutions have been installed for a large base of customers worldwide, including:

 

· traditional telephony providers, such as Moldtelecom, and SMTC;

 

· wireless telephony providers, such as KDDI America, Inc., Mobi PCS, Inc., and Revol;

 

· cable providers that also offer voice services, such as Megacable and EastLink;

 

· Mobile Virtual Network Enablers (MVNEs), such as Pelephone Telecommunications Ltd; and

 

· MVNOs, such as Viaero and Alon Cellular.

 

Enterprise Software

 

Our enterprise software has been installed on about 20,000 switches around the world, for customers that include international banking firms, global technology leaders, government agencies and other small to very large organizations.

 

Competition

 

Billing and Customer Care Solutions

 

Competition in the market for billing and customer care software is intense and we expect competition to continue to be strong. We compete with many local companies and worldwide companies such as Amdocs and Comverse.

 

We believe that our competitive advantage is based on:

 

· our ability to rapidly deploy a complete turn-key product based solution;

 

· our truly convergent platform using one database and one product catalog for both prepaid and postpaid subscribers;

 

· our solutions’ functionality, which includes billing, customer care, point-of-sale, mediation, provisioning, online charging for multiple services and interconnect reporting;

 

· our proven platform and our many years of wireless and IP experience to satisfy customer requirements; and

 

· our flexibility to meet customer requirements in a short time frame.

 

Some of our competitors have greater financial, technical, sales, marketing and other resources and greater name recognition than we do. Some of our competitors have lower cost structure and compete with us on pricing. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to address the needs of prospective customers. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share and their solutions could achieve greater market acceptance than our solutions.

 

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Enterprise Software

 

Our competitors in the market for enterprise software products are mainly local companies. To compete effectively, companies must be able to offer adequate technical support and ongoing product development and customization services. In addition, multinational companies prefer call accounting systems that can be installed at their various offices throughout the world, and therefore require call accounting products that are multilingual and support the local telecommunication requirements. The principal factors upon which we compete are scalability, ease of use, being certified by major IP switch vendors and the multi-lingual and multi-currency nature of our system.

 

C. Organizational Structure

 

Set forth below is a list of our significant subsidiaries:

 

· MIND Software Limited, a wholly owned subsidiary, incorporated in the United Kingdom;

 

· MIND Software Inc. (formerly Sentori Inc.), a wholly owned subsidiary, incorporated in the State of Delaware;

 

· MIND Software SRL., a wholly owned subsidiary, incorporated in Romania; and

 

· Dirot Comp SRL., a wholly owned subsidiary, incorporated in Romania.

 

D. Property, Plant and Equipment

 

Our headquarters are located in Yoqneam, Israel, approximately 50 miles north of Tel Aviv. We lease approximately 15,000 square feet at our Yoqneam headquarters. We also lease approximately 2,100 square feet of office space in Silver Spring, Maryland and approximately 32,000 square feet in Iasi, Romania. The office in Maryland is used primarily for supporting our customers in the United States, while the office in Iasi is used primarily for software development and for customer support. The office in Maryland is the group’s headquarters in the Americas.

 

Item 4A. Unresolved Staff Comments

 

Not applicable.

 

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Item 5. Operating and Financial Review and Prospects

 

The following discussion of our results of operations should be read together with our audited consolidated financial statements and the related notes, which appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.

 

Overview

 

We were incorporated in Israel in 1995 and started providing our enterprise software products in that year. In 1997, we introduced our billing and customer care software for Voice over IP. We have enhanced our billing solutions since then to support multiple IP services, wireless and wireline carriers and triple play (voice, data and content) service providers. In 2013, 77% of our revenues were derived from providing our billing and customer care software and 23% were derived from providing our enterprise software. In 2013, license fees represented 25% of our revenues and services represented 75%. In each of 2011 and 2013 no customer accounted for 10% or more of our total revenues, while in 2012 one customer accounted for approximately 11% of total revenues. We expect to continue to derive sizeable revenues from a small number of changing customers.

 

In August 2005, we acquired Sentori Inc., a leading provider of billing and customer care solutions to tier 3 and tier 2 wireless carriers and mobile virtual network operators, or MVNO's, mainly in the United States and the Caribbean. In October 2007, we acquired the U.K.-based Omni Consulting Company Limited, which provides billing and customer care software solutions in a service bureau mode, mainly to European carriers.

 

In July 2003, we adopted a dividend policy, according to which we declare, subject to specific board approval and applicable law, a dividend distribution once per year, in the amount of our net income from the previous year. In October 2010, our board of directors updated this policy slightly. The new policy changes only the amount to be distributed, the new amount being equal to our EBITDA plus financial income (expenses) minus taxes on income. Additionally, the board approved dividend distributions in 2003, 2007, 2008, 2009, 2010, 2011 and 2014 that were subject to approvals from an Israeli Court in accordance with Section 303 of the Israeli Companies Law due to the fact that we did not have sufficient retained earnings, which court approvals were received. Since 2003, we have distributed aggregate cash dividends of approximately $3.09 per share to our shareholders. The amount per share that we distributed in 2011, 2012 and 2013 was $0.32, $0.24 and $0.24, respectively, and $0.24 per share so far in 2014. The board decision to approve the annual distribution is based, among other factors, on our cash position at that time, potential acquisitions and future cash needs. The board may decide to discontinue the dividend distribution in whole or in part at any time.

 

In September 2008, our board of directors authorized a plan for the repurchase of up to 2,100,000 of our ordinary shares in the open market, in an amount in cash of up to $2.8 million. As of December 31, 2008, we had repurchased 2,100,000 ordinary shares under the program at a total purchase price of approximately $1.6 million, after getting an approval by an Israeli court in accordance to the Israeli Companies Law. In February 2009, our board of directors authorized additional repurchase transactions of our shares in the total amount of $1.2 million pursuant to the 2008 repurchase plan. Under these plans, we purchased an aggregate amount of 3,165,092 ordinary shares at a total purchase price of $2.8 million.

 

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In November 2009, our board of directors authorized an additional plan for the repurchase of our shares in an amount of up to $1.8 million. In March 2010, we received Israeli court approval for this plan. In August 2012, our board of directors approved to reactivate this repurchase plan, but no shares have been purchased under this plan to date.

 

Revenues . We are paid license fees by our customers for the right to use our products, based on (1) traffic volume, which is measured by factors such as minutes per month and number of subscribers, and (2) the functionality of the system based on application modules that are added to the software. In relation to our professional services, other than maintenance services and managed services, we mainly quote a fixed price based on the type of service offered, estimated direct labor costs and the expenses that we will incur to provide these services. Fees for maintenance services are based on a percentage of the solution fee and are paid annually, quarterly or monthly. Fees for managed services are primarily based on the number of subscribers or customers business volume and are paid monthly.

 

We primarily use two business models when we sell our solutions, the license model and the managed services model. In the license model, the customer pays a one-time implementation fee, a one-time license fee for a perpetual license limited by the traffic metrics chosen by the customer, and additional fees to expand the chosen traffic metrics limitation. In addition, we are paid maintenance fees to renew periodically the maintenance agreement at the customer discretion. In the managed services model, the customer pays a one-time implementation fee, a monthly fee that includes a periodic license (right to use), maintenance and services fees, calculated by the metrics chosen by the customer (mainly, number of subscribers).

 

We provide a revenue breakdown for our billing and customer care software and our enterprise call management software. We believe that this information provides a better understanding of our performance and allows investors to make a more informed judgment about our business.

 

Cost of Revenues . The cost of revenues consists primarily of direct labor costs and overhead expenses related to software installation and maintenance. Cost of revenues also includes, among other things, software license fees to third parties, primarily Oracle, hardware, travel expenses, packaging and shipping costs.

 

Research and Development Expenses . Our research and development expenses consist primarily of compensation, overhead and related costs for research and development personnel and depreciation of testing and other equipment. Research and development costs related to software products are expensed as incurred until the “technological feasibility” of the product has been established. Because of the relatively short time period between “technological feasibility” and product release, no software development costs have been capitalized. We expect to continue to make investments in research and development.

 

Selling and Marketing Expenses . Our selling and marketing expenses consist primarily of compensation, overhead and related costs for sales and marketing personnel, the operation of international sales offices, sales commissions, marketing programs, public relations, promotional materials, travel expenses, trade shows and exhibition expenses.

 

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General and Administrative Expenses . Our general and administrative expenses consist primarily of compensation, overhead and related costs for executives and administrative personnel, professional fees, insurance, provisions for doubtful accounts and other general corporate expenses.

 

Financial Income (Expenses), Net . Our financial income (expenses), net consists mainly of interest earned on bank deposits and short-term investments, gains and losses from the conversion of monetary balance sheet items denominated in non-dollar currencies into U.S. dollars, net of financing costs, and bank charges.

 

Taxes on Income. See "—Corporate Tax Rate" below.

 

A. Operating Results

 

The following discussion of our results of operations for 2011, 2012 and 2013, including the percentage data in the following table, is based upon our statements of operations contained in our financial statements for those periods, and the related notes thereto, contained in Item 18 :

 

    Years ended December 31,
(% of revenues)
 
    2011     2012     2013  
Revenues     100.0 %     100.0 %     100.0 %
Cost of revenues     34.2       38.9       42.6  
Gross profit     65.8       61.1       57.4  
Research and development expenses     24.7       23.0       27.2  
Selling, general and administrative expenses:                        
Selling and marketing expenses     10.6       7.5       9.2  
General and administrative expenses     9.7       9.0       9.3  
Operating income     20.8       21.6       11.7  
Financial income (expenses) – net     0.9       1.5       0.9  
Income before taxes on income     21.7       23.1       12.6  
Income tax expense (benefit)     (1.0 )     1.9       0.7  
Net income     22.7       21.2       11.9  

 

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Comparison of 2011, 2012, and 2013

 

Revenues

 

    Years ended December 31,
($ in millions)
    % Change  
    2011     2012     2013     2012 vs.
2011
    2013 vs.
2012
 
License sales     5.1       6.0       4.6       17.6       (23.3 )
Professional services     13.8       14.2       13.9       2.9       (2.1 )
Total revenues     18.9       20.2       18.5       6.9       (8.4 )

 

Revenues in 2012 increased in comparison to 2011 by 6.9%. The increase was primarily attributed to four new deals signed in 2011 for which the revenues were recognized mainly in 2012, offset by the discontinuation of one significant and some other maintenance agreements during 2012. Revenues in 2013 decreased in comparison to 2012 by 8.4%. The decrease was primarily attributed to the discontinuation of certain maintenance agreements (including one significant agreement) during 2012 and to the decrease of approximately $1.3 million in revenues from billing and customer care solutions in the Israel market. Revenues from our billing and customer care product solutions for service providers increased from $14.8 million in 2011 to $15.7 million in 2012 and decreased to $14.2 million in 2013 for similar reasons to the changes in total revenues.

 

Revenues from our enterprise products increased from $4.1 million in 2011 to $4.5 million in 2012. The increase was primarily attributed to increased maintenance fees received from our existing large customers and our resellers and a few new above average size wins. Revenues from our enterprise products decreased from $4.5 million in 2012 to $4.3 million in 2013. The decrease was primarily attributed to a weakness in the European markets.

 

Revenues from professional services increased from $13.8 million in 2011 to $14.2 million in 2012 and decreased to $13.9 million in 2013. As our projects are of a larger scale and as convergent service offerings become more complex, our customers increasingly require consulting services, especially for customization, as well as for project management, installation and training, technical support and maintenance. As a result, fees from professional services increased in 2012. While we expect this increase to resume, due to the discontinuation of certain maintenance agreements (including one significant agreement) during 2012 we experienced a decrease in 2013.

 

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The following table presents the geographic distribution of our revenues:

 

    Years ended December 31,
(% of revenues)
 
    2011     2012     2013  
The Americas     50.0       53.8       63.9  
Asia Pacific and Africa     6.5       5.1       6.2  
Europe     35.3       26.0       20.3  
Israel     8.2       15.1       9.6  
Total     100.0 %     100.0 %     100.0 %

 

Our sales in the Americas as a percentage of revenues increased from 50.0% in 2011 to 53.8% in 2012 and further increased to 63.9% in 2013, mainly due to our focus on solutions and sales in this region that materialized in new wins we have had in the United States and also due to the reduction in sales in Europe, where the general economy was depressed during this period. Our sales in Europe as a percentage of revenues decreased from 35.3% in 2011 to 26.0% in 2012 and further decreased to 20.3% in 2013, mainly due to loss of service bureau customers that were clients of our U.K. subsidiary and loss of maintenance agreements which were not renewed in 2012. Our sales in Israel as a percentage of revenues increased from 8.2% in 2011 to 15.1% in 2012 mainly due to our second win of a billing project for an MVNO in Israel and decreased to 9.6% in 2013 since this billing project was in its final stages in 2013, which resulted in reduced revenues from the project.

 

Cost of Revenues

 

    Years ended December 31,
($ in millions)
    % Change  
    2011     2012     2013     2012 vs. 2011     2013 vs. 2012  
Cost of sales of licenses     0.4       0.9       0.4       125.0       (55.6 )
Cost of services     6.1       7.0       7.5       14.8       7.1  
                                         
Total cost of revenues     6.5       7.9       7.9       21.5       -  

 

The increase in total cost of revenues in 2012 by $1.4 million compared with 2011 was mainly due to an increase in purchases of equipment and licenses for implementations recognized in 2012 by $1.0 million and increases in labor related costs and travel expenses. The total cost of revenues in 2013 remained the same compared with 2012 due to an increase in cost of services by $0.5 million, mainly due to an increase in labor related costs, offset by the decrease in cost of licenses by $0.5 million that occurred due to the decrease in revenue from licenses.

 

Gross profit as a percentage of revenues decreased from 65.8% in 2011 to 61.1% in 2012 and further decreased to 57.4% in 2013. The decrease in 2012 compared to 2011 was mainly due to termination of maintenance agreements that were supported with relatively low cost of revenues and to some lower margin deals that we implemented mainly in 2012. The decrease in 2013 compared to 2012 was mainly due to the above-mentioned increase in labor related costs and the decrease in sales of licenses. We expect gross margins to decrease even further as we perform significantly more professional services for our existing customer base.

 

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Operating Expenses

 

    Years ended December 31,
($ in millions)
    % Change  
    2011     2012     2013     2012 vs. 2011     2013 vs. 2012  
Research and development     4.7       4.7       5.0       -       6.4  
Selling and marketing     2.0       1.5       1.7       (25.0 )     13.3  
General and administrative     1.8       1.8       1.7       -       (5.6 )
                                         
Total operating expenses     8.5       8.0       8.4       (5.9 )     5.0  

 

Research and Development . We have made substantial investment in research and development to maintain our advanced technology and add functionality to our products. Although there was no change in research and development expenses in 2012 compared to 2011, there was a further increase in the average salary in Romania, offset by the decrease in R&D headcount and the increase in customization services. The increase in our research and development expenses by 6.4% in 2013, compared to 2012, was primarily due to the increase in research and development related payroll expenses. The increase in payroll reflects the increase in the average salary, mainly in Romania, expansion in R&D personnel required to improve and expand our product offering, and the devaluation of the U.S. dollar in relation to the NIS and the Euro. We expect cost of employment to be significantly higher in the future, as the global need for software engineers constantly grows and more European companies adopt near-shore outsourcing. Research and development expenses as a percentage of revenues decreased from 24.7% in 2011 to 23.0% in 2012 as engineering efforts were allocated more to customizations for new and existing customers. Research and development expenses as a percentage of revenues increased from 23.0% in 2012 to 27.2% in 2013 as the result of the above-mentioned decrease in our revenues and the increase in the research and development-related payroll expenses.

 

Selling and Marketing Expenses . Selling and marketing expenses decreased from $2.0 million in 2011 to $1.5 million in 2012 mainly due to a decrease in the cost attributable to payroll and related expenses of our employees engaged in selling and marketing resulting from a decrease in the total number of employees engaged in selling and marketing and a decrease in commission expenses. Selling and marketing expenses increased from $1.5 million in 2012 to $1.7 million in 2013 mainly due to an increase in sales commission expenses. Selling and marketing expenses as a percentage of revenues decreased from 10.6% in 2011 to 7.5% in 2012 mainly due to timing of commission payments and related revenue recognition. Selling and marketing expenses as a percentage of revenues increased from 7.5% in 2012 to 9.2% in 2013 mainly due to an increase in sales commissions related to significant new contracts signed in 2013 which were not yet recognized as revenue.

 

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General and Administrative Expenses . General and administrative expenses remained almost the same in 2012 compared to 2011, and decreased from $1.8 million in 2012 to $1.7 million in 2013. This decrease reflects mainly the decrease in allowance for doubtful accounts.

 

Impairment of Goodwill and another Intangible Asset . No impairment of goodwill was required following the impairment test performed during the years 2011, 2012, and 2013.

 

Financial Income (Expenses) . In 2011, financial income consisted of interest income incurred mainly on short-term bank deposits and available for sale securities in the amount of approximately $311,000, offset by negative currency exchange rate fluctuations, bank charges and realized loss on sale of available for sale securities in the amount of approximately $140,000. In 2012, financial income consisted of interest income incurred mainly on short-term bank deposits and available for sale securities and positive currency exchange rate fluctuations in the amount of approximately $330,000, offset by bank charges and a realized loss on the sale of available for sale securities in the amount of approximately $32,000. In 2013, financial income consisted of interest income incurred mainly on short-term bank deposits, marketable and available for sale securities and positive currency exchange rate fluctuations in the amount of approximately $182,000, offset by bank charges in the amount of approximately $19,000.

 

Income Tax Expense (Benefit). Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. On a regular basis, we estimate our actual current tax exposures and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred taxes, which are included within our consolidated balance sheet. In 2011 we had an income tax benefit of $185,000 due to an increase of deferred income taxes of $277,000, offset by current taxes on income of $92,000. The deferred tax asset represents expenses that were already recognized for accounting purposes but will be recognized for tax purposes only in future years. In 2012 our income tax expenses in the amount of $392,000 included deferred tax expenses in the amount of $138,000. In 2013 our income tax expenses in the amount of $137,000 were comprised of current tax expenses in the amount of $187,000 and taxes in respect of previous years in the amount of $107,000, offset by an increase in deferred taxes in the amount of $157,000.

 

Critical Accounting Policies

 

To improve understanding of our financial statements, it is important to obtain some degree of familiarity with our critical or principal accounting policies. These policies are described in note 1 to the consolidated financial statements contained in Item 18. We review our accounting policies annually to ensure that the financial statements developed, in part, on the basis of these accounting policies provide complete, accurate and transparent information concerning the financial condition of our company. As part of this process, we reviewed the selection and application of our critical accounting policies and financial disclosures as of December 31, 2013, and we believe that the consolidated financial statements present fairly, in all material respects, the consolidated financial position of our company as of that date.

