UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (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, 2009
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 0-30394
METALINK LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
YAKUM BUSINESS PARK, YAKUM 60972, ISRAEL
(Address of principal executive offices)
ATTN: ERAN VITAL, TEL: +972-9-9605407 FAX: +972-9-9605737,
YAKUM BUSINESS PARK, YAKUM 60972, ISRAEL
(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, NIS 1.0 PAR VALUE NASDAQ CAPITAL MARKET
PER SHARE*
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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:
25,738,732 ORDINARY SHARES, NIS 0.1 PAR VALUE 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 (ss.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).
[_] 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:
[X] U.S. GAAP
[_] 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 statements 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).
[X] Yes [_] No
INTRODUCTION
Unless indicated otherwise by the context, all references in this annual report to:
o "WE", "US", "OUR", "METALINK", or the "COMPANY" are to Metalink Ltd. and its consolidated subsidiaries;
o "DOLLARS" OR "$" are to United States dollars;
o "NIS" OR "SHEKEL" are to New Israeli Shekels;
o the "COMPANIES LAW" or the "ISRAELI COMPANIES LAW" are to the Israeli Companies Law, 5759-1999;
o the "SEC" are to the United States Securities and Exchange Commission;
o "NASDAQ" are to the NASDAQ Capital Market (formerly, the Nasdaq SmallCap Market);
o "SENIOR LOAN" are to the senior secured loan we borrowed from an institutional investor, or the Senior Lender, pursuant to a Loan Agreement, dated September 8, 2008, as amended on December 31, 2008, September 6, 2009 and December 30, 2009;
o "HT-WLAN" are to WLANPLUS(TM)products, a high-throughput wireless local area network based on the 802.11n standard draft 2.0;
o "LANTIQ" are to Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG. Lantiq is a newly-formed fabless semiconductor company funded by Golden Gate Capital;
o "LANTIQ TRANSACTION" are to the transactions consummated pursuant to that Asset Purchase Agreement, dated January 5, 2010, by and among Metalink, Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG.
*REVERSE SHARE SPLIT
On February 22, 2010, we effected a one-for-ten reverse split of our ordinary shares, and accordingly the par value of our ordinary shares was changed from NIS 0.1 to NIS 1.0 per share. Unless otherwise indicated, all ordinary share, option and per share figures in this annual report are presented in pre-split values and do not give retroactive effect to the share split.
TRADEMARKS
We use "NML(TM)", "VDSLPLUS(TM)", "Total-VDSL(TM)" and "MIMODSL(TM)" as our trademarks. All other trademarks and trade names appearing in this annual report are owned by their respective holders.
INCORPORATION BY REFERENCE
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms, and the summary included herein is qualified by reference to the full text of the document which is incorporated by reference into this annual report.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the statements contained in this annual report are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our business, financial condition, prospects and results of operations. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including our absence of significant operations following the Lantiq Transaction and uncertainty as to our future business model and our ability to identify and evaluate suitable business opportunities; the fact that our U.S. shareholders may suffer adverse tax consequences if we will be classified as a passive foreign investment company; changes in general economic and business conditions; any unforeseen developmental or technological difficulties with regard to our products; changes in currency exchange rates and interest rates; as well as the other risks discussed in "Item 3--Key Information--Risk Factors" and elsewhere in this annual report.
We urge you to consider that statements which use the terms "believe," "do not believe," "expect," "plan," "intend," "estimate," "anticipate," and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
TABLE OF CONTENTS
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................1
ITEM 3. KEY INFORMATION......................................................2
ITEM 4. INFORMATION ON THE COMPANY..........................................13
ITEM 4A. UNRESOLVED STAFF COMMENTS ..........................................26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................27
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................44
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................56
ITEM 8. FINANCIAL INFORMATION...............................................59
ITEM 9. THE OFFER AND LISTING...............................................65
ITEM 10. ADDITIONAL INFORMATION..............................................67
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........89
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............90
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................90
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.................................................90
ITEM 15. CONTROLS AND PROCEDURES.............................................90
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT....................................92
ITEM 16B. CODE OF ETHICS......................................................92
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................92
ITEM 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES..............92
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS...............................................92
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT........................93
ITEM 16G. CORPORATE GOVERNANCE................................................93
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TABLE OF CONTENTS (cont'd)
PART III
ITEM 17. FINANCIAL STATEMENTS................................................94
ITEM 18. FINANCIAL STATEMENTS................................................94
ITEM 19. EXHIBITS............................................................95
iv
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
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ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
We have derived the following selected consolidated financial data from our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or US GAAP.
The following selected data is derived from our audited consolidated financial statements included elsewhere in this annual report:
o consolidated statement of income data for the years ended December 31, 2007, 2008 and 2009; and
o consolidated balance sheet data as of December 31, 2008 and 2009.
The following selected data is derived from our audited consolidated financial statements that are not included in this annual report:
o consolidated statement of income data for the years ended December 31, 2005 and 2006; and
o consolidated balance sheet data as of December 31, 2005, 2006 and 2007.
YOU SHOULD READ THE SELECTED CONSOLIDATED FINANCIAL DATA TOGETHER WITH
ITEM 5 OF THIS ANNUAL REPORT ENTITLED "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND THE
OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS ANNUAL REPORT. SEE ALSO
NOTE 2 TO OUR CONSOLIDATED FINANCIAL STATEMENTS FOR AN EXPLANATION OF THE NUMBER
OF SHARES USED IN COMPUTING PER SHARE DATA.
ON FEBRUARY 15, 2010, WE HAVE COMPLETED THE SALE OF OUR WLAN BUSINESS TO
LANTIQ PURSUANT TO AN ASSET PURCHASE AGREEMENT, WHICH IS DESCRIBED BELOW UNDER
ITEM 10.C "ADDITIONAL INFORMATION--MATERIAL AGREEMENTS." AS THE SALE WAS
CONSUMMATED ON FEBRUARY 15, 2010, THE DATA PRESENTED BELOW AND IN OUR AUDITED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS ANNUAL REPORT DO
NOT REFLECT THE RESULTS OF SUCH SALE, INCLUDING THE RECEIPT OF THE CONSIDERATION
OR THE DISCONTINUATION OF OUR OPERATIONS IN THE WLAN BUSINESS, AND ARE NOT
OTHERWISE INDICATIVE OF OUR FUTURE OPERATING RESULTS OR FINANCIAL POSITION. SUCH
CHANGES WILL ONLY BE REFLECTED IN OUR CONSOLIDATED FINANCIAL STATEMENTS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 2010. YOU ARE ENCOURAGED TO READ THE UNAUDITED
CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 2009 INCLUDED ELSEWHERE IN THIS ANNUAL REPORT, WHICH REFLECT THE HISTORICAL
RESULTS OF METALINK, AS ADJUSTED TO GIVE EFFECT TO THE DISPOSITION OF THE WLAN
BUSINESS TO LANTIQ.
YEAR ENDED DECEMBER 31, 2009*
2005 2006 2007 2008 2009
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF
OPERATIONS DATA:
Revenues $ 14,529 $ 14,476 $ 10,166 $ 7,162 $ 4,916
Cost of revenues:
Costs and expenses 6,938 7,071 4,736 2,964 3,174
Royalties to the
Government of
Israel 392 436 297 218 160
--------- --------- --------- --------- ---------
Total cost of
revenues 7,330 7,507 5,033 3,182 3,334
--------- --------- --------- --------- ---------
Gross profit 7,199 6,969 5,133 3,980 1,582
Operating expenses:
Gross research and
development 20,117 20,498 25,474 22,516 9,627
Royalty bearing and
other grants 3,477 2,882 2,598 3,068 1,898
--------- --------- --------- --------- ---------
Research and
development, net 16,640 17,616 22,876 19,448 7,729
Sales and marketing 5,765 4,892 5,427 4,502 1,397
General and
administrative 2,254 1,985 2,451 2,647 2,416
Non-cash
compensation 17 -- -- -- --
--------- --------- --------- --------- ---------
Total operating
expenses 24,676 24,493 30,754 26,597 11,542
--------- --------- --------- --------- ---------
Operating loss (17,477) (17,524) (25,621) (22,617) (9,960)
Financial income,
net: 1,189 1,304 1,298 1,639 (3,494)
--------- --------- --------- --------- ---------
Net loss $ (16,288) $ (16,220) $ (24,323) $ (20,978) $ (13,454)
========= ========= ========= ========= =========
Loss per ordinary
share:
Basic $ (8.4) $ (8.3) $ (11.4) $ (8.9) $ (5.4)
========= ========= ========= ========= =========
Diluted $ (8.4) $ (8.3) $ (11.4) $ (8.9) $ (5.4)
========= ========= ========= ========= =========
Shares used in
computing loss
per ordinary share:
Basic 1,935,062 1,962,531 2,131,926 2,356,971 2,482,863
========= ========= ========= ========= =========
Diluted 1,935,062 1,962,531 2,131,926 2,356,971 2,482,863
========= ========= ========= ========= =========
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* Shares used for loss per share calculation have been adjusted retroactively to reflect the one for ten reverse split of our ordinary shares dated February 22, 2010.
CONSOLIDATED BALANCE SHEET DATA:
AS OF DECEMBER 31,
2005 2006 2007 2008 2009
------- ------- ------- ------- -------
(IN THOUSANDS)
Cash and cash
equivalents $ 7,134 $ 4,775 $ 7,291 $ 5,166 $ 2,273
Short-term investments 20,142 18,317 17,233 677 --
Long-term investments 10,589 5,520 2,200 -- --
Working capital 31,098 22,956 23,163 6,553 (4,678)
Total assets 52,853 40,286 38,622 17,379 7,866
Shareholders' equity 44,605 30,883 28,331 8,988 (3,102)
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UNAUDITED PRO-FORMA SELECTED DATA*
AS OF DECEMBER 31, 2009
---------
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,288
Cost of revenues:
Costs and expenses 1,028
Royalties to the Government of Israel 97
---------
Total cost of revenues 1,125
---------
Gross profit 2,163
Operating expenses:
Gross research and development --
Royalty bearing and other grants --
---------
Research and development, net --
---------
Sales and marketing --
General and administrative 2,322
---------
Total operating expenses 2,322
---------
Operating loss (159)
---------
Financial income, net: (3,494)
---------
Net loss $ (3,653)
=========
Loss per ordinary share:
Basic $ (1.47)
=========
Diluted $ (1.47)
=========
Shares used in computing loss
per ordinary share: 2,482,863
=========
Basic 2,482,863
=========
AS OF DECEMBER 31, 2009
---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 7,973
Working capital 3,543
Total assets 11,964
Shareholders' equity 3,341
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* Shares used for loss per share calculation have been adjusted retroactively to reflect the one for ten reverse split of our ordinary shares dated February 22, 2010.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
D. RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE DECIDING TO PURCHASE, HOLD OR SELL OUR STOCK. SET FORTH BELOW ARE THE MOST SIGNIFICANT RISKS, AS IDENTIFIED BY OUR MANAGEMENT, BUT WE MAY ALSO FACE RISKS IN THE FUTURE THAT ARE NOT PRESENTLY FORESEEN. OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION COULD BE MATERIALLY AND ADVERSELY AFFECTED BY THESE AND OTHER RISKS. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT, BEFORE MAKING ANY INVESTMENT DECISION REGARDING OUR COMPANY.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE SOLD OUR PRINCIPAL OPERATING BUSINESS AND CURRENTLY CONDUCT ONLY LIMITED BUSINESS ACTIVITIES.
We sold our WLAN business to Lantiq in February 2010. Since then, we hold substantially all of our assets in cash and cash equivalents and we currently conduct only limited business activities related to our remaining digital subscriber line, or DSL business. Our plan of operation is (1) to continue the marketing of our DSL products and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates. Other than activities relating to attempting to locate such opportunities and activities relating to our DSL business and the investment of our funds in short and long-term investments, we do not currently conduct any operations.
WE MAY NOT BE SUCCESSFUL IN IDENTIFYING AND EVALUATING SUITABLE BUSINESS OPPORTUNITIES OR TO OTHERWISE EXECUTE OUR PLAN OF OPERATIONS.
There can be no assurance that we will be successful in identifying and evaluating suitable business opportunities or to otherwise execute our plan of operations. While we are actively exploring strategic transactions and opportunities, we have not identified any particular opportunities. Accordingly, we may enter into a business combination with a business entity having no significant operating history or other negative characteristics such as having a limited or no potential for immediate earnings, or otherwise pursue a strategic transaction that will not necessarily provide us or our shareholders with significant financial benefits in the short or long term. In the event that we complete a business combination with an operating company, the success of our operations will be dependent upon the management of the target company and numerous other factors beyond our control. There is no assurance that we will be able to negotiate a business combination on terms favorable to us, or at all, or that we will otherwise be successful in executing our plan of operations. In addition, if we do consummate a major strategic transaction, such as a business combination, our shareholders may suffer a dilution of value of shares and we may need to raise additional financing because a business combination normally will involve the issuance of a significant number of additional Metalink shares and may require us to raise funds through a public or private financing.
WE HAVE A HISTORY OF OPERATING LOSSES.
We have incurred significant operating losses since our inception, and we may not achieve operating profitability in the foreseeable future. We reported operating losses of approximately $25.6 million for the year ended December 31, 2007, $22.6 million for the year ended December 31, 2008, and $10.0 million for the year ended December 31, 2009. As of December 31, 2009, our accumulated deficit was approximately $151.7 million. We reported revenues of approximately $4.9 million for the year ended December 31, 2009, compared to $7.2 million for the year ended December 31, 2008. Our revenues may not grow and are likely to decline in the foreseeable future. Even if we achieve and are able to sustain profitability, we cannot assure that future net income will offset our accumulated deficit. This is likely to have an adverse impact on the value of our stock.
WE ARE NOT LIKELY TO GENERATE SIGNIFICANT REVENUES FROM OUR DSL BUSINESS.
In early 2008, we issued an "end-of-life" notice to our customers, according to which we are discontinuing the production of the majority of our digital subscriber line, or DSL, components. Consequently, we have not allocated any research and development resources for DSL chipsets and have significantly reduced the scope of these operations. As such, future realization of revenues from our current remaining DSL activities may be impaired by the introduction of newer solutions by our competitors and the obsolescence of our proposed solutions. We expect that in the foreseeable future our revenues will be reduced as sales of our DSL chipsets decline .
OUR FUTURE REVENUES ARE PRIMARILY DEPENDENT ON THE ABILITY OF LANTIQ TO SUCCESSFULLY SELL OUR HT-WLAN PRODUCTS.
As part of the Lantiq Transaction, we are entitled to earn-out payments of up to an aggregate $8.0 million, contingent upon the acquired WLAN business's achievement of specified performance targets through March 2012. The achievement of these specified performance targets is primarily related to the ability of Lantiq to successfully sell our HT-WLAN products, which, in turn, is dependent, among others, on the development of the HT-WLAN market, including the willingness of end-customer telecommunications service providers to deploy 802.11n standard based products that include WLAN chipsets and the timing of the deployment.
WE ARE EXPOSED TO POTENTIAL LIABILITIES IN CONNECTION WITH THE LANTIQ TRANSACTION.
As part of the Lantiq Transaction, we have agreed to indemnify Lantiq for several matters, including with respect to liabilities of the WLAN business that were not assumed by Lantiq and breaches of the asset purchase agreement entered between us, including in the case of breaches of representations and warranties made by us in the asset purchase agreement. A claim against us could result in substantial cost, which would have a negative impact on our financial condition. In addition, we have generated a significant amount of income from this transaction. Based on our assessment, we believe that we are in compliance with all taxes due in relation with this transaction. The various tax authorities may not agree with our view and any such disagreement or a subsequent tax dispute could result in tax liabilities in amounts which we currently cannot estimate.
PRODUCTS SOLD BY US MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Third parties may assert against us infringement claims or claims that WLAN and DSL products sold by us in the past, as well as prouducts sold under our current remaining DSL activities, have violated a patent or infringed a copyright, trademark or other proprietary right belonging to them. In such event, we may also be exposed to an indemnity claim by Lantiq in accordance with the asset purchase agreement, as described elsewhere in this annual report.
We have received from time to time in the past, and may receive in the future, written notices and offers from research institutions, intellectual property holding firms and others claiming to have patent rights in certain technology and inviting us to license this technology and related patent rights for use in our products and methods or otherwise claiming that our products infringe on the intellectual property rights of others. For example, we have recently received a notice that one of our WLAN chipsets may be infringing the patent rights of a third party and, to our knowledge, such third party is in the process of submiting lawsuits against various other participants in the WLAN market. While, to date, none of these notices has resulted in litigation against us, we cannot assure you that any of these or other third-parties will not pursue litigation or assert their patent and other intellectual property rights against us in the future. It would be time consuming for us to defend any such claims, with or without merit, and any such claims could result in. among others, costly litigation; divert management's attention and resources; and require us to enter into royalty or licensing agreements and/or indemnify third parties. In particular, we have certain indemnification obligations to customers, as well as to Lantiq (see above), with respect to infringement of third-party patents and intellectual property rights by our products and underlying technology. We cannot assure you that our potential obligations to indemnify such third parties will not harm us, our business or our financial condition and results of operations. The results of any litigation are inherently uncertain and any infringement claim or litigation against us, whether with or without merit, could result in the expenditure of significant financial and managerial resources.
WE ARE EXPOSED TO VARIOUS OTHER RISKS IN CONNECTION WITH THE OPERATION OF OUR REMAINING DSL BUSINESS.
While we expect that in the foreseeable future our revenues will be reduced as sales of our DSL chipsets decline, we are exposed to various risks in connection with the operation of our remaining DSL business, including due to the following:
o We currently rely on a single subcontractor for the manufacture of our current remaining DSL chipests and on a limited number of subcontractors for the assembly of finished chips and other related services. These subcontractors currently have limited manufacturing capacity, which may not be made available to us on a timely basis, or at all;
o We currently obtain key components from a single supplier or from a limited number of suppliers and we generally do not have long-term supply contracts with our suppliers;
o We may experience delays in the delivery of components from our suppliers. Due to the discontinuation of the production of the majority of our DSL components and our expectation that any purchase orders placed with us, will be limited in scale, our subcontract manufacturers may allocate available capacity to other customers, including customers that are larger or have long-term supply contracts in place;
o If our products fail to comply with European or other directives relating to the sale of electrical and electronic equipment, we could be subject to penalties and sanctions that could materially adversely affect our business;
o Because competition in the market for our DSL chipsets and alternative products is intense, we may not be able to effectively compete with other suppliers in our market; and
o Because we operate in international markets, we are subject to risks which often characterize international markets, including multiple, conflicting and changing laws and regulations; economic and political instability; and fluctuations in exchange rates.
WE ARE DEPENDENT ON TZVI SHUKHMAN, OUR CHIEF EXECUTIVE OFFICER, THE LOSS OF WHOM WOULD NEGATIVELY AFFECT OUR BUSINESS.
We believe our future success will depend in large part on the continued services of Tzvi Shukhman, our chief executive officer. Mr. Shukhman has not entered into an employment contract with us. We do not carry a life insurance on Mr.Shukhman. Any loss of the services of Tzvi Shukhman, could negatively affect our business.
RISK FACTORS RELATING TO OUR ORDINARY SHARES
WE MAY NOT SATISFY THE NASDAQ CAPITAL MARKET'S REQUIREMENTS FOR CONTINUED LISTING. IF WE CANNOT SATISFY THESE REQUIREMENTS, NASDAQ COULD DELIST OUR ORDINARY SHARES.
Our ordinary shares are listed on the NASDAQ Capital Market, or NASDAQ, under the symbol MTLK. To continue to be listed on the NASDAQ, we will need to satisfy a number of conditions. For example, since late 2008 and through February 2010, we were not in compliance with NASDAQ's minimum bid price requirement of $1.00 per share, which eventually led us to effect a reverse share split of our ordinary shares.
We cannot assure you that we will be able to continue to be in compliance with the minimum bid requirment, or continue to meet the other continued listing requirements of NASDAQ in the future. In particular, NASDAQ has, from time to time, issued delisting notices to issuers that it believed to no longer have an operating business or are otherwise considered a "public shell" based on certain NASDAQ rules that generally provide NASDAQ with a discretionary authority listing even though the securities meet all enumerated criteria for continued inclusion in NASDAQ.
If we are delisted from NASDAQ, trading in our ordinary shares may be conducted, if available, on the "OTC Bulletin Board Service" or another medium. In the event of such delisting, an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of our ordinary shares, and our ability to raise future capital through the sale of our ordinary shares could be severely limited. If we are delisted from NASDAQ, our shares will cease to qualify for the mark-to-market election under the PFIC rules. See "Item 10E, Taxation--United States Federal Income Tax Considerations--Passive Foreign Investment Company Considerations."
In addition, if our ordinary shares were delisted from NASDAQ, our ordinary shares could be considered a "penny stock" under the U.S. federal securities laws. Additional regulatory requirements apply to trading by broker-dealers of penny stocks that could result in the loss of an effective trading market for our ordinary shares.
A MAJORITY OF OUR OUTSTANDING SHARES ARE HELD BY TWO INDIVIDUALS, WHO EXERT SIGNIFICANT CONTROL OVER THE COMPANY'S DIRECTION. IN ADDITION, SUBSTANTIAL FUTURE SALES OF OUR ORDINARY SHARES MAY DEPRESS OUR SHARE PRICE.
As of June 24, 2010, Messrs. Tzvi Shukhman and Uzi Rozenberg, who are directors of the Company, held an aggregate of 10,685,654 of ordinary shares (or 1,068,566 shares after the reverse share split effected February 22, 2010), representing 39.71% of our outstanding shares. Mr. Shukhman is also our chief executive officer, and Mr. Rozenberg is also the Chairman of our Board of Directors. As a result, if these shareholders vote together, they could have a significant influence on the election of our directors and on other decisions by our shareholders on matters submitted to shareholder vote, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares. This concentration of ownership may also adversely affect our share price.
In addition, if these shareholders sell substantial amounts of our ordinary shares, or if the perception exists that they may sell a substantial number of our ordinary shares, the market price of our ordinary shares may fall.
IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OUR U.S. SHAREHOLDERS MAY SUFFER ADVERSE TAX CONSEQUENCES.
As more fully described in Item 10 - "Additional Information - Taxation" under the caption "PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS," there is a high likelihood that we will be properly classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in 2010. If, for any taxable year, our passive income, or our assets that produce passive income, exceed specified levels, we may be characterized as a PFIC for that year and possibly also for later years. We satisfied the corpoate level test to be a PFIC during the years 2002 and 2003 but not in the years 2004-2009. Our ordinary shares will be shares in a PFIC in the case of any United States person that owned those shares in 2002 or 2003 and that person has not made any of certain elections that could permit the PFIC classification of our shares to terminate in a taxable year in which we did not satisfy the test to be a PFIC. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences. These consequences may include having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gains, and having the highest possible tax rates in prior years, together with significant interest charges, apply to substantial portions of those gains and to certain distributions, if any, that we make, whether or not we have any earnings and profits. U.S. shareholders should consult their own U.S. tax advisers with respect to the U.S. tax consequences of investing in our ordinary shares.
IF WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS AND STOCK PRICE.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to comply with the management assessment requirements of Section 404, which apply to us beginning with year 2007, have resulted in increased general and administrative expenses and a devotion of management time and attention to compliance activities, and we expect these efforts to require the continued commitment of significant resources. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. We may also identify material weaknesses or significant deficiencies in our internal control over financial reporting. In addition, our internal control over financial reporting has not yet been audited by our independent registered public accounting firm. In the future, if we are unable to assert that our internal controls are effective, our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation and/or sanctions by regulatory authorities, and could have a material adverse effect on our business and operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
RISKS RELATING TO OUR LOCATION IN ISRAEL
CONDITIONS IN ISRAEL AFFECT OUR RESULTS OF OPERATIONS AND MAY LIMIT OUR ABILITY TO PERSUE OUR STRATEGIC ALTERNATIVES.
We are incorporated under the laws of the State of Israel, and our principal offices are located in Israel. Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since late 2000, there has been a high level of violence between Israel and the Palestinians which has strained Israel's relationship with its Arab citizens, Arab countries and, to some extent, with other countries around the world. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Any armed conflicts or political instability in the region, including acts of terrorism or any other hostilities involving or threatening Israel, might deter potential targets from effecting a business combination with an Israeli company. In addition, the operations and financial results of our remaining DSL business could be adversely affected if political, economic or military events curtailed or interrupted trade between Israel and its present trading partners or if major hostilities involving Israel should occur in the Middle East.
PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR COMPLICATE MERGER OR ACQUISITION ACTIVITY, WHICH COULD DEPRESS THE MARKET PRICE OF OUR SHARES.
Provisions of Israeli corporate, securities and tax law may have the effect of delaying, preventing or making an acquisition of our company more difficult. For example, under the Companies Law, upon the request of a creditor of either party to a 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. This and other provisions of Israeli law could cause our ordinary shares to trade at prices below the price for which third parties might be willing to pay to gain control of us, since third parties who are otherwise willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE GENERATED IN U.S. DOLLARS WHILE A SIGNIFICANT PORTION OF OUR EXPENSES ARE INCURRED IN NIS OUR RESULTS OF OPERATIONS MAY BE SERIOUSLY HARMED IF THE RATE OF INFLATION IN ISRAEL EXCEEDS THE RATE OF DEVALUATION OF THE NIS AGAINST THE U.S. DOLLAR OR IF THE NIS IS APPRECIATED AGAINST THE U.S. DOLLAR.
We generate substantially all of our revenues in dollars, but we incur a significant portion of our expenses, principally salaries, related personnel expenses and occupancy expenses in NIS. As a result, we are exposed to the risk that our dollar costs in Israel will increase if the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of this devaluation lags behind inflation in Israel or that the NIS is appreciated against the dollar. Historically, over time, the NIS has been devalued against the dollar, generally reflecting inflation rate differentials. Likewise, our operations could be adversely affected if we are unable to protect ourselves against currency fluctuations in the future.
In 2007, we entered into certain currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS. In 2008 the Company settled all hedging transactions and did not resume any such transactions during 2009. We may however enter into additionl currency hedging transactions in the future. These measures, however, may not adequately protect us from serious harm due to the impact of inflation in Israel.
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 under the laws of the State of Israel. Service of process upon us, our Israeli subsidiaries and our directors and officers, all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of them may not be collectible within the United States.
We have been informed by our legal counsel in Israel that it may be difficult to assert U.S. securities law claims in original actions instituted in Israel. 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. final 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:
o the judgment is enforceable in the state in which it was given;
o adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
o the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
o 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
o an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the U.S. court.
WE DERIVE CERTAIN TAX BENEFITS UNDER ISRAELI LAW FROM OUR STATUS AS AN "APPROVED ENTERPRISE", IN ADDITION TO OTHER TAX AND PROGRAM BENEFITS UNDER ISRAELI LAW. SUCH BENEFITS MAY REQUIRE US TO SATISFY CERTAIN CONDITIONS, OR MAY BE REDUCED OR ELIMINATED IN THE FUTURE. OUR POTENTIAL TAX LIABILITY COULD INCREASE IF WE FAIL TO MEET SUCH CONDITIONS, OR IF SUCH PROGRAMS ARE REDUCED OR ELIMINATED.
Several of our capital investments have been granted "approved enterprise" status under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investments Law. An approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs. The benefits available to an approved enterprise are dependent upon the fulfillment of conditions stipulated in applicable law and the certificate of approval. If we fail to comply with these conditions, in whole or in part, with respect to any approved enterprise program we establish, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and we would likely be denied these benefits in the future. This could harm our business and our profitability. In addition, the Israeli government may reduce or eliminate in the future tax benefits available to approved enterprise programs. Our approved enterprise program and the tax benefits thereunder may not continue in the future at their current levels or at any level. The termination or reduction of these tax benefits would likely increase our taxes.
SINCE WE RECEIVED GOVERNMENT GRANTS FOR RESEARCH AND DEVELOPMENT EXPENDITURES, WE ARE SUBJECT TO ONGOING RESTRICTIONS AND CONDITIONS, INCLUDING RESTRICTIONS ON OUR ABILITY TO MANUFACTURE PRODUCTS AND TRANSFER TECHNOLOGIES OUTSIDE OF ISRAEL.
We have received royalty-bearing grants from the Government of Israel through the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Chief Scientist, for the financing of a significant portion of our research and development expenditures in Israel and we may to apply for additional grants in the future. To maintain our eligibility for these grants we must continue to meet several conditions under the grant programs, including paying royalties with respect to the grants received. If we fail to comply with any of the conditions imposed by the Chief Scientist, we may be required to refund any payments previously received, together with interest and penalties.
In addition, the terms of the Chief Scientist grants limit our ability to manufacture products or transfer technologies, outside of Israel, if such products or technologies were developed using know-how developed with or based upon Chief Scientist grants. Any non-Israeli who becomes a holder of 5% or more of our share capital is generally required to notify the Chief Scientist and to undertake to observe the law governing the grant programs of the Chief Scientist, the principal restrictions of which are the transferability limits described above in this paragraph.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
CORPORATE HISTORY AND DETAILS
Metalink was incorporated in September 1992 as a corporation under the laws of the State of Israel. Our principal executive offices are located at Yakum Business Park, Yakum 60972, Israel. Our telephone number is 972-9-960-5555. Our agent for service in the United States is National Registered Agents, Inc. 160 Greentree Drive, Suite 101 Dover, DE 19904.
Our address on the Internet is www.MTLK.com. The information on our website is not incorporated by reference into this annual report.
From our inception through the third quarter of 1994, our operating activities related primarily to establishing a research and development organization, developing prototype chip designs which meet industry standards and developing strategic OEM partnerships with leading telecommunications equipment manufacturers. We shipped our first chip set in the fourth quarter of 1994. Since that time, we have continued to focus on developing additional products and applications, shaping new industry standards and building our worldwide indirect sales and distribution channels.
In December 1999, we completed our initial public offering of 4,600,000 ordinary shares and our ordinary shares commenced trading on the NASDAQ Global Market under the symbol "MTLK". In March 2000, we completed our secondary public offering of 1,500,000 ordinary shares and, in December 2000, our ordinary shares commenced trading also on the TASE.
RECENT MAJOR BUSINESS DEVELOPMENTS
On January 5, 2010, we entered into an Asset Purchase Agreement with Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG (together, "Lantiq") for the sale of the assets of, and certain specified liabilities related to, our wireless local area network (WLAN) business to Lantiq, a newly-formed fabless semiconductor company funded by Golden Gate Capital, in consideration for a total purchase price of up to $16.9 million in cash. On February 15, 2010 we completed the transaction. As part of the transaction, we entered into several additional agreements with Lantiq whereby, among other things, we agreed to provide Lantiq certain consulting services and Lantiq agreed to provide us with certain transition services for a limited period following the closing. FOR ADDITIONAL DETAILS ABOUT THE LANTIQ TRANSACTION, SEE BELOW UNDER ITEM 10.C "ADDITIONAL INFORMATION--MATERIAL AGREEMENTS."
On September 8, 2008, we entered into a loan agreement with the Senior
Lender, whereby the Senior Lender extended us a senior secured loan of up to
$8.0 million, $3.5 million of which were drawn on September 9, 2008, and $2.25
million were drawn on January 2, 2009 as part of an amendment to the loan
agreement. On September 6, 2009, we entered into a second amendment to the Loan
Agreement, whereby the maturity date was extended from September 9, 2009 to
March 9, 2010. As part of the such amendment, we repaid the Senior Lender $2.0
million out of the outstanding $5.75 million. On December 30, 2009, we entered
into a third amendment to the Loan Agreement, whereby a repayment of $4,312,500
originally due upon the closing of the Lantiq Transaction would be reduced to
$4,100,000 and repaid in four installments: $3,750,000, which was paid at the
closing of the Lantiq Transaction, and the remainder in three installments by
March 31, 2011. FOR ADDITIONAL DETAILS ABOUT THE LOAN AGREEMENT, SEE BELOW UNDER
ITEM 10.C "ADDITIONAL INFORMATION--MATERIAL AGREEMENTS."
On November 30, 2009, NASDAQ staff informed us that our securities will be delisted from Nasdaq as we have failed to meet the Nasdaq $1.00 minimum bid price requirement and minimum shareholders' equity requirement of $2.5 million
On February 22, 2010 we effected a one-for-ten reverse split of the Company's outstanding ordinary shares that was designed to assist us in regaining compliance with the $1.00 minimum bid price requirement. After the reverse split, the number of the Company's authorized Ordinary Shares was decreased from 50 million to 5 million and the par value per Ordinary Share was increased from NIS 0.1 to NIS 1.0.
On March 8, 2010, following the aforesaid reverse share split and the increase in our shareholders' equity that occurred as a result of the closing of the Lantiq Transaction, NASDAQ staff informed us that we have regained compliance with the minimum bid price requirement and the minimum shareholders' equity requirement. Accordingly, the staff determined to continue the listing of our securities on The Nasdaq Stock Market.
On March 11, 2010, we voluntary delisted our ordinary shares from trading on the Tel Aviv Stock Exchange (TASE), which delisting became effective on June 14, 2010.
PRINCIPAL CAPITAL EXPENDITURE AND DIVESTITURES
Capital expenditures were $15,000 for the year ended December 31, 2009, $793,000 for the year ended December 31, 2008, and $1,975,000 for the year ended December 31, 2007. These expenditures were principally for equipment and software for our research, development and manufacturing activities.
During 2007, 2008 and 2009, we did not make any significant divestitures. In early 2008, we issued "end of life" notices to our DSL customers regarding most of our DSL products and, as described elsewhere in this annual report, we sold our WLAN business to Lantiq in February 2010.
B. BUSINESS OVERVIEW
EXPLANATORY NOTE
Upon the sale of our WLAN business to Lantiq in February 2010, we ceased substantially all of the operations of our business as conducted prior thereto. Since then, our plan of operation is (1) to continue the marketing of our digital subscriber line, or DSL products and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates. In addition, as a result of the Lantiq Transaction, the results of operations of the WLAN business in future periods will be reported as discontinued operations and the consolidated results from continuing operations will no longer include revenues and expenses attributable to such business. Nevertheless, since the operations of the WLAN business comprised one of our principal activities in the past years, we have divided this Item 4 into the following two primary sections (1) DSL Business - Continued Operations, and (2) Sale of WLAN Business to Lantiq.
DSL BUSINESS - CONTINUED OPERATIONS
GENERAL
We sell DSL chipsets used by manufacturers of telecommunications equipment. Our DSL chipsets enable the digital transmission of voice, video and data over copper wire communications lines at speeds that are up to 2,000 times faster than transmission rates provided by conventional analog modems. Our chipsets typically include two individual integrated circuits, or chips, and include an analog front-end (AFE) for line interfacing with analog signals and a digital signal processor (DSP) / framer for signal and data processing of the messages being transmitted. We have sold over fifteen million of our chips to OEMs that incorporate our chips into their own products. These OEMs have sold products containing our chipsets to telecommunications service providers throughout the world.
PRODUCTS AND TECHNOLOGY
DSL. A typical DSL chip set consists of an analog front-end (AFE) device and a digital device. The AFE serves as an interface between the analog signals transmitted aloNg the copper wire and the digital device. The AFE performs various analog signal-processing functions, such as converting the analog signals into digital format and vice-versa. The digital device includes multiple functions including the transceiver (DSP) section implementing the modulation and demodulation of the digital signal, the framer section which serves as an interface between the DSP functional block and the digital network system. In some cases the digital device may contain additional functionality such as a network processor, higher layers processing, etc.
SDSL. SDSL uses 2BlQ encoding to offer a symmetric link over a single copper wire at maximum symmetric rates of 2.320 megabits per second (Mbps). SDSL is used by competitive local exchange carriers, or CLECs, to allow their business customers cost effective access to the network, including high-speed access to the Internet and remote local area networks (LANs), integrated with multiple transmissions of voice channels and video conferencing. To date, the SDSL technology has been recognized as an accepted specification and is not likely to be adopted as a formal standard by any of the standardizing bodies.
HDSL2 AND HDSL4. HDSL2 improves on the T1 HDSL 2-Pair solution by offering similar performance achieved using only a single copper wire pair. This is achieved by using the PAM-16 line code in combination with Trellis coding. This standard was further enhanced to support an extended reach 4 wire mode, using the same PAM-16 line code referred to as HDSL4. G.SHDSL. G.SHDSL improves on the SDSL and HDSL technologies by providing rate adaptive solutions at rates of up to 2.320 Mbps, while increasing the maximum range of transmissions by 20%, compared to that allowed by the legacy technologies. G.SHDSL supports various encoding technologies, including the technologically-advanced Trellis coded PAM-16.
VDSL. VDSL technology defines very high transmission rates over a single copper wire pair. This includes symmetric transmission at a rate of up to 100 Mbps. This unit is connected by copper wire to multiple subscribers located in large complexes, such as large residential complexes, hotels and campuses. The unit multiplexes the bandwidth of tens to hundreds of subscribers onto a single fiber that carries the information to the central office. VDSL technology has been standardized by the American National Standards Institute, or ANSI, and the ITU. In 2003 the standards working group in the ANSI developed an American National Standard for VDSL using Multi Carrier Modulation (DMT) and a Committee T1 Technical Requirement (TRQ) document for VDSL using Single Carrier Modulation (QAM). In 2004, the ITU has reached agreement on a new global standard that specifies the application of the two main technologies used for encoding signals for DSL - Discrete Multi Tone (DMT) technology and Quadrature Amplitude Modulation (QAM) - to VDSL (Very high-speed Digital Subscriber Line) technology. In May 2005 the ITU has ratified a VDSL2 standard based on the existing ADSL2 and VDSL standards that specify DMT modulation only. Our existing VDSL chipsets are based on QAM. Currently most of the future deployment of VDSL chipsets require the VDSL2 standard of DMT only. Thus, our VDSL sales suffer from lack of demand, and we expect them to continue to diminish in the near future.
In early 2008, we issued "end of life" notices to our DSL customers regarding most of our DSL products and we are not currently engaged in development of any DSL chipsets.
The following is a table of our proprietary DSL chips which form the chipsets offered by us to our customers:
-------- ---------------------------------------------------------------------------- ------------- -----------
MAXIMUM
TRANSMISSION
SAMPLING RATES
CHIPS FUNCTION DATE (MBPS)
-------- ---------------------------------------------------------------------------- ------------- -----------
MtS 870 Octal SHDSL transceiver/framer 4Q00 4.640
MtS 170 Single SHDSL transceiver frame 1Q01 4.640
MtS 140 Single SHDSL AFE 4Q00 4.640
MtS 142 Single SHDSL/HDSL2/HDSL4 AFE with integrated line-driver. 2Q01 4.640
-------- ---------------------------------------------------------------------------- ------------- -----------
MtS 180 SHDSL / HDSL2 / HDSL4 system on a chip for T1/E1/TDM transport applications 1Q02 4.640
MtS 172 SDSL / SHDSL / HDSL2 / HDSL4 transceiver with integrated T1/E1 framer. 2Q02 4.640
-------- ---------------------------------------------------------------------------- ------------- -----------
MtV 9370 Dual VDSL transceiver/framer for 3-band applications 3Q01 52
MtV 9141 VDSL AFE for 2,3 and 4-band applications 4Q01 52
-------- ---------------------------------------------------------------------------- ------------- -----------
MtV 9172 Single trunk 2/3/4-band VDSL transceiver with integrated MAC for
Ethernet & ATM applications (ONU & NT) 4Q02 60
MtV 9470 Quad 2/3/4-band VDSL transceiver for Ethernet applications (ONU) 4Q02 60
-------- ---------------------------------------------------------------------------- ------------- -----------
MtV 9473 Quad 2/3/4/5-band VDSL transceiver for Ethernet applications (ONU) 1Q04 100
MtV 9273 Single trunk 2/3/4/5/6-band VDSL transceiver with integrated MAC
for Ethernet & ATM applications (ONU & NT) 1Q04 100
MtV 9143 VDSL AFE for 2,3,4, 5 and 6-band applications 1Q04 100
MtV 9120 VDSL Line Driver for 2,3,4,5 and 6-band applications 1Q04 100
-------- ---------------------------------------------------------------------------- ------------- -----------
|
The following table enumerates our product applications:
------------------------------------------------- ------------- --------------------------------------
CHIP SET APPLICATIONS PRODUCTS CONFIGURATION
------------------------------------------------- ------------- --------------------------------------
Octal G.shdsl SHDSL CO application MtS870 Each chip set consists of one octal
MtS140 DSP / framer and eight AFE chips.
OR
MtS142 DSP / framer and eight AFE chips.
------------------------------------------------- ------------- --------------------------------------
G.shdsl SHDSL CPE application MtS170 Each chip-set consist of a single DSP
MtS140 / framer chip and a single AFE chip.
OR
MtS142 / framer chip and a single AFE chip.
------------------------------------------------- ------------- --------------------------------------
Single pair T1 HDSL2 and E1 G.SHDSL MtS180 Each chip-set consist of a single DSP
MtS140 / framer chip and a single AFE chip.
OR
MtS142 / framer chip and a single AFE chip.
------------------------------------------------- ------------- --------------------------------------
Two pair T1 HDSL4 and E1 G.SHDSL MtS180 Each chip-set consist of a two DSP /
MtS172 framer chips and two AFE chips.
MtS140
OR
MtS142 framer chips and two AFE chips.
------------------------------------------------- ------------- --------------------------------------
Single pair T1 HDSL2 MtS180 Each chip-set consist of a single DSP
MtS142 / framer chip and a single AFE chip.
------------------------------------------------- ------------- --------------------------------------
Two pair T1 HDSL4 MtS180 Each chip-set consist of a single
MtS172 System on Chip, single DSM/Framer and
MtS142 two AFE devices.
------------------------------------------------- ------------- --------------------------------------
CO/ONU dual three band VDSL application MtV9370 Each chip-set consist of a DSP/
MtV9141 framer chip and two AFE chips.
------------------------------------------------- ------------- --------------------------------------
CO/ONU Quad four-band EoVDSL application MtV 9470 Each chip-set consist of a DSP/framer
MtV9141 chip and four AFE chips
------------------------------------------------- ------------- --------------------------------------
EoVDSL CPE four band VDSL application MtV9172 Each chip-set consist of a single DSP
MtV9141 / framer chip and a single AFE chip.
------------------------------------------------- ------------- --------------------------------------
CO/ONU Quad five-band EoVDSL application MtV 9473 Each chip-set consist of a DSP/framer
MtV9143 chip and four AFE chips and four line
MtV9120 driver chips
------------------------------------------------- ------------- --------------------------------------
EoVDSL CPE five band VDSL application MtV9172 Each chip-set consist of a single DSP
MtV9141 / framer chip two AFE chips and a
MtV9120 single line driver chip.
------------------------------------------------- ------------- --------------------------------------
ONU and CPE six-band VDSL application MtV9273 Each chip-set consist of a single DSP
MtV9143 / framer chip, a single AFE chip and
MtV9120 a single line driver chip.
------------------------------------------------- ------------- --------------------------------------
|
Older products are approaching a point of obsolence, and as the market for those products diminishes, we will slow or stop production of those products altogether.
CUSTOMERS
Our customers for the DSL products, primarily telecommunications equipment manufacturers, incorporate our chipsets into the products that they sell to telecommunications service providers. Since we commenced operations in 1993, we have shipped over fifteen million of our DSL chips to our customers or OEM partners, including ADC, Alcatel, ECI Telecom, Marconi, Motorola Wireline Networks, Primeteck, RAD, Schmid, Tellion, Tellabs and others. These chips are used in telecommunications equipment deployed worldwide by telecommunications service providers. We do not have purchase contracts with any of our customers that obligate them to continue to purchase our chipsets, and these customers could cease purchasing our chipsets, at any time.
At the beginning of year 2008, we provided our customers an "end-of-life" announcement, according to which we are discontinuing the production of most of our digital subscriber line, or DSL, components.
Our DSL chipsets are being incorporated into the following systems:
o T1/El transmission equipment, which is used by telecommunications service
providers to enable transmission speeds of 1.544 Mbps, for T1 lines, and
2.048 Mbps, for El lines;
o Digital subscriber line access multiplexers (DSLAMs), which are used to terminate up to hundreds of lines in a central office and aggregate them onto high-speed lines for transmission to the communications backbone;
o DSL enabled digital loop carriers (DLC), which are used to terminate up to hundreds of DSL and telephony lines, typically in a remote terminal (RT) or an optical network unit (ONU);
o Ethernet based digital subscriber line access multiplexers (DSLAMs) and Ethernet switches, which are used to terminate tens of lines in a building basement or street cabinet and aggregate them onto a high-speed optical Ethernet link for transmission to the communications backbone;
o DSL network interface units, which are customer premises equipment that enable high-speed data transmission over the local loop;
o DSL-compatible routers, which are used to connect one or more personal computers to the local loop;
o DSL-integrated access device (IAD) that combine voice and data transport over single twisted pair; and
o DSL residential gateways and set-top boxes (STB) that combine Video, Voice and Data transport over single twisted pair.
Our customers market their products to public and private telecommunications service providers. These service providers include incumbent local exchange carriers or ILECs, CLECs and Internet service providers.
The following is a summary of revenues by geographic area. Revenue is attributed to geographic region based on the location of the customers.
2 0 0 9 2 0 0 8 2 0 0 7
---------- ------------ -------------
(IN THOUSANDS)
----------------------------------------------
REVENUES:
Korea $ 336 $ 542 $ 1,051
Israel 1,218 1,554 2,023
United States 1,308 75 2,284
Other foreign countries
(mainly European) 2,054 4,991 4,808
---------- ------------ -------------
$ 4,916 $ 7,162 $ 10,166
========== ============ =============
|
For the year ended December 31, 2009, three customers accounted for approximately 71% of our revenues. For the year ended December 31, 2008, three customers accounted for approximately 63% of our revenues. For the year ended December 31, 2007, four customers accounted for approximately 69% of our revenues.
The following is a summary of revenues by product line.
2 0 0 9 2 0 0 8 2 0 0 7
--------- --------- ----------
(IN THOUSANDS)
--------------------------------------
REVENUES:
DSL $ 3,288 $ 7,108 $ 9,855
WLAN (discontinued see ITEM 10C) 1,628 54 311
--------- --------- ----------
$ 4,916 $ 7,162 $ 10,166
========= ========= ==========
|
SALES AND MARKETING
Since the sale of the WLAN business to Latiq in February 2010, we have only limited sales representatives and distributors, who are typically engaged on an ad-hoc basis. Until the sale of the WLAN business, we marketed our products through a worldwide network of independent agents, sales representatives and distributors.
We also sell our products directly to selected customers in the United States, Israel and Europe.
RESEARCH AND DEVELOPMENT
Since the sale of the WLAN business to Latiq in February 2010, we are not engaged in any research and development activites. Until the sale of the WLAN business, we invested significant resources in research and development activities and, as of December 31, 2009 our research and development staff consisted of 50 employees.
The Government of Israel, through the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, encourages research and development projects. Since 1995, we received grants from the Office of the Chief Scientist for the development of our products. In addition, we were engaged in a research project, under the sixth framework program of the European Commission, under which we were entitled to grants based on certain approved expenditures of a research and development plan. See "Item 5(A)--Operating and Financial Review and Prospects--Operating Results--Government Grants."
MANUFACTURING
We have never owned or operated a semiconductor fabrication facility. As a fabless provider of chipsets, we subcontract our entire semiconductor manufacturing to third party contractors. Our chipsets are delivered to us fully assembled and tested based on our proprietary designs.
We currently subcontract our semiconductor wafer manufacturing to Taiwan Semiconductor Manufacturing Company in Taiwan, Jazz Semiconductor in USA, and to Semiconductor Manufacturing International (Shanghai) Corp. in China. The packaging and testing of our chipsets are performed by Singapore Technologies Assembly and Test Services, Advanced Semiconductor Engineering Inc. in Taiwan, and ASAT Ltd. in Hong Kong and China. The selection of these manufacturers was based on the breadth of available technology, quality, manufacturing capacity and support for design tools used by us. All of the fabrication, assembly and test facilities are ISO 9002 / QS9000 / SAC certified, or have a roadmap to comply with the above standards. Most of our chipsets are not manufactured by more than one contractor. In the event that one of our contractors notifies us that it intends to cease manufacturing a chip or that it is temporarily unable to manufacture a chip, we may not have an adequate opportunity to order sufficient quantities of the affected chip to prevent shipments to customers from being adversely affected while we qualify a new manufacturer.
We intend to continue for the foreseeable future to rely on third parties for substantially all of our wafer manufacturing, assembly and test requirements. All of our subcontract manufacturers produce products for other companies. We do not have long-term manufacturing, packaging and testing agreements with any of our subcontractors, except for one foundry. Most of our foundries, and packaging and testing subcontractors are not obligated to supply us with products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order that has been accepted by one of our subcontractors.
We must place orders at least 16 to 20 weeks in advance of expected delivery. As a result, we have only a limited ability to react to fluctuations in demand for our chipsets, which could cause us to have excess or a shortage of inventory of a particular chip.
PROPRIETARY RIGHTS
We rely on patent, copyright, trademark and trade secret laws, confidentiality agreements and other contractual arrangements with our employees, strategic partners and others to protect our technology. We do not currently own any registered trademarks or registered copyrights.
In addition, our NML technology is protected by three patents in the United States. Most of our chipsets design is based on the NML technology. If that technology was not protected, or if it was deemed to be infringing on third party intellectual property rights, we would incur significant costs and competitive disadvantages in redesigning our products. In addition, other parties may assert rights as inventors of the underlying technologies, which could limit our ability to fully exploit the rights conferred by any patent that we receive. Our competitors may be able to design around any patent that we receive and other parties may obtain patents that we would need to license or circumvent in order to exploit our patents.
One of our existing U.S. patents will expire in 2015. Our other two U.S. patents will expire in 2018.
COMPETITION
The DSL chip set market is intensely competitive. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market. We believe that we must compete on the basis of a variety of factors, including time to market, functionality, conformity to industry standards, performance, price, breadth of product lines, product migration plans, and technical support.
We believe our principal competitors in the DSL market include Ikanos, Lantiq and Mindspeed. As described above, at the beginning of year 2008, we provided our customers an "end-of-life" announcement with respect to most of our DSL components.
Many of our competitors have greater name recognition, their own manufacturing capabilities, significantly greater financial and technical resources, and the sales, marketing and distribution strengths that are normally associated with large multinational companies. These competitors may also have preexisting relationships with our customers or potential customers. These competitors may compete effectively with us because in addition to the above-listed factors, they may introduce new technologies more rapidly or effectively address customer requirements or devote greater resources to the promotion and sale of their products than we do. Further, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to do so.
As time passes in the DSL market, we expect that the existing need for our chipsets to decline. Since we do not manufacture our own products, we may be unable to negotiate volume discounts with our foundries in order to reduce the costs of manufacturing our chipsets in response to declining average per unit selling prices. Many competitors are larger with greater resources and therefore may be able to achieve economies of scale and would be less vulnerable to price competition and may use our subcontractors manufacturing capacity causing us difficulties in supply from said manufaturers. Our inability to achieve manufacturing efficiencies would have an adverse impact on our operating results.
GOVERNMENT REGULATIONS
ENVIRONMENTAL DIRECTIVES. A directive issued by the European Union on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or "RoHS," came into effect in July 2006. The RoHS directive lists a number of substances including, among others, lead, mercury, cadmium and hexavalent chromium, which must either be removed or reduced to within maximum permitted concentrations in any products containing electrical or electronic components that are sold within the European Union. Our products meet the requirements of the RoHS directive and we are making every effort in order to maintain compliance, without otherwise adversely affecting the quality and functionalities of our products.
We, like other manufacturers, are dependent on our suppliers for certain components and sub-system modules to comply with these requirements and on their ability to monitor such compliance.
A further European Union directive on Waste Electrical and Electronic Equipment, or "WEEE," approved by the European Union in 2003, promotes waste recovery with a view to reducing the quantity of waste for disposal and saving natural resources, in particular by reuse, recycling and recovery of waste electrical and electronic equipment. The WEEE directive covers all electrical and electronic equipment used by consumers and electronic equipment intended for professional use. The directive, which partly came into effect in August 2005, requires that all new electrical and electronic equipment put on the market in European Union be appropriately labeled regarding waste disposal and contains other obligations regarding the collection and recycling of waste electrical and electronic equipment. We support the WEEE and conform to the industry standard practices wherever practical. If we fail to maintain compliance, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
An additional European Code of Conduct on Energy Consumption of Broadband Equipment Conduct, or the Code of Conduct, has set out the basic principles to be followed by all parties involved in broadband equipment, operating in the European Community, in respect of energy efficient equipment. The Code of Conduct requires Customer-premises equipment, or CPE and home appliances to meet certain maximum power cunsmpution targets. Though this requeirment is on the overall device manfucaturred by our customers, it influences the requriments from our products which are integrated into such devices. If we fail to maintain compliance with the Code of Conduct, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
The countries of the European Union, as a single market for our products, accounted in 2009 for approximately 42% of our revenues. If our products fail to comply with WEEE or RoHS directives, the Code of Conduct or any other directive or similar regulation issued from time to time by the European Union or in other countries in which we operate, we could be subject to penalties and other sanctions that could have a material adverse affect on our results of operations and financial condition.
ISRAELI OFFICE OF THE CHIEF SCIENTIST. See "Item 5(A)--Operating and Financial Review and Prospects--Operating Results--Government Grants."
SALE OF WLAN BUSINESS TO LANTIQ
On February 15, 2010, we completed a transaction to sell our WLAN business to Lantiq, as described under "ITEM 10C. MATERIAL CONTRACTS - LANTIQ TRANSACTION" below. As a result of this transaction, the results of operations of the WLAN business in future periods will be reported as discontinued operations and the consolidated results from continuing operations will no longer include revenues and expenses attributable to such business. Nevertheless, since the operations of the WLAN business comprised one of our principal activities in past years, the following is a brief description of the WLAN business prior to February 15, 2010. Accordingly, the following description of the WLAN business, to the extent the descrioption below uses current tense, does not purport to describe the current operations of Metalink. For example, we no longer sell or own rights to WLANPLUS chipsets and such chipsets are sold by Lantiq.
GENERAL
Until the Lantiq Transaction, we designed and sold. Our HT-WLAN chipsets, commercialy sold as WLANPLUS, were designed to enable transport of digital broadband media including video, voice and data at significantly higher rates than conventional wireless local area networking (WLAN) solutions. Our HT-WLAN products support the IEEE 802.11n standard.
PRODUCTS AND TECHNOLOGY
Commercialy sold as the WLANPLUS, this family of products was developed to comply with the IEEE 802.11n standard. Previous WLAN solutions were inadequate to meet the needs of the emerging multimedia environment: a minimum of 60 Mbps effective throughput at 60 feet, together with a high level of Quality of Service (QoS) is needed to support the required applications, such as streaming three streams of HDTV throughout the home. There is also an increasing requirement to provide distribution of broadband content arriving into the home to various consumer devices, such as distributing IPTV from a residentual gateway to a TV. Our WLANPLUS features implementation of real-MIMO technology to enhance performance provides QoS features to facilitate multimedia connectivity, supports high-throughput, rich-content, quality-critical applications and delivers a significant increase in WLAN throughput and range compared to legacy 802.11a,b,g solutions.
The MtW817X / MtW815X is Metalink's IEEE 802.11n 802.11m Certified dual-band chip-set series. It has been sampling since the first quarter of 2007 and became commercially available at the end of the third quarter of 2007. WLANPLUS is designed to provide the optimal performance in home environments, supporting both data and HD video delivery throughout the home. These performance advantages were demonstrated and validated by customers, partners and independent test houses. We partner with other chip vendors, such as makers of decoders and network processors, to provide their customers with complete solutions.
CUSTOMERS
We sold our HT-WLAN chipsets directly to ODMs, who may include our chipsets in their products, and to OEMs. These inlcude Set-Top-Boxes, Televisions, Video Bridges, Personal Video Recorders, Routers and residential gateway manufacturers. We generated insignificant revenues from our HT-WLAN products.
Our HT-WLAN chipsets were incorporated into Video Bridges, which are used to connect the home router or PC to a TV or Game console which enables the end users to transfer high definition video from the PC (via the router) to the TV in order to watch high definition, or HD, movies or play HD games over the internet.
For a summary of revenues by product line, see above under "DSL Business
- Continued Operations - Customers."
SALES AND MARKETING
We sold and provided technical suppot to our HT-WLAN chipsets, through independent consultatnts, sales representatives and distributors, in Europe, Asia and North America. Following the Lantiq Transaction, we terminated substantialy all of our agreements with such representatives and consultatnts.
RESEARCH AND DEVELOPMENT
Prior to the closing of the Lantiq Transaction, we devoted a significant portion of our personnel and financial resources to research and development of HT-WLAN chipsets.
As of December 31, 2009, our research and development staff consisted of 50 employees. Research and development activities take place at our facilities in Yakum, Israel, and at the design center of our representative office in Taiwan. Additionally, we retain form time to time consultants and other subcontractors to provide us with development services.
See "Item 5(A)--Operating and Financial Review and Prospects--Operating Results--Government Grants."
MANUFACTURING
As a fabless provider of chipsets, we subcontracted our entire semiconductor manufacturing to third party contractors. Our HT-WLAN chipsets were delivered to us fully assembled and tested based on our proprietary designs.
PROPRIETARY RIGHTS
Our HT-WLAN chipsets were protected by one patent and 8 patent applications in the United states and 3 additional patents and patent applications in other jurisdictions. We also relied on trade secret laws, confidentiality agreements and contractual arrangements with employees and partners for the protection of our proprietary rights.
COMPETITION
The wireless chip set market is intensely competitive, due to a variety of factors, including among others, time to market, functionality, conformity to industry standards, performance, price, breadth of product lines, product migration plans, and technical support.
Our principal competitors for HT-WLAN based products included Atheros, Qualcomm, Broadcom, Marvell, Ralink, Celeno and Quantenna. Broadcom, Atheros, Qualcomm, and Marvel, all of whom possess a broad portfolio of telecom semiconductor products in addition to their WLAN product lines, which enables them to provide bundled offerings at competitive pricing.
