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UNITED STATES

Title of each class		Name of each exchange on which registered
Ordinary Shares, nominal value NIS 0.04 per share		The NASDAQ Stock Market LLC

PART I

 

ITEM 1.                        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Not applicable.

 

ITEM 2.                       OFFER STA TISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.                        KEY IN FORMATION

 

SELECTED FINANCIAL DATA

 

The following selected consolidated financial data are presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The Israeli Securities Law – 1968 allows Israeli companies, such as us, whose securities are listed both on the  TASE and on certain stock exchanges in the United States (including NASDAQ), to report to the Israel Securities Authority and the TASE in accordance with the reporting requirements under SEC rules and U.S. GAAP.  All financial statements included in this annual report and all financial information released in Israel are presented solely under U.S. GAAP. The selected consolidated financial data should be read in conjunction with and are qualified by reference to Item 5 of this report entitled “Operating and Financial Review and Prospects” and the consolidated financial statements and notes thereto and other financial information included elsewhere in this report.

 

 

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		2008				2009				2010				2011				2012
		U.S. dollars in thousands (except share and per share data)
Statement of Operations Data:
Revenues			32,222				23,534				21,762				28,673				31,330
Cost of revenues			15,075				9,258				8,350				11,184				11,989
Gross profit			17,147				14,276				13,412				17,489				19,341
Research and development, net			1,762				1,558				1,647				1,976				2,609
Selling and marketing			9,292				7,202				6,160				7,748				8,733
General and administrative			5,956				4,381				3,845				4,383				5,087
Restructuring charges			-				-				849				-				-
Impairment of goodwill and other intangible assets			1,839				-				-				-				-
Operating income (loss)			(1,702	)			1,135				1,760				3,382				2,912
Financial income( expenses), net			3,136				(5,452	)			(2,190	)			(911	)			(191	)
Other income (expenses), net			-				(26	)			(6	)			4				-
Income (loss) from continuing operations before taxes on income			1,434				(4,343	)			(436	)			2,475				2,721
Taxes on income			74				91				24				125				(1,122	)
Income (loss) from continuing operations after taxes on income			1,360				(4,434	)			(460	)			2,350				3,843
Equity in earnings (including impairment losses)  of affiliated companies			84				(677	)			-				-				-
Net income (loss) from continuing operations			1,444				(5,111	)			(460	)			2,350				3,843
Income (loss) from discontinued operations, net of tax			(840	)			13				-				-				-
Net income (loss)			604				(5,098	)			(460	)			2,350				3,843
Net basic income (loss) per share:
Continued operations		$	0.16			$	(0.55	)		$	(0.05	)		$	0.23			$	0.34
Discontinued operations		$	(0.09	)			-				-				-				-
Net dilutive income (loss) per share:
Continued operations		$	0.16			$	(0.55	)		$	(0.05	)		$	0.21			$	0.31
Discontinued operations		$	(0.09	)			-				-				-				-
Weighted average number of shares outstanding for basic net income (loss) per share			8,921,951				9,322,341				9,389,512				10,207,111				11,403,596
Weighted average number of shares outstanding for dilutive net income (loss) per share			8,936,458				9,322,341				9,389,512				11,100,654				12,317,502

 

		2008				2009				2010				2011				2012
Summary of Balance Sheet Data:
Cash and cash equivalents			5,777				2,866				1,763				2,090				2,223
Working capital			6,030				3,933				1,762				2,463				7,674
Total assets			24,642				18,167				15,024				15,598				21,535
Long term debt			4,660				6,729				5,250				1,543				1,808
Total liabilities			14,540				13,137				10,732				6,458				6,709
Shareholders’ equity			10,102				5,030				4,292				9,140				14,826

 

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RISK FACTORS

 

  Risks Related to Our Business

 

If we are unable to achieve and maintain a leading position and to build awareness of our brands, we may not be able to compete effectively against competitors with greater name recognition and our sales could be adversely affected.

 

If we are unable to economically achieve and maintain a leading position in data recognition software or to promote and maintain our brands, our business, results of operations and financial condition could suffer.  Development and awareness of our brands will depend largely on our success in increasing our customer base.  In order to attract and retain customers and to promote and maintain our brands in response to competitive pressures, we may be required to increase our marketing and advertising budget or increase our other sales expenses.  There can be no assurance that our efforts will be sufficient or that we will be successful in attracting and retaining customers or promoting our brands.  Failure in this regard could harm our business and results of operations.

 

Our capital requirements have historically been significant and we may not in the future be able to meet our requirements with our working capital.

 

Historically, our capital requirements have been significant. We may in the future require additional financing to fund our operations and capital requirements beyond our current resources, our cash flow from our operations or funding under our revolving line of credit.  In such event, we cannot assure you that additional financing will be available to us when needed, on commercially reasonable terms, or at all.  We have no expectation that our existing shareholders will provide any portion of our future financing requirements.  Any inability to obtain additional financing when needed would have a material adverse effect on us, requiring us to curtail our expansion efforts.  In addition, to the extent that we incur substantial indebtedness, we will be subject to risks associated with incurring substantial indebtedness, including the risk that interest rates may fluctuate, and cash may be insufficient to repay interest and principal on any such indebtedness.  Any additional equity financing may involve substantial dilution of the interests of our then-existing shareholders.

 

We have had difficulties in making our debt payments and may not be able to make debt payments that we may incur in the future.

 

In December 2006, through the issuance of convertible debentures, we raised net proceeds of NIS 61.9 million (approximately $14.8 million at the date of issuance).

 

 The first principal payment on the debentures was due December 31, 2009.  Prior to the first principal payment we concluded that making full payment at such time would have had an adverse effect on our cash flow and, therefore, initiated negotiations with our debenture holders in order to reach an alternative payment arrangement.   That arrangement was approved by the debenture holders on November 24, 2010 and by the Tel Aviv District Court on December 13, 2010, and the amendment to the indenture, pursuant to which the debentures had been issued, was entered into on December 31, 2010.  In 2011, we raised funds in a private placement and used them to repay the remaining outstanding principal balance of, and accrued interest on, the convertible debentures in full.

 

In 2011, we entered into a credit agreement with Leumi bank, which provides for a revolving credit facility of $600,000. As of March 11, 2013, we had borrowed $597,000 pursuant to the credit facility. O ur ability to meet our existing and future obligations under the credit facility or otherwise will depend on whether we can implement our strategy as well as on financial, competitive and other factors, including factors that are beyond our control.

 

Any failure to make timely payments could result in a material adverse effect on our business, prospects, financial condition and results of operations.

 

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The impact of a continuing global economic downturn, including the European debt crisis, may have a material adverse effect on our business, results of operations and financial condition.  

 

We sell our products and services in various countries around the world, with a concentration in Europe. Consequently, our sales and profitability are dependent on general economic conditions globally and locally. The weakening of consumer and corporate confidence, declining income and asset values in many areas and other adverse factors related to the global economic downturn that has been ongoing during the past several years  has resulted in our customers and the end-users of our products, services and solutions, postponing or reducing spending on our products, services and solutions.  A substantial and lasting slowdown of the global economy could result in a continuation of that trend thereby adversely affecting our business.

 

The global economic downturn and the European debt crisis in particular have also led to more limited availability of credit which may have a negative impact on the financial condition, and in particular on the purchasing ability, of some of our customers and may also result in requests for extended payment terms, credit losses, insolvencies, limited ability to respond to demand or diminished sales channels available to us. The generally difficult economic conditions combined with tightening credit markets may also cause financial difficulties for our suppliers and collaborative partners which may result in their failure to perform as planned and, consequently, in delays in the delivery of our products, services and solutions.  

 

For example, the European debt crisis, which has had a negative impact on the European economy, may have adverse impact on our operations.  In 2010, 2011 and 2012, we generated $14.3 million, $20.5 million and $19.9 million, respectively, of revenues from our operations in Europe, which represented 66%, 71% and 64%, respectively, of our total revenues. We are not certain that we will be able to maintain those levels in light of the ongoing economic difficulties in Europe. The tightening of European credit markets may result in additional deterioration of our customers’ and end-users’ credit quality or access to cash, which could lower the realization rate on our accounts receivable.  In addition, the debt crisis in certain European countries could cause the value   of the Euro to deteriorate, reducing the purchasing power of our customers and end-users of our products or services, which can lead to the lower demand for such products or services, increase our exposure to losses from bad debts or result in our customers or end-users ceasing operations, any of which could materially adversely affect our business, financial condition and results from operations.

 

The difficult global economic conditions may also result in inefficiencies due to our reduced ability to forecast developments in our industry and plan our operations accordingly. Adverse economic conditions affecting us, our current and potential customers, their spending on our products, services and solutions, and our suppliers and collaborative partners may have a material adverse effect on our business, results of operations and financial condition.  

 

For a more detailed discussion of our liquidity and capital resources, see “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”

 

If we acquire additional businesses, it may lead to increased expenditures and integration costs, and could strain management, financial, and operational resources.

 

Between 2007 and 2009, we acquired related complementary businesses in an effort to expand capacity, enter new markets and diversify our sources of revenue.  Those acquisitions strained our management, financial and operational resources.  Any future acquisition may also generate such strain. In the event we engage in additional acquisitions, they may also result in potentially dilutive issuances of equity securities, incurrence of additional debt, the assumption of known and unknown liabilities, the amortization of expenses related to intangible assets and the impairment of goodwill, all of which could harm our business, financial condition and operating results.

 

We currently have subsidiaries in foreign countries and additional acquisitions in foreign countries, should we choose to pursue them, may pose additional problems. We could experience inefficiencies in conducting our business as we integrate new operations and manage geographically dispersed operations.  Also, the acquired businesses may not yield the income and levels of activity we expected them to yield, which may result in losses.

 

 

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Additionally, we may not succeed in retaining or hiring qualified management, sales, customer support, and technical personnel to integrate acquired operations, manage future growth effectively, and accomplish our overall objectives.  Competition for qualified personnel is intense.  If we expand too fast, or fail to integrate our recently acquired businesses or other new businesses, or lose key personnel from our recently acquired businesses or other businesses, there could be a material adverse effect on our business, prospects, financial condition and results of operations.

 

The market  for data capture systems, automatic form processing systems and mobile data captures highly competitive.

 

The market for data capture systems in general, and for automatic form processing systems in particular, is characterized by intense competition, significant price erosion over the life of the product, and rapidly changing business conditions, customer requirements, and technology.  Our products compete with those developed and marketed by numerous well-established companies, including EMC (Captiva Software), Mitek, Banctec, Kofax (formerly, Dicom Group), Datacap, and ReadSoft, as well as with manual data entry systems.  Many of our competitors have longer operating histories and greater financial resources than we do.  Furthermore, certain of these competitors are industry leaders with the financial resources necessary to enable them to withstand substantial price competition or downturns in the market for computer software.  The fact that our resources are more limited places us at a significant disadvantage.  This risk is particularly acute during difficult economic times. Further, the emerging market for mobile data capture systems in which we are competing, even at this stage of its development, is characterized by intense competition and rapidly changing business conditions, customer requirements, and technology.  We are in competition with Mitek and others in that market. The emerging nature of the market may impose financial risks that competitors with greater financial resources are more equipped to bear.

 

A slowdown in our customers’ industries could adversely impact the sale of our products and our prospects of achieving or maintaining profitability.

 

A slowdown in the industries to which we sell our products would likely result in significantly reduced product demand, erosion of selling prices and overcapacity.  Such a downturn could materially reduce demand for the products and technology that we offer.  In addition, our ability to reduce expenses in response to any downturn or slowdown in such industries may be limited because of:

 

·

our continuing need to invest in research and development;

 

·

our capital equipment requirements; and

 

·

marketing requirements.

 

A slowdown could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Our success depends on our strategic marketing relationships and the marketing and distribution efforts of our distributors and other strategic partners.

 

Our business and prospects depend upon our ability to maintain our existing, and to develop additional, strategic marketing relationships and upon the marketing and distribution efforts of our distributors and other strategic partners.  The loss or diminishment of our relationship with any one of our significant strategic partners could have a material and adverse effect on our existing operations and growth prospects.  We normally attempt to recruit distributors with established distribution channels and reputations for marketing and installing document imaging, data capture and workflow systems to market our products. We cannot assure you that we will be able to develop such relationships. Our litigation with Mitek (see "Our success depends on our proprietary software technology") may impact the willingness of others to enter strategic partnerships with us.

 

 

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Our industry is marked by rapid technological changes and frequent new or updated product introductions, and if we do not respond to such rapid technological changes, new product introductions and enhancements and evolving industry standards, our products and services could become obsolete.

 

As processing speeds increase, memory capacities expand and software is upgraded, we need to ensure our products, capitalize on these developments, and remain compatible with industry standards.  Our ability to compete will depend upon our ability to offer state-of-the-art products in a timely and cost-effective manner.  Our product decisions must anticipate the changing demand for products.  If we are unable to develop, modify and enhance our existing technology to respond to such changing standards and customer demands, our business could be adversely affected.  In addition, the development of new technologies, new product introductions or enhancements by our competitors could adversely affect our sales.

 

We have had a history of losses and may incur future losses.

 

Since our inception in March 1991, we have incurred net losses in every year other than in 1995, 1997, 1998, 2006, 2008, 2011 and 2012, and our losses may recur and continue.  For the year ended December 31, 2012, we had an accumulated deficit of $19,806,000. We plan to maintain the level of our aggregate product development expenses. We cannot assure you that our revenues will grow or that we will continue to achieve profitability in the future. Failure to increase revenues could result in a material adverse effect on our business, prospects, financial results and results of operations.

 

We have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue, this may cause our stock price to decline.

 

We have experienced and expect to experience in the future significant fluctuations in our quarterly results of operations.

 

Our lengthy sales cycle increases our exposure to customer cancellations or delays in orders, which may result in volatile quarterly revenues.  Given the high average selling price of, and the cost and time required to implement our solutions, a customer’s decision to license our products typically involves a significant commitment of resources and is influenced by the customer’s budget cycles and internal approval procedures for information technology purchases.  In addition, selling our solutions requires us to educate potential customers about our solutions’ uses and benefits.  As a result, our solutions have a long sales cycle, which can take 9 to 12 months or more.  Consequently, we have difficulty predicting the quarter in which sales to expected customers may occur and actual sales may not necessarily be in the same calendar quarter or even year in which we expended resources in connection with marketing to the client.  The sale of our solutions is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers, which typically accompany significant capital expenditures.

 

Other factors that may contribute to fluctuations in our quarterly results of operations include:

 

·

the size and timing of orders;

 

·

customer deferral of orders in anticipation of new products, product upgrades or price enhancements;

 

·

customer deferral of orders due to general economic conditions or a customer’s specific cash flow shortages;

 

·

the high level of competition that we encounter; and

 

·

the timing of our product introductions, upgrades or enhancements or those of our competitors or of providers of complementary products.

 

 

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Fluctuations in our quarterly results could discourage investors and cause the market price of our ordinary shares to decline.

 

Large customers have historically constituted a significant portion of our orders and if we become dependent on large customers, the loss of such customers could adversely affect us.

 

In some years, prior to 2010, sales to large customers accounted for a significant part of our sales, and  although in 2012, 2011 and 2010, we had no customer who accounted for more than 10% of our total revenues, we are actively recruiting large customers and partners for our products.   If we become dependent on large customers    our business, prospects, financial conditions and results of operations could be adversely affected by the loss of such customers.

 

Our success depends on our ability to execute our restructuring.

 

Our plans for growth are dependent on our ability to execute the organizational restructuring detailed in "Recent Developments". We are devoting significant energy and resources to bringing about that restructuring based on the belief that it will allow us to expand the scope of our product offerings in the various markets around the world in which we are active and to increase our penetration of those markets.  That energy and those resources could be devoted to other activities. There is no assurance that we will be successful in executing the organizational restructuring or that, if we are successful, the restructuring will have the positive effects which we hope to achieve through it. If either occurs, our profits and growth could be adversely impacted.

 

Our success depends on our key personnel.

 

Our success depends upon the contributions of our executive officers and other key personnel.  All of our key management and technical personnel have expertise, which is in high demand among our competitors, and the loss of any of these individuals could cause our business to suffer.  We do not as a general matter maintain key person life insurance policies on our officers, directors and key employees.

 

Our solutions require a sophisticated sales effort targeted at senior management of our prospective customers.  New employees in our sales department require extensive training and typically take several months to achieve full productivity.  There is no assurance that we will be able to retain our sales staff, or that new sales representatives will ultimately become productive.  If we were to lose qualified and productive sales personnel, our revenues could be adversely impacted.

 

We are may be subject to potential liabilities arising from a patent claim filed against us in the United States.

 

On September 25, 2012, TIS America Inc. and Top Image Systems, Ltd. were named as defendants in Case Number 1:12-cv-01208-UNA, filed by Mitek Systems, Inc. for alleged infringement on five United States patents in the United States District Court for the District of Delaware.  Mitek filed a First Amended Complaint on January 11, 2013.  An answer to the First Amended Complaint was filed on January 28, 2013.  A scheduling order was entered on February 21, 2013 and the lawsuit is still in its early state. No discovery has been taken and a trial is scheduled for December 8, 2014.

 

The lawsuit relates to technology used in our MobiCHECK software. Mitek is seeking a declaration of infringement, damages, and other amounts.

 

While we believe that Mitek’s claim is without merit, we cannot assure you that the suit will be dismissed or that we will prevail. If Mitek is successful, or if we agree to settle the lawsuit, we might be unable to pursue, or severely limited in, our marketing and sale of MobiCHECK and possibly other products might restricted or be subject to significant obligations to pay royalties. Further, even if we prevail in the lawsuit, intellectual property litigation is expensive and tends to divert management attention from our business. Accordingly, if any of the foregoing risks are realized, the lawsuit could have a material adverse effect on our business, prospects, financial condition, and results of operations.

 

 

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Our success depends on our proprietary software technology.

 

Our success depends upon our proprietary software technology.  Although we believe that our technology has been developed independently and does not infringe on the proprietary rights of others, we cannot assure you that the technology does not and will not infringe or that third parties will not assert infringement claims against us in the future.  In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license.  We cannot assure you that we would be able to do so either in a timely manner under acceptable terms and conditions or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action.  Further, even if we were not infringing, intellectual property litigation is expensive and time consuming for management.  Failure to do any of the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies are deemed to infringe upon the rights of others, or if infringement claims are asserted against third parties whom we are obligated to indemnify, we could become liable for damages, which could have a material adverse effect on us.

 

Our products contain third party intellectual property which may expose us to additional risks.

 

We license components of our software systems and technology from third parties in reliance on such parties’ representations as to ownership of the licensed intellectual property.  If our licensors are found not to own or have rights to sublicense such rights to us and we are unable to replace the licensed technology with a comparable substitute, there could be a material adverse effect on our business prospects and financial results.  Even if we were to replace licensed technology with available alternatives, it could take time to identify the best replacement and integrate it into our software.  The delay and uncertainty could negatively impact our financial results. Furthermore, we could be sued for, or found liable for infringement arising from our use of such licensed technology and indemnity obligations, if any, on the part of the providers of such licensed technology might not be sufficient to cover liabilities we incur.

 

Our inability to protect our intellectual property could adversely affect our competitive position and, consequently, our business and operations.

 

Our success depends on our ability to protect our intellectual property. We rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information.  Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or copy and use information that we regard as proprietary without our authorization.  In the past, we have not obtained any patents.  As a result of a change in our intellectual property protection policy, we have begun to file patent applications with regard to relevant technology.  We have applications at this point for patents in the United States with regard to Mobile capture, full page images and contextual classification.  We may file additional patent applications in the future.  We cannot assure you that:

 

·

any of our existing patent applications will be accepted;

 

·

we will be successful in generating technology in the future which will be susceptible to applications for patents;

 

·

any patents which we may obtain will be broad enough to protect our technology, will provide us with competitive advantages or will escape challenge or invalidation by third parties;

 

·

the patents of others will not have an adverse effect on our ability to do business; or

 

·

others will not independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents.

 

 

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Further, the laws of foreign jurisdictions where we sell and seek to sell our products may afford little or no protection of our intellectual property rights.  We cannot assure you that the protection provided to our intellectual property rights by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law.

 

Our products may contain defects, damaging our reputation, causing a loss of customers, requiring us to allocate significant time and financial resources to correct, and potentially resulting in liability claims.

 

Our products may contain undetected errors or defects, particularly when first introduced or when new versions or enhancements are released.  In the past, we have discovered minor software bugs in certain products after they were released to the market.  Such errors or defects could require us to divert financial and other resources to correct the problems.

 

In addition, our products are combined with complex products developed by other vendors.  As a result, should problems occur, it may be difficult to identify the source or sources of the problems.  Defects and errors, or end-user perception of defects and errors, found in current versions, new versions or enhancements of these products after commencement of commercial shipments may result in:

 

·

damage to brand reputation;

·

loss of customers;

·

delay in market acceptance of current and future products;

·

diversion of development and engineering resources to correct defects or errors; and

 

·

warranty or product liability claims.

 

Although we have product liability insurance, defects, errors or successful product liability claims against us could have a material adverse effect on our business, prospects and financial results.  For additional information on our warranty policy, see below “ Business Overview – Customers --- Warranty and Service.”

 

We engage in international sales, which expose us to a number of foreign political and economic risks.

 

We have significant operations in foreign countries, including research and development, sales and customer support operations.  Currently, in addition to our operations in Israel, we have significant operations in the United Kingdom, Germany, and Singapore and in the United States where we recently opened our new North American office.  Our international sales and other operations are subject to risks inherent in doing business in foreign countries, including, but not limited to:

 

·

changing domestic and foreign customs and tariffs or other trade barriers;

 

·

potential staffing difficulties and labor disputes;

 

·

managing and obtaining support and distribution for local operations;

 

·

difficulty in enforcing agreements through the different legal systems of the countries in which we operate;

 

·

customers in the various countries in which we operate may have long payment cycles;

 

·

seasonal reductions in business activity in certain parts of the world;

 

 

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·

restrictions on our ability to repatriate earnings from countries in which we operate;

 

·

credit risk and financial conditions of local customers and distributors;

 

·

potential difficulties in protecting intellectual property;

 

·

potential imposition of restrictions on investments;

 

·

potentially adverse tax consequences;

 

·

foreign currency exchange restrictions and fluctuations;

 

·

natural disasters; and

 

·

local political and social conditions, including the possibility of hyperinflationary conditions, terrorism and political instability in certain countries.

 

Approximately 64% of our revenues in 2012 were generated from sales made in the European Union. If this trend continues, we may be more particularly exposed to the risk of losing business and revenues as a result of trade restrictions imposed by the European Union as well as ramifications of the debt crisis in certain European countries.  See “The impact of a continuing global economic downturn, including the European debt crisis, may have a material adverse effect on our business, results of operations and financial condition”.

 

We may not be successful in developing and implementing policies and strategies to address the foregoing risks in a timely and effective manner at each location where we do business.  Consequently, the occurrence of one or more of the foregoing factors could have a material adverse effect on our international operations or upon our financial condition and results of operations.

 

We may be adversely impacted by fluctuations in currency exchange rates.

 

We maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received.  Our most significant currency exposures are to the Euro, New Israeli Shekel, British Pound and Singapore dollar. Approximately 64% of our revenues are generated in the European Union. In periods when the U.S. dollar weakens against these other currencies, our reported results of operations may be adversely affected. Although from time to time we may purchase forward exchange contracts to reduce currency transaction risk, these purchases will not eliminate translation risk or all currency risk.

 

 Political, economic and military conditions in Israel may adversely affect our ability to develop, manufacture and market our products.