 

In preparing our financial statements in accordance with generally accepted accounting policies in the United States of America, our management must often make estimates and assumptions which may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures as of the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and consequently actual results may differ from those estimates. For any given individual estimate or assumption made by our management, there may be alternative estimates or assumptions which are also reasonable. However, we believe that given the facts and circumstances before our management at the time of making the relevant judgments, estimates or assumptions, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on the consolidated results of operations, financial position or liquidity for the periods presented in the consolidated financial statements.

 

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We are also subject to risks and uncertainties that may cause actual results to differ from estimates and assumptions, such as changes in the economic environment, competition, customer claims, foreign exchange, taxation and governmental programs. Certain of these risks, uncertainties and assumptions are discussed under the heading “Forward-Looking Statements” and in Item 3.D “Risk Factors”.

 

We consider our most significant accounting policies to be those discussed below:

 

Revenue Recognition . We apply the provisions of Statement of ASC 985-605, "Revenue Recognition" (formerly SOP No. 97-2) and ASC 605-35, "Construction-Type and Production-Type Contracts" (formerly SOP No. 81-1), as follows:

 

i) Sales of licenses : Revenue from sale of products is recognized when delivery has occurred, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collection is probable. If collection is not considered probable, revenue is recognized when the fee is collected. We generally do not grant a right of return on products sold to customers.

 

ii) Services : The services we provide consist of implementation, training, hardware installation, maintenance, support and project management. All services are priced on a fixed price basis and are recognized ratably over the period in which the services are provided except services which are recognized under the percentage-of-completion method as described below.

 

Products are mainly supplied with maintenance for a period of one year from delivery. When revenue on sale of the products is recognized, we defer a portion of the sales price and recognize it as maintenance revenue ratably over the above period. The portion of the sales price that is deferred is determined based on the fair value of the service as priced in transactions in which we render maintenance solely. Where vendor specific objective evidence for fair value cannot be determined, the entire sale is being recognized over the maintenance period. Where the services are considered essential to the functionality of the software products, both the software product revenue and the revenue related to the integration and implementation services are recognized under the percentage-of-completion method in accordance with ASC 605-35. We generally determine the percentage-of-completion by comparing the labor performed to date to the estimated total labor required to complete the project. When the estimate indicates that a loss will be incurred, such loss is recorded in the period identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yield materially different results.

 

iii) Managed Services : Revenues from managed services include a monthly fee for services and for right of use and are recorded as service revenues and license revenues, respectively. The monthly fee is based mainly on number of subscribers or customer’s business volume and the agreements include a minimum monthly charge. These revenues are recognized on a monthly basis. Where installation services are sold together with a managed services contract, the installation services are recognized over the entire contract term, commencing with the deployment finalization.

 

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Provision for Doubtful Accounts . The provision for doubtful accounts is for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the adequacy of this provision by taking into account variables such as past experience, age of the receivable balance, and current economic conditions that may affect a customer’s ability to pay. The use of different estimates or assumptions could produce different provision balances. If collection is not probable at the time the transaction is consummated, we do not recognize revenue until cash collection. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional provision for doubtful accounts may be required.

 

Impairment of Goodwill and Other Intangible Assets. We test our goodwill for impairment using a fair value approach at the reporting unit level, on an annual basis, or more frequently if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value.

 

The goodwill impairment test is a two-step test. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities.

 

In performing our impairment tests related to goodwill, we determine the fair value of our reporting units using the discounted cash flow approach. The discounted cash flow approach uses a reporting unit’s projections of estimated operating results and cash flows and applies a weighted-average cost of capital that reflects current market conditions. The evaluation of goodwill requires us to use significant judgments and estimates, including but not limited to projected future revenues and expenses, changes in operating margins, cash flows, and estimates of future capital expenditures. Our estimates may differ from actual results due to, among other things, economic conditions, changes to our business model, or changes in operating performance. Significant differences between these estimates and actual results could result in future impairment charges and could materially affect our future financial results.

 

We perform annual testing for impairment of the goodwill during the third quarter of each year. As of September 30, 2013 the fair value of the reporting unit Sentori exceeded its carrying value by approximately 99%.

 

Recently Issued Accounting Pronouncements

 

Recently issued accounting pronouncements are described in note 1 to the consolidated financial statements.

 

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Our Functional Currency

 

The currency of the primary economic environment in which we operate is the U.S. dollar. In 2013 the majority of our revenues were denominated in U.S. dollars. In addition, most of our marketing costs are incurred outside Israel, primarily in U.S. dollars. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Balances in non-dollar currencies are remeasured into U.S. dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items reflected in our income statements, the following exchange rates are used:

 

· for transactions, exchange rates at the transaction dates or average rates; and

 

· for other items (derived from non-monetary balance sheet items such as depreciation and amortization or similar items), historical exchange rates.

 

The resulting currency transaction gains or losses are reported as financial income or expenses as appropriate.

 

Impact of Foreign Currency Fluctuations on Results of Operations

 

The U.S. dollar cost of our operations may be significantly influenced by currency fluctuations.

 

The weakening of the U.S. dollar in global markets will have a negative effect on our profitability as we receive payment in U.S. dollars for most of our sales while we incur a significant portion of our expenses, principally salaries and related personnel expenses, in NIS and Euro.

 

A devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of any of our expenses or liabilities which are payable in NIS, unless these expenses or payables are linked to the U.S. dollar. This devaluation also has the effect of decreasing the U.S. dollar value of any asset, which consists of NIS or receivables payable in NIS, unless the receivables are linked to the U.S. dollar.

 

Any increase in the value of the NIS and/or Euro in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of our expenses. Because exchange rates between the NIS and Euro to the U.S. dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.

 

B. Liquidity and Capital Resources

 

Since our inception, we have financed our operations mainly through cash generated by operations. We supplemented this source by two private rounds of equity financing, the first in 1997 (with a follow-on in 1999) and the second in 2000 and our initial public offering in 2000, which raised total net proceeds in the amount of $44.3 million.

 

As of December 31, 2013, we had approximately $8.2 million in cash and cash equivalents, and our working capital was $14.8 million. In our opinion, our working capital is sufficient for our requirements for the foreseeable future.

 

The majority of our cash and cash equivalents and our deposits are nominated in U.S. dollars.

 

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Net Cash Provided by/Used in Operating Activities . Net cash provided by operating activities in 2011 was $4.4 million, attributable to our net income of $4.3 million, non-cash related items, net, in the amount of $0.4 million, and to a net increase in operating assets and liabilities items in the amount of $0.3 million. Net cash provided by operating activities in 2012 was $4.9 million, attributable to our net income of $4.3 million and non-cash related items, net, in the amount of $0.6 million. Net cash provided by operating activities in 2013 was $5.2 million, attributable to our net income of $2.2 million, non-cash related items, net, in the amount of $0.2 million, and a net increase in operating assets and liabilities items in the amount of $2.8 million.

 

The increase in net cash provided by operating activities of $0.6 million from 2011 to 2012 reflects mainly an increase in deferred income taxes, net of approximately $0.4 million (expenses of $138,000 in 2012 compared to income of $277,000 in 2011) and changes in several operating asset and liability items of $0.2 million. The increase in net cash provided by operating activities of $0.3 million from 2012 to 2013 reflects mainly a decrease in our net income of $2.1 million, an increase in deferred income taxes, net of approximately $0.3 million (income of $157,000 in 2013 compared to expenses of $138,000 in 2012) and a net increase in operating assets and liabilities items (mainly in deferred revenues) of $2.8 million.

 

Net Operating Working Capital

 

As of December 31, 2012, the net operating working capital was $17.2 million compared with $17.0 million as of December 31, 2011. The increase of $0.2 million is comprised of an increase in cash and cash equivalents and other short term investments in the amount of $0.3 million and decreases of $1.0 million in accounts receivables and $0.5 million in prepaid expenses, while accounts payables decreased by $0.7 million and deferred revenues decreased by $0.7 million. As of December 31, 2013, the net operating working capital was $14.8 million compared with $17.2 million as of December 31, 2012. The decrease of $2.4 million was mainly due to an increase in deferred revenues in the amount of approximately $2.5 million and an increase of approximately $0.5 million in total current assets, while accounts payables increased by approximately $0.4 million.

 

Cash Deposits

 

As of December 31, 2013, we had approximately $8.3 million in bank deposits with maturities of between three and twelve months.

 

Marketable Securities

 

As of December 31, 2013, we held marketable securities of approximately $2.8 million (consisting mainly of municipal bonds which are held for trading).

 

Net Cash Provided by/Used in Investing Activities . In 2011, we increased our investments in short-term bank deposits by $1.4 million and used $0.4 million for capital expenditures. In addition, in 2011, we purchased security bonds in the amount of $2.5 million and we received $1.4 million from selling a portion of them. In 2012, we increased our investments in short-term bank deposits by $1.3 million, we used $0.2 million for capital expenditures and we received $0.4 million from selling the short-term available for sale securities. In 2013, we increased our investments in short-term bank deposits by $2.6 million, invested in marketable securities in the amount of $2.8 million and used $0.2 million for capital expenditures.

 

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Net Cash Provided by/Used in Financing Activities . In 2011, our financing activities used $5.6 million due to a cash dividend of $6.0 million, offset by $0.4 million in proceeds from the exercise of employee stock options. In each of 2012 and 2013, our financing activities used $4.5 million due to a cash dividend of $4.5 million.

 

Capital Expenditures . In 2011, the aggregate cash amount of our capital expenditures was $0.4 million, in 2012 it was $0.2 million, and in 2013 it was $0.2 million. These expenditures were principally for the purchase of equipment, mainly for our engineering teams. Although we have no material commitments for capital expenditures, we anticipate an increase in capital expenditures if we decide to construct a building for our office in Romania or if we purchase or merge with companies or purchase assets in order to obtain complementary technology and to expand our product offerings, customer base and geographical presence.

 

Cash Dividends . Since 2003, we distributed aggregate cash dividends of approximately $3.09 per share to our shareholders including $0.32 per share in 2011, $0.24 per share in each of 2012 and 2013, and $0.24 per share so far in 2014. For information about our dividend policy, please see Item 8 “Financial Information - Dividend Policy.”

 

Share Repurchase . As of December 31, 2013, we have repurchased an aggregate amount of 3,165,092 ordinary shares, for a total consideration of approximately $2.8 million. As of August 1, 2012, we have the authority to use an additional $1.8 million for share repurchases.

 

C. Research and Development, Patents and Licenses, etc.

 

We believe that investment in research and development is essential for maintaining and expanding our technological expertise in the market for billing and customer care software and to our strategy of being a leading provider of new and innovative convergent billing products. Our customers provide significant feedback for product development and innovation.

 

We have invested significant time and resources to create a structured process for undertaking research and product development. We believe that the method that we use for our product development and testing is well suited for identifying market needs, addressing the activities required to release new products, and bringing development projects to market successfully. Our product development activities also include the release of new versions of our products. Although we expect to develop new products internally, we may, based upon timing and cost considerations, acquire or license technologies or products from third parties.

 

We invested in research and development $4.7 million or 24.7% of revenues in 2011, $4.6 million or 23.0% of revenues in 2012 and $5.0 million or 27% of revenues in 2013. We expect the cost of research and development percentage of revenue to slightly decrease in the long term.

 

Our engineering department comprised approximately 243 employees at the end of 2013.

 

D. Trend Information

 

Our billing and customer care solutions target tier 2 and tier 3 service providers. The trend that we believe is currently driving the market is eliminating niche solutions and replacing multiple platforms with one convergent real time billing solution. The need for comprehensive billing solutions is also driven by the market trend that requires service providers to introduce new services more rapidly, to be innovative in creating new product offers and to optimize business processes for maximum efficiency.

 

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In our experience, the active markets lately are in the U.S. rural mobile carriers that offer simple plans, mainly pay-as-you-go with either prepaid or pay-in-advance policies, the service providers worldwide that move towards IP networks and offer multiple services, and existing carriers that search for replacement of billing solutions as they diversify their offering and seek a convergent platform.

 

Another trend that we expect will have an impact on our business is the growing acceptance of Software as a Service (SaaS) model, as both carriers and enterprises are looking at different options of leveraging cloud solutions to fulfill their business needs.

 

Unified communications (UC) is an increasingly important investment for organizations looking to improve productivity and responsiveness while reducing their IT costs. The convergence of voice, video, and data communications around a shared IP-based infrastructure - allowing users to easily make a call, send a message, or join an audio or video conference - is bringing benefits to businesses of various sizes, industries and geography.

 

The new business models include Unified Communications as a Service (UCaaS) or Billing as a Service (BaaS) along the Managed Services model we support already.

 

Our goal is to develop marketing and sales relationships with the vendors of UCaaS under which our UC solutions (enterprise software) will be sold as part of these vendors’ offering. This requires us to develop new sales channels, and this process is time consuming and requires the investment of some resources to conclude the necessary agreements and to certify and train these new channel partners.

 

E. Off-balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

F. Tabular Disclosure of Contractual Obligations

 

    Payment due by period  
Contractual Obligations   Total     Less than 1
year
    1-3 years     3-5 years     More than
5 years
 
Long-Term Debt Obligations     0       0       0       0       0  
Operating Lease Obligations   $ 815     $ 609     $ 206       0       0  
Purchase Obligations     0       0       0       0       0  
Total   $ 815     $ 609     $ 206       0       0  

 

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Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

The following table sets forth certain information regarding our directors and executive officers as of the date of filing of this Annual Report:

 

Name   Age   Position
Monica Iancu   56   President and Chief Executive Officer, Director
Aviram Cohen   37   Chief Financial Officer
Doron Segal   49   Vice President – Engineering and Chief Technology Officer
Tal Shain   46   Vice President – Professional Services
Shoval Cohen Nissan   39   IT Director
Gilad Parness   45   VP Enterprise Solutions
Liviu Serea   59   General Manager, MIND Romania
Danny Engle   45   Vice President – Sales for North America
Mihail Rotenberg   62   Chairman of the Board
Menahem Shalgi   64   Director
Rimon Ben – Shaoul    69    Director

 

On March 31, 2014, Mr. Amnon Neubach, who served as one of our external directors since 2001, resigned from our board of directors following his appointment as Chairman of the Board of the Tel Aviv Stock Exchange.

 

The background of each of our directors and executive officers is as follows:

 

Monica Iancu. Mrs. Iancu founded MIND and has been President and Chief Executive Officer of our company since inception and, until April 6, 2012, also served as the Chairperson. Mrs. Iancu holds a B.Sc. degree in Computer Science and a Masters Degree in Telecommunications (with expertise in Voice and Data Integration over the Ethernet) from the Technion, Israel Institute of Technology.

 

Aviram Cohen. Mr. Cohen joined MIND as Controller in June 2006 and was promoted to Chief Financial Officer in 2010. Before joining us, he served as an auditor and accountant at Ernst & Young, (Haifa, Israel) from 2002. Mr. Cohen is a Certified Public Accountant and holds a B.A. degree in Accounting and Economics from Haifa University.

 

Doron Segal . Mr. Segal has served as our Chief Technology Officer since October 2004 and as our Vice President of Engineering since July 2007 . Prior thereto, he worked for eight years at Comverse, at which he held a number of positions including Assistant Vice President with responsibility for product requirement definition and product level design. Mr. Segal holds a M.Sc. degree in Computer Science from Bar Ilan University and a B.Sc. degree in Physics, Mathematics & Computer Science from the Hebrew University.

 

Tal Shain . Mr. Shain joined us in June 1999 and has served as our Vice President of Professional Services since February 2006. Prior thereto, Mr. Shain served as our R&D Manager in Romania and Chief Architect. Mr. Shain holds a B.Sc. degree in Computer Engineering from the Technion, Israel Institute of Technology.

 

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Shoval Cohen Nissan . Mr. Cohen Nissan joined MIND as IT Manager in December 1998. Mr. Cohen Nissan leads the planning and management of the supporting infrastructure company-wide and the implementation of network security at the corporate level. He also acts as Purchasing Manager for our internal needs and customer solutions. Mr. Cohen Nissan holds a Practical Engineering degree from Braude College.

 

Gilad Parness . Mr. Parness joined MIND in 2004 as a team leader in the MINDBill Support. He was promoted to Support Manager and later to Director Professional Services leading the Sentori support team in 2007, and in 2009 joined our Sales and Account Management. In February 2014 Mr. Parness was promoted to VP Enterprise Solutions and now leads both the engineering and the sales teams. Mr. Parness holds a Software Engineering degree from Tel Chai College.

 

Liviu Serea . Mr. Serea has served as General Manager of our Romania office since January 2001. Before joining MIND, for over five years Mr. Serea managed a local company involved in hardware assembly, distribution and support. Mr. Serea holds a M.Sc. Degree in Electronics and Telecommunications from the Politechnic Institute, Iasi, Romania.

 

Danny Engle . Mr. Engle is Vice President of North American Sales for MIND Software Inc. (formerly Sentori Inc.). Mr. Engle joined Sentori in 2003 as Director of Sales, and in 2005 was promoted to Sentori’s Vice President of North American Sales. Mr. Engle is responsible for Sales, Customer Account Management and Partner Relationship Management. Prior to joining Sentori, Mr. Engle was District Manager at Siebel Systems, a leading CRM solutions provider. Mr. Engle holds a B.S. degree in Business Administration from the University of Texas.

 

Mihail Rotenberg . Mr. Rotenberg has served as a director of our company since May 2008 and as our Chairman since May 2012. He is the founder of BreezeCOM Ltd., which merged to become Alvarion Ltd., a wireless broadband pioneer and the leading provider of WiMAX. Mr. Rotenberg served as the Chief Executive Officer of BreezeCOM from 1993 to 2000. From 2000 to 2005, Mr. Rotenberg served as President and CEO of Accessnet SA, a wireless internet service provider in Romania, which was sold in 2005 to Clearwire Inc. Mr. Rotenberg holds a Ph.D. degree from Polytechnic University, Bucharest, Romania .

 

Menahem Shalgi . Mr. Shalgi has served as an external director of our company since April 2005. Mr. Shalgi joined Amdocs in 1985 and served at Amdocs Ltd. (NYSE:DOX) as Vice President of Business Development and M&A from 1998 to 2003. Mr. Shalgi serves as an external director of Click Software Inc. since July 2010 and as the chairman of Afterdox Ltd., an investment house in Israel. In addition, Mr. Shalgi served as a director in Pilat Media PLC in the UK from 2006 until mid-2009. Mr. Shalgi holds a B.A. degree in Economics and Statistics from Tel-Aviv University and a M.Sc. degree in Computer Sciences from Weizmann Institute for Science.

 

Rimon Ben-Shaoul. Mr. Ben-Shaoul has served as an external director of our company since 2010 and from 2002 to 2008. Mr. Ben-Shaoul served as the CEO of Polar Communications Ltd. from 2004 to February 2013 and serves as the Chairman of T.A.T. Technologies Ltd. and of Grand Automotive Ltd. Mr. Ben-Shaoul has served as a director of NICE Systems Ltd. since 2001 and also serves as a director on the boards of several privately held companies. Mr. Ben-Shaoul holds an M.B.A. degree and a B.A. degree in Economics, both from Tel Aviv University .