C. ORGANIZATIONAL STRUCTURE
We currently have the following subsidiaries:
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PROPORTION PORTION
COUNTRY OF OF OWNERSHIP OF VOTING
NAME INCORPORATION INTEREST POWER HELD
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METALINK INTERNATIONAL LTD.* Republic of
Seychelles 100% 100%
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* CURRENTLY INACTIVE
D. PROPERTY, PLANTS AND EQUIPMENT
Our headquarters and principal office is located in Yakum, Israel. During 2010, we terminated our leases for office space in Yakum, Israel and Taiwan as part of the Lantiq Transaction and secured under our Transition Services Agreement with Lantiq, as described below under Item 10.C "Additional Information-Material Agreements," a sublease of one room per employee for up to 6 employees, at a maximum size of 15sqm per person. Such sublease rights include all related administration and cleaning services, parking and storage space of 40sqm.
Total rent expenses for the years ended December 31, 2009, 2008 and 2007 were $889,000, $1,451,000, and $1,126,000, respectively. The total rent expenses for 2010 are expected to be approximately $31,000.
We believe that the aforesaid office space is suitable and adequate for our operations as currently conducted and as currently foreseen. In the event that additional or substitute offices and facilities are required, we believe that we could obtain such offices and facilities at commercially reasonable rates.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 AND RELATED NOTES FOR THE YEAR THEN ENDED INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH US GAAP.
ON FEBRUARY 15, 2010 WE HAVE COMPLETED THE SALE OF OUR WLAN BUSINESS TO LANTIQ FOR UP TO $16.5 MILLION IN CASH (SEE NOTE 1 TO THE FINANCIAL STATEMENTS). AS THE SALE OF OUR WLAN BUSINESS TO LANTIQ WAS CONSUMMATED ON FEBRUARY 15, 2010, OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS DO NOT REFLECT THE RESULTS OF SUCH SALE, INCLUDING THE RECEIPT OF THE CONSIDERATION OR THE DISCONTINUING OF OUR OPERATIONS IN THE WLAN BUSINESS. SUCH CHANGES WILL ONLY BE REFLECTED IN OUR CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2010. THEREFORE, THE DATA PRESENTED IN OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IN OUR DISCUSSION BELOW ARE NOT INDICATIVE OF OUR FUTURE OPERATING RESULTS OR FINANCIAL POSITION.
YOU ARE ENCOURAGED TO READ THE ENCLOSED UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2009 INCLUDED ELSEWHERE IN THIS ANNUAL REPORT, WHICH REFLECT THE HISTORICAL RESULTS OF METALINK, AS ADJUSTED TO GIVE EFFECT TO THE DISPOSITION OF THE WLAN BUSINESS TO LANTIQ.
OVERVIEW
Prior to the consummation of the Lantiq Transaction in February 2010, we were a global provider and developer of high-throughput wireless local area network (HT-WLAN) silicon solutions for telecommunications, networking and home broadband equipment makers, and a provider of high performance wireline broadband communication silicon solutions for telecommunications equipment makers.
On January 5, 2010, we entered into an Asset Purchase Agreement with Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG (together, "Lantiq") for the sale of the assets of, and certain specified liabilities related to, our wireless local area network (WLAN) business to Lantiq, a newly-formed fabless semiconductor company funded by Golden Gate Capital, in consideration for a total purchase price of up to $16.9 million in cash. On February 15, 2010 we completed the transaction. As part of the transaction, we entered into several additional agreements with Lantiq whereby, among other things, we agreed to provide Lantiq certain consulting services and Lantiq agreed to provide us with certain transition services for a limited period following the closing. FOR ADDITIONAL DETAILS ABOUT THE LANTIQ TRANSACTION, SEE BELOW UNDER ITEM 10.C "ADDITIONAL INFORMATION--MATERIAL AGREEMENTS."
On September 8, 2008 we entered into a short term secured loan agreement, or the Loan Agreement, with an institutional investor, or the Senior Lender, as amended on December 31, 2008 and September 6, 2009.
On December 30, 2009, we entered into a third amendment to the Loan Agreement, that became effective on January 5, 2010, whereby the repayment of $4.3 million originally due under the loan agreement was reduced to $4.1 million and repaid in four installments: $3.7 million at closing of the Lantiq Transaction, which occurred on February 15, 2010, and the remainder in three installments by March 31, 2011.
As of the date of this annual report, we are required to repay the Senior Lender $100,000 on September, 30 2010; $100,000 on December, 31 2010; and $150,000 on March, 31 2011. See Item 5B and 10C below.
Revenues in 2009 were $4.9 million, a decrease of 32% compared with revenues of $7.2 million in 2008. The decrease was due to decline in demand for both our SHDSL and for our VDSL products, which was partialy offset by increase in demand for our WLANPlus chipsets.
Operating loss for 2009 was $10.0 million, compared to operating loss of $22.6 million in 2008. Said decrease was achieved mainly due to operating expenses reduction plan that we initiated in March 2008 and continued to implement throughout 2009.
As of December 31, 2009 and as of March 31, 2010, we had $2.3 million and $ 3.8 million, respectively, in cash, cash equivalents and short term investments. As of the date of this annual report, we anticipate that we will be able to meet our cash requirements in the next 12 months without obtaining additional capital from external sources. FOR ADDITIONAL DETAILS, SEE ITEM 5B - LIQUIDITY AND CAPITAL RESOURCES BELOW.
Moving forward we will continue supporting our current remaining DSL activities, that were not part of the "end-of-life" announcement we provided our customers with respect to most of our DSL components in 2008. In addition, we expect a substantial decrease in our level of revenues in year 2010 derived from sale of chipsets compared to previous years. Our plan of operation is (1) to continue the marketing of our digital subscriber line, or DSL products and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. A change in those accounting rules can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. The preparation of financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. These estimates include assessing the collectability of accounts receivable, and the use and recoverability of inventory. Actual results could differ from those estimates. The markets for our products are characterized by intense competition, rapid technological development and frequent new product introductions, all of which could impact the future realizability of our assets.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
REVENUE RECOGNITION
Revenue is recognized upon the shipment of products to the customer provided that persuasive evidence of an arrangement exists, title has been transferred, the price is fixed, collection of resulting receivables is probable and there are no remaining significant obligations. We generally provide a warranty period for up to 12 months at no extra charge. No warranty provision has been recorded for any of the reported periods, since based on the past experience, such amounts have been insignificant.
Our revenue recognition policy is significant because our revenue is a key component of our operations. In addition, our revenue recognition determines the timing of certain expenses, such as royalties and sales commissions. Our revenue recognition policy requires that we make a judgment as to whether collectability is reasonably assured. Our judgment is made for each customer on a case-by-case basis, and, among other factors, we take into consideration the individual customer's payment history and its financial strength. In some cases, we secure payments by a letter of credit or other instrument.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a moving average basis. We regularly review inventory values and quantities on hand and write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. In making the determination, we consider future sales of related products and the quantity of inventory at the balance sheet date, assessed against each inventory items past usage rates and future expected usage rates. Changes in factors such as technology, customer demand, competing products and other matters could affect the level of our obsolete and excess inventory in the future.
STOCK-BASED COMPENSATION
The Company applies ASC 718-10 (formerly known as SFAS No. 123(R), "Share Based Payment"). The Company's net loss for the year ended December 31, 2009, 2008 and 2007 includes $0.5 million, $1.8 million and $1.5 million of compensation expenses related to the Company's share-based compensation awards, respectively. The stock based compensation accounting is critical because of the discretion of management in determining the inputs that is used in calculation of the fair value of options granted. Such inputs include the Company's share volatility, and the expected term of options granted.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 28, 2009, the FASB issued ASC 855-10 (formerly SFAS 165), which provides guidance on management's assessment of subsequent events. Historically, management had relied on U.S. auditing literature for guidance on assessing and disclosing subsequent events. ASC 855-10 represents the inclusion of guidance on subsequent events in the accounting literature and is directed specifically to management, since management is responsible for preparing an entity's financial statements. ASC 855-10 is not expected to significantly change practice because its guidance is similar to that in AU Section 560, with some important modifications. The new standard clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date "through the date that the financial statements are issued or are available to be issued." Management must perform its assessment for both interim and annual financial reporting periods. ASC 855-10 is effective for the interim or annual financial periods ending after June 15, 2009. The adoption of ASC 855-10 did not have a material impact on our consolidated financial statements.
In April 2009 the FASB issued an amendment to ASC 320-10-65 (Investments
- Debt and Equity Securities) Through the issuance of FASB staff position 115-2
and 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments"
("OTTI") for investment in debt securities . This amendment applies to all
entities and is effective for interim and annual reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009. Earlier adoption for periods ending before March 15, 2009, is not
permitted. Under the amendment, the primary change to the OTTI model for debt
securities is the change in focus from an entity's intent and ability to hold a
security until recovery. Instead, an OTTI is triggered if (1) an entity has the
intent to sell the security, (2) it is more likely than not that it will be
required to sell the security before recovery, or (3) it does not expect to
recover the entire amortized cost basis of the security. In addition, the
amendment changes the presentation of an OTTI in the income statement if the
only reason for recognition is a credit loss (i.e., the entity does not expect
to recover its entire amortized cost basis). That is, if the entity has the
intent to sell the security or it is more likely than not that it will be
required to sell the security, the entire impairment (amortized cost basis over
fair value) will be recognized in earnings. However, if the entity does not
intend to sell the security and it is not more likely than not that the entity
will be required to sell the security, but the security has suffered a credit
loss, the impairment charge will be separated into the credit loss component,
which is recorded in earnings, and the remainder of the impairment charge, which
is recorded in other comprehensive income (OCI). The adoption of ASC 320-10-65
(FSP FAS 115-2 and FAS 124-2) did not have a material impact on our consolidated
financial statements.
In October 2009, the FASB issued "Accounting Standards Update ("ASU") 2009-13 Multiple Deliverable Revenue Arrangements a consensus of EITF" (formerly topic 08-1) an amendment to ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments in this update also will replace the term "fair value" in the revenue allocation guidance with the term "selling price" in order to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.
The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable's selling price.
The update will be effective for revenue arrangements entered into or modified in fiscal year beginning on or after June 15, 2010 with earlier adoption permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
A. OPERATING RESULTS
GENERAL
REVENUES. Our revenues in the first half of 2009 derived mainly from sales of our DSL chipsets to our customers. In the second half of 2009 our revenues derived solely from sales of our WLANPlus chipsets. Our revenues are generated in U.S. dollars, and the majority of our costs and expenses are incurred in dollars. Consequently, we use the dollar as our functional currency. For the year ended December 31, 2009, three customers accounted for approximately 71% of our revenues.
We sell our chipsets in Europe, Asia and North America through independent sales representatives and distributors. We also sell our chipsets directly to selected customers. For the year ended December 31, 2009, approximately 67% of our sales were to customers in Europe and Israel, 26% in North America and 7% in Asia.
COST OF REVENUES. Our cost of revenues consists primarily of materials and components used in the manufacture and assembly of our chips, depreciation and amortization of equipment used in the manufacturing process, salaries and other personnel related expenses for those engaged in operations, fees for subcontractors who manufacture, assemble and test our chipsets, and other overhead expenses and royalties paid to the Government of Israel and to certain third parties.
GROSS RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and other personnel related expenses for those engaged in the design, development and enhancement of our products, software license fees, depreciation and amortization of equipment and software used in research and development, and other overhead expenses. In addition, we subcontract certain activities mainly the mask development production of our chips to unaffiliated third parties. Research and development costs are expensed as incurred. We believe that continued investment in research and development is critical to attaining our strategic product objectives.
RESEARCH AND DEVELOPMENT, NET. The Government of Israel, through the Office of the Chief Scientist, encourages certain research and development projects. In 2006, 2007, 2008 and 2009 we received grants from the Office of the Chief Scientist for the development of our products. In addition, the European Commission encourages research and development projects, which are performed as part of an international consortium. In 2004, 2005 and 2006, we received grants from the European Commission for the development of our products. The research and development grants are presented in the statements of operations as an offset to research and development expenses.
SELLING AND MARKETING. Selling and marketing expenses consist primarily of salaries and other personnel related expenses for those engaged in the sales, marketing and support of our products, as well as commissions, trade show, promotional and public relations expenses. Our success in increasing revenues depends on our ability to increase our customer base, achieve design wins, drive industry standards and introduce new products and product applications.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries and other personnel related expenses for executive, accounting and administrative personnel, professional fees, and other general corporate expenses.
STOCK BASED COMPENSATION. In 2006 we initially implemented ASC 718-10 (formerly known as SFAS No. 123(R), "Share Based Payment"). The implementation of ASC 718-10 resulted in 2009 and in 2008 in stock-based compensation expenses of $0.5 million and $1.8 million, respectively.
FINANCIAL INCOME, NET In 2009, Financial expenses, net are primarily attributable to the amortization of the short term loan discount, amortization of deferred expenses related to the loan and to the increase in the fair value of the warrants issued under the loan agreement that are carried at fair value. In 2008, Financial Income, net is primarily attributable to the decrease in the fair value of the warrants issued under the loan that are carried at fair value, accompanied by a smaller amount of financial income earned on our total cash, short term and long term investments balance. In 2007, Financial income, net consisted primarily of interest earned on marketable debt securities and certificates of deposits in which we invested and gains and losses from the exchange differences of monetary balance sheet items denominated in non-dollar currencies.
TAXES. Israeli companies are generally subject to Corporate Tax at the corporate rate of 26% for the 2009 tax year and 25% for the 2010 tax year. Following an amendment to the Israeli Income Tax Ordinance (New Version), 1961 (the "Tax Ordinance"), which came into effect on January 1, 2009, the Corporate Tax rate is scheduled to decrease as follows: 24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax year and thereafter. Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003. However, we are eligible for tax benefits under our "approved enterprise" programs, which should result in our taxable income being taxed at a lower rate for some time after we begin to report taxable income and exhaust our net loss carry forwards.
The following table sets forth, for the periods indicated, financial data, expressed as a percentage of total revenues which we believe to be significant in analyzing our results of operations (in US$ thousands).
2007 2008 2009
------ ------ ------
Revenues 100% 100% 100%
Cost of revenues:
Costs and expenses 47 41 65
Royalties to the Government of Israel 3 3 3
------ ------ ------
Total Cost of revenues 50 44 68
------ ------ ------
Gross profit 50 56 32
Operating expenses:
Gross research and development 251 314 196
Royalty bearing grant 26 43 39
------ ------ ------
Research and development, net 225 271 157
Selling and marketing 53 63 29
General and administrative 24 37 49
------ ------ ------
Total operating expenses 302 371 235
------ ------ ------
Operating loss (252) (315) (203)
Financial income, net 13 23 (71)
------ ------ ------
Net loss (239)% (292)% (274)%
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YEAR ENDED DECEMBER 31, 2009 COMPARED WITH YEAR ENDED DECEMBER 31, 2008
REVENUES. Revenues in 2009 were $4.9 million a decrease of 32% compared with revenues of $7.2 million in 2008. Said decrease is primarily due to a decrease in demand for both our SHDSL and for our VDSL products during 2009, partly offset by increase in demand for our WLANPlus chipsets.
COST OF REVENUES. Cost of revenues was $3.3 million in 2009, an increase of $0.1 million compared with cost of revenues of $3.2 million in 2008. Said increase is attributed to the increase in the portion of our revenues associated with our WLANPlus chipsets, which have a lower gross margin than our SHDSL and VDSL products, which was offset by the decrease in our revenues. Cost of revenues as a percentage of revenues increased in 2009 to 68% from 44% in 2008.
GROSS RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development expenses were attributable solely to development of HT-WLAN products and amounted to $9.6 million in 2009, a decrease of $12.9 million compared with gross research and development expenses of $22.5 million in 2008. Said decrease was achieved mainly due to operating expenses reduction plan that the company initiated in March 2008 and continued to implement throughout 2009. Gross research and development as a percentage of revenues decreased to 196% in 2009 from 314% in 2008.
RESEARCH AND DEVELOPMENT, NET. Grants from the Office of the Chief Scientist, totaling $1.9 million in 2009 compared with grants from the Office of the Chief Scientist of $3.1 million in 2008, are applied as reductions to gross research and development expenses. Research and development expenses, net, were $7.7 million in 2009, or 157% of revenues, compared with $19.5 million in 2008, or 271% of revenues.
SELLING AND MARKETING. Selling and marketing expenses were $1.4 million in 2009, a decrease of $3.1 million compared with selling and marketing expenses of $4.5 million in 2008. Said decrease was achieved mainly due to an operating expenses reduction plan that the company initiated in March 2008 and continued to implement throughout 2009. Selling and marketing expenses, as a percentage of revenues, were 29% in 2009 compared to 63% in 2008.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.4 million in 2009, a decrease of $0.2 million compared with general and administrative expenses of $2.6 million in 2008. Said decrease was achieved mainly due to an operating expenses reduction plan that the company initiated in March 2008 and continued to implement throughout 2009, which was offset by a one-time allowance for legal costs . General and administrative expenses as a percentage of revenues were 49% in 2009 compared to 37% in 2008.
STOCK-BASED COMPENSATION. Stock-based compensation expenses were $0.5 million in 2009 compared with Stock-based compensation expenses of $1.8 million in 2008, a decrease of $1.3 million. Said decrease is attributable to a decrease in stock options grants to employees in 2009 compared to 2008. Stock-based compensation expenses are included in profit and loss items both in 2009 and 2008. Stock-based compensation expenses as a percentage of revenues in 2009 were 10.2% compared to 24.9% in 2008.
FINANCIAL EXPENSES, NET. Financial expenses, net were $3.5 million in 2009, compared with financial income, net of $1.6 million in 2008. Said increase in the financial expenses is primarily attributable to the increase in amortization of short term loan discount and amortization of deferred expenses and to the increase in the fair value of the warrants carried at fair value.
YEAR ENDED DECEMBER 31, 2008 COMPARED WITH YEAR ENDED DECEMBER 31, 2007
REVENUES. Revenues in 2008 were $7.2 million a decrease of 30% compared with revenues of $10.2 million in 2007. In 2008 we faced a decrease in demand for both our SHDSL and for our VDSL products.
COST OF REVENUES. Cost of revenues was $3.2 million in 2008, a decrease of $1.8 million compared with cost of revenues of $5 million in 2007. Said decrease is in-line with the Company's decrease in revenues. Cost of revenues as a percentage of revenues decreased in 2008 to 44% from 50% in 2007.
GROSS RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development expenses were $22.5 million in 2008, a decrease of $3 million compared with gross research and development expenses of $25.5 million in 2007. Said decrease was achieved mainly due to operating expenses reduction plan that the company implemented in 2008. Gross research and development as a percentage of revenues increased to 314% in 2008 from 251% in 2007.
RESEARCH AND DEVELOPMENT, NET. Grants from the Office of the Chief Scientist, totaling $3.1 million in 2008 compared with grants from the Office of the Chief Scientist of $2.6 million in 2007, are applied as reductions to gross research and development expenses. Research and development expenses, net, were $19.5 million in 2008, or 271% of revenues, compared with $22.9 million in 2007, or 225% of revenues.
SELLING AND MARKETING. Selling and marketing expenses were $4.5 million in 2008, a decrease of $0.9 million compared with selling and marketing expenses of $5.4 million in 2007. This decrease is primarily attributable to personal and related expenses due to the decrease in selling and marketing personnel in 2008 compared to 2007. Selling and marketing expenses, as a percentage of revenues, were 63% in 2008 compared to 53% in 2007.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.6 million in 2008, an increase of $0.1 million compared with general and administrative expenses of $2.5 million in 2007. This increase is primarily attributable to professional expenses. General and administrative expenses as a percentage of revenues were 37% in 2008 compared to 24% in 2007.
STOCK-BASED COMPENSATION. Stock-based compensation expenses were $1.8 million in 2008 compared with Stock-based compensation expenses of $1.5 million in 2007, an increase of $0.3 million. The increase is attributable to an increase in Restricted Stock Units (RSU) grants to employees in 2008 compared to 2007. Stock-based compensation expenses are included in profit and loss items both in 2008 and 2007. Stock-based compensation expenses as a percentage of revenues in 2008 were 24.9% compared to 14.7% in 2007.
FINANCIAL INCOME, NET. Financial income, net was $1.6 million in 2008, an increase of $0.3 million compared with financial income, net of $1.3 million in 2007. Said increase is primarily attributable to the decrease in the fair value of the warrants carried at fair value accompanied by a smaller amount of financial income earned on our total cash, short term and long term investments balance.
IMPACT OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
The dollar cost of our operations is influenced by the extent to which any increase in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by the devaluation of the NIS in relation to the dollar. Inflation in Israel has a negative effect on our profitability as we receive payment in dollars or dollar-linked NIS for substantially all of our sales while we incur a portion of our expenses, principally salaries and related personnel expenses, in NIS, unless such inflation is offset by a devaluation of the NIS.
In 2009, the NIS appreciated against the dollar at the rate of 0.71% while the rate of inflation increased by 3.91%. We cannot predict any future trends in the rate of inflation/deflation in Israel or the rate of devaluation/revaluation of the NIS against the dollar. If the dollar costs of our operations in Israel increase, our dollar-measured results of operations could be adversely affected. We cannot assure you that we will not be adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of such devaluation lags behind increases in inflation in Israel or if the NIS will be appreciated against the dollar.
A devaluation of the NIS in relation to the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities which are payable in NIS (unless such expenses or payables are linked to the dollar). Such devaluation also has the effect of decreasing the dollar value of any asset, which consists of NIS or receivables payable in NIS (unless such receivables are linked to the dollar). Conversely, any revaluation of the NIS in relation to the dollar has the effect of increasing the dollar amount of any of our expenses or liabilities which are payable in NIS (unless such expenses or payables are linked to the dollar). Such revaluation in the value of the NIS in relation to the dollar has the effect of increasing the dollar value of any unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and expenses.
Because exchange rates between the NIS and the dollar fluctuate continuously (albeit with a historically declining trend in the value of the NIS), 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.
Because Israeli labor costs and most of our leasing expenses on one hand, and grants received from the Office of the Chief Scientist on the other hand, are incurred in NIS, even though we report them in U.S. dollars, inflation and exchange rate variations can have a material impact on this component of our expenses.
CORPORATE TAX RATE
Israeli companies are generally subject to Corporate Tax at the corporate rate of 26% for the 2009 tax year and 25% for the 2010 tax year. Following an amendment to the Israeli Income Tax Ordinance (New Version), 1961 (the "Tax Ordinance"), which came into effect on January 1, 2009, the Corporate Tax rate is scheduled to decrease as follows: 24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax year and thereafter.
Israeli companies are generally subject to Capital Gains Tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003. However, in 1994, our facility was granted "approved enterprise" status under the Law for the Encouragement of Capital Investments, 1959, and consequently we are eligible, subject to compliance with certain requirements, for certain tax benefits beginning when such facility first generates taxable income, but not later than the 2008 tax year. In December 2000, our facility received an approval for extension of the "approved enterprise" status period, as a result of the additional capital investment in the Company resulting from the initial and the secondary public offerings conducted in December 1999 and March 2000. Such additional capital investment was a condition of the extension of the "approved enterprise" status period. Consequently we are eligible, subject to compliance with certain requirements, for certain tax benefits beginning when such facility first generates taxable income, but no later than the 2014 tax year. The period of tax benefits with respect to our approved enterprise has not yet commenced, because we have yet to realize taxable income in Israel. As a result of the foregoing, and of our accumulated tax loss carry-forwards (which totaled at approximately $183 million at December 31, 2009), and based on the current tax system in Israel, we do not anticipate being subject to income tax in Israel for the 2010 tax year.
ISRAELI GOVERNMENT GRANTS
We conducted a substantial part of our research and development operations in Israel. Some of our research and development efforts have been financed through internal resources and grants per project from the Office of the Chief Scientist. The Office of the Chief Scientist provided us grants for research and development efforts of approximately $2.6 million for the year ended December 31, 2007 (8.6% of total research and development expenses), $3.1 million for the year ended December 31, 2008 (14% of total research and development expenses) and $1.9 million for the year ended December 31, 2009 (19.7% of total research and development expenses).
Since the grant program has the impact of lowering our research and development expenditures, and improving our operating margins, reduction in the Company's participation in the program or in the benefits that the Company receives under the program could affect the Company's financial condition and results of operations. Currently, we are obligated to pay royalties to the Office of the Chief Scientist at the rate of 3% to 4.5%. Due to our manufacturing outside of Israel, our aggregate payment amount with respect to grants received in 2007, 2008 and 2009 is 100% of the dollar-linked value of such grants. In 2003, we were required by the Office of the Chief Scientist to perform at least 50% of our manufacturing in Israel. See "Item 5(C)- Research and Development, Patents and Licenses, etc.- Grants from the Office of the Chief Scientist".
The refund of the grants is contingent on future sales (or related services) and we have no obligation to refund these grants, if sales are not generated.
We paid or accrued to the Office of the Chief Scientist $297,000 for the year 2007,$ 218,000 for the year 2008 and $160,000 for the year 2009.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations primarily through funds generated by our public offerings in 1999 and 2000 as well as research and development and marketing grants, primarily from the Government of Israel. In the past few years, we have also financed our operations through private equity investments and, on a limited basis, through short-term loans.
PRINCIPAL FINANCING ACTIVITIES
On September 8, 2008 we entered into a short term secured loan agreement, or the Loan Agreement, with an institutional investor, or the Senior Lender.
According to the Loan Agreement, the Senior Lender agreed to extend us a loan of $3.5 million at the first stage ("First Loan"), which we received in September 2008 and agreed to extend us at our request, an additional loan of up to $4.5 million ("Second Loan"). Under the Loan Agreement, the outstanding principal amount will accrue interest at an annual rate of 10% payable, in cash or ordinary shares, at our election, on a quarterly basis.
In addition, in consideration for the First Loan, we issued to the lender five-year warrants to purchase up to a total of 2,000,000 ordinary shares at exercise prices per share of $0.01 (for 1,000,000 warrants) and $0.50 (for the balance), subject to adjustments. In consideration for the Second Loan, we undertook to issue to the lender five-year warrants to purchase up to a total of 2,200,000 ordinary shares at exercise prices per share of $0.01 (for 1,870,000 warrants) and $0.50 (for the balance), subject to adjustments.
The First Loan we received was offset by issuance expenses in the amount of $313,000. We allocated the amount received between the loan and the warrants. In accordance with ASC 470-20 (formerly known as APB 14), we allocated to the warrants $1,838,000 which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the "OV" function on Bloomberg L.P with the following assumptions: risk free interest rate of 1.59%; dividend yield of zero; expected volatility of 85.75%; and an expected life of five years. The remaining amount was attributed to the loan. As a result, a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the payment of the loan as of September 2009. For the year ended December 31,2009, we recorded $1,419,000 of financial expenses related to the amortization of the First Loan discount.
On December 31, 2008, the Loan Agreement was amended, such that, among other things, the Second Loan will be provided in two tranches of $2.25 million each. The first tranche was provided in January 2009, such that we have drawn down a total of $5.75 million under the loan agreement. In addition, in consideration for the first tranche, we issued to the lender additional five-year warrants to purchase up to a total of 1,100,000 ordinary shares at exercise prices per share of $0.01 (for 935,000 warrants) and $0.50 (for the balance), subject to adjustments.
The Second Loan was offset by issuance expenses in the amount of $169,000. We allocated the amount received between the loan and the warrants. In accordance with ASC 470-20 (formerly known as APB 14), we allocated to the warrants $123,000 which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the "OV" function on Bloomberg L.P with the following assumptions: risk free interest rate of 0.04%; dividend yield of zero; expected volatility of 178.5%; and an expected life of five years. The remaining amount was attributed to the loan. As a result, a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the payment of the loan as of September 2009. For the year ended December 31,2009, we recorded $123,000 of financial expenses related to the amortization of the Second Loan discount.
In accordance with ASC 815-10 (formerly known as FAS 133), the warrants are recorded on the balance sheet as derivative liability and carried at fair value, due to the fact that in certain circumstances the warrants could be paid off in cash according to the Senior Lender's decision. Gains and losses resulting from changes in the fair values of the warrants are recorded in financial expenses, net on the consolidated statement of operations. For the year ended December 31, 2009, the Company recorded $706,000 of financial expenses related to the increase in the fair value of these warrants.
On September 6, 2009 we entered into a second amendment to the Loan Agreement (the "Second Amendment"), whereby the maturity date was extended from September 9, 2009 to March 9, 2010. As part of the amendment, we repaid to the lender $2.0 million out of the outstanding $5.75 million. We also agreed that in the event of a fundamental transaction, the repayment amount will be $4.3 million. (with interest at the annual rate of 10% will continue to accrue on the original amount outstanding). Pursuant to the amendment, the exercise price of 1,165,000 warrants that were previously issued to the Senior Lender was adjusted from $0.50 to $0.03 per share.
On December 30, 2009, we entered into a third amendment to the Loan Agreement (the "Third Amendment"), that became effective on January 5, 2010, whereby the repayment of the $4.3 million originally due upon the closing of a fundmanetal transaction, such as the Lantiq Transaction, was reduced to $4.1 million and repaid in four installments: $3.7 million at closing of such transaction, which occurred on February 15, 2010, and the remainder in three installments by March 31, 2011.
As of the date of this annual report, we are required to repay the Senior Lender $100,000 on September 30, 2010; $100,000 on December 31 2010; and $150,000 on March, 31 2011.
In 2009, 1,835,000 warrants were exercised for 1,835,000 shares of common stock for a total of $18,000. In 2008, 100,000 warrants were exercised for 100,000 shares of common stock for a total of $1,000.
The issuance of the Warrants contemplated in the Loan Agreement, triggered the adjustment of the exercise price of the warrants issued in August 2007 (see Note 10A). According to this adjustment the warrants issued originally with $8 per share, was adjusted to $6.5 per share according to the original terms of the warrants.
FOR ADDITIONAL DETAILS ABOUT THE LOAN AGREEMENT, AS AMENDED, SEE BELOW
UNDER ITEM 10.C "ADDITIONAL INFORMATION--MATERIAL AGREEMENTS."
WORKING CAPITAL AND CASH FLOWS
On December 31, 2009, we had cash and cash equivalents of $2.3 million, and we had no short-term or long-term investments. By comparison, on December 31, 2008, we had cash and cash equivalents of $5.2 million, short-term investments of $0.7 million and we had no long-term investments. On December 31, 2007, we had cash and cash equivalents of $7.3 million, short-term investments of $17.2 million and long-term investments of $2.2 million.
Our total proceeds from grants received from the Office of the Chief Scientist, net of royalties paid, was $28 million as of December 31, 2009, $26 million as of December 31, 2008, and $23 million as of December 31, 2007. We are committed to pay royalties to the Government of Israel on proceeds from the sale of products and related services that incorporate know-how developed with grants from the Office of the Chief Scientist, up to the amount of 100% -150% of the grants received plus interest at LIBOR rate (in dollar terms). The refund of the grants is contingent upon the successful outcome of the Company's research and development programs and the attainment of sales. The Company has no obligation to refund these grants, if sales are not generated, such that the financial risk is assumed completely by the Government of Israel. The grants are received from the Government on a project-by-project basis. If the project fails the Company has no obligation to repay any grant received for the specific unsuccessful or aborted project.
Capital expenditures were $15,000 for the year ended December 31, 2009, $793,000 for the year ended December 31, 2008, and $1,975,000 for the year ended December 31, 2007. These expenditures were principally for equipment and software for our research, development and manufacturing activities.
Net cash used in operating activities was $3.8 million for the year ended December 31, 2009, which were primarily attributable to research and development expenditures. Net cash used in operating activities was $23.1 million for the year ended December 31, 2008 and $20.1 million for the year ended December 31, 2007.
Net cash provided by investing activities was $833,000 for the year ended December 31, 2009. $800,000 of cash was provided from sales of marketable debt securities held in our treasury and $48,000 were attributable to the proceeds we received from disposal of property and equipment which was offset by $15,000 that were used for the purchase of property and equipment. Net cash provided by investing activities was $17.8 million for the year ended December 31, 2008 and $2.4 million for the year ended December 31, 2007. We held treasury securities primarily in instruments denominated in U.S. dollars, with the goals of capital preservation and generation of income, at fixed rates. We no longer hold treasury securities and we do not conduct interest rate or currency hedging activities.
Net cash provided by financing activities was $0.1 million for the year ended December 31, 2009, primarily attributable to the $2.25 million loan we received in January 2009 which was offset by the partial repayment of the loan at the amount of $2.1 million. Net cash provided by financing activities was $3.2 million for the year ended December 31, 2008 and $20.2 million for the year ended December 31, 2007.
FOR ADDITIONAL DETAILS ABOUT CASH GENERATED FROM THE LANTIQ TRANSACTION DURING 2010, SEE THE DESCRIPTION OF THE LANTIQ TRANSACTION BELOW UNDER ITEM 10.C "ADDITIONAL INFORMATION--MATERIAL AGREEMENTS."
OUTLOOK
During 2009 and early 2010, we performed several strategic and financing activities in order to improve our financial condition. These activities, which included the Loan Agreement, as amended, the Lantiq Transaction and the cost reduction program implemented during 2009, resulted in (1) a decrease of our operating expenses from approximately $26.6 million in 2008 to approximately $11.5 million in 2009 and an additional reduction is expected in 2010 due to the Lanqtiq Transaction and (2) an overall improvement in our cash balance and stockholders' equity.
In light of the aforesaid, as well as other factors, such as our current cash position and contemplated mandatory (as opposed to contingent) payments from the Lantiq Transaction, we anticipate that our existing capital resources will be adequate to satisfy our working capital and capital expenditure requirements until at least June 2011. If we will not be able to satisfy our working capital and capital expenditure requirements from our internal cash resources, we may need to raise additional funds to provide the capital necessary therefor.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
During the fiscal years 2007, 2008 and 2009, we spent $25.5 million,
$22.5 million and $9.6 million, respectively, on gross R&D expenses, $22.9
million, $19.5 million and $7.7 million, respectively, for R&D net of grants
from the Office of the Chief Scientist and the European Commission. See "Item
4(B) - Information on the Company - Business Overview - Research and
Development," Item 4(B) - Information on the Company - Business Overview -
Proprietary Rights" and "Item 5(A) - Operating and Financial Review and
Prospects - Operating Results."
GRANTS FROM THE OFFICE OF THE CHIEF SCIENTIST
The Government of Israel encourages research and development projects through the Office of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, and the regulations promulgated there under, commonly referred to as the "R&D Law". Grants received under such programs are generally repaid through a mandatory royalty based on revenues from products (and ancillary services) incorporating know-how developed, in whole or in part, with the grants. This government support is condition upon our ability to comply with certain applicable requirements and conditions specified in the Office of the Chief Scientist's programs and with the provisions of the R&D Law.
Generally, grants from the Chief Scientist constitute up to 50% of qualifying research and development expenditures for particular approved projects. Under the terms of these Chief Scientist projects, a royalty of 3% to 5% is due on revenues from sales of products and related services that incorporate know-how developed, in whole or in part, within the framework of projects funded by the Chief Scientist. Royalty obligations are usually 100% of the dollar-linked amount of the grant, plus interest. The royalty rates applicable to our programs range from 3% to 4.5%. Due to our manufacturing outside of Israel, our aggregate payment amount with respect to grants received in 2001 and 2002 was 120% of the dollar-linked value of such grants. With respect to grants received in 2003, 2004, 2005, 2006, 2007, 2008 and 2009, our aggregate payment amount was 100% of the dollar-linked value of such grants.
The R&D Law generally requires that the product developed under a program be manufactured in Israel. However, upon a notification to the Office of the Chief Scientist a portion of up to 10% of the manufacturing volume may be performed outside of Israel; furthermore, upon the approval of the Office of the Chief Scientist, a greater portion of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased up to 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. The R&D Law further permits the Office of the Chief Scientist, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The R&D Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program.
The R&D Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the Research Committee. Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except in certain circumstances and subject to the Office of the Chief Scientist's prior approval. The Office of the Chief Scientist may approve the transfer of Chief Scientist-funded know-how outside Israel, generally in the following cases:
o the grant recipient pays to the Chief Scientist a portion of the sale price paid in consideration for such Chief Scientist-funded know-how (according to certain formulas);
o the grant recipient receives know-how from a third party in exchange for its Chief Scientist-funded know-how; or
o such transfer of Chief Scientist-funded know-how arises in connection with certain types of cooperation in research and development activities.
The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and foreign interested parties to notify the Office of the Chief Scientist of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient and requires the new interested party to undertake to the Office of the Chief Scientist to comply with the R&D Law. In addition, the rules of the Office of the Chief Scientist may require additional information or representations in respect of certain of such events. For this purpose, "Control" is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. "Means of Control" refers to voting rights or the right to appoint directors or the chief executive officer. An "interested party" of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the Office of the Chief Scientist that it has become an interested party and to sign an undertaking to comply with the R&D Law.
The funds available for Office of the Chief Scientist grants out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the future. We cannot predict whether, if at all, we would be entitled to any future grants or the amounts of any such grants.
D. TREND INFORMATION
INDUSTRY. In May 2005 the ITU has ratified a VDSL2 standard based on the existing ADSL2 and VDSL standards that specify DMT modulation only. Our existing VDSL chipsets are based on QAM. Currently most of the future deployment of VDSL chipsets require the VDSL2 standard of DMT only. Thus, our VDSL sales have essentialy deminshed due to lack of demand.
DSL REVENUES. As described elsewhere in this annual report, we expect revenues derived from the sale of our DSL chipsets, to continue to decline in the near future and, in light of the "end-of-life" notification we issued for our DSL chipsets, even in a greater pace.
PLAN OF OPERATIONS. Our plan of operation is (1) to continue the marketing of our digital subscriber line, or DSL products and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates. There is no assurance that any of these alternatives will be pursued or, if one is pursued, the timing thereof or terms on which it would occur. Since this may result in the engagement of new areas of operations, our financial data reported in this annual report is not necessarily indicative of our future operating results or financial position.
E. OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
The following table summarizes our contractual obligations and commercial commitments related to our long-term debt and operating leases, as of December 31, 2009 and the effect we expect them to have on our liquidity and cash flow in future periods.
LESS THAN 1 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------- ---------- --------- -------- --------
Long-Term Debt Obligations -- -- -- -- --
Operating lease obligations 634 617 17 -- --
Purchase obligations (vendors of
equipment and services) 800 800 -- -- --
----- ----- ----- ----- -----
TOTAL CONTRACTUAL CASH OBLIGATIONS 1,434 1,417 17 -- --
===== ===== ===== ===== =====
|
We lease our motor vehicles under cancelable operating lease agreements, for periods through 2011. The minimum payment under these operating leases upon cancellation of these lease agreements, amounted to $30,000 as of December 31, 2009. Substantially all of the liability under the operating lease agreements was transferred to Lantiq.
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table lists our current directors and executive officers:
NAME AGE POSITION ---- --- -------- Uzi Rozenberg* 50 Chairman of the Board of Directors Tzvi Shukhman 49 Chief Executive Officer and Director Efi Shenhar** 52 Director Rony Eizenshtein 45 Chief Financial Officer Orly Etzion** 48 External Director Meir Bar-El** 64 External Director Eran Vital 33 Legal Counsel & Company Secretary |
* Designated as an "independent director" in accordance with NASDAQ Marketplace Rules.
** Designated as an "independent director" in accordance with NASDAQ Marketplace Rules, and a Member of the Audit Committee.
UZI ROZENBERG, a co-founder of our company, has served as a director from 1992 until 1997 and from August 1999 to the present, and as Chairman of our Board of Directors since December 2007. Mr. Rozenberg is also the founder and Chief Executive Officer of USR Electronics Systems (1987) Ltd. since February 1987. Mr. Rozenberg served as a director of Orbot Ltd. from 1992 to 1996 and as a director of Gibor Sport Ltd. from 1993 to 1997. Mr. Rozenberg and Mr. Shenhar are brothers.
TZVI SHUKHMAN, a co-founder of our company, has served as our Chief Executive Officer from our inception in 1992 and as the Chairman of the Board of Directors from our inception until December 2007. Prior to May 1999, Mr. Shukhman also served as our President. From March 1989 until March 1993, Mr. Shukhman served as an independent consultant for RAD Data Communications and ECI Telecom. Prior thereto, Mr. Shukhman served in the Israel Defense Forces where he founded a group involved in digital signal processing applications. Mr. Shukhman has a B.Sc. and an M.Sc. from the Technion-Israel Institute of Technology.
RONY EIZENSHTEIN, was appointed as our Chief Financial Officer during March 2010. Mr. Eizenshtein is a certified public accountant and a senior manager at Brooks-Keret Ltd., a reputable Israeli provider of financial and accounting services. He is an experienced certified public accountant who served as a CFO in EZ Energy Ltd., PeerTV Ltd. and other various Hi-Tech companies. Mr. Eizenshtein has a B.A, in Accounting and Economics from Ben-Gurion University and an M.B.A. from Herriot Watt University.
EFI SHENHAR has served as a director since 1995. Mr. Shenhar is the
Corporate Chief Executive Officer & President of USR Group. Mr. Shenhar
currently serves as a member of the board of directors of USR Electronic Systems
(1987) Ltd. From 1987 until 2003, Mr. Shenhar has served as a Vice President of
USR Electronics Systems (1987) Ltd., an electronic manufacturing services
company. Mr. Shenhar has a B.A. in accounting and economics from Tel Aviv
University and an M.B.A. from Herriot Watt University. Mr. Shenhar is a
certified public accountant. Mr. Shenhar and Mr. Rozenberg are brothers.
ORLY ETZION, has served as a director since December, 2009. Ms. Etzion is the CFO of Coriolis Wind Inc. From February 2005 until March 2009, Ms. Etzion served as the CFO of Precede Technologies Ltd. From May 2004 until January 2005, Ms. Etzion served as the CFO of The People's Voice, Ltd. From October 2002 until April 2004, Ms. Etzion served as the Manager of finance at Millimetrix Broadband Networks Ltd. and from March 1998 until February 2002 Ms. Etzion served as the controller of Chromatis networks Ltd. Ms. Etzion holds a BA degree in Economics from the Tel Aviv University and an MBA degree, specializing in Finance, from The Colman College.
MEIR BAR-EL has served as a director since November 2002. Mr. Bar-El currently serves as a director of Extra Plastic Ltd. Mr. Bar-El currently serves as the Deputy General Director, and Director of the General Division of the Manufacturers' Association of Israel, a General Director of the Israeli Plastics & Rubber Industry, and a General Director of the Israeli Furniture Industries Association. Mr. Bar-El also has served as a Director for the Wood Products & Furniture Export Economic Company. Mr. Bar-El has a B.A. in Economics from Jerusalem University.
ERAN VITAL has served as legal counsel and company secretary since October 2008. From August 2004 until September 2008, he served as legal advisor to On Track Innovations Ltd. Mr. Vital holds an LL.B. from the Haifa University and is a member of the Israel Bar Association.
In February 2010, Yuval Ruhama, who served as our Chief Financial Officer since January 2006, left our company and was replaced by Rony Eizenshtein, as part of the Company's engagement with Brooks-Keret to provide CFO and other financial and accounting services to the Company.
B. COMPENSATION
The aggregate remuneration we paid for the year ended December 31, 2009 to all executive officers as a group (8 persons during 2009, including 7 persons who are no longer in the Company's employ), was approximately $1,000,000 in salaries, fees, commissions and bonuses. This amount includes approximately $40,000 set aside or accrued to provide for pension, retirement or similar benefits provided to our directors and executive officers.
Members of our board of directors (other than external directors) who are not executive officers do not receive compensation for their service on the board of directors or any committee of the board of directors, but they are reimbursed for their expenses for each board of directors meeting attended. External directors receive fixed compensation for their service on the board of directors or any committee of the board of directors of NIS 42,600 (equivalent to approximately $ 10,770), and in addition, receive proportional compensation for their participation the board of directors or any committee meetings of NIS 2,200 per meeting attended (equivalent to approximately $555). In addition, all board members received options to purchase shares of the Company, except our CEO and Chairman of the Board (see Item 6(E) below). Other than officers of the Company who serve as directors, no directors have arrangements to receive benefits upon termination of employment. Regarding officers, who are directors, see the discussion under the caption "Management Employment Agreements" below.
C. BOARD PRACTICES
CORPORATE GOVERNANCE PRACTICES
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, relating to such matters as external directors, the audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoing listing conditions of NASDAQ and other relevant provisions of U.S. securities laws.
Under the NASDAQ rules, a majority of our directors are required to be "independent directors" as defined in NASDAQ rules. We are also required to have an audit committee, all of whose members are "independent directors" as defined in NASDAQ and SEC rules. Four out of the five members of our board of directors, namely, Messrs. Rozenberg, Shenhar, Bar-El and Ms. Etzion, are independent directors under the NASDAQ requirements. Messrs. Shenhar, Bar-El and Ms. Etzion are the members of our audit committee.
The NASDAQ rules also require that director nominees be selected or recommended for the board's selection either by a committee composed solely of independent directors or by a majority of independent directors. The compensation of a company's chief executive officer and other executive officers is required to be approved either by a majority of the independent directors on the board or a committee comprised solely of independent directors. Accordingly, these matters are approved by a majority of our independent directors.
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 powers and may take all actions that are not specifically granted to our shareholders. As part of its powers, our board of directors may cause us to borrow or secure payment of any sum or sums of money for our purposes, at times and upon terms and conditions as it thinks fit, including the grant of security interests in all or any part of our property. Our board of directors may consist of between four (4) and nine (9) directors and currently consists of five (5) directors.
Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise, as defined in the regulations, that 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 at least one director with the requisite financial and accounting expertise and that Ms. Etzion has such expertise.
Our directors are elected at annual meetings of shareholders by a vote of the holders of a majority of the ordinary shares voting thereon. Directors generally hold office until the next annual meeting of shareholders. Our annual meeting of shareholders is required to be held at least once during every calendar year and not more than fifteen months after the last preceding meeting. The board of directors generally may temporarily fill vacancies in the board.
A resolution proposed at any meeting of the board of directors is deemed adopted if approved by a majority of the directors present and voting on the matter.
EXTERNAL DIRECTORS
QUALIFICATIONS OF EXTERNAL DIRECTORS
Under the Israeli 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 at least two external directors. External directors are required to possess professional qualifications 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 if the person or the person's relative, partner, employer or any entity under the person's control has, as of the date of the person's appointment to serve as an outside director, or had, during the two years preceding that date, any affiliation with:
o the company;
o any entity controlling the company; or
o any entity controlled by the company or by its controlling entity.
The term affiliation includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder.
The Companies Law defines the term "office holder" of a company to include a director, the chief executive officer and any officer of the company who reports directly to the chief executive officer.
No person can serve as an external director if the person's position or other business creates, or may create, a conflict of interest 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 two years from termination of office, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.
ELECTION OF EXTERNAL DIRECTORS
External directors are elected at meetings of shareholders by a vote of the holders of a majority of the ordinary shares voting thereon, provided that either:
o at least one third of the shares of non-controlling shareholders voted at the meeting vote in favor of the external director's election; or
o the total number of shares of non-controlling shareholders that voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company.
The initial term of an external director is three years and may be extended for one additional term of three years. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the 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 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, which is required to include all the external directors.
Our external directors are Meir Bar-El, who was elected to a third three-year term in 2008, and Orly Etzion, who was elected to a three-year term in December, 2009.
COMMITTEES
Subject to the provisions of the Companies Law, our board of directors may delegate its powers to committees consisting of board members. Our board has formed an audit committee.
AUDIT COMMITTEE
Under the Israeli 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, but excluding:
o the chairman of our board of directors;
o a controlling shareholder or a relative of a controlling shareholder; and
o any director employed by us or who provides services to us on a regular basis.
Under the Companies Law, the role of the audit committee is to identify flaws in the management of our business, including in consultation with the internal auditor and our independent accountants, to suggest remedial measures and to approve specified related party transactions. Under the Companies Law, the 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 outside directors are serving as members of the audit committee and at least one of whom was present at the meeting in which any approval was granted. An interested party is defined in the Companies Law as a 5% or greater shareholder, any person or entity who has the right to designate one director or more or the general manager of the company or any person who serves as a director or as a general manager.
Our Audit Committee consists of Efi Shenhar, Orly Etzion and Meir Bar-El.
As required by the NASDAQ rules, our Audit Committee has adopted a formal written charter, which is available on our website at www.MTLK.com. Each of Messrs. Shenhar and Bar-El and Ms. Etzion is "independent" under the applicable SEC and NASDAQ rules. In addition, the board of directors has determined that Ms. Etzion qualifies as an "audit committee financial expert" within the meaning of the SEC rules.
Our Audit Committees' functions also include:
o Overseeing financial and operational matters involving accounting, corporate finance, internal and independent auditing, internal control over financial reporting, compliance, and business ethics.
o Overseeing other financial audit and compliance functions as assigned by the board of directors.
o Reviewing areas of potential significant financial risk to the Company.
o Authority to oversee the Company's independent registered public accounting firm and recommend to our shareholders to appoint or remove them.
o Sole authority to approve non-audit services to be performed by the independent registered public accounting firm.
o Providing an avenue of communications among the independent registered public accounting firm, management and the board of directors.
o Determining whether to approve "related party transactions."
INTERNAL AUDITOR
Under the Companies Law, our board of directors is also required to appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine, among other things, whether our activities comply with the law and orderly business procedure. The internal auditor may participate in all audit committee meetings and has the right to demand that the chairman of the audit committee convene a meeting. Under the Companies Law, the internal auditor may be an employee of the company but may not be an interested party, an office holder, or a relative of any of the foregoing, nor may the internal auditor be the company's independent accountant or its representative. Mr. Yossi Ginossar, CPA, a manager partner in Fahn Kanne, serves as our internal auditor.
NOMINATION POLICY
It is our policy that our independent directors review and consider all candidates for nomination and election as directors who may be suggested by any director or executive officer of the Company. Our policy is also to refer to our independent directors for consideration any director candidate recommended by any shareholder if made in accordance with the Company's articles of association and applicable law.
APPROVAL OF SPECIFIED RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW
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, including directors and executive officers.
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 circumstances. The duty of care includes a duty to use reasonable means to obtain:
o information on the appropriateness of a given action brought for his/her approval or performed by him/her by virtue of his/her position; and
o all other important information pertaining to the previous actions.
The duty of loyalty of an office holder includes a duty to:
o refrain from any conflict of interest between the performance of his duties in the company and his personal affairs;
o refrain from any activity that is competetive with the company;
o refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and
o 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.
Each person listed in the table under "Directors and Senior Management" above is an office holder. Under the Companies Law, all arrangements as to compensation of directors in public companies such as ours, generally require the approvals of the audit committee, the board of directors and the shareholders, in that order.
DISCLOSURE OF PERSONAL INTERESTS OF AN OFFICE HOLDER.
The Companies Law requires that an office holder of a company promptly disclose 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. A personal interest of an office holder includes an interest of a company in which the office holder is, directly or indirectly, 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. In the case of an "extraordinary transaction", the office holder's duty to disclose applies also to a personal interest of the office holder's relative.
Under the Companies law, an extraordinary transaction is a transaction:
o other than in the ordinary course of business;
o other than on market terms; or
o that is likely to have a material impact on the company's profitability, assets or liabilities.
Under the Companies Law, once an office holder complies with the above disclosure requirement the board of directors may approve a transaction between the company and such office holder or a third party in which such office holder has a personal interest, unless the articles of association provide otherwise. Nevertheless, a transaction that is adverse to the company's interest cannot be approved.
If the transaction is an extraordinary transaction, both the audit committee and the board of directors must approve the transaction. Under specific circumstances, shareholder approval may also be required. Generally, when a transaction is considered by the audit committee and board of directors, the interested director may not be present or vote, unless a majority of the members of the board of directors or the audit committee, as the case may be, has a personal interest in the matter. If a majority of members of the board of directors have a personal interest therein, shareholder approval is also required.
EXCULPATION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
EXCULPATION OF OFFICE HOLDERS
Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care (except in connection with distributions), provided that the articles of association of the company allow it to do so. Our articles of association allow us to exempt our office holders to the fullest extent permitted by law.
OFFICE HOLDER INSURANCE
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:
o a breach of his duty of care to us or to another person;
o 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
o a financial liability imposed upon him in favor of another person.
INDEMNIFICATION OF OFFICE HOLDERS
Subject to certain qualifications, the Companies Law also permits us to indemnify an office holder for acts or omissions committed in his or her capacity as an office holder of the company for:
o a financial liability imposed on him in favor of another person by any judgement, including a settlement or an arbitrator's award approved by a court. Such indemnification may be approved (i) after the liability has been incurred, or (ii) in advance, provided that our undertaking to indemnify is limited to events that our board of directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or criterion that our board of directors determines to be reasonable under the circumstances;
o 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 (i) concluded without the imposition of any financial liability in lieu of criminal proceedings, or (ii) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and
o reasonable litigation expenses, including attorneys' fees, expended by the office holder or charged to him or her by a court, resulting from the following: proceedings we institute against him or her or instituted on our behalf or by another person; a criminal indictment from which he or she was acquitted; or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of intent.
LIMITATIONS ON INSURANCE AND INDEMNIFICATION
The Companies Law provides that a company may not exculpate or indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:
o a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
o a breach by the office holder of his duty of care if the breach was done intentionally or recklessly, unless the breach was done negligently;
o any act or omission done with the intent to derive an illegal personal benefit; or
o 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, in specified circumstances, by our shareholders.
We have obtained director's and officer's liability insurance with coverage $5,000,000 in aggragate. In addition, we entered into indemnification and exculpation agreements with our directors and executive officers in accordance with our articles of association.
MANAGEMENT EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our executive officers, other than our chief executive officer. These agreements contain various provisions, including provisions relating to assignment of intellectual property rights to us and confidentiality and are in effect until terminated by either party upon advance notice or otherwise in accordance with the terms of the particular agreement. All of these agreements also contain non-competition provisions.
DIRECTORS' SERVICE CONTRACTS
There are no arrangements or understandings between us and any of our current directors, including our Chief Executive Officer, for benefits upon termination of service.
D. EMPLOYEES
We have standard employment agreements with all of our employees, other than our Chief Executive Officer. All of our employees, other than our Chief Executive Officer, have executed employment agreements, including confidentiality and non-compete provisions with us.
The following table details certain data on the workforce of Metalink and its consolidated subsidiaries for the periods indicated*:
As at December 31,
----------------------------
2009 2008 2007
---- ---- ----
APPROXIMATE NUMBERS OF EMPLOYEES BY GEOGRAPHIC LOCATION
United States and Asia Pacific 10 17 38
Europe, Middle East 59 66 192
---- ---- ----
TOTAL WORKFORCE 69 83 230
==== ==== ====
APPROXIMATE NUMBERS OF EMPLOYEES BY CATEGORY OF ACTIVITY
Research and development 50 57 172
Sales and marketing 6 8 22
Product and customer support 4 7 21
Management and administrative 9 11 15
---- ---- ----
TOTAL WORKFORCE 69 83 230
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* Includes the employees for these years that were transferred to Lantiq in connection with the WLAN business to Lantiq in February 2010. As of June 24, 2010, we had 3 employees.
The overall reduction in our workforce, from 83 employees in 2008 to 69 employees in 2009, is due primarily to the cost reduction plan. The reduction in our workforce from 69 to 3 in February 2010 is due primarily to the Lantiq Transaction.
We are subject to labor laws and regulations in Israel. We and our Israeli employees are also subject to certain provisions of the general collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists Association) by order of the Israeli Ministry of Labor and Welfare. None of our employees is represented by a labor union and we have not experienced any work stoppages.
E. SHARE OWNERSHIP
The following table sets forth certain information regarding the ownership of our ordinary shares by our directors and officers as of June 24, 2010. The percentage of outstanding ordinary shares is based on 2,690,863 ordinary shares outstanding as of June 24, 2010, subsequent to the reverse share split affected on February 22, 2010 at a ratio of one to ten.
NUMBER OF ORDINARY PERCENTAGE OF
SHARES BENEFICIALLY OUTSTANDING ORDINARY
NAME OWNED(1) SHARES
-------------- ------- ------
Tzvi Shukhman 591,031 21.96%
Uzi Rozenberg 477,535 17.75%
Orly Etzion * *
Efi Shenhar * *
Eran Vital * *
Meir Bar-El * *
Rony Eizenshtein * *
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* Less than 1%.
(1) Except as otherwise noted and pursuant to applicable community property laws, each person named in the table has sole voting and investment power with respect to all ordinary shares listed as owned by such person. Shares beneficially owned include shares that may be acquired pursuant to options that are exercisable within 60 days of June 24, 2010.
(2) Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire such shares within 60 days of June 24, 2010, are treated as outstanding only for the purposes of determining the percent owned by such person or group.
SHARE OPTION PLANS
We have seven employee share option plans and one additional option plan, our Share Option Plan (2000), for our advisors and independent contractors, or, together, the Plans. The expiration dates of the options granted under the Plans range from 4 to 25 years from the date of grant. Our Plans are administered currently by our board of directors. All of our employees and directors are eligible to participate in our Plans. Members of advisory board, if any, and our independent contractors are eligible to receive options under our Share Option Plan (2000).
As of June 2, 2010 options to purchase 63,681 ordinary shares, or 636,810 prior to the reverse share split affected February 22, 2010 at a ratio of one to ten, under our share option plans were outstanding. As of June 2, 2010, an additional 7,125,630 ordinary shares or 712,563 options subsequent to above reverse share split were reserved for issuance pursuant to options issuable under our share option plans.
In 2009, we granted options exercisable into 39,100 ordinary shares, or 3,910 options subsequent to above reverse share split, under our share option plans. Such options will expire in 2012. Of the total options granted in 2009, none of our directors and executive officers were granted options exercisable into ordinary shares. As part of the Lantiq Transaction, options exercisable into 677,640 (or 67,764 options subsequent to above reverse share split), were canceled within 90 days from transfer of the employees to Lantiq.
In October 2007, our board of directors approved the increase of 2,100,000 in the number of outstanding shares reserved under the plans. We may further increase the number of ordinary shares reserved for issuance under the plans.