 

Because our principal offices are located in Israel, political, economic and military conditions in Israel directly affect our operations.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  There has been a marked increase in such hostility and a significant deterioration of Israel’s relationship with the Palestinian community since October 2000, and especially since Hamas, an Islamic movement responsible for many attacks against Israelis, has led the government of the Palestinian Authority.  In 2010, events and developments related to the Israeli-Palestinian conflict have also led to a deterioration of Israel’s relations with Turkey, with whom Israel currently has a free trade agreement.  In addition, 2011 and 2012 were marked by increasing instability in neighboring Arab countries including Egypt, Jordan, Tunisia, Libya, Bahrain, Yemen and Syria culminating in the replacement of certain leaders in some of  those countries, in addition, there is a high level of tension relating to Iran’s nuclear capabilities and the potential response of Israel and the international community to Iran’s gaining nuclear capabilities. Civil war in Syria has intensified with stray ammunition from the conflict landing in Israel from time to time. Continuing or escalating instabilities and hostilities in the region or curtailment of trade between Israel and its present trading partners as a result or in response to such instabilities may have an adverse effect on our business conditions, including our ability to develop, manufacture and market our products.

 

 

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Rising political tensions and negative publicity about Israel may negatively impact demand for our products .

Our principal offices are located in Ramat Gan, Israel. A number of groups in several countries have called for consumer boycotts of Israeli products. While many of those boycotts are focused on products originating in the West Bank and Ramat Gan is not in that area, other boycotts do not differentiate between different areas under Israeli control.  Various political events from time to time have led to the revival or intensification of boycott efforts. Existing or future boycott efforts might adversely affect our sales efforts, and could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our operations may be disrupted by the obligation of key personnel to perform military service.

 

Generally, all male adult citizens and permanent residents of Israel under the age of 42 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) are obligated, unless exempt, to perform military reserve duty annually and some of our executive officers and employees in Israel are so obligated.  Moreover, in the event of armed conflict in which Israel is involved or the threat of such conflict, our executive officers and employees might be called for active military duty for an unlimited period of time. Increased military activity could also result in a reduction of prospective qualified employees available to work for us to expand our business or replace employees on active military duty.  Our operations could be disrupted by the absence for a significant period of our executive officers or key employees as a result of military service.  Any disruption in our operations could adversely affect our ability to develop and market products.

 

We may not be able to expand our personnel or marketing efforts quickly enough to support our growth.

 

Because of our small size and our business strategy to increase our sales we anticipate an increased demand on all of our resources.  To the extent that our efforts to generate new business and increase demand for our products and services are successful, we will need to accurately estimate our need for personnel or marketing and customer support, or we may not be able to support our future growth.  For example, if we are successful in our efforts to obtain significant orders for our products, we may be required to install and service, on a timely basis, large numbers of installations at our customers’ locations.  We cannot assure you that we will be able to provide such services on adequate terms and conditions or at all.  Furthermore, in order to remain competitive and keep our products up to date, we need to continue to attract and retain a qualified team of employees.  If we fail to obtain the human resources our business requires, there could be a material adverse effect on our business, prospects, financial conditions and results of operations.

 

 

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Government grants we received for research and development expenditures may be reduced or eliminated in the future due to Israeli government budget cuts.  Furthermore, our receipt of such grants limits our ability to develop products and transfer technologies outside of Israel, and require us to satisfy specified conditions.

 

In 2012, as several times in the past, we have received grants from the government of Israel through the Office of the Chief Scientist of the Ministry of Industry Trade and Labor, or the OCS, under the Law for the Encouragement of Industrial Research and Development, 1984 for the financing of a portion of our research and development expenditures in Israel.  Such grants bear royalties on sales of products utilizing technologies developed   using such grants or arising out of such technologies up to a maximum of 100% of the amount of participation received, linked to the dollar, plus interest at the LIBOR rate. The total grants received in 2012 were about $183,000.  The terms of the OCS grants limit our ability to develop products and transfer technologies outside of Israel without the prior approval of the OCS, if such products or technologies were developed using OCS grants or arose out of such technologies.  The Israeli government may decide not to continue the program in the future at its current level or to terminate it altogether.  Such approval, if granted, will generally be subject to additional financial obligations.  In addition, if we fail to comply with any of the conditions imposed by the OCS, including the payment of royalties with respect to grants received, we may be required to refund any payments previously received from the OCS, together with interest and penalties.  See also “Governmental Regulation” in Item 4 below.

 

If we fail to satisfy the conditions specified under Israeli law, we may be denied benefits to which we are currently entitled or may be entitled to in the future.

 

Our activities in Israel have been granted “Approved Enterprise” (established plan) and "Benefited Enterprise" status under "The Law for the Encouragement of Capital Investments, 1959", or the Investment Law, as amended.  The benefits available to an Approved Enterprise program or a Benefited Enterprise are normally in the form of favorable tax rates and are dependent upon the continuing fulfillment of ongoing conditions stipulated  in the certificate of approval or under applicable law.  If we fail to comply with these conditions, in whole or in part, benefits from tax exemptions or reduced tax rates would likely be denied us in the future.

 

For a description of the investment law and its recent material amendments, see “Additional Information-Law for the Encouragement of Capital Investments, 1959.”

 

The application and/or amendment of Israeli laws or laws of other countries may adversely affect our ability to enforce judgments or other rights.

Because our principal offices are located in Israel, we are subject to Israeli law.  Many of our contracts with third parties are subject to the laws of other jurisdictions.  We cannot assure you that any judgments granted in the United States or any jurisdiction other than Israel would be capable of enforcement or execution in Israel.  Nor can we assure you that any of our contracts pursuant to the laws of any foreign country are enforceable by us.  The inability to enforce or execute judgments or other rights and/or the possibility of the laws of various jurisdictions being amended from time to time may have a material adverse effect on our business, prospects, and financial condition.

Under current Israeli law, we may not be able to enforce covenants not to compete, and, therefore, we may be unable to prevent competitors from benefiting from the expertise of some of our former employees.

In general, we have entered into non-competition agreements with our employees in Israel. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. Under current law, we may be unable to enforce these agreements, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer that have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to our material interests, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

 

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Risks Related to Our Ordinary Shares

 

Our ordinary shares have been subject to frequent significant price fluctuations.

 

Trading in shares of companies listed on the NASDAQ and TASE in general and trading in shares of technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market and industry fluctuations may depress our share price, regardless of our actual operating results.

 

In addition, the trading price of our ordinary shares has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including, but not limited to:

 

·

actual or anticipated period-to-period fluctuations in financial results;

 

·

litigation or the threat of litigation;

 

·

failure to achieve, or changes in, financial estimates by securities analysts, if any;

·

announcements regarding new or existing products or services or technological innovations by us or our competitors;

 

·

conditions or trends in the software industry;

 

·

additions or departures of key personnel or directors;

 

·

regulatory developments in the United States and other countries in which we operate;

 

·

developments or disputes concerning our intellectual property rights;

 

·

general market conditions;

 

·

overall fluctuations in the U.S. and Israeli equity markets; and

 

·

economic and other external factors or disasters or crises.

 

 

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If we fail to maintain NASDAQ minimum price requirements, the TASE minimum valuation requirements or other applicable continued listing requirements, our ordinary shares could be delisted.

 

According to NASDAQ listing standards, if the stock price of a listed company falls below $1.00 a share for a period of 30 consecutive business days, such company’s stock may be subject to delisting unless such failure is cured within 180 days from the date on which NASDAQ notifies the listed company of such failure. There were periods in 2009 and 2010 during which our stock price fell below $1.00 per share.

 

According to the TASE rules, a company with stock that trades on both the TASE and NASDAQ must comply with the TASE minimum valuation requirements which currently provide that it must have a minimum market capitalization of NIS 25 million.  If the company does not comply with the minimum valuation requirements, compliance with which is being tested on a semi-annual basis, it is given six months to regain compliance or be delisted.  Our ordinary shares were in compliance with the minimum valuation requirements as of March 11, 2013.

 

If we fail to maintain the minimum price for our ordinary shares required by NASDAQ, maintain the minimum valuation required by TASE rules, or comply with other continued listing requirements of these exchanges, our ordinary shares could be delisted.

 

In addition, if our ordinary shares are delisted from NASDAQ, we will lose our status as a “dually-listed company” which will result in us being subject to different reporting requirements under Israeli securities laws and the rules and regulations of the Israeli Securities Authority and the TASE which may cause an increase in our reporting related costs and expenses.  In addition, the rules and regulations of the Israeli Securities Authority and the TASE will require our financial reports to be prepared in accordance with a different accounting method than we currently utilize, which will result in increases in our reporting related costs and expenses.

 

 

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A large number of our ordinary shares could be sold in the market in the near future, which would cause downward pressure on the market price for our ordinary shares.

 

As of March 11, 2013, we had approximately 11,653,807 ordinary shares outstanding, of which 9,226,823 were held by shareholders who were not our directors, executive officers and more than 10% shareholders.  Since the effectiveness of the registration statement on Form F-3, the selling security holders named in that registration statement have been able to freely sell all of the ordinary shares covered by such registration statement, which is substantial in relation to our outstanding ordinary shares and public float of our ordinary shares.  In addition, a substantial portion of our shares is currently freely trading without restriction under the Securities Act of 1933, as amended, or the Securities Act, having been registered for resale or held by their holders for over one year and are eligible for sale under Rule 144.  As of March 11, 2013, there were outstanding options and warrants to purchase an aggregate of approximately 1,552,975 ordinary shares.

 

If shareholders determine to sell a significant number of shares into the market or there is a perception that the holders intend to sell these shares, including upon their exercise of options or warrants, there likely will not be a sufficient demand in the market to purchase the shares without a decline in the market price of our ordinary shares.  Moreover, continuous sales into the market of a number of shares in excess of the typical trading market for our ordinary shares, or even the availability of such a large number of shares, could depress the trading market for our ordinary shares over an extended period of time.

 

Future issuances of our ordinary shares could adversely affect the trading price of our ordinary shares and could result in substantial dilution to shareholders.

 

We may need to issue substantial amounts of our ordinary shares in financings or acquisitions in the future.  To the extent that the market price of our ordinary shares declines, we will need to issue an increasing number of ordinary shares per dollar of equity investment.  In order to obtain future financing if required, it is likely that we will issue additional ordinary shares or financial instruments that are exchangeable for or convertible into ordinary shares.  Capital raising activities, if available, and dilution associated with such activities could cause our share price to decline.

 

Also, in order to compensate our directors, provide incentives to our employees and induce prospective employees and consultants to work for us, from time to time we offer and issue options to purchase ordinary shares and/or rights exchangeable for or convertible into ordinary shares.  Future issuances of shares could result in substantial dilution to shareholders.

 

Our ordinary shares are traded on more than one market and this may result in price variations.

 

Our ordinary shares are traded on the NASDAQ and on the TASE. Trading in our ordinary shares on these markets is effected in different currencies (US dollars on the NASDAQ and New Israeli Shekels on the TASE) and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). Consequently, the trading prices of our ordinary shares on these two markets often differ, resulting from the factors described above as well as differences in exchange rates and from political events and economic conditions in the United States and Israel. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.

 

Our ordinary shares may become subject to the SEC’s penny stock rules.

 

Generally, transactions in securities that are traded in the United States at a market price per share of less than $5.00, may be subject to the “penny stock” rules promulgated under the Exchange Act.  Under these rules, broker-dealers who recommend such securities to persons other than institutional investors:

 

·

must make a special written suitability determination for the purchaser;

 

·

receive the purchaser’s written agreement to a transaction prior to sale;

 

·

provide the purchaser with risk disclosure documents which identify risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and

 

·

obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.

 

 

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As a result of these requirements, if our common shares become subject to the “penny stock” rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our ordinary shares in the United States may be significantly limited.  Some broker-dealers have adopted a policy under which they refuse to allow clients to hold penny stocks in their brokerage accounts, or refuse to open new accounts holding penny stocks. Accordingly, the market price of our ordinary shares may be depressed or limited, and investors may find it more difficult to sell the shares.

 

We have not paid dividends in the past.

 

We have never declared or paid any cash dividends on our ordinary shares.  We have retained any future earnings to finance operations and to expand our business and, therefore, may not pay any cash dividends in the future.

 

The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.

We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by the Israeli Companies Law, 5759-1999, or the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company has to act in good faith in exercising its rights and fulfilling its obligations toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.

 

As a foreign private issuer whose shares are listed on NASDAQ, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.

As a foreign private issuer whose shares are listed on NASDAQ, we are permitted to follow certain home country corporate governance practices instead of certain requirements of The NASDAQ Listing Rules.  As a foreign private issuer listed on NASDAQ, we may also follow home country practice with regard to, among other things, composition of the board of directors and quorum at shareholders' meetings.  A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws.  In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement.  Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ's corporate governance rules.

 

 

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Provisions of Israeli law could delay, prevent or make difficult a change of control and therefore depress the price of our shares.

The Companies Law generally provides that a merger be approved by the board of directors and by the shareholders of a participating company by the vote of a majority of the shares of each class present and voting on the proposed merger. The Companies Law has specific provisions for determining the majority of the shareholder vote. Upon the request of any creditor of a constituent in the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations to creditors. In general, a merger may not be completed until the passage of certain statutory time periods. In certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer that complies with certain requirements of the Companies Law that differ from those that apply to U.S. corporations. 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. These provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making more difficult an acquisition of or merger with us, which, if public trading in our ordinary shares resumes, could depress our share price.

We are a foreign private issuer and you will receive less information about us than you would from a domestic U.S. corporation.

As a “foreign private issuer”, we are exempt from rules under the Exchange Act that impose certain disclosure and procedural requirements in connection with proxy solicitations under Section 14 of the Exchange Act. Our directors, executive officers and principal shareholders also are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder with respect to their purchases and sales of our shares. In addition, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. As a result, you may not be able to obtain the same information relating to us as you would for a domestic U.S. corporation.

Although our internal control over financial reporting was considered effective as of December 31, 2012, there is no assurance that our internal control over financial reporting will continue to be effective in the future, which could result in our financial statements being unreliable, government investigation or loss of investor confidence in our financial reports.

       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 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 or sanctions by regulatory authorities.

ITEM 4.                        INFORMATION ABOUT THE COMPANY

 

History and Development

 

Establishment, Legal Name, Office and Trading Markets

 

We were incorporated in March of 1991, are domiciled in Israel and exist as a company with a limited share capital subject to Israeli law.  Our legal name is Top Image Systems Ltd. and our registered and principal executive offices are located in Israel at 2 Ben Gurion St, Ramat Gan, 52573, and our telephone number is + 972-3-767-9100.  Our website is http://www.topimagesystems.com (the information contained in our website is not a part of this annual report and no portion of such information is incorporated herein).

 

Our ordinary shares began trading on the NASDAQ in November 1996 and on the TASE in December 2006.

 

Recent Developments

 

In late 2012, we decided on an organizational restructuring aimed at establishing a scalable, balanced organization to facilitate global expansion of its product lines and related business activities in the many markets in which it operates around the globe. The reorganization plan includes setting up a global solutions group to develop, manage and support market-driven solutions and setting up a field operations group in attempt to maximize the business potential of the company in each of our regions.  Under the new structure,  we hope to grow in the US and Asia Pacific by promoting sales of those products we already sell in high volume in Europe and the Middle East & Africa (EMEA), while in parallel introducing our mobile solutions to the European market and allowing for improved cross-organizational knowledge transfer that will enable us to meet these goals. The two sections of the organization will work closely together and implement integrative processes with the leadership and support. We are in the process of implementing the reorganization.

 

 

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In April, May and August 2012, we issued 250,000 of our Ordinary shares to an external consultant in consideration of services provided during 2012. The shares were fully vested when granted. In connection with the grants, we recorded compensation expenses in the amount of $813,000.

 

In June 2012, we opened our North American headquarters in New York City. The office employs eight individuals, including sales and technical personnel. Our new office provides us with proximity to the financial institutions and banks that comprise a significant segment of our target customer base. We anticipate that our new office will provide the foundation for us to strengthen our sales and marketing activities in the US and elsewhere in North America, focusing on the banking and financial sectors as well as on enterprises in other industries employing content-rich business processes.

 

On June 13, 2011, we closed a private placement transaction, which we refer to as the private placement.  In the private placement, we issued an aggregate of 1,425,000 ordinary shares at a price of $2.00 per share and warrants to purchase an aggregate of 441,750 ordinary shares at an exercise price of $2.20 per share, which we refer to as the warrants, pursuant to the Securities Purchase Agreement, dated June 6, 2011, that we entered into with investors.  The warrants may be exercised for five years after the closing date.  We also entered into the Registration Rights Agreement, dated June 13, 2011 with the investors in the private placement, pursuant to which we filed a registration statement on Form F-3 to cover the resale of the ordinary shares sold in the private placement and the ordinary shares issuable upon exercise of the warrants issued in the private placement.   We used the proceeds of the offering of $2,497,000, net of issuance expenses, to repay, in part, the remaining principal balance of debentures originally issued in December 2006. We completed the repayment of the debentures and retired our debt under them on October 4, 2011.

 

We held, through Top Image Systems (Asia Pacific) Pte. Ltd. investments in affiliated companies such as: Asiasoft Hong Kong Ltd ("AS HK"), in which we held 23.37%. During 2010 AS HK sold its business to another company. In December 2010, AS HK received an advance in the amount of $369,000 as a result of such sale.

Until May 2011 we also held an investment in Asiasoft (M) Sdn Bhd ("AS M"), in which ASG holds 30% equity interest, is a Malaysian registered company which provides information system products and related services. During May 2011 the Company decided to waive its holding in AS M and transferred its holding for no proceed. Due to the fact that the investment book value was $0, no gain or loss was recorded in connection therewith.

 

Business Overview

 

1. Products and Solutions

 

Our  product offering is based on our eFLOW flagship platform, which is an among industry-leading document and content capture and workflow platform that empowers a wide variety of solutions, the top five of which we focus on today: Accounts Payable (AP) Automation, Digital Mailroom, e-Government, eFLOW for Banks and TIS Mobile Capture & Payment Solutions.

 

 

 

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eFLOW Document and Content Capture and Workflow Platform

 

eFLOW is our advanced proprietary platform that leverages our 20 years of experience. Large and mid-sized enterprises across the globe benefit from this expertise and deploy eFLOW end-to-end solutions to collect information from different types of inbound documents and process them to provide actionable data delivered to their ERP, CRM and workflow systems.

 

eFLOW is a modular solution based on one platform. Each module has been customized to tackle different business challenges using one uniform underlying technology and infrastructure. Companies can target their most urgent problems and then expand the solution through their enterprise as required module by module. Businesses benefit from streamlined processes across the company and a consistent look and feel. eFLOW is a scalable solution that can grow with the customer’s business.

The eFLOW technology includes mechanisms and engines that allow it to continuously achieve very high recognition rates for complex of documents. eFLOW captures all incoming information at the gateway to the business – from structured, semi-structured, and unstructured document formats, and from - paper, fax, email and other digital files,  mobile devices and more. Both printed and handwritten content is processed using our powerful OCR software functionality. Information from documents is automatically extracted, classified and verified, and fed to other enterprise systems for further action.

Our R&D group constantly improves the eFLOW technology, its algorithms and architecture in order to maintain its industry-leading intelligent capture and recognition of complex documents. In 2012 eFLOW was recognized by Forrester Research as one of the top five multichannel capture solutions, being the only solution to score 5 out of 5 in both "Intelligent Data Capture" and OCR Support.

 

eFLOW INVOICE for Accounts Payable (AP) Automation

Accounts Payable, or AP, automation, is a need shared by almost every large and mid-sized enterprise which receives numerous invoices every day as part of their standard business activities. eFLOW INVOICE automates and streamlines the process of handling invoices in an organization, and interfaces with the customer’s ERP system.

 

 

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In 2012 Top Image Systems augmented the eFLOW INVOICE solution by adding functionality for e-Invoice processing, incorporating other aspects of the invoice processing function, enabling seamless process automation,  approval workflow and interface to ERP for payment.

eFLOW DMR - Intelligent Digital Mailroom

 

eFLOW DMR - Digital Mailroom enables an enterprise to collect all inbound information on one platform and combine it into a single electronic data capture workflow. The incoming content is captured, classified, prioritized and accurately routed without delay to all destinations across the organization. This process results in improved efficiency and customer service, better relationships with suppliers and business partners, as well as reduced errors and associated costs.

 

In 2012 eFLOW DMR strengthened its artificial intelligence algorithms, enabling it to recognize incoming documents in complete context related to other materials, and  allowing faster and more accurate recognition and classification.  We also enhanced the system’s ability to generate automatic responses to incoming mail which facilitate immediate reaction to critical issues, improve responsiveness to customers and significantly save time and money by eliminating routine manual mail-related tasks.

eFLOW e-Government & Forms Processing

We are among world leaders in processing population censuses and related projects in which governments need to collect and process high volumes of form-based data in very short timeframes. Related projects include election processing projects, social security, tax and other government form processing projects, as well as postal service projects in which various types of postal items are quickly scanned and processed for accurate and rapid tracking and delivery.

eFLOW for Banks

The banking and financial industry has undergone an information technology revolution to enable its core banking systems to provide a satisfactory response to new and growing needs  stemming from competition, regulation and volatile global market conditions. However, the "outer envelope" framing typical banking business processes is still dependent on forms, paper documents, manual processes and cumbersome procedures which reduce efficiency and profitability, impair user experience and jeopardize customer satisfaction.  We fill the banking "envelope gap" with our eFLOW for Banks.

The eFLOW for Banks automates the numerous daily typical document-centric processes, including account opening, lockbox, loan origination and many more.  The eFLOW for Banksenables banks to more easily implement various procedures and workflows, such as account initiation and administration involving the application of regulatory rules such as KYC (Know Your Customer) and Four-Eyes. Check clearing, lockbox, fraud detection and signature verification, credit card verification and many other document- based processes can be digitized and automated to significantly improve efficiency and customer satisfaction.

 

TIS Mobile Capture & Payment Solutions

We combine our technological knowledge in the area of recognizing and processing content with knowledge of a wide variety of existing mobile smart user devices to develop mobile capture apps and solutions that process content using mobile devices such as smartphones and tablets.

In 2012, we introduced our initial mobile capture and payment solution suite – MobiCHECK, MobiPAY, MobiFLOW and MobiCLOUD – officially introducing the solutions on the US market at the Remote Deposit Capture Summit 2012 in Florida in September and pursuing partnerships to resell the solutions.  We continue to enhance our mobile capture and payment solution offering to meet the rapidly expanding needs of this growing market.

 
 

 

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Our mobile remote check deposit solution MobiCHECK allows banks to offer their customers a mobile check deposit solution which carries all the “brainpower” on the mobile device itself; users do not need to guess how and when to  snap the image with the mobile phone camera – because the application does that automatically for them.

 

eFLOW Industry Solutions

We provide innovative solutions to a range of vertical markets in both the private and public sectors.  With eFLOW® clients gain a remarkable improvement in business process efficiency while reducing their operating costs.  We have packaged eFLOW® in pre-configured solutions for the following sectors:

·

Banking & Financial Institutions;

 

·

Government Departments & Statistical Offices;

 

·

Insurance;

 

·

Health Care;

 

·

Energy & Utilities;

 

·

Transport & Logistics;

 

·

Postal Services;

 

·

Retail & Manufacturing; and

 

·

Business Process Outsourcing (BPO) and Shared Services

 

We believe that our eFLOW applications and solutions, which we  improved in 2012, provide proven value to all the industry markets above; we have been very active automating document-centric processes across various industry segments, including not only in the financial services sector (banking, insurance) but also in postal, transportation and logistics and retail and manufacturing.  In parallel we expend great efforts to build and support our partnerships with many large BPOs that base their document processing services on eFLOW technology.

 

Principal Markets

 

As of December 31, 2012, we operated offices and branches in Israel, the United States, the United Kingdom, Germany, Hong Kong, Singapore and Japan.  Our U.S. branch is responsible for sales, marketing and support activities in the United States, Canada, and Latin America.  In addition, we believe that significant opportunities exist in other countries of Western and Eastern Europe, South Africa and Australia.  We have several local sales and technical representatives in France, Spain, Italy and the Netherlands.  These representatives manage our sales, marketing and operational activity in their locations, providing integration and implementation services, as well as marketing support.