 

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To the best of our knowledge, there are no family relationships between any of the directors or members of senior management named above. To the best of our knowledge, there is no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management .

 

B. Compensation of Directors and Executive Officers

 

The aggregate direct remuneration paid to all persons who served in the capacity of director or executive officer during 2013 was approximately $1.45 million, including approximately $90,000 that was set aside for pension and retirement benefits. This does not include amounts expensed by us for automobiles made available to our officers or expenses, including business, travel, professional and business association dues and expenses, reimbursed to officers, and do not include equity based compensation expenses.

 

During 2013, we did not grant to our executive officers any options to purchase our ordinary shares.

 

On May 15, 2011, our board of directors resolved that each of our external directors will be entitled to receive an annual fee of NIS 53,500 (approximately $15,000) and a participation fee of NIS 2,820 (approximately $800) per meeting. On September 27, 2011, the same payment to each non-executive director was approved by our shareholders, and in addition our shareholders approved that the remuneration of those external directors who will be classified by the board as expert external directors will be 20% more than the remuneration of the ordinary external directors.

 

On June 24, 2013, at our 2013 annual general meeting of shareholders, our shareholders approved a new compensation policy for directors and officers.

 

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C. Board Practices

 

Board of Directors

 

Our board is divided into three classes of directors, denominated Class I, Class II and Class III. The term of Class I will expire in 2016, Class II in 2014 and Class III in 2015. Monica Iancu is a member of Class I, Mihail Rotenberg is a member of Class II and currently there is no director who is a member of Class III. At each annual general meeting of shareholders, directors will be elected by a simple majority of the votes cast for a three-year term to succeed the directors whose terms then expire. There is no legal limit on the number of terms that may be served by directors who are not external directors. Our external directors are not members of any class.

 

The initial term of an external director is three years and may be extended for up to two additional terms of three years. Thereafter, an external director may be reelected by our shareholders for additional periods of up to three years each in certain circumstances described below. Mr. Neubach was re-elected to a fifth term as an external director on June 24, 2013. Mr. Menahem Shalgi was re-elected to a third term as an external director on September 27, 2011. Mr. Rimon Ben-Shaoul was elected to a second term as an external director on June 24, 2013. Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting experience, as defined in the regulations, which our board of directors should have. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require one director with the requisite financial and accounting expertise.

 

External Directors

 

Under the Companies Law, companies incorporated under the laws of Israel whose shares are listed for trading on a stock exchange or have been offered to the public in or outside of Israel are required to appoint two external directors. External directors are required to possess professional qualifications or financial and accounting expertise as set out in regulations promulgated under the Companies Law. The Companies Law provides that a person may not be appointed as an external director (i) if the person or the person’s relative or affiliate has, as of the date of the person’s appointment to serve as an external director, or had, during the two years preceding that date, any affiliation with the company, a controlling shareholder thereof or their respective affiliates or (ii) in a company that does not have a 25% shareholder, if such person has an affiliation with any person who, at the time of appointment, is the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company.

 

The term affiliation includes:

 

· an employment relationship;

 

· a business or professional relationship;

 

· control; and

 

· service as an office holder.

 

The Companies Law defines the term “office holder” of a company to include a director, the chief executive officer, the chief business manager, a vice president and any officer that reports directly to the chief executive officer.

 

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No person can serve as an external director if the person's position or other business creates, or may create, conflict of interests with the person's responsibilities as an external director or may otherwise interfere with the person's ability to serve as an external director.

 

Until the lapse of two years from termination of office, a company or its controlling shareholder may not give any direct or indirect benefit to the former external director.

 

As mentioned above, the initial term of an external director is three years and may be extended for up to two additional terms of three years. Thereafter, an external director may be reelected by our shareholders for additional periods of up to three years each only if our audit committee and our board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period is beneficial to us.

 

External directors are to be elected by a majority vote at a shareholders' meeting, provided that either:

 

· at least a majority of the shares of non-controlling shareholders voted at the meeting vote in favor of the election; or

 

· the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed two percent of the aggregate voting rights in the company.

 

Reelection of an external director may be effected through one of the following mechanisms:

 

· the board of directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint external directors for their initial term; or

 

· a shareholder holding 1% or more of the voting rights proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than 2% of the voting rights in the company.

 

External directors may be removed from office only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. Each committee of a company's board of directors that exercises a power of the board of directors is required to include at least one external director, except for the audit committee and the compensation committee, each of which is required to include all the external directors.

 

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Audit Committee

 

Under the Companies Law, our board of directors is required to appoint an audit committee, comprised of at least three directors, including all of the external directors. The members of the audit committee must satisfy certain independence standards under the Companies Law, and the chairman of the audit committee is required to be an external director. Our audit committee consists of all our external directors.

 

Under the Companies Law, the roles of the audit committee include examining flaws in the management of the company’s business, in consultation with the internal auditor and the company's independent accountants, suggesting remedial measures, approving specified related party transactions and assessing the company's internal audit system and the performance of its internal auditor.

 

The approval of the audit committee is required to effect specified actions and transactions with office holders, controlling shareholders and entities in which they have a personal interest. An audit committee may not approve an action or a transaction with related parties or with its office holders unless at the time of approval at least two external directors are serving as members of the audit committee and at least one of who was present at the meeting in which any approval was granted.

 

Under the Nasdaq rules, our audit committee assists the board in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications and performance of our independent auditors. Our audit committee also has the authority and responsibility to oversee our independent auditors, to recommend for shareholder approval the appointment and, where appropriate, replacement of our independent auditors and to pre-approve audit engagement fees and all permitted non-audit services and fees. We have adopted an audit committee charter, which sets forth the qualifications, powers and responsibilities of our audit committee.

 

Our audit committee also serves as (i) our compensation committee, as described below, and (ii) our nominations committee, authorized to recommend all director nominees for the selection of the board of directors, provided that no such recommendation is required in cases, if any, where the right to nominate a director legally belongs to a third party. In its capacity as our compensation committee, the audit committee is authorized to, among other things, review, approve and recommend to our board of directors base salaries, incentive bonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other benefits, compensation or arrangements of our office holders.

 

Under the Companies Law, at least once every three years our compensation committee is required to propose for shareholder approval by a special majority, a policy governing the compensation of office holders based on specified criteria, to review, from time to time, modifications to the compensation policy and examine its implementation and to approve the actual compensation terms of office holders prior to approval thereof by the board of directors.

 

All the members of our audit committee are “independent directors” under the Nasdaq rules and meet the additional qualifications for membership on an audit committee and a compensation committee under applicable law.

 

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Internal Auditor

 

Under the 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, inter alia, whether the company's actions comply with the law and orderly business procedure. The internal auditor must satisfy certain independence standards. Doron Cohen C.P.A., of the accounting firm of Fahn – Kanne & Co. Grant Thornton Israel, serves as our internal auditor.

 

Fiduciary Duties of Office Holders

 

The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means to obtain:

 

· information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and

 

· all other important information pertaining to these actions.

 

The duty of loyalty of an office holder includes a duty to:

 

· refrain from any conflict of interest between the performance of his duties in the company and the performance of his other duties or his personal affairs;

 

· refrain from any activity that is competitive with the company;

 

· refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and

 

· disclose to the company any information or documents relating to a company's affairs which the office holder has received due to his position as an office holder.

 

Disclosure of Personal Interest of an Office Holder

 

The Companies Law requires that an office holder of a company disclose to the company any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. The disclosure is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first discussed. If the transaction is an extraordinary transaction, 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 these people; or

 

· any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he has the right to appoint at least one director or the general manager.

 

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Under Israeli law, an extraordinary transaction is 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.

 

Approval of Related Party Transactions

 

Once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest. A transaction that is adverse to the company's interest may not be approved.

 

If the transaction is an extraordinary transaction, approval of both the audit committee and the board of directors is required. Under specific circumstances, shareholder approval may also be required.

 

Office Holder Compensation

 

In general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must comply with the company's compensation policy. In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder generally must be approved separately by the compensation committee, the board of directors and the shareholders of the company, in that order. The compensation terms of other officers require the approval of the compensation committee and the board of directors.

 

Disclosure of Personal Interests of a Controlling Shareholder

 

Under the Companies Law, the disclosure requirements, which apply to an office holder, also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest (other than compensation matters, which are discussed above under "Office Holder Compensation"), require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. Except under specific circumstances, such a transaction need to be re-approved in accordance with the foregoing procedure once in every three years. The shareholder approval must be by a majority of the shares voted on the matter, provided that either:

 

· at least a majority of the shares of shareholders who have no personal interest in the transaction and who vote on the matter vote in favor thereof; or

 

· the shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than two percent of the voting rights in the company.

 

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Shareholders generally have the right to examine any document in the company's possession pertaining to any matter that requires shareholder approval. If this information is made public in Israel or elsewhere, we will file the information with the Securities and Exchange Commission in the United States.

 

For information concerning the direct and indirect personal interests of an office holder and principal shareholders in specified transactions with us, see Item 7.B “Related Party Transactions.”

 

Executive Officers

 

Our executive officers are appointed by our board of directors and serve at the discretion of our board of directors. We maintain written employment agreements with our executive officers. Each agreement terminates upon 30 days’ written notice and provides for standard terms and conditions of employment. All of our executive officers have agreed not to compete with us for 12 months (or 24 months in the case of Monica Iancu) following the termination of their employment with us. Monica Iancu is entitled to severance pay upon termination of her employment by either her or us (other than by us for cause) and to receive, during each month of the six-month period following termination of her employment by us, or by her for cause, an amount of salary and benefits equal to her former monthly salary and other benefits. Under recent Israeli case law, the non-competition undertakings of employees may not be enforceable.

 

D. Employees

 

The numbers and breakdowns of our employees as of the end of the past three years are set forth in the following table:

 

    As of December 31,  
    2011     2012     2013  
Approximate numbers of employees by geographic location                        
Israel     55       54       53  
Romania     256       279       296  
United States     6       5       3  
United Kingdom     2       1       -  
Total workforce     319       339       352  
Approximate numbers of employees by category of activity                        
General and administration     14       15       13  
Research and development     212       233       243  
Professional services and customer support     80       81       86  
Sales and marketing     13       10       10  
Total workforce     319       339       352  

 

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We are subject to Israeli labor laws and regulations with respect to our Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick days, length of the work day and work week, minimum wages, pay for overtime, insurance for work-related accidents, pension plans and severance payments upon the retirement or death of an employee or termination of employment under specified circumstances. The severance payments may be funded, in whole or in part, through Managers’ Insurance or a Pension Fund, as described below. The payments to the Managers’ Insurance fund or Pension Fund toward severance amount to 8.33% of base salaries. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Since January 1, 1995, these amounts also include payments for health insurance. The payments to the National Insurance Institute equal up to approximately 18.5% of base salaries, of which the employee contributes approximately two-thirds and the employer contributes approximately one-third. Our general practice in Israel is to contribute funds on behalf of all of our employees to Managers’ Insurance or a Pension Fund. Each employee who agrees to participate in the Managers’ Insurance plan contributes 5.0% of his or her base salary and we contribute 13.3% or 13.8% (and such contributions include contributions towards the severance component). Each employee who agrees to participate in the Pension Fund contributes 5.0% or 7.0% of his or her base salary and we contribute 13.3% or 15.8% (and such contributions include contributions towards the severance component). Another savings plan we offer some of our employees, although not legally required, is known as the Advanced Studies Fund. Each employee who agrees to participate in the Advanced Studies fund contributes up to 2.5% of base salary and we contribute up to 7.5%.

 

Furthermore, by order of the Israeli Ministry of Industry, Trade and Labor, all employers and employees are subject to provisions of collective bargaining agreements between the Histadrut, Federation of Labor, and the Coordination Bureau of Economic Organizations in Israel. These provisions principally concern cost of living increases, recreation pay, commuting expenses and other conditions of employment. We provide our employees with benefits and working conditions above the required minimums. Our employees are not represented by a labor union. To date, we have not experienced any work stoppages and our relationships with our employees are good.

 

E. Share Ownership

 

As of April 1, 2014, Monica Iancu beneficially owned 3,854,000, or 20.4%, of our ordinary shares. None of our other directors or members of senior management beneficially owns 1% or more of our ordinary shares.

 

We have established stock option plans to provide for the issuance of options to our directors, officers and employees. As these plans expired on December 31, 2010, a new share incentive plan was adopted by our shareholders at our 2011 annual general meeting (the “2011 Share Incentive Plan” Under the 2011 Share Incentive Plan, our ordinary shares and/or options to purchase our ordinary shares may be issued from time to time to our directors, officers, employees, consultants and contractors at exercise prices and on other terms and conditions as determined by our board of directors. Our board of directors determines the exercise price and the vesting period of options granted. Unless otherwise is determined by our Board, any award granted under the 2011 Share Incentive Plan will have a four-year vesting schedule, such that 50% of the award will vest on the second anniversary of the commencement date and 25% of the award will vest on each of the third and fourth anniversaries of the commencement date, and the exercise price will be equal to the average closing price per share of our ordinary shares on the stock market during the 30 trading day period immediately preceding the date of grant of such award. The total pool of shares reserved for the 2011 Share Incentive Plan permits the issuance of shares and/or options to acquire up to 1,800,000 ordinary shares.

 

As of April 1, 2014, options to purchase 417,000 ordinary shares were outstanding and options for 1,485,790 ordinary shares had been exercised. The options vest over three to five years, primarily commencing on the date of grant. Generally, options not previously exercised will expire approximately five to seven years after they are granted. Our board of directors elected the capital gains treatment afforded under Section 102 of the Israeli Income Tax Ordinance [New Version], 1961, or the Tax Ordinance, in respect of options and ordinary shares awarded to our Israeli employees under our option or share incentive plans after January 1, 2003. Accordingly, gains derived from options awarded to our Israeli employees after January 1, 2003, and held by a trustee for at least two years from the end of the tax year in which they were awarded (or in some cases for 30 months from the date of grant), will generally be taxed as capital gains at a rate of 25%, and we will generally not be entitled to recognize an expense for the award of such options. For grants of options made on or after January 1, 2006, the aforesaid minimum holding period by the trustee is two years from the date of grant of the options.

 

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On February 22, 2011, Monica Iancu adopted a Rule 10b5-1 Sales Plan in order to establish a systematic program by which Oppenheimer & Co. Inc. is instructed to sell on NASDAQ up to 2,800,000 ordinary shares held by her pursuant to the guidelines set forth therein.

 

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

 

The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of April 1, 2014, unless otherwise specified, by each person who is known to own beneficially more than 5% of the outstanding ordinary shares.

 

Name of
Beneficial Owners
  Total Shares
Beneficially Owned
   

Percentage of

Ordinary Shares (1)

 
Monica Iancu     3,854,000 (2)     20.4 %
Renaissance Technologies LLC     1,266,589 (3)     6.7 %

_________________________

(1) Based on 18,934,918 ordinary shares outstanding on April 1, 2014.
(2) Based on a Schedule 13G/A filed with the SEC on May 4, 2011.
(3) Based on a Schedule 13G/A filed with the SEC on February 13, 2014.

 

As of April 1, 2014, there were seven holders of record of our ordinary shares in the United States who collectively held less than 1% of our outstanding ordinary shares. In addition to this amount, there were also 15,007,546 shares held by the Depositary Trust Company in the United States. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees.

 

B. Related Party Transactions

 

None.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

 

Financial Statements

 

See Item 18.

 

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Export Sales

 

We conduct our sales activities primarily directly, by our sales force located in the MIND offices in the United States, the United Kingdom and Israel. For information regarding our revenues by geographic market, see Item 5 — “Operating and Financial Review and Prospects.”

 

Legal Proceedings

 

We are, or may be, from time to time named as a defendant in certain routine litigation incidental to our business. However, we are currently not a party to any legal proceedings which may have or have had in the recent past significant effects on our financial position or profitability.

 

Dividend Policy

 

Our dividend policy was adopted in 2003, and in October 2010 our board of directors updated this policy slightly. The original policy called for us to distribute a cash dividend once in each calendar year, in the amount of our net income from the previous year. This policy commenced in 2004 with respect to our net income for 2003. The new policy changes only the amount to be distributed, the new amount being equal to our EBITDA plus financial income (expenses) minus taxes on income. Each dividend under the policy is subject to board approval and the requirements of applicable law. Our board of directors plans to declare the annual dividend when it approves the applicable year-end financial statements.

 

B. Significant Changes

 

Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2013.

 

Item 9. The Offer and Listing

 

A. Offer and Listing Details

 

Our ordinary shares have been listed on the Nasdaq Global Market under the symbol MNDO since August 8, 2000. They were also listed on the Tel Aviv Stock Exchange, under the symbol MIND, from July 11, 2002 until February 7, 2010, when they were delisted at our request.

 

The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares as reported on the Nasdaq Global Market. The table contains actual prices in U.S. dollars, without adjustment for dividends paid on our ordinary shares.

 

Period   High     Low  
Last six months:            
March 2014     2.32       1.90  
February 2014     2.19       2.05  
January 2014     2.18       2.01  
December 2013     2.03       1.85  
November 2013     2.09       1.68  
October 2013     1.71       1.65  

 

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Last nine quarters:                
Q1 2014     2.32       1.90  
Q4 2013     2.09       1.65  
Q3 2013     1.85       1.65  
Q2 2013     2.00       1.72  
Q1 2013     2.26       1.86  
Q4 2012     2.13       1.89  
Q3 2012     1.94       1.65  
Q2 2012     1.92       1.64  
Q1 2012     2.76       1.80  

 

Last five years:                
2013     2.26       1.65  
2012     2.76       1.64  
2011     3.50       1.66  
2010     2.60       0.95  
2009     1.74       0.59  

 

B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

Our ordinary shares are quoted on the Nasdaq Global Market under the symbol MNDO.

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

Item 10. Additional Information

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Associations

 

Objects and Purposes

 

We were first registered under Israeli law on April 6, 1995 as a private company, and on August 8, 2000 became a public company. Our registration number with the Israeli registrar of companies is 51-213448-7. The full details of our objects and purposes can be found in Section 2 of our Memorandum of Association filed with the Israeli registrar of companies. Among the objects and purposes stipulated are the following: “to engage in any kind of commercial and/or productive business and to engage in any action or endeavor which the company’s managers consider to be beneficial to the company.”

 

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Transfer of Shares and Notices

 

Fully paid ordinary shares are issued in registered form and may be freely transferred pursuant to our articles of association unless such transfer is restricted or prohibited by another instrument. Unless otherwise prescribed by law, we will provide at least 21 calendar days' prior notice of any general shareholders meeting.