The following table summarizes information relating to stock options outstanding, to employees and directors of the Company, as of December 31, 2009:
OPTIONS & RSU OUTSTANDING OPTIONS & RSU EXERCISABLE
------------------------------------------------------- ------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31 EXERCISE
EXERCISE PRICE 2009 LIFE (IN YEARS) PRICE 2009 PRICE
---------------- -------------- --------------- -------- -------------- --------
$ 0.00-2.66 677,883 3.43 1.69 639,417 1.70
$ 2.76-3.28 22,100 0.71 3.05 22,100 3.05
$ 3.39-4.00 33,200 0.38 3.80 15,000 3.80
$ 4.04-5.00 49,127 1.09 4.36 49,127 4.36
$ 5.04-7.00 168,150 0.57 5.99 147,850 5.94
$ 7.01-8.95 229,600 1.17 7.30 214,800 7.30
$ 9.00-22.06 258,084 0.46 15.34 258,084 15.34
-------------- --------------
1,438,144* 2.01 5.70 1,346,378 5.82
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* As part of the Lantiq Transaction, options exercisable into 677,640 (or 67,764 options subsequent to above reverse share split), were canceled within 90 days from transfer of the employees to Lantiq.
STOCK PURCHASE PLAN
In October 2000 we initiated our 2000 Employee Stock Purchase Plan, or the ESPP. The plan is implemented through consecutive offering periods with new offering periods commencing on the first trading day following the last day of the previous period, and continuing thereafter until terminated. It enables eligible employees who elect to participate in the plan to purchase ordinary shares through payroll deductions at a price of 85% of the fair market value of the ordinary shares on the first or the last day of each offering period, whichever is lower. Participants were limited to a maximum of $25,000 deducted from their compensation under the plan during each calendar year. The maximum number of ordinary shares which was available for sale under the plan was 160,000 shares, plus an annual increase to be added by the first day of the year commencing 2001 equal to the lesser of (i) 140,000 shares or (ii) 0.75% of the outstanding shares on such date or (iii) a lesser amount determined by our board. The plan is currently administered by our board, who may delegate such power to a committee appointed by the board. The plan terminates on October 31, 2010. As of June 24, 2010, 329,080 ordinary shares had been issued under the ESPP, and an additional 108,143 ordinary shares are reserved for issuance. The last ESPP offering period ended in August 2004 and in April 2005, our board of directors resolved to suspend the ESPP until further notice.
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 June 24, 2010 by each person or entity known to own beneficially more than 5% of our outstanding ordinary shares based on information provided to us by the holders or disclosed in public filings with the SEC.
NUMBER OF ORDINARY PERCENTAGE
SHARES BENEFICIALLY OF OUTSTANDING
NAME OWNED (1) ORDINARY SHARES(2)
---- ------- ------
Tzvi Shukhman(3) 591,031 21.96%
Uzi Rozenberg(3)(4) 477,535 17.75%
Harel Insurance and
Harel PIA (5) 253,254 9.41%
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(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by pursuant to applicable community property laws, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
(2) The percentage of outstanding ordinary shares is based on 2,690,863 ordinary shares outstanding as of June 24, 2010, subsequent to the reverse share split affected February 22, 2010 at a ratio of one to ten.
(3) Our major shareholders do not have voting rights different from the voting rights of our other shareholders.
(4) The record holder of 100,000 shares out of the 477,535 is not Uzi Rozenberg, but U.S.R. Electronic Systems (1987) Ltd., an Israeli company wholly owned by Mr. Rozenberg and his wife, Shoshana Rozenberg.
(5) As of December 31, 2009, based on a Schedule 13G/A filed by Harel Insurance Investments & Financial Services Ltd. ("Harel Insurance") and Harel PIA Mutual Funds Management Ltd. ("Harel PIA") with the SEC on March 1, 2010.
As a result of the size of their share ownership, Messrs. Tzvi Shukhman and Uzi Rozenberg, if they vote together, could have a significant influence on the election of our directors and on other decisions by our shareholders on matters submitted to shareholder vote. Except with respect to effect of the concentration of ownership by said major shareholders, the Company is not directly or indirectly controlled by any other corporation, foreign government or other natural or legal person.
RECORD HOLDERS
As of June 24, 2010, we had 32 shareholders of record, of whom 24 were registered with addresses in the United States, representing approximately 17% of our outstanding ordinary shares. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. depository, CEDE & Co., which held approximately 71% of our outstanding ordinary shares as of said date).
DUTIES OF SHAREHOLDERS
DISCLOSURE BY CONTROLLING SHAREHOLDERS. Under the Companies Law, the disclosure requirements that 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, and the engagement of a controlling shareholder as an office holder or employee, generally require the approval of the audit committee, the board of directors and the shareholders, in that order. The shareholder approval must include at least one-third of the shares of non-interested shareholders voted on the matter. However, the transaction can be approved by shareholders without this one-third approval if the total shares of non-interested shareholders that voted against the transaction do not represent more than one percent of the voting rights in the company.
GENERAL DUTIES OF SHAREHOLDERS. In addition, under the Companies Law, each shareholder has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his or her power in the company, such as in shareholder votes. In addition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint or prevent the appointment of an office holder or any other power with respect to the company. However, the Companies Law does not define the substance of this duty of fairness.
B. RELATED PARTY TRANSACTIONS
None.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See Item 18 below - "Financial Statements".
OTHER FINANCIAL INFORMATION
In the year ended December 31, 2009 the amount of our export sales was approximately $3.7 million, which represents 75% of our total sales.
LEGAL PROCEEDINGS
1998 CLAIM. In July 1998, a former employee filed a claim against us in the Tel Aviv District Labor Court (the "Court") demanding that we issue him ordinary shares and pay on his behalf any taxes relating to such issuance; that the Company pay him statutory severance pay together with the statutory penalty for late payment of such severance pay and travel expenses; and that we release his managers insurance and continuing education fund. We filed a counterclaim against this former employee. In March 2001, the Court ordered that certain of the disputes between the parties be referred to a two-stage arbitration and pursuant to the Court's order we issued 75,765 ordinary shares (which were held in trust) in favor of the former employee. In addition, in January 2002, we paid the former employee $16,000 in payment of statutory severance pay and reimbursement of travel expenses. In August 2002, the arbitrators in the first stage of the arbitration awarded $391,000 to the former employee (which we paid in September 2002).
In December 2003, the former employee filed a claim in the second phase of the arbitration (the "Second Arbitration") in the amount of $3.2 million and at least $2.9 million before deductions and also a sum of $3.8 million for funding differences. We contested this claim and filed a claim for damages against the former employee in the amount of $950,000 and for a refund of the NIS 1.9 million ($435,000) already paid to him according to the foregoing judgment and of the $35,000 paid as statutory severance pay and reimbursement of travel expenses.
In May 2010, we entered into a settlement agreement with the former employee, whereby both parties agreed to finally and irrevocably waive all rights, claims and causes of action against the other. As part of the settlement agreement, we agreed to pay the former employee a sum of $200,000.
On June 14, 2010 the Tel Aviv District Labor Court sanctioned the settlement agreement.
2010 Claim. On May 24, 2010, we received a notice from a former employee claiming certain rights with respect to termination of employment in the amount of approximately $100,000. We rejected this notice as being without merits. However, there is no assurance that the claimant will not pursue litigation or that if litigation is pursued that we will necessarily prevail.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our ordinary shares. Rather, we have elected to retain earnings and other cash resources to continue the development and expansion of our business. Any future dividend policy will be determined by our board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions.
According to the Israeli Companies Law, a company may distribute dividends only out of its "profits," as such term is defined in the Israeli Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher. Our board of directors is authorized to declare dividends, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Notwithstanding the foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after deduction of previous distributions that were not already deducted from the surpluses, as evidenced by financial statements prepared no more than six months prior to the date of distribution.
B. SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2009.
UNAUDITED PRO FORMA FINANCIAL STATEMENT
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited condensed combined pro forma financial statements for the year ended December 31, 2009 reflect the historical results of Metalink Ltd, adjusted to give effect to the disposition of the WLAN business to Lantiq.
We derived this information from the audited consolidated financial statements of Metalink Ltd for the year ended December 31, 2009. This information should be read together with our consolidated financial statements and related notes included elsewhere in this Form 6-K.
The following unaudited pro forma condensed balance sheet as of December 31, 2009 adjusted to give pro forma effect to the disposition of the WLAN business to Lantiq as if it had occurred on December 31, 2009. The following unaudited pro forma condensed results of operations for the year ending December 31, 2009 adjusted to give pro forma effect to the disposition of the WLAN business to Lantiq as if it had occurred on January 1, 2009.
The pro forma adjustments are preliminary, and the unaudited pro forma condensed combined financial statements are not necessarily indicative of the financial position or results of operations that may have actually occurred had the disposition taken place on the dates noted, or the future financial position or operating results of Metalink Ltd. The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. Any material change in estimates would materially impact results of operations after the disposition.
PRO-FORMA INFORMATION
The following Pro forma statement relates to the balance sheet of the Company as of December 31, 2009 as if the sale of the wireless local area network (WLAN) business to Lantiq had occurred on December 31, 2009.
METALINK LTD.
CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS IN THOUSANDS
DECEMBER 31, 2009
-----------------------------------------
2 0 0 9 ADJUSTMENT 2 0 0 9
---------- ---------- ----------
AUDITED (1) UNAUDITED (2) UNAUDITED (3)
---------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,273 5,700(7) $ 7,973
Trade accounts receivable 461 (461) -
Other receivables 602 2,812 3,414
Prepaid expenses 88 (54) 34
Inventories 1,068 (771) 297
---------- ----------
Total current assets 4,492 11,718
---------- ----------
SEVERANCE PAY FUND 1,229 (1,083) 146
---------- ----------
PROPERTY AND EQUIPMENT, NET 2,145 (2,045) 100
========== ==========
Total assets $ 7,866 $ 11,964
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Trade accounts payable $ 1,542 (305) $ 1,237
Other payables and accrued expenses 3,239 (690) 2,549
Short-term loan 4,100 4,100
Warrants to issue shares 289 289
---------- ----------
Total current liabilities 9,170 8,175
---------- ----------
ACCRUED SEVERANCE PAY 1,798 (1,350) 448
---------- ----------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Ordinary shares of NIS 0.1 par value (Authorized - 50,000,000 shares,
issued and outstanding 26,637,232 shares as of December 31, 2009) 759 759
Additional paid-in capital 157,692 157,692
Accumulated deficit (151,668) 6,443 (145,225)
---------- ----------
6,783 13,226
---------- ----------
Treasury stock, at cost; 898,500 shares as of
December 31, 2009 (9,885) (9,885)
---------- ----------
Total shareholders' equity (deficiency) (3,102) 3,341
========== ==========
Total liabilities and shareholders' equity (deficiency) $ 7,866 $ 11,964
========== ==========
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PRO-FORMA INFORMATION
The following Pro forma statement relates to the results of operations of the Company for the year ending December 31, 2009 as if the sale of the wireless local area network (WLAN) business to Lantiq had occurred on January 1, 2009.
METALINK LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2 0 0 9 ADJUSTMENT 2 0 0 9
----------- ----------- -----------
AUDITED (4) UNAUDITED (5) UNAUDITED (6)
----------- ----------- -----------
Revenues $ 4,916 (1,628) $ 3,288
----------- -----------
Cost of revenues:
Costs and expenses 3,174 (2,146) 1,028
Royalties to the Government of Israel 160 (63) 97
----------- -----------
Total cost of revenues 3,334 1,125
=========== ===========
GROSS PROFIT 1,582 2,163
Operating expenses:
Gross research and development 9,627 (9,627) -
Less - Royalty bearing and other grants 1,898 (1,898) -
----------- -----------
Research and development, net 7,729 -
----------- -----------
Selling and marketing 1,397 (1,397) -
General and administrative 2,416 (94) 2,322
----------- -----------
Total operating expenses 11,542 2,322
=========== ===========
OPERATING LOSS (9,960) (159)
Financial expenses, net (3,494) (3,494)
----------- -----------
NET LOSS $ (13,454) $ (3,653)
=========== ===========
Loss per ordinary share:
Basic $ (5.4) $ (1.47)
=========== ===========
Diluted $ (5.4) $ (1.47)
=========== ===========
Shares used in computing loss per ordinary share*:
Basic 2,482,863 2,482,863
=========== ===========
Diluted 2,482,863 2,482,863
=========== ===========
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* Shares used for loss per share calculation have been adjusted retroactively to reflect the one for ten reverse split of our ordinary shares dated February 22, 2010.
METALINK LTD.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On February 15, 2010 the Company completed the sale of the wireless local area network (WLAN) business to Lantiq, a newly-formed fabless semiconductor company funded by Golden Gate Capital for up to $16,500 in cash as follows:
o $5,700 was paid concurrently with the closing, of which $3,750 was used to repay the first installment under Metalink's loan agreement with an institutional investor.
o $812 was paid on March 31, 2010; and $2,000 to be paid in four installments throughout the year 2010;
o Earn-out payments of up to an aggregate of $8,000, contingent upon the acquired business' achievement of specified performance targets through March 2012.
1) The audited financial data in the balance sheets is identical to the financial data in the balance sheets of the company as it appears in our financial statements.
2) This column reflects adjustments to the balance sheets of the company as of December 31, 2009, as if the sale of the WLAN business to Lantiq had occurred on December 31, 2009.
3) This column reflects the balance sheets of the Company as of December 31, 2009, as if the sale of the WLAN business to Lantiq had occurred on December 31, 2009. As such on December 31, 2009 substantially all of the assets and liabilities relating to the WLAN business with the exception of specific assets and liabilities as defined in the Purchase Agreement were transferred to Lantiq.
4) The audited financial data in the statement of operations is identical to the results of operation as it appears in the financial statements of the company.
5) This column reflects adjustments of our results of operation for the current year as if the sale of the WLAN business to Lantiq had occurred on January 1, 2009.
6) This column reflects the results of operations of the Company for the year ending December 31, 2009 as if the sale of the WLAN business to Lantiq had occurred on January 1, 2009. As such in 2009 there would have been no revenues and associated cost of revenues derived from the sale of WLAN chipsets, nor selling, marketing expenses and research and development expenses relating to the WLAN business.
7) The proceeds from the sale were used to retire our debt owed to institutional investor in the amount of $3,750. The remainder of the debt owed is scheduled to be paid in three installments throughout the years 2010 and the beginning of 2011.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
LISTING DETAILS
The following table sets forth the high and low closing prices for our ordinary shares as reported by the NASDAQ Global and, commnecing March 2009, the NASDAQ Capital Market, for the periods indicated. The prices have been adjusted to retroactively reflect the one-for-ten reverse split of our ordinary shares we effected on February 22, 2010:
FIVE MOST RECENT YEARS HIGH LOW
---------------------- ---------- ----------
2005 $ 57.2 $ 38.5
2006 $ 64.9 $ 43.6
2007 $ 87.9 $ 44.3
2008 $ 47.5 $ 1.0
2009 $ 6.0 $ 1.0
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Third Quarter 2008 $ 11.3 $ 5.7
Fourth Quarter 2008 $ 5.9 $ 1.0
First Quarter 2009 $ 1.9 $ 1.0
Second Quarter 2009 $ 6.0 $ 1.6
Third Quarter 2009 $ 5.0 $ 3.3
Fourth Quarter 2009 $ 3.9 $ 2.1
First Quarter 2010 $ 3.4 $ 1.3
Second Quarter 2010 (through June 24) $ 1.97 $ 0.78
MOST RECENT SIX MONTHS
----------------------
December 2009 $ 3.2 $ 2.1
January 2010 $ 3.4 $ 2.45
February 2010 $ 2.4 $ 1.55
March 2010 $ 1.84 $ 1.3
April 2010 $ 1.97 $ 1.3
May 2010 $ 1.45 $ 1.19
June 2010 (through June 24) $ 1.2 $ 0.78
|
We voluntarily delisted our ordinary shares from trade on the TASE, effective June 14, 2010.
The following table sets forth the high and low closing prices for our ordinary shares as reported by the Tel Aviv Stock Exchange for the periods indicated. The translation into dollars is based on the representative rate of exchange on December 31, 2009, as published by the Bank of Israel (NIS 3.775 per one dollar):
FIVE MOST RECENT YEARS HIGH LOW
------------- --------------
$ NIS $ NIS
--- ---- ----- -----
2005 6.7 25.31 4.69 17.71
2006 7.54 28.48 5.5 20.77
2007 9.55 36.06 4.58 17.29
2008 4.89 18.47 0.08 0.33
2009 0.72 2.75 0.1 0.38
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EIGHT MOST RECENT QUARTERS AND SUBSEQUENT PERIOD
Third Quarter 2008 1.07 4.06 0.31 1.18 Fourth Quarter 2008 0.59 2.24 0.08 0.33 First Quarter 2009 0.23 0.88 0.1 0.38 Second Quarter 2009 (through June 24) 0.72 2.75 0.19 0.75 Second Quarter 2009 0.41 1.55 0.37 1.41 Third Quarter 2009 0.54 2.04 0.33 1.27 Fourth Quarter 2009 0.38 1.45 0.22 0.85 First Quarter 2010 0.42 1.6 0.12 0.48 Second Quarter 2010 (through June 10) 0.17 0.67 0.09 0.36 MOST RECENT SIX MONTHS December 2009 0.38 1.45 0.22 0.85 January 2010 0.42 1.6 0.23 0.90 February 2010 0.24 0.93 0.16 0.62 March 2010 0.18 0.68 0.12 0.48 April 2010 0.17 0.67 0.12 0.49 May 2010 0.13 0.51 0.11 0.44 June 2009 (through June 10) 0.11 0.44 0.09 0.36 B. PLAN OF DISTRIBUTION |
Not applicable.
C. MARKETS
Our ordinary shares began trading on the NASDAQ Global Market on December 2, 1999 under the symbol "MTLK". In March 2009, we transferred the listing of our securities to the NASDAQ Capital Market under the symbol "MTLK". As of December 3, 2000, our ordinary shares began trading also on the Tel Aviv Stock Exchange, or TASE, under the symbol "MTLK." We voluntarily delisted our ordinary shares from trade on the TASE, effective June 14, 2010.
D. SELLING SHAREHOLDERS.
Not applicable.
E. DILUTION.
Not applicable.
F. EXPENSES OF THE ISSUE.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
SET OUT BELOW IS A DESCRIPTION OF CERTAIN PROVISIONS OF OUR MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION, AND OF THE ISRAELI COMPANIES LAW RELATED TO SUCH PROVISIONS, UNLESS OTHERWISE SPECIFIED. THIS DESCRIPTION IS ONLY A SUMMARY AND DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE MEMORANDUM AND ARTICLES, WHICH ARE INCORPORATED BY REFERENCE AS EXHIBITS TO THIS ANNUAL REPORT, AND TO ISRAELI LAW.
OBJECTS AND PURPOSES
We were first registered under Israeli law on September 7, 1992 as a
private company, and on December 2, 1999 became a public company. Our
registration number with the Israeli registrar of companies is 52-004448-8. Our
objects and purposes include a wide variety of business purposes as set forth in
Section 2 of our Memorandum of Association, which was filed with the Israeli
registrar of companies.
THE POWERS OF THE DIRECTORS
Under the provisions of the Israeli Companies Law and our articles of association, a director generally cannot participate in a meeting nor vote on a proposal, arrangement or contract in which he or she is personally interested. In addition, our directors generally cannot vote compensation to themselves or any members of their body without the approval of our audit committee and our shareholders at a general meeting. See Item 6(C). "Directors, Senior Management and Employees - Board Practices - Approval of Specified Related Party Transactions Under Israeli Law."
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
Under our articles of association, retirement of directors from office is not subject to any age limitation and our directors are not required to own shares in our company in order to qualify to serve as directors.
RIGHTS ATTACHED TO OUR SHARES
Our authorized share capital consists of 5,000,000 ordinary shares of a nominal value of NIS 1.0 each.
The key rights attached to our ordinary shares are as follows:
DIVIDEND RIGHTS. Our articles of association provide that our board of directors may from time to time, declare such dividend as may appear to be justified. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of the company, unless the company's articles of association require otherwise. Subject to the rights of the holders of shares with preferential or other special rights that may be authorized in the future, holders of ordinary shares are entitled to receive dividends according to their rights and interest in our profits. Any dividend unclaimed after a period of seven years from the date of its declaration, shall be forfeited and reverted to us, provided, however, that our board may, at its discretion, cause us to pay any such dividend or any part thereof, to a person who would have been entitled thereto, had the same not reverted to us.
VOTING RIGHTS. Holders of ordinary shares have one vote for each ordinary shares 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. The ordinary shares do not have cumulative voting rights in the election of directors. As a result, holders of ordinary shares that represent more than 50% of the voting power present at the meeting have the power to elect all the directors, other than external directors.
RIGHTS TO SHARE IN THE COMPANY'S PROFITS. Our board has the power to cause any moneys, investments, or other assets forming part of the undivided profits of the company, standing to the credit of a reserve fund for the redemption of capital, to be capitalized and distributed among such shareholders as would be entitled to receive the same if distributed by way of dividend.
LIQUIDATION RIGHTS. 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. This 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.
REDEMPTION PROVISIONS. We may, subject to applicable law, issue redeemable shares and redeem the same, and our board may redeem, in the case of redeemable preference shares, and subject to applicable law, such shares or fractional shares sufficient to preclude or remove fractional share holdings.
PREEMPTIVE, FIRST REFUSAL AND CO-SALE RIGHTS. All outstanding ordinary shares, are validly issued, fully paid and non-assessable and do not have preemptive rights, rights of first refusal or co-sale rights.
TRANSFER OF SHARES. Fully paid ordinary shares are issued in registered form and may be transferred pursuant to our articles of association, unless such transfer is restricted or prohibited by another instrument and subject to applicable securities laws.
MODIFICATION OF RIGHTS
Unless otherwise provided by our articles of association, rights attached to any class may be modified or abrogated by a resolution adopted in a general meeting approved by a simple majority of the voting power represented at the meeting in person or by proxy and voting thereon, subject to the sanction of a resolution passed by majority of the holders of a majority of the shares of such class present and voting as a separate general meeting of the holders of such class.
SHAREHOLDERS' MEETINGS AND RESOLUTIONS
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 33-1/3% of the outstanding voting shares, unless otherwise required by applicable rules. 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 of the board may designate. At such reconvened meeting the required quorum consists of any two members present in person or by proxy.
Unless otherwise prescribed by law, each shareholder of record will be provided at least 7 calendar days' prior notice of any general shareholders meeting.
Under our articles of association, as amended, all resolutions of our shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter, unless otherwise required by the Companies Law.
Our annual general meetings are held once in every calendar year at such time (within a period of not more than fifteen months after the last preceding annual general meeting) and at such place determined by our board. All general meetings other than annual general meetings are called extraordinary general meetings. Our board may, whenever it thinks fit, convene an extraordinary general meeting at such time and place as it determines, and shall be obligated to do so upon a requisition in writing in accordance with the Companies Law.
LIMITATION ON OWNING SECURITIES
The ownership of our ordinary shares by non-residents of Israel is not restricted in any way by our memorandum of association and articles of association or the laws of the State of Israel, except for citizens of countries which are in a state of war with Israel, who may not be recognized as owners of our ordinary shares.
CHANGE OF CONTROL
There are no specific provisions of our Memorandum or Articles of Association that would have an effect of delaying, deferring or preventing a change in control of us or that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or any of our subsidiaries). However, certain provisions of the Companies Law may have such effect.
The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to the merger have the transaction approved by its board of directors and a vote of the majority of its shares at a shareholders' meeting called on at least 21 days' prior notice. For purposes of the shareholder vote of each party, unless a court rules otherwise, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power or the right to appoint 25% or more of the directors of the other party), vote against the merger. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligation 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 the requisite proposals for approval of the merger have been filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed since the merger was approved by the shareholders of each merging company.
The Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, unless there is already a 45% or greater shareholder of the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholder approval, (2) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the 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 offeror 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 acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to it. The Companies Law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.
Lastly, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such stock-for-stock swap.
C. MATERIAL CONTRACTS
LANTIQ TRANSACTION
On January 5, 2010, we entered into an Asset Purchase Agreement, or the Purchase Agreement, with Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG (together, "Lantiq"), for the sale of the assets of, and certain specified liabilities related to, our wireless local area network (WLAN) business to Lantiq. Lantiq is a newly-formed fables semiconductor company funded by Golden Gate Capital.
In consideration for the acquired WLAN business, Lantiq has agreed to pay us a total of up to $16.9 million in cash, consisting of the following:
o $5.7 million to be paid concurrently with the closing;
o Up to $1.2 million (subject to downward adjustments) to be paid on March 31, 2010; and
o Earn-out payments of up to $10.0 million in the aggregate, contingent upon the acquired business' achievement of specified performance targets during a two-year period ending March 31, 2012. Pursuant to the Purchase Agreement, $2.0 million out of the $10.0 million earn-out payments are guaranteed payments, or the Guaranteed Payments, that, if not otherwise earned pursuant to the established performance targets, will be paid in four installments throughout the year 2010.
The performance targets are based on the gross profits generated by the acquired business during two earnout periods of April 1, 2010 through March 31, 2011 (the "first earnout period") and April 1, 2011 through March 31, 2012 (the "second earnout period"). During the first earnout period, if gross profits are between $2.0 million and greater than $10.0 million, the earnout payment is between $0.5 million and $9.0 million based on a sliding scale of increasing gross profits. During the second earnout period, if gross profits are between $8.0 million and greater than $15.0 million, the earnout payment is between $0.5 million and $9.0 million based on a sliding scale of increasing gross profits. Under no circumstances will the minimum aggregate earnout payments be less than $2.0 million, nor will the maximum aggregate earnout payments be greater than $10.0 million, as described above.
Other key terms of the Purchase Agreement include, among other things:
o Lantiq has agreed to reimburse us for costs related to the operation of the acquired business in the period prior to closing, subject to certain limitations and caps;
o Subject to certain exceptions, we made a number of customary representations and warranties to Lantiq. Lantiq made customary representations and warranties to us;
o During the pre-closing period, we agreed to act in the ordinary course of business and not take certain specified actions without obtaining Lantiq's prior written consent;
o Lantiq agreed to make an offer of continued employment to most of our WLAN business employees, to generally be no less favorable in the aggregate than their existing terms of employment;
o We agreed that, subject to closing, until March 31, 2012 we shall not compete with the acquired WLAN business nor solicit any employee or consultant working for Lantiq in such business. In connection therewith, Mr. Shukhman, our Chief Executive Officer, has entered into a similar non-competition agreement with Lantiq, which became effective at closing;
o We agreed that, subject to closing and for a period of six (6) months thereafter, Lantiq shall have the non-exclusive right to use certain trade names and trademarks in connection with the operation of the acquired business;
o The parties agreed to indemnify each other for breaches of representations, warranties, covenants and other liabilities under certain circumstances, subject to certain limitations, including (1) a cap of $4 million on our obligation to indemnify Lantiq for breaches of representations and warranties, except for a breach of certain fundamental representations, which are not capped and (ii) a cap of $2 million on the obligation of Lantiq to indemnify us for breaches of representations and warranties. The representations and warranties made by the parties survive the closing and, in general, expire on March 31, 2012; and
o The Purchase Agreement could be terminated by either party due to legal restraints or certain breaches of representations or covenants of the other party; by mutual consent of the parties; or by the non-failing party if the transaction has not closed by March 31, 2010.
The transaction closed on February 15, 2010, following satisfaction of the customary closing conditions contained in the Purchase Agreement and relating to, among other things, obtaining a specified list of consents and the approval of the Israeli Office of the Chief Scientist.
As contemplated by the Purchase Agreement, we entered into the following additional agreements at the closing:
o Consulting Agreement, whereby we agreed to provide Lantiq certain consulting services for up to two years in consideration for $400,000 per year;
o Transition Services Agreement, whereby Lantiq agreed to provide us with certain transition services for a limited period following the closing for an insignificant monthly payment. Such transition services included, among other things, entering into a Sublease Agreement allowing us to continue using a portion of our existing office space in Yakum, Israel; and
o Cross-License Agreement, whereby (1) we agreed to grant Lantiq a royalty-free non-exclusive license to our intellectual property rights (not sold as part of the transaction to Lantiq) and (ii) Lantiq agreed to grant us a royalty-free non-exclusive license to the intellectual property rights we sold as part of the transaction, to be used by us in connection with our retained DSL business.
To date, Lantiq paid us the following amounts as contemplated by the Purchase Agreement (excluding payments under the Consulting Agreement):
o $5.70 million which were paid concurrently with the closing;
o $0.57 million, reflecting certain payments on account of expense reimbursements which were paid on February18, 2010;
o $0.10 million of the Guaranteed Payments were paid on March 31, 2010;
o $0.81 million (following downward adjustment from $1.2 million) were paid on March 31, 2010 ;
Accordingly, as contemplated in the Purchase Agreement, we are entitled to receive the remaining $1.9 million on account of the Guaranteed Payments in three additional installments by December 31, 2010, unless we generated sufficient earn-out payments in lieu thereof.
THE FOREGOING DESCRIPTION OF THE LANTIQ TRANSACTION AND THE AGREEMENTS ENTERED IN CONNECTION THEREWITH IS ONLY A SUMMARY AND DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE THESE AGREEMENTS, WHICH ARE INCORPORATED BY REFERENCE AS EXHIBITS 4.21, 4.22, 4.23, 4.24 AND 4.25 TO THIS ANNUAL REPORT.
SENIOR LOAN
On September 8, 2008 we entered into a short term secured loan agreement, or the Loan Agreement, with an institutional investor, or the Senior Lender. According to the Loan Agreement, the Senior Lender agreed to extend us a loan of $3.5 million at the first stage ("First Loan"), which we received in September 2008, and agreed to extend us at our request, an additional loan of up to $4.5 million ("Second Loan"). Under the Loan Agreement, the outstanding principal amount will accrue interest at an annual rate of 10% payable, in cash or ordinary shares, at our election, on a quarterly basis.
In addition, in consideration for the First Loan, we issued to the lender five-year warrants to purchase up to a total of 2,000,000 ordinary shares at exercise prices per share of $0.01 (for 1,000,000 warrants) and $0.50 (for the balance), subject to adjustments. In consideration for the Second Loan, we undertook to issue to the Senior Lender five-year warrants to purchase up to a total of 2,200,000 ordinary shares at exercise prices per share of $0.01 (for 1,870,000 warrants) and $0.50 (for the balance), subject to adjustments.
The outstanding principal amount is evidenced by Senior Secured Promissory Notes, or the Notes. In connection with the loan, we entered into an Israeli Security Agreement granting the Lender a first priority fixed charge on all of our intellectual property and a first priority floating charge on all of our other assets. Our U.S. subsidiary entered into a U.S. Security Agreement granting the Senior Lender a security interest in its assets to secure our obligations under the Notes and obligations under the Notes are guaranteed by our wholly owned subsidiaries pursuant to a Subsidiary Guarantee. The transaction documents also contain customary representations, warranties and covenants, including various limitations on, among other things, our ability to incur additional debt or sell the collateral, without the consent of the Senior Lender.
FIRST AMENDMENT. On December 31, 2008, the Loan Agreement was amended, such that, among other things, the Second Loan will be provided in two tranches of $2.25 million each. The first tranche was provided in January 2009, such that we have drawn down a total of $5.75 million under the Loan Agreement. In addition, in consideration for the first tranche, we issued to the Senior Lender additional five-year warrants to purchase up to a total of 1,100,000 ordinary shares at exercise prices per share of $0.01 (for 935,000 warrants) and $0.50 (for the balance), subject to adjustments.
SECOND AMENDMENT. On September 6, 2009 we entered into a second amendment to the Loan Agreement (the "Second Amendment"), whereby the maturity date was extended from September 9, 2009 to March 9, 2010. As part of the amendment, we repaid to the lender $2.0 million out of the outstanding $5.75 million. We also agreed that in the event of a fundamental transaction, the repayment amount will be $4.3 million (with interest at the annual rate of 10% will continue to accrue on the original amount outstanding). Pursuant to the amendment, the exercise price of 1,165,000 warrants that were previously issued to the Senior Lender was adjusted from $0.50 to $0.03 per share.
THIRD AMENDMENT. On December 30, 2009, we entered into a third amendment to the Loan Agreement (the "Third Amendment"), that became effective on January 5, 2010, whereby the repayment of the $4.3 million originally due upon the closing of a fundmanetal transaction, such as the Lantiq Transaction, was reduced to $4.1 million and repaid in four installments: $3.7 million at closing of such transaction, which occurred on February 15, 2010, and the remainder in three installments by March 31, 2011. As part of the Third Amendment and the closing of the Lantiq Transaction, the charges on our assets were removed.
THE FOREGOING DESCRIPTION OF THE SENIOR LOAN AND THE AGREEMENTS ENTERED IN CONNECTION THEREWITH IS ONLY A SUMMARY AND DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE THESE AGREEMENTS, WHICH ARE INCORPORATED BY REFERENCE AS EXHIBITS 4.11, 4.18, 4.19 AND 4.20 TO THIS ANNUAL REPORT.
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 our shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding some transactions. However, legislation remains in effect under which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our articles of association or by the laws of the State of Israel.
E. TAXATION
The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us and certain Israeli Government programs benefiting us. The following also contains a discussion of material Israeli and United States tax consequences to purchasers of our ordinary shares. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question of the courts. The discussion is not intended, and should not be construed, as legal or professional tax advice.
HOLDERS OF OUR ORDINARY SHARES ARE ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE UNITED STATES, ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.
ISRAELI TAX
GENERAL CORPORATE TAX STRUCTURE
For a discussion of the current corporate tax stucture applicable to companies in Israel - see Item 5A above "Operating Reuslts - Corporate Tax Rate".
Following a Temporary Order, which came into effect on January 1, 2009 and expired at the end of one year, an Israeli corporation may elect a 5% rate of corporate tax (instead of 25%) for dividend distributions received in 2009 from a foreign subsidiary, which is used in Israel either in 2009 or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period during which the dividend income will be used in Israel.
TAX BENEFITS AND GRANTS FOR RESEARCH AND DEVELOPMENT
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures, including depreciation on capital expenditures, in scientific research and development projects, if the expenditures are approved by the relevant Israeli government ministry, determined by field of research, and the research and development is for the promotion of the enterprise and is carried out by, or on behalf of, the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved or funded, are deductible over a three-year period.
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS,
1959
The Law for the Encouragement of Capital Investments, 1959, or the Investments Law, provides that a proposed capital investment in eligible facilities may be designated as an approved enterprise. See discussion below regarding an amendment to the Investments Law that came into effect in 2005. Prior to the aforementioned amendment, such status was contingent upon the receipt of an applicable certificate of approval from the Investment Center of the Ministry of Industry and Trade of the State of Israel, known as the Investment Center.
Taxable income of a company derived from an approved enterprise is subject to company tax at the maximum rate of 25% (rather than regular corporate tax rates) for the benefit period. The benefit period is seven or ten years (depending on the extent of foreign investment in the company) commencing with the year in which the approved enterprise first generates taxable income, and is limited to the earlier of twelve years from commencement of production or fourteen years from the start of the tax year in which the approval was obtained , whichever is earlier. The Investments Law also provides that a company that has an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.
The tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific approved enterprise. In the event that a company is operating under more than one approval or that its capital investments are only partly approved, its effective company tax rate is the result of a weighted combination of the various applicable rates.
A company owning an approved enterprise may elect to forego certain government grants extended to approved enterprises in return for an alternative package of benefits. Under the alternative package of benefits, a company's undistributed income derived from an approved enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate for the remainder of the benefits period. The tax benefits under the Investments Law shall also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the approved enterprise's ordinary course of business.
In 1994, our request for designation of our capital investment at our facility as an "Approved Enterprise" program was approved under the Investment Law. For this approved enterprise, we elected the alternative package of benefits. In December 2000, we received an approval for additional capital investment in our approved enterprise under the alternative package of benefits. We have derived, and expect to continue to derive, a substantial portion of our income from our approved enterprise facilities.
A company that has elected the alternative package of benefits and that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to tax in respect of the amount distributed (including the tax thereon) at the rate which would have been applicable had it not elected the alternative package of benefits (generally 10%-25%, depending on the extent of foreign investment in such company). The dividend recipient is subject to withholding tax at the rate applicable to dividends from approved enterprises (15%), if the dividend is distributed during the tax exemption period or within 12 years thereafter. We must withhold this tax at source, regardless of whether the dividend is converted into foreign currency.
Subject to certain provisions concerning income under the alternative package of benefits, all dividends are considered to be attributable to the entire enterprise and their effective tax rate is the result of a weighted combination of the various applicable tax rates. We are not obliged to distribute exempt retained profits under the alternative package of benefits, and we may generally decide from which year's profits to declare dividends. We currently intend to reinvest the amount of our tax-exempt income and not to distribute such income as a dividend.
The benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investments Law and its regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, with the addition of the consumer price index linkage adjustment and interest.
AMENDMENT TO THE INVESTMENTS LAW
On April 1, 2005, an amendment to the Investments Law came into force. Pursuant to the amendment, a company's facility will be granted the status of "Approved Enterprise" (which following such amendment is referred to as a Benefited Enterprise) only if it is proven to be an industrial facility (as defined in the Investments Law) that contributes to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. The amendment provides that the Israeli Tax Authority and not the Investment Center will be responsible for a Benefited Enterprise under the alternative package of benefits. A company wishing to receive the tax benefits afforded to a benefited enterprise is required to select the tax year from which the period of benefits under the Investment Law are to commence by simply notifying the Israeli Tax Authority within 12 months of the end of that year, or in the tax return for that year, whichever is earlier. In order to be recognized as owning a benefited enterprise, a company is required to meet a number of conditions set forth in the amendment, including making a minimal investment in manufacturing assets for the benefited enterprise and having completed a cooling-off period from the company's previous year of commencement of benefits under the Investments Law.
Pursuant to the amendment, a company with a benefited enterprise is entitled, in each tax year, to accelerated depreciation for the manufacturing assets used by the benefited enterprise and to certain tax benefits, provided that no more than 12 to 14 years have passed since the beginning of the year of commencement of benefits under the Investments Law. The tax benefits granted to a benefited enterprise, as applicable to us, are determined according one of the following new tax routes:
o Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the benefited enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of from seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the benefited enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%). The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the benefited enterprise.
o A special tax route enabling companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the benefited enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents (subject to certain conditions).
Generally, a company that is abundant in Foreign Investment (as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.
The amendment changes the definition of "foreign investment" in the Investments Law so that instead of an investment of foreign currency in the company, the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company's outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition are retroactive from 2003.
The amendment applies to Benefited Enterprise programs in which the year of commencement of benefits under the Investments Law is 2004 or later, unless such programs received"Approved Enterprise" approval from the Investment Center on or prior to March 31, 2005 in which case the amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
According to the Law for the Encouragement of Industry (Taxes), 1969, or the "Industry Encouragement Law", an "Industrial Company" is a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency (exclusive of income from certain government loans, capital gains, interest and dividends), is derived from an "Industrial Enterprise" owned by it. An "Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production activity. We believe that we currently qualify as an "Industrial Company" within the definition of the Industry Encouragement Law.
Under the Industry Encouragement Law, if we qualify as an "Industrial Company" we are entitled to the following preferred corporate tax benefits, among others:
o deduction of the cost of purchased know-how and patents over an eight-year period for tax purposes;
o the right to elect under certain conditions to file a consolidated tax return with additional related Israeli Industrial Companies;
o accelerated depreciation rates on equipment and buildings; and
o deduction over a three-year period of expenses involved with the issuance and listing of shares on a stock exchange.
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be given that we will continue to qualify as an "Industrial Company" or that the benefits described above will be available in the future.
ISRAELI TRANSFER PRICING REGULATIONS
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the "TP Regs"). Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions carried out between related parties will be conducted on an arm's length principle basis and will be taxed accordingly.
CAPITAL GAINS TAX
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets in Israel, including our ordinary shares, 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 the real gain and inflationary surplus. Real gain is the difference between the total capital gain and the inflationary surplus. The inflationary surplus is computed on the basis of the difference between the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, on the date of sale and the date of purchase.
The tax rate generally applicable to capital gains derived from the sale
of shares, whether listed on a stock market or not, is 20% for Israeli
individuals, unless such shareholder claims a deduction for financing expenses
in connection with such shares, in which case the gain will generally be taxed
at a rate of 25%. Additionally, if such shareholder is considered a "Significant
Shareholder" at anytime 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 shall be 25%. Israeli
Companies are subject to the Corporate Tax rate on capital gains derived from
the sale of listed shares. However, the foregoing tax rates will not apply to:
(i) dealers in securities; and (ii) shareholders who acquired their shares prior
to an initial public offering (that may be subject to a different tax
arrangement).
The tax basis of our shares acquired prior to January 1, 2003 will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE, provided such gains did not derive from a permanent establishment of such shareholders in Israel, and are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock market outside of Israel (such as the NASDAQ), 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 25% or more 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.
APPLICATION OF THE U.S.-ISRAEL TAX TREATY TO CAPITAL GAINS TAX
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 "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 credit for these taxes if required to be paid against U.S. income tax imposed with respect to such sale, exchange or disposition, subject to the limitations set in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to state or local taxes.
TAXATION OF NON-RESIDENTS ON RECEIPT OF DIVIDENDS
On distributions of dividends other than bonus shares, or stock dividends, income tax is withheld at the source. Non-residents of Israel are subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, at the rate of 20%, or 25% for a shareholder that is considered a Significant Shareholder at any time during the 12-month period preceding such distribution, unless the dividends are paid from income derived from an Approved or Benefited Enterprise during the applicable benefit period, or a different rate is provided in a treaty between Israel and the shareholder's country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of our ordinary shares who is a Treaty U.S. Resident will be 25%. However, dividends paid from income derived during any period for which the Israeli company is not entitled to the reduced tax rate applicable to an Approved or Benefited Enterprise under the Investments Law, the maximum tax will be 12.5% if the holder is a U.S. company holding shares representing at least 10% of the issued voting power during the part of the taxable year preceding the date of payment of dividends and during the whole of the prior taxable year, and provided that not more than 25% of the Israeli company's gross income consists of interest or dividends. Dividends paid from income derived during any period for which the Israeli company is entitled to the reduced tax rate applicable to an Approved or Benefited Enterprise will be subject to a 15% tax rate.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Subject to the limitations described below, the following discussion describes the material U.S. federal income tax consequences to a U.S. Holder (as defined below) that is a beneficial owner of our ordinary shares and that holds them as capital assets. For purposes of this summary, a "U.S. Holder" is a beneficial owner of our ordinary shares who or that is for U.S. federal income tax purposes:
o a citizen or individual resident of the United States;
o a corporation (or other entity treated as a corporation for U.S. federal tax purposes) created or organized in the United States or under the law of the United States or of any State or the District of Columbia;
o an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
o a trust if (1) a court within the United States is able to exercise primary supervision over the administration of the trust, and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) the trust was in existence on August 20, 1996 and properly elected to continue to be treated as a United States person.
This summary is not a comprehensive description of all of the tax considerations that may be relevant to each individual investor's decision to purchase, sell or hold ordinary shares. We recommend that owners of our ordinary shares consult their own tax advisers with respect to the U.S. federal, state and local tax consequences, as well as non-U.S. tax consequences, of the acquisition, ownership and disposition of our ordinary shares applicable to their particular tax situations.
This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), current and proposed U.S. Treasury regulations promulgated thereunder, and administrative and judicial decisions, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on that holder's individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to U.S. Holders that are subject to special treatment, including:
o broker-dealers, including dealers in securities or currencies;
o insurance companies;
o taxpayers that have elected mark-to-market accounting;
o tax-exempt organizations;
o financial institutions or "financial services entities";
o taxpayers who hold the ordinary shares as part of a straddle, "hedge", constructive sale, "conversion transaction" or other risk reduction transaction;
o holders owning directly, indirectly or by attribution shares having at least ten percent of the total voting power of all our shares;
o taxpayers whose functional currency is not the U.S. dollar; and
o taxpayers who acquire our ordinary shares as compensation.
This discussion does not address any aspect of U.S. federal gift or estate tax or state or local tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or other entities treated as pass-throughs for U.S. federal income tax purposes or persons who hold our ordinary shares through a partnership or other pass-through entity.
Material aspects of U.S. federal income tax relevant to a Non-U.S. Holder are also discussed below. In general, a Non-U.S. Holder is a beneficial owner of our ordinary shares who or that is for U.S. federal income tax purposes: (i) a nonresident alien individual, (ii) a corporation (or an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the law of a country other than the United States or a political subdivision thereof or, (iii) an estate or trust that is not a U.S. Holder. Each prospective investor is advised to consult that person's own tax adviser with respect to the specific tax consequences to that person of purchasing, holding or disposing of our ordinary shares.
TAXATION OF DIVIDENDS PAID ON ORDINARY SHARES
We have never paid cash dividends, and we currently do not intend to pay cash dividends in the foreseeable future. In the event that we do pay a dividend, and subject to the discussion of the passive foreign investment company, or PFIC, rules below, a U.S. Holder will be required to include in gross income as a dividend the amount of any distribution paid on our ordinary shares, including any Israeli taxes withheld from the amount paid, on the date the distribution is received to the extent the distribution is paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Distributions in excess of those earnings and profits will be applied against and will reduce the U.S. Holder's basis in the ordinary shares and, to the extent in excess of that basis, will be treated as a gain from the sale or exchange of the ordinary shares. Pursuant to current legislation that is scheduled to expire for taxable years beginning after December 31, 2010, dividend income generally will be taxed to noncorporate taxpayers at the rates applicable to long-term capital gains, provided certain holding period and other requirements (including a requirement that we are not a PFIC in the year of the dividend or in the preceding year) are satisfied. Dividends received after 2010 will be taxable as ordinary income.
Distributions out of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder will be includible in the income of the U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the date the distribution is received. A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
U.S. Holders will have the option of claiming the amount of any Israeli income taxes withheld at source either as a deduction from gross income or as a dollar-for-dollar credit against their U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of any Israeli income taxes withheld, but those individuals may still claim a credit against their U.S. federal income tax liability. The amount of foreign income taxes that may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. The total amount of allowable foreign tax credits in any year cannot exceed the pre-credit U.S. tax liability for the year attributable to foreign source taxable income.
A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares:
o if the U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date; or
o to the extent the U.S. Holder is under an obligation to make related payments on substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished his or its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute. In addition, distributions of current or accumulated earnings and profits generally will be foreign source passive income for U.S. foreign tax credit purposes and will not qualify for the dividends received deduction otherwise available to corporations.
TAXATION OF THE DISPOSITION OF ORDINARY SHARES
Subject to the discussion of the PFIC rules 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 that U.S. Holder's basis in the ordinary shares, which is usually the U.S. dollar cost of those shares, and the amount realized on the disposition. A disposition of the ordinary shares will be considered to occur on the "trade date," regardless of the U.S. Holder's method of accounting. A U.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles. However, a U.S. Holder that uses an accrual method of accounting is required to calculate the value of the proceeds of the sale as of the "trade date" and may therefore realize foreign currency gain or loss, unless that U.S. Holder has elected to use the settlement date to determine its proceeds of sale for purposes of calculating that foreign currency gain or loss. Capital gain from the sale, exchange or other disposition of the ordinary shares held more than one year is long-term capital gain. Long-term capital gains of noncorporate taxpayers are eligible for reduced rates of taxation.
Gain or loss recognized by a U.S. Holder on a sale, exchange or other disposition of our ordinary shares generally is treated under the U.S. Internal Revenue Code as U.S. source income or loss for U.S. foreign tax credit purposes, and thus a U.S. Holder ordinarily would not be entitled to claim a foreign tax credit for taxes paid to Israel with respect to gains. However, under the U.S.- Israel Tax Treaty, gains derived from the sale, exchange or other disposition of our ordinary shares generally are considered to be from Israeli sources if the sale, exchange or other disposition occurs in Israel, and a U.S. Holder who is entitled to claim the benefits of that treaty is permitted to claim a foreign tax credit for taxes paid to Israel with respect to the sale, exchange or disposition, subject to the limitations on foreign tax credits under U.S. federal income tax law. The U.S. Israel Tax Treaty does not relate to state or local taxes. (See Israeli Tax -- Application of the U.S.-Israel Tax Treaty to Capital Gains Tax).
The deductibility of a capital loss recognized on the sale, exchange or other disposition of the ordinary shares is subject to limitations. In addition, a U.S. Holder that receives foreign currency upon disposition of the ordinary shares and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
If we are characterized as a PFIC for U.S. federal income tax purposes, adverse tax consequences can arise for our shareholders. Generally a foreign corporation is treated as a PFIC if either (i) 75 percent or more of its gross income in a taxable year, including the pro-rata share of the gross income of any company, U.S. or foreign, in which that corporation is considered to own 25 percent or more by value of the shares, is passive income, or (ii) 50 percent or more of its assets in a taxable year, averaged over the year and ordinarily determined based on quarter-end fair market values and including the pro-rata share of the assets of any company in which that corporation is considered to own 25 percent or more by value of the shares, produce, or, are held for the production of, passive income. In general, passive income for this purpose means, with certain designated exceptions, dividends, interest, rents, royalties (other than certain rents and royalties derived in the active conduct of trade or business), annuities, net gains from dispositions of certain assets, net foreign currency gains, income equivalent to interest, income from notional principal contracts and payments in lieu of dividends.
We believe that we satisfied the test to be a PFIC in 2001, 2002 and 2003 but not in 2004, 2005, 2006, 2007 or 2008. Although we will endeavor to avoid characterization as a PFIC in the future, we may not be able to do so. In particular, our holding of the proceeds of the sale of our WLAN business on February 15, 2010 likely will cause us to be a PFIC in 2010 and possibly also in later years unless and until we invest a sufficient porton of those proceeds in assets that do not produce passive income. Although the Code contains an exception to PFIC classification for certain corporations that change their business, that exception is not available to a corporation that was, as we were, a PFIC in any prior taxable year.
The determination of whether a foreign corporation is a PFIC is a factual determination made annually and is therefore subject to change. However, once stock in a foreign corporation is stock in a PFIC in the hands of a particular shareholder that is a United States person, it remains stock in a PFIC in the hands of that shareholder, even if in later taxable years the foreign corporation ceases to satisfy the test to be a PFIC, unless the shareholder makes any of certain elections. As described below, those elections include a "qualified electing fund", or QEF, election and a mark-to-market election.
A U.S. Holder who is subject to the PFIC rules and who does not make a QEF election or a mark to-market election will be subject to the following rules:
o gain recognized by the U.S. Holder upon the disposition of, as well as income recognized upon receiving certain dividends on, the ordinary shares will be taxable as ordinary income;
o the U.S. Holder will be required to allocate that dividend income and/or disposition gain ratably over the shareholder's entire holding period for the ordinary shares;
o the amount allocated to each year other than the year of the dividend payment or disposition will be subject to tax at the highest applicable tax rate, and an interest charge will be imposed with respect to the resulting tax liability;
o the U.S. Holder will be subject to information reporting requirements each year and will be required to report distributions received on, and gain recognized on dispositions of, our shares; and
o any U.S. Holder who acquired our ordinary shares upon the death of a shareholder will not receive a step-up in the tax basis of those shares to fair market value but instead, the U.S. Holder beneficiary will have a tax basis equal to the decedent's basis, if lower.
In the case of a U.S. Holder that made, or, as described below, is treated as having made, a QEF election for the first taxable year the U.S. Holder owns our ordinary shares and we are a PFIC (that taxable year hereafter being referred to as the "First PFIC Year"), the following U.S. federal income tax consequences will arise:
o the U.S. Holder will be required for each taxable year in which we are a PFIC to include in income a pro-rata share of our (i) net ordinary earnings as ordinary income (which income is not eligible for any 15 percent maximum tax rate applicable to certain dividends) and (ii) net capital gain as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge.
o the U.S. Holder will not be required under these rules to include any amount in income for any taxable year during which we do not have net ordinary earnings or capital gains; and
o the U.S. Holder will not be required under these rules to include any amount in income for any taxable year for which we are not a PFIC.
The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A QEF election applies to all shares of the PFIC held or subsequently acquired by an electing U.S holder. A shareholder makes a QEF election by attaching a completed IRS Form 8621, including the PFIC annual information statement, to a timely filed U.S. federal income tax return and by filing that form with the IRS Service Center in Philadelphia, Pennsylvania. Continuation of a QEF election requires ongoing annual filing of the PFIC annual information statement that we provide. Even if a QEF election is not made, a shareholder in a PFIC who is a United States person must satisfy information reporting requirements to the IRS every year. During January 2002, 2003 and 2004, we sent to our shareholders the required information to report income and gain under a QEF election - a "PFIC ANNUAL INFORMATION STATEMENT" for the years 2001, 2002, and 2003 respectively.
We did not have net ordinary earnings or net capital gain for our 2001-2003 taxable years. Therefore, any U.S. Holder who made a timely QEF election for those periods was not required to include any amount in income in those years as a result of that election.
Any U.S. Holder who would like to receive a PFIC ANNUAL INFORMATION STATEMENT for years 2001, or2002, 2003 or 2010 can contact Mr. Eran Vital, Metalink Ltd., Yakum Business Park, Yakum 60972, Israel.
Alternatively, provided our ordinary shares qualify as marketable stock, a U.S. Holder can elect to mark our ordinary shares to market annually, recognizing as ordinary income or loss each year that we are a PFIC and the U.S. Holder either holds or disposes of the shares, an amount equal to the difference between the U.S. Holder's adjusted tax basis in our ordinary shares and their fair market value or amount realized. Losses would be allowed only to the extent of net mark-to-market gain included in income by the U.S. Holder for prior taxable years pursuant to the mark-to-market election. As with the QEF election, a U.S. Holder who makes a mark-to-market election with respect to our shares would not be subject to deemed ratable allocations of distributions or gain, the interest charge, or the denial of basis step-up at death described above (except for the first year that the election applies, if that is not the first PFIC Year). We believe that our shares should be treate as marketable stock for purposes of this mark-to-market election. Subject to our shares not being or ceasing to be marketable, a mark-to-market election is irrevocable without the consent of the IRS. If our shares are de-listed from NASDAQ, our shares would no longer be treated as marktable.
As noted above, once stock in a foreign corporation is stock in a PFIC in the hands of a particular U.S. shareholder, it remains stock in a PFIC in the hands of that shareholder, even if in later taxable years the foreign corporation ceases to satisfy the test to be a PFIC, unless the shareholder makes a QEF election for the First PFIC Year makes or the mark-to-market election.
If a U.S. shareholder makes a QEF election for the First PFIC Year, and if in any later year the foreign corporation does not satisfy the test to be a PFIC, the PFIC rules do not apply to the stock of the foreign corporation owned by that shareholder in that year. However, if the foreign corporation subsequently becomes a PFIC in a later taxable year, the QEF rules once again will apply to that stock. A U.S. shareholder who or that did not make a QEF election in the First PFIC Year may make a QEF election in a later taxable year, and if the U.S. shareholder also makes another election, sometimes called a "purging" election, pursuant to which the U.S. shareholder may be required to pay additional tax and interest, the U.S. shareholder will be treated as having made a QEF election in the First PFIC Year.
If a U.S. shareholder makes the mark-to-market election for the stock in a PFIC, the stock will cease to be stock in a PFIC in any later year the foreign corporation does not satisfy the test to be a PFIC. However, if the foreign corporation subsequently becomes a PFIC in a later taxable year, the mark-to-market rules once again will apply to that stock. If a United States person makes a mark-to-market election after the First PFIC Year, his or its mark-to-market gain, if any, will be subject to the PFIC rules that apply when there is no special election, described above, but those rules will not thereafter apply in subsequent taxable years.
We believe that we satisfied the test to be a PFIC in 2001, 2002 and 2003 but not in 2004, 2005, 2006, 2007 or 2008. In that event, based on the rules described above, in the hands of any U.S. Holder that owned our ordinary shares in 2001, 2002 or 2003 and that has made, or is treated as having made, a QEF election for the First PFIC Year or that has made a mark-to-market election, our ordinary shares will not be shares in a PFIC in any year after 2003 in which we do not satisfy the test to be a PFIC. In addition, any U.S. Holder that acquired our ordinary shares in 2004, 2005, 2006, 2007 or 2008 (or in a later year, if any, in which we were or are not a PFIC) will not be subject to the PFIC rules, unless in a subsequent year we again satisfy the test to be a PFIC. However, any U.S. Holder that owned our ordinary shares in 2001, 2002 or 2003 (or any later year we are a PFIC) and did not and does not make a QEF election effective for the First PFIC Year and has not made an does not make a mark-to-market election will remain subject to the PFIC rules that apply when no special election is in effect.
U.S. HOLDERS OF OUR SHARES ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISERS ABOUT THE PFIC RULES, INCLUDING THE AVAILABILITY, ADVISABILITY AND TIMING OF, AND PROCEDURE FOR, MAKING A QEF OR MARK-TO-MARKET ELECTION WITH RESPECT TO THEIR HOLDING OF OUR ORDINARY SHARES, INCLUDING WARRANTS OR RIGHTS TO ACQUIRE OUR ORDINARY SHARES.
TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF ORDINARY SHARES
Except as described in "U.S. Information Reporting and Backup Withholding" below, a Non-U.S. Holder who is a beneficial owner of our ordinary shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, or the proceeds from the disposition of, the ordinary shares, unless:
o that item is effectively connected with the conduct by the Non-U.S. Holder of trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States, that item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States;
o the Non-U.S. Holder is an individual who holds the ordinary shares as capital assets and is present in the United States for 183 days or more in the taxable year of the disposition and does not qualify for an exemption; or
o the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to U.S. expatriates.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders generally are subject to information reporting requirements with respect to dividends paid in the United States on our ordinary shares. In addition, U.S. Holders are subject to U.S. backup withholding at a rate of 28 percent on dividends paid in the United States on the ordinary shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption. U.S. Holders are subject to information reporting and backup withholding at a rate of 28 percent on proceeds paid from the sale, exchange, redemption or other disposition of the ordinary shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or proceeds from the sale, exchange, redemption or other disposition of, the ordinary shares, provided that the Non-U.S. Holders provide a taxpayer identification number, certify to their foreign status or otherwise establish an exemption.
The amount of any backup withholding will be allowed as a credit against the U.S. Holder's or Non-U.S. Holder's U.S. federal income tax liability and may entitle the holder to a refund, provided that the required information is timely furnished to the U.S. Internal Revenue Service.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENTS BY EXPERTS.