 

 

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The following table summarizes total revenues by category of activity and geographic market for each of the last three completed fiscal years:

 

Product Revenues by Region

(U.S. dollars in thousands)

 

		2010								2011								2012
		$				%				$				%				$				%
Europe			6,055				67	%			10,370				74	%			9,146				60	%
Far East (excluding Japan)			1,176				13	%			713				5	%			701				5	%
Japan			312				3	%			347				2	%			833				5	%
North and South America			1,590				17	%			1,635				12	%			2,442				16	%
Africa & Middle East			16				-				864				6	%			2,052				13	%
Israel			16				-				120				1	%			129				1	%
Total			9,165				100	%			14,049				100	%			15,303				100	%

 

Service Revenues by Region

(U.S. dollars in thousands)

		2010								2011								2012
		$				%				$				%				$				%
Europe			8,260				65	%			10,111				69	%			10,790				67	%
Far East (excluding Japan)			1,848				15	%			2,258				15	%			2,580				16	%
Japan			1,134				9	%			851				6	%			902				6	%
North and South America			1,236				10	%			1,247				9	%			1,595				10	%
Africa & Middle East			67				1	%			103				1	%			112				1	%
Israel			52				-				54				-				48				0	%
Total			12,597				100	%			14,624				100	%			16,027				100	%

 

2. Description of Markets

Our technologies and software solutions are generally categorized under the ECM (Enterprise Content Management) segment of Enterprise IT, and within this segment we offer Intelligent Document and Content Capture, Workflow and Delivery applications.

 

A dominant player in the Image and Capture segment

We believe in the robustness and future growth of our core business.  Leading industry analyst indicate that document capture is one of the leading, highest potential growth sectors in today’s IT software market, and forecast that this sector will continue to grow at a double digit rate per year.

Within ECM, in the Document Capture Software Market, according to major analysts, 2010 represented a major turnaround for Document Capture Software which grew by just over 10% to be worth just over $2 billion and analysts are now predicting that this can double to $4 billion by 2015.

 

 

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As in previous years, capture outperformed the overall IT and ECM markets.   Growth came mainly from North America with the U.S. showing 15% growth to make it once again the largest market segment.  We have therefore invested considerable resources to expand our activities in this important and growing market segment.

A key sub-segment of the document capture market is Ad Hoc Transaction capture activities, that segment has been expanding rapidly.   Analysts are forecasting continuing robust growth in this market as cloud technologies, SharePoint and the growth in new mobile devices such as smartphones and tablets gain market share.  This demand driven capture combined with business process understanding has huge potential which we aim to meet with its mobile and integrated mobile and enterprise capture solutions.

The mobile payment market is a sub-segment of the mobile banking market, whose magnitude is determined by the size of the total mobile phone, or more specifically smartphone, user population.

 

Consumers expect to leverage them to optimize more and more tasks. including mobile banking solutions such as mobile remote deposit of checks,. The “first generation” of mobile banking solutions presents many challenges, especially in the area of image quality.  We have focused on these issues and believe that our mobile capture products solve the image quality challenge and provide “recognition-proof” images for documents and checks captured by mobile devices.

 

Seasonality

 

Seasonality does not currently affect our business in a material manner because the seasonality of different markets substantially offset each other.

 

Our business significantly depends upon the requirements of large corporations and governmental agencies.  As many of these entities operate according to annual budgets, their tendency is to approve budgets in the beginning of the fiscal year and release the budgets toward the end of the fiscal year. This mode of operation affects our results of operations throughout the year. Nevertheless, in Japan and the United Kingdom, the fiscal year for most of our customers ends on March 31 while in other markets the fiscal year ends on December 31. Thus activity in the Japanese and UK markets tends to reduce the seasonality of our other business.  We could become subject to fluctuations in seasonality in the event the volume of business from different markets changes significantly, including, but not limited to, strong and rapid growth in the United States.

 

See the section of Item 5 herein entitled “Sale Cycle” for additional details.

 

5. Marketing Channels

We continue to sell our solutions both via our own direct sales force as well as via partners, resellers and integrators worldwide.  In terms of direct sales channels, in June 2012 we opened our US office and boosted our direct sales efforts in the US by hiring additional sales people. In the US we intend to sell our mobile products as well as our full solutions portfolio

In 2012 Top Image Systems forged more than a dozen new business partnerships, which we believe will   contribute to future business growth through a wider channel for distribution of our solutions, reinforcing our strategy of growth via channel partnerships. Among these partnerships, of particular note are four partnerships in North America, the region where we are focusing our primary current aims for growth both in our core business areas as well as in the emerging mobile capture market.

Soon after opening our US offices, we announced our first mobile remote deposit capture partnership with check 21/remote deposit and e-check processing supplier CheckAlt, which evaluated and approved the quality of our MobiCHECK solution.  During 2012 we also announced partnerships with TransCentra and its customer DataMARK to market our mature enterprise capture solution portfolio to large and mid-sized businesses throughout the US. Then, recently, we expanded our relationship with TransCentra to promote our mobile capture products.

We also reached an agreement with the supplier to the financial industry Jack Henry & Associates to resell our mobile solution suite.

 

 

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7. Competition

 

The data capture market is changing through increased demand to process information more rapidly. Document volumes are growing at the same time as competition is intensifying.  The market is fragmented and is characterized by local application and requirement differentiations, vertical solutions and various combined software offerings to customers. Competitors usually focus on one or more business processes and their solutions address different needs derived from the customer company size, industry, geography and platform. Within the ECM lifecycle, we position ourselves primarily in the Imaging and Capture phase, which precedes content management, although also offers important BPM workflow capabilities. The big three ECM players (IBM, Opentext, and Oracle) primarily focus on what comes after Capture, which is content management, BPM and records management.

We focus on the source of origination of physical or electronic documents entering an organization. In relation to the smaller players, our eFLOW® platform was built from ground up and covers the entire spectrum of Capture / Imaging, as opposed to the other players focusing only on specific areas (such as accounts payable or invoices). The data capture/imaging market is highly fragmented with more than 50 players. We compete with EMC, Kofax, Readsoft, Datacap, Mitek, Banctec, AnyDoc, eCopy, Global360, Ikon, Itesoft, Parascript, Scansoft, Scan Optics, as well as manual data entry systems.

Globally, our three main competitors are Kofax, Readsoft and EMC. Kofax became the market leader via acquisitions and strong distribution channels. Readsoft is our second competitor mainly in the AP - Invoice solution and especially in the EU market. EMC which acquired Captiva is strong in the global enterprise marketplace and is also a significant competitor.  In certain markets such as in the United States and Europe, we compete with more than one company supplying similar solutions. In the Asia Pacific region we compete mainly against local technology providers and the large global competitors. The market for our technology and solutions is also characterized by rapid changes and evolving industry standards, often resulting in product obsolescence or shortened product lifespan.

In the area of mobile capture and payments, we compete primarily with Mitek who is mostly active in the US. Mitek has commenced suit again us claiming infringement of patents they own.

In its 2012 Multichannel Capture Wave Report, Forrester Research executed an 18-criteria evaluation of capture vendors, evaluating offerings from Brainware, EMC, IBM, Itesoft, Kofax, Notable Solutions, OpenText, and Top Image Systems. Although unable to include all of the many capture providers in the formal evaluation, the other competitors they note include Hyland OnBase, Isis Papyrus, AnyDoc Software, Autonomy Cardiff TeleForm, Ricoh GlobalScan, Mitek Systems, ReadSoft for invoicing, KnowledgeLake for Microsoft and Oracle Document Capture (formerly Captovation).   As mentioned above, Forrester ranked us as one of the five leaders of this market, along with Kofax, IBM, EMC and OpenText.

 

Licensed Technology

 

We license various recognition software technologies from third parties in order to utilize them in our products. We currently use technologies developed by several different companies. Depending upon the requirements of each customer, we incorporate one or several of such technologies into a specific product. We are not dependent upon any single source of recognition software technology and the various technologies that we use are, in large part, interchangeable.

 

 

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Intellectual Property Rights

 

Our success depends upon our proprietary software technology. We rely on trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information. In addition, we have begun to move toward protecting our intellectual property through the filing of patent applications. Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or copy and use information that we regard as proprietary without our authorization. None of our patent applications have yet been productive of a patent and we cannot assure you that we will file for or obtain any patents. In addition, we cannot assure you that:

 

·

any patents which we may obtain will be broad enough to protect our technology, will provide us with competitive advantages or will escape challenge or invalidation by third parties;

 

·

the patents of others will not have an adverse effect on our ability to do business; or

 

·

others will not independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents.

 

Further, the laws of foreign jurisdictions where we sell and seek to sell our products may afford little or no protection of our intellectual property rights. We cannot assure you that the protection provided to our intellectual property rights by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law.

 

We believe that our technology has been developed independently and does not infringe on the proprietary rights of others. However, we cannot assure you that the technology does not and will not infringe or that third parties will not assert infringement claims against us in the future. In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license. We cannot assure you that we would be able to do either in a timely manner under acceptable terms and conditions or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action. Further, even if we were not infringing, intellectual property litigation is expensive and time consuming for management. Failure to do any of the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies are deemed to infringe upon the rights of others, we could become liable for damages, which could have a material adverse effect on us.

 

In addition, we license components of our software systems and technology from third parties in reliance on such parties’ representations as to ownership of the licensed intellectual property. If our licensors are found not to own or have rights to sublicense such rights to us and we are unable to replace the licensed technology with a comparable substitute, there could be a material adverse effect on our business prospects and financial results. Even if we were to replace licensed technology with available alternatives, it could take time to identify the best replacement and integrate it into our software. The delay and uncertainty could negatively impact our financial results.

 

We believe that product recognition is an important competitive factor in the form processing industry. Accordingly, we promote the eFLOW ® name in connection with our marketing activities. On March 10, 2009, the United States Patent and Trade Office (the  "USPTO") registered a trademark for one of our significant solution and module names, namely eFLOW ®, for computer software applications; namely, software applications that processes and integrates data provided from various sources across a single platform, in Class 9 (U.S. CLS. 21, 23, 26, 36 and 38).

Likewise, on May 26, 2009, the USPTO registered our trademark TIS® for use in connection with “Application service provider (ASP) featuring software, technical consultation and technical assistance in the field of computer systems and installation, maintenance, and updating of computer software” in International Class 042 (U.S. CLS. 100 and 101). Similarly, on May 26, 2009, the USPTO registered our trademark TOP IMAGE SYSTEMS® for use in connection with “Technical consultation in the field of computer systems; technical assistance in the nature of technical support services, namely, troubleshooting of computer hardware and software systems; installation, maintenance and updating of computer software”, in International Class 042 (U.S. CLS. 100 and 101).

On September 25, 2012, TIS America Inc. and Top Image Systems, Ltd. were named as defendants in Case Number 1:12-cv-01208-UNA, filed by Mitek Systems, Inc. for alleged infringement on five United States patents in the United States District Court for the District of Delaware.  Mitek filed a First Amended Complaint on January 11, 2013.  An answer to the First Amended Complaint was filed on January 28, 2013.  A scheduling order was entered on February 21, 2013 and the lawsuit is still in its early state. No discovery has been taken and a trial is scheduled for December 8, 2014.

 

 

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The lawsuit relates to technology used in our MobiCHECK software. Mitek is seeking a declaration of infringement, damages, and other amounts.

 

While we believe that Mitek’s claim is without merit, we cannot assure you that the suit will be dismissed or that we will prevail. If Mitek is successful, or if we agree to settle the lawsuit, we might be unable to pursue, or severely limited in, our marketing and sale of MobiCHECK and possibly other products might restricted or be subject to significant obligations to pay royalties. Further, even if we prevail in the lawsuit, intellectual property litigation is expensive and tends to divert management attention from our business. Accordingly, if any of the foregoing risks are realized, the lawsuit could have a material adverse effect on our business, prospects, financial condition, and results of operations.

 

Warranty and Service

 

We generally negotiate our warranty obligations with respect to our products on a case-by-case basis.  Normally our warranty period is up to three months. We may be exposed to potential product liability claims by our customers and users of our products. Currently, we hold worldwide product liability insurance and professional indemnity policies that provide coverage limited to different amounts up to $9 million. Despite this coverage, a successful claim against us for product liability could have a material adverse effect on our financial condition.  While we have not experienced material warranty liability in the past, we cannot assure you that future warranty expense will not have an adverse effect on us.

 

We have various maintenance and support agreements with our customers. These agreements typically provide us with regular payments of fees ranging 15-20% per annum of the applicable license fees. Our technical team also provides support to value-added resellers, distributors and systems integrators to assist in the integration of our products.

 

Governmental Regulation

 

The government of Israel encourages research and development projects through its Office of the Chief Scientist Office, or OCS, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984 (the “ Research Law ”). In exchange for assistance provided by the Israeli government in connection with research and development costs we are committed to paying to the Israeli government royalties at the rate of 3% to 3.5% of revenues from sale of our iCMR software, up to a maximum of 100% of the amount of participation received, linked to the U.S. dollar plus interest at the LIBOR rate. There are no outstanding obligations in respect of royalty-bearing government participation as of December 31, 2012.

 

The terms of the Research Law and the OCS grants restrict our ability to manufacture products outside of Israel or transfer technologies outside of Israel, if those products or technologies were developed using OCS grants or derive from such development. The OCS has the right but not the obligation, to allow such manufacture or transfer of technology outside of Israel. Even if we receive approval to manufacture our products outside of Israel, we may be required to pay an increased total amount of royalties, which may be up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. Also, even if we receive approval for the transfer of technology outside of Israel, such approval is likely to involve a significant payment to the OCS. We cannot be certain that any approval of the OCS will be obtained on terms that are acceptable to us, or at all.

We also benefit from being designated as an “Approved and Benefited Enterprises” under Israel’s Law for the Encouragement of Capital Investments, 1959.  For additional information, see the section below entitled "Additional Information - Law for the Encouragement of Capital Investments, 1959.”

 

 

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Additionally, we may be subject to varied regulation in the markets where we sell our products.  The burden of complying with such regulatory schemes (which may be contradictory) could have a material adverse effect on our ability to diversify or grow our sales.

 

Organizational Structure

 

Top Image Systems Ltd. is the parent company of several companies. It has a number of subsidiaries worldwide, the most significant and operational of which are the following wholly owned subsidiaries:

 

¾

TIS America Inc. (incorporated in Delaware);

 

¾

Top Image Systems UK Limited (incorporated in the United Kingdom);

 

¾

Top Image Systems (2007) UK Limited (incorporated in the United Kingdom), formerly known as CPL;

 

¾

TIS Deutschland GmbH (incorporated in Germany);

 

¾

Top Image Systems (Asia Pacific) Pte. Ltd (incorporated in Singapore), formerly known as Asiasoft Global Pte Ltd ; and

 

¾

TIS Japan Ltd. (incorporated in Japan)

 

Top Image Systems (Singapore) Pte. Ltd and Asiasoft System (China) Limited, are wholly-owned subsidiaries of Top Image Systems (Asia Pacific) Pte. Ltd, formerly known as Asiasoft Global Pte. Ltd. Top Image Systems (China) Ltd. Is a wholly-owned subsidiary of Asiasoft System (China) Limited, and is currently not operational.

Property, Plant and Equipment

 

Our principal executive offices are located in Ramat Gan, Israel and our principal business and service operations are located around the world in Cologne, Germany, London, United Kingdom, Tokyo, Japan, and Singapore. We also have several regional offices in Paris, France, Delft, the Netherlands and Hong Kong.

All facilities are leased. The following table sets forth details of the square meters and approximate monthly rental fees in U.S. dollars of our main current leased property, all of which are fully utilized:

Facility		Monthly rent in USD (approximate)				Square meters (approximate)				Expiration date
Ramat Gan, Israel			14,000				670				2014
Cologne, Germany			24,000				740				2016
London, United Kingdom			6,000				130				2012
Tokyo, Japan			6,000				120				2013
Hong Kong			2,000				100				2013
Singapore			10,000				200				2016

ITEM 5.                        OPERATIN G AND FINANCIAL REVIEW AND PROSPECTS

 

Management’s discussion and analysis of financial condition and results of operations

 

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties, including those discussed in "Item 3. Key Information—Risk Factors." See "Forward-looking statements" at the beginning of this annual report.

 

 

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Overview

 

We develop and market automated data capture solutions for managing and validating content gathered from customers, trading partners and employees. Whether originating from electronic, paper, mobile or other sources, our solutions deliver digital content to the applications that drive an enterprise by using advanced technologies including wireless communications, servers, form processing and information recognition systems.  Our software improves business processes by integrating different types of data from multiple sources. Our products integrate information regardless of the source and format of the data, whether structured, as in the case of application forms or surveys, or semi-structured, such as invoices, purchase orders, checks, freight and shipping bills and others. Our solutions seamlessly deliver the extracted data to applications such as document and content management, enterprise resource planning, or customer relationship management. Our solutions minimize the need for manual data entry by automatically reading, identifying, interpreting and processing information, thereby increasing data capture accuracy and the rate of information processing. The platform solution we offer replaces traditional means of extracting information from paper-based documents and integrates multiple information sources into a single enterprise-level solution that increases speed and efficiency.

 

We develop and market our software solutions to wide range of customers, based on one end-to-end solution that automatically classifies, recognizes and understands data processed into the organization systems. We process, validate and integrate the data into ERP, CRM and workflow systems, while our solution, eFLOW® Unified Content Platform, performs business-critical key data capture, lying within incoming documents (paper forms, eForms, fax, image files, microfiche and electronic).

 

In 2012 we had net income of $3,843,000 compared to net income of $2,350,000 in 2011.

 

Sales Cycle

 

Our sales to end-user customers, value-added resellers, distributors and system integrators are made on open credit terms and we do not hold collateral to secure payment. The terms of the arrangements with these customers, generally, do not provide them with the right to return the purchased products or solutions.  Payment with respect to such sales is generally due within a specified period following receipt of an invoice.  The period varies from customer to customer, but usually we provide credit terms of up to 120 days for end-user customers and up to 180 days for resellers, distributors and system integrators.  In some arrangements, management can offer longer payment terms as mentioned above, evaluating business sense, creditworthiness of the customer and other facts needed to establish such decision.

 

Our sales cycle for eFLOW ® solutions ranges from 9 to 12 months.  These sales cycles vary by customer and could extend for longer periods depending on the time required by the customer to evaluate the utility of the applicable product to its operations.  Our operating results could vary between periods as a result of this fluctuation in the length of our sales cycles, the purchasing patterns of potential customers, the timing of introduction of new products and product enhancements introduced by us and our competitors, technological factors, variations in sales by distribution channels, competitive pricing and generally non-recurring product sales.  Consequently, our product revenues may vary significantly by quarter.

 

Geographical Considerations

 

The following table summarizes total revenues by geographic market for each of the last three completed fiscal years.

 

Revenues by Region

(U.S. dollars in thousands)

 

		2010								2011								2012
		$				%				$				%				$				%
Europe			14,315				66	%			20,481				71	%			19,936				64	%
Far East (excluding Japan)			3,024				14	%			2,971				12	%			3,281				10	%
Japan			1,446				7	%			1,198				4	%			1,735				5	%
North and South America			2,826				13	%			2,882				10	%			4,037				13	%
Africa			83				-				967				3	%			2,164				7	%
Middle East			68				-				174				-				177				1	%
Total			21,762				100	%			28,673				100	%			31,330				100	%

 

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Acquisitions and Dispositions

 

Our business and financial position during the three years ended December 31, 2012 were influenced by  the acquisition of Asiasoft which was completed in two stages, in 2007 and 2009, and increased our presence in Singapore and Hong Kong.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires our 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 period, which could potentially result in materially different results under different assumptions and conditions. These are our management’s best estimates based on experience and historical data; however, actual results could differ materially from these estimates. Our significant accounting principles are presented within Note 2 to our consolidated financial statements attached to this annual report. While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Management believes that the following policies are those that are most important to the portrayal of our financial condition and results of operations and are the most critical to aid in fully understanding and evaluating our reported results:

 

·

Revenue recognition

 

·

Allowance for doubtful accounts

 

·

Convertible Debentures

 

·

Contingencies and accrued expenses

 

·

Share-based compensation

 

·

Income taxes

 

Revenue Recognition

 

We derive our revenues mainly from sales of products and services. Product revenues include mainly sales of software. Revenues from services include maintenance and technical support, consulting and training.

 

We account for software sales in accordance with ASC 985-605 “Software". ASC 985-605 generally requires revenues earned from software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements determined by the vendor’s specific objective evidence (“VSOE”) of fair value. Revenues are allocated under the “residual method” when VSOE of fair value exists for all undelivered elements and VSOE of fair value does not exist for all of the delivered elements, and when all ASC 985-605 criteria for revenue recognition are met.

 

 

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Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable.

 

Maintenance and support revenue are deferred and recognized on a straight-line basis over the term of the maintenance and support agreement. The VSOE of fair value of the undelivered elements (maintenance, support and services) included in multiple element arrangements is determined based on the price charged for the undelivered element when sold separately or renewed.

 

Deferred revenues represent mainly unearned amounts received under technical support and maintenance arrangements that are paid by customers and not yet recognized as revenues.

 

We generally do not grant a right of return to our customers.

 

Allowance for doubtful accounts

 

We maintain an allowance for doubtful accounts for estimated losses inherent in our accounts receivables portfolio. In establishing the required allowance, we base our determination, among other factors, on information available about the debtors' financial condition, the volume of their operations and our evaluation of the security received from them. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is determined to be remote.

 

Convertible debentures

 

We adopted ASC 825, "Financial Instruments" as of the beginning of 2008 and irrevocably elected to apply the fair value option to its convertible debentures. The primary reasons for electing the fair value option were simplification and cost-benefit considerations as well as expansion of use of fair value measurement consistent with the FASB's long-term measurement objectives for accounting for financial instruments. The fair value of the debentures is determined according to its quoted market price in TASE.

 

As of December 31, 2012, we don't have convertible debentures.

 

Contingencies and Other Accrued Expenses

 

We are, from time to time, involved in claims, lawsuits, government investigations, and other proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.

 

 

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If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.

 

Share-based compensation

 

We have selected the Monte-Carlo option-pricing model to determine the fair value of our awards on the date of grant. Determining the fair value of equity-based awards on the grant date requires the exercise of judgment, including the amount of equity-based awards that are expected to be forfeited. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

 

Although management believes that their estimates and judgments about equity-based compensation expense are reasonable, actual results could differ.

 

Income taxes

 

We account for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

We accounts for uncertain tax positions in accordance with the provisions of ASC No. 740 "Income Taxes". This accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements, under which a Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

 

 

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Results of Operations

 

The following table sets forth the percentage relationships of certain items from our consolidated statements of operations, as a percentage of revenues for the periods indicated (dollar amounts in thousands):

 

		Year ended December 31,
		2010				2011				2012
		%				%				%
Products revenues			42.1				49.0				48.8
Services revenues			57.9				51.0				51.2
Revenues			100.0				100.0				100.0
Cost of products revenues			3.7				5.8				3.9
Cost of services revenues			34.7				33.2				34.4
Cost of revenues			38.4				39.0				38.3
Gross profit			61.6				61.0				61.7
Research and development costs, net			7.6				6.9				8.3
Selling and marketing expenses			28.3				27.0				27.9
General and administrative expenses			17.7				15.3				16.2
Total operating expenses			53.5				49.2				52.4
Operating income			8.1				11.8				9.3
Financial expenses, net			(10.1	)			(3.2	)			(0.6	)
Income (loss) from continuing operations before taxes on income			(2.0	)			8.6				8.7
Taxes on income			(0.1	)			(0.4	)			(3.6	)
Other income (expenses), net			(0.0	)			(0.0	)			(0.0	)
Income from discontinued operations			-				-				-
Impairment losses of affiliated companies			-				-				-
Net income (loss)			(2.1	)			8.2				12.2

 

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Revenues .  Total revenues for the year ended December 31, 2012 amounted to $31,330,000 compared to $28,673,000 for the year ended December 31, 2011, an increase of 9.3%. The increase in revenues was driven by our focus on digital mailroom and ERP solution over the last few years as well as several census projects that occur once every few years.