 

Election of Directors

 

The ordinary shares do not have cumulative voting rights in the election of directors. Thus, the holders of ordinary shares conferring more than 50% of the voting power have the power to elect all the directors, to the exclusion of the remaining shareholders. Our board is divided into three classes of directors serving staggered three-year terms, in addition to our external directors, who are not members of any class.

 

Dividend and Liquidation Rights

 

Dividends on our ordinary shares may be paid only out of profits and other surplus, as defined in the Companies Law, as of our most recent financial statements or as accrued over a period of two years, whichever is higher, unless otherwise approved by a court order. Our board of directors is authorized to declare dividends, provided that there is no reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. Dividend or liquidation right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.

 

Voting, Shareholders' Meetings and Resolutions

 

Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders.

 

These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.

 

We have two types of general shareholders meetings: the annual general meetings and extraordinary general meetings. These meetings may be held either in Israel or in any other place the board of directors determines. An annual general meeting must be held in each calendar year, but not more than 15 months after the last annual general meeting. Our board of directors may convene an extraordinary meeting, from time to time, at its discretion and is required to do so upon the request of shareholders holding at least 5% of our ordinary shares.

 

The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules. Nasdaq generally requires a quorum of 33-1/3%, but we have an exemption from that requirement and instead follow the generally accepted business practice for companies in Israel. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the Chairman may designate with the consent of the shareholders voting on the matter adjourned. At such reconvened meeting, the required quorum consists of any two members present in person or by proxy, unless otherwise required by applicable rules.

 

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Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter. However, our articles of association require approval of 75% of the shares present and voting to remove directors or change the structure of our staggered board of directors.

 

We file annual reports on Form 20-F electronically with the SEC and post a copy on our website.

 

Duties of Shareholders

 

Under the Companies Law, each and every shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations towards the company and other shareholders and to refrain from abusing his power in the company, such as in voting in the general meeting of shareholders on the following matters:

 

· any amendment to the articles of association;

 

· an increase of the company's authorized share capital;

 

· a merger; or

 

· approval of certain actions and transactions which require shareholder approval.

 

In addition, each and every shareholder has the general duty to refrain from depriving rights of other shareholders. Furthermore, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder in the company or any other power toward the company is under a duty to act in fairness towards the company. The Companies Law does not describe the substance of this duty of fairness. These various shareholder duties, which typically do not apply to shareholders of U.S. companies, may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests.

 

Restrictions on Non-Israeli Residents

 

The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.

 

Mergers and Acquisitions under Israeli Law

 

The Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares, voting on the proposed merger at a shareholders’ meeting. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares held by parties other than the other party to the merger, or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that a proposal of the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.

 

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The Companies Law also provides that an acquisition of shares of public company must be made by means of tender offer if as a result of the acquisition the purchaser would become a 25% or more shareholder of the company and there is no 25% or more shareholder in the company. In addition, an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or more shareholder of the company and there is no 45% or more shareholder in the company. These requirements do not apply if the acquisition (i) is made in a private placement that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company. The tender offer must be extended to all shareholders, but the offer or is not required to purchase more than 5% of the company's outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offer and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.

 

If as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s outstanding shares, the Companies Law requires that the acquisition be made by means of a tender offer for all of the outstanding shares. If as a result of a full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer, although the acquirer may stipulate that any tendering shareholders forfeit their appraisal rights. If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares.

 

Finally, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law subjects a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such stock-for-stock swap.

 

Modification of Class Rights

 

Our articles of association provide that the rights attached to any class (unless otherwise provided by the terms of such class), such as voting, rights to dividends and the like, may be varied by a shareholders resolution, subject to the approval of the holders of a majority of the issued shares of that class.

 

Board of Directors

 

According to the Companies Law and our articles of association, the oversight of the management of our business is vested in our board of directors. The board of directors may exercise all such powers and may take all such actions that are not specifically granted to our shareholders. As part of its powers, our board of directors may cause the company to borrow or secure payment of any sum or sums of money, at such times and upon such terms and conditions as it thinks fit, including the grants of security interests on all or any part of the property of the company.

 

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A resolution proposed at any meeting of the board of directors shall be deemed adopted if approved by a majority of the directors present and voting on the matter. For additional information, please see Item 6.C “Board Practices”.

 

Exculpation of Office Holders

 

Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions) provided the articles of association of the company allow it to do so. Our articles allow us to exempt our office holders to the fullest extent permitted by law.

 

Insurance of Office Holders

 

Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders, with respect to an act performed in the capacity of an office holder for:

 

· a breach of his duty of care to us or to another person;

 

· a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or

 

· a financial liability imposed upon him in favor of another person.

 

Indemnification of Office Holders

 

Our articles of association provide that we may indemnify an office holder against the following obligations and expenses imposed on or incurred by the office holder with respect to an act performed in the capacity of an office holder:

 

· a financial obligation imposed on him in favor of another person by a court judgment, including a settlement or an arbitrator’s award approved by the court; such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that our undertaking to indemnify is limited to events that our board of directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or criterion that our board of directors determines to be reasonable under the circumstances;

 

· reasonable litigation expenses, including attorneys’ fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent or in connection with a financial sanction;

 

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· reasonable litigation expenses, including attorneys' fees, expended by the office holder or charged to him by a court in connection with: (A) proceedings we institute against him or instituted on our behalf or by another person; or (B) a criminal charge from which he was acquitted; or (C) a criminal proceeding in which he was convicted of an offense that does not require proof of criminal intent; and

 

· a financial obligation imposed upon an office holder and reasonable litigation expenses, including attorney fees, expended by the office holder as a result of an administrative proceeding instituted against him. Without derogating from the generality of the foregoing, such obligation or expense will include a payment which the office holder is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 1968 – 5728 (the "Securities Law") and expenses that the office holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law, including reasonable legal expenses, which term includes attorney fees.

 

Limitations on Exculpation, Insurance and Indemnification

 

The Companies Law provides that a company may not exculpate 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 duty of loyalty unless, with respect to indemnification or 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 duty of care if the breach was done intentionally or recklessly;

 

· any act or omission done with the intent to derive an illegal personal benefit; or

 

· any fine levied against the office holder.

 

In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, if the beneficiary is a director, by our shareholders.

 

We have agreed to exempt from liability and indemnify our office holders to the fullest extent permitted under the Companies Law. We have obtained directors and officers liability insurance for the benefit of our office holders.

 

C. Material Contracts

 

None.

 

D. Exchange Controls

 

There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect, pursuant to which currency controls can be imposed by administrative action at any time.

 

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E. Taxation

 

Israeli Tax Considerations

 

The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us. Note that this tax structure and any resulting benefit may not apply for any income derived by our foreign subsidiaries, which subsidiaries may be taxed according to tax laws applicable to their country of residence. The following also contains a discussion of the material Israeli tax consequences to persons purchasing our ordinary shares. To the extent that the discussion is based on tax legislation, which has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities or courts will accept the views expressed in the discussion in question.

 

Prospective purchasers of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.

 

General Corporate Tax Structure

 

The general rate of corporate tax in Israel to which Israeli companies are subject is 25% for the 2013 tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2012, the Corporate Tax rate is scheduled to remain at a rate of 25% for future tax years. The general rate of capital gains tax in Israel to which Israeli companies are subject is the corporate tax rate. However, the effective tax rate payable by a company which derives income from a “Preferred Enterprise” (as defined below) may be considerably less, as further discussed below.

 

Law for the Encouragement of Capital Investments, 1959

 

General

 

The Law for Encouragement of Capital Investments, 1959, or the Investments Law, as in effect until 2005, provided that upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel, a proposed capital investment in eligible facilities may be designated as an “Approved Enterprise”. Please see discussion below regarding a reform of the Investments Law that came into effect in 2011.

 

Our Approved and Preferred Enterprises

 

Most of our manufacturing facilities in Yoqneam have been granted the status of Approved Enterprise. The period of tax benefits of the first approved enterprise, which commenced operations in 1995, expired at the end of 2004. The period of tax benefits in respect of the second approved enterprise entitled to the said benefits commenced in 2000 and expired at the end of 2009.

 

During 2011 we decided to implement the new legislation amending the Investment Law, while waiving future benefits provided from the Approved Enterprise program under the Investment Law (see more details hereinafter). The introduction of our Preferred Enterprise program from 2012 lowered our effective tax rate for year 2012 and the withholding tax rate on the dividend distributed in April 2013. The effects on any future tax rates are unpredictable.

 

Further information with regard to our Approved and Preferred Enterprise programs can be found in Item 3, “Risk Factors” under the caption “We currently benefit from local tax benefits that may be discontinued or reduced” and in Note 8 of our Consolidated Financial Statements under the caption “Taxes on Income.”

 

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Dividends Taxation

 

When dividends are distributed from the Preferred Enterprise, they are generally considered to be attributable to the entire enterprise and their effective tax rate is a result of a weighted combination of the applicable tax rates. Further information with regard to taxation of dividends can be found in Note 8 of our Consolidated Financial Statements under the caption “Taxes on Income.”

 

We paid dividends to our shareholders in the amounts of $4.5 million, $4.5 million and $6.0 million during 2013, 2012, and 2011, respectively. Since at the time of 2011 distributions we had insufficient statutory retained earnings, the distribution was done by way of reduction of additional paid-in capital, after due approval by an Israeli court order, in accordance to the Israeli Companies Law. In April 2014 we distributed to our shareholders approximately $4.5 million and tax was withheld at a rate of 25%.

 

Reform of the Investments Law - 2011

 

On December 29, 2010, the Israeli parliament approved an amendment to the Investments Law, effective as of January 1, 2011, which constitutes a reform of the incentives regime under such law. This amendment revises the objectives of the Investments Law to focus on achieving enhanced growth in the business sector, improving the Israeli industry’s competitiveness in international markets and creating employment and development opportunities in remote areas of Israel. The amendment allows enterprises meeting certain required criteria to enjoy grants as well as tax benefits. The amendment also introduces certain changes to the map of geographic development areas for purposes of the Investments Law, which will take effect in future years.

 

The amendment generally abolishes the previous tax benefit routes that were afforded under the Investments Law, specifically the tax-exemption periods previously allowed, and introduces new tax benefits for industrial enterprises meeting the criteria of the law, which include the following:

 

· A reduced corporate tax rate for industrial enterprises, provided that more than 25% of their annual income is derived from export, which will apply to the enterprise’s entire preferred income so that in the tax years 2011-2012 the reduced tax rate was 10% for preferred income derived from industrial facilities located in development area A and 15% for those located elsewhere in Israel, in the tax year 2013 the reduced tax rate was 7% for development area A and 12.5% for the rest of Israel, and in the tax year 2014 and onwards the reduced tax rate will be 9% for development area A and 16% for the rest of Israel.

 

· The reduced tax rates will no longer be contingent upon making a minimum qualifying investment in productive assets.

 

· A definition of “preferred income” was introduced into the Investments Law to include certain types of income that are generated by the Israeli production activity of a Preferred Enterprise.

 

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· A reduced dividend withholding tax rate of 15% will apply to dividends paid from preferred income to both Israeli and non-Israeli investors, with an exemption from such withholding tax applying to dividends paid to an Israeli company. Under a later amendment of the Investments Law, the dividend withholding tax rate of 15% was increased to 20% for dividends paid from preferred income that accrued from the tax year 2014 and onwards.

 

· A special tax benefits route will be granted to certain industrial enterprises entitling them to a reduced tax rate of 5% for preferred income derived from industrial facilities located in development area A and 8% for those located elsewhere in Israel, provided certain threshold requirements are met and such enterprise can demonstrate its significant contribution to Israel’s economy and promotion of national market objectives.

 

The amendment will generally apply to preferred income produced or generated by a Preferred Company (as defined in the Investments Law) commencing from January 1, 2011. The amendment contains various transition provisions which allow, under certain circumstances, to apply the new regime to investment programs previously approved or elected under the Investments Law in its previous form. Although this recent amendment took effect on January 1, 2011, the transitional provisions of its adoption also allow the company to defer its adoption to future years.

 

Following our 2011 request to the Israeli tax authorities for applying the new benefits under the 2011 Amendment, we applied in 2013 for a tax ruling with respect to 2012 and future years. At the beginning of 2014, we obtained the ruling, which provides that the portion of our income attributed to the Preferred Enterprise (and thereby subject to lower tax rates) will be calculated each year based on, among other things, the ratio between the number of our employees in Israel and abroad. According to the ruling, our tax rate on income in Israel in 2013 was approximately 20%.

 

Law for the Encouragement of Industry (Taxes), 1969

 

Under the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, a company qualifies as an “Industrial Company” if it is resident in Israel and at least 90% of its income in a given tax year, determined in NIS, exclusive of income from capital gains, interest and dividends, is derived from Industrial Enterprises owned by that company. An “Industrial Enterprise” is defined as an enterprise whose major activity in a particular tax year is industrial production activity.

 

Industrial Companies qualify (based on tax regulations) for accelerated depreciation rates for machinery, equipment and buildings used by an Industrial Enterprise. An Industrial Company owning an Approved Enterprise, as described above, may choose between the above depreciation rates and the depreciation rates available to Approved Enterprises.

 

Pursuant to the Industry Encouragement Law, an Industrial Company is also entitled to amortize the purchase price of know-how and patents over a period of eight years beginning with the year in which such rights were first used.

 

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In addition, an Industrial Company is entitled to deduct over a three-year period expenses involved with the issuance and listing of shares on a stock exchange and has the right, under certain conditions, to elect to file a consolidated tax return with related Israeli Industrial Companies that satisfy conditions set forth in the law.

 

Eligibility for the benefits under the law is not subject to receipt of prior approval from any governmental authority. We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. However, the definition may be amended from time to time and the Israeli tax authorities, which reassess our qualifications annually, may determine that we no longer qualify as an Industrial Company. As a result of either of the foregoing, the benefits described above might not be available in the future.

 

Israeli Transfer Pricing Regulations

 

On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “Transfer Pricing Regulations”). Section 85A of the Tax Ordinance and the Transfer Pricing Regulations generally require that all cross-border transactions carried out between related parties will be conducted on an arm’s length principle basis and will be taxed accordingly.

 

Capital Gains Tax on the Sale of our Ordinary Shares

 

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 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 equal to the increase in the purchase price of the relevant asset 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

 

Generally, as of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale, i.e. , such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate will be 30%. However, the foregoing tax rates will not apply to individuals: (i) who are dealers in securities; or (ii) who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement). Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of listed shares.

 

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 taxpayer may elect the actual adjusted cost of the shares as the tax basis provided he can provide sufficient proof of such adjusted cost.

 

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As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the CPI each year (NIS 811,560 in the 2014 tax year)), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their taxable income for such tax year which is in excess of NIS 800,000. For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions.

 

Non-Residents of Israel

 

Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a recognized stock market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

 

In some instances where our shareholders may be 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.

 

Pursuant to the Convention between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended (the “U.S.- Israel Tax Treaty”), the sale, exchange or disposition of our ordinary shares by a person who qualifies as a resident of the United States and is entitled to claim the benefits afforded to a resident, or a Treaty U.S. Resident, will not be subject to Israeli capital gains tax unless (i) that Treaty U.S. Resident held, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition or (ii) the capital gains from such sale can be allocated to a permanent establishment in Israel. A sale, exchange or disposition of our ordinary shares by a Treaty U.S. Resident who held, directly or indirectly, shares representing 10% or more of our voting power at any time during the 12-month period preceding the sale, exchange or disposition will be subject to Israeli capital gains tax, to the extent applicable. However, under the U.S.-Israel Tax Treaty, this Treaty U.S. Resident would be permitted to claim a credit for such taxes against U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to state or local taxes.

 

A non-resident of Israel who receives dividend income or that realizes capital gains derived from the sale of our ordinary shares, from which tax was withheld at the source, is generally exempted from the duty to file tax returns in Israel with respect to such income, provided such income was not derived from a business conducted in Israel by the taxpayer and the taxpayer has no other taxable sources of income in Israel.

 

Dividend Taxation

 

Income Taxes on Dividends Distributed by the Company to Israeli Residents

 

As of January 1, 2012, the distribution of dividend income to Israeli residents will generally be subject to income tax at a rate of 25% for individuals and will be exempt from income tax for corporations. The portion of dividends paid out of profits earned under a Preferred Enterprise tax status of the Company to individuals is subject to withholding tax at the rate of 15% (20% for income accrued in the 2014 tax year and onwards).

 

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In addition, if an Individual Israeli shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such distribution, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate on the dividend (not sourced from Preferred Enterprise income) will be 30%.

 

For information with respect to the applicability of High Income Tax on distribution of dividends, see "Capital Gains Tax on Sales of Our Ordinary Shares - Taxation of Israeli Residents".

Income Taxes on Dividends Distributed by the Company to Non-Israeli Residents

 

Subject to the provisions of applicable tax treaties, dividend distributions from regular profits (non-Preferred Enterprise) by the Company to a non-resident shareholder are generally subject to withholding tax of 25%-30% as of January 1, 2012. The portion of dividends paid out of profits earned under a Preferred Enterprise tax status of the Company is subject to withholding tax at the rate of 15% (20% for income accrued in the 2014 tax year and onwards).

 

Generally, under the U.S-Israel Tax Treaty the maximum rate of withholding tax on dividends paid to a shareholder who is a resident of the United States (as defined in the U.S. – Israel Tax Treaty) will be 25%. However, when a U.S. tax resident corporation is the recipient of the dividend, the withholding tax rate on a dividend out of regular (non-Approved Enterprise) profits may be reduced to 12.5% under the U.S-Israel Tax Treaty, where the following conditions are met:

 

(a) the recipient corporation owns at least 10% of the outstanding voting rights of the Company for all of the period preceding the dividend during the Company’s current and prior taxable year; and
(b) generally not more than 25% of the gross income of the paying corporation for its prior tax year consists of certain interest and dividend income.

 

Otherwise, the usual rates apply. Dividends paid to such U.S. corporation from income derived during any period for which the Israeli company is entitled to the reduced tax rate applicable to an Approved or Preferred Enterprise will be subject to a 15% tax rate.

 

U.S. Federal Income Taxation

 

Subject to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a "U.S. Holder" arising from the purchase, ownership and sale of the Ordinary Shares. For this purpose, a "U.S. Holder" is a holder of Ordinary Shares that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury Regulations) created or organized in or under the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is subject to U.S. federal income tax regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations; or (6) any person otherwise subject to U.S. federal income tax on a net income basis in respect of the Ordinary Shares, if such status as a U.S. Holder is not overridden pursuant to the provisions of an applicable tax treaty.

 

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This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase or hold our Ordinary Shares. This summary generally considers only U.S. Holders that will own our Ordinary Shares as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer's status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, administrative and judicial interpretations thereof, and the U.S./Israel Income Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. The Company will not seek a ruling from the U.S. Internal Revenue Service, or the IRS, with regard to the U.S. federal income tax treatment of an investment in our Ordinary Shares by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.