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill our obligations with respect to such requirements by filing reports with the SEC. You may read and copy any document we file 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 l-800-SEC-0330 for further information on the public reference room.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and "short-swing" profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicable United States law is available for public review at our principal executive offices.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
All of our sales are made in US dollars. In addition, a substantial portion of our costs is incurred in dollars. Since the dollar is the primary currency of the economic environment in which we operate, the dollar is our functional currency, and accordingly, monetary accounts maintained in currencies other than the dollar (principally cash and cash equivalents, short-term deposits and liabilities) are remeasured using the foreign exchange rate at the balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effect of foreign currency remeasurement is reported in current operations.
In 2007, the Company entered into currency-forward and zero cost Collar transactions (NIS/dollar) of $5.0 milion with settlement date through 2007 and 2008, designed to reduce the variability in cash-flow of NIS denominated expenses in the amount of $5.0 milion. The Company designed the hedge such that the critical terms of the hedged item and the hedging item match. As a result, the Company recorded in 2007 the amount of $43,000 as change in fair market value of hedging activities in "Other Comprehensive Income" relating to the unsettled transactions as of December 31, 2007. In 2008, the Company settled all the hedging transactions and reclassified it from "Other Comprehensive Income" to earnings concurrent with the effect of the hedged transaction on earning. We do not presently engage in any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations.For additional qualitative disclosure see Item 5 - " Impact of Inflation and Foreign Currency Fluctuations".
Had the NIS exchange rate versus the US dollar been appreciated by 10%, operating loss for 2008 would have been increased from current operating loss of $22.6 million to $24.5 million, an increase of approximately $1.9 million.
INTEREST RATE RISK
Our exposure to market risk with respect to changes in interest rates relates primarily to our short- and long-term investments. Our short- and long-term investments consist primarily of certificates of deposits and marketable debt securities of highly-rated corporations. On December 31, 2008, we had no long-term investments. As of December 31, 2009 we had no short- and long-term investments.
The table below present principal amounts of our financial instruments sensitive to interest rate and related weighted average rates by date of maturity for our short- and long-term investments and short- term loans.
--------------------------------------------------------------------------------
Short-Term
(U.S. dollars in thousands)
--------------------------------------------------------------------------------
MARKETABLE DEBT SECURITIES MATURITY DATE OF UP TO 1 YEAR
-------------------------------- -----------------------------------------------
Auction Rates Securities -
-------------------------------- -----------------------------------------------
Weighted Average Interest Rate -
-------------------------------- -----------------------------------------------
TRADE RECEIVABLES MATURITY OF UP TO 1 YEAR BEARING NO INTEREST
-------------------------------- -----------------------------------------------
Trade receivables 461
-------------------------------- -----------------------------------------------
SHORT- TERM LOANS MATURITY DATE OF UP TO 1 YEAR
-------------------------------- -----------------------------------------------
Short- term loan 4,100
-------------------------------- -----------------------------------------------
Fixed Interest Rate 10%
-------------------------------- -----------------------------------------------
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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
As described elsewhere in this annual report, on December 29, 2009 our shareholders approved a one-to-ten reverse share split, which we effected on February 22, 2010. Since all of our shareholders were affected, the share split did not result in a dilution of the percentage of aggregate equity ownership.
ITEM 15. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive and principal financial officers have concluded that, as of December 31, 2009, the Company's disclosure controls and other procedures were effective to ensure that information required to be disclosed by the Company in the reports that we file or submit to the SEC under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information was accumulated and communicated to our management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management, including our chief executive officer, or CEO, and our principal financial officer, or CFO, is responsible for establishing and maintaining adequate internal control over financial reporting for us. We performed an evaluation of the effectiveness of our internal control over financial reporting that is designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
o pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
o provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
o provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework for Internal Control-Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on such evaluation, our management, including the CEO and CFO, has concluded that the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) as of December 31, 2007 is effective.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, internal control over financial reporting determined to be effective provides only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
THIS ANNUAL REPORT DOES NOT INCLUDE AN ATTESTATION REPORT OF OUR REGISTERED PUBLIC ACCOUNTING FIRM REGARDING INTERNAL CONTROL OVER FINANCIAL REPORTING. MANAGEMENT'S REPORT WAS NOT SUBJECT TO ATTESTATION BY OUR REGISTERED PUBLIC ACCOUNTING FIRM PURSUANT TO TEMPORARY RULES OF THE SEC THAT PERMIT US TO PROVIDE ONLY MANAGEMENT'S REPORT IN THIS ANNUAL REPORT.
There were no changes in the Company's internal control over financial reporting that occurred during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Ms. Orly Etzion, an independent member of our audit committee, serves as, and qualifies as, a financial expert under the applicable regulations. Ms. Etzion also qualifies as an "independent director" under the NASDAQ rules.
ITEM 16B. CODE OF ETHICS
In April 2004, we adopted Code of Business Conduct and Ethics (the "Code") that applies to the Company's employees and directors. The Code is available on our website at www.MTLK.com. If we make any amendment to the Code or grant any waivers, including any implicit waiver, from a provision of the Code, which applies to our chief executive officer, chief financial officer, chief accounting officer or controller, or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES. Brightman Almagor & Co., Certified Public Accountants (Israel), a member of Deloitte Touche Tohmatsu billed us aggregate annual amounts of approximately $40 thousand, for 2009, and 2008 audit of our annual financial statements, review of our quarterly financial results, consultations on various accounting issues and performance of local statutory audits.
TAX FEES. For 2009 and 2008, our principal accountant billed us aggregate amounts of approximately $10 thousand and $0, respectively, for services relating to tax compliance, tax advice and tax planning.
ALL OTHER FEES. For 2009 and 2008 our principal accountant billed us aggregate amounts of approximately $0 and $3.5 thousand, respectively for other services.
PRE-APPROVAL POLICIES AND PROCEDURES. Our audit committee approves each audit and non-audit service to be performed by our independent accountant before the accountant is engaged.
ITEM 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
We are a foreign private issuer whose ordinary shares are listed on the NASDAQ Capital Market. As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the NASDAQ rules, including the NASDAQ corporate governance requirements. The NASDAQ rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies:
o The NASDAQ rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer's common voting stock. We have chosen to follow home country practice with respect to the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Israeli Companies Law and Israeli practice, provide that the quorum requirements for an adjourned meeting are the presence of a minimum of two shareholders present in person.
o The NASDAQ rules require shareholder approval of stock option plans available to officers, directors or employees. We have decided to follow home country practice in lieu of obtaining shareholder approval for our stock option plans. However, subject to exceptions permitted under the Companies Law, we are required to seek shareholder approval of any grants of options to directors and controlling shareholders or plans that require shareholder approval for other reasons.
o Additionally, we have chosen to follow our home country practice in lieu of the requirements of NASDAQ Rule 4350(b)(1)(A), relating to an issuer's furnishing of its annual report to shareholders.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements and related auditors' report for the year ended December 31, 2009 are enclosed as part of this annual report.
ITEM 19. EXHIBITS
The exhibits filed with or incorporated into this annual report are listed on the index of exhibits below.
EXHIBIT NO. DESCRIPTION
1.1 Memorandum of Association, as amended and restated through
Febrary 22, 2010 (translated from Hebrew).
1.2 Articles of Association, as amended and restated through
Febrary 22, 2010.
4.1* Employee Share Option Plan (1997) (incorporated herein by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form F-1 (No. 333-11118) filed with the SEC on
November 10, 1999).
4.2* Employee Share Option Plan (1997), Section 102 (incorporated
herein by reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form F-1 (No. 333-11118) filed with
the SEC on November 10, 1999).
4.3* International Employee Stock Option Plan (incorporated herein
by reference to Exhibit 10.4 to the Registrant's Registration
Statement on Form F-1 (No. 333-11118) filed with the SEC on
November 10, 1999).
4.4* Employee Share Option Plan (1999) (incorporated herein by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form F-1 (No. 333-11118) filed with the SEC on
November 10, 1999).
4.5* Employee Share Option Plan (1999a) (incorporated herein by
reference to Exhibit 10.6 to the Registrant's Registration
Statement on Form F-1 (No. 333-11118) filed with the SEC on
November 10, 1999).
4.6* Unprotected Lease Agreement dated June 6, 2000, between Yakum
Development Ltd. and the Registrant (English summary
accompanied by Hebrew original) (incorporated herein by
reference to Exhibit 4.6 to the Registrant's Annual Report on
Form 20-F for the fiscal year ended December 31, 1999).
4.7* 2000 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.5 to the Registrant Registration
Statement on Form S-8, filed with the SEC on April 17, 2001).
4.8* Share Option Plan (2000) (incorporated herein by reference to
Exhibit 4.9 to the Registrant's Registration Statement on Form
20-F, filed with the SEC on June 29, 2001).
4.9* 2003 Share Option Plan (incorporated herein by reference to
Exhibit 4.10 to the Registrant's Report on Form 20-F, filed
with the SEC on June 26, 2003).
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4.10* 2003 International Employee stock option Plan (incorporated
herein by reference to Exhibit 4.11 to the Registrant's Report
on Form S-8, filed with the SEC on April 1, 2004).
4.11* Loan Agreement between the Registrant and certain investors;
filed as Exhibit 99.2 to the Registrant's Current Report on
Form 6-K, filed with the SEC on September 9, 2008, and
incorporated herein by reference.
4.12* Form of Note issued to certain investors; filed as Exhibit
99.3 to the Registrant's Current Report on Form 6-K, filed
with the SEC on September 9, 2008, and incorporated herein by
reference.
4.13* Form of Warrant to purchase Ordinary Shares issued to certain
investors; filed as Exhibit 99.4 to the Registrant's Current
Report on Form 6-K, filed with the SEC on September 9, 2008,
and incorporated herein by reference.
4.14* Form of Israeli Security Agreement between the Registrant and
certain investors; filed as Exhibit 99.5 to the Registrant's
Current Report on Form 6-K, filed with the SEC on September 9,
2008, and incorporated herein by reference.
4.15* Form of U.S. Security Agreement between the Registrant and
certain investors; filed as Exhibit 99.6 to the Registrant's
Current Report on Form 6-K, filed with the SEC on September 9,
2008, and incorporated herein by reference.
4.16* Form of Subsidiary Guarantee between the Registrant and
certain investors; filed as Exhibit 99.7 to the Registrant's
Current Report on Form 6-K, filed with the SEC on September 9,
2008, and incorporated herein by reference.
4.17* Form of Placement Agent Agreement between the Registrant and
the placement agent; filed as Exhibit 99.8 to the Registrant's
Current Report on Form 6-K, filed with the SEC on September 9,
2008, and incorporated herein by reference.
4.18* Amendment to Loan Agreement between the Registrant and certain
investors, dated December 31, 2008; filed on Form 6-K filed
with the SEC on January 5, 2009, and incorporated herein by
reference.
4.19* Second Amendment to Loan Agreement between the Registrant and
certain investors, dated September 6, 2009; filed on Form 6-K
filed with the SEC on September 8, 2009, and incorporated
herein by reference.
4.20 Third Amendment to Loan Agreement between the Registrant and
certain investors, dated December 30, 2009.
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4.21 Asset Purchase Agreement by and among the Registrant, Lantiq
Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG, dated
January 5, 2010.
4.22 Consulting Agreement by and between the Registrant and Lantiq
Israel Ltd., dated February 15, 2010.
4.23 Transition Services Agreement by and between the Registrant
and Lantiq Israel Ltd., dated February 15, 2010.
4.24 Cross License Agreement by and between the Registrant and
Lantiq Israel Ltd., dated February 15, 2010.
4.25 Sublease Agreement by and between the Registrant and Lantiq
Israel Ltd., dated February 15, 2010.
8 List of Subsidiaries.
12.1 Certification by CEO pursuant to 17 CFR 240.13a-14(a), as
adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002.
12.2 Certification by CFO pursuant to 17 CFR 240.13a-14(a), as
adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002.
13.1 Certification of CEO pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.
13.2 Certification of CFO pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.
15 Consent of Brightman Almagor & Co., independent auditors.
-----------------
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* Incorporated by reference.
METALINK LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009
METALINK LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2009 and 2008 F-3 Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 F-4 Statements of Shareholders' Equity and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007 F-5-F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 F-7-F-8 Notes to Consolidated Financial Statements F-9-F-32 |
[DELOITTE LOGO]
Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
|
P.O.B. 16593, Tel Aviv 61164 Israel
Tel: +972(3)608 5555 Fax: +972(3)609 4022 info@deloitte.co.il www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF METALINK LTD.
We have audited the accompanying consolidated balance sheets of Metalink, Ltd ("the Company") and its subsidiary as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements, present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2009 and 2008, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the Company sold its principal line of business, the WLAN business, to Lantiq, A newly-formed fabless semiconductor company founded by Golden Gate Capital.
BRIGHTMAN ALMAGOR ZOHAR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
March 29, 2010
METALINK LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2009 2008
-------------- -------------
(IN THOUSANDS)
--------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,273 $ 5,166
Short-term investments (Note 3) - 677
Trade accounts receivable 461 2,515
Other receivables (Note 12) 602 1,529
Prepaid expenses 88 209
Deferred charges (Note 8) - 242
Inventories (Note 4) 1,068 2,508
-------------- -------------
Total current assets 4,492 12,846
-------------- -------------
SEVERANCE PAY FUND (Note 6) 1,229 1,195
-------------- -------------
PROPERTY AND EQUIPMENT, NET (Note 5) 2,145 3,338
============== =============
Total assets $ 7,866 $ 17,379
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES
Trade accounts payable $ 1,542 $ 739
Other payables and accrued expenses
(Note 12) 3,239 3,257
Short-term loan (Note 8) 4,100 2,101
Warrants to issue shares (Note 8) 289 196
-------------- -------------
Total current liabilities 9,170 6,293
-------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
ACCRUED SEVERANCE PAY (Note 6) 1,798 2,098
-------------- -----------
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 10)
Ordinary shares of NIS 0.1 par value
(Authorized - 50,000,000 shares, issued and
outstanding 26,637,232 and 24,752,232 shares
as of December 31, 2009 and December 31, 2008,
respectively) 759 711
Additional paid-in capital 157,692 156,500
Accumulated other comprehensive loss - (124)
Accumulated deficit (151,668) (138,214)
-------------- -----------
6,783 18,873
-------------- -----------
Treasury stock, at cost; 898,500 shares as of
December 31, 2009 and 2008 (9,885) (9,885)
-------------- -----------
Total shareholders' equity
(deficiency) (3,102) 8,988
============== ===========
Total liabilities and shareholders'
equity (deficiency) $ 7,866 $ 17,379
============== ===========
|
The accompanying notes are an integral part of the financial statements
METALINK LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
2009 2008 2007
---------------- ------------ -------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
----------------------------------------------
Revenues (Note 13) $ 4,916 $ 7,162 $ 10,166
---------------- ----------- -----------
Cost of revenues (Note 13):
Costs and expenses 3,174 2,964 4,736
Royalties to the Government of Israel (Note 7) 160 218 297
---------------- ----------- -----------
Total cost of revenues 3,334 3,182 5,033
================ =========== ===========
GROSS PROFIT 1,582 3,980 5,133
Operating expenses:
Gross research and development 9,627 22,516 25,474
Less - Royalty bearing and other grants 1,898 3,068 2,598
---------------- ----------- -----------
Research and development, net 7,729 19,448 22,876
---------------- ----------- -----------
Selling and marketing 1,397 4,502 5,427
General and administrative 2,416 2,647 2,451
---------------- ----------- -----------
Total operating expenses 11,542 26,597 30,754
================ =========== ===========
OPERATING LOSS (9,960) (22,617) (25,621)
Financial income (expenses), net (3,494) 1,639 1,298
---------------- ----------- -----------
NET LOSS $ (13,454) $ (20,978) $ (24,323)
================ =========== ===========
Loss per ordinary share:
Basic $ (5.4) $ (8.9) $ (11.4)
================ =========== ===========
Diluted $ (5.4) $ (8.9) $ (11.4)
================ =========== ===========
Shares used in computing loss per ordinary share:
Basic 2,482,863 2,356,971 2,131,926
================ =========== ===========
Diluted 2,482,863 2,356,971 2,131,926
================ =========== ===========
|
The accompanying notes are an integral part of the financial statements
METALINK LTD.
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
ACCUMULATED
NUMBER OF NUMBER OF ADDITIONAL TREASURY OTHER
OUTSTANDING TREASURY SHARE PAID-IN STOCK COMPREHENSIVE
SHARES SHARES CAPITAL CAPITAL (AT COST) INCOME (LOSS)
----------- --------- ------- ---------- ---------- --------------
BALANCE AT
DECEMBER 31, 2006 20,653,826 898,500 $ 614 $ 133,119 $ (9,885) $ (52)
Changes during 2007:
Exercise of employee options 523,406 - 13 2,156 - -
Employee stock-based
compensation - - - 1,494 - -
Issuance of shares (Note10(A)) 3,200,000 - 74 17,934 - -
Other comprehensive income:
Unrealized gain on marketable securities - - - - - 57
Change in fair market value of hedging
derivatives - - - - - 43
Loss for the year - - - - - -
----------- --------- -------- ----------- --------- --------------
Total comprehensive loss
BALANCE AT
DECEMBER 31, 2007 24,377,232 898,500 $ 701 $ 154,703 $ (9,885) $ 48
=========== ========= ======== =========== ========= ==============
Changes during 2008:
Exercise of employee options & issuance of
Restricted Stock Units (RSU's) 275,000 - 8 2 - -
Employee stock-based
compensation - - - 1,781 - -
Exercise of warrants (Note 8) 100,000 - 2 16 - -
Expenses related to issuance of shares - - - (2) - -
Other comprehensive income:
Unrealized gain on marketable securities - - - - - (129)
Reclassification of fair value of derivatives
Used in cash flow hedge - - - - - (43)
Loss for the year - - - - - -
----------- --------- -------- ----------- --------- --------------
Total comprehensive loss
BALANCE AT
DECEMBER 31, 2008 24,752,232 898,500 $ 711 $ 156,500 $ (9,885) $ (124)
=========== ========= ======== ============ ========== ===============
|
TOTAL
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
------------ -------------- ---------
BALANCE AT
DECEMBER 31, 2006 $ (92,913) $ 30,883
Changes during 2007:
Exercise of employee options - - 2,169
Employee stock-based
compensation - - 1,494
Issuance of shares (Note10(A)) - - 18,008
Other comprehensive income:
Unrealized gain on marketable securities - 57 57
Change in fair market value of hedging
derivatives - 43 43
Loss for the year (24,323) (24,323) (24,323)
------------ -------------- --------
Total comprehensive loss $ (24,223)
==============
BALANCE AT
DECEMBER 31, 2007 $ (117,236) $ 28,331
============ ========
Changes during 2008:
Exercise of employee options & issuance of
Restricted Stock Units (RSU's) - - 10
Employee stock-based
compensation - - 1,781
Exercise of warrants (Note 8) - - 18
Expenses related to issuance of shares - - (2)
Other comprehensive income:
Unrealized gain on marketable securities - (129) (129)
Reclassification of fair value of derivatives
Used in cash flow hedge - (43) (43)
Loss for the year (20,978) (20,978) (20,978)
------------ -------------- --------
Total comprehensive loss $ (21,150)
==============
BALANCE AT
DECEMBER 31, 2008 $ (138,214) $ 8,988
============ ========
|
The accompanying notes are an integral part of the financial statements
METALINK LTD.
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (CONT.)
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
NUMBER OF NUMBER OF ADDITIONAL TREASURY OTHER
OUTSTANDING TREASURY SHARE PAID-IN STOCK COMPREHENSIVE
SHARES SHARES CAPITAL CAPITAL (AT COST) INCOME (LOSS)
----------- --------- -------- ----------- ---------- ---------------
BALANCE AT
DECEMBER 31, 2008 24,752,232 898,500 $ 711 $ 156,500 $ (9,885) $ (124)
Changes during 2009:
Exercise of employee options & issuance of
Restricted Stock Units (RSU's) 50,000 - 1 - - -
Employee stock-based
compensation - - - 483 - -
Exercise of warrants (Note 8) 1,835,000 - 47 709 - -
Other comprehensive income:
Unrealized gain on marketable securities - - - - - 124
Loss for the year - - - - - -
----------- --------- -------- ----------- --------- --------------
Total comprehensive loss
BALANCE AT
DECEMBER 31, 2009 26,637,232 898,500 $ 759 $ 157,692 $ (9,885) $ -
=========== ========= ======== =========== ========= ==============
|
TOTAL
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
------------ -------------- --------
BALANCE AT
DECEMBER 31, 2008 $ (138,214) $ 8,988
Changes during 2009:
Exercise of employee options & issuance of
Restricted Stock Units (RSU's) - - 1
Employee stock-based
compensation - - 483
Exercise of warrants (Note 8) - - 756
Other comprehensive income:
Unrealized gain on marketable securities - 124 124
Loss for the year (13,454) (13,454) (13,454)
------------ -------------- --------
Total comprehensive loss $ (13,330)
==============
BALANCE AT
DECEMBER 31, 2009 $ (151,668) $ (3,102)
============ ========
|
The accompanying notes are an integral part of the financial statements
METALINK LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
2009 2008 2007
-------- -------- --------
(IN THOUSANDS)
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,454) $(20,978) $(24,323)
Adjustments to reconcile net loss to net cash
used in operating activities (Appendix) 9,626 (2,169) 4,238
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES (3,828) (23,147) (20,085)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable debt securities and certificates of deposits - - (44,794)
Proceeds from maturity and sales of marketable debt securities and certificates of deposits 800 18,491 49,181
Proceeds from disposal of property and equipment 48 128 12
Purchase of property and equipment (15) (793) (1,975)
-------- -------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 833 17,826 2,424
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares and exercise of options, net 21 8 20,177
Proceeds from issuance of warrants to issue shares, as part of the
loan received (Note 8) 123 1,838 -
Loan received, net of issuance costs 1,958 1,350 -
Repayment of loan (2,000) - -
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 102 3,196 20,177
======== ======== ========
Increase (decrease) in cash and cash equivalents (2,893) (2,125) 2,516
Cash and cash equivalents at beginning of year 5,166 7,291 4,775
-------- -------- --------
Cash and cash equivalents at end of year $ 2,273 $ 5,166 $ 7,291
======== ======== ========
|
The accompanying notes are an integral part of the financial statements
METALINK LTD.
APPENDIX TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2 0 0 9 2 0 0 8 2 0 0 7
---------- ---------- ----------
(IN THOUSANDS)
--------------------------------------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization $ 1,160 $ 1,397 $ 1,302
Amortization of marketable debt securities and deposit
premium and accretion of discount (1) (36) 57
Amortization of deferred charges and loan discount and
increase in the face value of the loan 2,305 488 -
Increase (decrease) in warrants to issue shares 706 (1,622) -
Increase (decrease) in accrued severance pay, net (334) (311) 104
Employee stock-based compensation 483 1,781 1,494
Capital (gain) loss - 96 (4)
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in assets:
Trade accounts receivable 2,054 (1,838) 1,348
Other receivables and prepaid expenses 1,050 1,146 (1,674)
Inventories 1,440 (743) 1,406
Increase (decrease) in liabilities:
Trade accounts payable 803 (825) (716)
Other payables and accrued expenses (40) (1,702) 921
---------- ---------- ----------
$ 9,626 $ (2,169) $ 4,238
========== ========== ==========
|
The accompanying notes are an integral part of the financial statements
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - GENERAL
Metalink Ltd. (the "Company"), an Israeli fabless semiconductor Company, is engaged in the research and development of high-throughput wireless local area network chipsets, and in the sale of high performance broadband access chipsets used by telecommunications and networking equipment manufacturers. The Company's broadband silicon solutions enable very high speed streaming video, voice and data transmission and delivery throughout worldwide communication networks. The Company operates in one business segment. The Company generates revenues from the sale of its products mainly in Asia, Europe and North America.
SUBSEQUENT EVENTS -
On February 15, 2010 the Company completed the sale of the wireless local area network (WLAN) business to Lantiq, a newly-formed fabless semiconductor company funded by Golden Gate Capital for up to $16,500 in cash as follows:
o $5,700 was paid concurrently with the closing, of which $3,750 was used to repay the first installment under Metalink's loan agreement with an institutional investor. For further details on the loan agreement see Note 8.
o Up to $800 (subject to downward adjustments) to be paid on March 31, 2010; and $2,000 to be paid in four installments throughout the year 2010;
o Earn-out payments of up to an aggregate $8,000, contingent upon the acquired business' achievement of specified performance targets through March 2012.
Moving forward the Company will continue supporting its current DSL activities.
On March 8, 2010 the NASDAQ staff informed the Company that it has regained compliance with the minimum bid price requirement in Listing Rule 5550(a)(2) and the minimum shareholders' equity requirement in Listing Rule 5550(b)(1). Accordingly, the staff has determined to continue the listing of the Company's securities on the Nasdaq Stock Market.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with U.S.
generally accepted accounting principles.
A. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The reporting currency of the Company is the U.S. dollar ("dollar" or "$"). The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the dollar, and the dollar has been determined to be the Company's functional currency.
Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured into dollars at the spot rate on the day of the transaction. All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are reflected in the statements of operations as they arise.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All material inter-company transactions and balances have been eliminated.
D. CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities when purchased of three months or less.
E. MARKETABLE DEBT SECURITIES
The Company accounts for its investments in marketable securities in accordance with ASC 320-10 (formerly known as SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities").
Management determines the appropriate classification of the Company's investments in marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Held-to-maturity securities include debt securities for which the Company has the intent and ability to hold to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale.
During 2009 the company sold all of its marketable securities investments. As of December 31, 2008 all marketable debt securities were designated as available-for-sale and accordingly were stated at fair value, with the unrealized gains and losses reported in shareholders' equity under accumulated other comprehensive income (loss). Realized gains and losses on sales of investments, are determined based on specific identification and are included in the consolidated statement of operations.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
F. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts has been made on the specific identification basis. The Company maintains an allowance for doubtful accounts, which management believes adequately covers all anticipated losses in respect of trade receivables. As of December 31, 2009 and 2008 no provision was required.
G. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined as follows:
Raw materials, components and finished products - on the moving average basis.
Work-in-process - on the basis of actual manufacturing costs.
H. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of assets, as follows:
Computers and equipment 3-7 years Furniture and fixtures 10-15 years
Leasehold improvements are amortized by the straight-line method over the shorter of the term of the lease or the estimated useful life of the improvements.
The Company periodically assesses the recoverability of the carrying amount of property and equipment based on expected undiscounted cash flows. If an asset's carrying amount is determined to be not recoverable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with ASC 360-10 (formerly known as SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets").
I. REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of its products to the customer provided that persuasive evidence of an arrangement exists, title has been transferred, the price is fixed, collection of resulting receivables is probable and there are no remaining significant obligations. The Company generally provides a warranty period for up to 12 months at no extra charge. No warranty provision has been recorded for any of the reported periods, since based on the past experience, such amounts have been insignificant.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
J. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses, net of third-parties grants, are expensed as incurred. The Company has no obligation to repay the grants, if sales are not generated.
K. DEFERRED INCOME TAXES
Deferred income taxes are provided for temporary differences between the assets and liabilities, as measured in the financial statements and for tax purposes, at tax rates expected to be in effect when these differences reverse, in accordance with ASC 740-10 (formerly known as SFAS No. 109, "Accounting for Income Taxes").
L. NET LOSS PER ORDINARY SHARE
Basic and diluted net loss per share have been computed in accordance with ASC 260-10 (formerly known as SFAS No. 128, "Earnings per Share") using the weighted average number of ordinary shares outstanding. Basic loss per share excludes any dilutive effect of options and warrants. A total of 25,420,046, 8,356,748 and 204,399 incremental shares were excluded from the calculation of diluted net loss per ordinary share for 2009, 2008 and 2007, respectively due to the anti-dilutive effect.
M. STOCK-BASED COMPENSATION
The company applies ASC 718-10 (formerly known as SFAS No.
123(R), "Share Based Payment"). The Company's net loss for the
year ended December 31, 2009, 2008 and 2007 includes $483, $1,781
and $1,494 of compensation expenses related to the Company's
share-based compensation awards, respectively.
For purposes of estimating fair value , the Company utilized the Black-Scholes option-pricing model. The following assumptions were utilized in such calculations for the years 2009, 2008 and 2007 (all in weighted averages):
2009 2008 2007
-------- ------- -------
Risk-free interest rate 2.23% 2.25% 4.26%
Expected life (in years) 2.97 2.51 2.43
Expected volatility (*) 60% 38% 32%
Expected dividend yield None None None
|
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
M. STOCK-BASED COMPENSATION (CONT.)
The Company is utilizing the simplified method, to determine the expected life used in fair valuation of newly granted awards.
The Company believes that this calculation provides a reasonable estimate of expected life for the Company's employee stock options. No adjustments to previous years assumptions have been made.
(*) Volatility is determined using historical quotes commensurate with expected term of the option under evaluation.
The grant date fair value of the Restricted Stock Units (RSU), was determined using the closing price of the Company's stock at NASDAQ on the day of issuance.
N. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, marketable securities and trade receivables.
(i) As of December 31, 2009, the Company had cash and cash equivalents that totaled to $2,273 all of which are deposited in a major Israeli financial institution. As of December 31, 2008, the Company had cash and cash equivalents and short-term investments that totaled to $5,843, most of which were deposited in major U.S. financial institutions. Management believes that the financial institutions holding the Company's cash and cash equivalents and its deposits are financially sound.
(ii) Most of the Company's revenues are generated in Asia, Europe and North America from a small number of customers (see Note 13). The Company generally does not require security from its customers.
O. CONCENTRATIONS OF AVAILABLE SOURCES OF SUPPLY OF PRODUCTS
Certain components used in the Company's products are currently available to the Company from only one source and other components are currently available from only a limited number of sources. The Company does not have long-term supply contracts with its suppliers. In addition, the Company employs several unaffiliated subcontractors outside of Israel for the manufacture of its chipsets. While the Company has been able to obtain adequate supplies of components and has experienced no material problems with subcontractors to date, in the event that any of these suppliers or subcontractors is unable to meet the Company's requirements in a timely manner, the Company may experience an interruption in production. Any such disruption, or any other interruption of such suppliers' or subcontractors' ability to provide components to the Company and manufacture its chipsets, could result in delays in making product shipments, which could have a material adverse impact on the Company's business, financial condition and results of operations.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist mainly of cash and cash equivalents, short-term investments, current accounts receivable, long-term investments, accounts payable and accruals. In view of their nature, the fair value of the financial instruments included in working capital and long-term investments of the Company is usually identical or substantially similar to their carrying amounts.
Q. RECLASSIFICATION
Certain prior years amounts have been reclassified in conformity with current year's financial statements presentation.
R. DERIVATIVE FINANCIAL INSTRUMENTS
ASC 815-10 (formerly known as SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended), requires, principally, the presentation of all derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value. Gains and losses resulting from changes in the fair values of derivative instruments would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.
See Note 15 for disclosure of the derivative financial instruments in accordance with such pronouncements.
S. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 28, 2009, the FASB issued ASC 855-10 (formerly SFAS 165), which provides guidance on management's assessment of subsequent events. Historically, management had relied on U.S. auditing literature for guidance on assessing and disclosing subsequent events. ASC 855-10 represents the inclusion of guidance on subsequent events in the accounting literature and is directed specifically to management, since management is responsible for preparing an entity's financial statements
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
S. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONT.)
ASC 855-10 is not expected to significantly change practice because its guidance is similar to that in AU Section 560, with some important modifications. The new standard clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date "through the date that the financial statements are issued or are available to be issued." Management must perform its assessment for both interim and annual financial reporting periods. ASC 855-10 is effective for the interim or annual financial periods ending after June 15, 2009. The adoption of ASC 855-10 did not have a material impact on the Company consolidated financial statements.
In April 2009 the FASB issued an amendment to ASC 320-10-65
(Investments - Debt and Equity Securities) Through the issuance
of FASB staff position 115-2 and 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments" ("OTTI") for
investment in debt securities . This amendment applies to all
entities and is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. Earlier adoption for
periods ending before March 15, 2009, is not permitted. Under the
amendment, the primary change to the OTTI model for debt
securities is the change in focus from an entity's intent and
ability to hold a security until recovery. Instead, an OTTI is
triggered if (1) an entity has the intent to sell the security,
(2) it is more likely than not that it will be required to sell
the security before recovery, or (3) it does not expect to
recover the entire amortized cost basis of the security. In
addition, the amendment changes the presentation of an OTTI in
the income statement if the only reason for recognition is a
credit loss (i.e., the entity does not expect to recover its
entire amortized cost basis). That is, if the entity has the
intent to sell the security or it is more likely than not that it
will be required to sell the security, the entire impairment
(amortized cost basis over fair value) will be recognized in
earnings. However, if the entity does not intend to sell the
security and it is not more likely than not that the entity will
be required to sell the security, but the security has suffered a
credit loss, the impairment charge will be separated into the
credit loss component, which is recorded in earnings, and the
remainder of the impairment charge, which is recorded in other
comprehensive income (OCI). The adoption of ASC 320-10-65 (FSP
FAS 115-2 and FAS 124-2) did not have a material impact on the
Company consolidated financial statements.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
S. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONT.)
In October 2009, the FASB issued "Accounting Standards Update ("ASU") 2009-13 Multiple Deliverable Revenue Arrangements a consensus of EITF" (formerly topic 08-1) an amendment to ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments in this update also will replace the term "fair value" in the revenue allocation guidance with the term "selling price" in order to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.
The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable's selling price.
The update will be effective for revenue arrangements entered into or modified in fiscal year beginning on or after June 15, 2010 with earlier adoption permitted.The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 - INVESTMENT IN MARKETABLE SECURITIES AND DEPOSITS
A. SHORT-TERM INVESTMENTS
Comprised as follows:
DECEMBER 31,
-----------------------------------------------------------------------------------------------
2009 2008
----------------------------------------------- ---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE COST LOSSES GAINS VALUE
------------- ----------- ----------- ------ ---------- ------------ ----------- ------
Available for sale:
Auction Rate Securities
(ARS) $ - $ - $ - $ - $ 801 $ (124) $ - $ 677
------------- ----------- ----------- -------- ---------- ----------- ----------- -------
Total available for sale:
Marketable securities $ - $ - $ - $ - $ 801 $ (124) $ - $ 677
============= =========== =========== ======== ========== =========== =========== =======
|
The Company's financial income, net for the year ended December 31, 2009 and 2008 includes $0 and $15 of realized gains, respectively.
During 2009 the company sold all of its marketable securities investments .As of December 31, 2008 all the investments are classified in accordance with ASC 320-10 (formerly known as SFAS 115) as available-for-sale.
NOTE 4 - INVENTORIES
Comprised as follows:
DECEMBER 31,
------------------------------
2009 2008
--------------- -------------
(IN THOUSANDS)
------------------------------
Raw materials and components $ 288 $ 1,630
Work-in-process 179 23
Finished products 601 855
--------------- -------------
$ 1,068 $ 2,508
=============== =============
|
The balances are net of write-downs of $1,230 and $1,334 as of December 31, 2009 and 2008, respectively.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5 - PROPERTY AND EQUIPMENT
Comprised as follows:
DECEMBER 31,
------------------------------
2009 2008
--------------- -------------
(IN THOUSANDS)
------------------------------
Cost:
Computers and equipment $ 13,158 $ 13,201
Furniture and fixtures 495 571
Leasehold improvements 1,363 1,363
--------------- -------------
$ 15,016 $ 15,135
=============== =============
Accumulated depreciation and amortization:
Computers and equipment $ 11,398 $ 10,578
Furniture and fixtures 233 223
Leasehold improvements 1,240 996
--------------- -------------
$ 12,871 $ 11,797
=============== =============
Property and equipment, net $ 2,145 $ 3,338
=============== =============
|
NOTE 6 - ACCRUED SEVERANCE PAY, NET
The Company's liability for severance pay is calculated in accordance
with Israeli law based on the latest salary paid to employees and the
length of employment in the Company. For employees joining the Company
subsequent to November 2006 the Company adopted the provisions of
Section No.14 of the Severance Compensation Act, 1963 ("Section 14").
Section 14 allows the Company to make deposits in the severance pay
funds according to the employees' current salary. Such deposits are
releasing the Company from any further obligation with this regard.
The deposits made are available to the employee at the time when the
employer - employee relationship ends, regardless of cause of
termination. The Company's liability for severance pay is fully
provided for. Part of the liability is funded through individual
insurance policies. The policies are assets of the Company and, under
labor agreements, subject to certain limitations, they may be
transferred to the ownership of the beneficiary employees.
The severance pay expenses for the years ended December 31, 2009, 2008 and 2007 were $226, $1,058, and $961, respectively.
The Company has no liability for pension expenses to its employees.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
A. ROYALTIES
(i) The Company is committed to pay royalties to the Government of Israel on proceeds from the sale of products in the research and development of which the Government has participated by way of grants (received under the Chief Scientist program), up to the amount of 100% - 150% of the grants received plus interest at LIBOR rate (in dollar terms). The royalties are payable at a rate of between 3% to 4.5%. The total amount of grants received, net of royalties paid or accrued, as of December 31, 2009 was $28,693
The research and development grants are presented in the statements of operations as an offset to research and development expenses.
The refund of the grants is contingent upon the successful outcome of the Company's research and development programs and the attainment of sales. The Company has no obligation to refund these grants, if sales are not generated. The financial risk is assumed completely by the Government of Israel. The grants are received from the Government on a project-by-project basis. If the project fails the Company has no obligation to repay any grant received for the specific unsuccessful or aborted project.
Royalty expenses to the Government of Israel for the years ended December 31, 2009, 2008 and 2007 were $160, $218 and $297, respectively.
(ii) The Company is obligated to pay royalties to certain third parties, based on agreements, which allow the Company to incorporate their products into the Company's products. Royalty expenses to these parties for the years ended December 31, 2009, 2008 and 2007 were $171, $113 and $188 respectively.
(iii) Subsequent to the reporting date the Company assigned its royalties commitments related to the wireless activities to Lantiq as part of the sale of the wireless local area network (WLAN) business (see note 1).
B. LEASE COMMITMENTS
(i) The premises of the Company in Israel are rented under an operating lease agreements expiring in September 2010, the premises of the Company in Taiwan is rented under an operating lease agreement expiring in July 2010.
Future aggregate minimum annual rental payments pursuant to the existing lease commitments in effect as of December 31, 2009, are as follows:
YEAR $ ---- ---- 2010 604 |
The Company arranged for a bank guarantee in favor of the lessors of the premises in Israel in the amount of $193.
Total rent expenses for the years ended December 31, 2009, 2008 and 2007 were $889, $1,451 and $1,126, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
B. LEASE COMMITMENTS (CONT.)
Subsequent to the reporting date the company assigned its rental payments pursuant to the existing lease commitments to Lantiq as part of the sale of the wireless local area network (WLAN) business (see note 1).
(ii) The Company leases its motor vehicles under cancelable operating lease agreements, for periods through 2011. The minimum payment under these operating leases upon cancellation of these lease agreements, amounted to $30 as of December 31, 2009. Lease expenses for the years ended December 31, 2009, 2008 and 2007, were $432, $1,147 and $1,224, respectively. Subsequent to the reporting date, the company assigned to Lantiq its leasing commitments related to the transferred motor vehicles, as part of the sale of the wireless local area network (WLAN) business (see note 1).
C. LEGAL CLAIM
In July 1998, a former employee filed a claim against the Company in the Tel Aviv District Labor Court (the "Court") demanding that the Company issue him ordinary shares and pay on his behalf any taxes relating to such issuance; that the Company pay him statutory severance pay together with the statutory penalty for late payment of such severance pay and travel expenses; and that the Company release his managers insurance and continuing education fund. The Company filed a counterclaim against this former employee. In March 2001 the Court ordered that certain of the disputes between the parties be referred to a two-stage arbitration and pursuant to the Court's order the Company issued 75,765 ordinary shares (which were held in trust) in favor of the former employee. In addition, in January 2002, the Company paid the former employee $16 in payment of statutory severance pay and reimbursement of travel expenses. In August 2002, the arbitrators in the first stage of the arbitration awarded $391 to the former employee (which the Company paid in September 2002).
In December 2003 the former employee filed a claim in the second phase of the arbitration (the "Second Arbitration") in the amount of $3.2 million and at least $2.9 million before deductions and also a sum of $3.8 million for Funding differences. The Company contested this claim and filed a claim for damages against the former employee in the amount of $250,000 and for a refund of the NIS1.9 million already paid to him according to the foregoing judgment and of the sum paid as statutory severance pay and reimbursement of travel expenses.
Both parties have filed their pleadings, affidavits, and expert opinions. Cross-examination started in 2009, during which motions for disclosure of documents, summoning witnesses and temporary remedies were filled. These motions are still pending.
The Company believes that the resolution of this matter will not have a material adverse effect on the results of operations, liquidity, or financial condition, nor cause a material change in the number of outstanding ordinary shares, but there can be no assurance that the Company will necessarily prevail, due to the inherent uncertainties in litigation.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8 - SHORT-TERM LOAN
In September 2008, the Company entered into a short term secured loan agreement with an institutional investor. According to the loan agreement, the lender agreed to extend to the company a loan of $3,500 at the first stage ("First Loan") and, at the request of the Company, an additional loan of up to $4,500 ("Second Loan"). On December 31, 2008, the Loan Agreement was amended such that, among other things, the Second Loan will be provided in two tranches of $2,250 each.
The key terms of the loan agreement are as follows:
o The outstanding principal amount (including of the Second Loan) is due and payable in one payment 12 months after the first closing;
o The outstanding principal amount will accrue interest at an annual rate of 10% payable, in cash or ordinary shares, at the Company's election, on a quarterly basis;
o The loan may be prepaid by the Company at any time and is subject to a mandatory prepayment upon a change of control; and
o The loan is secured by a first priority fixed charge on all of the Company's intellectual property and a first priority floating charge on all of its other assets.
The transaction documents contain customary representations, warranties and covenants, including various limitations on, among other things, the Company's ability to incur additional debt or sell the collateral, without the consent of the lender.
In addition, in consideration for the First Loan, the Company issued to the lender five-year warrants to purchase up to a total of 2,000,000 ordinary shares at exercise prices per share of $0.01 (for 1,000,000 warrants) and $0.50 (for the balance), subject to adjustments. In consideration for the first tranche of the Second Loan, the Company issued to the lender five-year warrants to purchase up to a total of 1,100,000 ordinary shares at exercise prices per share of $0.01 (for 935,000 warrants) and $0.50 (for the balance), subject to adjustments.
Under the agreement, the Company received in September 2008 a loan in the amount of $3,500 ("First Loan") offset by issuance expenses in the amount of $313. The Company allocated the amount received between the loan and the warrants. In accordance with ASC 470-20 (formerly known as APB 14), the Company allocated to the warrants $1,838, which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the "OV" function on Bloomberg L.P with the following assumptions: risk free interest rate of 1.59%; dividend yield of zero; expected volatility of 85.75%; and an expected life of five years. The remaining amount was attributed to the loan. As a result a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the payment of the loan as of September 2009. For the year ended December 31,2009, the Company recorded $1,419 of financial expenses related to the amortization of the First Loan discount.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8 - SHORT-TERM LOAN (CONT.)
In January 2009 the company received half of the Second Loan at the amount of $2,250 ("Second Loan") offset by issuance expenses in the amount of $169. The Company allocated the amount received between the loan and the warrants. In accordance with ASC 470-20 (formerly known as APB 14), the Company allocated to the warrants $123, which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the "OV" function on Bloomberg L.P with the following assumptions: risk free interest rate of 0.04%; dividend yield of zero; expected volatility of 178.5%; and an expected life of five years. The remaining amount was attributed to the loan. As a result a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the payment of the loan as of September 2009. For the year ended December 31,2009, the Company recorded $123 of financial expenses related to the amortization of the Second Loan discount.
On September 6, 2009, the Company entered into a second amendment to the Loan Agreement (the "Second Amendment"), whereby the maturity date was extended from September 9, 2009 to March 9, 2010. As part of the Second Amendment, the Company immediately repaid the Lender $2,000 out of the outstanding $5,750. The Company also agreed that in the event of a fundamental transaction (such as the contemplated sale to Lantiq described in Note 1), the repayment amount will be $4,312.5.
Pursuant to the Second Amendment, the exercise price of 1,165,000 warrants that were previously issued to the lender was adjusted from $0.50 to $0.03 per share.
On December 30, 2009, the Company entered into a third amendment to the Loan Agreement (the "Third Amendment"), that became effective on January 5, 2010, whereby the repayment of the $4,312.5 originally due upon the closing of the Lantiq transaction will be reduced to $4,100 and repaid in four installments: $3,750 at closing , which occurred on February 15, 2010, and the remainder in three installments by March 31, 2011.
In accordance with ASC 815-10 (formerly known as FAS 133), the warrants are recorded on the balance sheet as derivative liability and carried at fair value, due to the fact that in certain circumstances the warrants may be paid off in cash according to the lender's decision. Gains and losses resulting from changes in the fair values of the warrants are recorded in financial expenses, net on the consolidated statement of operations. For the year ended December 31, 2009, the Company recorded $706 of financial expenses related to the increase in the fair value of these warrants.
In 2009, 1,835,000 warrants were exercised for 1,835,000 shares of common stock for a total of $18.
In 2008, 100,000 warrants were exercised for 100,000 shares of common stock for a total of $1.
The issuance of the Warrants contemplated in the Loan Agreement, triggered the adjustment of the exercise price of the warrants issued in August 2007 (see Note 10A). According to this adjustment the warrants issued originally with $8 per share, was adjusted to $6.5 per share according to the original terms of the warrants.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 9 - FAIR VALUE MEASUREMENTS
The Company adopted the provisions of ASC 820-10 (formerly known as SFAS No. 157), effective January 1, 2008, concurrent with the adoption of ASC 470-20-25-21(formerly known as SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities").
Fair values of the warrants were determined utilizing the income approach using the UV Bloomberg Merton formula.
Recurring Fair Value Measurements Using the Indicated Inputs:
Liabilities:
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
DECEMBER 31, 2009 (LEVEL 2)
------------------ ---------------
Warrants $ 289 $ 289
------------------ ---------------
$ 289 $ 289
================== ===============
|
NOTE 10 - SHARE CAPITAL
A. In December 1999, the Company completed an initial public offering in the United States and issued 4,600,000 ordinary shares (including the underwriters' over-allotment) for net proceeds of $49,838. Following the public offering, the Company's shares are traded on the Over-the-counter market and were listed on the NASDAQ National Market, until March 13, 2009 upon which listing of the Company's securities was transferred to the NASDAQ Capital Market.
In March 2000, the Company completed a second public offering in the United States and issued 1,500,000 ordinary shares for net proceeds of $62,702.
Since December 2000, the shares of the Company are also traded on the Tel-Aviv Stock Exchange. In October 2000 and March 2001, the Board of Directors of the Company approved the purchase of up to 1,000,000 of the Company's ordinary shares for up to $10,000. Through December 31, 2003, the Company had purchased 898,500 of its ordinary shares, in the aggregate amount of $9,885.
In April 2005, the Board of Directors of the Company approved the purchase of shares of the Company for up to $10,000, subject to market conditions and approval by the Board of Directors. The Company has not purchased any of its ordinary shares following the April 2005 approval.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 - SHARE CAPITAL (CONT.)
In August 2007, the Company has entered into Purchase Agreements with institutional investors. Pursuant to the Purchase Agreements, the Company agreed to sell 3,200,000 ordinary shares at $6.00 per share. The purchasers also received five-year warrants to purchase ordinary shares at an exercise price of $8.00 per share (subject to adjustments). The Company evaluated each component in the Purchase agreement to determine whether it should be classified as equity or liability. The Company determined that all components (warrants and shares) were determined to be eligible for equity classification. As such the warrants were initially recorded in equity at their fair value at the date of issuance, with no subsequent remeasurement, with the remainder of the proceeds allocated to the shares. The fair value of the warrants amounted to $1,081.
In February 2010, the Company has implemented a one-for-ten
reverse stock split of its outstanding ordinary shares. Pursuant
to this reverse stock split, each ten (10) shares of common
stock of the Company's issued and outstanding shares as of the
date following the reverse stock split was converted into one
(1) share of the Company's common stock. Options in the
following Notes 10 B through D are represented in their original
pre-split value, loss per share calculation have been adjusted
retroactively to reflect the one for ten reverse stock split.
B. EMPLOYEE STOCK PURCHASE PLAN
During 2000, the Board of Directors approved an Employee Stock Purchase Plan (the "ESPP"), effective October 2000. Under the ESPP, the maximum number of shares to be made available is 160,000 with an annual increase to be added on the first day of the year commencing 2001 equal to the lesser of 140,000 shares or 3/4% of the outstanding shares on such date or a lesser amount determined by the Board of Directors.
Any employee of the Company is eligible to participate in the ESPP. Employee stock purchases are made through payroll deductions. Under the terms of the ESPP, employees may not deduct an amount exceeding $25 in total value of stock in any one year. The purchase price of the stock will be 85% of the lower of the fair market value of an ordinary share on the first day of the offering period and the fair market value on the last day of the offering period. The offering period was determined to be six months. The ESPP shall terminate on October 31, 2010, unless terminated earlier by the Board of Directors. As of December 31, 2004, 329,080 ordinary shares were issued under the ESPP, and an additional 108,143 ordinary shares are available for issuance.
In April 2005 the Board of Directors of the Company resolved to suspend the ESPP until further notice.
C. STOCK OPTIONS
(i) Under the Company's six Stock Option Plans (the "Plans"), up to 10,142,433 options approved to be granted to employees and directors of the Company or its subsidiary.
(ii) Pursuant to the Plans, as of December 31, 2009, an aggregate of 4,058,762 options of the Company are still available for future grants.
(iii) The options granted vest over periods of up to five years from the date of the grant. Most of the options granted in previous years expire after 10 years from the date of the grant while most of the options granted subsequent to 2005 expire after 4 years.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 - SHARE CAPITAL (CONT.)
C. STOCK OPTIONS (CONT.)
(iv) In October 2007, the Board of Directors of the Company allowed the grant of Restricted Stock Units ("RSU") under each of the Company's Plans. RSU is a right to receive a share of the Company, under certain provisions, for a consideration of no more than the underlying share's nominal value (NIS 0.1). In addition, upon the lapse of the vesting period of RSU, such RSU shall automatically vest into the Company's ordinary share and the grantee shall pay to the Company its nominal value as a precondition to any receipt of such share. In 2007 ,2008 and 2009 the Company granted 10,000 RSU, 293,500 RSU and 20,000 RSU respectively.
A summary of the status of the Company's stock option plans to employees and directors of the Company, including RSU as of December 31, 2009, 2008 and 2007 and changes during the years then ended are as follows:
DECEMBER 31, 2009 DECEMBER 31, 2008 DECEMBER 31, 2007
--------------------------------------- ------------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------------ ------------------ ------------------ --------- ---------- ----------
Options outstanding at
beginning of year 2,973,528 $ 5.50 4,533,398 $ 6.41 3,761,629 $ 4.46
Granted during year 28,100 0.20 2,111,582 2.25 1,608,100 6.66
Forfeited during year (1,513,484) 5.40 (3,407,452) 5.11 (317,925) 5.54
Exercised during year (50,000) 0.03 (264,000) 0.03 (518,406) 4.13
------------------ ------------------ ----------
Outstanding at end of year 1,438,144 5.70 2,973,528 5.50 4,533,398 6.41
================== ================== ==========
Options exercisable at end
of year 1,346,378 5.82 2,176,676 6.22 2,344,223 6.64
================== ================== ==========
Weighted average fair
value of options & RSU granted
during year $ 0.35 $ 0.65 $ 1.85
================== ================== ==========
|
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 - SHARE CAPITAL (CONT.)
C. STOCK OPTIONS (CONT.)
The following table summarizes information relating to stock options outstanding, to employees and directors of the Company, as of December 31, 2009:
OPTIONS & RSU OUTSTANDING OPTIONS & RSU EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 2009 LIFE (IN YEARS) PRICE 2009 PRICE
--------------- ------------------------- -------------------------- -------- -------------- --------
0.00 - 2.66 677,883 3.43 1.69 639,417 1.70
2.76 - 3.28 22,100 0.71 3.05 22,100 3.05
3.39 - 4.00 33,200 0.38 3.80 15,000 3.80
4.04 - 5.00 49,127 1.09 4.36 49,127 4.36
5.04 - 7.00 168,150 0.57 5.99 147,850 5.94
7.01 - 8.95 229,600 1.17 7.30 214,800 7.30
9.00 - 22.06 258,084 0.46 15.34 258,084 15.34
------------------------- --------------
1,438,144 2.01 5.70 1,346,378 5.82
========================= ==============
|
D. OPTIONS ISSUED TO CONSULTANTS
In April 2000, the Company adopted the "Share Option Plan - 2000" to provide for the grant of options to members of the advisory board of the Company and independent contractors. The options are exercisable over five years. As of December 31, 2009, 253,000 options have been granted (0 in 2009, 1,000 in 2008 and 30,000 in 2007) under this plan to certain sales representatives and advisors of the Company at an exercise price of $ 1.83 - $ 22.13 per share. The fair value was determined using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 1.95%-6.50%; volatility rate of 37%- 109%; dividend yields of 0% and an expected life of one to ten years.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 - TAXES ON INCOME
A. TAXATION UNDER VARIOUS LAWS
(i) The Company and its subsidiaries are assessed for tax purposes on an unconsolidated basis. The Company is assessed under the provisions of the Israeli Income Tax Law (Inflationary Adjustments), 1985, pursuant to which results for tax purposes are measured in NIS in real terms in accordance with changes in the Israeli CPI. The Company's foreign subsidiaries are subject to the tax rules in their countries of incorporation.
(ii) "Approved Enterprise"
The production facilities of the Company have been granted "Approved Enterprise" status in two separate programs under the Law for the Encouragement of Capital Investments, 1959, as amended. Under this law, income attributable to each of these enterprises, is fully exempt from tax for two years, commencing with the first year in which such enterprise generates taxable income, and is entitled to a reduced tax rate (25%) for a further eight years, respectively. The expiration date of the period of benefits is limited to the earlier of twelve years from commencement of production or fourteen years from the date of the approval. As of December 31, 2009, the period of benefits had not yet commenced.
Income derived from sources other than the "Approved Enterprise" is taxable at the ordinary corporate tax rate of 26% in 2009 (regular "Company Tax"). The regular Company Tax rate in 2010 and thereafter will be reduced to 25%.
In the event of a distribution of cash dividends to the Company's shareholders of earnings subject to the tax-exemption, the Company will be liable to tax at a rate of 25% of the amounts of dividend distributed.
On July 23, 2009, the Economic Efficiency Act (Revised Law for Implementation of the Economic Plan for 2009-2010), 5769-2009 (the "Arrangements Law") was published. Under the Arrangements Law, the Income Tax Ordinance (New Version), 5721-1961 (the "Income Tax Ordinance") was amended such that the 26% and 25% tax rates imposed upon Israeli companies in the years 2009 and 2010, respectively, will be gradually reduced beginning in the 2011 tax year, for which the corporate tax rate will be set at 24%, until the 2016 tax year, for which the corporate tax rate will be set at 18%. The company did not realize any deferred tax income as a result of the amendment to the Income Tax Ordinance.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 - TAXES ON INCOME (CONT.)
B. LOSSES FROM CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------
2009 2008 2007
---------- -------- --------
(IN THOUSANDS)
--------------------------------
Israeli company $ (13,435) $(21,072) $(24,512)
U.S. subsidiary (19) 94 189
---------- -------- --------
$ (13,454) $(20,978) $(24,323)
========== ======== ========
|
C. RECONCILIATION OF INCOME TAXES
The following is a reconciliation of the taxes on income assuming that all income is taxed at the ordinary statutory corporate tax rate in Israel and the effective income tax rate:
YEAR ENDED DECEMBER 31,
--------------------------------
2009 2008 2007
---------- -------- --------
(IN THOUSANDS)
--------------------------------
Net loss as reported in the
consolidated statements of operations $ (13,454) $(20,978) $(24,323)
Statutory tax rate 26% 27% 29%
Income Tax under statutory tax rate $ (3,498) $ (5,664) $ (7,054)
Tax benefit arising from the Approved
Enterprise 2,956 4,847 6,128
Increase (decrease) in valuation allowance (866) 972 459
Permanent differences, net 1,408 (155) 467
---------- -------- --------
Actual income tax $ - $ - $ -
========== ======== ========
|
D. DEFERRED TAXES
The main components of the Company's deferred tax assets are as follows:
DECEMBER 31,
------------------------------
2009 2008
--------------- ------------
(IN THOUSANDS)
------------------------------
Net operating loss carry forwards in Israel $ 7,320 $ 6,698
Net operating loss carry forwards of non-Israeli subsidiary - 1,176
Other allowances 455 767
--------------- ------------
Total gross deferred tax assets 7,775 8,641
Less - Valuation allowance 7,775 8,641
--------------- ------------
Total deferred tax asset $ - $ -
=============== ============
|
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 - TAXES ON INCOME (CONT.)
D. DEFERRED TAXES (CONT.)
Under ASC 740-10 (formerly known as FASB Statement No. 109), deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss carryforwards and deductible temporary differences, unless it is more likely than not that some or all of the deferred tax assets will not be realized. The adjustment is made by a valuation allowance.
Since the realization of the net operating loss carryforwards and deductible temporary differences is less likely than not, a valuation allowance has been established for the full amount of the tax benefits.
Tax loss carryforwards of the Company totaling $183,012 are unlimited in duration, denominated in NIS and linked to the Israeli CPI.
E. TAX ASSESSMENTS
The Company and its subsidiary have not received final tax assessments for income tax purposes since incorporation.
F. FASB INTERPRETATION NO. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48"), AS CODIFIED INTO ASC 740-10.
On July 13, 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"), as codified into ASC 740-10, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires recognition in the financial statements of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the 2007 fiscal year with the cumulative effect of the change in accounting principle recorded as an adjustment to opening balance of retained earnings. The Company adopted the provisions of FIN 48 in 2007. The adoption of FIN 48 did not have a material impact on the Company's consolidated financial statements.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 - SUPPLEMENTARY BALANCE SHEET INFORMATION
A. OTHER RECEIVABLES
Comprised as follows:
DECEMBER 31,
------------------------------
2009 2008
--------------- -------------
(IN THOUSANDS)
------------------------------
Research and development participation from the
Government of Israel $ 311 $ 1,437
Loan to former employee (*) 45 45
Others 246 47
--------------- -------------
$ 602 $ 1,529
=============== =============
|
(*) Interest bearing loan granted to former employee under arbitration proceedings between the Company and the former employee. For further details see Note 7C.