 

Product revenues increased by $1,254,000, or by 8.9%, from $14,049,000 in 2011 to $15,303,000 in 2012. Service revenues increased by $1,403,000, or by 9.6%, from $14,624,000 in the year ended December 31, 2011 to $16,027,000 in the year ended December 31, 2012. The increase in service revenues was due to the increase in our maintenance stream as well as higher levels of professional services provided by our larger services team.

 

Cost of Revenues .  Cost of Revenues increased by 7.2%, from $11,184,000 in 2011 to $11,989,000 in 2012.

 

Cost of revenues from products decreased by 27.1%, from $1,670,000 in 2011 to $1,218,000 in 2012. The decrease is a result of lower expenses for third party product costs.

 

Cost of revenues from services increased by 13.2%, from $9,514,000 in 2011 to $10,771,000 in 2012 as a result of an increase in headcount for our larger services team.

 

Gross margin slightly increased by 0.7% from 61% gross margin in 2011 to 61.7% gross margin in 2012.

 

Research and Development, net .  Research and Development expenses increased by 32%, from $1,976,000 in 2011 to $2,609,000 in 2012. Most of the cost of our Research and Development is incurred in Israel, where our Research and Development team is located. The increase is the result of higher investment in developing new products, and recruiting additional personnel in 2012, with our personnel at R&D and quality assurance teams increasing from 19 in average at 2011 to 24 at average in 2012.

 

Selling and Marketing . Selling and Marketing expenses amounted to $8,733,000 in the year ended December 31, 2012 and $7,748,000 in the year ended December 31, 2011. This 12.7% increase is the result of recruiting additional sales and marketing personnel in 2012 with our personnel increasing from 34 at the end of 2011 to 46 at the end of 2012.

 

 General and Administrative Expenses .   General and Administrative expenses in the year ended December 31, 2012 amounted $5,087,000, compared to $4,383,000 for the year ended December 31, 2011. This increase of 16.1% is mainly result of non-cash compensation expenses vested to equity issues to consultant for professional service in 2012.

 

Financial expenses, net .  Our net financial expenses for the year ended December 31, 2012 decreased to $191,000, from $911,000 for the year ended December 31, 2011. $745,000 of our financial expenses in 2011 were connected to the debenture that was recorded at fair value in accordance with ASC 825. The debenture was completely repaid in October 2011.

 

Tax income (expenses). In 2012 we recorded tax income in the amount of $1,123,000, related to our net operating losses as of December 31, 2012 in TIS Ltd, as we believe we’ll utilize these losses in the upcoming years.

 

Net income (loss) .  As a result of the foregoing, we earned a net income of $3,843,000 at 2012 compared to net income in the amount of $2,350,000 in 2011.

 

 

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

 

Revenues .  Total revenues for the year ended December 31, 2011 amounted to $28,673,000 compared to $21,762,000 for the year ended December 31, 2010, an increase of 31.8%. The increase in revenues was driven by our focus on digital mailroom over the last few years as well as several census projects that occur once every few years.

 

Product revenues increased by $4,884,000, or by 53.3%, from $9,165,000 in 2010 to $14,049,000 in 2011. Service revenues increased by $2,027,000, or by 16.1%, from $12,597,000 in the year ended December 31, 2010 to $14,624,000 in the year ended December 31, 2011. The increase in service revenues was due to the increase in our maintenance stream and to larger deals.

 

Cost of Revenues .  Cost of Revenues increased by 33.9%, from $8,350,000 in 2010 to $11,184,000 in 2011.

 

Cost of revenues from products increased by 108%, from $803,000 in 2010 to $1,670,000 in 2011. The increase is a result of higher expenses to third party product costs.

 

Cost of revenues from services increased by 26.1%, from $7,547,000 in 2010 to $9,514,000 in 2011 as a result of the increase in headcount.

 

Gross margin slightly decreased by 1% from 62% gross margin in 2010 to 61% gross margin in 2011.

 

Research and Development .  Research and Development expenses increased by 20%, from $1,647,000 in 2010 to $1,976,000 in 2011. Most of the cost of our Research and Development is incurred in Israel, where our Research and Development team is located. The increase is the result of recruiting additional personnel in 2011, with our personnel at R&D and quality assurance teams increasing from 12 at the end of 2010 to 23 at the end of 2011.

 

Selling and Marketing . Selling and Marketing expenses amounted to $7,748,000 in the year ended December 31, 2011 and $6,160,000 in the year ended December 31, 2010. This 25.8% increase is the result of recruiting additional sales and marketing personnel in 2011 with our personnel increasing from 23 at the end of 2010 to 34 at the end of 2011.

 

 General and Administrative Expenses .  General and Administrative expenses in the year ended December 31, 2011 amounted to $4,383,000, compared to $3,845,000 for the year ended December 31, 2010. This increase of 14% is the result of professional and administrative expenses required due to growth of the company and to incentives given to certain employees.

 

Financial expenses, net .  Our net financial expenses for the year ended December 31, 2011 decreased to $911,000, from $2,190,000 for the year ended December 31, 2010. This decrease is primarily due to lower influence of fair value change of our convertible debentures, which we completely repaid in October 2011.  Starting January 1, 2008, in accordance with ASC 825, we recorded the debenture at their market value (for further details please refer to the Note 9 of our financial statements).

 

Net income (loss) .  As a result of the foregoing, we earned a net income of $2,350,000 at 2011 and suffered a loss in the amount of $460,000 in 2010

 

Impact of Currency Fluctuation and Inflation.

 

We maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received.  Our most significant currency exposures are to the Euro, New Israeli Shekel (NIS), UK Pound and Singapore dollars. In periods when the U.S. dollar fluctuates against these other currencies, our reported results of operations may be adversely affected.

 

 

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 The annual rate of inflation in Israel was 2.2% and 1.6% in 2011 and 2012, respectively. The dollar cost of our operations in Israel is influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by devaluation of the NIS in relation to the U.S. dollar. For example, during the years 2011 and 2012, the appreciation of the NIS against the dollar, amounted to -8% and 2% respectively.

 

From time to time we purchase forward exchange contracts to reduce currency transaction risk. However, these purchases will not eliminate translation risk or all currency risk.

 

Political and Economic Conditions in Israel Affecting our Business.

 

Because our principal offices and research and development facilities are located in Israel, political, economic and military conditions in Israel directly affect our operations.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  There has been a marked increase in such hostility and a significant deterioration of Israel’s relationship with the Palestinian community since October 2000, and especially since Hamas, an Islamic movement responsible for many attacks against Israelis, has governed Gaza.  In 2010, events and developments related to the Israeli-Palestinian conflict have also led to a deterioration in Israel’s relations with Turkey, with whom Israel currently has a free trade agreement. In addition, the first few months of 2011 have been marked by increasing instability in neighboring Arab countries including Egypt, Jordan, Tunisia, Libya, Bahrain, Yemen and in the last few months of 2011, Syria as well culminating in the ouster of certain leaders in some of those countries.  Civil war in Syria has intensified with stray ammunition from the conflict landing in Israel from time to time. Tension has gradual increased relating to Iran’s nuclear capabilities and the potential response of Israel and the international community to the notion of Iran gaining nuclear capabilities.  Continuing or escalating hostilities in the region or curtailment of trade between Israel and its present trading partners as a result of or in response to such instabilities may have an adverse effect on our business conditions, including our ability to develop, manufacture and market our products.

 

Some of our executive officers and employees in Israel are obligated to perform military reserve duty annually.  Moreover, in the event of armed conflict in which Israel is involved or the threat of such conflict, our executive officers and employees might be called for active military duty for an unlimited period of time. Increased military activity could also result in a reduction of prospective qualified employees available to work for us to expand our business or replace employees on active military duty.  Our operations could be disrupted by the absence for a significant period of our executive officers or key employees as a result of military service.  Any disruption in our operations could adversely affect our ability to develop and market products.

 

Economic Conditions.

 

The Israeli government’s monetary policy contributed to relative price and exchange rate stability in recent years, despite fluctuating rates of economic growth.  We cannot assure you that the Israeli government will be successful in its attempts to keep prices and exchange rates stable.  Price and exchange rate instability may have a material adverse effect on our business.

 

Trade Relations

 

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.  Israel is also a member of the World Trade Organization and is a signatory of the Global Agreement on Trade in Services and the Agreement on Basic Telecommunications Services.  In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan.  These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel is also a member in the Organization of Economically Developed Countries. Israel and the European Economic Community, now known as the European Union, concluded a Free Trade Agreement in 1975.  This agreement confers advantages on Israeli exports to most European countries and obligates Israel to lower its tariffs on imports from these countries over a number of years.  In 1985, Israel and the United States entered into an agreement to establish a free trade area.  The free trade area has eliminated all tariff and some non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the EFTA (European Free Trade Association), which includes Austria, Norway, Finland, Sweden, Switzerland, Iceland and Liechtenstein, established a free trade zone between Israel and the EFTA nations.  In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, Turkey and other nations in Eastern Europe and Asia.  In 2010, events and developments related to the Israeli-Palestinian conflict have also led to a deterioration in Israel’s relations with Turkey, although such deterioration did not result in any suspension or termination of such agreement. We cannot assure you that the recent increase of armed conflict and hostility and the significant deterioration of Israel’s relationship with the Palestinian community will not have an adverse effect on our ability to conduct trade in the international market.

 

 

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Liquidity and Capital Resources

 

As of December 31, 2012, we had $2,223,000 in cash, cash equivalents, compared to $2,090,000 as of December 31, 2011.

 

Our capital resources are derived from our daily operating activities. In 2012, we used $409,000 in operating activity. We believe that our current cash, cash equivalents and cash deposits and our forecasted positive cash flows for future periods, will be sufficient to meet our on-going operations for the year ending December 31, 2013.

 

Net cash (used) by operating activities for the year ended December 31, 2012 was $(409,000) as compared to net cash generated by operating activities of $4,369,000 in 2011. The decrease in cash provided by operating activities in 2012 as compared to 2011 was mainly attributed to increase in trade receivables and decrease in deferred revenues as well as accrued expenses.

 

Net cash used by investing activities for the year ended December 31, 2012 was $184,000 as compared to $517,000 in 2011. In 2012, net cash used in investing activities consisted primarily of purchase of property and equipment.

 

For the years ended December 31, 2012 and 2011, the aggregate amount of our capital expenditures was $119,000 and $250,000, respectively. These expenditures were principally for the purchases of computer hardware and software.

 

Net cash provided by financing activities was $744,000 in 2012 compared to net cash used in financing activities of $(3,482,000) in 2011. The increase is attributable to proceeds from exercise of Warrants and stock options.

 

 

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Private Placement of Securities

 

On June 13, 2011, we closed a private placement transaction pursuant to which we issued an aggregate of 1,425,000 ordinary shares at a price of $2.00 per share and warrants to purchase an aggregate of 441,750 ordinary shares at an exercise price of $2.20 per share pursuant to the Securities Purchase Agreement, dated June 6, 2011, that we entered into with investors.  The warrants may be exercised until June 13, 2016.  We also entered into the Registration Rights Agreement, dated June 13, 2011 with the investors in the private placement, pursuant to which we filed a registration statement on Form F-3 to cover the resale of the ordinary shares sold in the private placement and the ordinary shares issuable upon exercise of the warrants issued in the private placement.   We used the proceeds of the offering of $2,497,000, net of issuance expenses, to repay, in part, the remaining principal balance of Original Debentures, as described below.

 

Convertible debentures

 

In December 2006 through the issuance of convertible debentures, we raised net proceeds of NIS 61,900,000 (approximately $14,780,000 at such time). On several occasions, we repurchased debentures and, finally, on October 4, 2011, we paid off the entire remaining balance of the debentures.    Following this payment our indebtedness under the debentures was eliminated.

 

Line of Credit

 

We currently have a short-term line of credit with Leumi Bank.  The total amount available under this line of credit is $600,000.  During 2012 we did not use the line of credit and therefore no interest expenses were recorded. The short-term line of credit bears interest rate of Libor + 4%. The actual Libor interest rate at December 31, 2012 was 0.167%. Any indebtedness under this credit line is payable on demand and secured by a floating charge on our assets.  As of March 11, 2013 we have borrowed $597,000 under the credit line.

 

The financial covenant in connection with the credit line, require that our annual consolidated earnings before interest, taxes depreciation and amortization commencing from the year ended December 31, 2012 and onwards shall be no less than $1,500,000. This covenant is to be tested annually by reference to the consolidated financial statements as of the end of each calendar year. As of December 31, 2012, we were in compliance in all respects with the covenants in the line of credit agreement.

Our ability to issue securities is restricted.  In the event that we default under the line of credit, the Bank could declare our indebtedness immediately due and payable and, if we are unable to make the required payments, foreclose on our assets.  Moreover, to the extent that our assets continue to secure such indebtedness, such assets will not be available to secure additional indebtedness unless approved by the Bank.

 

Research and Development, Patents and Licenses

 

In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to improve our existing product lines and to develop new product lines to meet the changing needs of our market.  In 2012 as part of our position strengthening, we invested substantially more in research and development with expenses level of $2,609,000 in 2012, $1,976,000 in 2011 and $1,647,000 in 2010. As of December 31, 2012, 24 of our employees were engaged primarily in research and development activities. We expect that we will continue to commit substantial resources to research and development in the future. For further details about our product see “Business Overview - Products and Solutions”.

 

 

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Trends

 

Worldwide content management software market – an estimated $6.1 billion market opportunity by 2015

Content management forms the basic foundation or infrastructure for knowledge management. As defined by IDC, content management software develops, organizes, manages and stores compilations of digital works in any medium/format, and includes document management, web content management, capture and image management, digital asset management, and records management. Despite low-single digit revenue de-growths from the top-3 vendors IBM, OpenText (and EMCthe worldwide content management software market bounced back in 2010, with the improvement in the global economic conditions and the resulting demand for large compliance driven projects, need for tighter integration of enterprise content management with enterprise applications, and growing customer interest in case management, web content management, and capture management applications. In 2010, the worldwide content management software revenue grew 5.3% year over year to reach $4.3 billion, according to International Data Corporation (IDC).

Going forward, IDC forecast the worldwide content management software market to reach $6.1 billion in 2015, growing at a CAGR of 7.6% between 2010 and 2015. This expected growth will be mainly driven by of the following factors -- strong growth in Asia Pacific and Americas regions, compliance-driven initiatives, integration of enterprise content management systems with enterprise applications, need for optimizing content- and document-intensive business processes via content-enabled applications (e.g. case management applications), investment in capture and image management solutions for automating manual document-intensive business processes, and investment in web content management to retain customers through online channel in more interactive and personalized ways. Moreover, the content management market still remains highly underpenetrated, as many organizations still use traditional methods (e.g. file servers or run homegrown systems or aging legacy systems) for processing their critical information. According to Harvey Spencer Associates Inc., only about 17% of the companies worldwide presently employ automated invoice processing and content extraction as their primary method for processing the paper invoices. This low-penetration level provides ample room for scalable development of the overall content management market.

The Americas region is the largest content management software market worldwide (representing 57.0% of the worldwide content management software revenue in 2010), followed by the Europe, Middle East and Africa (EMEA) region (32.9%) and Asia Pacific region including Japan (10.1%), according to IDC. IDC expect the content management software market in the Asia Pacific and Americas regions to witness comparatively faster growth (CAGRs of 9.1% and 8.2%, respectively) between 2010 and 2015 vis-à-vis CAGR of 6.0% in that of the EMEA region.

Capture and image management is one of the fastest growing sub-segments of content management market

Capture and image management software solutions enable organizations to automate and streamline manual, document-intensive business processes and workflows into more structured and useful electronic data/information, which help drive return on investment (ROI) via improved business process efficiency and information worker productivity, and containment of costs. Capture and image management solutions offer capture capabilities (conversion of scanned documents into text), indexing capabilities (generating metadata for scanned documents for search purposes), storage and retrieval of scanned documents, classification of both scanned and electronic documents, intelligent extraction facilities, records management facilities, full text search, and other business process automation facilities (e.g. notification, approvals, exception handling, etc.).

According to IDC research, the capture and image management software market is one of the leading and fastest growing sub-segments of the overall content management market. Even during the economic slowdown, the sub-segment stood lesser impacted. As is evident, the worldwide capture and image management software revenue grew 1.3% year over year in 2009 vis-à-vis a 1.5% year over year decrease in that of the worldwide content management software market. In 2009, the worldwide capture and image management software revenue stood at about $972 million, and accounted for 24.1% of the worldwide content management software market.  Going forward, IDC forecast the worldwide capture and image management software market to reach $1.4 billion in 2014, growing at a comparatively higher CAGR of 8.0% between 2009 and 2014, with increasing investments by organizations in automation of manual, document-intensive business processes and workflows, and potential ROI benefits.

 

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Growth Drivers

Compliance Initiatives

Compliance has emerged as a top priority for board rooms and senior management, with the strict and extensive rules and regulations stipulated by governmental and regulatory bodies (e.g. compliance with the Sarbanes-Oxley Act of 2002 and BASEL-II framework) worldwide. Accordingly, the compliance initiatives continue to drive investments in content management software solutions, driven by the growing need to capture, streamline, store and protect enterprise content for reducing compliance risks and costs. The leading content management software vendors (e.g. IBM, OpenText and EMC) derive significant revenue from compliance and/or litigation preparedness deals.

Web Content Management

Web content management continues to be a dominant growth segment within the overall content management market, due to the continued shift in marketing budgets to the online channels. Vendors in web content management segment have seen very strong double-digit growth rates. Web content management has been evolving into Web Experience Management (WEM), which covers personalization, targeting, testing, analytics, and other online marketing avenues, including community-building and social networking features and compatibility to publish to mobile and other devices.

Integration of enterprise content management systems with enterprise applications

The integration of enterprise content management system with enterprise applications enables organizations to realize the vision of their enterprise application investment (full automation of and completed visibility into enterprise business processes) and the vision of enterprise content  management (e.g. broad deployment). Vendors aggressively pursuing this opportunity include OpenText in partnership with SAP and Oracle, and Perceptive Software in partnership with Microsoft. Capture, classification, and intelligent extraction are fundamental to realizing this vision, and so are enterprise search, enterprise social, and information governance.

Potential ROI benefits from automating manual, document-intensive business processes

In document-intensive business processes, documents drive the work; for instance, invoice processing, sales order processing, opening of new accounts, citizen benefit enrollment, case management and contract management, etc.  Automation of manual, document-intensive business processes will help drive ROI via saving in document-processing time, improvement in business process efficiency and information/knowledge worker productivity and cost containment.  We estimate that some 86% of the documents in organizations worldwide involve manual paper processing, and automation can save up to 80% of the document-processing costs. Manually processing a document (e.g. an invoice, application or claim) can cost up to $25/unit. About 25% of invoices are paid late (incurring late charges and sometimes legal action), while 20% of the incoming documents contain irregularities (that delay processing).  In effect, there is significant room for increased ROI from investments in capture and image management software solutions in most organizations worldwide.  According to an April 2010 IDC survey, 59.6% of respondents stated that the ROI from their investment in capture and image management projects was as good as or better than the ROI from investments in other IT projects, while 29.3% of respondents stated the ROI from investment in capture and image management projects was as better or much better than that of their other IT projects.

We expect continuing growth in the data capture software market. Capture is a maturing market where software is increasingly being deployed as part of a larger solution. Continuing pressures on organizations to keep costs down and the organizations’ need to control costs make it ideal time for data capture and document process automation. Industry experts predict capture and image management market growth to remain in the range of 7.1 - 9.5% per year throughout 2012, with a five-year CAGR estimated of 8.6%. The estimation is that market will attain revenue of $1.5 billion by 2012 (based on: Harvey Spencer report: Overview and Trends in the Capture Software Market 2008 -2012).

 

 

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Off-Balance Sheet Arrangements

 

We are not a party to any material off-balance sheet arrangements.

 

Tabular disclosure of contractual obligations.

 

The following is a summary of our significant contractual obligations as of December 31, 2012:

 

		Payment due by period ($ thousands)
Contractual Obligation*		Total				Less Than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Operating Lease Obligation			2,302				975				1,091				236				-
Accrued severance pay			1,808																1,808

 

*Our contractual obligations and commitments at December 31, 2012 principally include obligations associated with our operating lease obligations and contractual and legal obligations related to employees and officers’ severance expense.  Such obligations are detailed in Note 10 to the consolidated financial statements for the year ended December 31, 2012 as well as the section entitled “Compensation” herein. We expect to finance these contractual commitments from cash on hand and cash generated from operations.

 

ITEM 6.                        DIRECT ORS, SENIOR MANAGEMENT AND EMPLOYEES

 

Directors and Senior Management

 

The following table sets forth the identity of our directors, and senior management as of March 18, 2012.  The mailing address for each of the individuals below is c/o TIS at our address set forth herein.

 

Name		Age		Title
Izhak Nakar		62		Chairman of the Board
Ido Schechter		52		Chief Executive Officer and Director
Gili Shalita		37		Chief Financial Officer
Michael Schrader		37		EMEA General Manager
Alex Toh Kian Hong		37		APAC General Manager
Asael (Asi) Karfiol		47		External Director
Elie Housman		75		Director
Osnat Segev-Harel		50		External Director
Lyron Bentovim		43		Director

 

Izhak Nakar founded us in 1991, and served as our Chairman of the Board and CEO from inception until 2001.  In 2001 – 2009, Mr. Nakar served as a Director.  Since 2009, Mr. Nakar has served as the Active Chairman of the Board.

 

 

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In the beginning of 2009, Izhak Nakar purchased most of the equity of Charterhouse Group International in us and became the Active Chairman of the Board and a major shareholder.

Mr. Nakar has co-founded several technology companies including us and TopGuard (acquired by Elron Software NASDAQ:ELRN), e-Mobilis and has founded Anir Vision and NIR 4 YOU TECHNOLOGY.  Mr. Nakar served in the Israeli Air Force from 1970 to 1987, where he led various large-scale, highly technical development projects, including leading a development team that worked in cooperation with the U.S. Air Force. He received his B.Sc. in Computer Science from Bar Ilan University in 1982, and an MBA from Bar Ilan University in 1984. Mr. Nakar is a recipient of the “Israel Defense Award,” bestowed annually by the President of Israel, for the development of high-tech systems in the field of intelligence for the Israeli Defense Forces. He also received the “Man of the Year Award” in Business and Management (‘95-’96) in recognition of his business accomplishments and contributions to the growth and development of Israeli high-tech companies. In addition, in 2004, Mr. Nakar was elected as a member of the Board of Israel-Japan chamber of Commerce.

Ido Schechter has been our CEO since January 2002 and has been a director since December 2004.  From January 2001 until he became CEO, Dr. Schechter was Vice President of TIS’ ASP 2 , an initiative of ours to offer data collection services via the Internet, using the eFLOW® platform solution.  Prior to that Dr. Schechter had been the TIS’s Vice President of Sales since August 1996.  From January 1995 until August 1996, Dr. Schechter served as General Manager of Super Image, a former affiliate of ours, which operated a form processing service bureau.  From August 1993 to December 1994, Dr. Schechter oversaw the start-up of automatic form processing services at Israel Credit Cards, Ltd.  From 1991 to 1993, Dr. Schechter was a research scientist at the Horticultural Research Institute of Ontario, Canada.  Dr. Schechter is the recipient of eight Honors and Scholarships, has published or presented more than twenty-five articles and is a Captain in the Israeli Air Force.  Dr. Schechter received his Ph.D.  and M.Sc. in Plant Physiology from the University of Guelph in Ontario, Canada and his B.Sc.  from the Hebrew University in Israel.