 

This discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to a particular shareholder based on such shareholder's particular circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local or foreign tax considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or "financial services entity"; (2) a broker or dealer in securities or foreign currency; (3) a person who acquired our Ordinary Shares in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our Ordinary Shares as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional currency other than the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, Ordinary Shares representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of persons who hold Ordinary Shares through a partnership or other pass-through entity are not considered.

 

You are encouraged to consult your own tax advisor with respect to the specific U.S. federal and state income tax consequences to you of purchasing, holding or disposing of our Ordinary Shares, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.

 

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Distributions on Ordinary Shares

 

Subject to the discussion under the heading "Passive Foreign Investment Companies" below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on Ordinary Shares (including the amount of any Israeli tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder's tax basis for the Ordinary Shares to the extent thereof, and then capital gain. Corporate holders generally will not be allowed a deduction for dividends received. For noncorporate U.S. Holders, to the extent that their total adjusted income does not exceed applicable thresholds, the maximum federal income tax rate for "qualified dividend income" and long-term capital gains is generally 15%. For those noncorporate U.S. Holders whose total adjusted income exceeds such income thresholds, the maximum federal income tax rate for "qualified dividend income" and long-term capital gains is generally 20%. For this purpose, "qualified dividend income" means, inter alia , dividends received from a "qualified foreign corporation." A "qualified foreign corporation" is a corporation that is entitled to the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax Treaty satisfies this requirement and we believe we are eligible for the benefits of that treaty.

 

In addition, our dividends will be qualified dividend income if our Ordinary Shares are readily tradable on NASDAQ or another established securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is paid or in the prior year, as a passive foreign investment company, or PFIC. A U.S. Holder will not be entitled to the preferential rate: (1) if the U.S. Holder has not held our Ordinary Shares or ADRs for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend date, or (2) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss on our Ordinary Shares are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as "investment income" pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.

 

The amount of a distribution with respect to our Ordinary Shares will be measured by the amount of the fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. (See discussion above under "Israeli Taxation Considerations - Taxation of Our Shareholders - Dividends.") Cash distributions paid by us in NIS will be included in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. Holder subsequently converts the NIS, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.

 

Distributions paid by us will generally be foreign source income for U.S. foreign tax credit purposes. Subject to the limitations set forth in the Code, U.S. Holders may elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld from distributions received in respect of the Ordinary Shares. In general, these rules limit the amount allowable as a foreign tax credit in any year to the amount of regular U.S. tax for the year attributable to foreign source taxable income. This limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. Holder whose creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if such individual's gross income for the taxable year from non-U.S. sources consists solely of certain passive income. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received with respect to the Ordinary Shares if such U.S. Holder has not held the Ordinary Shares for at least 16 days out of the 31-day period beginning on the date that is 15 days before the ex-dividend date or to the extent that such U.S. Holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any day during which a U.S. Holder has substantially diminished his or her risk of loss with respect to the Ordinary Shares will not count toward meeting the 16-day holding period. A U.S. Holder will also be denied a foreign tax credit if the U.S. Holder holds the Ordinary Shares in an arrangement in which the U.S. Holder's reasonably expected economic profit is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S. Holders should consult with their own tax advisors to determine whether, and to what extent, they are entitled to such credit. U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxes withheld, provided such U.S. Holders itemize their deductions.

 

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Disposition of Shares

 

Except as provided under the PFIC rules described below, upon the sale, exchange or other disposition of our Ordinary Shares, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder's tax basis in the sold Ordinary Shares and the amount realized on the disposition of such Ordinary Shares (or its U.S. dollar equivalent determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss realized on the sale or exchange or other disposition of Ordinary Shares will be long-term capital gain or loss if the U.S. Holder has a holding period of more than one year at the time of the disposition.

 

In general, gain realized by a U.S. Holder on a sale, exchange or other disposition of Ordinary Shares will generally be treated as U.S. source income for U.S. foreign tax credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other disposition of Ordinary Shares is generally allocated to U.S. source income. However, U.S. Treasury Regulations require such loss to be allocated to foreign source income to the extent specified dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange or other disposition of Ordinary Shares is subject to limitations.

 

Tax on Net Investment Income

 

U.S. Holders who are individuals, estates or trusts will generally be required to pay a new 3.8% tax on their net investment income (including dividends on and gains from the sale or other disposition of our Ordinary Shares), or in the case of estates and trusts on their net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only to the extent the U.S. Holder's total adjusted income exceeds applicable thresholds.

 

Passive Foreign Investment Companies

 

Special U.S. federal income tax laws apply to a U.S. Holder who owns shares of a corporation that was (at any time during the U.S. Holder's holding period) a PFIC. We would be treated as a PFIC for U.S. federal income tax purposes for any tax year if, in such tax year, either:

 

•              75% or more of our gross income (including our pro rata share of gross income for any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value), in a taxable year is passive (the "Income Test"); or

 

•             At least 50% of our assets, averaged over the year and generally determined based upon value (including our pro rata share of the assets of any company in which we are considered to own 25% or more of the shares by value), in a taxable year are held for the production of, or produce, passive income (the "Asset Test").  

 

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For this purpose, passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from notional principal contracts. Cash is treated as generating passive income.

 

If we are or become a PFIC, each U.S. Holder who has not elected to treat us as a qualified electing fund by making a "QEF election", or who has not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions by us and upon disposition of our Ordinary Shares at a gain, be liable to pay U.S. federal income tax at the then prevailing highest tax rates on ordinary income plus interest on such tax, as if the distribution or gain had been recognized ratably over the taxpayer's holding period for the Ordinary Shares. In addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. Holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent's death, but instead would be equal to the decedent's basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also be subject to special U.S. federal income tax rules.

 

The PFIC rules would not apply to a U.S. Holder who makes a QEF election for all taxable years that such U.S. Holder has held the Ordinary Shares while we are a PFIC, provided that we comply with specified reporting requirements. Instead, each U.S. Holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income such U.S. Holder's pro rata share of our ordinary earnings as ordinary income and such U.S. Holder's pro rata share of our net capital gains as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the IRS. U.S. Holders should consult with their own tax advisors regarding eligibility, manner and advisability of making a QEF election if we are treated as a PFIC.

 

A U.S. Holder of PFIC shares which are traded on qualifying public markets, including the NASDAQ, can elect to mark the shares to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and the U.S. Holder's adjusted tax basis in the PFIC shares. Losses are allowed only to the extent of net mark-to-market gain previously included income by the U.S. Holder under the election for prior taxable years.

 

In light of the complexity of PFIC rules, we cannot assure you that we have not been or are not a PFIC or will avoid becoming a PFIC in the future. U.S. Holders who hold Ordinary Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to specified exceptions for U.S. Holders who made a QEF or mark-to-market election. U.S. Holders are strongly urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to our Ordinary Shares in the event we that qualify as a PFIC.

 

Information Reporting and Withholding

 

A U.S. Holder may be subject to backup withholding (at a rate of 28%) with respect to cash dividends and proceeds from a disposition of Ordinary Shares. In general, back-up withholding will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will not apply with respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.

 

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Under the Hiring Incentives to Restore Employment Act of 2010 (the "HIRE Act"), some payments made to "foreign financial institutions" in respect of accounts of U.S. stockholders at such financial institutions may be subject to withholding at a rate of 30%. U.S. Treasury Regulations provide that such withholding will only apply to distributions paid on or after January 1, 2014, and to other "withholdable payments" (including payments of gross proceeds from a sale or other disposition of our Ordinary Shares) made on or after January 1, 2017. U.S. Holders should consult their tax advisors regarding the effect, if any, of the HIRE Act on their ownership and disposition of our Ordinary Shares. See "Non-U.S. Holders of Ordinary Shares."

 

Non-U.S. Holders of Ordinary Shares

 

Except as provided below, an individual, corporation, estate or trust that is not a U.S. Holder generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares.

 

A non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend paid on our Ordinary Shares or the proceeds from the disposition of our Ordinary Shares if: (1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States or, in the case of a non-U.S. Holder that is a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment or, in the case of gain realized by an individual non-U.S. Holder, a fixed place of business in the United States; (2) in the case of a disposition of our Ordinary Shares, the individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and other specified conditions are met; (3) the non-U.S. Holder is subject to U.S. federal income tax pursuant to the provisions of the U.S. tax law applicable to U.S. expatriates.

 

In general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our Ordinary Shares if payment is made through a paying agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides on an applicable Form W-8 (or a substantially similar form) a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. A U.S. related person for these purposes is a person with one or more current relationships with the United States.

 

The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such holder's U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.

 

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The HIRE Act may impose withholding taxes on some types of payments made to "foreign financial institutions" and some other non-U.S. entities. Under the HIRE Act, the failure to comply with additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to U.S. Holders that own Ordinary Shares through foreign accounts or foreign intermediaries and specified non-U.S. Holders. The HIRE Act imposes a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of, Ordinary Shares paid from the United States to a foreign financial institution or to a foreign nonfinancial entity, unless (1) the foreign financial institution undertakes specified diligence and reporting obligations or (2) the foreign nonfinancial entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. In addition, if the payee is a foreign financial institution, it generally must enter into an agreement with the U.S. Treasury that requires, among other things, that it undertake to identify accounts held by specified U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to other specified account holders. U.S. Treasury Regulations provide that such withholding will only apply to distributions paid on or after January 1, 2014, and to other "withholdable payments" (including payments of gross proceeds from a sale or other disposition of our Ordinary Shares) made on or after January 1, 2017. You should consult your tax advisor regarding the HIRE Act.

 

F. Dividends and paying agents

 

Not applicable.

 

G. Statement by Experts

 

Not applicable.

 

H. Documents on Display

 

We are subject to certain of the information reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act. As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act prescribing the content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and "short-swing" profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file 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 are required to file with the SEC, within four months after the end of each fiscal year, an annual report on Form 20-F containing financial statements audited by an independent accounting firm. We publish unaudited interim financial information after the end of each quarter. We furnish this quarterly financial information to the SEC under cover of a Form 6-K.

 

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission, or SEC. You may read and copy any document we file, including any exhibits, with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549.Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Certain of our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov , and on our website at http://www.mindcti.com .

 

You may request a copy of our SEC filings, at no cost, by e-mailing to investor@mindcti.com and upon said request copies will be sent by e-mail. A copy of each report submitted in accordance with applicable U.S. law is available for review at our principal executive offices.

 

I. Subsidiary Information

 

Not applicable.

 

Item 11. Quantitative and Qualitative Disclosures about Market Risk

 

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Market risk represents the risk of changes in the value of our financial instruments as a result of fluctuations in foreign currency exchange rates.

 

The following table sets forth our consolidated balance sheet exposure with respect to change in foreign currency exchange rates as of December 31, 2013.

 

Currency   Current
Monetary Assets
(Liabilities)-net
 
    ($ in thousands)  
NIS     148  
Euro     1,222  
Romanian Ron     (87 )
Other non-dollar currencies     2,435  
      3,718  

 

Our annual expenses paid in NIS are approximately $5.0 million. Accordingly, we estimate that a hypothetical increase of the value of the NIS against the U.S. dollar by 1% would result in an increase in our operating expenses by approximately $50,000 for the year ended December 31, 2013.

 

We are exposed to changes in prices of various securities in which we invest. As of December 31, 2013, we held short term investments (mainly highly-rated municipal bonds) of approximately $2.8 million, which are held for trading and presented in the balance sheet as marketable securities. These debt securities are exposed to potential loss in market value due to a decline in debt securities prices. The potential loss in fair value resulting from a 10% adverse change in debt securities prices would be approximately $0.3 million.

 

As of December 31, 2013, we did not hold any derivative financial instruments for either trading or non-trading purposes.

 

Item 12. Description of Securities Other Than Equity Securities

 

None.

 

PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

 

Not applicable.

 

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

 

None.

 

Item 15. Controls and Procedures

   

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Disclosure Controls and Procedures

 

We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2013. The evaluation was performed with the participation of our senior management and under the supervision and with the participation of our chief executive officer and chief financial officer. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2013.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management, including our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and our board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may decline.

 

Our management (with the participation of our chief executive officer and chief financial officer) conducted an evaluation, pursuant to Rule 13a-15(c) under the Securities Exchange Act, of the effectiveness, as of the end of the period covered by this Annual Report, of our internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, management assessed the effectiveness of our internal control over financial reporting as at December 31, 2013 and concluded that our internal control over financial reporting was effective as of December 31, 2013. 

 

Attestation Report of the Registered Public Accounting Firm

 

Not applicable.

 

Changes in Financial Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during 2013 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 16A. Audit Committee Financial Expert

 

Following the resignation on March 31, 2014 of  Mr. Amnon Neubach,  our “audit committee financial expert”, as defined by the SEC rules, our board of directors is expected to designate a new "audit committee financial expert" at its next meeting.

 

Item 16B. Code of Ethics

 

We have adopted a Code of Ethics that applies to all of our directors, officers and employees, including our principal executive and financial officers. The Code of Ethics is publicly available on our website at www.mindcti.com. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of this code to our chief executive officer, principal financial officer, principal accounting officer or controller, we will either disclose the nature of such amendment or waiver on our website or in our annual report on Form 20-F.

 

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Item 16C. Principal Accountant Fees and Services

 

In the annual meeting held on June 24, 2013, our shareholders re-appointed Brightman Almagor Zohar, certified public accountants in Israel and a member of Deloitte Touche Tohmatsu, as our independent auditor until the close of the following year’s annual general meeting. Brightman Almagor Zohar has served as our independent auditor since 2009.

 

Brightman Almagor Zohar billed the following fees to us for professional services in each of the last two fiscal years:

 

    Years ended December 31,  
    2012     2013  
Audit Fees   $ 77,530     $ 74,063  
Audit-Related Fees     0       0  
Tax Fees   $ 7,172     $ 15,853  
Total   $ 84,702     $ 89,916  

 

Our audit committee’s policy is to approve each audit and non-audit service to be performed by our independent accountant before the accountant is engaged.

 

Item 16D. Exemptions from the Listing Standards for Audit Committees

 

Not applicable.

 

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

Item 16F. Change in Registrant’s Certifying Accountant

 

Not applicable.

 

Item 16G. Corporate Governance

 

We follow the Companies Law, the relevant provisions of which are summarized in this annual report, rather than comply with the Nasdaq requirement relating to the quorum for shareholder meetings, as described in Item 10.B “Additional Information – Memorandum and Articles of Association – Voting, Shareholders' Meetings and Resolutions”, and rather than comply with the Nasdaq requirement relating to compensation committees our audit committee serves as our compensation committee in accordance with the Companies Law, as described in Item 6 "Directors, Senior Management and Employees - Board Practices". In addition, we are exempt from Nasdaq’s requirement to send an annual report to shareholders prior to our annual general meetings. Instead, we file annual reports on Form 20-F electronically with the SEC and post a copy on our website.

 

72
 

 

Item 16H. Mine Safety Disclosure

 

                Not Applicable.

 

PART III

 

Item 17. Financial Statements

 

Not applicable.

 

Item 18. Financial Statements

 

See pages F-1 through F-26 of this annual report attached hereto.

 

73
 

 

Item 19. Exhibits

 

The following exhibits are filed as part of this Annual Report:

 

Exhibit No.   Exhibit
1.1 *   Memorandum of Association, as amended
1.2 ***   Articles of Association, as amended
4.1 **   MIND 1998 Share Option Plan
4.2 **   MIND 2000 Share Option Plan
4.3 ***   MIND 2011 Share Incentive Plan
4.4   Compensation Policy of Directors and Officers, as adopted June 24, 2013
8   List of Subsidiaries
11 ***   Code of Ethics and Business Conduct
12.1   Certification of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act
12.2   Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act
13.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
13.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
15.1   Consent of Brightman Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu
101  

The following financial information from MIND C.T.I. Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language):

(i) Consolidated Balance Sheets at December 31, 2013 and 2012;

(ii) Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011;

(iii) Consolidated Comprehensive Income for the years ended December 31, 2013, 2012 and 2011;

(iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011;

(v) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and

(vi) Notes to Consolidated Financial Statements, tagged as blocks of text

 

 

 

 

* Incorporated by reference to MIND C.T.I. Ltd.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002.

 

74
 

 

** Incorporated by reference to MIND C.T.I. Ltd.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2003.

 

*** Incorporated by reference to MIND C.T.I. Ltd.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011.

 

75
 

 

SIGNATURES

 

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  MIND CTI LTD.
   
  /s/ Monica Iancu
   
  By: Monica Iancu
  Title: President & CEO
  Date: April 10, 2014

 

76
 

 

MIND C.T.I. LTD.

(An Israeli Corporation)

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR 2013

 

 
 

 

MIND C.T.I. LTD.

(An Israeli Corporation)

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR 2013

 

TABLE OF CONTENTS

 

  Page
   
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
   
   
CONSOLIDATED FINANCIAL STATEMENTS:  
Balance sheets F-3
Statements of operations F-4
Statements of comprehensive income F-5
Statements of changes in shareholders’ equity F-6
Statements of cash flows F-7
Notes to financial statements F-8-26
   

 

The amounts are stated in U.S. dollars ($) in thousands.

 

F- 1
 

   

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders of

MIND C.T.I .

 

We have audited the accompanying consolidated balance sheets of MIND C.T.I. ("the Company") and its subsidiaries as of December 31, 2013 and 2012 and the consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2013. 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 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 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 consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2013 and 2012 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

 

/s/ Brightman Almagor Zohar & Co.

Certified Public Accountants

A member of Deloitte Touche Tohmatsu

 

Tel Aviv, Israel April 10, 2014

 

 

F- 2
 

 

MIND C.T.I. LTD

CONSOLIDATED BALANCE SHEETS

 

          December 31,  
          2013     2012  
    Note     U.S. $ in thousands  
                   
ASSETS                        
                         
CURRENT ASSETS:                        
Cash and cash equivalents     9a   $ 8,212     $ 13,310  
Short term bank deposits             8,266       5,567  
Marketable securities     2a     2,836       -  
Accounts receivable, net     9b                
Trade             1,241       850  
Other             165       159  
Prepaid expenses             221       95  
Deferred cost of revenues             63       584  
Deferred taxes     8d     256       124  
Inventory             10       13  
Total current assets             21,270       20,702  
                         
INVESTMENTS AND OTHER NON CURRENT ASSETS:                        
Available for sale securities     2b     517       504  
Severance pay fund     5       1,673       1,399  
Deferred cost of revenues             44       -  
Deferred taxes     8d     40       15  
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization     3       650       681  
GOODWILL     4       5,430       5,430  
Total assets           $ 29,624     $ 28,731  
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY                        
                         
CURRENT LIABILITIES:                        
Accounts payable and accruals:                        
Trade           $ 525     $ 113  
Other     9c     1,153       1,151  
Deferred revenues             4,796       2,259  
Total current liabilities             6,474       3,523  
                         
LONG TERM LIABILITIES:                        
Deferred revenues             357       487  
Employees' rights upon retirement     5       1,804       1,615  
Total liabilities             8,635       5,625  
                         
SHAREHOLDERS’ EQUITY:     7                  
Share capital             54       54  
Additional paid-in capital             30,196       30,138  
Accumulated other comprehensive income             31       17  
Differences from translation of foreign currency financial statements
of a subsidiary
            (958 )     (1,043 )
Treasury shares             (2,287 )     (2,360 )
Accumulated deficit             (6,047 )     (3,700 )
Total shareholders’ equity             20,989       23,106  
                         
Total liabilities and shareholders’ equity           $ 29,624     $ 28,731  

 

The accompanying notes are an integral part of the financial statements.