B. OTHER PAYABLES AND ACCRUED EXPENSES
Comprised as follows:
DECEMBER 31,
------------------------------
2009 2008
--------------- --------------
(IN THOUSANDS)
-------------------------------
Payroll and related amounts $ 924 $ 1,147
Accrued expenses 1,516 1,046
Royalties to the Government of Israel 46 115
Others 753 949
--------------- --------------
$ 3,239 $ 3,257
=============== ==============
|
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
A. GEOGRAPHIC INFORMATION
The following is a summary of revenues and long-lived assets by geographic area. Revenues are attributed to geographic region based on the location of the customers.
YEAR ENDED DECEMBER 31,
-----------------------------
2009 2008 2007
--------- -------- --------
(IN THOUSANDS)
-----------------------------
REVENUES:
Korea $ 336 $ 542 $ 1,051
Israel 1,218 1,554 2,023
United States 1,308 75 2,284
Other foreign countries (mainly European) 2,054 4,991 4,808
--------- -------- --------
$ 4,916 $ 7,162 $ 10,166
=================== ========
|
DECEMBER 31,
----------------------------
2009 2008 2007
--------- ------- --------
(IN THOUSANDS)
----------------------------
LONG-LIVED ASSETS:
Israel $ 1,871 $ 2,895 $ 3,279
Taiwan 274 443 583
United States - - 320
--------- ------- --------
$ 2,145 $ 3,338 $ 4,182
========= ======= ========
|
B. SALES TO MAJOR CUSTOMERS
The following table summarizes the percentage of revenues from sales to major customers (exceeding 10% of total revenues for the year):
YEAR ENDED DECEMBER 31,
------------------------
2009 2008 2007
----- ----- -------
Customer A 21% 31% 17%
Customer B 24% 16% 19%
Customer C 26% (*) (*)
Customer D (*) 16% (*)
Customer E (*) (*) 20%
Customer F (*) (*) 13%
|
(*) Less than 10%.
METALINK LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONT.)
C. COST OF REVENUES:
YEAR ENDED DECEMBER 31,
-----------------------------
2009 2008 2007
----------- ------- -------
(IN THOUSANDS)
-----------------------------
Materials and production expenses $ 2,753 $ 1,975 $ 3,004
Salaries, wages and employee benefits 60 348 440
Depreciation and amortization 23 28 43
Other manufacturing costs 240 243 320
----------- ------- -------
3,076 2,594 3,807
Decrease in finished
products and work-in-process 98 370 929
----------- ------- -------
3,174 2,964 4,736
Royalties to the Government of Israel 160 218 297
----------- ------- -------
$ 3,334 $ 3,182 $ 5,033
=========== ======= =======
|
NOTE 14 - RELATED PARTIES
Payroll and related amounts to related parties in 2009, 2008 and 2007 were $238, $251 and $253, respectively.
NOTE 15 - DERIVATIES FINANCIAL INSTRUMENTS
In 2007, the Company entered into currency-forward and zero cost Collar transactions (NIS/dollar) of $5,000 with settlement date through 2007 and 2008, designed to reduce the variability in cash-flow of NIS denominated expenses in the amount of $5,000. The Company designed the hedge such that the critical terms of the hedged item and the hedging item match and as such recorded in 2007 $43 as change in fair market value of hedging activities in "Other Comprehensive Income" relating to the unsettled transactions as of December 31, 2007. In 2008 the Company settled all the hedging transactions and reclassified it from "Other Comprehensive Income" to earnings concurrent with the effect of the hedged transaction on earning.
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
METALINK LTD.
By: /s/ Rony Eizenshtein
--------------------
Name: Rony Eizenshtein
Title: Chief Financial Officer
Date: June 29, 2010
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EXHIBIT 1.1
Translated from the Hebrew Original
COMPANY LIMITED BY SHARES
MEMORANDUM OF ASSOCIATION
OF METALINK LTD.
AMENDED AND RESTATED AS OF FEBRUARY 22, 2010
1. NAME OF THE COMPANY: METALINK LTD.
2. THE OBJECTS FOR WHICH THE COMPANY HAS BEEN ESTABLISHED ARE:
a) To initiate, set up, found, develop, acquire, hold, operate and manage a business of development, planning, production and marketing of transmission devices in various communications systems.
b) Without prejudice to or derogating from that stated above, the Company shall be a corporation, fit for any right, obligation and legal act, and shall be permitted and entitled to engage in any business or matter as the company shall resolve upon.
3. THE LIABILITY OF THE MEMBERS: The liability of the members is limited.
4. SHARE CAPITAL:
a) The share capital of the company is NIS 5,000,000 divided into 5,000,000 Ordinary A Shares of a nominal value of NIS 1.0 each.
b) The rights attached to the shares of the Company of any class may be modified pursuant to the manner and the form determined in the Articles of Association of the Company, provided that the holders of all the classes of shares whose rights are sought to be modified shall pass a special resolution in respect of the said modification.
c) Permission is reserved to the Company to add and to remove shares of the Company by passing a special resolution and to remove shares of any class, including shares with various, special, deferred and additional rights, provided that the removal of shares which may prejudice or derogate from the rights attached to the shares shall require a special resolution passed by the holders of all the classes of shares.
d) That stated in section (b) above and in this section may be modified by the passing of a special resolution, provided that the holders of all the classes of existing shares shall pass a special resolution concerning the said modification.
e) The Company shall be entitled to become a public company and to revert to being a private company, in accordance with the provisions of the law which shall exist at the time that such a change shall be discussed.
5. CHANGING THE MEMORANDUM
It is possible to change this Memorandum of Understanding by a shareholders resolution adopted in a General Meeting of the Company by a simple majority of shareholders who are entitled to vote, in person or represented by proxy.
EXHIBIT 1.2
THE COMPANIES LAW
A COMPANY LIMITED BY SHARES
AMENDED AND RESTATED AS OF FEBRUARY 22, 2010
GENERAL PROVISIONS
1. OBJECT AND PURPOSE OF THE COMPANY
(a) The object and purpose of the Company shall be as set forth in the Company's Memorandum of Association, as the same shall be amended from time to time in accordance with applicable law.
(b) In accordance with Section 11(a) of the Companies Law 5759 - 1999 (the "Companies Law"), the Company may contribute a reasonable amount to a worthy cause.
2. LIMITATION OF LIABILITY
The liability of the shareholders is limited to the payment of the nominal value of the shares in the Company allotted to them and which remains unpaid, and only to that amount. If the Company's share capital shall include at any time shares without a nominal value, the shareholders' liability in respect of such shares shall be limited to the payment of up to NIS 0.01 for each such share allotted to them and which remains unpaid, and only to that amount.
3. INTERPRETATION
(a) Unless the subject or the context otherwise requires: words and expressions used herein which are defined in the Memorandum of Association of the Company shall have the meanings therein defined, and words and expressions defined in the Companies Law in force on the date when these Articles or any amendment thereto, as the case may be, first became effective shall have the same meanings herein; words and expressions importing the singular shall include the plural and vice versa; words and expressions importing the masculine gender shall include the feminine gender; and words and expressions importing persons shall include bodies corporate.
(b) The captions in these Articles are for convenience only and shall not be deemed a part hereof or affect the construction of any provision hereof.
3A AMENDMENT
The approval of a resolution adopted in a General Meeting approved by a simple majority of the voting power represented at the meeting in person or by proxy and voting thereon (a "Shareholders' Resolution") is required to approve any amendment to these Articles of Association.
SHARE CAPITAL
4. SHARE CAPITAL
The share capital of the Company is Five Million New Israeli Shekels (NIS 5,000,000) divided into Five Million (5,000,000) Ordinary A Shares, par value One New Israeli Shekel (NIS 1.00) each.
5. INCREASE OF SHARE CAPITAL
(a) The Company may, from time to time, by a Shareholders Resolution, whether or not all the shares then authorized have been issued, and whether or not all the shares theretofore issued have been called up for payment, increase its share capital by the creation of new shares. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such resolution shall provide.
(b) Except to the extent otherwise provided in such resolution, such new shares shall be subject to all the provisions applicable to the shares of the original capital.
6. SPECIAL RIGHTS; MODIFICATIONS OF RIGHTS
(a) Without prejudice to any special rights previously conferred upon the holders of existing shares in the Company, the Company may, from time to time, by Shareholders Resolution, provide for shares with such preferred or deferred rights or rights of redemption or other special rights and/or such restrictions, whether in regard to dividends, voting, repayment of share capital or otherwise, as may be stipulated in such resolution.
(b) (i) If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by these Articles, may be modified or abrogated by the Company, by Shareholders Resolution, subject to the sanction of a resolution passed by a majority of the holders of a majority of the shares of such class present and voting at a separate General Meeting of the holders of the shares of such class.
(ii) The provisions of these Articles relating to General Meetings shall, mutatis mutandis, apply to any separate General Meeting of the holders of the shares of a particular class.
(iii) Unless otherwise provided by these Articles, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed, for purposes of this Article 6(b), to modify or abrogate the rights attached to the previously issued shares of such class or of any other class.
7. CONSOLIDATION, SUBDIVISION, CANCELLATION AND REDUCTION OF SHARE CAPITAL
(a) The Company may, from time to time, by Shareholders Resolution (subject, however, to the provisions of Article 6(b) hereof and to applicable law):
(i) consolidate and divide all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares,
(ii) subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by these Articles of Association (subject, however, to the provisions of the Companies Law), and the Shareholders Resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from such subdivision, one or more of the shares may, as compared with the others, have any such preferred or deferred rights or rights of redemption or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares,
(iii) cancel any shares which, at the date of the adoption of such resolution, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so canceled, or
(iv) reduce its share capital in any manner, and with and subject to any incident authorized, and consent required, by law.
(b) With respect to any consolidation of issued shares into shares of larger nominal value, and with respect to any other action which may result in fractional shares, the Board of Directors may settle any difficulty which may arise with regard thereto, as it deems fit, including, INTER ALIA, resort to one or more of the following actions:
(i) determine, as to the holder of shares so consolidated, which issued shares shall be consolidated into each share of larger nominal value;
(ii) allot, in contemplation of or subsequent to such consolidation or other action, such shares or fractional shares sufficient to preclude or remove fractional share holdings;
(iii) redeem, in the case of redeemable preference shares, and subject to applicable law, such shares or fractional shares sufficient to preclude or remove fractional share holdings;
(iv) cause the transfer of fractional shares by certain shareholders of the Company to other shareholders thereof so as to most expediently preclude or remove any fractional shareholdings, and cause the transferees to pay the transferors the fair value of fractional shares so transferred, and the Board of Directors is hereby authorized to act as agent for the transferors and transferees with power of substitution for purposes of implementing the provisions of this sub-Article 7(b)(iv).
SHARES
8. ISSUANCE OF SHARE CERTIFICATES; REPLACEMENT OF LOST CERTIFICATES
(a) Share certificates shall be issued under the seal or stamp of the Company and shall bear the signature of one Director, or of any other person or persons authorized thereto by the Board of Directors.
(b) Each holder of shares shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if reasonably requested by such member, to several certificates, each for one or more of such shares.
(c) A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Registrar of Members in respect of such co-ownership.
(d) If a share certificate is defaced, lost or destroyed, it may be replaced, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board of Directors may think fit.
(e) The Company may issue bearer shares.
9. REGISTERED HOLDER
Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of any share as the absolute owner thereof, and, accordingly, shall not, except as ordered by a court of competent jurisdiction, or as required by statute, be bound to recognize any equitable or other claim to, or interest in such share on the part of any other person.
10. ALLOTMENT OF SHARES
The unissued shares from time to time shall be under the control of the Board of Directors, who shall have the power to allot shares or otherwise dispose of them to such persons, on such terms and conditions (including inter alia terms relating to calls as set forth in Article 12(f) hereof), and either at par or at a premium, or, subject to the provisions of the Companies Law, at a discount, and at such times, as the Board of Directors may think fit, and the power to give to any person the option to acquire from the Company any shares, either at par or at a premium, or, subject as aforesaid, at a discount, during such time and for such consideration as the Board of Directors may think fit.
11. PAYMENT IN INSTALLMENTS
If by the terms of allotment of any share, the whole or any part of the price thereof shall be payable in installments, every such installment shall, when due, be paid to the Company by the then registered holder(s) of the share of the person(s) entitled thereto.
12. CALLS ON SHARES
(a) The Board of Directors may, from time to time, make such calls as it may think fit upon holders of shares in respect of any sum unpaid in respect of shares held by such holders which is not, by the terms of allotment thereof or otherwise, payable at a fixed time, and each such holder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments), to the person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may be thereafter extended and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice hereafter referred to), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares in respect of which such call was made.
(b) Notice of any call shall be given in writing to the holder(s) in question not less than fourteen (14) days prior to the time of payment, specifying the time and place of payment, and designating the person to whom such payment shall be made, provided, however, that before the time for any such payment, the Board of Directors may, by notice in writing to such holder(s), revoke such call in whole or in part, extend such time, or alter such person and/or place. In the event of a call payable in installments, only one notice thereof need be given.
(c) If, by the terms of allotment of any share or otherwise, any amount is made payable at any fixed time, every such amount shall be payable at such time as if it were a call duly made by the Board of Directors and of which due notice had been given, and all the provisions herein contained with respect to such calls shall apply to each such amount.
(d) The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof and all interest payable thereon.
(e) Any amount unpaid in respect of a call shall bear interest from the date on which it is payable until actual payment thereof, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel), and at such time(s) as the Board of Directors may prescribe.
(f) Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amount of calls and/or the times of payment thereof.
13. PREPAYMENT
With the approval of the Board of Directors, any holder of shares may pay to the Company any amount not yet payable in respect of his shares, and the Board of Directors may approve the payment of interest on any such amount until the same would be payable if it had not been paid in advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or any part of the money so advanced, without premium or penalty. Nothing in this Article 13 shall derogate from the right of the Board of Directors to make any call before or after receipt by the Company of any such advance.
14. FORFEITURE AND SURRENDER
(a) If any holder fails to pay any amount payable in respect of a call, or interest thereon as provided for herein, on or before the day fixed for payment of the same, the Company, by resolution of the Board of Directors, may at any time thereafter, so long as the said amount or interest remains unpaid, forfeit all or any of the shares in respect of which said call had been made. Any expense incurred by the Company in attempting to collect any such amount or interest, including, inter alia, attorneys' fees and costs of suit, shall be added to, and shall, for all purposes (including the accrual of interest thereon), constitute a part of the amount payable to the Company in respect of such call.
(b) Upon the adoption of a resolution of forfeiture, the Board of Directors
shall cause notice thereof to be given to such holder, which notice shall state
that, in the event of the failure to pay the entire amount so payable within a
period stipulated in the notice (which period shall not be less than fourteen
(14) days and which may be extended by the Board of Directors), such shares
shall be ipso facto forfeited, provided, however, that, prior to the expiration
of such period, the Board of Directors may nullify such resolution of
forfeiture, but no such nullification shall estop the Board of Directors from
adopting a further resolution of forfeiture in respect of the non-payment of the
same amount.
(c) Whenever shares are forfeited as herein provided, all dividends theretofore declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time.
(d) The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share.
(e) Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors thinks fit.
(f) Any holder whose shares have been forfeited or surrendered shall cease to be a holder in respect of the forfeited or surrendered shares, but shall, notwithstanding, be liable to pay, and shall forthwith pay, to the Company, all calls, interest and expenses owing upon or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 12(e) above, and the Board of Directors, in its discretion, may enforce the payment of such moneys, or any part thereof, but shall not be under any obligation to do so. In the event of such forfeiture or surrender, the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing by the holder in question (but not yet due) in respect of all shares owned by such holder, solely or jointly with another, and in respect of any other matter or transaction whatsoever.
(g) The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it thinks fit, but no such nullification shall estop the Board of Directors from re-exercising its powers of forfeiture pursuant to this Article 14.
15. LIEN
(a) Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares registered in the name of each holder (without regard to any equitable or other claim or interest in such shares on the part of any other person), and upon the proceeds of the sale thereof, for his debts, liabilities and engagements arising from any cause whatsoever, solely or jointly with another, to or with the Company, whether the period for the payment, fulfillment or discharge thereof shall have actually arrived or not. Such lien shall extend to all dividends from time to time declared in respect of such share. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of the lien (if any) existing on such shares immediately prior to such transfer.
(b) The Board of Directors may cause the Company to sell any shares subject
to such lien when any such debt, liability or engagement has matured, in such
manner as the Board of Directors may think fit, but no such sale shall be made
unless such debt, liability or engagement has not been satisfied within fourteen
(14) days after written notice of the intention to sell shall have been served
on such holder, his executors or administrators.
(c) The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or engagements of such holder (whether or not the same have matured), or any specific part of the same (as the Company may determine), and the residue (if any) shall be paid to the holder, his executors, administrators or assigns.
16. SALE AFTER FORFEITURE OR SURRENDER OR IN ENFORCEMENT OF LIEN
Upon any sale of shares after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint some person to execute an instrument of transfer of the shares so sold and cause the purchaser's name to be entered in the Register of Members in respect of such shares, and the purchaser shall not be bound to see to the regularity of the proceedings, or to the application of the purchase money, and after his name has been entered in the Register of Members in respect of such shares, the validity of the sale shall not be impeached by any person, and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively.
17. REDEEMABLE SHARES
The Company may, subject to applicable law, issue redeemable shares and redeem the same.
18. [reserved]
TRANSFER OF SHARES
19. EFFECTIVENESS AND REGISTRATION
No transfer of shares shall be registered unless a proper instrument of transfer (in form and substance satisfactory to the Board of Directors) has been submitted to the Company or its agent, together with any share certificate(s) and such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Register of Members in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof. The Board of Directors, may, from time to time, prescribe a fee for the registration of a transfer.
20. RECORD DATE FOR GENERAL MEETINGS
Notwithstanding any provision to the contrary in these Articles, for the determination of the holders entitled to receive notice of and to participate in and vote at a General Meeting, or to express consent to or dissent from any corporate action in writing, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of shares of the Company, the Board of Directors may fix, in advance, a record date, which, subject to applicable law, shall not be earlier than ninety (90) days prior to the General Meeting or other action, as the case may be. No persons other than holders of record of shares as of such record date shall be entitled to notice of and to participate in and vote at such General Meeting, or to exercise such other right, as the case may be. A determination of holders of record with respect to a General Meeting shall apply to any adjournment of such meeting, provided that the Board of Directors may fix a new record date for an adjourned meeting.
TRANSMISSION OF SHARES
21. DECEDENTS' SHARES
(a) In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof unless and until the provisions of Article 21(b) have been effectively invoked.
(b) Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient that he sustains the character in respect of which he proposes to act under this Article or of his title), shall be registered as a holder in respect of such share, or may, subject to the regulations as to transfer herein contained, transfer such share.
22. RECEIVERS AND LIQUIDATORS
(a) The Company may recognize the receiver or liquidator of any corporate shareholder in winding-up or dissolution, or the receiver or trustee in bankruptcy of any shareholder, as being entitled to the shares registered in the name of such shareholder.
(b) The receiver or liquidator of a corporate shareholder in winding-up or dissolution, or the receiver or trustee in bankruptcy of any shareholder, upon producing such evidence as the Board of Directors may deem sufficient that he sustains the character in respect of which he proposes to act under this Article or of his title, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a shareholder in respect of such shares, or may, subject to the regulations as to transfer herein contained, transfer such shares.
GENERAL MEETINGS
23. ANNUAL GENERAL MEETING
An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place either within or without the State of Israel as may be determined by the Board of Directors.
24. EXTRAORDINARY GENERAL MEETINGS
All General Meetings other than Annual General Meetings shall be called "Extraordinary General Meetings." The Board of Directors may, whenever it thinks fit, convene an Extraordinary General Meeting at such time and place, within or without the State of Israel, as may be determined by the Board of Directors, and shall be obliged to do so upon a requisition in writing in accordance with Sections 63(b)(1) or (2) and 63(c) of the Companies Law.
25. NOTICE OF GENERAL MEETINGS
The Company is not required to give notice under Section 69(b) of the Companies Law. The Company is required to give such prior notice of a General Meeting as required by law or applicable stock exchange rules, but in any event not less than seven (7) days. The accidental omission to give notice of a meeting to any shareholder or the non-receipt of notice by one of the shareholders shall not invalidate the proceedings at any meeting.
PROCEEDINGS AT GENERAL MEETINGS
26. QUORUM
(a) Two or more shareholders (not in default in payment of any sum referred to in Article 32(a) hereof), present in person or by proxy and holding shares conferring in the aggregate thirty-three and one-third percent (33 1/3%) of the voting power of the Company (subject to rules and regulations, if any, applicable to the Company), shall constitute a quorum at General Meetings. No business shall be transacted at a General Meeting, or at any adjournment thereof, unless the requisite quorum is present when the meeting proceeds to business.
(b) If within an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon requisition under Sections 63(b)(1) or (2), 64 or 65 of the Companies Law, shall be dissolved, but in any other case it shall stand adjourned to the same day in the next week, at the same time and place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment. No business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called. At such adjourned meeting, any two (2) shareholders (not in default as aforesaid) present in person or by proxy, shall constitute a quorum (subject to rules and regulations, if any, applicable to the Company).
(c) The Board of Directors may determine, in its discretion, the matters that may be voted upon at the meeting by proxy in addition to the matters listed in Section 87(a) to the Companies Law.
27. CHAIRMAN
The Chairman, if any, of the Board of Directors shall preside as Chairman at every General Meeting of the Company. If there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes after the time fixed for holding the meeting or is unwilling to act as Chairman, the shareholders present shall choose someone of their number to be Chairman. The office of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote (without derogating, however, from the rights of such Chairman to vote as a shareholder or proxy of a shareholder if, in fact, he is also a shareholder or such proxy).
28. ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS
(a) Unless otherwise indicated herein, a Shareholders Resolution shall be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon.
(b) A Shareholders Resolution approving a merger (as defined in the Companies Law) of the Company shall be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon.
(c) Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any shareholder present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be demanded before the proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may be withdrawn at any time before the same is conducted, in which event another shareholder may then demand such written ballot. The demand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which the written ballot has been demanded.
(d) A declaration by the Chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or lost, and an entry to that effect in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution.
29. RESOLUTIONS IN WRITING
A resolution in writing signed by all shareholders of the Company then
entitled to attend and vote at General Meetings or to which all such
shareholders have given their written consent (by letter, facsimile
[telecopier], telegram, telex or otherwise), or their oral consent by telephone
(provided that a written summary thereof has been approved and signed by the
Chairman of the Board of Directors of the Company) shall be deemed to have been
unanimously adopted by a General Meeting duly convened and held.
30. POWER TO ADJOURN
(a) The Chairman of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called.
(b) It shall not be necessary to give any notice of an adjournment, whether pursuant to Article 26(b) or Article 30(a), unless the meeting is adjourned for thirty (30) days or more in which event notice thereof shall be given in the manner required for the meeting as originally called.
31. VOTING POWER
Subject to the provisions of Article 32(a) and subject to any provision hereof conferring special rights as to voting, or restricting the right to vote, every shareholder shall have one vote for each share held by him of record, on every resolution, without regard to whether the vote hereon is conducted by a show of hands, by written ballot or by any other means.
32. VOTING RIGHTS
(a) No shareholder shall be entitled to vote at any General Meeting (or be counted as a part of the quorum thereat), unless all calls and other sums then payable by him in respect of his shares in the Company have been paid, but this Article shall not apply to separate General Meetings of the holders of a particular class of shares pursuant to Article 6(b).
(b) A company or other corporate body being a shareholder of the Company may, by resolution of its directors or any other managing body thereof, authorize any person to be its representative at any meeting of the Company. Any person so authorized shall be entitled to exercise on behalf of such shareholder all the power which the latter could have exercised if it were an individual shareholder. Upon the request of the Chairman of the meeting, written evidence of such authorization (in form acceptable to the Chairman) shall be delivered to him.
(c) Any shareholder entitled to vote may vote either personally or by proxy (who need not be a shareholder of the Company), or, if the shareholder is a company or other corporate body, by a representative authorized pursuant to Article 32(b).
(d) If two or more persons are registered as joint holders of any share, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s); and for this purpose seniority shall be determined by the order in which the names stand in the Register of Members.
PROXIES
33. INSTRUMENT OF APPOINTMENT
(a) The instrument appointing a proxy shall be in writing and shall be substantially in the following form:
"I _____________________ of __________________________________
(Name of Shareholder) (Address of Shareholder)
being a member of ___________________________ hereby appoint
(Name of the Company)
________________________of _____________________________
(Name of Proxy) (Address of Proxy)
as my proxy to vote for me and on my behalf at the General Meeting of the Company to be held on the _____ day of ___________, 20__ and at any adjournment(s) thereof.
Signed this ______ day of ____________, 20__.
or in any usual or common form or in such other form as may be approved by the Board of Directors. It shall be duly signed by the appointer or his duly authorized attorney or, if such appointer is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s).
(b) The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall either be delivered to the Company (at its Registered Office, or at its principal place of business or at the offices of its registrar and/or transfer agent or at such place as the Board of Directors may specify) not less than seventy-two (72) hours (or such shorter period as determined by the Board of Directors) before the time fixed for the meeting at which the person named in the instrument proposes to vote.
34. EFFECT OF DEATH OF APPOINTOR OR REVOCATION OF APPOINTMENT
A vote cast pursuant to an instrument appointing a proxy shall be valid notwithstanding the previous death of the appointing shareholder (or of his attorney-in-fact, if any, who signed such instrument), or the revocation of the appointment or the transfer of the share in respect of which the vote is cast, provided no written intimation of such death, revocation or transfer shall have been received by the Company or by the Chairman of the meeting before such vote is cast and provided, further, that the appointing shareholder, if present in person at said meeting, may revoke the appointment by means of a writing, oral notification to the Chairman, or otherwise.
BOARD OF DIRECTORS
35. POWERS OF BOARD OF DIRECTORS
(a) IN GENERAL
The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company in General Meeting. The authority conferred on the Board of Directors by this Article 35 shall be subject to the provisions of the Companies Law, of these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company in General Meeting, provided, however, that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors which would have been valid if such regulation or resolution had not been adopted.
(b) BORROWING POWER
The Board of Directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it thinks fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being.
(c) RESERVES
The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board of Directors, in its absolute discretion, shall think fit, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments, and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may from time to time think fit.
36. EXERCISE OF POWERS OF DIRECTORS
(a) A meeting of the Board of Directors at which a quorum is present (in person, by means of a conference call or any other device allowing each director participating in such meeting to hear all the other directors participating in such meeting) shall be competent to exercise all the authorities, powers and discretions vested in or exercisable by the Board of Directors.
(b) A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the Directors present when such resolution is put to a vote and voting thereon.
(c) A resolution MAY BE ADOPTED BY THE BOARD OF DIRECTORS WITHOUT CONVENING A MEETING IF all Directors then in office and lawfully entitled to vote thereon (as conclusively determined by the Chairman of the Audit Committee, and, in the absence of such determination, by the Chairman of the Board of Directors) having given their consent (IN ANY MANNER WHATSOEVER) NOT TO CONVENE A MEETING. SUCH A RESOLUTION SHALL BE ADOPTED IF APPROVED BY A MAJORITY OF THE DIRECTORS ENTITLED TO VOTE THEREON (AS DETERMINED AS AFORESAID). THE CHAIRMAN OF THE BOARD SHALL SIGN ANY RESOLUTIONS SO ADOPTED, INCLUDING THE DECISION TO ADOPT SAID RESOLUTIONS WITHOUT A MEETING.
37. DELEGATION OF POWERS
(a) The Board of Directors may, subject to the provisions of the Companies Law, delegate any or all of its powers to committees, each consisting of two or more persons (all of whose members must be Directors), and it may from time to time revoke such delegation or alter the composition of any such committee. Any Committee so formed (in these Articles referred to as a "Committee of the Board of Directors"), shall, in the exercise of the powers so delegated, conform to any regulations imposed on it by the Board of Directors. The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis mutandis, be governed by the provisions herein contained for regulating the meetings of the Board of Directors, so far as not superseded by any regulations adopted by the Board of Directors under this Article. Unless otherwise expressly provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers.
(b) Without derogating from the provisions of Article 50, the Board of Directors may, subject to the provisions of the Companies Law, from time to time appoint a Secretary to the Company, as well as officers, agents, employees and independent contractors, as the Board of Directors may think fit, and may terminate the service of any such person. The Board of Directors may, subject to the provisions of the Companies Law, determine the powers and duties, as well as the salaries and emoluments, of all such persons, and may require security in such cases and in such amounts as it thinks fit.
(c) The Board of Directors may from time to time, by power of attorney or otherwise, appoint any person, company, firm or body of persons to be the attorney or attorneys of the Company at law or in fact for such purpose(s) and with such powers, authorities and discretions, and for such period and subject to such conditions, as it thinks fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board of Directors may think fit, and may also authorize any such attorney to delegate all or any of the powers, authorities and discretions vested in him.
38. NUMBER OF DIRECTORS
The Board of Directors shall consist of such number of Directors (not less than four (4) nor more than nine (9) as may be determined by Shareholder Resolution of the Company.
39. ELECTION AND REMOVAL OF DIRECTORS
(a) If at any time, the Company shall be required to appoint independent or external directors such as a public director or directors of any other type as the may be required by law ("External Directors") such directors shall serve on the Board according to the number required by law. External Directors will be appointed and removed pursuant to and shall be governed by the relevant provisions of the law which applies to External Directors. If permitted by applicable law, External Directors will be appointed by the Board.
(b) The members of the Board of Directors shall be called Directors, and other than External Directors (who will be chosen and appointed, and whose term will expire, in accordance with applicable law,) they shall be appointed in accordance with the provisions of this Article.
(c) Directors (other than External Directors) shall be elected at the Annual General Meeting by the vote of the holders of a majority of the voting power represented at such meeting in person or by proxy and voting on the election of directors, or by the Board of Directors. In the event that Directors are appointed by the Board of Directors, such appointment of Directors shall be adopted by Shareholders' Resolution at the first extraordinary or annual general meeting of the shareholders following the date upon which the Director was appointed by the Board of Directors. Each Director shall serve, subject to Article 42 hereof, and with respect to a Director appointed pursuant to Article 41 hereof, subject to such Article, until the Annual General Meeting next following the Annual General Meeting at which such Director was appointed, or his earlier removal pursuant to this Article 39. The shareholders shall be entitled to remove any Director(s) from office, all subject to applicable law.
40. QUALIFICATION OF DIRECTORS
No person shall be disqualified to serve as a Director by reason of his not holding shares in the Company or by reason of his having served as a Director in the past.
41. CONTINUING DIRECTORS IN THE EVENT OF VACANCIES
In the event of one or more vacancies in the Board of Directors, the continuing Directors may continue to act in every matter, and may temporarily fill any such vacancy until the next Annual General Meeting, provided, however, that if they number less than the minimum number provided for pursuant to Article 38 hereof, they may only act in an emergency, and may call a General Meeting of the Company for the purpose of electing Directors to fill any or all vacancies, so that at least a majority of the number of Directors provided for pursuant to Article 38 hereof are in office as a result of said meeting.
42. VACATION OF OFFICE
(a) The office of a Director shall be vacated, ipso facto, upon his death, or if he be found lunatic or become of unsound mind, or if he becomes bankrupt, or, if the Director is a company, upon its winding-up.
(b) The office of a Director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.
43. REMUNERATION OF DIRECTORS
No Director shall be paid any remuneration by the Company for his services
as Director except as may be approved by the Company in a General Meeting
(including, but not limited to, the grant of options for the Company's shares)
and except for reimbursement of reasonable expenses incurred in connection with
carrying out his duties as a Director.
44. CONFLICT OF INTERESTS
Subject to the provisions of the Companies Law, the Company may enter into any contract or otherwise transact any business with any Director in which contract or business such Director has a personal interest, directly or indirectly; and may enter into any contract of otherwise transact any business with any third party in which contract or business a Director has a personal interest, directly or indirectly.
45. ALTERNATE DIRECTORS
(a) A Director may, by written notice to the Company, appoint a natural person for himself (in these Articles referred to as "Alternate Director"), remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. Unless the appointing Director, by the instrument appointing an Alternate Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Board of Directors, or otherwise restricts its scope, the appointment shall be for an indefinite period, but will expire upon the expiration of the appointing Director's term, and shall be for all purposes.
(b) Any notice given to the Company pursuant to Article 45(a) shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.
(c) An Alternate Director shall have all the rights and obligations of the Director who appointed him, provided, however, that he may not in turn appoint an alternate for himself (unless the instrument appointing him otherwise expressly provides), and provided further that an Alternate Director shall have no standing at any meeting of the Board of Directors or any committee thereof while the Director who appointed him is present.
(d) An Alternate Director shall alone be responsible for his own acts and defaults, and he shall not be deemed the agent of the Director(s) who appointed him.
(e) The office of an Alternate Director shall be vacated under the circumstances, mutatis mutandis, set forth in Article 42, and such office shall ipso facto be vacated if the Director who appointed such Alternate Director ceases to be a Director.
(f) Notwithstanding Article 45(a), (i) no person shall be appointed as the Alternate Director for more than one Director and (ii) except as otherwise specifically permitted by the Companies Law, (A) no External Director may appoint an Alternate Director and (B) no Director may serve as an Alternate Director.
PROCEEDINGS OF THE BOARD OF DIRECTORS
46. MEETINGS
(a) The Board of Directors may meet and adjourn its meetings and otherwise regulate such meetings and proceedings as the Board of Directors think fit. Notice of the meetings of the Board of Directors shall be sent to each Director at the last address that the Director provided to the Company, or via telephone, facsimile or e-mail message.
(b) Any Director may at any time, and the Secretary, upon the request of such Director, shall, convene a meeting of the Board of Directors, but not less than seven (7) days' notice (oral or written) shall be given of any meeting so convened. The failure to give notice to a Director in the manner required hereby may be waived by such Director.
47. QUORUM
Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence of a majority of the Directors then in office who are lawfully entitled to participate in the meeting (as conclusively determined by the Chairman of the Audit Committee and in the absence of such determination - by the Chairman of the Board of Directors), but shall not be less than two.
48. CHAIRMAN OF THE BOARD OF DIRECTORS
The Board of Directors may from time to time elect one of its members to be the Chairman of the Board of Directors, remove such Chairman from office and appoint another in its place. The Chairman of the Board of Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting, or if he is unwilling to take the chair, the Directors present shall choose one of their number to be the chairman of such meeting.
49. VALIDITY OF ACTS DESPITE DEFECTS
Subject to the provisions of the Companies Law, all acts done bona fide at any meeting of the Board of Directors, or of a Committee of the Board of Directors, or by any person(s) acting as Director(s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meetings or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect or disqualification.
GENERAL MANAGER
50. GENERAL MANAGER
The Board of Directors may from time to time appoint one or more persons, whether or not Directors, as General Manager(s) of the Company and may confer upon such person(s), and from time to time modify or revoke, such title(s) (including Managing Director, President, Director General or any similar or dissimilar title) and such duties and authorities of the Board of Directors as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe. Such appointment(s) may be either for a fixed term or without any limitation of time, and the Board of Directors may from time to time (subject to the provisions of the Companies Law and of any contract between any such person and the Company) fix his or their salaries and emoluments, remove or dismiss him or them from office and appoint another or others in his or their place or places.
MINUTES
51. MINUTES
(a) Minutes of each General Meeting and of each meeting of the Board of Directors shall be recorded and duly entered in books provided for that purpose. Such minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat.
(b) Any minutes as aforesaid, if purporting to be signed by the chairman of the meeting or by the chairman of the next succeeding meeting, shall constitute prima facia evidence of the matters recorded therein.
DIVIDENDS
52. DECLARATION AND PAYMENT OF DIVIDENDS
The Board of Directors may from time to time declare, and cause the Company to pay, such dividend as may appear to the Board of Directors to be justified. The Board of Directors shall determine the time for payment of such dividends, and the record date for determining the shareholders entitled thereto.
53. [Deleted]
54. AMOUNT PAYABLE BY WAY OF DIVIDENDS
Subject to the rights of the holders of shares with special rights as to dividends, any dividend paid by the Company shall be allocated among the members entitled thereto in proportion to their respective holdings of the shares in respect of which such dividend is being paid.
55. INTEREST
No dividend shall carry interest as against the Company.
56. PAYMENT IN SPECIE
Upon the declaration of the Board of Directors, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid up shares, debentures or debenture stock of the Company or of any other companies, or in any one or more of such ways.
57. CAPITALIZATION OF PROFITS, RESERVES ETC.
Upon the resolution of the Board of Directors, the Company -
(a) may cause any moneys, investments, or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve fund, or to the credit of a reserve fund for the redemption of capital, or in the hands of the Company and available for dividends, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportion, on the footing that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf of such shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures or debenture stock of the Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any issued shares or debentures or debenture stock; and
(b) may cause such distribution or payment to be accepted by such shareholders in full satisfaction of their interest in the said capitalized sum.
58. IMPLEMENTATION OF POWERS UNDER ARTICLES 56 AND 57
For the purpose of giving full effect to any resolution under Articles 56 or 57, and without derogating from the provisions of Article 7(b) hereof, and subject to applicable law, the Board of Directors may settle any difficulty which may arise in regard to the distribution as it thinks expedient, and, in particular, may issue fractional certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any members upon the footing of the value so fixed, or that fractions of less value than the nominal value of one share may be disregarded in order to adjust the rights of all parties, and may vest any such cash, shares, debentures, debenture stock or specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board of Directors.
59. DEDUCTIONS FROM DIVIDENDS
The Board of Directors may deduct from any dividend or other moneys payable to any member in respect of a share any and all sums of money then payable by him to the Company on account of calls or otherwise in respect of shares of the Company and/or on account of any other matter of transaction whatsoever.
60. RETENTION OF DIVIDENDS
(a) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share on which the Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities, or engagements in respect of which the lien exists.
(b) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of which any person is, under Articles 21 or 22, entitled to become a member, or which any person is, under said Articles, entitled to transfer, until such person shall become a member in respect of such share or shall transfer the same.
61. UNCLAIMED DIVIDENDS
All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors for the benefit of the Company until claimed. The payment by the Directors of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof, and any dividend unclaimed after a period of seven (7) years from the date of declaration of such dividend, and any such other moneys unclaimed after a like period from the date the same were payable, shall be forfeited and shall revert to the Company, provided, however, that the Board of Directors may, at its discretion, cause the Company to pay any such dividend or such other moneys, or any part thereof, to a person who would have been entitled thereto had the same not reverted to the Company.
62. MECHANICS OF PAYMENT
Any dividend or other moneys payable in cash in respect of a share may be paid by check or warrant sent through the post to, or left at, the registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to any one of such persons or to his bank account), or to such person and at such address as the person entitled thereto may by writing direct. Every such check or warrant shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto as aforesaid may direct, and payment of the check or warrant by the banker upon whom it is drawn shall be a good discharge to the Company. Every such check or warrant shall be sent at the risk of the person entitled to the money represented thereby.
63. RECEIPT FROM A JOINT HOLDER
If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable in respect of such share.
ACCOUNTS
64. BOOKS OF ACCOUNT
The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Law and of any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors may think fit, and they shall always be open to inspection by all Directors. No member, not being a Director, shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of Directors or by a Shareholders Resolution.
65. AUDIT
At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors.
66. AUDITORS
The appointment, authorities, rights and duties of the auditor(s) of the Company, shall be regulated by applicable law. The Audit Committee of the Company shall have the authority to fix, in its discretion, the remuneration of the auditor(s) for the auditing services.
BRANCH REGISTERS
67. BRANCH REGISTERS
Subject to and in accordance with the provisions of the Companies Law and to all orders and regulations issued thereunder, the Company may cause branch registers to be kept in any place outside Israel as the Board of Directors may think fit, and, subject to all applicable requirements of law, the Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such branch registers.
RIGHTS OF SIGNATURE, STAMP AND SEAL
68. RIGHTS OF SIGNATURE, STAMP AND SEAL
(a) The Board of Directors shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company, and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the scope of his or their authority.
(b) The Company shall have at least one official stamp.
(c) The Board of Directors may provide for a seal. If the Board of Directors so provides, it shall also provide for the safe custody thereof. Such seal shall not be used except by the authority of the Board of Directors and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed.
NOTICES
69. NOTICES
(a) Any written notice or other document may be served by the Company upon any shareholder either personally, or by facsimile transmission, or by sending it by prepaid mail (airmail or overnight air courier if sent to an address on a different continent from the place of mailing) addressed to such shareholder at his address as described in the Register of Members or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice or other document may be served by any shareholder upon the Company by tendering the same in person to the Secretary or the General Manager of the Company at the principal office of the Company, or by facsimile transmission, or by sending it by prepaid registered mail (airmail or overnight air courier if posted outside Israel) to the Company at its Registered Address. Any such notice or other document shall be deemed to have been served (i) in the case of mailing, two (2) business days after it has been posted (seven (7) business days if sent internationally), or when actually received by the addressee if sooner than two (2) days or seven (7) days, as the case may be, after it has been posted; (ii) in the case of overnight air courier, on the third (3rd) business day following the day sent, with receipt confirmed by the courier, or when actually received by the addressee if sooner than three (3) business days after it has been sent; (iii) in the case of personal delivery, on the date such notice was actually tendered in person to such shareholder (or to the Secretary or the General Manager); (iv) in the case of facsimile transmission, on the date on which the sender receives automatic electronic confirmation by the recipient's facsimile machine that such notice was received by the addressee. The mailing or publication date and the date of the meeting shall be counted as part of the days comprising any notice period. If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served, when received, notwithstanding that it was defectively addressed or failed, in some respect, to comply with the provisions of this Article 69(a).
(b) All notices to be given to the shareholders shall, with respect to any share to which persons are jointly entitled, be given to whichever of such persons is named first in the Register of Members, and any notice so given shall be sufficient notice to the holders of such share.
(c) Any shareholder whose address is not described in the Register of Members, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company.
(d) Notwithstanding anything to the contrary herein, notice by the Company of a General Meeting which is published in two (2) daily newspapers in the State of Israel, if at all, shall be deemed to have been duly given on the date of such publication to any shareholder whose address as registered in the Register of Members (or as designated in writing for the receipt of notices and other documents) is located in the State of Israel.
Notwithstanding anything to the contrary herein, notice by the Company of a General Meeting which is published in one (1) daily newspaper in the United States shall be deemed to have been duly given on the date of such publication to any member whose address as registered in the Registrar of Members (or as designated in writing for the receipt of notices and other documents) is located outside the State of Israel.
INSURANCE AND INDEMNITY
70. EXCULPATION, INDEMNITY AND INSURANCE
(a) For purposes of these Articles, the term "Office Holder" shall mean every Director and every officer of the Company, including, without limitation, each of the persons defined as "Nosei Misra" in the Companies Law.
(b) Subject to the provisions of the Companies Law, the Company may prospectively exculpate an Office Holder from all or some of the Office Holder's responsibility for damage resulting from the Office Holder's breach of the Office Holder's duty of care to the Company.
(c) Subject to the provisions of the Companies Law, the Company may indemnify an Office Holder in respect of an obligation or expense specified below imposed on or incurred by the Office Holder in respect of an act performed in his capacity as an Office Holder, as follows:
(i) a financial obligation imposed on him in favor of another person by a court judgment, including a compromise judgment or an arbitrator's award approved by court;
(ii) reasonable litigation expenses, including attorney's fees, expended by the Office Holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and
(iii) reasonable litigation expenses, including attorneys' fees, expended by an Office Holder or charged to the Office Holder by a court, in a proceeding instituted against the Office Holder by the Company or on its behalf or by another person, or in a criminal charge from which the Office Holder was acquitted, or in a criminal proceeding in which the Office Holder was convicted of an offense that does not require proof of criminal intent.
The Company may undertake to indemnify an Office Holder as aforesaid, (aa) prospectively, provided that in respect of Article 70(c)(i), the undertaking is limited to events which in the opinion of the Board of Directors are foreseeable in light of the Company's actual operations when the undertaking to indemnify is given, and to an amount or criteria set by the Board of Directors as reasonable under the circumstances, and further provided that such events and amount or criteria are set forth in the undertaking to indemnify, and (bb) retroactively.
(d) Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of all or part of the liability of any Office Holder imposed on the Office Holder in respect of an act performed in his capacity as an Office Holder, in respect of each of the following:
(i) a breach of his duty of care to the Company or to another person;
(ii) a breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of the Company;
(iii) a financial obligation imposed on him in favor of another person.
(e) The provisions of Articles 70(a), 70(b) and 70(c) above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of the procurement of insurance and/or in respect of indemnification (i) in connection with any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law; provided that the procurement of any such insurance and/or the provision of any such indemnification shall be approved by the Audit Committee of the Company.
WINDING UP
71. WINDING UP
(a) A resolution adopted in a General Meeting approved by 75% of the voting shares represented at such meeting in person or by proxy is required to approve the winding up of the Company.
(b) If the Company be wound up, then, subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the assets of the Company available for distribution among the members shall be distributed to them in proportion to the nominal value of their respective holdings of the shares in respect of which such distribution is being made.
EXHIBIT 4.20
AMENDMENT NO. 3 TO LOAN AGREEMENT
This Amendment No. 3 to the Loan Agreement (this "AMENDMENT"), dated as of the 30 day of December, 2009, is made and entered into by Metalink Ltd., an Israeli corporation (the "COMPANY"), and the Lender identified on the signature page hereto ("LENDER" or "HOLDER").
WHEREAS, the parties have entered into a certain Loan Agreement dated as of September 8, 2008 (as amended on December 31, 2008 and on September 6, 2009, the "LOAN AGREEMENT");
WHEREAS, the Company is currently negotiating a certain Asset Purchase Agreement (the "APA"), whereby it is contemplated that the Company will transfer certain of its assets to a third party and such third party will assume certain liabilities of the Company;
WHEREAS, the parties have agreed to amend the Loan Agreement upon the terms and conditions of this Amendment.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS. Capitalized terms not otherwise defined in this Amendment are used with the definitions assigned to them in the Loan Agreement.
2. EFFECTIVE DATE. This Amendment shall become effective upon the execution of the APA, provided such execution shall occur no later than January 31, 2010.
3. REPAYMENT. Subject to the closing of the transactions contemplated under the APA, the Company shall repay the Lender, by wire transfer to the bank account designated in writing by Lender on ANNEX A, a total sum of $4,100,000 (the "REPAYMENT AMOUNT"), which will be repaid as follows:
a. An amount of $3,750,000 will be repaid out of the non-contingent payments due to the Company in the APA concurrently with the closing of the transactions contemplated under the APA;
b. An amount of $100,000 will be repaid out of the non-contingent payments due to the Company in the APA by September 30, 2010;
c. An amount of $100,000 will be repaid out of the non-contingent payments due to the Company in the APA by December 31, 2010; and
d. An amount of $150,000 will be repaid by March 31, 2011.
4. RELEASE OF LIENS. Lender hereby acknowledges that, in order to effect the closing of the transactions contemplated under the APA, it will release the liens and charges created in its favor under the Loan Agreement and shall cooperate in such regard (such as by way of accepting a standard pay-off letter) against receipt of $3,750,000 of the Repayment Amount.
5. FULL PAYMENT. Upon the full and timely payment of the Repayment Amount, all of the Company's financial obligations (including any interest) to Lender in general, and with respect to the APA in particular, under the Transaction Documents shall be deemed fully and forever paid and the Notes shall be deemed canceled.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the representations and warranties set forth below to the Holder as of the date of its execution of this Agreement:
a. AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by this Amendment and otherwise to
carry out its obligations hereunder. The execution and delivery
of this Amendment by the Company and the consummation by it of
the transactions contemplated hereby have been duly authorized by
all necessary action on the part of the Company and no further
action is required by the Company, the Board of Directors or the
Company's stockholders in connection therewith. This Amendment
has been duly executed by the Company and, when delivered in
accordance with the terms hereof, will constitute the valid and
binding obligation of the Company enforceable against the Company
in accordance with its terms except (i) as limited by general
equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and
(iii) insofar as indemnification and contribution provisions may
be limited by applicable law.
b. NO CONFLICTS. The execution, delivery and performance of this Amendment by the Company and the consummation by the Company of the transactions contemplated hereby do not and will not: (i) conflict with or violate any provision of the Company's or any Subsidiary's certificate or articles of incorporation, memorandum of association, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) assuming the accuracy of the representations made in Section 6A, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state and Israeli securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.
6A. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Holder hereby makes the following representations and warranties to the Company as of the date of its execution of this Amendment: (a) the execution and delivery of this Amendment by it and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action on its behalf, (b) this Amendment has been duly executed and delivered by the Holder and constitutes the valid and binding obligation of the Holder, enforceable against it in accordance with its terms except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law, and (c) Holder, either alone or together with its representatives, (i) has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of this Amendment and the transactions contemplated hereunder, and has so evaluated the merits and risks thereof, (ii) is able to bear the economic risk of this Amendment and the transactions contemplated hereunder and, at the present time, is able to afford a complete loss of its investment and (iii) has been given the opportunity to ask questions of, and receive answers from, the Company concerning the business and financial status of the Company and the transactions contemplated hereunder.
7. EFFECT ON TRANSACTION DOCUMENTS. Except as expressly set forth above, all of the terms and conditions of the Loan Agreement, Note and Warrants shall continue in full force and effect after the execution of this Amendment and shall not be in any way changed, modified or superseded by the terms set forth herein, including, but not limited to, any other obligations the Company may have to the Holder under the Loan Agreement, Note and Warrants. Notwithstanding the foregoing, this Amendment shall be deemed for all purposes as an amendment to any and all of the Loan Agreement, Note and Warrants as required to serve the purposes hereof, and in the event of any conflict between the terms and provisions of any other of the Loan Agreement, Note or Warrants, on the one hand, and the terms and provisions of this Amendment, on the other hand, the terms and provisions of this Amendment shall prevail.
8. MISCELLANEOUS. In the event of any conflict between the terms and provisions of any other of the Loan Agreement, Note or Warrants, on the one hand, and the terms and provisions of this Amendment, on the other hand, the terms and provisions of this Amendment shall prevail. This Amendment may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a ".pdf" format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or ".pdf" signature page were an original thereof.
9. ENTIRE AGREEMENT. This Amendment, together with the exhibits and schedules hereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
10. AMENDMENTS AND WAIVERS. The provisions of this Amendment, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holder. All questions concerning the construction, validity, enforcement and interpretation of this Amendment shall be determined pursuant to the Governing Law provision of the Loan Agreement.
(SIGNATURE PAGES FOLLOW)
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to the Loan Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
Metalink Ltd. Lender By: ________________ By:________________ Name: Name: Title: Title: |
Date: Date:
EXHIBIT 4.21
ASSET PURCHASE AGREEMENT
The Asset Purchase Agreement has been included to provide shareholders with information regarding its terms. It is not intended to provide any other factual information about Metalink. The representations, warranties, covenants and agreements contained in the Asset Purchase Agreement were made only for purposes of such agreement and as of the specific dates therein, were solely for the benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with the execution of the Asset Purchase Agreement. The representations and warranties have been made for the purposes of allocating contractual risk between the parties to the agreement instead of establishing those matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to shareholders. Shareholders are not third party beneficiaries under the Asset Purchase Agreement and should not rely on the representations, warranties, covenants and agreements or any descriptions thereof as characterizations of the actual state of facts or condition of Metalink or Lantiq or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Asset Purchase Agreement, which subsequent information may or may not be fully reflected in Metalink's public disclosures.
EXECUTION COPY
ASSET PURCHASE AGREEMENT
BY AND AMONG
LANTIQ ISRAEL LTD.
as Buyer
LANTIQ BETEILIGUNGS - GMBH & CO. KG
as Parent
AND
METALINK LTD.
as Seller
TABLE OF CONTENTS
2.1 Purchase of Assets.................................................9
2.2 Non-Transferable Assets...........................................11
2.3 Assumed Liabilities...............................................12
2.4 Retained Liabilities..............................................12
2.5 Retained Assets...................................................12
2.6 Further Assurances................................................13
3. PURCHASE PRICE............................................................13
3.1 Purchase Price....................................................13
3.2 Second Payment....................................................13
3.3 Earn Out..........................................................14
3.4 VAT; Other Taxes..................................................17
3.5 Withholding Tax...................................................17
4. CLOSING ..................................................................18
4.1 Closing...........................................................18
4.2 Conditions to Closing.............................................18
4.3 Deliveries and Transactions at Closing............................20
5. REPRESENTATIONS AND WARRANTIES OF SELLER..................................21
5.1 Organization and Qualification....................................21
5.2 Authority; No Violation; Due Execution; Etc.......................22
5.3 Consents..........................................................22
5.4 Financial Statements;
Reports under Stock Exchange Rules; No Undisclosed Liabilities....22
5.5 No Changes........................................................23
5.6 Tax...............................................................23
5.7 Restrictions on Business Activities...............................23
5.8 Title to Properties...............................................23
5.9 Intellectual Property.............................................24
5.10 Contracts.........................................................27
5.11 Compliance with Laws; Governmental Authorizations.................27
5.12 Litigation........................................................28
5.13 Insurance.........................................................28
5.14 Environmental Matters.............................................28
5.15 Employee Matters..................................................28
5.16 Brokers and Finders...............................................29
5.17 Related Party Transactions........................................30
5.18 Customers and Suppliers...........................................30
5.19 Product Defects; Product Warranties...............................30
5.20 Solvency..........................................................30
5.21 Subsidiaries......................................................30
5.22 Grants, Incentives and Subsidies..................................30
5.23 Disclosure........................................................31
|
6.1 Organization and Qualification....................................31 6.2 Authority; No Violation; Due Execution; Etc.......................31 6.3 Consents..........................................................31 6.4 Available Funds...................................................31 6.5 Brokers and Finders...............................................31 6.6 Litigation........................................................31 6.7 Experience........................................................32 6.8 Disclosure........................................................32 |
7. CONDUCT PRIOR TO CLOSING..................................................32
7.1 Ordinary Course of Seller.........................................32
7.2 Procedures for Requesting Consent.................................34
8. ADDITIONAL AGREEMENTS.....................................................34
8.1 Confidentiality; Access to Information............................34
8.2 Non-Competition and Non-Solicitation..............................35
8.3 Seller Trademarks.................................................35
8.4 Public Announcements..............................................36
8.5 Expenses..........................................................36
8.6 Filings and Consents..............................................36
8.7 Reasonable Efforts................................................37
8.8 Notification of Certain Matters...................................37
8.9 Excess Payments...................................................38
8.10 [RESERVED] .......................................................38
8.11 Cut-Off Liabilities...............................................38
8.12 Corporate Existence...............................................38
9. EMPLOYEES.................................................................39
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION...............40
10.1 Survival of Representations, Etc..................................40
10.2 Indemnification...................................................41
10.3 Defense of Third Party Claims.....................................42
10.4 Claims Procedure..................................................43
10.5 Exercise of Remedies by Third Parties.............................43
10.6 Sole Remedy.......................................................43
10.7 Set-Off ..........................................................43
11. TERMINATION...............................................................43
11.1 Termination.......................................................43
11.2 Termination Procedures............................................44
11.3 Effect of Termination.............................................44
12. GENERAL PROVISIONS........................................................45
12.1 Notices...........................................................45
12.2 Counterparts......................................................46
12.3 Entire Agreement .................................................46
12.4 Severability......................................................46
12.5 Other Remedies....................................................46
12.6 Governing Law; Venue..............................................46
12.7 Specific Performance..............................................46
12.8 No Third Party Beneficiaries......................................47
12.9 Amendment.........................................................47
12.10 Extension; Waiver.................................................47
12.11 Joint Obligation..................................................47
12.12 Successors and Assigns............................................47
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LIST OF EXHIBITS & SCHEDULES
Exhibit A - Form of Non-Competition Agreement
Exhibit 4.3.1.3(a) - Form of Assignment Deed of Intellectual Property Rights
Exhibit 4.3.1.3(b) - Form of Bill of Sale and Assignment and Assumption Agreement
Exhibit 4.3.1.3(d) - Form of Sublease Agreement
Exhibit 4.3.1.3(e) - Form of Transition Services Agreement
Exhibit 4.3.1.3(g) - Form of Consulting Agreement
Exhibit 4.3.1.3(h) - Form of Cross-License Agreement
Exhibit 9.1 - Employee Offer
Schedule 1.2(a) - Knowledge
Schedule 1.2(b) - Taiwan Leases
Schedule 2.1.1 - Machinery, Equipment and Other Tangible Personal Property
Schedule 2.1.2 - Inventory
Schedule 2.1.3 - Acquired A/R
Schedule 2.1.4 - Prepayments, Prepaid Expenses and Other Similar Assets
Schedule 2.1.5 - Contracts
Schedule 2.1.7 - Business Intellectual Property Rights
Schedule 2.1.8 - Government Authorizations
Schedule 2.1.10 - Seller Existing Funds
Schedule 2.1.12 - OCS Programs
Schedule 2.3.2 - Assumed Liabilities
Schedule 2.4 - Retained Liabilities
Schedule 2.5 - Retained Assets
Schedule 3.2.2 - Second Payment Calculation
Schedule 3.3 - Gross Profit Calculation
Schedule 3.3.3.7 - Earnout Calculation Examples
Schedule 3.5 - Withholding Tax Certificate
Schedule 5.11.2 - Government Authorizations
Schedule 7.1 - Conduct Prior to Closing
Schedule 9.1 - Terms of Employment
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "AGREEMENT") is made and entered into as of January 5, 2010, by and among LANTIQ ISRAEL LTD., a private company organized under the laws of the State of Israel ("BUYER"), LANTIQ BETEILIGUNGS - GMBH & CO. KG, a private company organized under the laws of the Federal Republic of Germany ("PARENT") and METALINK LTD., a public company organized under the laws of the State of Israel ("SELLER").