 

Gili Shalita has been our CFO since August 2008.  From August 2007 until she became CFO, Ms. Shalita served as the Director of Finance of the Company.  Prior to joining us, from March 2005, Ms. Shalita served as the Controller of PMC-Sierra Israeli branch (Formerly: Passave). From July 2003 until March 2005, Ms. Shalita served as risk and control manager of Intel Israel. Between the years 2000 and 2003, Ms. Shalita worked at Ernst & Young Israel as a CPA in the high-tech practice group. Ms. Shalita is certified licensed public accountant (Isr.). She holds a B.A. in Economics and Accounting from the Tel Aviv University and an MBA in Finance from Bar Ilan University.

 

Michael Schrader is our general manager of EMEA and prior to that has served as manager of our German operation since 2004. Mr. Schrader has been with us since 1999, initially serving as a software engineer, a technical team leader, an international strategic project manager and as the director of engineering for Europe.  Prior to joining us, Mr. Schrader was a software engineer at Siemens and owned a Document Management consulting and development business. Mr. Schrader holds a B.Sc. of Business Engineering and Administration and is an Associate Engineer of Siemens Technical College.

 

Alex Toh Kian Hong joined us in 2007 with our acquisition of Asiasoft and serves as general manager of our Asia Pacific ("APAC") operations. He founded Asiasoft in 2004 and has managed it since then. Asiasoft has been engaged in research & development in Capture, Content Management as well as solutions for shared services centers in its various facilities in Asia.  Prior to founding Asiasoft, Mr. Toh founded Virtual Homes Pte Ltd, an online 3D / VRML company providing users with online 3D designs of their own homes. Mr. Toh is a graduate of the National University of Singapore with a degree from its School of Computing.

 

Asi Karfiol was elected to serve as our external director for the second term –in November 2010. Mr. Karfiol has been active in the field of venture capital and investment banking for more than 15 years in which he incorporates his financial education and expertise together with his technological and marketing education and expertise. Mr. Karfiol is a Partner and an Executive Director in Mooreland Partners, a global technology focused investment banking firm based in Greenwich Connecticut, with offices in New York, Silicon Valley and London . Prior to that, Mr. Karfiol served as General Partner at Hyperion Israel Venture Partners for seven years. From 1995 through 2001, Mr. Karfiol served as Vice President at Ascend Venture Capital, an Israeli venture capital fund and at ITI – Integrated Technologies of Israel, an American-Israeli investment company. Prior to that, Mr. Karfiol served as Marketing Manager for the Keter Plastic Group and as General Manager of a strategic international marketing consulting firm for leading Israeli corporations . Mr. Karfiol holds a B.Sc. (summa cum laud e) in Electrical Engineering and an MBA (magna cum laude) from Tel Aviv University.

 

 

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Elie Housman has been a director of ours since May 2000.  Mr. Housman was a principal at and consultant to Charterhouse Group International   from 1989 until June 2001. At Charterhouse, Mr. Housman was involved in the acquisition of a number of companies with total sales of several hundred million dollars.  Prior to Charterhouse, he was co-owner of AP Parts, a $250 million automotive parts manufacturer.  Mr. Housman was also the Chairman of Novo Plc. of London, a leading company in the broadcast storage and services industry.  At present, Mr. Housman is a director of three public companies, ICTS International, N.V., a prominent aviation security company and EVCI Career Colleges Incorporated. In addition, Mr. Housman serves as a director of Bartech Systems International, Inc., which is a privately held company in the United States. Mr. Houseman is also the Chairman and CEO of Inksure Technologies. Elie Housman will serve as a Director possessing financial and accounting expertise as determined by the Company following Section 92(a)(12) of the Companies Law.

Osnat Segev-Harel was elected to serve as an external director of ours in December 2011.   Ms. Segev-Harel has extensive experience of over 15 years in the business development for high-tech companies. Ms. Segev-Harel serves as CMO and VP of business development for Sapiens International Corporation N.V. From 2005 through 2009 Ms. Segev-Harel served as a director of sales strategy and planning and as director of business development in NICE Actimize Inc. in New York, in which she has acquired a deep knowledge of the global banking industry in general and in North America in particular From 1995 through 2005 she served as business development executive in IBM, Israel, including as an account manager in IBM’s Banking Division.  Prior to that, between 1988 and 1994 Ms. Segev-Harel was a User Interface project leader in Digital Equipment Corporations, Israel.   Ms. Segev-Harel holds a Practical Engineering degree from the Hadassah College in Jerusalem, a B.Sc. in Futurism from the State University of New York and an MBA from Derby University majoring in Strategy. Ms Segev-Harel has completed a Directors Certification Program at Bar Ilan University. Ms. Segev-Harel possesses professional competence as required by the Companies Law and regulations deriving thereof. 

 

Lyron Bentovim has been serving as a director of ours since November, 2008. From August 2009   until July 2012, Mr. Bentovim served as the Chief Operating Officer and the Chief Financial Officer of Sunrise Telecom, a US company engaged in developing test and measurement solutions for telecom networks.  Prior to joining Sunrise Telecom Mr. Bentovim was a Portfolio Manager for Skiritai Capital LLC, an investment advisor based in San Francisco. He has over 15 years of industry experience, including his experience as a member of the board of directors at Three-Five Systems, Sunrise Telecom, and Argonaut Technologies. Prior to his position in Skiritai Capital LLC, Mr. Bentovim served as the President, COO, and co-founder of WebBrix Inc. Additionally; Mr. Bentovim spent time as a Senior Engagement Manager with strategy consultancies USWeb/CKS, the Mitchell Madison Group and McKinsey & Company. As a Senior Engagement Manager, Mr. Bentovim advised many Fortune 1000 companies in the Financial Services, Insurance, Retail, and Manufacturing sectors. During his consulting career, Mr. Bentovim assisted companies in exploring and developing solutions in the areas of strategic planning and operational improvements. Mr. Bentovim is experienced in evaluating Global 500 organizations and implementing strategies designed to streamline processes, reduce inefficiencies and achieve significant overhead reductions. Mr. Bentovim has an MBA from Yale School of Management and a Law degree from the Hebrew University in Jerusalem.

 

The foregoing information is based upon data provided to us by the relevant director or senior management member.

 

 

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There are no familial relationships between any of the persons named above.  Elie Housman was initially appointed to the Board seat by Charterhouse which was a major shareholder of ours until late 2008, pursuant to the terms of the investment by Charterhouse in us and a voting agreement with Mr. Nakar. Charterhouse is no longer a major shareholder of ours and the voting agreement is no longer in effect.  For further details, see “Major Shareholders and Related Party Transactions - Significant Changes in Percentage Holding.”  Mr. Housman left the employ of Charterhouse in 2001.

 

Compensation

 

The aggregate direct remuneration paid or payable to all persons who served in the capacity of executive officer during 2012 was approximately $1,309,000, including approximately $133,000, which were set aside for pension and retirement benefits and including amounts expended by us for automobiles made available to our executive officers.

 

The total amount paid or payable to the directors, including external directors, for 2012 was $94,000. As of March 11 , 2013, 757,717 options to purchase our ordinary shares were outstanding to certain executive officers and directors (consisting of 9 persons), all of the options are currently exercisable or exercisable within 60 days of March 11 , 2013. See “Share Ownership.”

 

On November 29, 2012, our shareholders approved our Board of Director’s decision regarding compensation of external directors, which adjustment was effective December 3,   2012 in order to meet the requirement of amendment No. 20 to the Israeli Companies Law, 1999. The compensation of the directors is as follows:

 

·

Each of Messrs. Elie Housman, Lyron Bentovim, and Asael Karfiol and Ms. Osnat Segev- Harel, who will serve in 2013 as members of the Board of Directors and other committees, will receive compensation for his or her service, in the amount of NIS 27,075 (approximately $7,245) per year and an amount of NIS 2,120 (approximately $570) for each meeting of the Board of Directors or any committee in which they will participate.

 

·

Mr. Izhak Nakar and Dr. Schechter have waived, for 2013, any separate compensation in return for serving as a Director in excess of their compensation as the Active Chairman and the Chief Executive Officer (respectively).

 

For further details about Mr. Izhak Nakar compensation see “Related Party Transactions”.

 

Ido Schechter, our Chief Executive Officer who is also a director may be entitled, by virtue of his being an employee, to severance compensation and other payments required by Israeli law upon termination of his employment.  The terms of severance are dictated by Israeli law and provide for one month’s salary for every year in which Dr. Schechter is employed by us.

 

Committees of the Board

 

Audit Committee

 

Our audit committee is comprised of Elie Housman, and the external directors Asael Karfiol and Osnat Segev-Harel.  The Companies Law requires that public companies appoint an audit committee.  The responsibilities of the audit committee include identifying irregularities in the management of the company’s business, decide if certain actions are material or extraordinary to the company’s activity with relation to related parties transactions,  approving related party transactions as required by law, approving the internal auditor work plan, examining the internal auditing array of the company and the way the internal auditor is operating and determine if it has the sufficient tools as well as budget to operate, taking into consideration the size of the company and its special needs and to set arrangements regarding the ways of treatment given to complains by the company’s employees regarding impairments in the management of the company’s business and the protection give to such employees.  In addition, as described under Item 16, the audit committee is responsible for the approval of all audit and non-audit services provided to the Company by Ernst and Young and to oversee the qualifications, independence, appointment, compensation and performance of the Company’s independent auditors. The audit committee operates under a charter adopted by our Board of Directors and which is on display on our website at http://www.topimagesystems.com . An audit committee must consist of at least three directors, including all of the external directors of the Company and, commencing September 2011, its chairman will have be an external director as well. Asael Karfiol is the chairman of our audit committee. Furthermore, as required by the NASDAQ rules all the members of our audit committee are independent, see “Directors, Senior Management and Employees- Independent Directors”.

 

 

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Compensation Committee

 

Our compensation committee is comprised of Osnat Segev-Harel, Lyron Bentovim and Asi Karfiol. Under the 2012 Amendment (see "Approval of Terms of Office and Employment") public companies are required to appoint a compensation committee comprised of at least three directors, including all of the external directors. The external directors must also constitute a majority of the members. All other members of the committee, who are not external directors, must be directors who receive compensation that is in compliance with the Compensation Regulations. In addition, the chairperson of the compensation committee must be an external director. The Companies Law further stipulates that directors who are not qualified to serve on the audit committee may not serve on the compensation committee and that similar to the audit committee, generally, any person who is not qualified to be a member of the compensation committee may not attend the compensation committee’s meetings. Our compensation committee meets those standards.

 

The responsibilities of the compensation committee under the Companies Law include: (i) making recommendations to the board of directors with respect to the approval of the Compensation Policy and any extensions thereto; (ii) periodically reviewing the implementation of the Compensation Policy and providing the board of directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with respect to the Terms of Office and Employment of office holders; and (iv) resolving whether or not to exempt a transaction with a candidate for chief executive officer from shareholder approval. The compensation committee also oversees the administration of the Company’s various compensation plans and arrangements, in particular, the incentive compensation, deferred compensation and equity based plans of the Company (and to the extent appropriate, the subsidiaries of the Company) and assists the Board in fulfilling its responsibilities relating to the compensation of directors, the chief executive officer and other office holders of the Company.

 

Strategy Committee

 

The strategy committee is comprised of Lyron Bentovim, Izhak Nakar and Osnat Segev-Harel. The function of the strategy committee is to develop a strategy for advancing and developing our business for each market, based on the specific characteristics of each territory and the specific characteristics of each product, and to recommend such strategy and steps for its implementation to the board of directors.

 

Independent and External Directors

 

The rules of the NASDAQ Stock Market require that a majority of our directors be “independent” as defined in Rule 5605(a)(2) thereof.  The board of directors has determined that Elie Housman,  Lyron Bentovim, Osnat Segev Harel and Asael Karfiol are each independent directors for purposes of the NASDAQ rules.

 

Israeli law requires that a public company such as us, have at least two external directors. The two external directors of the Company are Osnat Segev Harel and Asael Karfiol.  The Companies Law requires as a general principle that at least one statutory external director have financial and accounting expertise, and that the other statutory external director have professional competence, as determined by the board of directors. The Companies Law also requires a company's board of directors to determine the minimal number of members of the board of directors to possess financial and accounting expertise, based, among other things, on the type of company, its size, the volume and complexity of its activities and the number of directors.  Our Board of Directors decided that the minimal number of directors to possess financial and accounting expertise on the Company's board shall be two. Under the Companies Regulations (Qualifications of Director Having Financial and Accounting Expertise and of Director Having Professional Competence) – 2005, a director having financial and accounting expertise is a person who, due to his or her education, experience and talents is highly skilled in respect of, and understands, business and accounting matters and financial reports, in a manner that enables him or her to deeply understand the company’s financial statements and to arouse discussion in respect of the manner in which the financial data is presented. The board of directors has determined that Asael Karfiol and Elie Housman both possess financial and accounting expertise as required by the above mentioned regulations. Under the regulations, a director having professional competence is a person who has an academic degree in either economics, business administration, accounting, law or public administration or an academic degree in an area relevant to the company’s business, or has at least five years’ experience in a senior position in the business management of a corporation with a substantial scope of business, in a senior position in the public service or in the field of the company’s business. The board of directors has determined that Osnat Segev Harel possesses professional competence as required by the above mentioned regulations.

 

 

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NASDAQ rule 5605(c)(3) provides that an audit committee must have at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. Elie Housman meets those requirements.

 

Employees

 

The following table presents the number of our employees categorized by geographic location:

 

Location		No. of Employees as of December 31,
		2010				2011				2012
Israel			26				32				30
Germany and rest of Europe			58				80				91
Japan			7				7				7
USA & Latin America			5				8				12
United Kingdom			14				16				13
Singapore and Hong Kong			17				20				18
Total			127				163				171

 

The following table presents the number of our employees categorized by activity:

		No. of Employees as of December 31,
		2010				2011				2012
Professional services			76				84				81
Research and development			12				23				24
Sales and marketing			23				34				46
Operations and administrations			16				22				20
Total			127				163				171

 

We have never experienced any strikes or work stoppages. Substantially all of our employees have employment agreements and none are represented by a labor union.

We are subject to labor laws and regulations in Israel and in other countries where our employees are located.  Although our Israeli employees are not parties to any collective bargaining agreement, we are subject to certain provisions of collective bargaining agreements that are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Industry, Commerce and Labor.   Israeli labor laws and the laws of other countries where our employees are located may differ materially from U.S. labor laws and, in some cases, impose material obligations on us (such as requirements to pay overtime, minimum wages, procedures for dismissal, severance pay or obligatory pensions and mandatory cost of living increases).

 

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Share Ownership

 

Board of Directors, Senior Management and Certain Employees

 

Izhak Nakar, the chairman of our Board of Directors beneficially owned 1,826,909 ordinary shares representing 15.4% of the Company’s issued and outstanding share capital, as of March 11, 2013.  Ido Schechter, our Chief Executive Officer, beneficially owned 703,829 ordinary shares representing 5.9% of the Company’s issued and outstanding share capital, as of March 18, 2013. Alex Toh Kian Hong, our APAC general manager, beneficially owned 413,333 ordinary shares representing 3.5% of the Company’s issued and outstanding share capital, as of March 18 , 2013. All other directors and executive officers each beneficially owned less than 1% of the Company’s shares. The following table sets forth information regarding options held by our directors and officers currently exercisable or exercisable within 60 days as of March 11, 2013.  Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person.

 

Name		Ordinary Shares Underlying Options		Expiration Dates		Exercise Prices ($/share)
Izhak Nakar		205,000		2015 - 2021		$1.30 - $2.11
Ido Schechter		298,754		2013 - 2021		$1.30 - $2.11
All other  directors and officers as a group		253,963		2013 - 2022		$1.30 - $4.27

 

None of the ordinary shares beneficially owned by any of the directors or executive officers of the Company has any voting rights which are different than the voting rights held by all other holders of ordinary shares.

 

Stock Options

 

In order to attract, retain and motivate employees (including officers) who perform services for or on behalf of us, we maintain three Employee Share Option Plans, one established in 1996 (“ESOP 1996”), the second in 2000 (“ESOP 2000”) and the third in 2003 (“ESOP 2003”).  Upon adoption of ESOP 2003, all shares previously available for grant under ESOP 1996 and ESOP 2000 that were not the subject of outstanding options were transferred to ESOP 2003 and are subject to the terms of ESOP 2003.

 

On December 11, 2008, our Board of Directors approved a plan in which we offered our option holders an opportunity to surrender their “underwater” vested options and be issued new options, each having an exercise price of $1.30 per share. The number of the options which were outstanding before the introduction of the exchange plan was approximately 1.4 million options with an average exercise price of $3.14 a share.

 

Below is information with respect to our options plan.

 

Employee Share Option Plan (2003)

 

The share option plan was approved by the board of directors on May 13, 2003 and by our shareholders at our annual meeting on December 18, 2003.  Our board approved the extension of the ESOP 2003 for an additional period of 10 years on November 14, 2011 and our shareholders approved such extension at our annual meeting on December 22, 2011. The terms of ESOP 2003 are substantially the same as those of ESOP 2000. All the shares reserved for grant under ESOP 2000 and ESOP 1996 that were not granted or that were not the subject of outstanding options under those plans were transferred to the new plan. Further, all options under such old plans that expire prior to their exercise according to the conditions detailed therein will be transferred into the new plan.  We filed the necessary documents with the Israeli tax authorities for the approval of the new option plan on June 4, 2003. Such approval provides the grantees the eligibility for certain benefits under Section 102 of the Israeli Income Tax Ordinance (New Version) 1961 and the rules promulgated thereunder as revised by the Israeli tax reform. As of March 11, 2013, options to purchase an aggregate of 1,279,300 ordinary shares were outstanding.  Most of outstanding options are exercisable at an exercise price between $1.30 - $2.25

 

 

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ITEM 7.                        MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

Major Shareholders.

 

The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of March 11, 2013, for each person whom we know (based on filings with the SEC) beneficially owns five percent or more of the outstanding ordinary shares.

 

Beneficial ownership of shares is determined under rules of the SEC, and generally includes any shares over which a person exercises sole or shared voting or investment power. In addition, the following table includes the number of shares underlying options or warrants that are currently exercisable or may be exercised in 60 days.  Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person. Applicable percentages are based on 11,653,807 ordinary shares outstanding as of March 11, 2013.

 

Name		Number of Shares Beneficially Owned				Percentage of Shares
Izhak Nakar(1)			1,826,909				15.4	%
Ido Schechter(2)			703,829				5.9	%

 

(1)

The information is based upon the recent Schedule 13G/A filed with the SEC by Nir 4 You Technologies Ltd., an investment company under Mr. Izhak Nakar’s control, and Mr. Izhak Nakar on February 19, 2013. Mr. Nakar’s beneficially owned shares includes 1,562,735 ordinary shares held by Nir 4 You Technologies Ltd.

 

(2)

The information is based upon the recent Schedule 13G filed with the SEC by Dr. Ido Schechter on February 19, 2013.

 

Significant Changes in Percentage Ownership

 

On June 6, 2011, the Company entered into a Securities Purchase Agreement (the "SPA") with several shareholders (the "Investors"), pursuant to which the Company issued to the investors 1,425,000 ordinary shares of NIS 0.04 par value each, at a price per share of $2 each, for proceed of $2,5 million, net of issuance expenses. As part of the private placement transaction under the SPA, the Company granted the Investors and certain agents,  Warrants to purchase additional 441,750 of the Company's Ordinary shares of NIS 0.04 par value each. The warrants may be exercisable on or after six months from June 13, 2011 for a period of five years thereafter at an exercise price of $2.20 per share. As of December 31, 2012 112,500 warrants had been exercised into 112,500 shares and additional 55,575 warrants had been converted into 26,533 shares.

 

As of March 11, 2013, 11,653,807 ordinary shares of Company were issued and outstanding.  The Company believes that, as of March 11, 2013, there were 78 shareholders of record of the Ordinary Shares in the United States, who, among them, held a total of 9,479,951 ordinary shares, or 81.3% of the Company’s total outstanding ordinary shares.

 

 

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Related Party Transactions

 

Our agreement with Mr. Izhak Nakar provides that in consideration for his services to the company worldwide, Mr. Nakar will be entitled to compensation in the amount of $28,125 plus VAT per month. During 2012, we paid Mr. Nakar $338,000 for his consulting fees.

 

For 2011, Mr. Nakar was entitled to receive a payment equal to 4% of the Company’s EBITDA for the year ended December 31, 2011, provided, however that Company met certain criteria set by the board with regard to revenue, EBITDA and cash targets. Mr. Nakar bonus payment for 2011 paid in 2012, was $147,000.

 

For 2012, Mr. Nakar is entitled to receive a payment equal to 4% of the Company’s EBITDA for the year ended December 31, 2012, provided, however that Company met certain criteria set by the board with regard to revenue and EBITDA. Mr. Nakar’s bonus entitlement for 2012 is $172,000.

 

The terms of Mr. Nakar's compensation for 2012 were approved in accordance with Israeli law as it existed prior to the 2012 Amendment (see "Approval of Terms of Office and Employment"). Under the transitional provisions of that amendment, the approval continues to be effective. The Audit Committee approved the terms of compensation for 2012 and thereafter, on June 27, 2012 and on October 16, 2012. The Board approved the foregoing on June 27, 2012 and on October 16, 2012 and the Shareholders approved the forgoing in the Company’s annual general meeting on November 29, 2012.

 

OOurO Our agreement with Dr. Ido Schechter, the Chief Executive Officer of the Company, provides for a base salary of $262,000 (denominated in NIS) per year and to an automobile allowance, pension, retirement, severance, vacation or similar benefits.  During 2012 Dr. Schechter was paid $486,000. That amount included his base salary, a bonus of $144,000 for the Company's performance during 2011 and $80,000 paid or reserved for automobile allowance, pension, retirement, severance, vacation or similar benefits. For a description of Dr. Schechter’s terms of severance see “Compensation.”

 

Dr. Schechter shall also be entitled to receive an amount equal 4% of the Company’s EBITDA for the year ended December 31, 2012, provided, however that Company will meet certain criteria set by the board in regard to revenue and EBITDA. Bonus entitlement for 2012 is $172,000.

 

Similarly, the terms of Dr. Schechter's compensation for 2012 were approved in accordance with Israeli law as it existed prior to the 2012 Amendment. Under the transitional provisions of that amendment, the approval continues to be effective. The Audit Committee approved the terms of compensation for 2012 and thereafter on June 27, 2012 and on October 16, 2012. The Board approved the above terms of compensation on June 27, 2012 and on October 16, 2012 and the Shareholders approved the foregoing on the Company’s annual general meeting on November 29, 2012.

 

From time to time, as new members join our Board of Directors, they become parties to our letter of indemnification to be given to our directors and officers. This letter was approved by our shareholders at a shareholders meeting held on November 15, 2005 and amended by our shareholders at a shareholders meeting held on December 22, 2011. The aggregate indemnification amount that the Company will pay to all its officers and directors pursuant to these letters of indemnification shall not exceed $5,000,000.

 

ITEM 8.                        FINAN CIAL INFORMATION

 

Consolidated statements and other financial information

 

Consolidated Financial Statements

 

See Item 18.

 

 

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Other Financial Information

 

The amount of export revenues constitutes a significant portion of our total revenues.  The following is a table giving details of our export revenues, as well as the breakdown of revenues between products and services.

 

		2010				2011				2012
		$ Thousands
Export Revenues
Export Revenues			21,694				28,499				31,153
Total Revenues			21,762				28,673				31,330
Percentage of Total Revenues			100	%			99	%			99.5	%
Breakdown of Revenues
Product Revenues			42	%			49	%			49	%
Service Revenues			58	%			51	%			51	%

 

Legal Proceedings

 

On September 25, 2012, TIS America Inc. and Top Image Systems, Ltd. were named as defendants in Case Number 1:12-cv-01208-UNA, filed by Mitek Systems, Inc. for alleged infringement on five United States patents in the United States District Court for the District of Delaware.  Mitek filed a First Amended Complaint on January 11, 2013.  An answer to the First Amended Complaint was filed on January 28, 2013.  A scheduling order was entered on February 21, 2013 and the lawsuit is still in its early state. No discovery has been taken and a trial is scheduled for December 8, 2014.