 

F- 3
 

 

MIND C.T.I. LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

          Years ended December 31,  
          2013     2012     2011  
          U.S. dollars in thousands,  
    Note     except per share data  
                         
REVENUES:     10a                        
Sales of licenses           $ 4,613     $ 5,960     $ 5,154  
Services             13,867       14,249       13,759  
              18,480       20,209       18,913  
COST OF REVENUES                                
Cost of sales of licenses             421       853       398  
Cost of services             7,450       6,999       6,078  
              7,871       7,852       6,476  
                                 
GROSS PROFIT             10,609       12,357       12,437  
                                 
RESEARCH AND DEVELOPMENT EXPENSES     10b     5,030       4,643       4,673  
                                 
SELLING AND MARKETING EXPENSES     10c     1,694       1,524       1,995  
                                 
GENERAL AND ADMINISTRATIVE EXPENSES     10d     1,726       1,818       1,834  
                                 
OPERATING INCOME             2,159       4,372       3,935  
                                 
FINANCIAL INCOME  - net     10e     163       298       171  
                                 
INCOME BEFORE TAXES ON INCOME             2,322       4,670       4,106  
INCOME TAX EXPENSE (BENEFIT)     8e     137       392       (185 )
                                 
NET INCOME FOR THE YEAR           $ 2,185     $ 4,278     $ 4,291  
                                 
EARNINGS PER ORDINARY SHARE -     10f                        
Basic and diluted           $ 0.12     $ 0.23     $ 0.23  
                                 
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES                                
USED IN COMPUTATION OF EARNINGS                                
PER ORDINARY SHARE - IN THOUSANDS     10f                        
                                 
Basic             18,869       18,767       18,679  
                                 
Diluted             18,890       18,846       18,803  

 

The accompanying notes are an integral part of the financial statements.

 

F- 4
 

 

MIND C.T.I. LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

    Years ended December 31,  
    2 0 1 3     2 0 1 2     2 0 1 1  
    U.S. dollars in thousands  
                   
Comprehensive Income                        
Net Income   $ 2,185     $ 4,278     $ 4,291  
                         
Other Comprehensive Income (Loss)                        
Currency translation adjustments     85       106       (9 )
Unrealized gain (loss) from available-for-sale securities     14       87       (70 )
Total Other Comprehensive Income (Loss)     99       193       (79 )
                         
Total Comprehensive Income   $ 2,284     $ 4,471     $ 4,212  

 

F- 5
 

 

MIND C.T.I. LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

    Share capital           Accumulated                    
    Number           Additional     other                    
    Outstanding           paid-in     comprehensive     Accumulated     Treasury        
    of shares     Amount     capital     Income (loss)     deficit     shares     Total  
    In thousands     U.S. dollars in thousands  
                                           
BALANCE AS OF JANUARY 1, 2011     18,495     $ 54     $ 35,633     $ (1,140 )   $ (7,764 )   $ (2,800 )   $ 23,983  
CHANGES DURING 2011:                                                        
Comprehensive income (loss)     -       -       -       (79 )     4,291       -       4,212  
Dividend paid (Note 7c)     -       -       (5,968 )     -       -       -       (5,968 )
Stock- based compensation granted to a customer     -       -       332       -       -               332  
Employees share based compensation expenses     -       -       61       -       -       -       61  
Exercise of options from treasury stock issued to employees     235       -       -       -       -       399       148  
BALANCE AS OF DECEMBER 31, 2011     18,730       54       30,058       (1,219 )     (3,473 )     (2,401 )     23,019  
CHANGES DURING 2012:                                                        
Comprehensive income     -       -       -       193       4,278       -       4,471  
Dividend paid (Note 7c)     -       -       -       -       (4,505 )     -       (4,505 )
Employees share based compensation expenses     -       -       80       -       -       -       80  
Exercise of options from treasury stock issued to employees     51       -       -       -       -       41       41  
                                                         
BALANCE AS OF DECEMBER 31, 2012     18,781       54       30,138       (1,026 )     (3,700 )     (2,360 )     23,106  
CHANGES DURING 2013:                                                        
Comprehensive income     -       -       -       99       2,185       -       2,284  
Dividend paid (Note 7c)     -       -       -       -       (4,532 )     -       (4,532 )
Employees share based compensation expenses     -       -       58       -       -       -       58  
Exercise of options from treasury stock issued to employees     104       -       -       -       -       73       73  
                                                         
BALANCE AS OF DECEMBER 31, 2013     18,885     $ 54     $ 30,196     $ (927 )   $ (6,047 )   $ (2,287 )   $ 20,989  

 

The accompanying notes are an integral part of the financial statements.

 

F- 6
 

 

MIND C.T.I. LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Years ended December 31  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net income   $ 2,185     $ 4,278     $ 4,291  
Adjustments to reconcile net income to net cash                        
provided by operating activities:                        
Depreciation and amortization (see Note 3)     250       270       295  
Financial loss (income) from available for sale securities     1       (3 )     47  
Deferred income taxes, net     (157 )     138       (277 )
Accrued severance pay     77       147       (138 )
Unrealized loss from marketable securities, net     6       -       -  
Capital loss (gain) on sale of property and equipment, net     (5 )     14       (19 )
Employees share based compensation     58       80       61  
Stock- based compensation granted to a customer (deducted from revenues)     -       -       332  
Realized loss on sale of available for sale securities     -       24       61  
Changes in operating asset and liability items:                        
Decrease (increase) in accounts receivable:                        
Trade     (390 )     913       (168 )
Other     (15 )     149       (167 )
Decrease (increase) in prepaid expenses and deferred cost of revenues     351       456       (705 )
Decrease in inventories     3       16       1  
Increase (decrease) in accounts payable and accruals:                        
Trade     412       (639 )     505  
Other     1       (65 )     (22 )
Increase (decrease) in deferred revenues     2,413       (842 )     288  
Net cash provided by operating activities     5,190       4,936       4,385  
                         
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Purchase of available for sale securities     -       -       (2,505 )
Proceeds from sale of available for sale securities     -       444       1,445  
Purchase of property and equipment     (240 )     (169 )     (401 )
Severance pay funds     (162 )     (174 )     191  
Investment in short-term bank deposits     (2,559 )     (1,258 )     (1,393 )
Investments in marketable securities     (2,842 )     -       -  
Proceeds from sale of property and equipment     26       84       79  
Net cash used in investing activities     (5,777 )     (1,073 )     (2,584 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Employee stock options exercised and paid     73       41       399  
Dividend paid     (4,532 )     (4,505 )     (5,968 )
Net cash used in financing activities     (4,459 )     (4,464 )     (5,569 )
                         
TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS     (52 )     45       52  
                         
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     (5,098 )     (556 )     (3,716 )
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR     13,310       13,866       17,582  
                         
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR   $ 8,212     $ 13,310     $ 13,866  
SUPPLEMENTAL DISCLOSURE OF CASH                        
FLOW AND NON-CASH ACTIVITIES-                        
Taxes paid   $ 95     $ 113     $ 72  
Supplier credit granted to the company for property and equipment investments   $ -     $ -     $ 39  

 

The accompanying notes are an integral part of the financial statements.

 

F- 7
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

 

a. General:

   

1) Nature of operations

 

MIND C.T.I. Ltd. (the “Company”) is an Israeli company, which together with its subsidiaries operate in one segment, providing integrated products and services. The Company designs, develops, markets, supports, implements and operates billing and customer care systems, including consulting and managed services, primarily to wireless, wireline, next-generation service providers throughout the world. The Company also provides a call management system used by enterprises for call accounting, traffic analysis, and fraud detection.

 

The Company has wholly-owned subsidiaries in the United States ("Mind Software Inc." or "Sentori"), Romania ("Mind Software SRL"), and U.K ("Mind Software Limited" or "Omni").

 

2) Accounting principles

 

The consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP").

 

3) Use of estimates in preparation of financial statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates. The most significant estimates with regard to the Company's consolidated financial statements relate to revenue recognition of products and service sales using the percentage of completion method, the valuation of auction rate securities, and the impairment of goodwill and other intangible asset.

 

4) Functional currency

 

The currency of the primary economic environment in which the operations of the Company and its subsidiaries, except the subsidiary in the U.K. as described below, are conducted is the U.S. dollar (“dollar” or “$”). Most of the Company’s revenues are derived from sales outside of Israel, which are denominated primarily in dollars. In addition, the majority of the Company’s cash reserves and financing activities are denominated in dollars. Thus, the functional currency of the Company and its subsidiaries is the dollar.

 

Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are re-measured into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items (detailed below) reflected in the statements of operations, the following exchange rates are used: (i) for transactions: exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items, such as depreciation and amortization, etc.) - historical exchange rates. The resulting currency translation gains or losses are carried to financial income or expenses, as appropriate.

 

The functional currency of the subsidiary in the U.K. is the British Pound. The financial statements of this subsidiary are included in consolidation, based on translation into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters” (formerly SFAS No. 52): assets and liabilities are translated at year-end exchange rates, while operating results items are translated at periodically average exchange rates during the year. Differences resulting from translation are presented in shareholders’ equity.

 

F- 8
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

 

b. Principles of consolidation:

 

1) The consolidated financial statements include the accounts of the Company and all of its subsidiaries.

 

2) Inter-company balances and transactions have been eliminated in consolidation. Profits from inter-company sales, not yet realized outside the Company and its subsidiaries, have also been eliminated.

 

c. Reclassifications:

 

Certain amounts in prior years’ financial statements have been reclassified to conform to the current year’s presentation.

 

d. Cash equivalents:

 

The Company and its subsidiaries consider all highly liquid investments, which include
short-term bank deposits (up to three months from original date of deposit) that are not restricted as to withdrawal or use, to be cash equivalents.

 

e. Short-term bank deposits:

 

Bank deposits with maturities of more than three months but less than one year are included in short-term bank deposits. Such short-term bank deposits are stated at cost.

 

f. Marketable securities

 

Marketable securities are classified as "financial assets held at fair value through profit or loss" when held for trading or are designated upon initial recognition as financial assets at fair value through profit or loss.

 

Financial asset at fair value through profit or loss is shown at fair value. Any gain or loss arising from changes in fair value, including those originating from changes in exchange rates is recognized in profit or loss in the period in which the change occurred. Net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset.

 

g. Available-for-sale financial assets (AFS financial assets):

 

AFS financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

 

The AFS held by the Company are traded in an active market and are stated at fair value at the end of each reporting period. Interest income calculated using the effective interest method. Changes in the fair value of available-for-sale financial assets are recognized in other comprehensive income (loss). Unrealized losses considered to be temporary are reflected in other comprehensive income (loss). Unrealized losses that are considered to be other-than-temporary are charged to income as an impairment charge. See also Note 2.

 

h. Inventories:

 

Inventories are valued at the lower of cost or market value. Cost is determined by the “first-in, first-out” method. Most of the inventories consist of acquired hardware.

 

F- 9
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

 

i. Property and equipment:

 

1) These assets are stated at cost less accumulated depreciation.

 

2) The assets are depreciated by the straight-line method, on basis of their estimated useful life.

 

Annual rates of depreciation are as follows:

  %
   
Computers and electronic equipment 15-33
  (mainly 33)
Office furniture and equipment 6-7
Vehicles 15

 

Leasehold improvements are amortized by the straight-line method over the term of the lease, which is shorter than the estimated useful life of the improvements.

 

j. Goodwill:

 

Goodwill reflects the excess of the purchase price of subsidiaries acquired over the fair value of net assets acquired. Under ASC 350 (formerly SFAS No. 142), goodwill is not amortized but rather tested for impairment at least annually. The Company performs annual testing for impairment of the goodwill during the third quarter of each year, see also Note 4.

 

k. Income taxes:

 

1) Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred income tax provisions and benefits are based on the changes in the deferred tax asset or tax liability from period to period. Valuation allowance is included in respect of deferred tax assets when it is more likely than not, that such asset will not be realized.

 

2) The Company adopted the provisions of Financial Accounting Standards Board (FASB) interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an Interpretation of ASC 740-10 on January 1, 2007.

 

l. Revenue recognition:

 

The Company’s revenues consist of revenues generated from software licensing, sales of professional services, including integration and implementation, sales of third-party hardware and software, maintenance services, managed services and training.

 

The Company applies the provisions of Statement of ASC 985-605, "Revenue Recognition" (formerly SOP No. 97-2) and ASC 605-35, "Construction-Type and Production-Type Contracts" (formerly SOP No. 81-1), as follows:

 

F- 10
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

 

l. Revenue recognition: (continued)

 

i) Licenses

Revenue from sale of products is recognized when delivery has occurred, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collection is probable. If collection is not considered probable, revenue is recognized when the fee is collected. The Company generally does not grant a right of return on products sold to customers.

 

ii) Services

The services the Company provides consist of implementation, training, hardware installation, maintenance, support and project management. All services are priced on a fixed price basis and are recognized ratably over the period in which the services are provided except services which are recognized under the percentage-of-completion method as described below.

 

Products are mainly supplied with maintenance for a period of one year from delivery. When revenue on sale of the products is recognized, the Company defers a portion of the sales price and recognizes it as maintenance revenue ratably over the above period. The portion of the sales price that is deferred is determined based on the fair value of the service as priced in transactions in which the Company renders maintenance solely. Where vendor specific objective evidence for fair value cannot be determined, the entire sale is being recognized over the maintenance period. Where the services are considered essential to the functionality of the software products, both the software product revenue and the revenue related to the integration and implementation services are recognized under the percentage-of-completion method in accordance with ASC 605-35. The Company generally determines the percentage-of-completion by comparing the labor performed to date to the estimated total labor required to complete the project. When the estimate indicates that a loss will be incurred, such loss is recorded in the period identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yield materially different results.

 

(iii) Managed Services

Revenues from managed services include a monthly fee for services and for right of use and are recorded as service revenues and license revenues, respectively. The monthly fee is based mainly on number of subscribers or customer’s business volume and the agreements include a minimum monthly charge. These revenues are recognized on a monthly basis. Where installation services are sold together with a managed services contract, the installation services are being recognized over the entire contract term, commencing the deployment finalization.

 

Deferred costs of revenues are presented net of related advances from customers.

 

m. Research and development expenses:

 

Pursuant to ASC 985-20, "Software - Costs of Software to be Sold, Leased, or Marketed" (formerly SFAS No. 86), development costs related to software products are expensed as incurred until the “technological feasibility” of the product has been established. Because of the relatively short time period between "technological feasibility" and product release, and the insignificant amount of costs incurred during such period, no software development costs have been capitalized.

 

F- 11
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

 

n. Allowance for doubtful accounts:

 

The allowance is determined for specific debts doubtful of collection.

 

o. Stock based compensation:

 

The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" (formerly SFAS No. 123 (R)), which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.

 

The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule using the straight-line method over the requisite service period for the entire award, net of estimated forfeitures.

 

p. Earnings (loss) per share ("EPS"):

 

Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the year, net of treasury shares.

 

Diluted EPS reflects the increase in the weighted average number of shares outstanding that would result from the assumed exercise of employee stock options, calculated using the treasury-stock-method.

 

q. Treasury shares:

 

Treasury shares are presented as a reduction in shareholders' equity, at their cost to the Company, under "Treasury shares".

 

r. Concentration of credit risks:

 

Most of the Company’s and its subsidiaries' cash and cash equivalents as of December 31, 2013 and 2012 were deposited with Israeli, European and U.S. banks. The Company is not aware of any specific credit risks in respect of these banks.

 

The Company's revenues have been generated from a large number of customers. Consequently, the exposure to credit risks relating to trade receivables is limited. The Company performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts.

 

F- 12
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

 

s. Recently issued accounting pronouncements:

 

On February 5, 2013, the FASB issued ASU 2013-02, which requires entities to disclose the following additional information about items reclassified out of accumulated other comprehensive income (AOCI):

Changes in AOCI balances by component (e.g., unrealized gains or losses on available-for-sale securities or foreign-currency items). Both before-tax and net-of-tax presentations of the information are acceptable as long as an entity presents the income tax benefit or expense attributed to each component of OCI and reclassification adjustments in either the financial statements or the notes to the financial statements.
Significant items reclassified out of AOCI by component either on the face of the income statement or as a separate footnote to the financial statements.

The ASU does not change the current U.S. GAAP requirements, for either public or nonpublic entities, for interim financial statement reporting of comprehensive income. That is, a total for comprehensive income must be reported in condensed interim financial statements in either (1) a single continuous statement or (2) two separate but consecutive statements. However, public entities would also need to include information about (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI in their interim reporting periods. ASU 2013-02 is effective for annual and interim reporting periods beginning after December 15, 2012. Adoption of this guidance did not have a significant impact on the determination or reporting of the Company’s financial results.

 

In July 2013, the FASB issued ASU No. 2013-11 amending requirements for the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU No. 2013-11 requires entities to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent such items are not available or not intended to be used at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position. In such instances, the unrecognized tax benefit is required to be presented in the financial statements as a liability and not be combined with deferred tax assets. ASU No. 2013-11 is effective for annual and interim periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 had no impact on our financial condition, results of operations, or cash flows.

 

NOTE 2 - AVAILABLE FOR SALE SECURITIES AND MARKETABLE SECURITIES

 

        December 31  
    Maturity year   2013     2012  
        U.S. dollars in thousands  
                 
Short-term: (a)                    
Municipal bond       $ 2,757     $ -  
Corporate bond         79       -  
        $ 2,836     $ -  
                     
Long-term - security bond (b)   Perpetual   $ 517     $ 504  

 

a. The Company invests in highly-rated marketable securities, and its policy limits the amount of credit exposure to any one issuer. The Company’s investment policy requires investments to be investment grade, rated single-A or better, with the objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio based on quoted prices in active markets.

 

F- 13
 

  

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2   - AVAILABLE FOR SALE SECURITIES AND MARKETABLE SECURITIES (continued)

 

b. As of December 31, 2013 the company held a long term security bond which is classified as available for sale security and is presented in its fair value. The fair value of the available for sale securities based on quoted prices in active markets for identical instruments (Level 1 as defined under ASC820).