RECITALS
A. Seller is engaged directly and through its Affiliates in the business of the design and sale of wireless local area network (WLAN) chipsets (the "BUSINESS") and in the business of the design and sale of digital subscriber line (DSL) chipsets (the "DSL BUSINESS").
B. Buyer is a wholly owned indirect subsidiary of Parent and an Affiliate of Wireline Holding S.a.r.l., a company incorporated as a societe a responsibilite limitee and existing under the laws of the Grand Duchy of Luxembourg ("WH"), which entered into that certain Asset Purchase Agreement, dated as of July 7, 2009, with Infineon Technologies AG, a stock corporation (Aktiengesellschaft) under the laws of the Federal Republic of Germany ("INFINEON"), for the acquisition of Infineon's wireline communications business (the "LANTIQ APA").
C. Buyer desires to purchase from Seller, and Seller desires to sell and assign to Buyer, substantially all of the assets of Seller associated with the Business upon the terms and subject to the conditions set forth in this Agreement.
D. Concurrently with the execution and delivery of this Agreement and as a condition to and inducement of Buyer's willingness to enter into this Agreement, the Chief Executive Officer of Seller and a principal shareholder thereof, is entering into a Non-Competition Agreement in the form attached hereto as EXHIBIT A, the effectiveness of which is contingent on and subject to the Closing (as defined below).
NOW, THEREFORE, in consideration of the covenants, promises, representations and warranties set forth herein, and intending to be legally bound hereby, the parties agree as follows:
1. INTERPRETATION; DEFINITIONS
1.1 GENERAL INTERPRETATION. The Recitals, Schedules and Exhibits hereof comprise an integral part of this Agreement. The headings of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation". The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
1.2 DEFINITIONS. In this Agreement, the following terms, as used herein, shall have the following meanings:
"ACCOUNTS PAYABLE" means all accounts payable and accrued expenses owed to third parties with respect to the Business for raw materials or supplies received by or services rendered to Seller.
"ACCOUNTS RECEIVABLE" means all accounts receivable, notes receivable and other current rights to payment of Seller to the extent related to the Business.
"ACQUISITION TRANSACTION" means any transaction involving the sale, exclusive license, disposition or acquisition of all or substantially all of the Business.
"AFFILIATE" of a specified Person means a Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. For this purpose, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
"APPROVED ENTERPRISE(S)" means all the Seller's enterprises related to the Business for which it has been granted "approved enterprise" status under the Israeli Law for the Encouragement of Capital Investment, 5719-1959.
"BUSINESS" means as defined in Recital A.
"BUSINESS DAY" means each day that is not a Saturday, Sunday or holiday on which banking institutions located in New York, New York, Tel Aviv, Israel or Munich, Germany are obligated by law or executive order to close.
"BUYER INDEMNITEES" means any of Parent, Buyer and their respective Representatives, successors and assigns.
"CLOSING" and "CLOSING DATE" means as defined in Section 4.1 hereunder.
"COMPANIES LAW" means the Israeli Companies Law, 5759-1999.
"CORPORATE DOCUMENTS" means an Entity's Memorandum of Association, Articles of Association, Certificate of Incorporation, Bylaws or other charter or governing documents, as applicable.
"COSTS" shall have the meaning set forth in SCHEDULE 3.3.
"CUT-OFF DATE" means December 31, 2009.
"DAMAGES" shall mean any loss (including diminution in value), damage, liability, claim, cause of action, demand, deficiency, settlement, judgment, award, fine, penalty, fee (including reasonable attorneys' fees), charge, cost or expense of any kind or nature, whether or not arising out of third party claims.
"DOLLAR" or "$" means U.S. Dollars.
"ENTITY" means any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.
"ENVIRONMENTAL LAW" means any federal, state, local or foreign Legal Requirement relating to: (i) the protection, preservation or restoration of the environment, public health and safety, worker health and safety or pollution; or (ii) the presence, use, storage, generation, handling, treatment, labeling, testing, transportation, processing, production, release, disposal, control or cleanup of Hazardous Substances. As used herein, "HAZARDOUS SUBSTANCE" means any substance listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any Governmental Entity or under any Environmental Law, including any toxic waste, pollutant, pesticide, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde, foam insulation, lead or polychlorinated biphenyls.
"EXCHANGE ACT" shall mean the U.S. Securities Exchange Act of 1934, as amended.
"FAMILY MEMBER" shall mean, in respect of a natural Person, (i) a spouse of such Person; (ii) a descendant of such Person or of such Person's spouse; (iii) such Person's brother or sister, or (iv) a spouse of any of the Persons referred to in clauses (ii) or (iii) above.
"GOVERNMENTAL AUTHORIZATION" shall mean any permit, license, certificate, franchise, permission, clearance, registration, approval, consent, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Entity or pursuant to any Legal Requirement.
"GOVERNMENTAL ENTITY" means any governmental body, court, administrative agency or commission or other federal, state, county, provincial, municipal, local or foreign governmental authority, instrumentality, agency or commission.
"GROSS PROFIT" shall have the meaning, and be calculated as, set forth in SCHEDULE 3.3.
"INTELLECTUAL PROPERTY RIGHTS" means all intellectual property and proprietary rights throughout the world, including (i) all trademark rights, trade dress, service marks and trade names; (ii) all copyrights and all other rights associated therewith and the underlying works of authorship; (iii) all patents and all proprietary rights associated therewith; (iv) all inventions, mask works and mask work registrations, net lists, schematics, enhancements, designs, improvements, know how, discoveries, improvements, designs, trade secrets, computer software programs or applications (in both source code and object code form), flow charts, diagrams, coding sheets, listings and annotations, programmers' notes, information, work papers, work product; and (v) all registrations of any of the foregoing, all applications therefor, all documentation and all goodwill associated with any of the foregoing.
"ISRAELI SECURITIES LAWS" means the Israeli Securities Law, 1968, and the regulations promulgated thereunder, all as amended.
"ISRAELI TAX ORDINANCE" means the Israeli Income Tax Ordinance [New Version], 1961, as amended, and any orders, rules and regulations promulgated thereunder.
"ITA" means the Israeli Tax Authority.
"KNOWLEDGE" or "KNOWN" shall mean, with respect to any Entity, with respect to any fact, circumstance, event or other matter in question, the actual knowledge of (i) in the case of Seller, the actual knowledge of the persons listed on SCHEDULE 1.2(A) hereto, and (ii) in the case of Parent or Buyer, the actual knowledge of the persons listed on SCHEDULE 1.2(A) hereto, or the knowledge that any of these persons would have after reasonable inquiry of those persons in the applicable Entity that have principal responsibility over the subject matter in question.
"LEASES" shall mean all of Seller's right, title and interest in each of (i) that certain Lease Agreement, dated as of June 6, 2000, by and between Seller and Yakum Pituach Ltd., as amended, (ii) that certain Lease Agreement, dated as of April 18, 2007, between Seller and Shimon Balulu, as amended, and (iii) with respect to Seller's leased premises in Taiwan, that certain Lease Agreement, dated as of June 10, 2007, and that certain Lease Agreement, dated as of June 11, 2007, in each case a copy thereof is attached as SCHEDULE 1.2(B) hereto, excluding the right to any security deposits and other amounts and instruments deposited by or on behalf of Seller under the Leases.
"LEGAL PROCEEDING" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Entity or any arbitrator or arbitration panel.
"LEGAL REQUIREMENT" shall mean any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, order, judgment, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity.
"LIENS" means all mortgages, liens, pledges, charges, security interests, right of first refusal, preemptive right, call, community property interest or other similar encumbrances of any kind or nature whatsoever.
"NASDAQ" means The NASDAQ Stock Market.
"OCS" means the Office of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor.
"OCS BUSINESS LIABILITY" means Seller's obligations and liabilities to the OCS set forth in SCHEDULE 2.1.12.
"PERSON" means a natural person or an Entity.
"REPRESENTATIVES" means officers, directors, employees, agents, attorneys, accountants, advisors and representatives.
"REVENUES" shall have the meaning set forth in SCHEDULE 3.3.
"SEC" means the U.S. Securities and Exchange Commission.
"SELLER INDEMNITEES" means any of Seller and its Representatives, successors and assigns.
"SELLER MATERIAL ADVERSE EFFECT" means any event, circumstance, change, or effect that, individually, or together with any other event, circumstance, change or effect, has or would reasonably likely be expected to have a material adverse effect on (a) the assets, liabilities, results of operations or the financial condition of the Business, taken as a whole, or (b) the ability of Seller to consummate the transactions contemplated hereunder; PROVIDED, HOWEVER, that in no event shall any of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has been or will be, a Seller Material Adverse Effect: (i) any change in Seller's stock price or trading volume, any adverse effect of delisting of Seller's shares from Nasdaq, or any failure to meet management projections (but not excluding the underlying cause of any such change pursuant to this clause (i)); (ii) any change, event, circumstance or effect that results from changes, events, circumstances or effects affecting general economic conditions or financial credit or securities markets in general or changes affecting the industry in which the Business operates (in each case, which changes, events, circumstances or effects do not disproportionately affect the Business); (iii) any change, event, circumstance or effect resulting from acts of war or terrorism or any escalation thereof or FORCE MAJEURE in and of itself, other than such acts of wars, terrorism or escalation thereof or FORCE MAJEURE that disproportionately affect the Business; (iv) any changes in GAAP; (v) any cancellation or delay in customer orders or any loss of customers, employees or other business relationships resulting from the announcement of this Agreement or the pendency or consummation of the transactions contemplated hereby; (vi) any change, event, circumstance or effect that results from an action taken or omission to act by Seller in accordance with this Agreement or at the written request of Buyer or Parent; or (vii) any adverse effect solely on the DSL Business.
"TAX" or "TAXES" means any federal, state, local or foreign net or gross income, gross receipts, social security, national health insurance, capital gains, license, payroll, employment, excise, severance, stamp, occupation, premium, customs duties, capital stock, franchise, profits, withholding, unemployment, disability, real property, personal property, sales, use, offer, registration, value added, alternative or add-on minimum, estimated or other tax, governmental fee or like assessment or charge of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not.
"TAX RETURNS" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendments thereof.
"TOTAL BUSINESS ASSETS" shall have the meaning assigned to such term in Section 3.2.
"TOTAL BUSINESS LIABILITIES" shall have the meaning assigned to such term in Section 3.2.
"U.S. GAAP" means generally accepted accounting principles in the United States of America, consistently applied.
2. ASSET PURCHASE AND LIABILITY ASSUMPTION
2.1 PURCHASE OF ASSETS. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, Seller shall (and, if applicable, Seller shall cause its Affiliates to) sell, assign, transfer and convey to Buyer, and Buyer shall purchase, acquire and accept from Seller (and its Affiliates, as the case may be), free and clear of all Liens (other than Permitted Liens), all right, title and interest of Seller (or its Affiliates) in and to all of Seller's (and its Affiliates') assets, interests and rights, tangible and intangible, wherever located, used or held for use in the conduct of the Business as they exist or shall exist on the Closing, including the following assets but excluding the Retained Assets (collectively, the "PURCHASED ASSETS"):
2.1.1 all machinery, equipment and other tangible personal property related to the conduct of the Business, as identified on SCHEDULE 2.1.1 hereto;
2.1.2 all inventories of Seller related to the Business, including raw materials, supplies, goods consigned to vendors or subcontractors, works in process, finished goods and goods in transit, as identified on SCHEDULE 2.1.2 hereto (the "INVENTORY"). No later than two (2) business days prior to the Closing Date, Seller shall provide an updated Schedule 2.1.2, calculated in the same manner as the Schedule provided on the date hereof, which will be substantially similar, in the aggregate, to the Schedule provided on the date hereof, subject to changes relating solely to the passage of time and the continued operation of the Business, following the date hereof, in the ordinary course consistent with past practice and consistent with this Agreement;
2.1.3 all Accounts Receivable, as identified on SCHEDULE 2.1.3 hereto ("ACQUIRED A/R"). No later than two (2) business days prior to the Closing Date, Seller shall provide an updated Schedule 2.1.3, calculated in the same manner as the Schedule provided on the date hereof, which will be substantially similar, in the aggregate, to the Schedule provided on the date hereof, subject to changes relating solely to the passage of time and the continued operation of the Business, following the date hereof, in the ordinary course consistent with past practice and consistent with this Agreement;
2.1.4 all prepayments, prepaid expenses and other similar assets to the extent related to the Business, as identified on SCHEDULE 2.1.4 hereto. No later than two (2) business days prior to the Closing Date, Seller shall provide an updated Schedule 2.1.4, calculated in the same manner as the Schedule provided on the date hereof, which will be substantially similar, in the aggregate, to the Schedule provided on the date hereof, subject to changes relating solely to the passage of time and the continued operation of the Business, following the date hereof, in the ordinary course consistent with past practice and consistent with this Agreement;
2.1.5 all rights and interests of Seller in and to the leases, subleases, licenses (including licenses of Intellectual Property Rights from third parties), sublicenses, contracts, commitments, obligations or other agreements, whether written or oral, or other similar agreements and rights thereunder, including contracts for the purchase of materials, supplies and services and the sale of products and services, related to the Business (collectively, the "CONTRACTS"), as identified on SCHEDULE 2.1.5;
2.1.6 all business records, plans, notebooks, specifications, advertising and promotional materials, studies, reports, equipment repair, maintenance or service records, in each case as used by Seller for operating the Business, provided that Seller shall be entitled to maintain one copy of any of such documents for the sole purpose of either retention as required by any applicable Legal Requirement or in connection with litigation arising out of this Agreement;
2.1.7 all Intellectual Property Rights related to the Business, including all registrations (and applications for registration) of Intellectual Property Rights set forth on SCHEDULE 2.1.7 hereto (collectively, the "BUSINESS INTELLECTUAL PROPERTY RIGHTS"; it being understood that such term shall not include licenses of Intellectual Property Rights from third parties);
2.1.8 all Government Authorizations and other permits or licenses to the extent related to the Business that are transferable under applicable Legal Requirements, as identified on SCHEDULE 2.1.8 hereto;
2.1.9 all claims, warranties, guarantees, refunds, causes of action, rights of recovery, rights of set-off and rights of recoupment of every kind and nature, whether liquidated or unliquidated, fixed or contingent, which Seller may have under any of the Purchased Assets;
2.1.10 all of Seller's and its Affiliates' rights related to the
employment of the Transferred Employees (as defined in Section
9.1) and all of Seller's and its Affiliates' rights and
interests in and to the Seller Existing Funds (as defined in
Section 9.3), as identified on SCHEDULE 2.1.10 hereto. No
later than two (2) business days prior to the Closing Date,
Seller shall provide an updated Schedule 2.1.10, calculated in
the same manner as the Schedule provided on the date hereof,
which will be substantially similar, in the aggregate, to the
Schedule provided on the date hereof, subject to changes
relating solely to the passage of time and the continued
operation of the Business, following the date hereof, in the
ordinary course consistent with past practice and consistent
with this Agreement;
2.1.11 all lists and records pertaining to customer accounts (whether past or current), suppliers, distributors, personnel and agents of the Business; and
2.1.12 all rights in Seller's OCS programs related to the Business, excluding receivables thereunder for the period ended December 31, 2009, all as identified on SCHEDULE 2.1.12 hereto.
2.2 NON-TRANSFERABLE ASSETS. Subject to Section 2.2.4 below, in the event that any Purchased Asset which would otherwise be transferred on the Closing Date to Buyer is not capable of being sold, assigned, transferred, conveyed or delivered without obtaining the consent of a third party, or if such sale, assignment, transfer, conveyance or delivery or attempted sale, assignment, transfer, conveyance or delivery would constitute a violation of any Contract constituting or relating to a Purchased Asset, or a violation of any Legal Requirement, then such Purchased Asset shall remain in Seller's ownership and shall not be sold, assigned, transferred, conveyed or delivered hereunder, nor shall any liability under any Contract constituting or relating to such Purchased Asset be assumed by Buyer. Any such Purchased Asset and any Contract which constitutes or relates to any such Purchased Asset or Assets shall be referred to herein as a "NON-TRANSFERABLE ASSET". In such event:
2.2.1 Both before and after the Closing Date, the parties shall exercise their reasonable best efforts (but without the requirement of any payment of money by Seller or Buyer) to obtain any consents so as to transfer each such Non-Transferable Asset to Buyer without modifying, amending or burdening such Non-Transferable Asset in any material respect.
2.2.2 To the extent that on the Closing Date there is any Non-Transferable Asset outstanding, Seller shall, from and after the Closing Date, cooperate with Buyer in any reasonable and lawful arrangement agreed upon between such parties under which Buyer would obtain the benefits and assume the obligations of such Non-Transferable Asset to Buyer; provided that Buyer shall only assume, satisfy or perform any obligation or liability under or in connection with such Non-Transferable Asset if and only if such obligation or liability would have been an Assumed Liability hereunder if such Non-Transferable Asset were a Purchased Asset. Such arrangements may include, with the consent of Buyer (not to be unreasonably withheld), terminating the Non-Transferable Asset between Seller and the relevant third party and the entry into a new contract by Buyer with such third party on substantially the same terms or a subcontract of the Non-Transferable Asset to Buyer.
2.2.3 At any time after the Closing Date, if any Non-Transferable Asset becomes capable of being sold, assigned, transferred, conveyed or delivered to Buyer, then, at such time, such Non-Transferable Asset shall be sold, assigned, transferred, conveyed and delivered to Buyer pursuant to the execution and delivery by the parties of an appropriate instrument of assignment with respect to the Non-Transferable Asset and such Non-Transferable Asset shall be deemed a Purchased Asset for all intents and purposes hereunder; PROVIDED, HOWEVER, that if and to the extent that Seller has theretofore provided Buyer with comparable assets or compensation for such Non-Transferable Asset, an equitable adjustment shall be made between Seller and Buyer to effectuate fully the intent of the foregoing provision.
2.2.4 Notwithstanding anything to the contrary contained herein, the receipt of the Required Consents is a condition to Parent's and Buyer's obligation to effect the Closing pursuant to Section 4.2.3.3 below.
2.2.5 For the avoidance of doubt, the Non-Transferable Assets, if any, shall not include any Purchased Asset that is governed by or subject to a Contract included in the list of Required Consents.
2.3 ASSUMED LIABILITIES. From and after the Closing, Buyer shall assume and agree to perform and discharge only the following specific obligations and liabilities of Seller (collectively, the "ASSUMED LIABILITIES"):
2.3.1 subject to Section 2.2 above, all liabilities of the Business first arising from and after the Closing under each Contract, including the Leases;
2.3.2 those accrued liabilities, obligations and expenses of Seller expressly set forth on SCHEDULE 2.3.2 hereto (it being understood that the December 2009 Costs (as defined therein) will be repaid by Buyer to Seller no later than three (3) business days following the Closing); and
2.3.3 the OCS Business Liability.
It is hereby acknowledged by Buyer (and Buyer undertakes) that it shall bear the costs and liabilities associated with Taxes relating to the conduct of the Business following the Closing; employment and employee benefits-related claims, obligations and liabilities of any Transferred Employees incurred in relation to the period of employment with Buyer or its Affiliates following the Closing Date; the Cut-Off Liabilities (as defined below); and those specific obligations expressly set forth in SCHEDULE 5.8.2.
2.4 RETAINED LIABILITIES. Notwithstanding anything to the contrary contained in this Agreement and regardless of whether such liability or obligation is disclosed herein or on any schedule or exhibit hereto, neither Buyer nor any of its Affiliates shall assume or be liable for any liabilities or obligations of Seller of any kind or nature except for those liabilities and obligations which are expressly assumed pursuant to Section 2.3 above. Without limiting the generality of the foregoing, Buyer shall not assume any obligations and liabilities of Seller resulting from, arising out of, relating to, in the nature of or caused by any (i) Retained Asset, (ii) Taxes relating to the conduct of the Business prior to Closing and any other Taxes relating to the DSL Business or any other non-Business activities of Seller, (iii) indebtedness for borrowed money or deferred purchase price for fixed assets, (iv) inter-company payables, loans or other inter-company liabilities or obligations of any kind or nature, (v) breach of contract, breach of warranty, tort, infringement or violation of any Legal Requirement to the extent arising out of facts, events, actions or inactions occurring prior to the Closing, (vi) litigation, claim, assessment, action, suit, proceeding, order, judgment, decree or investigation of any kind or nature arising out of facts, events, actions or inactions occurring prior to the Closing, (vii) employment and employee benefits-related claims, obligations and liabilities of any Transferred Employees incurred in relation to the period of employment with Seller or its Affiliates prior to and including the Closing Date (except to the extent expressly assumed by Buyer as reflected in Section 9.6), (viii) employment and employee benefits-related claims, obligations and liabilities of any employees of Seller or any of its Affiliates who are not Transferred Employees (including former employees) whether incurred prior to or after the Closing Date, (ix) fees, costs or expenses incurred by Seller in connection with the preparation, negotiation, execution, delivery and performance of this Agreement and the other transactions contemplated hereby, and (x) those accrued liabilities, obligations and expenses expressly set forth on SCHEDULE 2.4 hereto (collectively, the "RETAINED LIABILITIES").
2.5 RETAINED ASSETS. Notwithstanding the provisions of Section 2.2 above, the Purchased Assets shall not include any right, title, interest and claims of Seller in any of the following: (i) all non-Business assets, (ii) all cash and cash equivalents, including the Purchase Price, (iii) deposits related to the Leases, (iv) all refunds, and all rights or claims to refunds, of any Taxes with respect to the Purchased Assets or the Business relating to any date or period prior to the Closing Date and all interest thereon, (v) Seller's franchise to be a corporation, its Corporate Documents, name, non-Business trademarks and trade names (including the Licensed Marks (as defined below)), corporate seal, stock books, minute books and other corporate records, (vi) Seller's rights under or pursuant to this Agreement, (vii) insurance policies, (viii) to the extent not specifically covered under Section 2.1, any assets that have, individually and in the aggregate, a negligible effect on the Business, and (ix) the other assets listed in SCHEDULE 2.5 attached hereto (collectively, the "RETAINED ASSETS").
2.6 FURTHER ASSURANCES. From time to time after the Closing, Seller shall execute and deliver such other instruments of transfer and documents related thereto and take such other action as may be necessary or reasonably requested by Buyer in order to more effectively transfer to Buyer, and to place Buyer in possession and control of, the Purchased Assets. Buyer shall take such actions as may be necessary or reasonably requested by Seller in order to assure Buyer's assumption of the Assumed Liabilities.
3. PURCHASE PRICE
3.1 PURCHASE PRICE.
3.1.1 In consideration of the sale, assignment, transfer and delivery of the Purchased Assets by Seller and the assumption of the Assumed Liabilities by Buyer, Buyer will pay to Seller, by wire transfer of immediately available funds to an account designated in writing by Seller, (i) at and subject to the Closing, Five Million Seven Hundred Thousand U.S. Dollars ($5,700,000) (the "INITIAL PAYMENT"), (ii) subject to the Closing, on March 31, 2010, an amount equal to (a) the Total Business Assets LESS (b) the Total Business Liabilities (as such amount is calculated pursuant to Section 3.2 below, the "SECOND PAYMENT"), but in any event not more than One Million Two Hundred Thousand U.S. Dollars ($1,200,000), (iii) subject to the Closing, as and when due in accordance with Section 3.3.1 below, the Earnout Prepayments, and (iv) as and when due in accordance with Section 3.3.2 below, the Earnout Payments, if any (collectively, the "PURCHASE PRICE").
3.2 SECOND PAYMENT. The Second Payment shall be calculated and determined as follows:
3.2.1 At least two (2) business days prior to the Closing Date, Seller shall prepare and deliver to Buyer a statement setting forth Seller's good faith estimate of the Total Business Assets and the Total Business Liabilities as of the close of business on the Closing Date. No later than ten (10) business days following the Closing, Seller shall prepare and deliver to Buyer a statement setting forth Seller's calculation of the Total Business Assets and the Total Business Liabilities as of the close of business on the Closing Date (the "CLOSING STATEMENT").
3.2.2 The Second Payment shall be calculated as the amount equal to the sum of (X) the Total Business Assets less (Y) the Total Business Liabilities, as defined and calculated in SCHEDULE 3.2.2 hereto.
3.2.3 No later than 30 days following the delivery of the Closing Statement, Buyer may deliver to Seller a written notice setting forth its objection to the figure of the Second Payment in the Closing Statement (the "TC CLAIM NOTICE"), which notice shall consist of (i) Buyer's proposed changes to the Closing Statement and setting forth in reasonable detail the basis for such objection, (ii) the correct figure in Buyer's opinion of the Second Payment as of the Closing Date, and (iii) consequently, Buyer's proposed adjustment to the Second Payment. If Buyer fails to deliver such TC Claim Notice within the said 30-day period, then the calculation by Seller of the Second Payment in the Closing Statement shall be deemed finally determined.
3.2.4 If Buyer timely delivers such TC Claim Notice, Seller shall have 21 days from receipt of the TC Claim Notice to object to the TC Claim Notice by delivering a written notice to that effect to Buyer (the "TC OBJECTION NOTICE"). If Seller fails to timely deliver such TC Objection Notice, then the calculation by Buyer of the Second Payment in the TC Claim Notice shall be deemed finally determined.
3.2.5 However, if Seller does timely deliver such TC Objection Notice, then, notwithstanding Section 12.6 hereof, Buyer and Seller shall use reasonable efforts to resolve any disagreements as to the computation of the Second Payment, and if it is so resolved, the Closing Statement shall be modified as necessary to reflect such resolution and the Closing Statement as so modified shall be conclusive and binding on all of the parties. However, if Buyer and Seller do not reach a final resolution within 20 days after Buyer has received the TC Objection Notice, Buyer and Seller shall jointly retain an independent accounting firm of recognized standing (the "FIRM") to resolve any remaining disagreements. In any event, a Second Payment shall be timely made by Buyer with respect to such amounts as are not in dispute, as set forth in the TC Objection Notice (which amount shall not be greater than that reflected in the Closing Statement). If Buyer and Seller are unable to agree on the choice of the Firm, then Buyer's auditors and Seller's auditors shall jointly select a "big-four" accounting firm (or a successor) as the Firm. Buyer and Seller shall direct the Firm to render a determination within thirty (30) days after its retention and Buyer, Seller and their respective Representatives shall cooperate with the Firm during its engagement. The Firm shall consider only those items and amounts set forth in the TC Claim Notice and the TC Objection Notice which Buyer and Seller are unable to resolve. Buyer and Seller shall each make written submissions to the Firm promptly (and in any event within ten (10) days after the Firm's retention), which submissions shall contain such party's computation of the Second Payment in the Closing Statement and information, arguments, and support for such party's position. The Firm shall review such submissions and base its determination solely on them. In resolving any disputed item, the Firm may not assign a value to any item greater than the greatest value for such item claimed by either party or less than the smallest value for such item claimed by either party. The Firm's determination shall be based on the definition of the Second Payment included herein. The determination of the Firm shall be conclusive and binding upon the parties and shall not be appealable. Buyer shall pay the costs and expenses of the Firm, except that if the Firm's determination orders Seller to pay Buyer an amount (or by applying a deduction from any then-future payment from Buyer to Seller in an amount) that is equal to $50,000 or more, then Seller shall be liable for all of the Firm's reasonable expenses.
3.2.6 If the amount of the Second Payment reflected on the Closing Statement, as modified pursuant to Sections 3.2.4 or 3.2.5, is less than the Second Payment actually paid by Buyer to Seller, then Seller shall pay to Buyer (including, if agreed to by Buyer, by applying a deduction from any then-future payment from Buyer to Seller) an amount equal to the difference (expressed as a positive number) between such figures. Any payment required to be made by Seller pursuant to this Section 3.2.6 shall be made, by wire transfer of immediately available funds to an account designated in writing by Buyer, within five (5) business days after the determination that such payment is due and payable.
3.3 EARN OUT.
3.3.1 In addition to the Initial Payment and the Second Payment,
Buyer shall pay to Seller four payments (the "EARNOUT PREPAYMENT(S)") as
follows: (i) on March 31, 2010, One Hundred Thousand U.S. Dollars
($100,000.00), (ii) on June 30, 2010, Five Hundred Thousand U.S. Dollars
($500,000.00), (iii) on September 30, 2010, Seven Hundred Thousand U.S.
Dollars ($700,000.00) and (iv) on December 31, 2010, Seven Hundred
Thousand U.S. Dollars ($700,000.00). For the avoidance of doubt, the
Earnout Prepayments shall not be subject to the GP Milestones (as defined
below) or any other adjustments or refunds (other than in accordance with
Section 3.3.2 or Section 10 hereof).
3.3.2 In addition to the Initial Payment, the Second Payment and the Earnout Prepayments, Buyer shall pay to Seller additional contingent payments of up to a maximum of (including any Earnout Prepayments actually paid to Seller) Ten Million U.S. Dollars ($10,000,000.00) (the "EARNOUT PAYMENT(S)"), payable in performance installments calculated according to the Gross Profit recognized during (i) the twelve-month period ending March 31, 2011 (the "FIRST EARNOUT PERIOD") and (ii) the twelve-month period ending March 31, 2012 (the "SECOND EARNOUT PERIOD", and together with the First Earnout Period, the "EARNOUT PERIODS"), respectively, pursuant to the following table (each row of Gross Profit being referred to herein as the "GP MILESTONE"):
----------------------------------- ------------------------------------
FIRST EARNOUT PERIOD SECOND EARNOUT PERIOD
----------------------------------- ------------------------------------
EARNOUT EARNOUT
GROSS PROFIT* PAYMENT* GROSS PROFIT* PAYMENT*
------------------ ---------------- ------------------ -----------------
(IN $ MILLIONS) (IN $ MILLIONS)
----------------------------------- ------------------------------------
<2.0 0.0 <8.0 0.0
------------------ ---------------- ------------------ -----------------
2.0 0.5 8.0 0.5
------------------ ---------------- ------------------ -----------------
3.0 1.0 9.0 1.0
------------------ ---------------- ------------------ -----------------
4.0 2.0 10.0 2.0
------------------ ---------------- ------------------ -----------------
5.5 3.5 11.0 3.5
------------------ ---------------- ------------------ -----------------
6.4 5.0 12.0 5.0
------------------ ---------------- ------------------ -----------------
7.3 6.0 13.0 6.0
------------------ ---------------- ------------------ -----------------
8.2 7.0 14.0 7.0
------------------ ---------------- ------------------ -----------------
9.1 8.0 15.0 8.0
------------------ ---------------- ------------------ -----------------
Greater than 10.0 9.0 Greater than 15.0 9.0
------------------ ---------------- ------------------ -----------------
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* If the Gross Profit is between two GP Milestones, the Earnout Payment relating thereto shall be calculated on a prorated basis.
3.3.3 The procedures for the calculation and payment of the Earnout Payment(s) shall be as follows:
3.3.3.1 Promptly, but within no later than forty five (45)
days, following the end of each calendar quarter
during an Earnout Period (the "QUARTERLY EARNOUT
PERIOD"), Buyer shall (i) deliver to Seller a
written statement setting forth, Buyer's calculation
of the Gross Profit (which will include only the
aggregate amount for each component in the
definition of Gross Profit) it generated during such
Earnout Period through the end of the Quarterly
Earnout Period (i.e., between April 1st and the last
day of the applicable Quarterly Earnout Period) and
the amount of the Quarterly Earnout Payment (as
defined below), if any, payable to Seller in respect
of such Quarterly Earnout Period (the "EARNOUT
STATEMENT") and (ii) pay to Seller the Quarterly
Earnout Payment, if any, as set forth in such
Quarterly Earnout Statement.
3.3.3.2 A "QUARTERLY EARNOUT PAYMENT" during any Earnout
Period shall mean an amount equal to: (i) the
Earnout Payment due in accordance with Section
3.3.2 for Gross Profit accumulated during such
Earnout Period through the end of the applicable
Quarterly Earnout Period, LESS (ii) any Quarterly
Earnout Payments(s) previously made to Seller during
such Earnout Period, if any, LESS (iii) any Earnout
Prepayments previously made to Seller, if any.
Notwithstanding anything to the contrary in the
foregoing, Seller shall not be entitled to receive
any Quarterly Earnout Payment calculated as provided
in the immediately preceding paragraph until such
time as the Earnout Payment due in accordance with
Section 3.3.2 for Gross Profit accumulated during
such Earnout Period through the end of the
applicable Quarterly Earnout Period is equal to an
aggregate amount of Two Million U.S. Dollars
($2,000,000) (the "EARNOUT THRESHOLD"). If and when
the Earnout Threshold is met, then (i) Seller shall
be entitled to receive the Quarterly Earnout Payment
calculated as provided in the immediately preceding
paragraph without regard to the Earnout Threshold;
(ii) notwithstanding Section 3.3.1, all Earnout
Prepayments not previously paid shall be canceled
and Buyer shall no longer be required to pay them to
Seller; and (iii) the Earnout Threshold shall no
longer apply (including for purposes of calculating
the Quarterly Earnout Payment in respect of the
Quarterly Earnout Period in which the Earnout
Threshold is met) to the calculation of any
subsequent Quarterly Earnout Payments.
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3.3.3.3 Seller may object, no later than 30 days following
receipt of the Earnout Statement relating to the end
of each of the First Earnout Period and the Second
Earnout Period, to any Earnout Statement delivered
during the immediately preceding Earnout Period by
delivering a written notice to that effect to Buyer
(the "EARNOUT OBJECTION NOTICE").
3.3.3.4 If Seller fails to deliver such Earnout Objection
Notice within the said 30-day period, then the
calculation by Buyer of the Gross Profit during any
Quarterly Earnout Period in the First Earnout Period
or the Second Earnout Period, as applicable, and the
Quarterly Earnout Payment(s) related thereto, if
any, shall be deemed finally determined.
3.3.3.5 However, if Seller timely delivers such Earnout
Objection Notice, then, notwithstanding Section
12.6 hereof, the dispute regarding such amount
shall be resolved in the same manner as set forth in
Section 3.2.5 above, MUTATIS MUTANDIS, except that
(i) Buyer and Seller shall direct the Firm to render
a determination as promptly as possible following
the provision by Buyer to the Firm of all
information pursuant to Section 3.3.7, (ii) the Firm
shall consider and base its determination upon
information provided pursuant to Section 3.3.7 (and
neither Buyer nor Seller shall make any submissions
thereto except that Buyer shall provide to the Firm
the information required by Section 3.3.7), (iii) in
resolving any disputed item, the Firm may assign a
value to any item greater than the greatest value
for such item claimed by either party or less than
the smallest value for such item claimed by either
party, and (iv) Seller shall pay the costs and
expenses of the Firm, except that if the Firm's
determination orders Buyer to pay Seller an amount
that is at least equal to the greater of $50,000 or
(a) in respect of the First Earnout Period, three
percent (3.0%) of the aggregate amount of Earnout
Payments paid to Seller in respect of that Earnout
Period or (b) in respect of the Second Earnout
Period, two percent (2.0%) of the aggregate amount
of Earnout Payments paid to Seller in respect of
that Earnout Period, then Buyer shall be liable for
all of the Firm's reasonable expenses). In any
event, Earnout Payments shall be made with respect
to such amounts as are not in dispute.
3.3.3.6 For the avoidance of doubt, and notwithstanding
anything to the contrary set forth herein including
the table set forth in Section 3.3.2 above, the
total amount of the Quarterly Earnout Payments in
respect of the First Earnout Period and the
Quarterly Earnout Payments in respect of the Second
Earnout Period shall not exceed, in the aggregate,
$10,000,000 (including any Earnout Prepayments
actually paid to Seller).
3.3.3.7 SCHEDULE 3.3.3.7 sets forth several numeric examples
of the foregoing calculation for illustration
purposes only.
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3.3.4 Seller acknowledges that Buyer cannot provide a guarantee that the Business will generate sufficient Gross Profit so as to allow Seller to become entitled to Earnout Payments. Notwithstanding the foregoing, Parent and Buyer undertake that, during the Earnout Periods, they shall use their reasonable commercial efforts to generate Gross Profit.
3.3.5 For the purpose of assisting Seller with determining Gross Profit, during the Earnout Periods, Parent will not bundle, solely in its internal management accounting records, the Revenues and the Costs with any other revenues generated or costs incurred by Parent or its Affiliates.
3.3.6 For the avoidance of doubt, in the event Buyer wishes to sell or dispose of the Business (including by way of exclusive license to the Business Intellectual Property Rights) prior to expiration of the Second Earnout Period to any third party, then Buyer will cause such third party, as a condition to such sale, to acknowledge its agreement to be bound by this Section 3.3 with respect to the Business and shall deliver such acknowledgment to Seller; provided that if such third party is an Affiliate of Parent, Parent shall remain liable hereunder.
3.3.7 During the Earnout Periods and for a period of twelve (12) months thereafter, Parent and Buyer undertake to keep or cause to be kept accurate records and books of account in accordance with good accounting practice, showing the information required to permit calculation of Gross Profit and the Earnout Payments. Within thirty (30) days following the retention by the parties of the Firm, Parent and Buyer shall provide the Firm, during normal business hours, reasonable access to such personnel, accounting records and other information relating to the Business as necessary for the Firm in order to review and audit any Earnout Statement and to validate the calculation of the Earnout Payments, including any business records and price and customer lists related to the applicable Earnout Statements; PROVIDED, HOWEVER, that any such access shall be conducted in such manner as not to unreasonably interfere with Buyer's or Parent's operation; and PROVIDED FURTHER that the information obtained by the Firm in connection therewith may not be disclosed to Seller and shall be subject to a confidentiality agreement in a form reasonably acceptable to Buyer.
3.4 VAT; OTHER TAXES. The Purchase Price, including any Earnout Payment, is exclusive of Value Added Tax ("VAT"), if applicable. Promptly after the execution of this Agreement, Buyer shall file an application with the Israeli VAT authority for the payment of the VAT due in connection with this Agreement or the sale and purchase of any of the Purchased Assets or Assumed Liabilities in accordance with Section 20 of the Israeli VAT Law, 1975 via self invoicing. In the event that by the end of the business day immediately prior to the Closing Date Buyer does not provide Seller with a confirmation from the Israeli VAT authority that the VAT may be paid under such Section 20, or that no VAT is chargeable in connection with the transactions hereunder, then Buyer shall deliver to Seller at the Closing, for payment to the Israeli VAT authority, an amount equal to the applicable amount of Israeli VAT against receipt by Buyer of a valid Israeli VAT invoice from Seller. The party required by law to file a Tax Return with respect to such Israeli VAT or transfer Taxes shall do so within the time period prescribed by law. By signing this Agreement, Seller consents and undertakes to report the transactions hereunder pursuant to Section 20 of the Israeli VAT Law, 1975 and to execute all forms and documents and take any action that may be required by the Israeli VAT authority in connection therewith, all provided that the Seller is provided, by the end of the business day immediately prior to the Closing Date, with confirmation from the Israeli VAT authority that the VAT may be paid under such Section 20. The parties will further use commercially reasonable efforts to cooperate with each other to obtain any available reduction or exemption from such VAT or other Taxes (including, by way of example, assistance with regard to production of any applicable resale certificate, resale purchase exemption certificate or other certificate or document of exemption required or appropriate to reduce or eliminate such VAT or other Taxes) or any available refund of such VAT or other Taxes. For the avoidance of doubt, obtaining any such reduction or exemption shall not be a condition to the Closing.
3.5 WITHHOLDING TAX. Buyer shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to Seller such amounts as may be required to be deducted or withheld therefrom under any applicable law, including the Israeli Tax Ordinance, unless Buyer received from Seller a certificate or ruling from the ITA providing for an exemption or other reduction from such withholding or deduction which can clearly be relied upon by Buyer and which is presented at least seven days prior to the time that the applicable payment of consideration is due to be made. The certificate delivered by Seller and attached hereto as SCHEDULE 3.5 constitutes such a certificate. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes of this Agreement as having been delivered and paid to Seller and Buyer shall provide to Seller reasonably requested documentation evidencing such deduction or withholding. The parties will use commercially reasonable efforts to cooperate with each other to obtain any available reduction or exemption from such withholding Tax or any available refund of such withholding Tax.
4. CLOSING
4.1 CLOSING. Unless this Agreement is earlier terminated pursuant to
Section 11.1, the closing of the transactions contemplated hereby (the
"CLOSING") will be deemed to take place at the close of business on the third
(3rd) business day immediately following the satisfaction or waiver (by the
applicable party) of the conditions set forth in Section 4.2, other than those
conditions that by their terms are to be satisfied at the Closing, but subject
to the satisfaction or waiver of those conditions, but no earlier than January
27, 2010, at the offices of Meitar, Liquornik, Geva & Leshem, Brandwein, Law
Offices, 16 Abba Hillel Road, Ramat Gan 52506, Israel, unless another place or
time is agreed to in writing by the parties hereto. The date upon which the
Closing actually occurs is herein referred to as the "CLOSING DATE".
4.2 CONDITIONS TO CLOSING.
4.2.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective obligations of each party to this Agreement to effect the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing of the following conditions:
4.2.1.1 NO LITIGATION OR INJUNCTION. No action, suit, or
proceeding shall be pending before any court,
arbitrator or Governmental Entity having
jurisdiction over the parties wherein it is
reasonably likely that an unfavorable judgment or
ruling shall be issued, which judgment or ruling
shall declare unlawful this Agreement or the
transactions contemplated by this Agreement, cause
such transactions to be rescinded or materially and
adversely affect the right of Buyer to own or
operate the Business; and no temporary restraining
order, preliminary or permanent injunction, judgment
or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint
or prohibition preventing the performance of this
Agreement or the consummation of the transactions
contemplated hereby shall be in force.
4.2.1.2 GOVERNMENTAL AUTHORIZATIONS. All governmental and
regulatory filings and Governmental Authorizations
necessary to consummate the transactions
contemplated hereunder, including the approval of
the OCS, but excluding the MoC Permit (as defined
below), the approval of the Investment Center, the
approval of the ITA to the transfer of Seller's
Existing Funds for the benefit of the Transferred
Employees and any other immaterial Governmental
Authorizations the absence of which, individually
and in the aggregate, would not adversely affect the
ability of Seller to sell, transfer and assign to
Buyer all right, title and interest in and to the
Purchased Assets and the Assumed Liabilities, free
and clear of any Liens, or the ability of Buyer to
operate the Business as currently conducted and as
currently contemplated by Buyer to be conducted,
shall have been duly obtained and shall be in full
force and effect on the Closing Date.
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4.2.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived exclusively by Seller in writing pursuant to which Seller expressly agrees to consummate the transactions contemplated hereby without fulfillment of such condition:
4.2.2.1 REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Parent and Buyer contained in
Section 6 that are qualified by "material" or
similar qualifications shall be true and correct in
all respects, and the representations and warranties
of Buyer contained in Section 6 that are not so
qualified shall be true and correct in all material
respects, in each case on and as of the Closing
Date, as though such warranties and representations
were made at and as of such date and as though the
Closing Date were substituted for the date of this
Agreement throughout such representations and
warranties (except to the extent expressly made as
of an earlier date, in which case as of such date).
4.2.2.2 AGREEMENTS AND COVENANTS. Parent and Buyer shall
have performed or complied in all material respects
with all agreements and covenants required by this
Agreement to be performed or complied with by them
on or prior to the Closing.
4.2.2.3 DELIVERABLES. Parent and Buyer shall have taken all
of the actions and delivered to Seller, or to any
third party on its behalf, all of the documents
required to be so taken and delivered pursuant to
Section 4.3.2 below.
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4.2.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND BUYER. The obligations of Parent and Buyer to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived exclusively by Buyer in writing pursuant to which Buyer expressly agrees to consummate the transactions contemplated hereby without fulfillment of such condition exclusively by Seller:
4.2.3.1 REPRESENTATIONS AND WARRANTIES. (i) The Fundamental
Representations (as defined below) shall be true and
correct in all material respects (disregarding, for
this purpose, all qualifications and exceptions
contained therein relating to materiality or "Seller
Material Adverse Effect") and (ii) the
representations and warranties of Seller contained
in Section 5 other than the Fundamental
Representations (as such representations and
warranties would read, solely for purpose of this
clause (ii), without any qualification as to
materiality, Seller Material Adverse Effect or
similar qualification included therein), shall be
true and correct in all respects, in each case in
(i) and (ii) above on and as of the Closing Date, as
though such representations and warranties were made
at and as of such date and as though the Closing
Date were substituted for the date of this Agreement
throughout such representations and warranties
(except to the extent expressly made as of an
earlier date, in which case as of such date), except
with respect to clause (ii), to the extent that the
failure of any such representations and warranties
to be so true and correct does not have, and would
not reasonably be expected to have, individually or
in the aggregate, a Seller Material Adverse Effect.
4.2.3.2 AGREEMENTS AND COVENANTS. Seller shall have
performed and complied in all material respects with
all of the agreements and covenants required by this
Agreement to be performed or complied with by it on
or prior to the Closing.
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4.2.3.3 REQUIRED CONSENTS. All of the Required Consents
shall have been duly obtained and delivered to Buyer
and shall be in full force and effect on the Closing
Date.
4.2.3.4 RELEASES OF LIENS. Duly executed irrevocable written
consents and a UCC-3 termination statement for the
releases of any and all Liens indicated on Schedule
5.8.1 hereto, in forms reasonably acceptable to
Buyer, shall have been obtained and original copies
thereof shall have been delivered to Buyer.
4.2.3.5 PRIVILEGED ENTERPRISE STATUS. Seller shall have
filed an application for a ruling with the ITA in
order to obtain a Privileged Enterprise Status (year
of choice: 2008) under the Israeli Law for the
Encouragement of Capital Investment, 5719-1959 for
Seller and for the ITA's approval to the transfer to
Buyer of any and all rights of Seller in such
Privileged Enterprise Status (the "ITA APPROVAL");
it being understood that filing the application (and
not the ITA Approval) is a closing condition.
4.2.3.6 DELIVERABLES. Seller shall have taken all of the
actions and delivered to Buyer all of the documents
required to be so taken and delivered pursuant to
Section 4.3.1 (other than such deliverables set
forth in Section 4.3.1.2(b)).
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4.3 DELIVERIES AND TRANSACTIONS AT CLOSING. At the Closing, the following transactions shall occur simultaneously (no transaction shall be deemed to have been completed or any document delivered until all such transactions have been completed and all required documents delivered):
4.3.1 DELIVERIES AND ACTIONS BY SELLER. Seller shall deliver to Buyer:
4.3.1.1 possession of the Purchased Assets;
4.3.1.2 (a) all Required Consents and (b) such other consents, if any, obtained prior to the Closing Date to assign Contracts that are not included in the list of Required Consents;
4.3.1.3 the following documents and instruments, all duly executed by Seller:
(a) an assignment deed of the Intellectual Property Rights in the form of EXHIBIT 4.3.1.3(A);
(b) a Bill of Sale and Assignment and Assumption
Agreement in the form of EXHIBIT 4.3.1.3(B) (the
"ASSIGNMENT AGREEMENT");
(c) [RESERVED];
(d) the Sublease Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(D) attached hereto, duly executed by Seller;
(e) a Transition Services Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(E) hereto, duly executed by Seller;
(f) [RESERVED];
(g) a Consulting Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(G) hereto, duly executed by Seller;
(h) such other certificates, instruments and other documents as Buyer may reasonably request to effect the transactions contemplated hereby; and
(i) a Cross-License Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(H) hereto (the "CROSS-LICENSE AGREEMENT"), duly executed by Seller.
4.3.1.4 a written certificate, executed by the Chief Executive Officer and Chief Financial Officer of Seller confirming the satisfaction of the conditions set forth in Section 4.2.3.1, 4.2.3.2 and 4.2.3.5; and
4.3.2 DELIVERIES AND ACTIONS BY BUYER. Buyer shall deliver to Seller:
4.3.2.1 The Initial Payment by wire transfer of immediately available funds to such bank account as shall be designated in writing by Seller prior to the Closing Date;
4.3.2.2 a written certificate, executed by a Director or an Officer of Buyer and Parent confirming the satisfaction of the conditions set forth in Section 4.2.2.1 and 4.2.2.2;
4.3.2.3 An undertaking to the OCS with respect to the observance by Buyer, as the acquirer of the Purchased Assets, of the requirements of the Israeli Encouragement of Industrial Research and Development Law, 5744-1984;
4.3.2.4 the Assignment Agreement, duly executed by Buyer;
4.3.2.5 the Sublease Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(D) attached hereto, duly executed by Buyer;
4.3.2.6 a Transition Services Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(E) hereto, duly executed by Buyer;
4.3.2.7 a Consulting Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(G) hereto, duly executed by Buyer;
4.3.2.8 a Cross-License Agreement between Seller and Buyer, in the form of EXHIBIT 4.3.1.3(H) hereto, duly executed by Buyer; and
4.3.2.9 such other certificates, instruments and other documents as Seller may reasonably request to effect the transactions contemplated hereby.
5. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that, subject to the exceptions set forth in the disclosure schedule (the "SELLER DISCLOSURE SCHEDULE") delivered by Seller on the date hereof, the following statements are true and correct as of the date hereof and, except to the extent made as of an earlier date, as of the Closing Date:
5.1 ORGANIZATION AND QUALIFICATION. Seller is a company duly incorporated and validly existing under the laws of the State of Israel. Seller has the corporate power and authority necessary to own and operate its properties and to carry on its business as now conducted and as presently proposed to be conducted. Seller has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other than its own name.
5.2 AUTHORITY; NO VIOLATION; DUE EXECUTION; ETC. The execution, delivery and performance by Seller of this Agreement and all such other agreements delivered pursuant hereto (collectively, the "TRANSACTION DOCUMENTS") to which Seller is a party, including the sale and transfer of all Purchased Assets, have been duly authorized by all requisite corporate action, and no vote of the shareholders of Seller or other corporate proceedings of Seller is or are necessary to approve and authorize the execution of this Agreement or any of the Transaction Documents or to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Seller of this Agreement and the Transaction Documents and the consummation by Seller of the transactions contemplated hereby and thereby do not and will not violate or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit (any such event, a "SELLER CONFLICT") under (i) the Corporate Documents of Seller, (ii) any Legal Requirement or any order of any court or other Governmental Entity by which Seller or any of its material properties or assets is or are bound, or (iii) any provision of any indenture, mortgage, lease, Contract or other agreement or instrument, permit, concession, franchise or license to which Seller is a party or by which any of its properties or assets is or are bound, or result in the creation or imposition of any Lien upon any assets (tangible or intangible) of Seller; except in the case of clause (ii) or (iii), such Seller Conflict as would not have or reasonably be expected to result in a Seller Material Adverse Effect. Seller has the full corporate power and authority to enter into and perform the transactions contemplated by this Agreement and the Transaction Documents. This Agreement and the Transaction Documents to which Seller is a party have been duly executed and delivered by Seller and constitute the legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general or by general principles of equity.
5.3 CONSENTS. No consent, notice, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any other Person is required to be made or obtained by Seller in connection with the execution, delivery and performance of this Agreement, the consummation of the transactions contemplated hereby by Seller, or the assignment by Seller to Purchaser of the Purchased Assets (including the Contracts), except for the approval of the Investment Center, the approval of the OCS and such other consents, waivers, approvals, orders, authorizations, registrations, declarations and filings which are set forth on SCHEDULE 5.3 (those consents that are indicated with an asterisk being referred to herein as the "REQUIRED CONSENTS").
5.4 FINANCIAL STATEMENTS; REPORTS UNDER STOCK EXCHANGE RULES; NO UNDISCLOSED LIABILITIES.
5.4.1 Seller has previously delivered to Buyer, accurate, true and complete copies of the following financial statements (collectively, the "FINANCIAL STATEMENTS"): (i) Seller's audited consolidated financial statements as of and for the year ended December 31, 2008 together with the report thereon of Seller's auditors, and (ii) Seller's unaudited financial statements as of and for the nine month period ended September 30, 2009. The Financial Statements (including the notes thereto) present fairly the financial condition of Seller as of such dates and the results of operations of Seller for such periods, all in accordance with U.S. GAAP (except as may be otherwise specified in the notes to such financial statements and except that unaudited financial statements may not contain all footnotes required by U.S. GAAP).
5.4.2 Seller has timely filed (or submitted, as applicable) all forms, reports and documents required under the Exchange Act, the Israeli Securities Law, the rules of Nasdaq and the rules of the Tel Aviv Stock Exchange to be filed with the SEC, the Israeli Securities Authority, Nasdaq or the Tel Aviv Stock Exchange since January 1, 2008 (the "SELLER PUBLIC FILINGS"). Each of the Seller Public Filings complied in all material respects with all applicable requirements of the Exchange Act, the Israeli Securities Law, Nasdaq or the Tel Aviv Stock Exchange, as applicable, and the rules and regulations promulgated thereunder, each as in effect on the dates such forms, reports, and documents were filed. None of the Seller Public Filings, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
5.4.3 Except as set forth in the Financial Statements, Seller does not have any liabilities or other obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by U.S. GAAP to be recorded on a balance sheet of Seller on the date of this Agreement or disclosed in the related notes thereto, except (i) liabilities incurred since December 31, 2008 in the ordinary course of business consistent with past practice and (ii) liabilities not exceeding $100,000 in the aggregate.
5.5 NO CHANGES. Except as set forth in the Seller Public Filings, since December 31, 2008, there has not been, occurred or arisen any: (a) material transaction by Seller in relation to the Business which is not in the ordinary course of the Business; (b) destruction of, theft of, material damage to or loss of any material Purchased Assets; (c) change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by Seller with respect to the Business; (d) material increase in the salary or other compensation payable or to become payable to any of the Transferred Employees or consultants; (e) sale, lease, license or other disposition of any of the Purchased Assets, except in the ordinary course of business; (f) Lien (other than Permitted Liens or Liens for current Taxes not yet due and payable, if applicable) placed on any of the material Purchased Assets which remains in existence on the date hereof; (g) commencement of any lawsuit or proceeding against Seller; or (h) Seller Material Adverse Effect.
5.6 TAX.
5.6.1 There is no income of Seller that will be required under applicable Tax laws to be reported by Buyer for a Tax period beginning after the Closing Date which taxable income was realized (and reflects economic income) arising prior to the Closing Date. Seller (a) has duly and timely filed or shall duly and timely file all Tax Returns and reports required to be filed on or before the Closing Date by the laws of any jurisdiction to which it or any of the Purchased Assets is or has been subject, (b) has paid in full to the proper Governmental Entities all Taxes, interest, assessments, fees, and other governmental charges due on account of its assets, properties, income or operations, and (c) has withheld, collected and paid to the proper Governmental Entities all amounts that it has been required by law to withhold or collect.
5.6.2 There are no Liens for Taxes on the Purchased Assets, other than Liens for current Taxes not yet due and payable, if applicable.
5.6.3 Correct copies of all applications submitted by Seller to the Investment Center of the Ministry of Industry, Trade and Labor (the "INVESTMENT CENTER") since January 1 ,2004, for receipt of the Approved Enterprise status, and all material letters of approval, rulings and supplements thereto, granted by the Investment Center or the ITA in relation to the Business have been made available to Buyer.
5.6.4 Seller has not undertaken since December 31, 2007 any transaction that has required or would require special reporting in accordance with the Israeli Income Tax Regulations (Tax Planning Requiring Reporting) (Temporary Provision), 2006, regarding reportable tax planning.
5.7 RESTRICTIONS ON BUSINESS ACTIVITIES. (a) there is no non-competition, exclusivity or other similar agreement or commitment to which Seller is a party or subject to that has or would have the effect of prohibiting or impairing the operation of the Business, either prior to or after the Closing; and (b) Seller has not entered into any Contract containing a provision requiring best pricing, "most favored nation" clauses, or similar clauses.
5.8 TITLE TO PROPERTIES.
5.8.1 Seller has full right to sell, transfer and assign all of the
Purchased Assets to Buyer, and has marketable and valid title to, or, in
the case of leased properties and assets, valid leasehold interests in,
all of the Purchased Assets (excluding, for the purpose of the cross
reference in clause (B) of Section 10.2.1 to this Section 5.8.1, Business
Intellectual Property Rights), free and clear of any Liens, except for:
(i) Liens imposed by applicable law, such as suppliers' construction and
vendors' liens, incurred in good faith in the ordinary course of business
and securing obligations which are not yet due or which are being
contested in good faith by appropriate proceedings; (ii) with respect to
leasehold interests, liens incurred, created, assumed or permitted to
exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee (collectively, "PERMITTED
LIENS"); (iii) Liens for current Taxes not yet due and payable, if
applicable; and (iv) as set forth in SCHEDULE 5.8.1; and, subject to
Section 2.2, Seller will, at the Closing, sell, transfer and assign to
Buyer valid title to all of such Purchased Assets, free and clear of any
Liens, except for Permitted Liens.
5.8.2 Except as set forth in SCHEDULE 5.8.1, the Purchased Assets
(excluding, for the purpose of the cross reference in clause (B) of
Section 10.2.1 to this Section 5.8.2, Business Intellectual Property
Rights), collectively, comprise all of the assets, rights and services
necessary for the operation of the Business as currently conducted by
Seller and will enable Buyer to operate such business after the Closing in
substantially the same manner as operated by Seller prior to the Closing,
in each case, together with the Specified Employees. All material
machinery, equipment and other tangible assets included in the Purchased
Assets are in good and sufficient operating condition and in a state of
reasonable maintenance and repair for the continued conduct of the
Business on a basis consistent with past practice, ordinary wear and tear
excepted.
5.8.3 Seller does not own any real property.
5.8.4 Seller has delivered to Buyer a true and complete copy of each Lease document. Except as set forth in SCHEDULE 5.8.4, with respect to each of the Leases: (i) such Lease is legal, valid, binding, enforceable and in full force and effect, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general or by general principles of equity; (ii) the assignment of the Lease to Buyer pursuant to this Agreement does not require the consent of any other party to such Lease, will not result in a breach of or default under such Lease, or otherwise cause such Lease to cease to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing; (iii) in the past two years, Seller's possession and quiet enjoyment of the real property under such Lease has not been disturbed, and to Seller's Knowledge, there are no disputes with respect to such Lease; (iv) neither Seller nor, to Seller's Knowledge, any other party to the Lease is in default of any payments under such Lease or any other material breach or default under such Lease, and, to Seller's Knowledge, no event has occurred or circumstance exists which, with the delivery of notice, the passage of time or both, would constitute such a breach or default, or permit the termination, modification or acceleration of rent under such Lease; (v) no security deposit or portion thereof deposited with respect to such Lease has been applied in respect of a breach or default under such Lease which has not been redeposited in full; (vi) Seller does not, and will not in the future, owe any brokerage commissions or finder's fees with respect to such Lease; (vii) the other party to such Lease is not an affiliate of Seller; (viii) Seller has not subleased, licensed or otherwise granted any Person the right to use or occupy the leased real property subject to such Lease or any portion thereof; (ix) Seller has not collaterally assigned or granted any other security interest in such Lease or any interest therein; and (x) there are no Liens on the estate or interest created by such Lease.