 

The lawsuit relates to technology used in our MobiCHECK software. Mitek is seeking a declaration of infringement, damages, and other amounts.

 

While we believe that Mitek’s claim is without merit, we cannot assure you that the suit will be dismissed or that we will prevail. If Mitek is successful, or if we agree to settle the lawsuit, we might be unable to pursue, or severely limited in, our marketing and sale of MobiCHECK and possibly other products might restricted or be subject to significant obligations to pay royalties. Further, even if we prevail in the lawsuit, intellectual property litigation is expensive and tends to divert management attention from our business. Accordingly, if any of the foregoing risks are realized, the lawsuit could have a material adverse effect on our business, prospects, financial condition, and results of operations.

 

Dividend Policy

 

To date, we have not paid any dividends on our ordinary shares.  The payment of dividends in the future, if any, is within the discretion of the Board of Directors and will depend upon our earnings, our capital requirements and financial condition and other relevant factors.  We may not declare or pay any dividends in the future.

 

We obtained the status of  Enterprise” (established plan) and "Benefited Enterprise "under the Law for the Encouragement of Capital Investments, 1959, and as amended, under which we may take advantage of certain tax exemptions. If we distribute a cash dividend from income which derived from the Approved and Benefited Enterprise during the tax exemption period, we would have to pay corporate tax at a rate of up to 25% on the amount equal to the amount distributed and on the amount of corporate tax which would have been due in the absence of the tax exemption, in addition to withholding tax on such dividends paid. For further description of the conditions limiting our ability to declare and pay dividends see “Israeli Taxation, Foreign Exchange Regulation and Investment Programs".

 

 

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The distribution of dividends may also be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our articles of association provide that dividends will be paid at the discretion of, and upon resolution by, our board of directors however, the board of directors at its discretion, may transfer the decision in this matter to the general meeting.

 

  Significant Changes .

 

None.

 

ITEM 9.                        LISTIN G

 

   Offer and Listing Details.

 

Effective November 1996, our ordinary shares have been quoted on the NASDAQ, under the symbol “TISAF.”  Effective April 29, 1999, the symbol for the ordinary shares was changed to “TISA” on the NASDAQ.

 

The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares, as reported on the NASDAQ.

 

Stock price history

 

The annual high and low market prices (in USD) for the ordinary shares for the five most recent full financial years are set forth below:

 

Year Ending		NASDAQ Capital Market
December 31, 2012	Hi	5.45
	Lo	2.19
December 31, 2011	Hi	2.91
	Lo	1.11
December 31, 2010	Hi	1.29
	Lo	0.74
December 31, 2009	Hi	0.90
	Lo	0.45
December 31, 2008	Hi	2.16
	Lo	0.53

 

 

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The high and low market prices for the ordinary shares for each full financial quarter over the two most recent full financial years and any subsequent period are set forth below:

 

Quarter Ending		NASDAQ Capital Market
December 31, 2012	Hi	4.01
	Lo	3.4
September 30, 2012	Hi	4.75
	Lo	3.82
June 30, 2012	Hi	5.45
	Lo	3.51
March 31, 2012	Hi	4.3
	Lo	2.19
December 31, 2011	Hi	2.39
	Lo	1.81
September 30, 2011	Hi	2.78
	Lo	1.9
June 30, 2011	Hi	2.91
	Lo	1.22
March 31, 2011	Hi	1.3
	Lo	1.11

 

For the most recent six months, the high and low market prices of the ordinary shares for each month are set forth below:

 

Month Ending		NASDAQ Capital Market
February 28, 2013	Hi	3.63
	Lo	3.3
January 31, 2013	Hi	3.56
	Lo	3.07
December 31, 2012	Hi	4.0
	Lo	3.4
November 30, 2012	Hi	3.9
	Lo	3.55
October 31, 2012	Hi	4.01
	Lo	3.55
September 30, 2012	Hi	4.44
	Lo	3.82

 

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Our ordinary shares have been dually-listed for trading on the TASE since December 3, 2006. Since the date of listing on the TASE, there has been only limited and sporadic trading activity on that market.

 

Markets

 

Our ordinary shares were dual-listed on the TASE on December 3, 2006, in addition to being listed on the NASDAQ.  Effective January 1, 2007, the TASE included our shares in the Tel Aviv Tel-Tech index, which tracks the performance of the top Israeli technology companies by market cap.

 

In December 2006 we completed a public offering of convertible debentures, which were listed on the TASE. Effective October 4, 2011, we repurchased the remaining outstanding principal balance of, and accrued interest on, the debentures and the debentures are no longer listed on the TASE.

 

ITEM 10.                        ADDITIONAL INFORMATION

 

Memorandum and Articles of Association

 

General

 

TIS is registered with the Israeli Registrar of Companies.  The registration number issued to TIS by the Registrar of Companies is 52-004294-6.  The objectives for which we were founded are set out in Section 2 of the Memorandum of Association as follows: “The Company is permitted to deal with any activity that is meant to advance the interests of the Company and to act in any field which the Company’s management believes is beneficial to the Company.” At our December 22, 2011 shareholders meeting, we adopted new Articles of Association to provide for changes in the Companies Law and in the Israeli Securities Law 1968-5728.

 

Directors and other Office Holders

 

General

 

A director’s ability to vote on a proposal, arrangement or contract in which the director is materially interested is codified, along with the fiduciary duties of all “office holders,” in the Israeli Companies Law.  Under the Israeli Companies Law, the term “office holders,” is defined to mean, a director, chief executive officer,  chief business manager, deputy chief executive officer, vice chief executive officer,  any person filling any of those roles in a company even if his title is different and any other manager directly subordinate to the chief executive officer.  An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty.  The duty of care includes avoiding negligent acts and acting skillfully as a reasonable office holder would act.  The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder of the company.

 

The Israeli Companies Law requires that an office holder promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company.

 

In the case of a transaction in which an office holder has a personal interest, that is not an extraordinary transaction, as defined under Israeli law, and after the office holder complies with the above disclosure requirement, only board approval is required.  Members of the board having a personal interest should not be present at the vote or exercise their vote unless a majority of the board has a personal interest. The transaction must not be adverse to the company’s interest. If such transaction is an extraordinary transaction or if we intend to provide an undertaking to indemnify, exempt or insure an office holder, with regard to their duties, then, in addition to any approval required by the board of directors or by any other organ of the company according to its Articles of Association, it also must be approved by the audit committee or compensation committee (depending on the nature of the transaction) prior to the approval by the board of directors, and, under specified circumstances, by a meeting of the shareholders.  An office holder who has a personal interest in the approval of a transaction brought before the board of directors, the compensation committee or the audit committee may not be present at this meeting or vote on this matter unless most of the members have a personal interest in approving the transaction or the occurrence of specific circumstances defined in the law.

 

 

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Arrangements regarding the compensation of our directors (whether regarding in their capacity as directors or regarding the provision of other services) require audit committee, board of directors and shareholder approval.

 

External Directors

 

Under the Israeli Companies Law, public companies are required to appoint two external directors. Any committee having the power to act on behalf of a company’s board (as opposed to an advisory committee) must have at least one external director as a member.  All of the external directors must be members of the Audit Committee and the compensation committee, the chairman of the Audit Committee and the compensation committee must be an external director.  An external director must be an individual resident of Israel, who is qualified to serve as a director.  However, companies such as ours whose shares have been offered to the public outside of Israel may appoint external directors who are not residents of Israel.  A person may not be appointed as an External Director if:

 

·

Such person or his or her relative, partner, employer or any person to which they are directly or indirectly subordinate, or any entity under that person’s control, has or had, on or within the two years preceding the date of such appointment as an external director, any affiliation with the Company, with a Controlling shareholder at the date of such appointment or their relative,  or with an entity controlling, controlled by or under common control with the Company or, in a company that has no Controlling shareholder, an affiliation to a person who at the date of such appointment acts as the company’s chairman of the board, CEO, a principal shareholder or the most senior officer in the financial field. The term "affiliation" includes an employment relationship, a regular business or professional relationship, control, and service as an office holder other than service as a director appointed as an external director in a company offering shares to the public for the first time;

 

·

Such person's position or business activities create or may create a conflict of interests or interfere with such person's ability to serve in the capacity of an external director;

 

·

Such person acts as a director of another company in which one of the external directors acts as a director in the Company;

 

·

Such person is an employee of the securities authority or of the Tel Aviv Stock Exchange; or

 

·

Such person or their relative, partner, employer or any person to which he or she is directly or indirectly subordinate, or any entity under that person’s control, has a professional or business relationship with a person to whom affiliation is prohibited, even if such relationship is not maintained regularly, aside for negligible relationships.

 

Under the Companies Law and regulations promulgated under it, a person is qualified to serve as an external director only if he or she possesses accounting and financial expertise or professional competence. At least one of the external directors must have accounting and financial expertise.

 

A controlling shareholder means a shareholder who has the ability to direct the company's actions other than by virtue of being a director or an officer.  A shareholder who holds more than 50% of the voting power in the company's general meeting of shareholders or any equivalent governing body or has the right to elect directors or to appoint the company's CEO is presumed to be a controlling shareholder.

 

 

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No person may 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.  A director of one company may not be appointed as an external director in another, if at the same time, a director of the other company serves as an external director of the first.  Other limitations exist with regard to various types of memberships and positions, whose holders may not serve as external directors.  If, at the time external directors are to be appointed, all current members of the board of directors are of the same gender, then at least one external director must be of the other gender.

 

The election of the external director requires a simple majority of the total number of votes cast at the meeting, whether such votes are cast in person or by proxy, provided that either:

	—	such majority includes at least the majority of the votes of non-controlling shareholders who are present in person or by proxy, where abstentions are not counted as votes; or
	—	the total number of shares held by non-controlling shareholders who voted against the election of the external Director does not exceed two percent of the aggregate voting rights in the company.

 

The initial term of an external director under the law is three years (extendable for two additional three year terms). The approval of the general meeting shall require that the majority of votes include the majority of the non-controlling shareholders present at the meeting, or alternatively, that the total of opposing votes does not exceed 2% of the voting rights (and in the event that all Board members are of one gender, one of the external directors should be of the other), in accordance with the provisions of the Companies Law.  External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company.

 

An external director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly in connection with service provided as an external director or for any other service. Any external director who receives compensation in violation of such rules may not serve as an external director.  Commencing May 2011,  a company, a controlling shareholder and any other entity controlled by the controlling shareholder may not grant to such external director, its spouse or child, any benefits, directly or indirectly and the external director, its spouse or child may not be appointed to serve in any position, may not be employed by and may not, directly or indirectly render any professional services to the company such controlling shareholder or any other entity controlled by the controlling shareholder, during the first two years following such external director termination of services, and with respect to a relative who is not the external director’s spouse or child during the first year following such termination.

 

Alternate Directors

 

Under the Israeli Companies Law, the Articles of Association of a company may entitle a director to appoint another person to serve as an alternate director.  Our Articles entitle our directors by written notice to us to make such an appointment and to cancel any such appointment.  Our Articles also provide that any person may act as an alternate director.  The Israeli Companies Law now prohibits incumbent directors from acting as alternate directors and a single person from acting as an alternate director for more than one incumbent director.

 

The term of appointment of an alternate director may be for one meeting of the board of directors or for a specified period or until notice is given of the cancellation of the appointment.  To our knowledge, no director currently intends to appoint any other person as an alternate director, except if the director is unable to attend a meeting of the board of directors.

 

 

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Internal Auditor and Certified Public Accountant

 

Under the Israeli Companies Law, the board of directors must appoint an internal auditor, nominated by the Audit Committee.  The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure.  Under the Israeli Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined above), nor an affiliate, nor a relative of an office holder or affiliate, and he or she may not be the company’s independent accountant or its representative.  In addition, the internal auditor may not be a person who holds 5% or more of the company’s outstanding share capital or voting rights, or a person who has the right to appoint one or more directors or the general manager.  The Company’s internal auditor is Mr. Doron Cohen of Fahn Kanne Control Management Ltd., a member firm of Grant Thornton International.

 

In addition, under the Israeli Companies Law, all companies must appoint a certified public accountant to audit the company’s financial statements and to report to the chairman of the board of directors any material improprieties that it may discover with respect to the accounting control of the company.  In our last shareholders meeting, November 29, 2012, we appointed Kost Forrer Gabbay and Kasierer, a member firm of Ernst & Young Global and certified public accountants in Israel, as our certified public accountant for auditing services.

 

Indemnification of Directors and Officers

 

  At a shareholders meeting held on December 22, 2011, following the amendment of the law in 2011, the shareholders approved the adoption of a new Articles of Association, which include, inter alia, an expansion of the insurance and indemnification given to office holders to the maximum extent permitted by law and in addition, the Shareholders approved the amendment of the indemnification letter currently in place with regard to the Company’s directors and office holders. See “Major  Shareholders and Related Party Transactions - Related Party Transactions.”

 

Under the Israeli Companies Law, a company may indemnify an office holder against any monetary liability incurred in his or her capacity as an office holder whether imposed on him or her or incurred by him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by court. A company also can indemnify an office holder against reasonable litigation expenses including attorneys’ fees, incurred, whether or not paid by him or her in his or her capacity as an office holder, in proceedings instituted against him or her by the company, on its behalf or by a third-party, in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for a crime that does not require proof of criminal intent, or in which an indictment was not brought against the office holder.

 

 In addition, a company may indemnify an office holder against reasonable legal fees, including attorney’s fees, incurred, whether or not paid by him, by him or her in consequence of an investigation or proceeding instituted against him or her by an authority that is authorized to conduct such investigation or proceeding, and that was resolved without an indictment against him or her and without imposing on him or her financial obligation as an alternative of a criminal proceeding, or that was resolved without filing an indictment against him or her but with the imposition on him or her of a financial obligation as an alternative to a criminal proceeding in respect of an offense that does not require the proof of criminal intent.

 

A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification, other than litigation expenses, must be limited to foreseeable events in light of the company’s actual activities when the company undertook such indemnification, and reasonable amounts or standards, as determined by the board of directors.

 

A company may obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder. These liabilities include a breach of duty of care to the company or a third-party, including a breach arising out of negligent conduct of the office holder, a breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third-party. A company may also exculpate an office holder from a breach of duty of care in advance of that breach. Our Articles provide for exculpation both in advance or retroactively, to the extent permitted under Israeli law. A company may not exculpate an office holder from a breach of duty of loyalty towards the company, from a breach of duty of care concerning dividend distribution or a purchase of the company’s shares by the company or other entities controlled by the company or from procedures according to chapters H3, H4 or I1 of the Israeli Securities Law 1968-5728.

 

 

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Under the Israeli Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the intent to derive an unlawful personal gain, or against a fine or forfeit levied against the office holder in connection with a criminal offense In addition a Company may indemnify any person as permitted in Section 56H(b)(1) of the Israeli Securities Law.

 

Currently, we hold an insurance policy for our office holders that provides coverage limited to $15,000,000 in aggregate for the policy period ending on June 30, 2013.

 

Approval of Terms of Office and Employment

 

Prior to a recent amendment to the Companies Law which became effective on December 12, 2012 (the “ 2012 Amendment ”), arrangements with respect to the terms of office and employment of office holders required the approval of the audit committee and of the board of directors and, with respect to the terms of office and employment of directors, also the approval of the shareholders by a simple majority. Following the 2012 Amendment, public companies are required to appoint a compensation committee which meets certain independence criteria as described below, and whose approval with respect to the terms of office and employment of office holders is now required instead of the approval of the audit committee.

 

Pursuant to the 2012 Amendment, any arrangement between a public company and an office holder of the company as to such office holder’s terms of office and employment, including exemption and release of the office holder from liability for breach of his or her duty of care to the company, an undertaking to indemnify the office holder, post factum indemnification or insurance; any grant, payment, remuneration, compensation, or other benefit provided in connection with termination of service; and any benefit, other payment or undertaking to provide any payment as aforesaid (“ Terms of Office and Employment ”), now generally require the approval of the company’s compensation committee and the board of directors and, with respect to directors and the chief executive officer, also the company’s shareholders.

 

In addition, pursuant to the 2012 Amendment, the Terms of Office and Employment of office holders must be in accordance with the terms of a compensation policy which companies are required to adopt by September 11, 2013 (the “ Compensation Policy ”). The Compensation Policy must be based on those considerations, must include those provisions and needs to reference those matters as are detailed in the Companies Law. The Compensation Policy must be approved by the company’s board of directors, after considering the recommendations of the compensation committee. In addition, the Compensation Policy must be approved by the company’s shareholders by a simple majority, provided that (i) such majority includes at least a majority of the shareholders who are not controlling shareholders and who do not have a personal interest in the matter, present and voting (abstentions are disregarded), or (ii) the non-controlling shareholders or shareholders who do not have a personal interest in the matter who were present and voted against the policy, hold two percent or less of the voting power of the company (the “ Compensation Majority ”).   The board of directors and the compensation committee may override the resolution of the shareholders following a re-discussion of the matter and for specified reasons. A Compensation Policy which is approved for a period of more than three years generally must be brought for approval in accordance with the above procedure once every three years. TIS has not yet adopted a Compensation Policy, but is in the process of doing so.

 

Notwithstanding the above, the amendment of existing Terms of Office and Employment of office holders (other than directors), requires the approval of the compensation committee only, if the committee determines that the amendment is not material in relation to its existing terms.

 

During the transition period, from the effective date of the amendment (December 12, 2012) and until a Compensation Policy is adopted, the Terms of Office and Employment of an office holder, including any amendment thereof, are required to be approved as described below with respect to the different categories of office holders and must be based on, must include and need to reference the same matters as those required with respect to the Compensation Policy described above. The amendment does not affect the validity of Terms of Office and Employment approved prior to the effective date of the amendment in accordance with the requirements of the Companies Law as at the time of approval. All current relevant Terms of Office and Employment were approved by all required bodies of TIS prior to December 12, 2012.

 

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Directors

 

Pursuant to the 2012 Amendment, any arrangement between a company and a director as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of the compensation committee, the board of directors and the shareholders by a simple majority.

 

Under certain circumstances and conditions, the compensation committee and the board of directors may approve an arrangement that deviates from the Compensation Policy, provided that such arrangement is approved by the company’s shareholders by the Compensation Majority. Such approval will also be required with respect to determining the Terms of Office and Employment of a director during the transition period until the company adopts a Compensation Policy.

 

External directors may receive compensation solely as provided for in certain regulations promulgated pursuant to the Companies Law governing the terms of compensation payable to external directors (the “ Compensation Regulations ”).

 

Chief Executive Officer

 

Pursuant to the 2012 Amendment, any arrangement between a company and its chief executive officer as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of the compensation committee, the board of directors and the company’s shareholders by the Compensation Majority.

 

Under certain circumstances and conditions, the compensation committee and the board of directors may approve an arrangement that deviates from the Compensation Policy provided it is approved by the shareholders by the Compensation Majority. Such approval will also be required with respect to determining the Terms of Office and Employment of a chief executive officer during the transition period until the company adopts a Compensation Policy. In addition, under certain circumstances, a company may be exempt from receiving the shareholders’ approval with respect to the Terms of Office and Employment of a candidate for chief executive officer.

 

In special circumstances the board of directors and the compensation committee may override the resolution of the shareholders following a re-discussion of the matter and for specified reasons.

 

Other Office Holders

 

Pursuant to the 2012 Amendment, any arrangement between a company and an office holder (other than a director or the chief executive officer) as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of the compensation committee and the board of directors.

 

Under certain circumstances and conditions, the compensation committee and the board of directors may approve an arrangement that deviates from the Compensation Policy, provided that such arrangement is approved by the company’s shareholders by the Compensation Majority. In special circumstances the board of directors and the compensation committee may override the resolution of the shareholders following a re-discussion of the matter and for specified reasons. During the transition period until the company adopts a Compensation Policy, the compensation committee and the board of directors may approve the Terms of Office and Employment of such office holder.

 

Rights, Preferences, Restrictions of Shares

 

Our authorized share capital consists of a single class of equity, our ordinary shares. Subject to Israeli law, dividends may be declared by a company’s board of directors, unless authority is provided in the company’s articles of association to transfer such powers to the company’s shareholders, who may then declare dividends following a recommendation by the directors. Our articles of association grant the board the power to transfer the final decision regarding dividends to the shareholders. In such event, the shareholders may only declare a dividend in an amount that is equal or less than that recommended by the directors or not to declare a dividend at all, despite a directors’ recommendation, but may not declare dividend in an amount which is in excess of the amount recommended by the directors.  The directors may invest or use otherwise for our benefit, any dividends that are not demanded within one year of their being declared.  The directors shall pay such un-demanded dividends upon receipt of a valid demand; however the company is not liable to pay any interest on such un-demanded dividends.

 

 

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Each shareholder is entitled to one vote for each ordinary share held. Except for the external directors, each director is elected to serve until the next annual general meeting of shareholders and until his or hers successor has been elected.  Our Articles do not grant shareholders any rights to share in our profits other than through dividends.  In the event that we go into liquidation, any surplus is distributed to the shareholders in proportion to the amount paid by each on account of the nominal value of the shares paid.  No account is taken of any premiums paid in excess of the nominal value.

 

We may issue and redeem redeemable shares and redeemable warrants. There are no sinking fund provisions recorded in our Articles.  The directors may only make calls upon shareholders in respect of sums unpaid on their shares.  Our Articles contain no provisions which discriminate against any existing or future shareholder as a result of said shareholder holding a substantial number of shares.

 

According to our Articles, any resolution on the change of the Company’s share capital by way of the creation of new shares, or cancellation of unissued registered shares, with preferred or qualified rights is deemed a change of our Articles of Association and as such requires the vote of a majority of 75% of the shareholders participating in the general meeting. If at any time our share capital is divided into different classes of shares, we may change the rights of shareholders by way of a resolution of the general meeting, subject to the consent of the shareholders of the class whose rights are being impaired by the proposed change.

 

Meetings of Shareholders

 

An annual general meeting must be held once in each year and not later than fifteen months after the preceding annual general meeting.  All shareholders are entitled to attend and vote or vote by proxy at annual general meetings.  Notice of annual general meetings may be sent by us by personal delivery, post, facsimile or telex to shareholders at the address recorded in our records. Any notice sent by post to a shareholder’s address that is situated outside of Israel must be sent by airmail. Any general meeting that is not an annual general meeting is called an extraordinary general meeting.  All shareholders are entitled to attend and vote or vote by proxy at extraordinary general meetings.

 

Our board of directors may convene an extraordinary general meeting when and as it sees fit.  In addition the Board must, according to statute, convene an extraordinary general meeting if it receives a demand to do so from either (i) at least two directors, (ii) at least one quarter of the directors of the Board or (iii) one or more shareholders who hold (A) an aggregate of at least five percent of our issued share capital and one percent of all voting rights, or (B) at least five percent of all voting rights.  Any demand by a person or persons, as described in (i), (ii) and/or (iii) of this paragraph, who wish to demand that an extraordinary general meeting be convened must be made in writing and sent to our registered office.  The demand must detail the objects of the meeting and must be signed by all those making the demand.

 

Notice of an annual general meeting and of an extraordinary general meeting must be sent in advance to all shareholders recorded in our register of shareholders in accordance with the dates required according to the applicable law.  Such notice must include the place, date and hour of the meeting, the agenda for the meeting, the proposed resolutions and instructions for proxy voting.

 

The determining date as to share ownership for purposes of attending and voting at a general meeting is as set forth in the decision to convene a general meeting but not earlier than 21 day before the scheduled general meeting date and not later than 4 days prior to such scheduled meeting date;  Notwithstanding the foregoing, Israeli companies such as ours whose shares have been listed for trade both on the TASE and recognized foreign stock exchange, which issue proxy statements to their shareholders in conformity with the law of the country where such foreign exchange is located, are entitled to vary such determining date to not earlier than 21 day before the scheduled general meeting date and not later than 4 days prior to such scheduled meeting date, and are entitled to certain allowances as to issuing proxy statements to shareholders outside Israel, in accordance with the Companies Regulations (Allowances for Companies with Securities Listed on an Exchange Outside Israel), 2000.