 

NOTE 3   - PROPERTY AND EQUIPMENT

 

a. Composition of assets, grouped by major classification, is as follows:

 

    December 31  
    2013     2012  
    U.S. dollars in thousands  
Computers and electronic equipment   $ 1,462     $ 4,070  
Land     263       263  
Office furniture and equipment     162       358  
Vehicles     152       227  
Leasehold improvements     8       8  
      2,047       4,926  
Less - accumulated depreciation and amortization     1,397       4,245  
    $ 650     $ 681  

 

b. Depreciation and amortization expenses totaled $250 thousand, $270 thousand and $295 thousand in the years ended December 31, 2013, 2012 and 2011, respectively.

 

NOTE 4   - GOODWILL

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. The carrying value of goodwill was allocated to MIND’s reporting units pursuant to ASC 350 (formerly SFAS No. 142).

 

ASC 350 requires that companies not amortize goodwill, but instead test for impairment at least annually using a two-step approach. The Company evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable.

 

Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. Under the income approach, the Company determined fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.

 

Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment. The second step involves determining the implied value of goodwill for the reporting unit. Any excess carrying amount of goodwill over the fair value determined in the second step will be recorded as a goodwill impairment loss.

 

The Company performed the annual impairment tests during the third quarter of 2013, 2012 and 2011 and did not identify any impairment losses.

 

F- 14
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5   - EMPLOYEES' RIGHTS UPON RETIREMENT

 

a. Israeli law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The severance pay liability of the Company to its Israeli employees, based upon the number of years of service and the latest monthly salary, is partly covered by regular deposits with severance pay funds and pension funds, and by purchase of insurance policies; under labor agreements, the deposits with recognized pension funds and the insurance policies, as above, are in the employees' names and are, subject to certain limitations, the property of the employees.

 

The amounts accrued and the portions funded, with severance pay funds and by the insurance policies are reflected in the financial statements as follows:

 

    December 31  
    2013     2012  
    U.S. dollars in thousands  
             
Accrued severance pay   $ 1,804     $ 1,615  
Less - amounts funded (presented in “Investment and other non-current assets”)     (1,673 )     (1,399 )
Unfunded balance   $ 131     $ 216  

 

The amounts of accrued severance pay as above cover the Company’s severance pay liability in accordance with labor agreements in force and based on salary components which, in management’s opinion, create entitlement to severance pay. The Company records the obligation as if it was payable at each balance sheet date on an undiscounted basis.

 

Withdrawals from the funds are generally made for the purpose of paying severance pay.

 

b. The severance pay expenses were $139 thousand, $142 thousand and $290 thousand in the years ended December 31, 2013, 2012 and 2011, respectively.

 

F- 15
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6   - COMMITMENTS AND CONTINGENT LIABILITIES:

 

a. Commitments:

 

The Company and its subsidiaries entered into premises lease agreements that will expire between 2014 to 2015.

 

Future minimum lease commitments of the Company and its subsidiaries under the above leases, at exchange rates in effect on December 31, 2013, are as follows:

 

    U.S. dollars in
thousands
 
Years ending December 31:        
2014   $ 609  
2015     206  
    $ 815  

 

Rental expense totaled $581 thousand, $571 thousand, and $585 thousand in the years ended December 31, 2013, 2012 and 2011, respectively.

 

b. Contingent liabilities:

 

The Company has provided bank guarantees relating to future performance on certain contracts. As of December 31, 2013, contingent liabilities on outstanding bank guarantees aggregated to an amount of approximately $73 thousand. These amounts are secured by bank deposits.

 

NOTE 7   - SHAREHOLDERS’ EQUITY

 

a. Share capital:

 

The Company’s ordinary shares are traded in the United States on the NASDAQ National Market, under the symbol MNDO.

 

b. Treasury shares:

 

In September 2008, the Company’s Board of Directors authorized a plan for the repurchase of up to 2,100,000 of the Company’s ordinary shares in the open market, in an amount in cash of up to $2.8 million. As of December 31, 2008, the Company had repurchased 2,100,000 ordinary shares under the program at a total purchase price of approximately $1.6 million, after getting an approval by an Israeli court in accordance to the Israeli Companies Law. In February 2009, the Company’s Board of Directors authorized additional repurchase transactions of the Company’s shares in the total amount of $1.2 million pursuant to the 2008 repurchase plan. As of December 31, 2009, the Company has purchased an aggregate amount of 3,165,092 ordinary shares at a total purchase price of $2.8 million. In November, 2009 the Company’s Board of Directors authorized a new plan for the repurchase of the Company’s ordinary shares in the open market, in an amount in cash of up to $1.8 million and in February 2010 this repurchase was approved by an Israeli court in accordance to the Israel Companies Law. The Company’s Board of Directors authorized on August 1st, 2012 to reactivate the plan for the repurchase of the Company's ordinary shares in the open market, in an amount in cash of up to $1.8 million. There are no additional buyback plans. As of December 31, 2013, no repurchases have been made under this new plan. As of December 31, 2013 the treasury shares amounted to $2.29 million after exercise of options from treasury stock issued to employees in the amount of $73 thousand, $41 thousand and $399 thousand in 2013, 2012 and 2011 respectively.

 

F- 16
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7   - SHAREHOLDERS’ EQUITY (continued)

 

c. Dividend:

 

Dividends paid per share in the years ended December 31, 2013, 2012 and 2011 were $0.24, $0.24 and $0.32, respectively.

 

The Company paid dividends to its shareholders in the amounts of $4.5 million, $4.5 million and $6.0 million during 2013, 2012 and 2011, respectively. Since at the time of 2011 distribution the Company had insufficient statutory retained earnings, the distribution was done by way of reduction of additional paid-in capital, after due approval by an Israeli court order, in accordance to the Israeli Companies Law.

 

d. Stock option plans:

 

In December 1998, the Board of Directors approved an employee stock option plan, which was amended in 2000 and in 2003 (the “1998 Plan”). During 2004, the Board of Directors approved an employee stock option plan (the “2000 Plan”). Under the 1998 Plan (as amended in 2000 and in 2003) and the 2000 plan, options for up to 4,306,000 ordinary shares of NIS 0.01 par value are to be granted to employees of the Company and its subsidiaries. The 1998 Plan and 2000 Plan expired in December 2010.

 

In 2011, the Board of Directors and the 2011 Annual General Meeting of the Company’s shareholders approved a share incentive plan (the “2011 Share Incentive Plan”). Under the 2011 Share Incentive Plan, options for up to 1,800,000 ordinary shares of NIS 0.01 par value are to be granted to employees of the Company and its subsidiaries, directors, consultants or contractors of the Company.

 

Each option can be exercised to purchase one Ordinary Share. Immediately upon issuance, the Ordinary Shares issuable upon the exercise of the options will confer on holders the same rights as the other ordinary shares.

 

The Board of Directors determines the exercise price and the vesting period of the options granted. The outstanding options granted under the above mentioned plans vest over 3-5 years. Options not exercised will expire approximately 5-7 years after they are granted.

 

The compensation costs charged against income for all of the Company's equity remuneration plans during 2013, 2012 and 2011 were approximately $58 thousand, $80 thousand and $61 thousand, respectively without any reduction in income taxes.

 

In January 2011, we issued to a new customer a warrant to purchase 924,545 ordinary shares of MIND at an exercise price of $2.48 per share (equal to the average closing price per share of MIND's ordinary shares on the NASDAQ Stock Market during the 30 trading day period immediately preceding the date of the issuance thereof).  The compensation cost of $332 thousand was deducted from 2011 revenues. The right to purchase warrant shares upon exercise hereof terminated in July 2012 after a period of 18 months following the date of issuance thereof.

 

As a result of a change made to Section 102 of the Israeli Income Tax Ordinance as part of the Israeli tax reform of 2003, and pursuant to an election made by the Company thereunder, Israeli employees (except for employees who are deemed “Controlling Members” under the Israeli Income Tax Ordinance) will be subject to a lower tax rate on capital gains accruing to them in respect of Section 102 awards made after December 31, 2002. However, the Company will not 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 it had previously been entitled to do under Section 102.

 

The following is a summary of the status of the 1998 Plan, 2000 plan and 2011 Share Incentive Plan as of December 31, 2013, 2012 and 2011, and changes during the years ended on those dates:

 

F- 17
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7   - SHAREHOLDERS’ EQUITY (continued)

 

d. Stock option plans: (continued)

 

1)    
    Years ended December 31  
    2013     2012     2011  
    Number     Weighted
average
exercise
price
    Number     Weighted
average
exercise
price
    Number     Weighted
average
exercise
price
 
                                     
Options outstanding at  beginning of year     588,700     $ 1.87       817,200     $ 2.06       837,400     $ 2.45  
Changes during year:  Granted (a)     96,000     $ 2.16       18,000     $ 2.41       334,000     $ 1.71  
Exercised     (103,500 )   $ 0.70       (51,500 )   $ 0.78       (235,000 )   $ 1.70  
Forfeited     (36,000 )   $ 1.94       (2,000 )   $ 1.04       (1,000 )   $ 2.77  
Expired     (85,200 )   $ 3.24       (193,000 )   $ 3.33       (118,200 )   $ 4.02  
Options outstanding at  end of year     460,000     $ 1.93       588,700     $ 1.87       817,200     $ 2.06  
                                                 
Options exercisable at end of year     193,000     $ 1.95       228,700     $ 2.03       367,700     $ 2.77  
                                                 
Weighted average grant date fair value of options granted during the year (b)           $ 0.41             $ 0.52             $ 0.59  

 

(a) In 2013 and 2012 the options were granted with an exercise price equal to the average closing price per share of the Company ordinary shares on the stock market during the 30 trading day period immediately preceding the date of grant of such option.

 

In 2011 the options were granted with an exercise price equal to the average closing price per share of the Company ordinary shares on the stock market during the 30 trading day period immediately preceding the date of grant of such option or with an exercise price equal to Par value of NIS 0.01.

 

F- 18
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7   - SHAREHOLDERS’ EQUITY (continued)

 

d. Stock option plans: (continued)

 

1) (continued)

 

(b) The fair value of each stock option granted is computed on the date of grant according to the Black-Scholes option-pricing model with the following assumptions:

 

    Years ended December 31  
    2013     2012     2011  
                   
Dividend yield     11 %     10 %     10 %
                         
Expected volatility*     49 %     58 %     59 %
                         
Average risk-free interest rate     0.8 %     0.9 %     1.0 %
                         
Expected average term - in years     3.88       3.88       3.83  

 

* Volatility is based on historical volatility of the Company's share price for periods matching the expected term of the option until exercise.

 

As of December 31, 2013 there were approximately $65 thousand of total unrecognized compensation costs, net of expected forfeitures, related to nonvested share-based compensation awards granted under the stock option plan. The costs are expected to be recognized over a weighted average period of 0.82 years.

 

2) The following table summarizes information about options outstanding and exercisable as of December 31, 2013:

 

    Options Outstanding     Options Exercisable  
    Number     Weighted           Number     Weighted        
    outstanding     average     Weighted     exercisable     average     Weighted  
Range of   At     remaining     average     At     remaining     average  
exercise   December 31,     contractual     exercise     December 31,     contractual     exercise  
prices   2013     life     price     2013     life     Price  
          Years                 Years        
                                     
$ 0.003 – 1.800     60,000       1.46     $ 1.20       40,000       1.20     $ 1.80  
$ 1.939 – 2.410     400,000       2.76     $ 2.04       153,000       2.65     $ 1.99  
      460,000       2.59     $ 1.93       193,000       2.35     $ 1.95  

 

NOTE 8   - TAXES ON INCOME

 

a. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:

 

The Company is an “industrial company”, as defined by this law. As such, the Company is entitled to claim depreciation at increased rates for equipment used in industrial activity, as stipulated by regulations published under the inflationary adjustments law.

 

F- 19
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8   - TAXES ON INCOME (continued)

 

b. Tax benefits under the Law for the Encouragement of Capital Investments, 1959:

 

1) Tax benefits prior to the 2011 Amendment

 

Substantially all of the Company’s production facilities have been granted “approved enterprise” status under the above law (including Amendment No. 60 to the law that was published in April 2005). Income derived from the approved enterprise was tax exempt for a period of ten years commencing in the first year in which the Company earned taxable income from the approved enterprise (provided the maximum period to which it is restricted by law has not elapsed).

 

According to the above law, in the event of distribution of cash dividends from income that was tax exempt as above, the Company would have to pay the 25% tax in respect of the amount distributed.

 

The entitlement to the above benefits was conditional upon the Company’s fulfilling the conditions stipulated by the above law, regulations published thereunder and the certificate of approval for the specific investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be cancelled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli CPI and interest.

 

2) Tax benefits under the 2011 Amendment

 

On January 6, 2011 an amendment (Amendment No. 68) to the Law for the Encouragement of Capital Investment-1959 ("2011 Amendment") was published.The new Amendment significantly revising the tax incentive regime in Israel, commencing on January, 1 2011.

 

2011 Amendment introduced a new status of “Preferred Enterprise”. Similarly to the “approved enterprise” status, a Preferred Company is an industrial company meeting certain conditions (including a minimum threshold of 25% export). However, under the New Amendment the requirement for a minimum investment in productive assets in order to be eligible for the benefits granted under the Investments Law as with respect to “approved enerprise”status was cancelled. Dividends distributed from income which is attributed to a “Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations - 0%, (ii) Israeli resident individuals – 15% (iii) non-Israeli residents - 15%, subject to a reduced tax rate under the provisions of an applicable double tax treaty.

 

On July 30, 2013 the Knesset passed a Law for the change in the order of National Priorities (Legislative amendments to achieve budget objectives for 2013 and 2014) — 2013. As part of the legislation, the Law for the Encouragement of Capital Investments was amended so that the tax rate applicable to a preferred enterprise in this period in Development Area A will be 9% and the tax rate in other parts of the country will be 16%. Similarly, it was determined that the tax rate on dividends distributed to individuals and foreign residents out of preferred income will be increased to 20% as from January 1, 2014 as opposed to the current rate of 15%.

 

The following table summarise the reduced flat tax rate with respect to the income attributed to the Preferred Enterprise:

 

Tax Year   Development
Region “A”
    Other Areas
within Israel
 
             
2011-2012     10 %     15 %
2013     7 %     12.5 %
2014 onwards     9 %     16 %

 

F- 20
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8   - TAXES ON INCOME (continued)

 

b. Tax benefits under the Law for the Encouragement of Capital Investments, 1959: (continued)

 

2) Tax benefits under the 2011 Amendment (continued)

 

The Company is located in Development Region "A" and during 2011 had chosen the status of the 2011 Amendment.

 

If only a portion of the company's capital investments is approved, its effective tax rate will be the result of a weighted combination of the applicable rates. The tax benefits from any certificate of approval relate only to taxable income attributable to the specific Preferred Enterprise. Income derived from activity that is not integral to the activity of the Preferred Enterprise will not enjoy tax benefits. Our entitlement to the above benefits is subject to fulfillment of certain conditions under the Investment Law and related regulations.

 

During 2013, the Company applied for a tax ruling with respect to 2012 and future years. At the beginning of 2014, we obtained the ruling, which provides that the portion of our income attributed to the Preferred Enterprise (and thereby subject to lower tax rates) will be calculated each year based on, among other things, the ratio between the number of our employees in Israel and abroad. According to the ruling, our tax rate on income in Israel in 2013 was approximately 20%.

 

c. Other applicable tax rates:

 

1) Income from other sources in Israel

 

On December 6, 2011, the “Tax Burden Distribution Law” Legislation Amendments (2011) was published in the official gazette, under which the previously approved gradual decrease in corporate tax was cancelled. The corporate tax rate increased to 25% as from 2012.

 

As part of the mentioned above law for the change in the order of National Priorities (Legislative amendments to achieve budget objectives for 2013 and 2014) — 2013 the corporate tax rate has increased to 26.5% as from January 1, 2014 and thereafter.

 

2) Income of non-Israeli subsidiaries

 

Non-Israeli subsidiaries are taxed according to tax laws in their countries of residence.

 

d. Deferred income taxes:
      December 31  
      2013     2012  
      U.S. dollars in thousands  
1) Provided in respect of the following:                
                   
  Research and development expenses   $ 61     $ 103  
  Allowance for doubtful accounts     -       12  
  Carryforward tax losses     2,450       2,074  
  Other     102       24  
  Less- valuation allowance     (2,317 )     (2,074 )
      $ 296     $ 139  

 

F- 21
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8   - TAXES ON INCOME (continued)

 

d. Deferred income taxes: (continued)

 

2) As of December 31, 2013, the carryforward tax losses are related mainly to the company subsidiaries (in the U.S. and U.K. ) and amounted to approximately $7.8 million. The Company has provided valuation allowance in respect of deferred tax assets resulting from carryforward tax losses of the company subsidiaries. Management currently believes that it is more likely than not that those deferred tax losses will not be realized in the foreseeable future.

 

e. Taxes on income included in the statements of operations:

 

1) As follows:
    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Current:                        
In Israel   $ 116     $ 88     $ 43  
Outside Israel     71       96       49  
      187       184       92  
Taxes in respect of previous years     107       70       -  
Deferred in Israel     (157 )     138       (277 )
    $ 137     $ 392     $ (185 )

 

2) Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (see c. above), and the actual tax expense:
    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Income before taxes on income, as reported in the statements of operations*   $ 2,322     $ 4,670     $ 4,106  
Theoretical tax expense     581       1,168       985  
Less - tax benefits arising from approved                        
enterprise status, see a. above     (60 )     (410 )     -  
      521       757       985  
Increase (decrease) in taxes resulting from permanent differences:                        
Disallowable deductions     60       11       18  
Taxes in respect of previous years     107       70       -  
Changes in valuation allowance     243       351       (3,283 )
Changes in taxes resulting from computation of deferred taxes at a rate which is different from the theoretical rate and other     (794 )     (797 )     2,095  
Taxes on income for the reported year   $ 137     $ 392     $ (185 )
*    As follows:                        
Taxable in Israel   $ 1,325     $ 2,734     $ 3,418  
Taxable outside Israel     997       1,936       688  
    $ 2,322     $ 4,670     $ 4,106  

 

f. Tax assessments:

 

The Company has received final assessments from the tax authorities, through the year ended December 31, 2011. The subsidiaries, except Omni, have not been assessed since incorporation. Omni has received final tax assessments through tax year 2006.

 

F- 22
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9   - SUPPLEMENTARY BALANCE SHEET INFORMATION

 

a. Cash and cash equivalents:

 

The balance as of December 31, 2013 and 2012 includes $3.8 million and $7.8 million, respectively, of highly liquid bank deposits. The deposits are mainly denominated in dollars and, as of December 31, 2013, bear weighted average annual interest of 0.38%.