5.9 INTELLECTUAL PROPERTY.
5.9.1 SCHEDULE 2.1.7 lists all Business Intellectual Property Rights that are the subject of a registration or application with any Governmental Entity, specifying whether such Business Intellectual Property Rights are owned, controlled, used or held by Seller and indicating, where applicable, the jurisdictions in which each such Business Intellectual Property Right has been issued or registered or in which an application for such issuance and registration has been filed. All material Business Intellectual Property Rights set forth in SCHEDULE 2.1.7 have been properly registered, all pending registrations and applications have been properly made and filed and all maintenance, renewal and other fees relating thereto are current, as applicable. All such registrations, filings and issuances remain in full force and effect, and all fees and other charges with respect thereto are current, and have been paid, and none are due or owing.
5.9.2 Seller owns all right, title and interest to all Business Intellectual Property Rights, free and clear of any Liens. Each item of Business Intellectual Property Rights is valid and subsisting. Except as set forth in SCHEDULE 5.8.4, the Business Intellectual Property Rights set forth on SCHEDULE 2.1.7, together with all Intellectual Property Rights licensed to Seller pursuant to Contracts set forth on SCHEDULE 2.1.5 or pursuant to the Cross-License Agreement or the Licensed Marks, comprise all the Intellectual Property Rights that are required in the operation of the Business as it is currently conducted. Seller has taken all reasonably necessary actions to maintain and protect the Business Intellectual Property Rights and will continue to maintain and protect such Business Intellectual Property Rights prior to the Closing so as to not adversely affect the validity or enforceability thereof.
5.9.3 The operation of the Business (and, to the extent that any such operation uses Intellectual Property Rights of third parties under licenses granted to Seller, to the Knowledge of Seller) has not and does not infringe, misappropriate, dilute or otherwise violate any Intellectual Property Rights of any third party and will not infringe, misappropriate, dilute or otherwise violate such Intellectual Property Rights when conducted by Buyer in substantially the same manner following the Closing.
5.9.4 No claims have been asserted or are pending or, to the Knowledge of Seller, are threatened by any third party (i) to the effect that the manufacture, development, sale, licensing or use of any product incorporating any of the Business Intellectual Property Rights or the operation of the Business does or may infringe, misappropriate, dilute or otherwise violate any Intellectual Property Rights of a third party, (ii) challenging the ownership by Seller, validity or effectiveness, of any of the Business Intellectual Property Rights, or (iii) alleging unfair competition or trade practices under the laws of any jurisdiction, and, to the Knowledge of Seller, there is no basis for the same.
5.9.5 No Business Intellectual Property Rights are subject to any outstanding decree, order, judgment, injunction, stipulation or determination of an arbitrator or court or other competent Governmental Authority in which Seller conducts the Business or, to the Knowledge of Seller, anywhere else in the world adversely affecting the rights of Seller in such Business Intellectual Property Rights or restricting in any manner the licensing thereof by Seller.
5.9.6 To the Knowledge of Seller, there has not been any unauthorized use, infringement, dilution, misappropriation or other violation of any of Business Intellectual Property Rights by any third party, including any employee or independent contractor, consultant or former employee or former independent contractor or consultant of Seller. Seller has not provided notice to any person that such person is infringing, diluting, misappropriating or otherwise violating any Business Intellectual Property Rights.
5.9.7 Seller has not transferred ownership of, or granted any license of or authorized the retention of any exclusive rights to use or joint ownership of, any Business Intellectual Property Rights to any third party, and there are no outstanding options or agreements of any kind relating to the same. Seller has not permitted any of the material Business Intellectual Property Rights to lapse or enter the public domain. Seller is not obligated to pay any royalties or other payments to third parties with respect to its ownership, marketing, sale, distribution, manufacture, license or use of any Business Intellectual Property Rights.
5.9.8 Except as set forth in SCHEDULE 5.9.8, Seller has not requested from, made any application to, nor received any benefits from, the OCS for receipt of research and development funding in accordance with the Law for the Encouragement of Industrial Research and Development, 5744-1984, and SCHEDULE 5.9.8 lists all items of the Business Intellectual Property Rights as of the date hereof which were developed with (x) funding, facilities or resources provided by any Governmental Entity or quasi-Governmental Entity, or (y) funding, facilities or resources provided by a university, college, educational institution, research center, foundation or similar institution (collectively, an "INSTITUTION"). Except as set forth in SCHEDULE 5.9.8, (i) all such Business Intellectual Property Rights are freely transferable, conveyable and assignable by Seller to Buyer and, to the Knowledge of Seller, any other entity located in any jurisdiction in the world, (ii) to the Knowledge of Seller, no restriction, constraint, control, supervision or limitation whatsoever has been imposed by any Governmental Entity, quasi-Governmental Entity or Institution on the place, method and scope of exploitation of any such Business Intellectual Property Rights, including the operation of the Business as currently conducted and as proposed to be conducted, and (iii) no Governmental Entity, quasi-Governmental Entity or Institution listed in Schedule 5.9.8 has any claim or right in or to any such Business Intellectual Property Rights.
5.9.9 Seller is not and has never been a member or promoter of, or a contributor to, any industry standards body or similar organization in a manner that requires Seller to grant or offer to any third party any license or right to Business Intellectual Property Rights, whether upon demand by such third party or otherwise.
5.9.10 Seller has not disclosed or provided access to any third party (or is required to do so), including by way of escrow, to any source code of, or any material proprietary information or algorithm contained in or relating to, any software source code, of any Business Intellectual Property Rights other than pursuant to a valid confidentiality or non-disclosure agreement. All software contained in any Business Intellectual Property Rights operates substantially in compliance with its applicable documentation and without any material defects, and there are no viruses, worms, Trojan horses or similar disabling codes or programs in the same that have been inserted by Seller or, to its Knowledge, are contained therein. Seller has a complete copy of the source and object code of all such software.
5.9.11 Each former and current employee, officer, contractor and consultant of Seller working or who has worked with the Purchased Assets has executed an employment agreement or other written agreement which covers items relating to confidentiality, non-competition, and ownership of and assignment to Seller of the Business Intellectual Property Rights and other Seller's confidential information, substantially in the form of SCHEDULE 5.9.11. To the Knowledge of Seller, no employee, officer, contractor or consultant of Seller is in violation of any term of such agreements as far as they relate to items relating to confidentiality, non-competition, and intellectual property ownership and assignment.
5.9.12 All written documentation, specifications and other technical data useful for the development, manufacture, distribution or sale of the Purchased Assets which are in Seller's possession or control will be delivered to Buyer as part of the Purchased Assets and such documentation, specifications and data will enable Buyer to operate the Business after the Closing in substantially the same manner as operated by Seller prior to the Closing.
5.9.13 Neither this Agreement nor the transactions contemplated by
this Agreement, including the assignment to Buyer of any contracts or
agreements related to the Business contemplated hereunder, will result in
(i) Buyer or any of its Subsidiaries granting to any third party any
Intellectual Property Rights (or any rights therein), owned by, or
licensed to, any of them, (ii) Buyer or any of its Subsidiaries being
bound by, or subject to, any non-compete or other material restriction on
the operation or scope of their respective businesses, (iii) Buyer or any
of its Subsidiaries being obligated to pay any royalties or other material
amounts, or offer any discounts, to any third party in excess of those
payable by, or required to be offered by, any of them, respectively, in
the absence of this Agreement or the transactions contemplated hereby, or
(iv) any third party being granted rights or access to, or the placement
in or release from escrow, of any software source code or other Business
proprietary information or technology; PROVIDED that the foregoing shall
not apply to any obligations or granting of rights provided under any
Contract constituting a Purchased Asset.
5.9.14 SCHEDULE 5.9.14 contains a complete and accurate list of all software that is distributed as "open source software" or under a similar licensing or distribution model (including the GNU General Public License and the Lesser General Public License) that is used in the development of, incorporated or embedded into, or distributed with the products of the Business. In no case does such use or incorporation of open source software give rise to any rights in any third parties, or obligations for Seller with respect to any products of the Business, including any obligation to disclose or distribute any source code, to license any Business Intellectual Property Rights for the purpose of making derivative works or to distribute any products of the Business or Business Intellectual Property Rights without charge.
5.10 CONTRACTS.
5.10.1 The Contracts identified in SCHEDULE 2.1.5 collectively constitute all of the material Contracts necessary to enable Buyer to conduct the Business in substantially the same manner in which the Business is currently being conducted, including all contracts related to Intellectual Property Rights related to the Business. Seller has delivered to Buyer true, complete and correct copies of each of the Contracts. None of such Contracts has been cancelled, modified or amended and all of such Contracts are in full force and effect in accordance with their respective terms.
5.10.2 Except for such alleged breaches, violations and defaults, and events that would constitute a breach, violation or default with the lapse of time, giving of notice, or both, as are all noted in SCHEDULE 5.10.2, Seller has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the material terms or conditions of any Contracts.
5.10.3 Within the past 12 months, Seller has not received any material customer complaints, whether written or otherwise, concerning their services that have not been resolved. To Seller's Knowledge, none of the parties to any Contract intends to terminate or alter the provisions thereof by reason of the transactions contemplated by this Agreement or otherwise.
5.10.4 Each Contract is in full force and effect and is not subject to any default thereunder of which Seller has knowledge by any party obligated to Seller pursuant thereto.
5.10.5 To the Knowledge of Seller, no Person is renegotiating, or has a right pursuant to the terms of any Contract to renegotiate, any amount paid or payable to Seller under any Contract or any other material term or provision of any Contract.
5.10.6 Seller has never been suspended or debarred from bidding on contracts or subcontracts to provide services to any Governmental Entity, or, to the Knowledge of Seller, has any suspension or debarment action been contemplated, threatened or commenced and Seller has never made a bid for a Government bid, all as it relates to the Business. Neither Seller nor, to its Knowledge, any of its directors, officers or employees have, with respect to the Business or the Purchased Assets, (i) used any funds to offer or provide any unlawful contributions, payments, gifts, gratuities or entertainment, (ii) made any unlawful expenditures relating to political activity to government officials or others, (iii) received notice of any payment identified in (i) or (ii) above, (iv) made or offered or solicited or accepted any contributions, payments, gifts, gratuities, entertainment or any other item or service or any value as a kickback, bribe or for any other reason in violation of the laws, regulations or requirements of any Governmental Entity, including the Foreign Corrupt Practices Act of 1977, as amended, the Truth in Negotiations Act of 1962, as amended, the Anti Kickback Act of 1986, as amended, or the Office of Federal Procurement Policy Act, as amended, or any FAR provision implementing such laws, or other similar United States or foreign law, nor (v) made any material false statement to any official of a Governmental Entity.
5.11 COMPLIANCE WITH LAWS; GOVERNMENTAL AUTHORIZATIONS.
5.11.1 Seller has complied with and is in compliance in all material respects with all Legal Requirements, including export control laws. No claims have been filed against Seller alleging a violation of any Legal Requirements that has or may reasonably be expected to have an adverse effect on the Business, the Purchased Assets or the Assumed Liabilities, and Seller has not received notice of any such violations.
5.11.2 SCHEDULE 5.11.2 identifies each material Governmental
Authorization held by Seller in connection with the Business, and Seller
has delivered to Buyer accurate and complete copies of all Governmental
Authorizations identified in SCHEDULE 5.11.2, all of which are valid and
in full force and effect, and collectively constitute all Governmental
Authorizations necessary to enable Seller to lawfully conduct the Business
as currently conducted. Seller is, and has conducted the Business and the
ownership of its assets and properties, in compliance in all material
respects with the terms and requirements of the Governmental
Authorizations identified in SCHEDULE 5.11.2. No loss or expiration of any
such Governmental Authorization is pending or, to Seller's Knowledge,
threatened or reasonably foreseeable (including, without limitation, as a
result of the transactions contemplated hereby) other than expiration in
accordance with the terms thereof, which terms do not expire as a result
of the consummation of the transactions contemplated hereby. Seller has
not received any notice or other communication from any Governmental
Entity regarding (a) any actual or possible violation of or failure to
comply with any term or requirement of any Governmental Authorization, or
(b) any actual or possible revocation, withdrawal, suspension,
cancellation, termination or modification of any Governmental
Authorization, nor is any basis known to Seller for any such violation,
revocation, withdrawal, suspension, cancellation, termination or
modification.
5.12 LITIGATION. There are no claims, actions, suits, proceedings, disputes or investigations pending or, to the Knowledge of Seller, threatened, before any Governmental Entity, brought by or against Seller or any of its officers, directors, employees, independent contractors or agents involving the Business or the Purchased Assets, nor is any basis known to Seller for any such action, suit, proceeding or investigation. Neither the Business nor the Purchased Assets is subject to any order, writ, judgment, award, injunction or decree of any Governmental Entity or arbitrator, domestic or foreign, that adversely affects the Business or the Purchased Assets. There is no action pending or, to the Knowledge of Seller, threatened, which seeks to delay or prevent the consummation of, or which would be reasonably likely to materially adversely affect Seller's ability to consummate, the transactions contemplated by this Agreement.
5.13 INSURANCE. Set forth on SCHEDULE 5.13 is a list of all of Seller's insurance policies covering the assets, business, equipment, properties, operations and employees or independent contractors of the Business (other than D&O insurance). Seller has no Knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. All of such insurance policies are in full force and effect, and in the past two years Seller has not been (i) in default with respect to its obligations under any such insurance policies or (ii) denied such insurance coverage. Seller has no self-insurance or co-insurance programs.
5.14 ENVIRONMENTAL MATTERS. Seller has complied and is in compliance in all material respects with all applicable Environmental Laws related to the Business, which compliance includes the possession by Seller of all material permits and other Governmental Authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof. In connection with the conduct of the Business and any Purchased Asset, Seller represents and warrants that no action, proceeding, revocation proceeding, amendment, procedure, writ, injunction or claim is pending, or to Seller's Knowledge, threatened, concerning any such Environmental Laws, Hazardous Substance or any activity of Seller related to Hazardous Substance. Seller is not aware of any fact or circumstance which could involve Seller in any environmental litigation or impose upon Seller any environmental liability.
5.15 EMPLOYEE MATTERS.
5.15.1. SCHEDULE 5.15.1(A) contains a list of the name and position
of certain employees of Seller (the "SPECIFIED EMPLOYEES"), along with,
for each Specified Employee, (i) his or her position, date of hire,
salary, estimated or target annual or monthly incentive compensation of
each such person (if any), monthly vacation, sick, recuperation and other
paid time-off allowance, and other social benefits payable or which Seller
is bound to provide (whether now or in the future) to such Specified
Employee, (ii) such Specified Employee's classification for purposes of
Section 14 of the Severance Pay Law, 5723-1963 and (iii) Seller's
classification of such Specified Employee for purposes of the Hours of
Work and Rest Law, 5711-1951 (collectively, "BENEFITS"). SCHEDULE
5.15.1(B) identifies each Specified Employee who is entitled to a
termination notice of more than thirty (30) days. Each Specified Employee
has entered into confidentiality and assignment of inventions agreement.
5.15.2. SCHEDULE 5.15.2 contains a list of all independent contractors currently engaged by Seller in connection with the Business, along with the position, date of retention and rate of remuneration and any other forms of compensation payable to each such person or entity. Each such independent contractor has entered into confidentiality and assignment of inventions agreement with Seller. Seller believes that all individuals who are or were performing consulting or other services for the Business are or were correctly classified by Seller as either "independent contractors" or "employees", as the case may be.
5.15.3. Seller is in compliance in all material respects with all applicable Legal Requirements (including any national, industry or company collective agreement, order or award) and agreements relating (i) to the employment of the Specified Employees, including with respect to matters relating to pension, social security, employment practices, terms and conditions of employment, wages and hours, overtime payments and workplace safety, and (ii) to the proper withholding and remission to the proper tax authorities or to the proper withholding or contribution and remission to the proper pension or provident, life insurance, disability insurance, continuing education or other similar funds of all sums required to be withheld, contributed or remitted, legally or contractually in respect of the Specified Employees. Without limitation of the generality of the foregoing, Seller has paid in full to the Specified Employees (or has fully contributed to funds managed on their behalf) all remuneration, Benefits and other compensation due and payable to such employees other than routine deductions or withholdings to be timely made in the normal course of business and consistent with past practice. Except as disclosed in SCHEDULE 5.15.3, all contributions to the Seller Existing Funds have been made in full as required by applicable law or contract.
5.15.4. Seller is not a member in any employers' organization, and no claim or request has been made of Seller by any employers' organization. Seller is not a party to, or bound by, any collective bargaining agreement or arrangement or union contract or extension order (excluding such extension orders that may apply to all employers or employees in Israel in general) and no such collective bargaining agreement is being negotiated by Seller. No labor union or other representative organization has otherwise been certified or recognized as the collective bargaining representative of any employees of Seller or has applied to represent such employees or, to Seller's Knowledge, is attempting to represent such employees.
5.15.5. There are no legal proceedings pending or, to the Knowledge of Seller, threatened against Seller before any tribunal with respect to any labor or employment-related dispute.
5.15.6. Except as contemplated by this Agreement, no Specified Employee has notified or, to the Knowledge of Seller, intends to notify Seller that such individual intends to terminate his or her employment or engagement with Seller.
5.15.7. Neither the execution, delivery or performance of this Agreement, nor the consummation of any of the other transactions contemplated by this Agreement, will result in any payment (including any bonus, golden parachute or severance payment) by Seller to any Specified Employee in his or her capacity as an employee (whether or not under any benefit plan), or increase the benefits payable under any benefit plan, or result in any acceleration of the time of payment or vesting of any such benefits in respect of any Specified Employee.
5.15.8. All Specified Employees of Seller and its Affiliates have entered into employment or consulting agreements, as applicable, with Seller or any such Affiliate, and copies thereof have been provided to Buyer.
5.16 BROKERS AND FINDERS. No third party is entitled to receive from Seller, and Seller has no liability to pay, any brokerage commission, finders' fees or similar consideration in connection with the Purchased Assets, the execution of this Agreement or the transactions contemplated by this Agreement based on any arrangement or agreement made by Seller.
5.17 RELATED PARTY TRANSACTIONS. Except as is expressly contemplated by this Agreement or by virtue of employment agreements with Specified Employees in and by themselves, to Seller's Knowledge: (a) no Related Party has any direct or indirect interest in any Purchased Assets used in or otherwise relating to the Business; (b) no Related Party is indebted to Seller in connection with the Business; (c) no Related Party has entered into any material contract, transaction or business dealing related to the Business; and (d) no Related Party is competing with the Business. For purposes of this Section 5.17 each of the following shall be deemed to be a "RELATED PARTY": (i) each Person that, directly or indirectly, has an equity interest of more than 5% in Seller or, to its Knowledge, more than 2.5%; (ii) each individual who is an officer or director of Seller; (iii) each Family Member of each of the individuals referred to in clauses (i) and (ii) above.
5.18 CUSTOMERS AND SUPPLIERS. SCHEDULE 5.18 sets forth a complete and correct list of (a) all customers whose purchases exceeded 5.0% of the aggregate net sales of the Business during the nine month period ended September 30, 2009; and (b) the five top suppliers, by Dollar volume, of the Business during the nine month period ended September 30, 2009. None of such customers and suppliers has terminated or changed or, to the Knowledge of Seller, intends to terminate or change, its relationship with the Business in any material respect.
5.19 PRODUCT DEFECTS; PRODUCT WARRANTIES. (a) Each product manufactured, sold, leased, licensed or delivered, or service provided, by Seller has been in material conformity with all applicable contractual commitments and all warranties and (b) Seller has no material liability (and there is no pending or, to Seller's Knowledge, threatened claim against them that would give rise to any liability) for replacement or repair thereof or other damages in connection therewith. Seller does not have any liability (and, to Seller's Knowledge, there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against them giving rise to such liability) arising out of any injury to individuals or property as a result of the ownership, possession, or use of any products manufactured, licensed, sold, leased, or delivered by Seller.
5.20 SOLVENCY. Seller is not now insolvent and will not be rendered insolvent by the transactions contemplated hereunder. As used in this section, "insolvent" means that the sum of the debts and other probable liabilities and obligations of Seller exceeds the present fair saleable value of Seller's assets.
5.21 SUBSIDIARIES. Except as set forth on SCHEDULE 5.21, Seller does not
(i) control directly or indirectly or have any direct or indirect equity
participation in any corporation, partnership, trust, or other business
association, or (ii) own or have any right to acquire, directly or indirectly,
any outstanding capital stock of, partnership interest, joint venture interest,
equity participation or other security or interest in, any Person. None of the
Persons set forth on SCHEDULE 5.21 holds any assets, has any liabilities nor
conducts any operations.
5.22 GRANTS, INCENTIVES AND SUBSIDIES. SCHEDULE 5.22 sets forth a complete and accurate list of all pending and outstanding grants, incentives, exemptions and subsidies from any Israeli Governmental Entity other than the Investment Center ("ISRAELI GRANTS") granted to Seller or any of its Affiliates in connection with the Business or the Purchased Assets. Seller has made available to Buyer, prior to the date hereof, correct copies of all applications for Israeli Grants related to the Business or the Purchased Assets submitted by or on behalf of Seller and of all letters of approval, and supplements thereto, granted in connection therewith. Each of Seller and any applicable Affiliate is in compliance in all material respects with the terms and conditions of all the Israeli Grants and has duly fulfilled all the undertakings required thereby in all material respects. Without limiting the generality of the foregoing, SCHEDULE 5.22 includes the aggregate amounts of each Israeli Grant, and the aggregate outstanding financial obligations thereunder of Seller with respect to royalties or other payments (including rate), or the outstanding amounts to be paid by the OCS to Seller and the composition of such obligations or amount by the product or product family that it relates to. To Seller's Knowledge, no event or other set of circumstances has occurred which might lead to the revocation or material modification of any of the Israeli Grants.
5.23 DISCLOSURE. Neither this Agreement nor any certificates made or delivered in connection herewith by Seller contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements made by Seller herein or therein, in light of the circumstances under which they were made, not misleading. Seller acknowledges and agrees that neither Parent nor Buyer makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 6 hereof.
6. REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER
Each of Parent and Buyer, severally and jointly, hereby represents and warrants to Seller that the following statements are true and correct as of the date hereof and as of the Closing Date:
6.1 ORGANIZATION AND QUALIFICATION. Parent is a company duly incorporated and validly existing and in good standing under the laws of the Federal Republic of Germany. Buyer is a company duly incorporated and validly existing under the laws of the State of Israel. Each of Parent and Buyer has the corporate power and authority necessary to own and operate its properties and to carry on its business as now conducted and presently proposed to be conducted. Buyer is a wholly owned indirect subsidiary of Parent and an Affiliate of WH. Parent is a wholly owned subsidiary of WH and holds, directly or through its subsidiaries, substantially all of the assets purchased pursuant to the Lantiq APA. On November 6, 2009, WH and Infineon consummated the acquisition and the other transactions contemplated under the Lantiq APA.
6.2 AUTHORITY; NO VIOLATION; DUE EXECUTION; ETC. The execution, delivery and performance by Parent and Buyer of the Transaction Documents to which they are a party have been duly authorized by all requisite corporate action. The execution, delivery and performance by Parent and Buyer of this Agreement and the Transaction Documents to which they are a party and the consummation by Parent and Buyer of the transactions contemplated hereby and thereby do not and will not violate or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit (any such event, a "BUYER CONFLICT") under (i) the Corporate Documents of Parent or Buyer, (ii) any Legal Requirement and any order of any court or other Governmental Entity by which Parent or Buyer or any of their properties or assets is or are bound, or (iii) any provision of any indenture, mortgage, lease or other material agreement or instrument, permit, concession, franchise or license to which Parent or Buyer is a party or by which any of its material properties or assets is or are bound, or result in the creation or imposition of any Lien upon any material assets (tangible or intangible) of Parent or Buyer. This Agreement constitutes the legal, valid and binding obligation of Parent and Buyer, enforceable against them in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general or by general principles of equity.
6.3 CONSENTS. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any third party (so as not to trigger any Buyer Conflict) is required by or with respect to Parent or Buyer in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for the Required Consents.
6.4 AVAILABLE FUNDS. Buyer has access to and at Closing will have sufficient funds in its possession to permit Buyer to acquire and pay for the Purchased Assets and Assumed Liabilities and to perform its obligations under this Agreement.
6.5 BROKERS AND FINDERS. No third party is entitled to receive from Parent or Buyer any commission, fees or similar consideration in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Buyer.
6.6 LITIGATION. There is no action pending or, to the Knowledge of Parent or Buyer, threatened, which seeks to delay or prevent the consummation of, or which would be reasonably likely to materially adversely affect their ability to consummate, the transactions contemplated by this Agreement.
6.7 EXPERIENCE. Parent and Buyer acknowledge that they have made their own
assessment of the present condition and the future prospects of the Business and
are sufficiently experienced to make an informed judgment with respect thereto.
Without derogating from Seller's representations and warranties set forth in
Section 5 herein, Parent and Buyer further acknowledge that neither Seller nor
any Affiliate thereof has made any warranty, express or implied, as to the
future prospects of the Business or its profitability.
6.8 DISCLOSURE. Neither this Agreement nor any certificates made or delivered in connection herewith by Parent or Buyer contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements made by Parent or Buyer therein, in light of the circumstances under which they were made, not misleading. Parent and Buyer acknowledge and agree that Seller does not make nor has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 5 hereof.
7. CONDUCT PRIOR TO CLOSING.
7.1 ORDINARY COURSE OF SELLER. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to Section 11.1.1 hereof and the Closing (the "PRE-CLOSING PERIOD"),
other than (i) as contemplated hereunder, (ii) as required by applicable law,
(iii) as set forth in SCHEDULE 7.1, or (iv) with the prior written consent of
Buyer (which consent shall not be unreasonably withheld):
7.1.1 Seller shall conduct the Business in the usual, regular and ordinary course and in substantially the same manner as the Business has been conducted prior to the date of this Agreement;
7.1.2 Seller shall comply with all material legal requirements and contractual liabilities applicable to the operation of the Business and pay all applicable Taxes as and when due and payable;
7.1.3 Seller shall use reasonable commercial efforts to keep available the service of the Specified Employees and to preserve intact its current business organization and maintain its relations with all suppliers, customers, landlords, creditors, and other Persons having business relationships with Seller, all to the extent related to the Business;
7.1.4 Seller shall not make any sale, assignment, transfer, abandonment or other conveyance of the Purchased Assets or any part thereof, except transactions pursuant to the existing Contracts or sales in the ordinary course of business consistent with past practice to unaffiliated third Persons on an arm's length basis;
7.1.5 Seller shall not enter into any material new customer, supplier, lease, reseller or distributor agreement other than in the ordinary course of business consistent with past practice;
7.1.6 Seller shall not grant any license to any Business Intellectual Property Rights, other than non-exclusive licenses granted to customers in the ordinary course of business;
7.1.7 Seller shall not subject any of the Purchased Assets, or any part thereof, to any Lien or suffer such to exist other than Permitted Liens (or Liens for current Taxes not yet due and payable, if applicable) as may arise in the ordinary course of business consistent with past practice or by operation of law;
7.1.8 In connection with the Specified Employees, Seller shall not enter into any new (or amend any existing) employee benefit plan, program or arrangement or any new (or amend any existing) employment, severance or consulting agreement, grant any increase or other change in the compensation payable or to become payable (including bonuses), except in accordance with pre-existing contractual provisions or in the ordinary course of business in accordance with past practices of Seller or by operation of law;
7.1.9 Notwithstanding Section 7.1.8, Seller shall not hire any new employee or consultant to serve in the Business or, except as required under this Agreement, terminate any Specified Employee or Business' consultant;
7.1.10 Seller shall not take any other action that would cause a material breach of any of the representations, warranties or covenants made by Seller in this Agreement (other than due to the passage of time);
7.1.11 Seller will not solicit or enter into any Acquisition Transaction;
7.1.12 Seller shall not waive, cancel, compromise or release any rights or claims of material value, whether or not in the ordinary course of business, that are Purchased Assets and shall not institute or settle any claim or lawsuit related to the Business for an amount involving in excess of $20,000 in the aggregate or involving equitable or injunctive relief;
7.1.13 Seller shall not enter into, amend or terminate any material contract or any transaction with any Related Party with respect to the Purchased Assets, or into any other material transaction, materially change any business practice or make any capital expenditures, in each case having affect on the Purchased Assets and other than in the ordinary course of business;
7.1.14 Seller shall not grant any performance guarantee to any customers of the Business other than in the ordinary course of business and consistent with past practices;
7.1.15 Seller shall conduct the following cash management customs and practices of the Business in the ordinary course: maintenance of working capital balances and inventory levels, collection of Accounts Receivable, payment of Accounts Payable, accrued liabilities and other liabilities, pricing and credit policies and payment of employee-related liabilities including payroll and benefits;
7.1.16 Seller shall not acquire any other business or Person (or any significant portion or division thereof), whether by merger, consolidation or reorganization or by purchase of its assets or stock, or acquire any other material assets, which acquisition might have an adverse effect on the Business, the Purchased Assets or the Assumed Liabilities or on the ability of Seller to consummate the transactions contemplated by this Agreement;
7.1.17 Seller shall not make or change any election, change an annual accounting period, adopt or change any accounting method (other than as required by GAAP), file any amended Tax Return, enter into any closing agreement, settlement or other agreement or arrangement with regard to Tax claims, returns, refunds or limitation periods, in each case to the extent such action is reasonably likely to have an adverse effect on the Business, the Purchased Assets or the Assumed Liabilities, on the allocation of the Purchase Price as set forth in this Agreement or on the ability of Seller to consummate the transactions contemplated by this Agreement;
7.1.18 Seller shall confer on a regular and reasonable basis with representatives of Parent and Buyer to report on operational matters and the general status of ongoing operations of the Business;
7.1.19 Seller shall not agree or commit to take any of the actions described in subsections 7.1.4 through 7.1.14 and 7.1.16 through 7.1.17 above.
7.2 PROCEDURES FOR REQUESTING CONSENT. If Seller shall desire to take an action which requires the written consent of Buyer pursuant to Section 7.1 hereof, prior to taking such action, the individual designated by Seller and specified below shall request such written consent by providing written notice by electronic mail to the individual designated by Buyer and specified below, and Seller may not take such action until such consent in writing has been received from such following individual:
Individual designated by Buyer:
Stephan Pruecklmayer
Telephone: +49 (89) 89899 7481
Facsimile: +49 89 234 955 6336
Email: Stephan.Pruecklmayer@lantiq.com
Individual designated by Seller:
Yuval Ruhama
Telephone: +972 (9) 960-5395
Facsimile: +972 (9) 960-5733
Email: YuvalR@mtlk.com
8. ADDITIONAL AGREEMENTS
8.1 CONFIDENTIALITY; ACCESS TO INFORMATION.
8.1.1 The parties acknowledge that Seller and Golden Gate Capital
Private Equity, Inc. have previously executed a letter agreement, dated as
of August 17, 2009 (the "CONFIDENTIALITY AGREEMENT"), which
Confidentiality Agreement will continue in full force and effect in
accordance with its terms until the Closing Date. At all times following
the Closing Date, Seller shall, and shall use its reasonable best efforts
to cause its Affiliates and its and their respective directors, officers,
employees, agents and representatives to, (i) maintain in confidence all
non-public, proprietary and confidential information, in any form
whatsoever, concerning the Business, the Purchased Assets, the Business
Intellectual Property Rights and the Intellectual Property Rights of third
parties used in the Business (the "CONFIDENTIAL INFORMATION"); and (ii)
not disclose to any third party, nor use, whether in whole or in part, any
Confidential Information for any purpose (other than for and as authorized
in writing by Buyer). Without derogating from Seller's obligation under
Section 8.2 below, the obligation of non-disclosure and non-use imposed
on Seller hereunder shall not apply to information that is or becomes
generally known to the public through no wrongful act or breach of Seller
or any of its Affiliates or such persons. Notwithstanding the foregoing,
Seller shall not be prohibited from disclosing such Confidential
Information to the extent required by a court order or applicable law,
PROVIDED that, in either event, Seller shall use reasonable commercial
efforts to first give prompt prior written notice to Buyer and shall use
reasonable best efforts to (and cooperate with Buyer in seeking to) seal,
redact or otherwise minimize such disclosure and to protect the
confidentiality of any Confidential Information eventually disclosed. The
foregoing undertaking shall apply, MUTATIS MUTANDIS, to Parent and Buyer
solely with respect to confidential information of Seller that (i) is not
Confidential Information or was set forth in the Seller Disclosure
Schedule and (ii) was provided to Parent or Buyer prior to the date hereof
or will be provided pursuant to this Agreement.
8.1.2 Subject to the Confidentiality Agreement and applicable law, Seller shall afford, and shall cause its Affiliates and use reasonable best efforts to cause its and their respective Representatives to afford, to Parent and Buyer and to their respective officers, employees, accountants, counsel, financial and legal advisers and other representatives, full and complete access during normal business hours and on reasonable notice during the Pre-Closing Period to all its properties, books, contracts, commitments, assets, personnel, suppliers, customers and distributors, consultants, attorneys and accountants, records and other information concerning the Business, the Purchased Assets and Assumed Liabilities (provided that such access (i) shall not unreasonably interfere with the business or operations of Seller, and (ii) shall not cause Seller to disclose any information that would result in the disclosure of trade secrets of third parties, violate any of its obligations with respect to confidentiality or invalidate or terminate any legal privilege, in each case in clause (ii) hereof as determined by Seller in its reasonable judgment after receipt of advice from outside legal counsel). During such Pre-Closing Period and subject to the Confidentiality Agreement and applicable law, Seller shall furnish promptly to Buyer (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws, and (ii) all other information concerning the Business as Buyer may reasonably request.
8.2 NON-COMPETITION AND NON-SOLICITATION.
8.2.1 Seller shall not, and shall cause its Subsidiaries not to, at all times from the Closing Date until the end of the Second Earnout Period, directly or indirectly through its Subsidiaries, without the prior written consent of Buyer:
8.2.1.1 enter into, participate or engage in the design, development, manufacture, production, marketing, support or sale of any product that is substantially similar to any product of the Business offered by Buyer, or competes, directly or indirectly, with the Business as currently conducted (the "SPECIFIED TECHNOLOGY");
8.2.1.2 own, manage, operate, finance, control, promote or
participate in the ownership, management, operation, financing,
business, control or promotion of, any person, firm, association,
corporation, or other entity, anywhere in the world, engaged in
design, development, manufacture, production, marketing, support or
sale of any of the Specified Technology, except for any holding by
Seller of no more than 2% of the issued and outstanding share
capital of a publicly traded company otherwise prohibited by this
Section 8.2.1.2;
8.2.1.3 knowingly solicit the services, hire or retain any person employed or engaged in the Business by Buyer or any of its Affiliates as employees or employee-consultants, or otherwise knowingly encourage or solicit any such persons to terminate their employment or engagement with Buyer or its Affiliates; or
8.2.1.4 without limiting the generality of the foregoing, file any patent application that may, in the reasonable opinion of counsel to Buyer, restrict the Business Intellectual Property Rights, or register or challenge any Business Intellectual Property Rights owned, used or otherwise licensed by Buyer or any of its Affiliates.
8.2.2 Seller acknowledges that the consideration received by Seller under this Agreement is paid in consideration, in part, for the obligations and undertakings under this Section 8.2.2 and that the covenants of Seller in this Section 8.2 are reasonably necessary for the protection of Buyer's interests under this Agreement and to enable it to enjoy the full benefit of the Business, including the Purchased Assets, and are not unduly restrictive upon Seller.
8.2.3 Buyer undertakes that at all times from the Closing Date until the end of the Second Earnout Period, it shall not, without the prior written consent of Seller, knowingly solicit the services, hire or retain any person then employed or engaged by Seller or its Affiliates as employees or employee-consultants, or otherwise knowingly encourage or solicit any such persons to terminate their engagement with Seller.
8.3 SELLER TRADEMARKS. For a period of six (6) months following the Closing Date, Buyer shall have the right, on a non-exclusive, non-transferable, royalty-free and worldwide basis, solely in connection with the operation of the Business, to manufacture, market, distribute and sell products and provide (and market) services bearing the name "Metalink" or any variations thereof and any other trademarks, service marks or other indicia of source owned by Seller (together, "LICENSED MARKS"). Such limited license is subject to (i) Buyer using the Licensed Marks in a manner substantially similar to the manner in which the same were used by Seller prior to the Closing Date, (ii) Buyer using the Licensed Marks in compliance with all applicable laws and regulations, and (iii) Buyer cooperating to avoid confusion or conflict arising out of Buyer's and Seller's (including any licensees of Seller) use of the Licensed Marks. The grant of rights hereunder to the Licensed Marks is made only to the extent of the rights actually held by Seller in such Licensed Marks and Seller makes no warranty, express or implied, and hereby disclaims all warranties, with respect thereto; PROVIDED that nothing in this sentence overrides or limits any of the representations and warranties made by Seller in Section 5.9.
8.4 PUBLIC ANNOUNCEMENTS. (a) Seller shall not (nor shall it permit any of its Representatives to) issue any press release or make any public statement regarding this Agreement, or regarding any of the transactions contemplated by this Agreement, without Buyer's prior written consent, and (b) Parent and Buyer shall not (and shall not permit any of their Representatives to) issue any press release or make any public statement regarding this Agreement, or regarding any of the transactions contemplated by this Agreement, without Seller's prior written consent. Notwithstanding the provisions of the preceding sentence, either party shall be permitted to issue any press release or make any public statement as is required by or (in its reasonable judgment) advisable in connection with any Legal Requirement, including, with respect to Seller, the SEC, Israeli Securities Authority, Nasdaq or Tel Aviv Stock Exchange rules, provided that it first consults with the other party as to the timing and substance thereof. Each of the parties acknowledges that certain of the proceedings required to obtain consents to or approvals of the transactions contemplated hereunder from Governmental Entities are public, and hereby consent to the filings and disclosures required during the Pre-Closing Period pursuant to this Agreement and in accordance with its terms, notwithstanding anything to the contrary in this Section 8.3 8.4.
8.5 EXPENSES. Except as otherwise expressly provided herein, whether or not the transactions contemplated hereby are consummated, all fees and expenses incurred in connection with this Agreement, including all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties incurred by a party in connection with the negotiation, preparation, effectuation, execution, delivery or performance of this Agreement, any of the Transaction Documents, and the transactions contemplated hereby or thereby, shall be the obligation of the respective party incurring such fees and expenses.
8.6 FILINGS AND CONSENTS.
8.6.1 As promptly as practicable after the execution of this Agreement, each party to this Agreement (a) shall make all filings (if any) and give all notices (if any) required to be made and given by such party in connection with the transactions contemplated by this Agreement, and (b) shall use all commercially reasonable efforts to obtain all consents (if any) required to be obtained (pursuant to any applicable Legal Requirement or Contract, or otherwise) by such party in connection with or to give full effect to transactions contemplated by this Agreement; provided, however, that (i) Seller, with the reasonable assistance of Buyer where applicable, shall be responsible for making all filings with and obtaining all such consents from Governmental Entities pursuant to Legal Requirements applicable to Seller or its businesses or properties, and for obtaining all such consents (if any) required to be obtained from parties to Contracts by which Seller or its properties are bound, and (ii) Buyer, with the reasonable assistance of Seller where applicable, shall be responsible for making all filings with and obtaining all such consents from Governmental Entities pursuant to Legal Requirements applicable to Parent, Buyer or their business or properties; PROVIDED that neither Parent, Buyer nor any of their respective Affiliates shall be obligated to consent to any divestitures or operational limitations or requirements in connection therewith.
8.6.2 Each party to this Agreement shall promptly deliver to the other parties a copy of each such filing made, each such notice given and each such Consent obtained by such party during the Pre-Closing Period. Each party shall promptly provide the other parties with copies of all filings made by the other party with any state, federal or foreign Governmental Entity in connection with this Agreement and the transactions contemplated hereby. Each party shall promptly inform the other party of any material communication between such party and any Governmental Entity regarding this Agreement or the transactions contemplated hereby.
8.6.3 Without derogating from the generality of the foregoing:
8.6.3.1 Seller hereby undertakes, as promptly as practicable
after the execution of this Agreement, to use
commercially reasonable efforts, with the reasonable
assistance of Buyer, to obtain as promptly as
possible the final implementation approval of the
Investment Center with respect to Seller's Approved
Enterprises and the Investment Center's approval to
the transfer to Buyer of any and all rights of
Seller in such Approved Enterprises, it being
understood that Buyer will bear the costs of
Deloitte & Touche in connection therewith;
8.6.3.2 Seller hereby undertakes, as promptly as practicable
after the execution of this Agreement, to use
commercially reasonable efforts, with the reasonable
assistance of Buyer, to obtain the ITA Approval, it
being understood that (i) Seller shall not be
required to make capital expenditures in connection
therewith and (ii) Buyer will bear the costs of
Deloitte & Touche, retained by the parties for this
purpose, in connection therewith; and
8.6.3.3 Seller hereby undertakes to cooperate and assist
Buyer to obtain as promptly as possible a permit of
the Ministry of Communications, in the name of
Buyer, to conduct the frequency experiments required
by the Business ("MOC PERMIT"), including by way of
execution of a waiver of Seller's MoC Permit.
|
8.7 REASONABLE EFFORTS. During the Pre-Closing Period, (a) Seller shall use its reasonable efforts to cause the conditions set forth in Sections 4.2.1 and 4.2.2 to be satisfied on a timely basis (including the execution and delivery of all agreements contemplated thereunder to be so executed and delivered), and (b) Buyer shall use its reasonable efforts to cause the conditions set forth in Sections 4.2.1 and 4.2.3 to be satisfied on a timely basis (including the execution and delivery of all agreements contemplated thereunder to be so executed and delivered).
8.8 NOTIFICATION OF CERTAIN MATTERS. During the Pre-Closing Period, Seller shall promptly notify Buyer, and Parent and Buyer shall promptly notify Seller, in writing of the discovery of any of the following:
8.8.1 any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes a material inaccuracy in or breach of any representation or warranty made by the relevant party in this Agreement;
8.8.2 any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that causes or constitutes, or could reasonably be seen as likely to cause or constitute, a material inaccuracy in or breach of any representation or warranty made (or to be made on the Closing Date) by the relevant party in this Agreement;
8.8.3 any breach of any material covenant or obligation of the relevant party; and
8.8.4 any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in
Section 4.2 impossible, unlikely or postponed.
8.9 EXCESS PAYMENTS. The Parties recognize that the proceeds of certain Accounts Receivable not sold or transferred to Buyer hereunder ("EXCLUDED A/R") may be paid to Buyer, the proceeds of certain Acquired A/R may be paid to Seller, certain excluded Accounts Payable (not part of the Assumed Liabilities) ("EXCLUDED A/P") may be billed to and paid by Buyer and certain assumed Accounts Payable (as part of the Assumed Liabilities) ("ASSUMED A/P") may be billed to and paid by Seller (or an Affiliate thereof). Accordingly, the parties agree to cooperate and to take such actions, including payment as soon as administratively practicable, in cash to each other any such revenues and transfer such receipts, as are necessary to ensure that (i) the benefits relating to Excluded A/R are received by Seller, (ii) the benefits relating to Acquired A/R are received by Buyer, (iii) the liability represented by any Excluded A/P is borne by Seller and (iv) the liability represented by any Assumed A/P is borne by Buyer. Notwithstanding the foregoing, in no event may net amounts or receipts due to the other party be held in excess of thirty (30) days of the receipt of such revenues or receipts. Each party shall provide the other with a full, written accounting of any such revenues and receipts on a monthly basis, as soon as administratively practicable after the end of each calendar month.
8.10 [RESERVED].
8.11 CUT-OFF LIABILITIES. Buyer undertakes that, subject to Closing, it
shall fund and be solely liable for the following obligations to the extent
accrued from the Cut-Off Date through the Closing Date, (i) obligations to all
Transferred Employees, including salary and social benefits, and to the
contractors of GlobalLogic (Kiev contractors) (which costs, for the avoidance of
doubt, shall not include the December 2009 Costs); (ii) obligations to all
lessors under the Leases; (iii) such other expenses related to the conduct of
the Business during such period, not to exceed $150,000; all of the foregoing in
clauses (i) through (iii) not to exceed $750,000 in the aggregate; and (iv) such
additional expenses related to the conduct of the Business approved in writing
by Buyer (collectively, the "CUT-OFF LIABILITIES"); which Cut-Off Liabilities
shall be paid by Buyer to Seller (unless, and to the extent that, until the
Closing Date such amounts shall not have been already paid by Seller to the
persons entitled thereto, in which case Buyer shall pay such amounts directly to
the persons entitled thereto as they become due and payable) no later than three
(3) business days following the Closing Date pursuant to a statement setting
forth Seller's calculation of the Cut-Off Liabilities (the "CUT-OFF STATEMENT")
to be delivered to Buyer no later than two (2) business days prior to the
Closing Date; it being understood that:
8.11.1 Buyer may object to the Cut-Off Statement by delivering a written notice to that effect to Seller setting forth in reasonable detail the basis for such objection (the "CUT-OFF OBJECTION NOTICE") no later than 30 days following receipt of the Cut-Off Statement. At Buyer's request, Seller shall provide Buyer with all reasonably requested supporting documents related to such Cut-Off Statement.
8.11.2 If Buyer fails to deliver such Cut-off Objection Notice within the said 30-day period, then the calculation by Seller of the Cut-Off Liabilities shall be deemed finally determined.
8.11.3 However, if Buyer timely delivers such Cut-Off Objection Notice, then, notwithstanding Section 12.6 hereof, the dispute regarding such amount shall be resolved in the same manner as set forth in Section 3.2.5 above, MUTATIS MUTANDIS (it being understood that Buyer shall pay the costs and expenses of the Firm, except that if the Firm's determination orders Seller to refund Buyer an amount that is equal to $25,000 or more, then Seller shall be liable for all of the Firm's reasonable expenses).
8.12 CORPORATE EXISTENCE. Parent and Buyer acknowledge and agree that nothing herein shall be construed to mean that Seller has any obligation to continue its corporate existence or otherwise not to liquidate Seller following the Closing.
9. EMPLOYEES
9.1 Promptly following the date hereof, but no later than January 13, 2010, Buyer shall make, or cause an Israeli Affiliate to make, an offer of continued employment ('HAAVARA BERETZEF' in Hebrew), effective as of the Closing Date and contingent on the completion of the transaction contemplated hereunder, to each of the Specified Employees, in the form of EXHIBIT 9.1 hereto, to be fully countersigned by such employees (such form and any ancillary document thereto, including waivers, shall be hereinafter referred to as the "EMPLOYEE OFFER"). The Specified Employees who countersign the Employee Offer and are transferred to Buyer at Closing are hereinafter referred to as "TRANSFERRED EMPLOYEES". It is hereby understood that the Employee Offer shall generally be no less favorable in the aggregate than the terms of employment (including salary and social benefits) of the Specified Employees as with Seller, all as more fully set forth in the Employee Offer and SCHEDULE 9.1 hereto. Seller shall use commercially reasonable efforts to cooperate with Buyer in connection with Buyer's reasonable efforts to hire the Specified Employees, including allowing Representatives of Buyer reasonable access during normal business hours, upon reasonable advance notice and subject to pre-coordinating their arrival with Seller, to meet with such Specified Employees in connection with their proposed employment with Buyer and provide them with the Employee Offers. Seller and Buyer shall use commercially reasonable efforts to achieve an orderly transfer of the Transferred Employees to Buyer effective upon the Closing as contemplated by this Agreement. Prior to the Closing, Seller shall not take, and shall cause each of its Affiliates not to take, any action which would materially impede, hinder, interfere or otherwise compete with Buyer's efforts to hire any Specified Employees.
9.2 Notwithstanding this Section 9, nothing herein shall be construed as to prevent Buyer from terminating the employment of any employee at any time after the Closing Date for any reason (or no reason), in accordance with applicable law and such employee's employment agreement with Buyer.
9.3 (a) Seller hereby consents to the transfer at the Closing of each of
the Transferred Employees to Buyer and each such employee shall become an
employee of Buyer at the Closing, and (b) Seller hereby undertakes to transfer
and assign to Buyer for the benefit of the Transferred Employees, (i) all
education funds (keren hishtalmut), managers' insurance policies (bituach
menahalim) and/or pension funds, severance pay funds and any other funds and
(ii) any accruals (prorated for partial month) for salary (including for the pay
period in which the Closing occurs), accrued annual vacation, recuperation fees
entitlement, in each case of clauses (i) and (ii) that have been reserved or
contributed by Seller (whether required by applicable law, custom or agreement)
with respect to any of such Employees (the "SELLER EXISTING FUNDS") and all of
Sellers' rights with regard thereto. It is hereby acknowledged and agreed that
to the extent that any of the Seller Existing Funds at Closing are not
sufficient to cover all such funds to which any Transferred Employee is entitled
through the Closing Date (by applicable law, custom or agreement) and such
balance (the "SHORTFALL AMOUNT") does not exceed the amount set forth in
SCHEDULE 2.3.2 (the "MAXIMUM AMOUNT"), Buyer shall, without any consideration or
adjustment of the Purchase Price, transfer cash equal to the Shortfall Amount to
the Seller Existing Funds. It is hereby further acknowledged and agreed that to
the extent that the Shortfall Amount exceeds the Maximum Amount, Buyer shall,
without any consideration or adjustment of the Purchase Price, transfer cash
equal to the Maximum Amount to the Seller Existing Funds, and Seller shall,
prior to the Closing and without any consideration or adjustment of the Purchase
Price, transfer cash equal to the excess of the Shortfall Amount over the
Maximum Amount. Prior to the Closing, Seller shall make (and Buyer shall
cooperate with Seller to the extent required) the appropriate filings with the
ITA for the transfer of the Seller Existing Funds from Seller to Buyer and
Seller shall submit, within the appropriate time periods, all required documents
to the Transferred Employees' funds and insurance policies. Promptly following
its receipt of all requisite approvals from the ITA, which the parties shall
attempt to obtain (and each party undertakes to use commercially reasonable
efforts) at the Closing or promptly thereafter (but not as a condition to
Closing), Seller will transfer to Buyer all its title, rights and interests in
and to the Seller Existing Funds.
9.4 The Transferred Employees shall transfer to Buyer, as applicable, with continuity of rights, and whilst taking their term of employment with Seller in account for purposes of the calculation of their rights and entitlements.
9.5 Notwithstanding any obligations of any Transferred Employee to Seller, or any Affiliates thereof, all Transferred Employees (i) shall be permitted, on and after the Closing Date, to engage in the Business only on behalf of Buyer and its Affiliates, and (ii) shall be relieved and released from the confidentiality and non-compete obligations owed to Seller and its Affiliates solely to the extent required to perform the obligations and duties under their respective employment or engagement agreements with Buyer or its Affiliates.
9.6 As between the parties, Buyer shall assume all liabilities relating to the Transferred Employees (i) first arising following the Closing (including, for the avoidance of doubt, in respect of Transferred Employees who were not subject to Section 14 of the Severance Pay Law, 5723-1963 prior to the Closing as specified in SCHEDULE 5.15.1(A)), differences in severance payments relating to the period of employment with Metalink prior to the Closing that may result from increases, if any, in such employees' base salary during the period following the Closing) and (ii) their accrued salary (for the payroll period of December) and accrued but unused annual vacation, recuperation fees and sick leave entitlement, in each case up to the amount set forth in SCHEDULE 2.3.2, but excluding, and the following shall be retained by Seller, all liabilities relating to the Transferred Employees prior to the Closing, including any and all bonuses and employee stock options provided by Seller, and, to the extent related to the employment of any Transferred Employee that accrued before the Closing, (a) any employment or social benefits as is required by applicable law, custom or agreement, (b) any withholding or employment Taxes, (c) any other mandatory payments to social security (other than, in each case set forth in (a) through (c) above, to the extent of the Cut-Off Liabilities) or otherwise or any claims for wrongful discharge or employment discrimination.
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
10.1 SURVIVAL OF REPRESENTATIONS, ETC.
10.1.1 The representations and warranties made by Seller in Section
5 or in any other Transaction Document, including those made in Sections
5.1 (ORGANIZATION AND QUALIFICATION), 5.2 (AUTHORITY; NO VIOLATION; DUE
EXECUTION; ETC.), 5.3 (CONSENTS), 5.6 (TAXES), 5.8.1 and 5.8.2 (TITLE TO
PROPERTIES) and 5.9.2, 5.9.3 and 5.9.4 and 5.9.8 (INTELLECTUAL
PROPERTY) (collectively, the "FUNDAMENTAL REPRESENTATIONS"), shall survive
the Closing and shall expire at the end of the Second Earnout Period (the
"TERMINATION DATE"); PROVIDED, HOWEVER, that if, at any time prior to the
Termination Date, any Buyer Indemnitee delivers to Seller a written notice
alleging a breach of any of the representations and warranties made by it
(and setting forth in reasonable detail the basis for its belief that such
an incompleteness, inaccuracy or breach may exist) and asserting a claim
for recovery under this Section 10, then the claim asserted in such notice
shall survive the Termination Date; PROVIDED FURTHER that a claim for
recovery in connection therewith, if not resolved by mutual consent, is
filed with a competent court by the Buyer Indemnitee within three (3)
months after the Termination Date.
10.1.2 The representations and warranties made by Parent and Buyer in Section 6 shall survive the Closing and shall expire on the Termination Date; PROVIDED, HOWEVER, that if, at any time prior to the Termination Date, any Seller Indemnitee delivers to Buyer a written notice alleging a breach of any of the representations and warranties made by it (and setting forth in reasonable detail the basis for its belief that such an incompleteness, inaccuracy or breach may exist) and asserting a claim for recovery under this Section 10, then the claim asserted in such notice shall survive the Termination Date; PROVIDED FURTHER that a claim for recovery in connection therewith, if not resolved by mutual consent, is filed with a competent court by the Seller Indemnitee within three (3) months after the Termination Date.
10.1.3 All covenants and agreements of the parties contained in this Agreement and the Transaction Documents shall not survive the Closing; except that any such covenants and agreements that, by their terms, are to have effect or to be performed after the Closing shall survive in accordance with their terms.
10.2 INDEMNIFICATION.
10.2.1 From and after the Closing Date, the Buyer Indemnitees may seek indemnification from Seller, and Seller shall be obligated to pay indemnification for any Damages suffered or incurred by any of the Buyer Indemnitees or to which any of them may otherwise become subject (regardless of whether or not such Damages relate to any third-party claim) and which arise from or as a result of: (i) any incompleteness of, inaccuracy in or breach of any representation or warranty by Seller set forth in Section 5 or in any other Transaction Document; (ii) any failure to comply with or breach of any covenant or obligation of Seller hereunder or in any other Transaction Document; or (iii) any claims against Buyer with respect to any of the Retained Assets or the Retained Liabilities; PROVIDED, HOWEVER, that, (A) solely with respect to clause (i) above, the Buyer Indemnitees may seek indemnification under such clause solely from the Second Payment, the Earnout Prepayments and the Earnout Payment(s) then payable and/or that have been previously paid to Seller hereunder, (B) solely with respect to clause (i) above, the aggregate amount of indemnification payable by Seller in respect of such claims shall not exceed $4,000,000 (the "MAXIMUM DAMAGES"), PROVIDED that, notwithstanding the foregoing in this clause (B), Seller's indemnification obligations in respect of any incompleteness of, inaccuracy in or breach of any representation or warranty by Seller set forth in Sections 5.1 (ORGANIZATION AND QUALIFICATION), 5.2 (AUTHORITY; NO VIOLATION; DUE EXECUTION; ETC.), 5.6 (TAXES), and 5.8.1 and 5.8.2 (TITLE TO PROPERTIES) shall not be capped at the Maximum Damages, (C) solely with respect to clause (i) above, no Buyer Indemnitee shall be entitled to any such indemnification for such claims unless and until the Damages sought by all Buyer Indemnitees as a result of all such claims cumulatively exceed, in the aggregate, (x) One Hundred Thousand U.S. Dollars ($100,000), plus, if applicable, (y) to the extent such claims relate to any incompleteness of, inaccuracy in or breach of any representation or warranty as of the Closing Date (but provided that such representation or warranty was correct as of the date hereof), up to Fifty Thousand U.S. Dollars ($50,000) (the "THRESHOLD AMOUNT"), whereupon, in either case, indemnification may be sought by the Buyer Indemnitees for all such Damages without regard to the Threshold Amount, but without derogating from the other limitations in this Section 10.2.1, (D) solely with respect to clause (i) above, in the event that any Damages are incurred by the Buyer Indemnitees in connection with a Third Party Claim (as defined below) (including to the extent that the underlying facts of such Third Party Claim result out of any breach of or inaccuracy in Seller's representations and warranties in Section 5.9.3), then Seller's obligation to indemnify the respective Buyer Indemnitees shall be 50% of any such Damages, without derogating from the other limitations in this Section 10.2.1, (E) solely with respect to clause (i) above, each Damage for which a Buyer Indemnitee is entitled to recovery on account of such claims shall be reduced by (and if a claim for Damage has already been made and an amount therefor received from Seller, shall reimburse to Seller) the amount of any insurance proceeds (or, in respect of indemnification made pursuant to clause (D) above, 50% thereof) that the Buyer Indemnitee actually receives (and Buyer undertakes to reasonably attempt to receive) with respect to such Damage, net of any deductibles, "retro-premium" obligations, co-payments, the reasonably estimated amount of future increased premiums and similar costs, and (F) if a Buyer Indemnitee actually receives proceeds from a third party (not affiliated with Buyer) that cover a Damage for which a Buyer Indemnitee previously received indemnification payment hereunder, the Buyer Indemnitee shall reimburse Seller for such payment, net of any expenses (including those related to collecting such proceeds from the third party) up to the lesser of (i) the amount of proceeds received from Seller on account of such Damage and (ii) the net amount actually received from the third party in respect of such Damage (or, in respect of indemnification made pursuant to clause (D) above, 50% thereof).