 

 

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Limitations of Shareholders

 

No limitations exist or are imposed by Israeli law or our constituent documents with regard to the right to own our shares, including any limitations upon the rights of non-resident or foreign shareholders to hold or exercise voting rights.

 

Limitations on Change of Control

 

There are no provisions in our Articles or other constituent documents other than as required by law that would have an effect of delaying, deferring or preventing a change in control of us. An Israeli company whose securities are listed on both the TASE and on a recognized foreign exchange, such as ours, enjoys certain allowances with regard to a special purchase offer having consideration to the requirements of the law of the country where such foreign exchange is located.

 

Provisions Relating to Major Shareholders

 

We are required by law to maintain a separate register of shareholders that hold 5%, or over 5%, of either our issued shares or voting rights.

 

The Israeli Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company, as it does to “office holders” in the context of a related party transaction.  For the purposes of this definition, the law deems two or more shareholders who hold voting rights in the company and each of which has a personal interest in the approval of a transaction being brought to the company for approval, as jointly holding such shares.  See the section entitled “Directors-General” in this report.  Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and agreements relating to employment and compensation terms of a controlling shareholder, require the approval of the audit committee or the compensation committee (depends on the nature of the transactions), the board of directors and the shareholders of the company.

 

The shareholder approval must either include majority of the shares held by disinterested shareholders who are present, in person or by proxy, at the meeting, or, alternatively, the total shareholdings of the disinterested shareholders who vote against the transaction must not represent more than 2% of the voting rights in the company.  In addition, a private placement of securities that grants 25% or more of the actual voting rights in the company prior to such private placement that its proceeds are not in cash or in registered securities or that is not in “market terms”, that will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital, requires approval by the board of directors and then the shareholder of the company.

 

Under the Israeli Companies Law, a shareholder has a duty to act in good faith towards the company and the other shareholders and to refrain from abusing his power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:

 

·

any amendment to the Articles of Association;

 

·

an increase of the company’s authorized share capital;

 

·

a merger; or

 

 

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·

approval of interested party transactions that require shareholder approval.

 

In addition, any controlling shareholder who can determine the outcome of a shareholder vote and any shareholder who, under a company’s Articles of Association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company.  The Israeli Companies Law does not describe the substance of this duty.

 

The Companies Law, provides that in the event that a controlling shareholder breaches his duty of fairness then such breach shall be considered as a breach of contract, mutatis mutandis, while taking into account the special position of such controlling shareholder within the company.

 

Material Contracts

 

Other than as described below, neither we nor any of our subsidiaries has entered into any material contracts, other than contracts entered into in the ordinary course of business, during the two years immediately preceding publication of this document:

 

On June 13, 2011, we closed a private placement transaction, which we refer to as “the private placement”.  In the private placement, we issued an aggregate of 1,425,000 ordinary shares at a price of $2.00 per share and warrants to purchase an aggregate of 441,750 ordinary shares at an exercise price of $2.20 per share, which we refer to as “the warrants”, pursuant to the Securities Purchase Agreement, dated June 6, 2011, that we entered into with investors.  The warrants may be exercised for five years after the closing date.  We also entered into the Registration Rights Agreement, dated June 13, 2011 with the investors in the private placement, pursuant to which we filed a registration statement on Form F-3 to cover the resale of the ordinary shares sold in the private placement and the ordinary shares issuable upon exercise of the warrants issued in the private placement.   We used the proceeds of the offering of $2,497,000, net of issuance expenses, to repay, in part, the remaining principal balance of Original Debentures, as described below.

 

The Securities Purchase Agreement prohibits us, until such time as no investor in the private placement holds any of the warrants, from effecting or entering into an agreement to effect any issuance by us or any or our subsidiaries of ordinary shares or securities convertible into or exercisable or exchangeable for ordinary shares for cash consideration involving a transaction in which we:

 

•

issue or sell any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive, additional ordinary shares either (a) at a conversion price, exercise price or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for our ordinary shares at any time after the initial issuance of such debt or equity securities, or (b) with a conversion price, exercise price or exchange rate that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to our business or the market for our ordinary shares; or

 

•

enter into any agreement, including, but not limited to, an equity line of credit, whereby we may sell securities at a future determined price.

 

The warrants may not be exercised to the extent that, following such exercise, the holder of the warrants would beneficially own in excess of 4.99% of our outstanding ordinary shares.  This limitation may be increased or decreased by the holder of the warrants, provided that in no event will such holder’s beneficial ownership limitation exceed 9.99% of our outstanding ordinary shares.  The exercise price and the number of ordinary shares issuable upon the exercise of the warrants are subject to adjustment upon the occurrence of certain events, including share dividends, share splits, reverse share splits and share reclassifications.  Holders of the warrants do not have voting, dividend or other rights as our shareholders until such warrants are exercised.

 

In December 2006 through the issuance of convertible debentures, we raised net proceeds of NIS 61,900,000 (approximately $14,780,000 at such time). On several occasions, we repurchased debentures and, finally, on October 4, 2011, we paid off the entire remaining balance of the debentures.    Following this payment our indebtedness under the debentures was eliminated.

 

 

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Israeli Taxation, Foreign Exchange Regulation and Investment Programs

        The following is a summary of the principal Israeli tax laws applicable to us, the Israeli Government programs from which we benefit, and Israeli foreign exchange regulations. This section also contains a discussion of material Israeli tax consequences to our shareholders who are not residents or citizens of Israel. This summary does not discuss all aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances, or to some types of investors subject to special treatment under Israeli law. Examples of investors subject to special treatment under Israeli law include residents of Israel, traders in securities, or persons who own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation that has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax consequences.

 

To the extent that part of the discussion is based on new tax legislation, which has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities or the courts will accept the views expressed in this section.

 

         General corporate tax structure in Israel

 

        Israeli companies were subject to corporate tax at the rate of 25% in 2010 2011. Pursuant to tax reform legislation that came into effect in 2009, the corporate tax rate is to undergo further staged reductions to 18% by the year 2016.

 

        In December 2011, the Israeli Parliament ("Knesset") passed the Law for Socioeconomic Change (Legislative Amendments) (Taxes), 2011(the "Tax Burden Law") which prescribes, among others, to cancel, effective from 2012, the scheduled progressive reduction in the corporate tax rate and to raise the statutory corporate tax rate to 25% in 2012. In view of the increase in the corporate tax rate to 25% in 2012, the real capital gains tax rate and the real betterment tax rate will also be increased. The Amendment was enacted effective as of January 1, 2012. The adoption of the amendment had no effect on the financial statements        

However, as discussed below, the rate is effectively reduced for income derived from our Approved Enterprise and Benefited Enterprise plans.

As of December 31, 2012, we had business loss carry forwards for tax purposes in the amount of $4,007,000. The amount of our carry forward business losses will be offset against relevant taxable future income for an indefinite period.

 

As of December 31, 2012 the foreign subsidiaries had operating loss carry forwards for tax purposes in the amount of $9,933,000. A portion of such losses expires over a period from 2013 through 2022, and some of them can be carried forward indefinitely.

 

        Law for the Encouragement of Capital Investments, 1959

The Law for the Encouragement of Capital Investments, 5719-1959 (the “ Investment Law ”), provides certain incentives for capital investments in a production facility (or other eligible assets).  Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an “Approved Enterprise”, is entitled to benefits.  These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment is made or the election of the grantee.         

 

 

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Our facilities in Israel have been granted Approved Enterprise status under the Investment Law.  The Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs.  The tax benefits under the Investments Law 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. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates.  The tax benefits under the Investments Law are not, generally, available with respect to income derived from products manufactured outside of Israel.  In addition, the tax benefits available to an approved enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and 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, plus a consumer price index linkage adjustment and interest.

 

The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved enterprise program.

 

        Since we have not yet generated taxable income, the period of benefits to which we are entitled as an Approved Enterprise has not yet begun.

 

        The Investment Law has been amended several times over the last years, with the two most significant changes effective as of April 1, 2005 (the “ 2005 Amendment ”), and as of January 1, 2011 (the “ 2011 Amendment ”).  Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law.  Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment, yet companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 may choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead to forego such benefits and elect the benefits of the 2011 Amendment. The following discussion is a summary of the Investment Law prior to its amendments as well as the relevant changes contained in the new legislation.

 

 Tax benefits for Approved Enterprises approved before April 1, 2005

 

Under the Investment Law prior to its 2005 amendment, a company that wished to receive benefits had to receive an approval from the Investment Center of the Israeli Ministry of Industry, Trade and Labor, which we refer to as the Investment Center.  Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.

 

An Approved Enterprise may elect to forego any entitlement to the grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program. Under the alternative benefits track, 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 upon the geographic location within Israel of the Approved Enterprise.  The benefits commence on the date in which that taxable income is first earned. Upon expiration of the exemption period, the Approved Enterprise is eligible for the reduced tax rates otherwise applicable under the Investment Law for any remainder of the otherwise applicable benefits period.  The benefits period under Approved Enterprise status is limited to 12 years from commencement of production, or 14 years from the date of the approval, whichever ends earlier.  If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates.  The tax benefits from any certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise.  Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits. Since we have not yet generated taxable income, the period of benefits to which we are entitled as an Approved Enterprise has not yet begun.

 

 

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A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, or FIC.  A FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%.  The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel.  The determination as to whether or not a company qualifies as an FIC is made on an annual basis.  A FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. If a company that has an Approved Enterprise program is a wholly owned subsidiary of another company, then the percentage of foreign investment is determined based on the percentage of foreign investment in the parent company.

 

A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities that have been granted Approved Enterprise status during the tax exemption period will be required to recapture the deferred corporate tax applicable to the amount distributed (grossed up to reflect such tax) at the rate that would have been applicable had such income not been tax-exempted under the alternative route.  This rate generally ranges from 10% to 25%, depending on the extent to which non-Israeli shareholders hold such company’s shares. Such company may also be required to record a deferred tax liability with respect to such tax-exempt income prior to its distribution.

 

In addition, dividends paid out of income generated by an Approved Enterprise (or out of dividends received from a company whose income is generated by an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at the lower rate provided under an applicable tax treaty.  The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter.  After this period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty.  In the case of a FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.

 

The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.  This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.

 

The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval with respect thereto, as described above.  If a company does not meet these conditions, it may be required to refund the amount of tax benefits, together with consumer price index linkage adjustment and interest.

 

The 2005 Amendment

 

        On April 1, 2005, an amendment to the Investment Law came into effect. The 2005 amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a Benefited Enterprise (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. The period of tax benefits for a new Benefited Enterprise commences in the “Year of Commencement.” This year is the later of (1) the year in which taxable income is first generated by a company, or (2) a year selected by the company for commencement, on the condition that the company meets certain provisions provided by the Investment Law (Year of Election). The amendment does not apply to investment programs approved prior to December 31, 2004. The new tax regime applies to new investment programs only. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments.  However, the 2005 Amendment limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income be derived from export to specific markets with a population of at least 12 million.

 

 

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The 2005 Amendment provides that the approval of the Investment Center is required only for Approved Enterprises that receive cash grants. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive tax benefits.  Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment.  A company that has a Benefited Enterprise may, at its discretion, approach the Israeli Tax Authority for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law. Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) that derive more than 25% of their business income from export to specific markets with a population of at least 12 million.  In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all the conditions that are set out in the amendment for tax benefits and which exceeds a minimum amount specified in the Investment Law.  Such investment entitles a company to a Benefited Enterprise status with respect to the investment, and may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise.  Where a company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise, and the company’s effective tax rate will be the weighted average of the applicable rates.  In such case, the minimum investment required in order to qualify as a Benefited Enterprise must exceed a certain percentage of the value of the company’s production assets before the expansion.

 

The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise are determined, among other things, by the geographic location of the Benefited Enterprise.  Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefit period, depending on the level of foreign investment in the company in each year, as explained above.

 

The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the year of commencement, or 12 years from the first day of the Year of Election.

 

If a company distributes dividends from tax-exempt income, the company will be taxed on the otherwise exempt income at the same reduced corporate tax rate that would have applied to that income. Distribution of dividends derived from income that was taxed at reduced rates, but not tax-exempt, does not result in additional tax consequences to the company. Shareholders who receive dividends derived from Approved Enterprise or Benefited Enterprise income are generally taxed at a rate of 15%, which is withheld and paid by the company paying the dividend, if the dividend is distributed during the benefits period or within the following 12 years (the limitation does not apply to a Foreign Investors Company, which is a company that more than 25% of its shares owned by non-Israeli residents).

 

        The tax benefits available under Approved Enterprise or Benefited Enterprise relate only to taxable income attributable to the specific Approved Enterprise or Benefited Enterprise, and our effective tax rate will be the result of a weighted combination of the applicable rates.

 

 

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Percent of Foreign Ownership		Rate of Reduced Tax		Reduced Tax Period		Tax Exemption Period
0-25%		25%		5 years		2 years
25-49%		25%		8 years		2 years
49-74%		20%		8 years		2 years
74-90%		15%		8 years		2 years
90-100%		10%		8 years		2 years

 

The Company received approvals for an establishment program and three expansions during the years 1990, 1991, 1999 and 2000.

 

        We believe that our Approved Enterprise and Benefited Enterprise programs currently operate in compliance with all applicable conditions and criteria, but we cannot assure you that they will continue to do so. If we do not fulfill these conditions, in whole or in part, the benefits can be cancelled and we may be required to refund the amount of the benefits, linked to the Israeli consumer price index plus interest.

 

The Company elected 2009 as a year of election under the Amendment.

 

To date, the Company has not utilized the benefits of the Investment Law, as amended subsequent to April 1, 2005, because of utilizing carry forward losses from previous years for tax purposes.

 

The 2005 amendment to the Investment Law treats the repurchase of shares out of Benefited Enterprise tax exempt income as deemed dividend.        

 

        As a result of the 2005 amendment, tax-exempt income attributed to Benefited Enterprise will subject us to taxes also upon complete liquidation.

 

Reform of the Investments Law – “2011 Amendment”

 

The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such term is defined in the Investment Law) effective as of January 1, 2011 and onward.  A Preferred Company is defined as either (i) a company incorporated in Israel and not fully owned by a governmental entity or (ii) a limited partnership (a) that was registered under the Israeli Partnerships Ordinance and (b) all limited partners of which are companies incorporated in Israel, but not all of them are governmental entities, which, in the case of the company and companies referenced in clauses (i) and (ii)(b), have, among other things, Preferred Enterprise status and are controlled and managed from Israel. According to the 2011 amendment, the benefit tracks in the Investment Law were modified and a flat tax rate would apply to the Company’s entire preferred income. The Company will be able to opt to apply the amendment (the waiver is non-recourse) and from then on it will be subject to the amended tax rates that are:

 

2011 and 2012 - 15% (in development area A - 10%),

 

2013 and 2014 - 12.5% (in development area A - 7%)

 

2015 and thereafter - 12% (in development area A - 6%)

 

Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax will be withheld.

 

 

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The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits.  These transitional provisions provide, among other things, that: (i) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment came into effect, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, while the 25% tax rate applied to income derived by an Approved Enterprise during the benefit period will be replaced with the regular corporate income tax rate (24% in 2011 and 25% in 2012), unless a request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011 (such request should have been made by way of an application to the Israeli Tax Authority by May 31, 2012 and may not be withdrawn); and (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which had participated in an alternative benefits program, before the 2011 Amendment came into effect will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met.  However, a company that has such Approved Enterprise can file a request with the Israeli Tax Authority, according to which its income derived as of January 1, 2011 will be subject to the provisions of the Investment Law, as amended in 2011; and (iii) a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met, or file a request with the Israeli Tax Authority according to which its income derived as of January 1, 2011 will be subject to the provisions of the Investment Law as amended in 2011.

 

We may choose not to apply the 2011 amendment, in which case the Company will remain subject to the Investment Law as in effect prior to the 2011 amendment until the expiration of the Company’s current investment programs. We are examining the possible effect of the amendment on the financial statements, if at all.

 

         Law for the Encouragement of Industry (Taxes), 1969

        We believe that we currently qualify as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major activity in a given tax year is industrial production.

 

        The following are the principal corporate tax benefits that are available to an Industrial Company:

 

§

Amortization of the cost of purchased know-how patents used for the development or promotion of the Industrial Enterprise over an eight-year period commencing on the year in which such rights were first exercised for tax purposes..

 

§

Accelerated depreciation rates on equipment and buildings.

 

§

Under specified conditions, an election to file consolidated tax returns with related Israeli Industrial Companies.

 

§

Expenses related to a public offering are deductible in equal amounts over three years commencing on the year of offering.

        Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We cannot assure you that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.

 

Tax Benefits for Research and Development

 

Israeli tax law allows, under specified conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred.  Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli government ministry, determined by the field of research.  Furthermore, the research and development must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction.  However, the amount of such deductible expenses is 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 by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period.

 

 

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Taxation of our Shareholders

The following is a short summary of the material provisions of the tax environment to which shareholders may be subject. This summary is based on the current provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.

 

The summary does not address all of the tax consequences that may be relevant to all purchasers of our common shares in light of each purchaser’s particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our common shares should consult their own tax adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of common shares. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal adviser.

 

Israeli law generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise. The Ordinance distinguishes between the “Real Capital Gain” and the “Inflationary Surplus”.  The Inflationary Surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index (CPI) or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale.  The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.

 

On January 1, 2006, an amendment to the Israeli tax regime became effective (the “2006 Tax Reform”). The 2006 Tax Reform significantly changed the tax rates applicable to income derived from shares. According to the 2006 Tax Reform, an individual is subject to a 20% tax rate on real capital gains derived from the sale of shares, 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 “substantial shareholder” (generally a shareholder who holds directly or indirectly 10% or more of the right to profits, right to nominate a director or voting rights) of the company issuing the shares, the tax rate is 25%. Individual shareholders dealing with securities in Israel are taxed at their marginal tax rates applicable to business income.

 

Notwithstanding the foregoing, pursuant to the Tax Burden Law, the capital gain tax rate applicable to individuals was raised from 20% to 25% from 2012 and onwards (or from 25% to 30% if the selling individual shareholder is a Substantial Shareholder at any time during the 12-month period preceding the sale).  With respect to assets (not shares that are listed on a stock exchange) purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December 31, 2011 will be subject to the previous capital gains tax rates (20% or 25%) and the portion of the gain generated from January 1, 2012 until the date of sale will be subject to the new tax rates (25% or 30%).

 

The determination of whether the individual is a substantial shareholder will be made on the date that the securities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding this date he had been a substantial shareholder.

 

Taxation of Israeli Shareholders on Receipt of Dividends

 

Israeli Resident Individuals. Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our common shares (other than bonus shares or share dividends) at 20%, or 25% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any time during the preceding 12-month period.  Pursuant to the Tax Burden Law, as of 2012 such tax rate is 25%, or 30% if the dividend recipient is a Substantial Shareholder at the time of distribution or at any time during the preceding 12-month period.  However, dividends distributed from taxable income accrued during the period of benefit of an Approved Enterprise, Benefited Enterprise or Preferred Enterprise are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax benefit period under the Investment Law or within 12 years after that period.  An average rate will be set in case the dividend is distributed from mixed types of income (regular and Approved/ Benefited/ Preferred income).

 

 

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Israeli Resident Corporations. Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on our common shares.

 

Israeli Resident Corporations. Under present Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an Israeli company is the general corporate tax rate.  As described above, recent changes in the law abolished the scheduled progressive reduction of the corporate tax rate and set the corporate tax rate at 25% from 2012 and onwards.

 

Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise.  As mentioned above, Real Capital Gain derived by a company is generally subject to tax at the corporate tax rate (24% in 2011 and 25% as of 2012) or, if derived by an individual, at the rate of 20% (25% as of 2012), or 25% (30% as of 2012), if generated from an asset purchased on or after January 1, 2003.  Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income.

 

Taxation of Non-Israeli Shareholders on Receipt of Dividends

 

Non-residents of Israel, including corporations, will generally be exempt from any capital gains tax from the sale of shares traded on a recognized stock exchange outside of Israel (including NASDAQ), provided that such shareholders did not acquire their shares prior to an initial public offering and that the gains are not derived through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In any case, these tax rates are subject to the provisions of any applicable tax treaty. On January 2009, an amendment to the Israeli tax regime became effective all the non-residents of Israel will generally be exempt from any capital gains tax from the sales of shares traded on a recognized stock exchange outside of Israel.

 

In addition, pursuant to the Convention Between the U.S. Government and the Government of Israel with Respect to Taxes on Income, as amended (the “United States-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States-Israel Tax Treaty (a “United States Treaty Resident”) generally will not be subject to the Israeli capital gains tax unless such United States Treaty Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions. However, under the United States-Israel Tax Treaty, such United States Treaty Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.

 

Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income, including dividends, royalties and interest. On the distribution of dividends by a publicly traded company, income tax is withheld at source, at the rate of 20 % (25% as of 2012) for dividends paid to an individual or foreign corporation, and 15% for dividends generated by an Approved Enterprise, unless in each case a different rate is provided in a treaty between Israel and shareholder’s country of residence. Under the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident will be 25%. However, the maximum tax rate on dividends not generated by an approved enterprise paid to a U.S. corporation holding at least 10% of our voting power is 12.5%.

 

 

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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.

 

A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.

 

        Foreign Exchange Regulations

An Israeli company calculates its tax liability in US dollars according to certain orders. The tax liability, as calculated in US dollars is translated into NIS according to the exchange rate as of December 31st of each year.

 

        Dividends, if any, paid to the holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency. If these amounts are paid in Israeli currency, they may be converted into freely repatriable U.S. dollars at the rate of exchange prevailing at the time of conversion. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.

       

Singapore tax

 

As a result of change of control at Asiasoft Singapore the carry forward losses are subject to the approval of the Internal Revenue Authority of Singapore (“IRAS”).  Based on the facts and circumstances, the Company believes that the tax loss carry forwards of AsiaSoft Singapore can be substantiated without any restrictions over the utilization of these tax losses against future taxable profits.  In February 2009, The IRAS approved the request filed by Asiasoft Singapore for waiver which demonstrates the nature of the change in the share capital of AS Sin.

 

United States Federal Income Tax Considerations

 

Subject to the limitations described below, the following discussion describes certain material U.S. federal income tax consequences applicable to the ownership and disposition of the Company’s ordinary shares. In general, a “U.S. Holder” means a beneficial owner of ordinary shares who or which is any of the following for U.S. federal income tax purposes:

 

·

a citizen or resident of the United States or someone treated as a citizen of the United States or a United States resident;

 

·

a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in or organized under the laws of the United States or of any state thereof, or the District of Columbia;  an estate, the income of which is subject to U.S   . federal income taxation regardless of its source; or

 

·

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 U.S. persons have the authority to control all substantial decisions of the trust, or (2) the trust has a valid election in effect under applicable Treasury Regulations (as defined below) to be treated as a U.S. person.

 

In addition, certain material aspects of U.S. federal income tax relevant to a holder other than a U.S. Holder, referred to as a “Non-U.S. Holder” are discussed below.

 

 

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This summary is for general information purposes only.  It does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase, hold or dispose of ordinary shares.

This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations) (the “Treasury Regulations”), rulings, current administrative interpretations and official pronouncements by the Internal Revenue Service (the “IRS”), and judicial decisions as of the date hereof, all of which are subject to differing interpretations and change, possibly on a retroactive basis.  Such changes could materially and adversely affect the tax consequences described below.  No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.  This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. Holder based on such U.S. Holder’s individual circumstances.  In particular, this discussion considers only U.S. Holders that will own ordinary shares as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment.  It also does not address the U.S. federal income tax consequences to U.S. Holders that are subject to special treatment under U.S. federal income tax law, including U.S. Holders that:

 

·

are broker-dealers or insurance companies;

 

·

have elected mark-to-market accounting;

 

·

are tax-exempt organizations;

 

·

are financial institutions or banks;

 

·

hold ordinary shares as part of a straddle, “hedge” or “conversion transaction” with other investments;

 

·

own directly, indirectly or by attribution at least 10% of our voting power;

 

·

have a functional currency that is not the U.S. dollar;

 

·

have acquired their ordinary shares in a compensatory transaction;

 

·

are insurance companies;

 

·

are regulated investment companies;

 

·

are real estate investment companies;

 

·

are U.S. expatriates; or

 

·

are persons subject to the alternative minimum tax.