 

b. Accounts receivable:

 

1) Trade:
    December 31,  
    2013     2012  
    U.S. dollars in  
    thousands  
             
Open accounts   $ 1,241     $ 1,177  
Less - allowance for doubtful accounts *     -       (327 )
    $ 1,241     $ 850  

 

* The changes in allowance for doubtful accounts are composed as follows:

 

    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Balance at beginning of year   $ 327     $ 308     $ 435  
Increase (decrease) during the year     -       66       (15 )
Bad debt written off     (327 )     (47 )     (112 )
Balance at end of year   $ -     $ 327     $ 308  

 

2) Other:
    December 31,  
    2013     2012  
    U.S. dollars in  
    thousands  
             
Government of Israel   $ 19     $ 92  
Employees     28       20  
Sundry     118       47  
    $ 165     $ 159  

 

c. Accounts payable and accruals - other:
    December 31,  
    2013     2012  
    U.S. dollars in  
    thousands  
             
Payroll and related expenses   $ 515     $ 384  
Government institutions     377       416  
Accrued vacation pay     104       93  
Accrued expenses and sundry     157       258  
    $ 1,153     $ 1,151  

 

F- 23
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10  - SELECTED STATEMENT OF OPERATIONS DATA

 

a. Revenues:

 

1) The Company's revenues derive from sale of software products in one operating segment. The Company has two product lines: (i) product line “A” - billing and customer care solutions for service providers; and (ii) product line “B” - call accounting and call management solutions for enterprises. Revenues from Sentori and Omni product lines are included in product line “A”.

 

Following are data regarding revenues classified by product lines:

 

    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Product line “A”   $ 14,210     $ 15,707     $ 14,804  
Product line “B”     4,270       4,502       4,109  
    $ 18,480     $ 20,209     $ 18,913  

 

2) Following are data regarding geographical revenues classified by geographical location of the customers:
    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
United States   $ 11,809     $ 10,882     $ 9,405  
United Kingdom     1,221       668       403  
Italy     9       434       1,542  
Rest of Europe     2,528       4,143       4,740  
Israel     1,768       3,045       1,551  
Other     1,145       1,037       1,272  
    $ 18,480     $ 20,209     $ 18,913  

 

Property and equipment - by geographical location:

 

    December 31  
    2013     2012  
    U.S. dollars in  
    thousands  
             
Israel   $ 250     $ 292  
Romania     395       381  
United Kingdom     -       2  
United States     5       6  
    $ 650     $ 681  

 

F- 24
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10  - SELECTED STATEMENT OF OPERATIONS DATA (continued)

 

b. Research and development expenses:
    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Payroll and related expenses   $ 3,972     $ 3,574     $ 3,780  
Rent and related expenses     378       286       300  
Depreciation and amortization     133       163       169  
Subcontracting     188       224       114  
Other     359       396       310  
    $ 5,030     $ 4,643     $ 4,673  

 

c. Selling and marketing expenses:
    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Payroll and related expenses   $ 1,459     $ 1,180     $ 1,644  
Depreciation and amortization     8       12       17  
Travel and conventions     108       155       145  
Other     119       177       189  
    $ 1,694     $ 1,524     $ 1,995  

 

d. General and administrative expenses:
    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Payroll and related expenses   $ 1,105     $ 980     $ 1,013  
Depreciation and amortization     21       24       57  
Insurances     60       67       85  
Office expenses     102       117       123  
Professional services     302       368       337  
Allowance for doubtful accounts and bad debts     -       33       (5 )
Other     136       229       224  
    $ 1,726     $ 1,818     $ 1,834  

 

F- 25
 

 

MIND C.T.I. LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10  - SELECTED STATEMENT OF OPERATIONS DATA (continued)

 

e. Financial income - net:
    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
Income:                        
Interest on bank deposits and short-term investments   $ 97     $ 260     $ 157  
Non-dollar currency gains - net     17       23       -  
Income from Marketable securities     33       -       -  
Interest on available for sale securities     35       47       154  
      182       330       311  
Expenses:                        
Non-dollar currency losses - net     -       -       (58 )
Bank commissions and charges     (19 )     (8 )     (21 )
Realized loss on sale of available for sale securities     -       (24 )     (61 )
      (19 )     (32 )     (140 )
                         
    $ 163     $ 298     $ 171  

 

f. Earnings per ordinary share (“EPS”):

 

Following are data relating to the weighted average number of shares for the purpose of computing EPS:

 

    Years ended December 31,  
    2013     2012     2011  
    U.S. dollars in thousands  
                   
Weighted average number of shares issued and outstanding - used in computation of basic EPS     18,869       18,767       18,679  
Add - incremental shares from assumed exercise of options     21       79       124  
                         
Weighted average number of shares used in computation of diluted EPS     18,890       18,846       18,803  

 

In the years ended December 31, 2013, 2012 and 2011, options that their effect was anti-dilutive, were not taken into account in computing the diluted earnings per share.

 

The number of options that could potentially dilute EPS in the future and were not included in the computing of diluted EPS is 400,000 options for 2013, 425,200 options for 2012 and 266,200 options for 2011.

 

F- 26

 

Exhibit 4.4

 

Compensation Policy of Directors and Officers

 

1. Introduction

 

1.1. Pursuant to the provisions of the Companies Law 5759– 1999 (the “ Companies Law ”), the Board of Directors of the Company approved on May 8, 2013 a compensation policy (the “ Compensation Policy ”) with regard to the terms of service and employment of officers 1 of MIND CTI Ltd. (the “ Company ”), following the recommendation of the Company’s Compensation Committee who discussed and considered the Compensation Policy. The Compensation Policy was approved by the General Meeting of shareholders on June 24 2013.

 

1.2. The Compensation Policy shall be subject to all mandatory provisions of any applicable law which apply to the Company and its officers, and to the Company's Articles of Association.

 

Several main principles and objectives form the basis of the Compensation Policy: (a) To promote the Company's goals and targets and its long term policy; (b) To create appropriate incentives for the Company’s officers, considering, among others, the Company’s risk management policy; (c) To adopt a compensation package combination that matches the size of the Company and the nature of its activities; and (d) To comply with the provisions of the law by compensating those eligible pursuant to the Compensation Policy, based on their contribution and their efforts to the development of the Company’s business and promotion of its goals, in the short and long term.

 

1.3. The Compensation Policy is a multi-year policy which shall be in effect for a period of three years from the date of its approval. The Compensation Committee and the Board of Directors shall review the Compensation Policy from time to time, as required by the Companies Law. The Compensation Policy shall be reapproved as required by the Companies Law, every three years.

 

2. The Compensation Policy

 

2.1. Parameters for Examining the Compensation Terms

 

In general, the compensation terms for officers shall be examined while taking into consideration, inter alia , the following parameters:

 

2.1.1. The education, qualifications, expertise, seniority (in the Company in particular, and in the officer's profession in general), professional experience and achievements of the officer 1 ;

 

2.1.2. The officer’s position, the scope of his responsibility and previous wage agreements that were signed with him;

 

2.1.3. The officer’s contribution to the Company’s business, profits and stability;

 

2.1.4. The degree of responsibility imposed on the officer;

 

2.1.5. The Company’s need to retain officers who have skills, know-how or unique expertise;

 

2.1.6. The Company has examined the relationship between the terms of service and employment of its officers, which will result from the implementation of this Policy, and the wage of the other employees of the Company (including contractor employees employed at the Company, if employed at the time of approval of the compensation), and, in particular, the relationship to the average wage and median wage of such employment. However, in light of the Company's global nature and the fact that its employees are employed in various countries worldwide, under different terms of employment, the Company believes that in determining compensation for its officers it should make such examination on territorial basis (namely, examining the relationship of the compensation terms of the Company's officers together with the employment terms of its employees/contractor employees on the relevant territory).

 

 

1 The term “officer” in this policy will be interpreted in accordance with the definition set out in the Companies Law, from time to time.

 

 
 

 

Taking the above into consideration, the Compensation committee reviewed separately the average and median wage of the Company's employees in each territory in which the Company operates together with the employment terms of the relevant officers which will result from the implementation of this Policy, and decided that the levels of compensation of the officers are within reason and that they will not harm the working relationships in the Company.

 

2.2. Wage Comparisons

 

2.2.1. Prior to approval of a compensation package for an officer, the Company will be entitled to conduct a wage survey that compares and analyses the level of the overall compensation package offered to an officer of the Company with the compensation package for officers in similar positions to that of the relevant officer in other companies of the same type as the Company, which operate on the global market.

 

2.2.2. In the event that the Company decides to conduct a wage survey, it will be conducted internally or through an external consultant, according to the discretion of the Board of Directors, after receiving a recommendation of the Compensation Committee in this regard.

 

2.2.3. Prior to approval of a compensation package for an officer, the Company will compare the average and median wage of the Company's employees in each territory in which the Company operates to the proposed employment terms of such officer and determine whether the proposed level of compensation is within reason and will not harm the working relationships in the Company.

 

2.3. Compensation Terms of Officers

 

2.3.1. The Company will do its utmost to approve the compensation terms of new officers prior to the date of commencement of their employment in the Company and not retroactively.

 

The Company shall be entitled to grant to officers (to all or part of them) a compensation package which may include a base salary, commissions, annual cash bonus and share-based compensation, or any combination thereof.

 

2.3.2. Base Salary
The base salary of a new officer in the Company shall be determined based on the parameters specified in Section 2.1 above and similar to other officers already serving in the Company. The CEO’s base salary will not exceed $240,000 per annum and the other officers’ base salary will not exceed $150,000 per annum.

 

2.3.3. Commissions
In addition to the Base Salary and any other compensation element, the Company shall be entitled to pay to its officers that are involved in the sales process, commissions based on a pre-determined commission plan. The Company believes that in light of the Company's global nature and the fact that its employees that are paid commissions (among them officers) are employed in various countries worldwide, there should be different commission plans where there are common criteria – commissions are paid only upon receipt of funds from the customer and commissions are limited (per annum) to 5 (five) times annual base salary. The VP of Sales and additional officers that are paid commissions will not receive any annual bonuses.

 

2.3.4. Additional Terms of Compensation Package
The compensation package may include additional standard benefits such as social benefits, car allowance, mobile allowance, reimbursement of expenses, advanced notice for termination of employment, medical insurance, etc.

 

 
 

 

2.3.5. Insurance, Exculpation and Indemnification

 

The officers of the Company shall be entitled to benefit from the insurance, exculpation and indemnification arrangements, to be approved from time to time by the Company, pursuant to the provisions of the Articles of Association of the Company and applicable law.

 

2.3.6. Advance Notice

 

The advance notice period shall be limited to sixty days.

 

2.3.7. Retirement Terms

 

2.3.7.1. The retirement terms will be the minimum terms as per applicable law.

 

2.3.7.2. In the event that the terms of service of the officer include retirement grants, the amount or value of a retirement grant shall not exceed 6 times such officer’s monthly base salary. The payment and amount of such retirement grant shall be subject to the relevant officer's period of employment, his term of employment during such period, the Company's performance during such period, said officers' contribution to the obtaining of the Company's goals and revenues during said period, and the circumstances of retirement.

 

2.3.8. Annual Cash Bonus

 

The compensation package of officers may include an annual cash bonus based on measurable and non-measurable criteria as set forth hereunder (the “ Bonus ”) and as customary in the industry on which companies having similar characteristics to those of the Company operate.

 

In the event that officers are eligible for a Bonus, pursuant to the terms of employment, the Bonus shall be subject to the following:

 

2.3.8.1. The Bonus will be based mainly (at least 80%) on measurable criteria, and, with respect to its less significant part (up to 20%), at the Board of Directors' and Compensation Committee's discretion based on non-measurable criteria, all as set forth hereunder.

 

2.3.8.2. Measurable Criteria for the Bonus, may include, among others

 

· Financial targets – bonus based on the Company's net profit

 

· Compliance with milestones (as relevant for each officer)

 

· Productivity indices and growth in the volume of activity

 

· Cost savings

 

· Implementation and promotion of planned projects

 

· Promoting strategic targets that will benefit the Company in the future

 

At the beginning of each year, the Compensation Committee and the Board of directors shall adopt a specific bonus plan for the coming year, based on the foregoing criteria. Such a plan shall include, inter alia, the chosen measurable criteria for the coming year, the targets that need to be obtained with respect to said criteria, thresholds under which no bonuses shall be paid, bonuses budget and the amount of bonuses to be paid in relation to attainment of targets etc.

 

2.3.8.3. Non-Measurable Criteria for the Bonus

 

The Company is entitled to determine, in its sole discretion, that an insignificant component, which does not exceed 20% of the Bonus, will be determined according to non-measurable criteria, as set forth below:

 

 
 

 

· The contribution of the officer to the Company’s business, its profitability and stability;

 

· The need for the Company to retain an officer with skills, know-how, or unique expertise;

 

· The responsibility imposed on the officer;

 

· Changes that occurred in the responsibility imposed on the officer during the year;

 

· Satisfaction with the officer’s performance (including assessing the degree of involvement of the officer and devotion of efforts in the performance of his duties);

 

The Compensation Committee and the Board of Directors will consider and approve this component, based, inter alia , on the recommendation and personal assessment given by the official who is in charge of the officer, specifying the relevant reasons underlying the recommendation.

 

2.3.8.4. The CEO annual bonus will be 5% of the Company’s net profit if the annual net profit is over 70% of the one defined in the previously approved budget. In addition, the Compensation Committee and Board may grant an annual bonus of up to 2 monthly base salaries, based on their discretion, subject to the limitations in 2.3.9.4.

 

2.3.8.5. The Board of Directors shall have discretion to reduce the amount of Annual Bonus to officers.

 

2.3.9. Share Based Compensation

 

2.3.9.1. The Company shall be entitled to grant to officers options or any other share-based compensation (" Share-based Compensation "), pursuant to an equity plan as adopted or shall be adopted, from time to time and subject to any applicable law.

 

2.3.9.2. At the time of the grant, the value of a Share-based Compensation shall be calculated (“ Grant Value ”), in accordance with the accumulated cost that will be recorded in its respect in the Company's books.

 

2.3.9.3. In any event, the aggregate Annual Cash Bonus and the Grant Value for all of the officers of the Company as a group shall not exceed 10% of the annual net profit.

 

2.3.9.4. The ratio between the aggregate Annual Cash Bonus and Grant Value, for each officer of the Company and the Base Salary of each officer (including the CEO and an active chairman of the board of directors) shall not exceed 12 times such officer’s monthly base salary.

 

2.3.9.5. Any award granted under a share incentive plan will have a four-year vesting schedule, such that 50% of the award will vest on the second anniversary of the grant date and 25% of the award will vest on each of the third and fourth anniversaries of the grant date.

 

2.3.9.6. When discussing the grant of a Share-based Compensation to an officer of the Company, the Compensation Committee and the Board of Directors shall consider whether the aforesaid grant is a suitable incentive for increasing the Company's value in the long term, the economic value of the grant, the exercise price and the other terms.

 

2.3.10. Term of Employment Agreements
An employment agreement of an officer will be either ongoing with a notice period or will be for a fixed term that does not exceed 3 (three) years. Upon the expiry of an employment agreement, the agreement may be extended subject to the provisions of Section 2.4 below.

 

 
 

 

2.3.11. Claw Back
Officers shall be required to repay the Company any excess payments made to them which were based on the Company’s performance if such payments were paid based on false and restated financial statements of the Company, provided that such restatement to the Company's financial statements was made within two years following such falsely based payment.

 

2.4. Extension of Existing Agreements with Officers

 

2.4.1. Prior to approval of the extension of an employment agreement of an officer, the officer’s existing compensation package shall be reviewed and considered based on the parameters set forth in Section 2.1 above.

 

2.4.2. In the event that an extension of an employment agreement with an officer involves a change in his or her employment terms, the Compensation Committee will examine whether: (a) the change is considered a "material change" compared to current employment terms; and whether (b) such change is in compliance with the Company's Compensation Policy, for the purpose of identifying the Company's organs required to approve such change.

 

2.5. Compensation of Directors

 

2.5.1. The compensation of the Company's directors (including outside directors and independent directors) shall be within the permitted payment ranges stipulated under the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director), 5760-2000 (“ Compensation of Directors Regulations ”), as they shall be from time to time.

 

3. General

 

The Compensation Committee and the Board of Directors shall, from time to time, review the Compensation Policy as well as the need to adjust it, based, inter alia , on the considerations and guidelines set forth in this policy. In so doing, they will conduct an examination of changes in the Company’s goals, market conditions, the Company’s profits and revenues in previous periods and in real time, and any other relevant factors.

 

 

 

 

Exhibit 8

 

List of Subsidiaries

 

Name of Subsidiary Jurisdiction of Incorporation
   
MIND Software SRL Romania
   
DIROT COMP SRL Romania
   
MIND Software, Inc. Delaware
   
MIND Software Limited United Kingdom

  

 

 

 

Exhibit 12.1

 

Certification of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a),

as adopted pursuant to §302 of the Sarbanes-Oxley Act

 

I, Monica Iancu, certify that:

 

1. I have reviewed this annual report on Form 20-F of MIND C.T.I. Ltd.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 

 
 

 

5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

 

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

 

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

 

  /s/ Monica Iancu
   
   
Date: April 10, 2014 Monica Iancu
  President and Chief Executive Officer
   (Principal Executive Officer)

 

 

 

 

Exhibit 12.2

 

Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a),

as adopted pursuant to §302 of the Sarbanes-Oxley Act

 

I, Aviram Cohen, certify that:

 

1. I have reviewed this annual report on Form 20-F of MIND C.T.I. Ltd.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 

 
 

 

5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

 

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

 

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

 

  /s/  Aviram Cohen
   
   
Date: April 10, 2014 Aviram Cohen
  Chief Financial Officer
  (Principal Financial Officer)

 

 

 

Exhibit 13.1

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350,

as adopted pursuant to § 906 of the Sarbanes-Oxley Act

 

In connection with the annual report on Form 20-F for the fiscal year ended December 31, 2013 of MIND C.T.I. Ltd. (the “Company”) as filed with the U.S. Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”) and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Monica Iancu, certify that:

 

· the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

· the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 10, 2014  
/s/ Monica Iancu  
Monica Iancu  
President and Chief Executive Officer  
(Principal Executive Officer)  

 

 

 

 

Exhibit 13.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350,

as adopted pursuant to § 906 of the Sarbanes-Oxley Act

 

In connection with the annual report on Form 20-F for the fiscal year ended December 31, 2013 of MIND C.T.I. Ltd. (the “Company”) as filed with the U.S. Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”) and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Aviram Cohen, certify that:

 

· The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

· The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 10, 2014  
/s/ Aviram Cohen  
Aviram Cohen  
Chief Financial Officer  
(Principal Financial Officer)  

 

 

 

 

Exhibit 15.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration No. 333-181383; No. 333-117054; No. 333-100804 and No. 333-54632) of our reports dated April 10, 2014 with respect to the consolidated financial statements of MIND C.T.I. Ltd. and subsidiaries included in the Annual Report on Form 20-F for the year ended December 31, 2013.

 

/s/ Brightman Almagor Zohar & Co.

Certified Public Accountants

A member firm of Deloitte Touche Tohmatsu

Tel Aviv, Israel

April 10, 2014