10.2.2 From and after the Closing Date, the Seller Indemnitees may seek from Parent and Buyer, and Parent and Buyer shall be obligated, severally and jointly, to pay indemnification for any Damages that are suffered or incurred by a Seller Indemnitee or to which such Seller Indemnitee may otherwise become subject (regardless of whether or not such Damages relate to any third-party claim) and which arise from or as a result of: (i) any incompleteness of, inaccuracy in or breach of any representation or warranty by Parent or Buyer set forth in Section 6 or in any other Transaction Document; (ii) any failure to comply with or breach of any covenant or obligation of Parent or Buyer hereunder or in any other Transaction Document; (iii) any claims against Seller with respect to the Purchased Assets (but solely with respect to the ownership or use thereof after the Closing Date) or the Assumed Liabilities; PROVIDED, HOWEVER, that (A) solely with respect to clause (i) above, the aggregate amount of indemnification payable by Parent and Buyer in respect of such claims shall not exceed Two Million U.S. Dollars ($2,000,000), (B) solely with respect to clause (i) above, no Seller Indemnitee shall be entitled to any such indemnification unless and until the Damages sought by all Seller Indemnitees as a result of all such breaches cumulatively exceed the Threshold Amount, whereupon indemnification may be sought by Seller Indemnitees for all such Damages without regard to the Threshold Amount, without derogating from the other limitations in this Section 10.2.2, (C) solely with respect to clause (i) above, each Damage for which a Seller Indemnitee is entitled to recovery under this Section 10 shall be reduced by (and if a claim for Damage has already been made and an amount therefor received from Buyer, shall reimburse to Buyer) the amount of any insurance proceeds that the Seller Indemnitee actually (and undertakes it shall attempt to) receives with respect to such Damage, net of any deductibles, "retro-premium" obligations, co-payments, the reasonably estimated amount of future increased premiums and similar costs, and (D) if a Seller Indemnitee actually receives proceeds from a third party (not affiliated with Seller) that cover a Damage for which a Seller Indemnitee previously received indemnification payment hereunder, the Seller Indemnitee shall reimburse Buyer for such payment, net of any expenses (including those related to collecting such proceeds from the third party) up to the lesser of (i) the amount of proceeds received from Buyer on account of such Damage and (ii) the net amount actually received from the third party in respect of such Damage.
10.3 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or commencement by any Person of any claim or Legal Proceeding with respect to which any of the Buyer Indemnitees or Seller Indemnitees shall have the right to seek indemnification pursuant to this Section 10 (a "THIRD PARTY CLAIM"), each party agrees to notify the other, in writing and in reasonable detail, of the assertion or commencement of such Third Party Claim and the indemnifying party shall have the right, at its election, to proceed with the defense of such Third Party Claim on its own with counsel reasonably satisfactory to the party entitled to indemnification. If such party so proceeds with the defense of any such Third Party Claim:
10.3.1 the indemnifying party shall deliver to the party entitled to indemnification a written acknowledgement that the indemnifying party shall be solely responsible for such Third Party Claim and all Damages relating thereto (notwithstanding any limitations set forth in this Section 10 that would otherwise apply with respect thereto, which shall not thereafter be applicable);
10.3.2 all expenses relating to the defense of such Third Party Claim shall be borne and paid by the indemnifying party;
10.3.3 the indemnifying party shall only have the right to settle, adjust or compromise such Third Party Claim with the consent of the party entitled to indemnification; provided, however, that such consent shall not be unreasonably withheld in the event such settlement involves only the payment of money and a release in favor of the party entitled to indemnification and its Affiliates from all liability in respect of such Third Party Claim.
If the indemnifying party has not acknowledged in writing its obligation to indemnify the indemnified party, then the indemnified party shall have the right to assume and control the defense or the settlement against such third party claim, at the reasonable expense of the indemnifying party. Each party seeking indemnification shall give the indemnifying party prompt notice of the commencement of any such Legal Proceeding against Buyer or Seller (as applicable); PROVIDED, HOWEVER, that any failure to do so shall not limit any of the rights of the indemnitees under this Section 10 (except to the extent such failure materially prejudices the defense of such Legal Proceeding).
Notwithstanding the foregoing in this Section 10.3, in the event of
any Third Party Claim arising out of events or circumstances described in clause
(i) of Section 10.2.1, Buyer shall have the right to control the defense thereof
and to settle such claim; PROVIDED that Buyer provides written notice to Seller
that it has elected to do so.
10.4 CLAIMS PROCEDURE. If a party entitled to indemnification wishes to make a claim for indemnification hereunder for Damages that do not result from a Third Party Claim (a "DIRECT CLAIM"), such party shall notify the indemnifying party in writing in general terms of such Direct Claim, the amount or such party's good faith estimated amount of Damages sought thereunder to the extent then ascertainable (which estimate shall not be conclusive of the final amount of such Direct Claim), any other remedy sought thereunder, any relevant time constraints relating thereto, the nature of the misrepresentation, breach of warranty, covenant or obligation to which such item is related, and to the extent known a reasonable summary of the facts underlying the claim. The indemnifying party shall have a period of 30 days within which to respond to any Direct Claim. If the indemnifying party does not respond within such 30-day period, the indemnifying party will be deemed to have accepted such Direct Claim. If the indemnifying party rejects all or any part of such Direct Claim, Seller and Buyer shall attempt in good faith for 30 days to resolve such claim. If no such agreement can be reached through good faith negotiation within 30 days, either Buyer or Seller may thereafter commence an action.
10.5 EXERCISE OF REMEDIES BY THIRD PARTIES. No Person who is not a party to this Agreement (or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless the applicable party (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy.
10.6 SOLE REMEDY. From and after the Closing, the rights of the parties under this Section 10 shall be the sole and exclusive remedy of the parties with respect to claims resulting from or relating to any representation, warranty, covenant or agreement contained in this Agreement. Notwithstanding the above, each party hereto shall be (a) entitled to seek any available remedy of law or equity (including rescission or restitution) with respect to fraud and/or willful misconduct, (b) entitled to injunctive relief to enjoin the breach, or threatened breach, of any provision or covenant of this Agreement, and (c) entitled to seek the equitable remedy of specific performance in connection with this Agreement.
10.7 SET-OFF. Buyer and Parent shall be entitled to set-off or recoup any amounts due to Buyer or Parent from Seller pursuant to and in accordance with this Agreement or any other Transaction Documents against any amounts paid or payable by Buyer or Parent to Seller pursuant to this Agreement or any other Transaction Documents; PROVIDED, HOWEVER, that nothing herein shall preclude Seller from seeking all or any available remedy at law or in equity to the extent that it is later determined that Seller was entitled to any amounts withheld by Buyer or Parent based on this set-off right. The aforesaid set-off right will apply, MUTATIS MUTANDIS, to Seller.
11. TERMINATION
11.1 TERMINATION. Subject to Section 11.2 below, this Agreement may be terminated and abandoned at any time prior to the Closing in the following events:
11.1.1 by mutual written consent of the parties;
11.1.2 by either Seller or Buyer if a court of competent jurisdiction or other Governmental Entity shall have issued an order, decree or ruling or taken any other action (which order, decree or ruling the parties hereto shall use their reasonable best efforts to lift) and such was not at the request of the party seeking termination of the Agreement, in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable;
11.1.3 by either Seller or Buyer if the Closing has not taken place on or before March 31, 2010 (the "OUTSIDE DATE") (provided that a party shall not be entitled to terminate this Agreement pursuant to this Section 11.1.3 if such party's breach of this Agreement has prevented the consummation of the transactions contemplated hereby at or prior to such time);
11.1.4 by Buyer, if (i) Seller shall have breached any of its
representations or warranties or failed to perform any of its
covenants, obligations or other agreements hereunder, which
breach or failure to perform (A) would give rise to failure of
a condition set forth in Section 4.2.3.1 or 4.2.3.2 and (B) is
incapable of being cured by Seller by the Outside Date or, if
capable of being cured by Seller by the Outside Date, shall
not have been cured to the reasonable satisfaction of Buyer
within twenty one (21) calendar days following written notice
of such breach or failure to perform is given to Seller, or
(ii) events have occurred which have made it impossible to
satisfy any other condition precedent to Buyer's obligations
to consummate the transactions contemplated hereby by the
Outside Date, PROVIDED, in each case, that the right to
terminate this Agreement by Buyer under this Section 11.1.4
shall not be available where Buyer is at that time in breach
of this Agreement and such breach has caused such condition to
be unsatisfied; or
11.1.5 by Seller, if (i) Buyer shall have breached any of its
representations or warranties or failed to perform any of its
covenants, obligations or other agreements hereunder, which
breach or failure to perform (A) would give rise to failure of
a condition set forth in Section 4.2.2.1 or 4.2.2.2 and (B) is
incapable of being cured by Buyer by the Outside Date or, if
capable of being cured by Buyer by the Outside Date, shall not
have been cured to the reasonable satisfaction of Seller
within twenty one (21) calendar days following written notice
of such breach or failure to perform is given to Buyer, or
(ii) events have occurred which have made it impossible to
satisfy any other condition precedent to Seller's obligations
to consummate the transactions contemplated hereby by the
Outside Date, PROVIDED, in each case, that the right to
terminate this Agreement by Seller under this Section 11.1.5
shall not be available where Seller is at that time in breach
of this Agreement and breach has caused such conditions to be
unsatisfied.
11.2 TERMINATION PROCEDURES. If Buyer wishes to terminate this Agreement pursuant to Section 11.1.2, 11.1.3 or 11.1.4, Buyer shall deliver to Seller a written notice stating that Buyer is terminating this Agreement and setting forth a brief description of the basis on which Buyer is terminating this Agreement. If Seller wish to terminate this Agreement pursuant to Section 11.1.2, 11.1.3 or 11.1.5, Seller shall deliver to Buyer a written notice stating that Seller is terminating this Agreement and setting forth a brief description of the basis on which Seller is terminating this Agreement.
11.3 EFFECT OF TERMINATION. In the event of termination of this Agreement as provided in Section 11.1, this Agreement shall forthwith become void and all further obligations and liabilities of each party to the other party under this Agreement shall terminate; PROVIDED, HOWEVER, that (a) neither party shall be relieved of any obligation or liability arising from any prior willful and material breach of any representation, warranty, covenant or agreement in this Agreement that occurred prior to the date of termination; and (b) the parties shall, in all events, remain bound by and continue to be subject to Sections y8.4 (PUBLIC ANNOUNCEMENTS), 8.5 (EXPENSES) and Article 12 (GENERAL PROVISIONS).
12. GENERAL PROVISIONS
12.1 NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below:
IF TO BUYER:
Lantiq Israel Ltd.
c/o Meitar Liquornik Geva & Leshem Brandwein, Law Offices
16 Abba Hillel Rd. Ramat Gan 52506, Israel
Fax: +972-3-6103774
Attention: Assaf Oz, Adv.
IF TO PARENT:
Lantiq Beteiligungs - GmbH & Co. KG
Am Campeon 3, 85579 Neubiberg
Germany
Fax: +49-89-89899-7810
Attention: Gunther Stang, General Counsel
in each case, with copies to (which shall not constitute notice):
Golden Gate Capital
One Embarcadero Center, Suite 3900
San Francisco, CA 94111
Fax: 415-983-2934
Attention: John Knoll and Felix Lo
Kirkland and Ellis, LLP
555 California Street, Suite 2700
San Francisco, CA 94104
Fax: 415-439-1500
Attention: Stephen Oetgen
Meitar Liquornik Geva & Leshem Brandwein, Law Officers
16 Abba Hillel Rd.
Ramat Gan 52506, Israel
Fax: +972-3-6103774
Attention: Maya Liquornik
IF TO SELLER:
Metalink Ltd.
Yakum Business Park
Yakum 60972, Israel
Fax: +972-9-9605733
Attention: Chief Executive Officer
with a copy to (which shall not constitute notice):
Goldfarb, Levy, Eran Meiri, Tzafrir & Co.
2 Weizmann Street
Tel-Aviv 64239, Israel
Fax: +972-3-608-9908
Attention: Ido Zemach, Adv.
or such other address with respect to a party as such party shall notify each other party in writing as above provided. Any notice sent in accordance with this Section 12.1 shall be effective (i) if mailed, five (5) business days after mailing, (ii) if sent by messenger, upon delivery, and (iii) if sent via telecopier, upon transmission and electronic confirmation of transmission or (if transmitted on a non-business day) on the first business day following transmission and electronic confirmation of transmission.
12.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts (including by means of telecopied, facsimile or portable data format (PDF) signature pages), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.
12.3 ENTIRE AGREEMENT. This Agreement and the Schedules and Exhibits hereto, and the documents and instruments and other agreements among the parties hereto referenced herein constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof.
12.4 SEVERABILITY. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.
12.5 OTHER REMEDIES. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy.
12.6 GOVERNING LAW; VENUE. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of Israel, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof and without regard to the UN Convention on the Sale of Goods. Each party hereby irrevocably submits to the exclusive jurisdiction of the courts sitting in the City of Tel-Aviv for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents) and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
12.7 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled (without any requirement to post a bond or other security) to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity.
12.8 NO THIRD PARTY BENEFICIARIES. Except as set forth in Section 10, this Agreement is for the sole benefit of the parties hereto and their permitted assigns, and nothing herein expressed or implied shall give or be construed to give to any other Person any legal or equitable rights hereunder.
12.9 AMENDMENT. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto.
12.10 EXTENSION; WAIVER.
12.10.1 No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
12.10.2 No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
12.11 JOINT OBLIGATION. All representations, warranties, covenants, undertakings and obligations of Buyer and Parent set forth in this Agreement and the other Transaction Documents shall be joint and several.
12.12 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns (if any). Neither party may assign any of its rights or obligations under this Agreement and the Transaction Documents to any other Person without obtaining the written consent or approval of the other parties hereto; except that (i) Buyer may assign its rights and obligations under this Agreement and the Transaction Documents, at any time, to any of its Affiliates; PROVIDED that Buyer and such Affiliate shall have furnished Seller with a written assumption agreement reasonably acceptable to Seller and PROVIDED FURTHER that if such assignment is effected prior to the Closing, it will not have the effect of delaying the Closing; and (ii) following the Closing, Seller may, subject to Buyer's prior written consent (which shall not be unreasonably withheld), assign its rights and obligations hereunder to an acquirer of Seller or its operations, PROVIDED that Seller and such acquirer shall have furnished Buyer with a written assumption agreement reasonably acceptable to Buyer and that the acquirer is not a direct competitor of the Business.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the parties hereto have caused this Asset Purchase Agreement to be executed and delivered as of the date first above written.
PARENT:
LANTIQ BETEILIGUNGS - GMBH & CO. KG
By: ______________________________
Name:
Title:
BUYER:
LANTIQ ISRAEL LTD.
By: ______________________________
Name:
Title:
SELLER:
METALINK LTD.
By: ______________________________
Name:
Title:
EXHIBIT 4.22
CONSULTING SERVICES AGREEMENT
THIS CONSULTING SERVICES AGREEMENT (this "AGREEMENT") is executed this 15 day of February, 2010 (the "EFFECTIVE DATE"), by and among LANTIQ ISRAEL LTD., a private company organized under the laws of the State of Israel (the "COMPANY") and METALINK LTD., a public company organized under the laws of the State of Israel ("CONSULTANT").
RECITALS
A. The parties have entered into that certain Asset Purchase Agreement dated January 5, 2010 (the "PURCHASE AGREEMENT"; capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Purchase Agreement), whereby Consultant transferred certain assets and liabilities to Company and Company acquired and assumed certain assets and liabilities as set forth therein.
B. It is a condition to the Closing of the Purchase Agreement that the parties enter into this Agreement.
C. The Company desires to receive the Services (as defined below) from Consultant, and Consultant is willing to provide Company with the Services, all subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the covenants, promises, representations and warranties set forth herein, and intending to be legally bound hereby, the parties agree as follows:
1. SERVICES.
1.1. The Company hereby retains Consultant, and Consultant hereby accepts such retention, to perform the Services for the Company as set forth herein.
1.2. Subject to the terms and conditions set forth in this Agreement (i) Consultant shall provide the Company with certain consulting services, all as detailed in EXHIBIT A attached hereto (which Exhibit shall be incorporated by reference into this Agreement) (the "CONSULTING SERVICES"), for a period of twenty-four (24) months following the Closing (the "CONSULTING TERM"), and (ii) Consultant shall provide the Company with certain manufacturing support services, all as detailed in EXHIBIT B attached hereto (which Exhibit shall be incorporated by reference into this Agreement) (the "SUPPORT SERVICES" and, together with the Consulting Services, the "SERVICES"), for a period of six (6) months following the Closing (the "SUPPORT TERM").
1.3. The Services shall be provided by Consultant pursuant to the requirements (including instructions, terms, conditions, time-tables, locations and other terms, to the extent specified) as set forth in this Agreement or as may be agreed, modified or supplemented from time to time following the date hereof by mutual written consent of the parties.
1.4. Without derogating from the foregoing, the parties agree that, at the Company's request, Exhibit A or B shall be supplemented (which supplements shall be an integral part of this Agreement) to add services that are reasonably required by the Company to conduct the Business in substantially the same manner it was conducted prior to the Closing and do not materially increase the obligations of Consultant hereunder.
1.5. The Services shall be performed by professional, skilled and experienced employees of Consultant who have a special expertise in the Business as shall be proposed by Consultant and agreed by the Company, in a manner designed to provide the Services pursuant to Exhibit A or B, as applicable. In providing the Services, Consultant shall accord the Company the same priority it accords its own operations.
1.6. Notwithstanding the foregoing in Section 1.2, if Consultant is, for any reason whatsoever, incapable of providing to the Company the Support Services in a manner satisfactory to the Company, Consultant shall, in lieu thereof, grant such employee of the Company as shall be designated by the Company full access to all of Consultant's systems and servers necessary to enable the Company to perform by itself all actions that would have been the subject of the Support Services.
1.7. Consultant shall take reasonable measures to protect the Company's data that is processed by Consultant or by a designee of the Company using Consultant's systems or servers, as the case may be, from unauthorized destruction, deletion, change or disclosure to third parties, and to allow recovery of such data in events of force majeure.
2. CONSIDERATION; TERMS OF PAYMENT.
2.1. In consideration for the provision of the Consulting Services during the Consulting Term and the Support Services during the Support Term, the Company shall pay Consultant an annual gross amount of US $400,000 for each 12-month period of services (the "CONSIDERATION"), which shall be paid to Consultant in twelve monthly payments of $33,333.33 each, to be made on the first business day of each calendar month, in respect of Services rendered in the preceding month. In the event that Consultant ceases to provide to the Company the Support Services as required under this Agreement, then for as long as the Company is granted access as provided in Section 1.6, such event shall not affect the Consideration.
2.2. Unless otherwise agreed by the parties, all payments made under this Agreement shall be in NIS, according to the applicable 'HASHA'AR HAYATZIG' for US Dollars on the date of payment.
2.3. The Consideration is inclusive of any taxes, fees, and duties or other amounts, however designated, but excludes VAT and withholding taxes that are levied or based upon such charges, or upon this Agreement, and each of the parties shall be responsible for its respective tax, fee, duty, and other such obligations unless otherwise agreed in writing. The Company shall be entitled to withhold from payments any and all amounts as may be required from time to time under applicable law, unless it receives from Consultant a certificate or ruling from the ITA providing for an exemption or other reduction from such withholding or deduction which can clearly be relied upon by the Company and which is presented at least seven days prior to the time that the applicable payment of consideration is due to be made.
2.4. Consultant shall be responsible for all its expenses incurred in connection with the performance of its duties and obligations under this Agreement, except for such out-of-pocket expenses of Consultant associated with the provision of Services, including travel and accommodation expenses, as shall be approved by the Company in advance and in writing and conform to the Company's then applicable corporate travel guidelines. For the purpose of such reimbursement, Consultant shall be required to provide the Company with all invoices, receipts and other evidences of expenses as shall be required by the Company from time to time, provided that Consultant's invoices shall list travel and accommodation expenses separately when applicable.
2.5. The payments specified in this Section y2 constitute the full and final consideration for the Services provided hereunder, and Consultant will not be entitled to any additional consideration, of any form, for its Services hereunder.
3. CONFIDENTIALITY.
3.1. Without derogating from Consultant's obligations under the Purchase Agreement, each party agrees to maintain as confidential and not to disclose to any third party any and all Confidential Information (as defined below) of the other party. However, nothing herein will be deemed to prevent the receiving party from disclosing any Confidential Information received hereunder (i) to any of its employees who have a need to know such information for the purpose of providing the Services hereunder or (ii) pursuant to any applicable law, regulation or court order; provided that such receiving party will immediately notify the disclosing party of such required disclosure and shall use its reasonable commercial efforts to minimize or prevent such disclosure to the maximum extent allowed under any such applicable law, regulation or court order.
3.2. "CONFIDENTIAL INFORMATION" shall mean all information which is labeled or marked "Confidential" or with some other similar proprietary legend or which is reasonably understood to be confidential or proprietary, including, without limitation, any trade secret, information, process, technique, algorithm, computer program (source and object code), design, drawing, formula or test data relating to any research project, work in process, future development, engineering, manufacturing, marketing, servicing, financing or personnel matter relating to the disclosing party, its present or future products, sales, suppliers, clients, customers, employees, investors or business, whether in oral, written, graphic or electronic form. The term Confidential Information will not, however, include information which (i) is or becomes publicly available other than as a result of a breach by the receiving party or its representatives of the obligations hereunder, (ii) is or becomes available to the receiving party on a non-confidential basis from a source (other than the disclosing party or its representatives) which, to the best of the receiving party's knowledge, is not prohibited from disclosing such information by a legal, contractual or fiduciary obligation to the disclosing party; or (iii) was independently developed by the receiving party. Without derogating from the generality of the foregoing, the Company's "Confidential Information" shall be deemed to include the "Confidential Information", as such term is defined in the Purchase Agreement, and Consultant's "Confidential Information" shall be deemed to exclude the "Confidential Information", as such term is defined in the Purchase Agreement.
3.3. Consultant will promptly notify and disclose to the Company, or any persons designated by it, all inventions, discoveries, concepts, data and ideas, whether patentable or not, including, but not limited to, hardware, software, formulae, know-how, processes, methods, techniques as well as improvements thereto made, conceived, reduced to practice or developed by Consultant and its agents, alone or with others, which (i) result from the Services; (ii) are received or obtained by Consultant or its agents from the Company while performing the Services; (iii) result from use of the Company's equipment, facilities or materials; or (iv) are otherwise part of the Business (collectively referred to as "DEVELOPMENTS"). Delivery of the notice of any Development shall be in writing, supplemented with a detailed description of the applicable Development and the relevant documentation. All Developments shall be the sole property of the Company and its assignees, and the Company and its assignees shall be the sole owner of all patents and other rights in such Developments. Consultant hereby assigns to the Company its entire right, title and interest that Consultant may have or acquire in and to all such Developments and any intellectual property rights therein. It is hereby clarified that a lack of response from the Company with respect to the notice of the Developments or of its delivery shall not be considered a waiver of ownership of the Developments, and in any event the Developments shall remain the sole property of the Company.
3.4. Consultant further agrees to assist the Company, or any persons designated by it, at the Company's sole expense, in every proper and reasonable way to protect such Developments, including, without limitation, by assisting the Company in the preparation and submission of patent applications and the enforcement of patents.
3.5. Consultant shall not be entitled, with respect to all of the above, to any monetary consideration or any other consideration except as explicitly set forth in Section y2 of this Agreement.
4. TERM; TERMINATION.
4.1. This Agreement shall commence on the Effective Date and remain in effect until the expiration of the Consulting Term.
4.2. Commencing ninety (90) days following the Effective Date, the Company shall have the right to terminate this Agreement, for any reason whatsoever, by providing Consultant with at least twelve (12) months prior written notice.
4.3. Commencing ninety (90) days following the Effective Date, Consultant shall have the right to terminate this Agreement, for any reason whatsoever, by providing the Company with at least three (3) months prior written notice.
4.4. In addition, this Agreement may be terminated by either party hereto
(a) if the other party commits a material breach of this Agreement
(which includes any breach under Section y1.5) and fails to remedy
such breach within fifteen (15) days after receipt of written notice
of such breach and (b) immediately, by written notice, upon (i) the
other party's voluntary or involuntary bankruptcy, receivership or
commencement of a similar insolvency proceeding which is not removed
within ninety (90) days or (ii) the other party's election to
dissolve or wind-up business.
4.5. Notwithstanding anything to the contrary in the foregoing, this Agreement may be terminated by the Company, upon written notice of such breach, upon the breach by Consultant of any of its covenants under Sections 8.1 or 8.2 of the Purchase Agreement.
4.6. Upon the termination, cancellation or expiration of this Agreement for any reason, neither party shall be relieved of its duty to discharge in full all accrued, liquidated and due sums owed by either party to the other (but excluding, for the avoidance of doubt, any Consideration in respect of the period following the date of such termination, cancellation or expiration), which sums shall become immediately due and payable on the date of termination, cancellation or expiration. In the event of termination, Consultant shall continue to provide all Services during the applicable notice period, provided that the Company may immediately cease Consultant's Services and may shorten all or part of the notice period, regardless of whether notice of termination was given by the Company or by Consultant, and in lieu thereof shall pay Consultant the applicable Consideration for such period as if Consultant were to continue to provide Services for the remaining duration of the notice period.
4.7. In addition, the respective rights, obligations and duties of the parties under this Section y4.7 and Sections y1.7, y3, y4.6, y5 and y6, as well as any rights, obligations and duties which by their nature extend beyond the termination, cancellation or expiration of this Agreement, shall survive any termination, cancellation or expiration hereof in accordance with their respective terms.
5. RELATIONSHIP OF THE PARTIES.
5.1. Each of the parties shall at all times during the term of this Agreement be considered, act as, and shall represent itself to be, an independent contractor, and not an agent or employee of the other. No employment relationship shall exist or be construed to exist between either of the parties, on the one hand, and the employees of the other party, on the other hand. Except as expressly provided for herein or in another written agreement, neither of the parties shall be authorized to bind, commit or assume any obligations on behalf of the other party, without the other party's prior written consent. Consultant shall be responsible for the payments of all taxes applicable to him as an independent contractor.
5.2. In the event that any court or tribunal shall determine that notwithstanding the parties' mutual understanding, as described in this Agreement, Consultant or any of its employees is considered an employee of the Company, the following provisions shall be applicable:
5.2.1. Any compensation which has been paid to Consultant by the Company under this Agreement shall be reduced by 30% (the "REDUCED COMPENSATION"). To the Reduced Compensation shall be added only the "Tosefet Yoker" which has been paid in Israel from the Effective Date.
5.2.2. Consultant hereby agrees to immediately refund to the Company any amount which the Company has paid it under this Agreement in excess of the Reduced Compensation (as increased by the Tosefet Yoker), such refunded amount to be linked to CPI and include interest at an annual rate of 4%.
5.2.3. The Company may set-off any of Consultant's liability to the Company. For the avoidance of doubt, no such set-off shall relieve Consultant from repaying the Company Consultant's liability in full.
5.2.4. Consultant will defend, indemnify and hold the Company, or any third party on its behalf, harmless from and against all claims, damages, losses and expenses, including reasonable fees and expenses of attorneys and other professionals, relating to any obligation imposed upon the Company to pay any withholding taxes, social security, unemployment or disability insurance or similar items in connection with compensation received by Consultant or deriving from the adjudication of the existence of an employer-employee relationship between Consultant or any of its employees or consultants and the Company.
6. MISCELLANEOUS.
6.1. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire agreement between the parties with respect to the matters referred to herein, and supersedes any other arrangement, understanding or agreement, verbal or otherwise. This Agreement may not be amended or modified except by the written consent of the parties hereto.
6.2. NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto):
IF TO THE COMPANY:
Lantiq Israel Ltd.
[_________]
[_________]
Israel
Fax: [____________]
Attention: [_______________]
with a copy to (which shall not constitute notice):
Golden Gate Capital
One Embarcadero Center, Suite 3900
San Francisco, CA 94111
Fax: 415-983-2934
Attention: John Knoll and Felix Lo
Kirkland and Ellis, LLP
555 California Street, Suite 2700
San Francisco, CA 94104
Fax: 415-439-1500
Attention: Stephen Oetgen
Meitar Liquornik Geva & Leshem Brandwein, Law Officers
16 Abba Hillel Rd.
Ramat Gan 52506, Israel
Fax: 972-3-6103774
Attention: Maya Liquornik
IF TO CONSULTANT:
Metalink Ltd.
Yakum Business Park
Yakum 60972, Israel
Fax: +972-9-9605733
Attention: Chief Executive Officer
with a copy to (which shall not constitute notice):
Goldfarb, Levy, Eran, Meiri, Tzafrir & Co.
2 Weizmann Street
Tel-Aviv 64239, Israel
Fax: 972-3-608-9908
Attention: Ido Zemach, Adv.
or such other address with respect to a party as such party shall notify each other party in writing as above provided. Any notice sent in accordance with this Section y6.2 shall be effective (i) if mailed, five (5) business days after mailing, (ii) if sent by messenger, upon delivery, and (iii) if sent via telecopier, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non-business day) on the first business day following transmission and electronic confirmation of receipt.
6.3. COUNTERPARTS. This Agreement may be executed in one or more counterparts (including by means of telecopied, facsimile or portable data format (PDF) signature pages), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.
6.4. GOVERNING LAW; VENUE. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of Israel, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the courts sitting in the City of Tel-Aviv for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
6.5. AMENDMENT. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto.
6.6. EXTENSION; WAIVER. No failure on the part of any person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
6.7. SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.
6.8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns (if any). Neither party may assign any of its rights under this Agreement to any other person without obtaining the consent or approval of the other parties hereto, except that the Company may assign its rights and obligations under this Agreement, at any time, to any of its Affiliates.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the parties hereto have caused this Consulting Services Agreement to be executed and delivered as of the date first above written.
THE COMPANY:
LANTIQ ISRAEL LTD.
By: _________________
Name:
Title:
CONSULTANT:
METALINK LTD.
By: _________________
Name:
Title:
EXHIBIT 4.23
TRANSITION SERVICES AGREEMENT
THIS TRANSITION SERVICES AGREEMENT (this "AGREEMENT") is executed this 15 day of February, 2010 (the "EFFECTIVE DATE"), by and among LANTIQ ISRAEL LTD., a private company organized under the laws of the State of Israel ("BUYER"), and METALINK LTD., a public company organized under the laws of the State of Israel ("SELLER").
RECITALS
A. The parties have entered into that certain Asset Purchase Agreement dated January 5, 2010 (the "PURCHASE AGREEMENT"; capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Purchase Agreement), whereby Seller transferred certain assets and liabilities to Buyer and Buyer acquired and assumed such assets and liabilities as set forth therein.
B. It is a condition to the Closing of the Purchase Agreement that the parties enter into this Agreement.
C. Seller desires to receive the Services (as defined below) from Buyer, and Buyer is willing to provide Seller with the Services, all subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the covenants, promises, representations and warranties set forth herein, and intending to be legally bound hereby, the parties agree as follows:
1. SERVICES.
1.1 Subject to the terms and conditions set forth in this Agreement, Buyer will provide, or cause to be provided, to Seller with certain services, all as detailed in EXHIBIT A attached hereto (which Exhibit shall be incorporated by reference into this Agreement) (the "SERVICES").
1.2 The Services shall be provided by Buyer pursuant to the requirements (including instructions, terms, conditions, time-tables, locations and other terms, to the extent specified) as set forth in this Agreement or as may be agreed, modified or supplemented from time to time following the date hereof by mutual written consent of the parties. If during the Term (as defined below), Buyer relocates from an office in which Buyer is sharing space with Seller, the parties undertake to negotiate in good faith an agreed-upon solution that will allow Buyer to continue providing the Services to Seller on substantially the same terms and conditions.
1.3 Without derogating from the foregoing, the parties agree that, at the Seller's request, Exhibit A shall be supplemented (which supplements shall be an integral part of this Agreement) to add technical services of similar nature of the Services that are required by Seller to continue to conduct its business in substantially the same manner it shall be conducted immediately following the Closing; provided that are incidental to Buyer's operation of the Business; and further provided that if time consuming or otherwise not negligible in costs, Buyer may condition the same by a reasonable increase of the Consideration.
2. CONSIDERATION; TERMS OF PAYMENT.
2.1 In consideration for the provision of the Services hereunder, Seller shall pay Buyer on the first business day of each calendar month, in respect of such month, an amount of US $1,560 per each person employed by Seller on such day, but not more than US $9,360 per month in the aggregate (the "CONSIDERATION").
2.2 Unless otherwise agreed by the parties, all payments made under this Agreement shall be in NIS, according to the applicable 'HASHA'AR HAYATZIG' for US Dollars on the date of payment.
2.3 The Consideration is inclusive of any taxes, fees, and duties or other amounts, however designated, but excludes VAT and withholding taxes that are levied or based upon such charges, or upon this Agreement, and each of the parties shall be responsible for its respective tax, fee, duty, and other such obligations unless otherwise agreed in writing. Seller shall be entitled to withhold from payments any and all amounts as may be required from time to time under applicable law, unless it receives from Buyer a certificate or ruling from the Israeli Tax Authority providing for an exemption or other reduction from such withholding or deduction which can clearly be relied upon by Seller and which is presented at least seven days prior to the time that the applicable payment of consideration is due to be made.
4. CERTAIN COVENANTS.
4.1 CONTACT PERSONS. Seller and Buyer shall each name an individual to
serve as its respective point of contact. Such individuals shall be responsible
for the implementation of this Agreement between Seller and Buyer, including
resolution of any issues that may arise during the performance hereunder on a
day-to-day basis. Such individuals shall meet at least once each calendar
quarter throughout the Term and otherwise as reasonably requested by a party to
review the performance of the parties hereunder. The initial contact person of
(i) Seller shall be ______________, Tel: ________, Email:__________; and (ii)
Buyer shall be______________, Tel: ________, Email:__________.
4.2 DATA PROTECTION. Buyer shall take reasonable measures to protect Seller's data that are processed by Buyer from unauthorized destruction, deletion, change or disclosure to third parties, and to allow recovery of such data in events of force majeure.
5. CONFIDENTIALITY; OWNERSHIP.
5.1 Without derogating from Seller's obligations under the Purchase Agreement, each party agrees to maintain as confidential and not to disclose to any third party any and all Confidential Information (as defined below) of the other party. However, nothing herein will be deemed to prevent the receiving party from disclosing any Confidential Information received hereunder (i) to any of its affiliates, employees and advisors who have a need to know such information for the purpose of providing the Services hereunder or (ii) pursuant to any applicable law, regulation or court order; provided that such receiving party will immediately notify the disclosing party of such required disclosure and shall use its reasonable commercial efforts to minimize or prevent such disclosure to the maximum extent allowed under any such applicable law, regulation or court order.
5.2 Buyer acknowledges that it will acquire no right, title or interest (including any license rights or rights of use) in any firmware or software or Confidential Information owned by Seller. Buyer also acknowledges that, while it may continue to have access to databases existing on or accessible through the computer systems of Seller, Buyer will acquire no right, title or interest (including any license rights or rights of use) to any such databases, except to the extent expressly licensed by Seller to Buyer. Buyer acknowledges that the information contained in all such databases, including information regarding clients of Seller, shall be treated as Confidential Information of Seller hereunder. For the avoidance of doubt, nothing herein shall derogate from any right, title or interest of Buyer under any other agreement between Buyer and Seller.
5.3 Seller acknowledges that it will acquire no right, title or interest (including any license rights or rights of use) in any firmware or software or Confidential Information owned by Buyer, and the licenses therefor for which Buyer is a party, by reason of Seller's use or access thereto in connection with the provision of the Services provided hereunder. Seller also acknowledges that it will acquire no right, title or interest (including any license rights or rights of use) to any databases existing on or accessible through the computer systems of Buyer, except to the extent expressly licensed by Buyer to Seller. Seller acknowledges that the information contained in all such databases shall be treated as Confidential Information of Buyer hereunder. For the avoidance of doubt, nothing herein shall derogate from any right, title or interest of Seller under any other agreement between Buyer and Seller.
5.4 "CONFIDENTIAL INFORMATION" shall mean all information which is labeled or marked "Confidential" or with some other similar proprietary legend or which is reasonably understood to be confidential or proprietary, including, without limitation, any trade secret, information, process, technique, algorithm, computer program (source and object code), design, drawing, formula or test data relating to any research project, work in process, future development, engineering, manufacturing, marketing, servicing, financing or personnel matter relating to the disclosing party, its present or future products, sales, suppliers, clients, customers, employees, investors or business, whether in oral, written, graphic or electronic form. The term Confidential Information will not, however, include information which (i) is or becomes publicly available other than as a result of a breach by the receiving party or its representatives of the obligations hereunder; (ii) is or becomes available to the receiving party on a non-confidential basis from a source (other than the disclosing party or its representatives) which, to the best of the receiving party's knowledge, is not prohibited from disclosing such information by a legal, contractual or fiduciary obligation to the disclosing party; or (iii) was independently developed by the receiving party. Without derogating from the generality of the foregoing, Buyer's "Confidential Information" shall be deemed to include the "Confidential Information", as such term is defined in the Purchase Agreement, and Seller's "Confidential Information" shall be deemed to exclude the "Confidential Information", as such term is defined in the Purchase Agreement.
6. TERM; TERMINATION.
6.1 This Agreement shall remain in effect for a term of twelve (12) months from the Effective Date (the "INITIAL TERM"); provided, however, that if Seller requires the provision of any Services after the expiration of the Initial Term, then Seller shall have the right to extend the Initial Term for up to additional twelve (12) months (collectively with the Initial Term, the "TERM") by providing Buyer with written notice at least 30 days prior to the expiration of the Initial Term.
6.2 Unless otherwise expressly stated in the applicable Exhibit A with respect to a specific service, Seller shall have the right to terminate all or any part of any Service to be provided under this Agreement at any time during the Term by providing to Buyer with at least 30 days prior written notice.
6.3 In addition, this Agreement may be terminated in the following events:
(a) either party hereto may terminate this Agreement if the other party commits
a material breach of this Agreement and fails to remedy such breach within ten
(10) days after receipt of written notice of such breach, (b) this Agreement may
be terminated by Seller upon the provision of thirty (30) days written notice,
(c) this Agreement may be terminated by Buyer, upon written notice of a breach
by Seller of any of its covenants under Sections 8.1 and 8.2 of the Purchase
Agreement, and (ii) if, notwithstanding Section 1.2 above, the parties fail to
reach a solution for sharing an office space, and (d) this Agreement may be
immediately terminated by either party by written notice upon (i) the other
party's voluntary or involuntary bankruptcy, receivership or commencement of a
similar insolvency proceeding which is not removed within ninety (90) days; or
(ii) the other party's election to dissolve or wind-up business.
6.4 Upon the termination, cancellation or expiration of this Agreement for any reason, neither party shall be relieved of its duty to discharge in full all accrued, liquidated and due sums owed by either party to the other, which sums shall become immediately due and payable on the date of termination, cancellation or expiration. In addition, the respective rights, obligations and duties of the parties under Sections 4.2, 5, 6, 7 and 8, as well as any rights, obligations and duties which by their nature extend beyond the termination, cancellation or expiration of this Agreement, shall survive any termination, cancellation or expiration hereof.
7. RELATIONSHIP OF THE PARTIES. Each of the parties shall at all times during
the term of this Agreement be considered, act as, and shall represent itself to
be, an independent contractor, and not an agent or employee of the other. No
employment relationship shall exist or be construed to exist between either of
the parties, on the one hand, and the employees of the other party, on the other
hand. Except as expressly provided for herein or in another written agreement,
neither of the parties shall be authorized to bind, commit or assume any
obligations on behalf of the other party, without the other party's prior
written consent. In the event that any court or tribunal shall determine that
notwithstanding the parties' mutual understanding, as described in this
Agreement, Buyer or any of its employees is considered an employee of Seller,
Section 5.2 of the Consulting Services Agreement shall apply, MUTATIS MUTANDIS.
8. MISCELLANEOUS.
8.1 NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto):
IF TO BUYER:
Lantiq Israel Ltd.
[_________]
[_________]
Israel
Fax: [____________]
Attention: [_______________]
with a copy to (which shall not constitute notice):
Golden Gate Capital
One Embarcadero Center, Suite 3900
San Francisco, CA 94111
Fax: 415-983-2934
Attention: John Knoll and Felix Lo
Kirkland and Ellis, LLP
555 California Street, Suite 2700
San Francisco, CA 94104
Fax: 415-439-1500
Attention: Stephen Oetgen
Meitar Liquornik Geva & Leshem Brandwein, Law Officers
16 Abba Hillel Rd.
Ramat Gan 52506, Israel
Fax: 972-3-6103774
Attention: Maya Liquornik
IF TO SELLER:
Metalink Ltd.
Yakum Business Park
Yakum 60972, Israel
Fax: +972-9-9605733
Attention: Chief Executive Officer
with a copy to (which shall not constitute notice):
Goldfarb, Levy, Eran Meiri, Tzafrir & Co.
2 Weizmann Street
Tel-Aviv 64239, Israel
Fax: 972-3-608-9908
Attention: Ido Zemach, Adv.
or such other address with respect to a party as such party shall notify each other party in writing as above provided. Any notice sent in accordance with this Section 13.1 shall be effective (i) if mailed, five (5) business days after mailing, (ii) if sent by messenger, upon delivery, and (iii) if sent via telecopier, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non-business day) on the first business day following transmission and electronic confirmation of receipt.
8.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts (including by means of telecopied, facsimile or portable data format (PDF) signature pages), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.
8.3 GOVERNING LAW; VENUE. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of Israel, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the courts sitting in the City of Tel-Aviv for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
8.4 AMENDMENT. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto.
8.5 EXTENSION; WAIVER. No failure on the part of any person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
8.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns (if any). Neither party may assign any of its rights under this Agreement to any other person without obtaining the consent or approval of the other parties hereto, except that Buyer may assign its rights and obligations under this Agreement, at any time, to any of its Affiliates.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the parties hereto have caused this Transition Services Agreement to be executed and delivered as of the date first above written.
BUYER:
LANTIQ ISRAEL LTD.
By: ________________
Name:
Title:
SELLER:
METALINK LTD.
By: ________________
Name:
Title:
EXHIBIT 4.24
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (this "AGREEMENT") is executed this 15 day of February, 2010 (the "EFFECTIVE DATE"), by and among LANTIQ ISRAEL LTD., a private company organized under the laws of the State of Israel ("LANTIQ"), and METALINK LTD., a public company organized under the laws of the State of Israel ("SELLER" or "METALINK").
RECITALS
A. The parties have entered into that certain Asset Purchase Agreement dated January 5 2010, (the "PURCHASE AGREEMENT"; capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Purchase Agreement), whereby Seller transferred substantially all of the assets of Metalink associated with the Business as set forth therein.
B. Lantiq and Metalink desire to grant each other certain licenses in connection with the sale and transfer of the Business, all subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the covenants, promises, representations and warranties set forth herein, and intending to be legally bound hereby, the parties agree as follows:
1. ADDITIONAL DEFINITIONS.
"PATENT IPR" means (i) all patents and all proprietary rights associated therewith; (ii) all inventions or applications therefor or disclosures related thereto; and (iii) all registrations of any of the foregoing, all applications therefor, all documentation and all goodwill associated with any of the foregoing.
2. LICENSE GRANT BY METALINK.
Metalink hereby grants to Lantiq and its Affiliates a royalty free and fully paid-up, non-exclusive, non-transferable, worldwide, perpetual and irrevocable license under any Patent IPR owned or controlled by Metalink (or for which Metalink has the right to grant a sublicense without the payment of any additional consideration) on or prior to the date of Closing, including, but not limited to, any retained Patent IPR (other than the Patent IPR included in the Business Intellectual Property Rights) to make, have made, use, import, sell (either directly or indirectly), offer to sell or otherwise dispose of any products or services.
3. LICENSE BACK GRANT BY LANTIQ.
Lantiq hereby grants to Metalink and its Affiliates a royalty free and fully paid-up, non-exclusive, non-transferable, worldwide, perpetual and irrevocable license under any Patent IPR included in the Purchased Assets for which Lantiq has the right to grant a sublicense without the payment of any additional consideration, to make, have made, use, import, sell (either directly or indirectly), offer to sell or otherwise dispose of any products or services solely in connection with the DSL Business (and, for the avoidance of any doubt, not in connection with the Business).
4. "AS IS" BASIS.
4.1 The license by Lantiq hereunder is granted to Metalink "as is" and Lantiq makes no representation, warranty or assurance of any kind, whether express or implied, concerning the Patent IPR licensed by it hereunder, including, without limitation, warranties of merchantability, accuracy or completeness, fitness for a particular purpose, validity and/or non-infringement of any Intellectual Property Right of any person. Metalink will have no right to indemnification in respect of the license granted by Lantiq hereunder. Metalink's rights in and to the Patent IPR licensed to it hereunder will be limited to those expressly granted herein and all rights not expressly granted herein are reserved to Lantiq.
4.2 The license by Metalink hereunder is granted to Lantiq "as is" and Metalink makes no representation, warranty or assurance of any kind, whether express or implied, concerning the Patent IPR licensed by it hereunder, including, without limitation, warranties of merchantability, accuracy or completeness, fitness for a particular purpose, validity and/or non-infringement of any Intellectual Property Right of any person. Lantiq will have no right to indemnification in respect of the license granted by Metalink hereunder. Lantiq's rights in and to the Patent IPR licensed to it hereunder will be limited to those expressly granted herein and all rights not expressly granted herein are reserved to Metalink. For the avoidance of doubt, the disclaimer in this Section 4.2 shall not be construed to limit, modify or otherwise amend any representations or warranty, or any right to seek indemnification, included in the Purchase Agreement.
5. RELATIONSHIP OF THE PARTIES.
Each of the parties shall at all times during the term of this Agreement be considered, act as, and shall represent itself to be, an independent contractor, and not an agent or employee of the other. There is no relationship of partnership, joint venture, employment, franchise or agency between the parties. Except as expressly provided for herein or in another written agreement, neither of the parties shall be authorized to bind, commit or assume any obligations on behalf of the other party, without the other party's prior written consent.
6. OWNERSHIP ACKNOWLEDGEMENT.
6.1 Lantiq hereby acknowledges and agrees that Metalink owns the Patent IPR that
is licensed by Metalink to Lantiq hereunder and all rights therein and that
nothing in this Agreement shall give Lantiq any right, title or interest in or
to such Patent IPR, other than the limited and restricted license granted in
Section 2 of this Agreement.
6.2 Metalink hereby acknowledges and agrees that Lantiq owns the Patent IPR that
are licensed by Lantiq to Metalink hereunder and all rights therein and that
nothing in this Agreement shall give Metalink any right, title or interest in or
to such Patent IPR, other than the limited and restricted license granted in
Section 3 of this Agreement.
7. MISCELLANEOUS.
7.1 NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto):
IF TO LANTIQ:
Lantiq Israel Ltd.
[_________]
[_________]
Israel
Fax: [____________]
Attention: [_______________]
with a copy to (which shall not constitute notice):
Golden Gate Capital
One Embarcadero Center, Suite 3900
San Francisco, CA 94111
Fax: 415-983-2934
Attention: John Knoll and Felix Lo
Kirkland and Ellis, LLP
555 California Street, Suite 2700
San Francisco, CA 94104
Fax: 415-439-1500
Attention: Stephen Oetgen
Meitar Liquornik Geva & Leshem Brandwein, Law Officers
16 Abba Hillel Rd.
Ramat Gan 52506, Israel
Fax: 972-3-6103774
Attention: Maya Liquornik
IF TO SELLER:
Metalink Ltd.
Yakum Business Park
Yakum 60972, Israel
Fax: +972-9-9605733
Attention: Chief Executive Officer
with a copy to (which shall not constitute notice):
Goldfarb, Levy, Eran Meiri, Tzafrir & Co.
2 Weizmann Street
Tel-Aviv 64239, Israel
Fax: 972-3-608-9908
Attention: Ido Zemach, Adv.
or such other address with respect to a party as such party shall notify each other party in writing as above provided. Any notice sent in accordance with this Section 7.1 shall be effective (i) if mailed, five (5) business days after mailing, (ii) if sent by messenger, upon delivery, and (iii) if sent via telecopier, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non-business day) on the first business day following transmission and electronic confirmation of receipt.
7.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.
7.3 GOVERNING LAW; VENUE. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of Israel, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the courts sitting in the City of Tel-Aviv for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
7.4 AMENDMENT. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto.
7.5 EXTENSION; WAIVER. No failure on the part of any party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No party shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
7.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns (if any). Neither party may assign any of its rights under this Agreement to any other person without obtaining the consent or approval of the other parties hereto, provided however that either Party may assign any rights and licenses granted hereunder to a third party in the context of an assignment, merger or other transfer of all or substantially all of its assets related to the business licensed hereunder.
7.7 SEVERABILITY. In the event of invalidity of any provision of this Agreement, the parties agree that such invalidity shall not affect the validity of the remaining portions of this Agreement, and further agree to substitute for such invalid provision a valid provision, which most closely approximates the intent and economic effect of the invalid provision.
8. TERM AND TERMINATION
This Agreement shall become effective on the Effective Date and shall be effective, with respect to each item included in any Patent IPR licensed hereunder, in each case as long as such item of Patent IPR licensed hereunder remains in force. Each party shall have the right to pursue all other remedies available at law or at equity, including without limitation the right to seek an injunction without the necessity of posting a bond or making any showing of irreparable harm.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the parties hereto have caused this License Agreement to be executed and delivered as of the date first above written.
BUYER:
LANTIQ ISRAEL LTD.
By:_________________
Name:
Title:
SELLER:
METALINK LTD.
By:_________________
Name:
Title:
EXHIBIT 4.25
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "AGREEMENT") is made as of this 15 day of February, 2010, 2010 (the "EFFECTIVE DATE") by and between Lantiq Israel Ltd. (the "LESSOR") and Metalink Ltd. (the "LESSEE") (collectively, the "PARTIES").
WHEREAS, the Parties have entered into that certain Asset Purchase Agreement
dated January 5, 2010, pursuant to which Lessor has assumed all
Lessee's rights and obligations under that certain Lease Agreement
dated June 6, 2000, by and among Lessee and Yaqum Pituach Ltd. (the
"LANDLORD") (as amended from time to time, the "MASTER LEASE") and
that certain Management Services Agreement dated June 6, 2000, by
and among Landlord and Lessee (the "MANAGEMENT AGREEMENT"), which
agreements are attached hereto as EXHIBIT A-1 and EXHIBIT A-2,
respectively; and
WHEREAS, the Landlord has agreed to (i) the assignment of the Master Lease to
Lessor and the use by Lessor of that certain premises known as a
part of parcel 2 in block 8953 located at Yaqum, Israel (the
"PROPERTY") and (ii) this Agreement; and
WHEREAS, Lessor desires to sublease the Subleased Premises (as defined below)
to Lessee, subject to and in accordance with the terms and
conditions of this Agreement; and
WHEREAS, the Parties agree that the Tenants' Protection Law (Consolidated
Version), 5732-1972, or any laws, regulations or other provisions
which shall replace and/or amend it, shall not apply to this
Agreement.
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NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, the Parties hereby mutually agree as follows:
1. SUBLEASE.
1.1. Subject to the terms and conditions set forth in this Agreement, Lessor hereby subleases to Lessee and Lessee hereby subleases from Lessor an office space located in the Property in accordance with that certain Transition Services Agreement between the Parties dated as of the date hereof (the "SUBLEASED PREMISES" and the "TRANSITION SERVICES AGREEMENT", respectively), for the Term (as defined below).
1.2. Lessee hereby undertakes to comply, with respect to the Subleased Premises, with all terms, covenants, conditions, liabilities and obligations of Lessor under the Master Lease and the Management Agreement, as if Lessee were the original lessee under the Master Lease and the Management Agreement, MUTATIS MUTANDIS (including, without limitation, any provisions with respect to the purpose and use of the Subleased Premises, alterations, maintenance, evacuation, breach of contract, casualty, indemnity and compliance with laws), except as otherwise expressly set forth herein or in the Transition Services Agreement. In addition and without derogating from the above, as between the Parties, Lessor shall also have all rights of the Landlord as if it were the Landlord and Lessee were the tenant under the Master Lease. Lessor hereby agrees to make reasonable efforts to cause the Landlord to comply with its obligations under the Master Lease with respect to the Subleases Premises.
1.3. Lessee represents and warrants that it has checked the Subleased Premises and found them suitable for its needs and leases the Subleased Premises on an "as in" basis. Lessee further represents and warrants that it has adequate resources to perform its payment and other obligations under this Agreement. Except as specifically provided herein, Lessor shall have no obligations to Lessee under the Master Lease.
2. TERM AND TERMINATION.
2.1. This Agreement shall commence on the Effective Date and shall
continue in full force and effect until the termination or
expiration of the Transition Services Agreement (but subject to
Section y2.2 below) (the "TERM").
2.2. Notwithstanding the above, this Agreement shall terminate simultaneously with the termination of Master Lease, in which case Lessee shall have no claims against Lessor and/or the Landlord and shall not be entitled to any compensation in connection therewith.
2.3. Upon termination of this Agreement, and without derogating from any other provision under the Master Lease, Lessee shall return the Subleased Premises to Lessor vacant and free of any person or object (excluding the fixtures), in good, satisfactory and complete condition, subject to reasonable wear and tear.
3. RENT AND OTHER PAYMENTS.
3.1. The consideration for the sublease of the Subleased Premises hereunder, including but not limited to the management fees due under the Management Agreement, taxes, levies and obligatory municipal payments payable with respect to the use of the Subleased Premises and expenses for electricity, water, and drain fees incurred during the Term, is deemed to be fully included in the consideration payable by Lessee under the Transition Services Agreement, which consideration shall be paid in accordance with the terms thereof.
4. ASSIGNMENT.
4.1. Lessee may not assign its rights and/or interest in the Subleased Premises and/or this Agreement or any portion hereof, or sublet the Subleased Premises or any portion thereof to any party, without the prior written consent of Lessor and the Landlord.
5. MISCELLANEOUS.
5.1. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Master Lease, which is incorporated herein by references and deemed an integral part hereof, constitutes the entire agreement of the Parties with regard to the Subleased Premises and supersedes all prior written and oral agreements and representations. This Agreement may be amended by the Parties hereto at any time by execution of an instrument in writing signed on behalf of each of the Parties hereto.
5.2. WAIVER. No failure, delay of forbearance of either Party in exercising any power or right hereunder shall in any way restrict or diminish such Party's rights and powers under this Agreement, or operate as a waiver of any breach or nonperformance by either Party of any terms of conditions hereof.
5.3. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of Israel. Any dispute arising under or in relation to this Agreement shall be resolved in the competent court located in Tel-Aviv-Jaffa, and each of the Parties hereby submits irrevocably to the jurisdiction of such court.
5.4. COUNTERPARTS. This Agreement may be executed in one or more counterparts (including by means of telecopied, facsimile or portable data format (PDF) signature pages), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.
-SIGNATURE PAGE FOLLOWS-
IN WITNESS WHEREOF, the Parties have duly executed this Sublease Agreement on the date first written above.
LANTIQ ISRAEL LTD. METALINK LTD.
By: By:
-------------------------------- ----------------------------------------
Name: Name:
Title: Title:
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EXHIBIT 8
LIST OF SUBSIDIARIES
---------------------------- -------------- ------------- -----------
PROPORTION PORTION
COUNTRY OF OF OWNERSHIP OF VOTING
NAME INCORPORATION INTEREST POWER HELD
---------------------------- -------------- ------------- -----------
METALINK INTERNATIONAL LTD.* Republic of
Seychelles 100% 100%
---------------------------- -------------- ------------- -----------
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* CURRENTLY INACTIVE
EXHIBIT 12.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 17CFR 240.13A-14(A),
AS ADOPTED PURSUANT TO ss.302 OF THE SARBANES-OXLEY ACT OF 2002
I, Tzvika Shukhman, certify that:
1. I have reviewed this annual report on Form 20-F of Metalink 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 annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant 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 our 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 our 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 this 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 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.
Date: June 29, 2010 By: /s/ Tzvika Shukhman
------------------------
Name: Tzvika Shukhman
Title: Chief Executive Officer
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EXHIBIT 12.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 17CFR 240.13A-14(A),
AS ADOPTED PURSUANT TO ss.302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rony Eizenshtein, certify that:
1. I have reviewed this annual report on Form 20-F of Metalink 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 annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant 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 our 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 our 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 this 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 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.
Date: June 29, 2010 By: /s/ Rony Eizenshtein
-------------------------
Name: Rony Eizenshtein
Title: Chief Financial Officer
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EXHIBIT 13.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 USC ss.1350,
AS ADOPTED PURSUANT TO ss.906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 20-F for the fiscal year
ended December 31, 2009 of Metalink 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, Tzvika Shukhman, Chief
Executive Officer and Chairman of the Board, certify that:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 29, 2010
By: /s/ Tzvika Shukhman
-----------------------
Name: Tzvika Shukhman
Title: Chief Executive Officer
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EXHIBIT 13.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 USC ss.1350,
AS ADOPTED PURSUANT TO ss.906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 20-F for the fiscal year
ended December 31, 2009 of Metalink 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, Rony Eizenshtein, Chief
Financial Officer, certify that:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 29, 2010
By: /s/ Rony Eizenshtein
------------------------
Name: Rony Eizenshtein
Title: Chief Financial Officer
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EXHIBIT 15
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos. 333-121901, 333-12064, 333-88172, 333-112755 and 333-149657 on Form S-8 and Nos. 333-104147, 333-13806 , 333-145431 and 333-152119 on Form F-3, of our report, dated March 29, 2010, relating to the consolidated financial statements of Metalink Ltd. (the "Company") for the year ended December 31, 2009, (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the sale of the company's principal line of business), appearing in this Annual Report on Form 20-F of the Company for the year ended December 31, 2009.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu
Tel Aviv, Israel
June 30, 2010