 

In addition, this discussion does not address any aspect of state, local or non U.S. tax consequences of the ownership and disposition of ordinary shares.

 

Additionally, the discussion does not consider the tax treatment of persons who hold ordinary shares through a partnership (including, for these purposes, any entity treated as a partnership for U.S. federal income tax purposes).  A U.S. Holder of ordinary shares that is a partnership and partners in such partnership should consult their own tax advisors regarding the specific consequences of owning and disposing of ordinary shares. The possible application of U.S. federal gift or estate tax is also not considered.

 

 

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Each holder of ordinary shares is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such person of purchasing, holding or disposing of the Company’s ordinary shares.

 

U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

THE DISCUSSION BELOW IS BASED UPON THE SECTIONS OF THE INTERNAL REVENUE CODE, TREASURY REGULATIONS, PUBLISHED INTERNAL REVENUE SERVICE RULINGS, PUBLISHED ADMINISTRATIVE POSITIONS OF THE INTERNAL REVENUE SERVICE AND COURT DECISIONS THAT ARE CURRENTLY APPLICABLE, ANY OR ALL OF WHICH COULD BE MATERIALLY AND ADVERSELY CHANGED AT ANY TIME, POSSIBLY ON A RETROACTIVE BASIS.  THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY HOLDER OR PROSPECTIVE HOLDER OF ORDINARY SHARES AND NO OPINION OR REPRESENTATION WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO ANY SUCH HOLDER OR PROSPECTIVE HOLDER IS MADE. ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF ORDINARY SHARES.

 

The following is a discussion of material United States Federal income tax consequences generally applicable to  U.S. Holders (as defined below) who acquire our ordinary shares and hold them as capital assets. This discussion does not address all potentially relevant United States Federal income tax matters, and it does not address consequences peculiar to persons subject to special provisions of United States Federal income tax law, such as, for example, tax-exempt organizations, qualified retirement plans, persons subject to alternative minimum tax, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers and shareholders who acquired their shares through the exercise of employee share options or otherwise as compensation. In addition, this discussion only applies to common shares held by U.S. Holders as capital assets within the meaning of Section 1221 of the Internal Revenue Code, and does not cover any state, local or foreign tax consequences.

 

As used herein, the term “U.S. Holder” means a person, with the exception of those subject to special provisions of Federal income tax law, that holds our common shares that is (i) an individual who is a citizen or resident of the United States, (ii) a corporation organized under the laws of the United States, (iii) an estate, the income of which is subject to United States Federal income tax without regard to its source and (iv) a trust if (A) a United States court is able to exercise primary supervision over administration of the trust and one or more United States persons have authority to control all substantial decisions of the trust or (B) the trust has in effect a valid election under applicable United States Treasury Regulations to be treated as a U.S. person.

 

If a partnership or an entity treated as a partnership for United States Federal income tax purposes holds common shares, the United States Federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships or a partner in a partnership holding common shares should consult their own tax advisor regarding the consequences of the ownership and disposition of common shares by the partnership.

The term "Non-U.S. Holder" means a beneficial owner of an ordinary share who is not a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder also are discussed below.

 

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Taxation of ordinary shares

 

Taxation of Dividends Paid On Ordinary Shares

 

Subject to the discussion under “Tax Consequences if the Company is a Passive Foreign Investment Company” below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any distribution paid on ordinary shares, including any Israeli taxes withheld from the amount paid, 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.  In general, distributions in excess of such earnings and profits will be applied against and will reduce (but not below zero) the U.S. Holder’s tax basis in the ordinary shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of ordinary shares.

 

A non-corporate U.S. Holder that meets certain eligibility requirements may qualify for a 20% or lower rate of U.S. federal income taxation on dividends paid if the Company is a “qualified foreign corporation” for U.S. federal income tax purposes, although the actual rates may be higher due to the phase out of certain tax deductions, exemptions and credits.

 

The Company generally will be treated as a “qualified foreign corporation” if (i) the Company is eligible for benefits under the income tax treaty between the United States and Israel (the “Treaty”) which contains an exchange of information program, or (ii) the ordinary shares are readily tradable on an established securities market in the United States.  Because the Treaty has been identified by the U.S. Treasury as a qualifying treaty and the Company should be eligible for benefits under the Treaty, the Company should currently be treated as a qualified foreign corporation.  However, no assurance can be given that a change in circumstances will not affect the Company’s treatment as a qualified foreign corporation for U.S. federal income tax purposes in any taxable year.  In addition, a non-corporate U.S. Holder will generally not be eligible for the reduced rate (a) if such U.S. Holder has not held the ordinary shares for at least 61 days of the 121-day period beginning on the date which is 60 days before the ex-dividend rate, (b) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar or related property, or (c) with respect to any portion of a dividend that the U.S. Holder elects to treat as investment income under Section 163(d)(4)(B) of the Code.  Any days during which the U.S. Holder has diminished its risk of loss with respect to the ordinary shares (for example, by holding an option to sell the ordinary shares), are not counted towards meeting the 61-day holding period.  Non-corporate U.S. Holders should consult their own tax advisors concerning whether dividends received by them qualify for the reduced rate of tax.

 

U.S. Holders will generally include in their gross income any dividend paid in NIS, including the amount of any Israeli taxes withheld, in an amount equal to the U.S. dollar value of the NIS received, calculated by reference to the exchange rate in effect on the date the dividends are received, regardless of whether the dividend payments are actually converted into U.S. dollars.  U.S. Holders will have a tax basis in any NIS distributed by the Company equal to the U.S. dollar value of the NIS on the date of receipt.  Generally, any gain or loss resulting from exchange rate fluctuations during the period from the date the U.S. Holder includes the dividend payment in income to the date the payment is converted into U.S. dollars will be treated as ordinary income or loss and will be U.S. source income or loss for U.S. foreign tax credit purposes.

 

U.S. Holders may have the option of claiming the amount of any Israeli income taxes withheld at source either (1) as a deduction from gross income but only for a year in which the U.S. Holder elects to do so with respect to all foreign income taxes, or (2) subject to the foreign tax credit limitation, as a dollar-for-dollar credit against the U.S. Holder’s 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 the Israeli income taxes withheld, but such amount may be claimed as a credit against the individual’s U.S. federal income tax liability.  The amount of foreign income taxes which 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 U.S. Holder, and may further be impacted by the provisions of the Treaty.  The total amount of allowable foreign tax credits in any year cannot exceed regular 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 to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property.  Any days during which a U.S. Holder has substantially diminished 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 will be foreign source passive income for U.S. foreign tax credit purposes and will not qualify for the dividends received deduction available to certain corporations.

 

 

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Taxation of the Disposition of Ordinary Shares

 

Upon the sale, exchange or other disposition of ordinary shares, subject to the discussion under “Tax Consequences if the Company is a Passive Foreign Investment Company” below a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s adjusted basis in the ordinary shares, which is usually the cost of such shares, and the amount realized on the disposition.  Capital gain from the sale, exchange or other disposition of ordinary shares held for more than one year is long-term capital gain.  Long-term capital gain of a non-corporate U.S. Holder is eligible to be taxed at reduced rates. However, given the uncertain economic conditions in the United States and the size of the federal deficit, tax rates are subject to change and U.S. Holders should consult their tax advisors. Gains and losses recognized by a U.S. Holder on a sale, exchange or other disposition of ordinary shares will be treated as U.S source income or loss for U.S foreign tax credit purposes. The deductibility of capital losses is subject to limitations.

 

Tax Consequences if the Company is a Passive Foreign Investment Company

 

The Company will be a passive foreign investment company, or PFIC, if 75% 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 it is considered to own 25% or more of the shares by value, is passive income. Alternatively, the Company will be considered to be a PFIC if at least 50% of its assets in a taxable year, determined quarterly and averaged over the year including the pro rata share of the assets of any company in which it is considered to own 25% or more of the shares by value, are held for the production of, or produce, passive income.  Passive income includes amounts derived by reason of the temporary investment of funds raised in the Company’s public offerings.

 

 If the Company is a PFIC, and a U.S. Holder does not make one of the elections described below with respect to such shares, the U.S. Holder would be subject to special rules with respect to (1) any excess distribution ( i.e. , the portion of any distributions received by the U.S. Holder on the ordinary shares in a taxable year in excess of 125% of the average annual distributions received by the U.S. Holder in the three preceding taxable years, or, if shorter, the U.S. Holder's holding period for the ordinary shares), and (2) any gain realized on the sale, exchange or other disposition of the ordinary shares. Under these special rules:

 

	·	the excess distribution or gain would be allocated ratably to each day over the U.S. Holders' aggregate holding period for the ordinary shares
	·	the amount allocated to the current taxable year and any taxable year before the Company became a PFIC would be taxed as ordinary income; and

·

the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.

 

In addition, if a U.S.  Holder who is an individual dies while owning ordinary shares, such holder's successor generally would not receive a step-up in tax basis with respect to such ordinary shares.

 

The special PFIC rules described above will not apply to a U.S. Holder if the U.S. Holder makes a timely and effective election to treat the Company as a “qualified electing fund” (“QEF”), which election generally must be made in the first year in the U.S. Holder’s holding period for the ordinary shares in which the Company was a PFIC, and if the Company complies with certain reporting requirements.  Instead, a U.S. Holder that makes a QEF election is required for each taxable year to include in its income a pro rata share of (1) the “ordinary earnings” of the Company, which will be taxed as ordinary income and (2) the “net capital gain” of the Company, which will be taxed as long-term capital gain to such U.S. Holder.  A U.S. Holder that makes a QEF election will be subject to U.S. federal income tax on such amounts for each taxable year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company.  However, a U.S. Holder that makes a QEF election may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge.

 

 

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A U.S. Holder that makes a QEF election with respect to the Company generally (1) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the U.S. Holder because of such QEF election and (2) will adjust such U.S. Holder’s tax basis in its ordinary shares to reflect the amount included in income (resulting in an increase in basis) or allowed as a tax-free distribution (resulting in a decrease in basis) because of the QEF election.  In addition, a U.S. Holder that makes a QEF election generally will recognize capital gain or loss on the sale or other taxable disposition of Company ordinary shares.

 

The Company has agreed to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election in the event that the Company is classified as PFIC.  The QEF election is made on a U.S. Holder-by-U.S. Holder basis and can be revoked only with the consent of the IRS.  A U.S. Holder generally makes a QEF election by attaching a completed IRS Form 8621, including the PFIC annual information statement, to a timely filed United States federal income tax return.  Even if a QEF election is not made, a U.S. Holder in a PFIC generally must file a completed IRS Form 8621 every year.

 

As an alternative to making a QEF election, a U.S. Holder of PFIC stock which is publicly traded may, in certain circumstances, elect to mark the stock to market annually (a “mark-to-market election”), recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the U.S. holder’s fair market value of the PFIC stock and its adjusted basis in the PFIC stock.  Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years.  This election is available provided that the Company ordinary shares constitute “marketable stock,” which includes stock of a PFIC that is “regularly traded” on a “qualified exchange or other market,” as specifically defined in the Code.  If a U.S. Holder makes a mark-to-market election with respect to ordinary shares for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) theordinary shares and for which the Company is determined to be a PFIC, such U.S. Holder generally will not be subject to the PFIC rules described above with respect to its ordinary shares.  A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless theordinary shares cease to be marketable, or the IRS consents to revocation of the election.

 

The Company believes that it was not a PFIC in 2012.  However, the tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of future income and assets which are relevant to this determination.  Accordingly, we cannot be certain whether we will be treated as a PFIC for any taxable year.  Absent one of the elections described above, U.S. Holders who hold ordinary shares during a period when the Company is a PFIC will be subject to the foregoing rules, regardless of whether the Company ceases to be a PFIC in one or more subsequent years.  U.S. Holders are urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market or QEF election with respect to the Company’s ordinary shares, in the event that the Company qualifies as a PFIC.

 

Legislation regarding Medicare Tax

For taxable years beginning after December 31, 2012, a U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold (which, in the case of individuals, will be between $125,000 and $250,000 depending on the individual’s circumstances).  A U.S. Holder’s “net investment income” may generally include its dividend income and its net gains from the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities).  If you are a U.S. Holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares.

 

 

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Tax Consequences for Non-U.S. Holders of Ordinary Shares

 

Except as described in the section entitled “Information Reporting and Back-up Withholding”, a Non-U.S. Holder of ordinary shares generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless:

 

·

such item is effectively connected with the conduct by the Non-U.S. Holder of a 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, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States;

 

·

the Non-U.S. Holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met; or

 

·

the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to U.S. expatriates.

 

Information Reporting and Back-up Withholding

 

In general, U.S. Holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership of stock of a foreign corporation such as the Company.  Failure to comply with these information reporting requirements may result in substantial penalties.

For example, recently enacted legislation generally requires certain individuals who are U.S. Holders to file Form 8938 to report the ownership of specified foreign financial assets for tax years beginning after March 18, 2010 if the total value of those assets exceeds an applicable threshold amount (subject to certain exceptions).  For these purposes, a specified foreign financial asset includes not only a financial account (as defined by the Code and applicable Treasury Regulations ) maintained by a foreign financial institution, but also any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity, provided that the asset is not held in an account maintained by a U.S. financial institution. The minimum applicable threshold amount is generally $50,000 in the aggregate, but this threshold amount varies depending on whether the individual lives in the U.S., is married, files a joint income tax return with his or her spouse, etc.  Certain domestic entities that are U.S. Holders may also be required to file Form 8938 in the near future.  U.S. Holders are urged to consult with their tax advisors regarding their reporting obligations, including the requirement to file IRS Form 8938.

Information reporting requirements will generally apply to payments with respect to ordinary shares paid to a U.S. Holder other than certain exempt recipients (such as corporations). Backup withholding will apply to such payments if such U.S. Holder fails to provide a taxpayer identification number or certification of other exempt status or fails to comply with the applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such U.S. Holder's United States Federal income tax liability provided the required information is furnished by such U.S. Holder to the Internal Revenue Service. A U.S. Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the Internal Revenue Service.

Unless otherwise provided by the IRS, if the Company is a PFIC, a U.S. Holder is generally required to file an informational return annually to report its ownership interest in the PFIC.

 

Non-U.S. Holders generally are not subject to information reporting or back-up withholding with respect to dividends paid on, or upon the disposition of, ordinary shares, provided that such non-U.S Holder certifies to its foreign status, or otherwise establishes an exemption.

 

 

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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 the 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. Certain of our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov .  Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. In addition, all corporate documents filed with the SEC must be available to the public by law and are available for review at our headquarters, 2 Ben Gurion St, Ramat Gan, 52573, Israel.

 

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.  However, we generally publicly announce our quarterly and year-end results periodically, and furnish certain periodic information with the SEC under cover of Form 6-K.

 

ITEM 11.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk represents the risk of changes in the value of our financial instruments caused by fluctuations in interest rates, foreign exchange rates and equity prices. We do not engage in trading market-risk instruments or purchase hedging or “other than trading” instruments that are likely to expose us to market risk, whether interest rate, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts and do not use derivative financial instruments for speculative trading purposes.

 

We maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.

 

In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received.  Our most significant currency exposures are to the Euro, New Israeli Shekel, British Pound and Singapore dollars. In periods when the U.S. dollar fluctuates against these other currencies, our reported results of operations may be adversely affected. Although from time to time we purchase forward exchange contracts to reduce currency transaction risk, these purchases will not eliminate translation risk or all currency risk.

 

As an example, a decrease of 10% in the value of the Euro relative to the U.S. dollar in 2012 would have resulted in an increase in the U.S. dollar reporting value of our operating income of $511,000 for that period, while an increase of 10% in the value of the Euro relative to the U.S. dollar in 2012 would have resulted in a decrease in the U.S. dollar reporting value of our operating income of $511,000 for that period.

 

ITEM 12.                      DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable.

 

 

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PART II

 

ITEM 13.                      DEFAULTS, DIVIDEND ARREARAGES AN D DELINQUENCIES

 

None.

 

ITEM 14.                     MATERIAL MODIFICATIONS TO TH E RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

None.

 

ITEM 15.                      CONTROLS AND PROCEDURES

 

(a)           Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2012.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of such date were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)           Report of Management on Internal Control Over Financial Reporting.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management assessed the effectiveness of internal control over financial reporting as of December 31, 2012 based on the criteria in “Internal Control- Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Based on that assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2012 based on those criteria.

 

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and can only provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. 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.

 

(c)           Not applicable

 

(d)           There has been no change in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16A.                   AUDIT COM MITTEE FINANCIAL EXPERT

 

The Board of Directors has determined that – Elie Housman, a member of our audit committee, is an audit committee financial expert and is independent pursuant to the rules of the NASDAQ Stock Market. Mr. Housman is an independent director as required by the  NASDAQ listing standards.

 

 

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ITEM 16B.                   CODE OF E THICS

 

We have in place a Code of Business Conduct and Ethics that applies to all directors, officers and employees.  This code, as applied to TIS’ principal financial officers (i.e. our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions), is our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. This code is also our “code of conduct” within the meaning of NASDAQ Rule 5610.  The full text of the Code of Business Conduct and Ethics is available at our Internet website at http://www.topimagesystems.com.

 

ITEM 16C.                   PRINC IPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

 

In 2011 and 2012, we engaged the services of Kost Forer Gabbay and Kasierer, an independent registered accounting firm (a member of Ernst & Young Global) (“EY”), to audit our financial statements.  The aggregate fees billed by EY for professional services rendered for the audit of our annual financial statements included in this Annual Report and other services in connection with statutory and regulatory filings or engagements for the fiscal year ended December 31, 2012 and 2011 were  $192,000 and $181,000, respectively.

 

Tax Fees

 

For the fiscal years ended December 31, 2012 and 2011 the aggregate fees billed for tax compliance, tax advice and tax planning by EY were $30,000 and $10,000, respectively.

 

Other services

 

For the fiscal year ended December 31, 2012 and 2011, no fees were paid to EY for non-audit services.

 

Before EY is engaged by our subsidiaries or us to render any auditing or permitted non-audit related service, the engagement must be :

 

·

approved by our audit committee; or

 

·

entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.

 

The audit committee has considered the nature and amount of the fees billed by EY, and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining Ernst & Young’s independence.

 

ITEM 16D.                   EXEMPTI ONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E.

PURCHA SES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Not applicable.

 

 

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ITEM 16F.                   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTS

 

Not applicable.

 

ITEM 16G.                   CORPORATE GOVERNANCE

 

Not applicable.

 

ITEM 16H.                   MINE SAFETY DISCLOSURE

 

Not applicable.

PART III

 

ITEM 17.                      FINANCIAL STATEMENTS

 

The Company has elected to provide Financial Statements pursuant to Item 18.

 

ITEM 18.                      FINANCIAL STATEMENTS

 

See pages F-1 through F-35.

 

ITEM 19.                      EXHIBITS

 

Number

Description

 

1.1		Amended and restated Articles of Association of the Company dated October 27, 2003 and amended December 22, 2011(incorporated by reference to exhibit 99.1 to the Company’s 6-K Form filed on November 16, 2011).
1.2		Memorandum of Association of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form F-1 (registration number 333-05718).
2.1		Form of Ordinary Shares Purchase Warrant of the Company (incorporated by reference to Exhibit 99.3 to the Company’s Form 6-K filed on June 14, 2011).
4.1		Employee Agreement between the Company and Izhak Nakar
4.2		Employee Agreement between the Company and Ido Schechter (incorporated by reference to Exhibit 10.4(f) to the Company’s Registration Statement on Form F-1 (registration number 333-05718)).
4.3		Securities Purchase Agreement between the Company and the Purchasers named therein, dated as of June 10, 2004 (incorporated by reference to Exhibit 99.3 to the Company’s Form 6-K filed on June 10, 2004).
4.4		Top Image Systems Ltd.  Israeli Share Option Plan (2003) (incorporated by reference to Exhibit 4.48 to the Company’s annual report on Form 20-F for the year ended December 31, 2003).
4.5		Business Transfer Agreement between the Company and Toyo Ink Mfg.  Co., Ltd., dated as of August, 2004 (incorporated by reference to Exhibit 4.28 to the Company's annual report on Form 20-F for the year ended December 31, 2004).
4.6		Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 4.12 to the Company's annual report on Form 20-F for the year ended December 31, 2006).

 

 

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Number

Description

 

4.7		Sale and Purchase of Capture Projects Limited, between Top Image Systems UK Ltd , Top Image Systems Ltd , Roger Stoker and Edward Stoker , dated as of April, 2007 (incorporated by reference as Exhibit 4.13 to the Company’s annual report on Form 20-F for the year ended December 31, 2007)
4.8		Stock and Purchase of Asiasoft Global Pte. Ltd., between Asiasoft Global Pte. Ltd., Toh Kian Hong and PC Holding Pte, Ltd., dated as of June 12, 2007 (incorporated by reference as Exhibit 4.14 to the Company’s annual report on Form 20-F for the year ended December 31, 2007).
4.9		Sale and Purchase of Asiasoft Solutions (GZ) Limited, between Tai Kin Chung and Asiasoft Global Pte. Ltd., dated as of June 12, 2007 (incorporated by reference as Exhibit 4.15 to the Company’s annual report on Form 20-F for the year ended December 31, 2007).
4.10		Sale and Purchase of ordinary shares in the capital of Asiasoft Solutions (HK) Limited, between Tai Chung and Asiasoft Pte. Ltd., dated as of July, 2007(incorporated by reference as Exhibit 4.16 to the Company’s annual report on Form 20-F for the year ended December 31, 2007).
4.11		Sale and Purchase of Shanghai Asiasoft Ltd., between Shanghai Aixun Software Co., Ltd. and Asiasoft System (China) Limited, dated as of  July 2007 (incorporated by reference as Exhibit 4.17 to the Company’s annual report on Form 20-F for the year ended December 31, 2007).
4.12		Call Option Amendment Agreement dated January 4, 2009 by and among Mr. Toh Kian Hong and Top Image Systems Ltd. (incorporated by reference to exhibit 4.18 to the Company's annual report on Form 20-F for the year ended December 31, 2008.
4.13		Securities Purchase Agreement, dated June 6, 2011, among the Company and the purchasers identified on the signature pages thereto (incorporated by reference to Exhibit 99.1 to the Company’s Form 6-K filed on June 14, 2011).
4.14		Registration Rights Agreement, dated June 13, 2011, among the Company and the purchasers identified on the signature pages thereto (incorporated by reference to Exhibit 99.2 to the Company’s Form 6-K filed on June 14, 2011).
8		List of Subsidiaries.
12.1		Certification of the Chief Executive Officer pursuant to 15 U.S.C.  Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2		Certification of the Chief Financial Officer pursuant to 15 U.S.C.  Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1		Consent of Kost Forer Gabbay & Kasierer– member of Ernst & Young Global.
15.2		Audit Committee Charter (incorporated by reference to exhibit 14.3 to Company’s annual report on Form 20-F for the year ended December 31, 2003).

 

 

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Number

Description

 

101

Attached as Exhibit 101 to this report are the following Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010; (iii) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010;  (iv) Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011 and 2010; and (v) Notes to the Consolidated Financial Statements. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Company.

 

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

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SIGNATURES

 

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

 

	TOP IMAGE SYSTEMS LTD.
	By:	/s/ Ido Schechter
		Name: Ido Schechter
		Title: Chief Executive Officer

 

Date: March 21, 2013

 

 

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