(ii)
On each annual anniversary of the initial grant, an additional annual grant of
options to purchase 10,000 ordinary shares to each non-management director then
serving on the board of directors, with the following terms:
(a)
each option is exercisable for one ordinary share at an exercise price equal to
the closing price on the date of such additional grant, as reported by The
Nasdaq Global Market;
(b)
the options shall vest as follows: 3,333 of the options shall vest on each of
the first two anniversary dates of such grant and 3,334 on the third
anniversary date; and
(c)
any and all other terms and conditions pertaining to the grant of the options
shall be in accordance with, and subject to, the Compugen Share Option
Plan (2000)".
Notwithstanding
(i) and (ii) above, all options granted to non-management directors shall be fully vested
immediately upon the completion of one or more of the following events, whether by way of
a consolidation, merger or reorganization of the Company or otherwise: (a) a sale of
all or substantially all of Companys issued share capital or assets to any other
company, entity, person or a group of persons, or (b) the acquisition of more than
50% of Companys equity or voting power by any shareholder or group of shareholders.
Notwithstanding
the terms of the Compugen Share Option Plan (2000) all options granted above
which shall be vested as of the date of termination of services by a non-management
director to the Company, may be exercised within one year after the cessation of his or
her term as a director of the Company.
Grant
to the Chairman of the Board
In
recognition of the importance of Mr. Gerstels services to the Company and in
consideration of the fact that his compensation is entirely in the form of stock options
and not in cash , at the annual general meeting of shareholders held on July 31, 2007, Mr.
Gerstel was granted stock options to purchase 500,000 ordinary shares of the Company on
the condition, as requested by Mr. Gerstel, that each such option, even if vested, shall
not be exercisable if at the time of exercise, the Companys share price is less than
$10.00 per share as reported by The Nasdaq Global Market. Other than this special
limitation, these options were granted under the general terms of the Compugen Share
Option Plan (2000) and the following terms and conditions:
1.
Vesting Schedule: Monthly over a period of 4 years. 83,333 options vested as of
August 1, 2007 and the remaining 416,667 options shall vest as follows: 10,416
options vest on a monthly basis over a period of 39 months thereafter, and
10,443 options shall vest in month 40 thereafter.
2.
Limitation to exercising vested options: Each vested option shall not be
exercisable if at the time of exercise, the closing price of the Companys
ordinary shares as reported by The Nasdaq Global Market is less than $10.00 per
ordinary share.
3.
Exercise price per option: Each option shall be exercisable for one ordinary
share at an exercise price equal to the closing price known at the date of the
Shareholder Meeting, as reported by The Nasdaq Global Market
Any
and all other terms and conditions pertaining to the grant of the options shall be in
accordance with, and subject to, the Compugen Share Option Plan (2000) and the
Companys standard option agreement that was executed by the Chairman of the Board
and by the Company promptly after the date of the Meeting.
Except
for this aforesaid remuneration, the reimbursement of certain of Mr. Gerstels
reasonable expenses incurred in connection with the performance of his services for the
Company, and for remuneration that all of our non-employee directors receive, Mr. Gerstel
does not receive any other direct or indirect compensation for his services to us.
Grant
to the Companys Chief Executive Officer and Director
For
calendar year 2006, Mr. Kotzer requested that a portion of his gross salary (which was
previously approved by the shareholders of the Company) be provided to him in the form of
ordinary shares and that his salary be determined in New Israeli Shekels. Pursuant to this
request, and pursuant to the decision of the shareholders at the Annual General Meeting
held on July 31, 2007, the cash portion of Mr. Kotzers shareholders approved
gross salary for 2006 was reduced by approximately $28,000.
At
the Annual General Meeting held on July 31, 2007, the shareholders of the Company approved
the issuance of ordinary shares, in a number equal to (i) $28,000, divided by (ii) the
closing price of the Companys ordinary shares known at the date of the shareholder
meeting, as reported by The Nasdaq Global Market, to Mr. Kotzer (the Cash
Replacement Shares) as consideration for the deduction of such amount from his 2006
salary.
49
The
Companys shareholders also approved payment to Mr. Kotzer of a cash bonus, grossed
up to cover the taxes payable by Mr. Kotzer as a result of issuing to him the Cash
Replacement Shares.
On
October 22, 2007, the board of directors approved a grant of 150,000 options to Mr.
Kotzer, subject to the approval of the shareholders at the next annual general shareholder
meeting.
ITEM 7.
|
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Major Shareholders
The
following table sets forth certain information regarding beneficial ownership of our
ordinary shares as of February 29, 2008 by each person who is known by us to own
beneficially more than 5% of our outstanding ordinary shares. The voting rights of our
major shareholders do not differ from the voting rights of other holders of our ordinary
shares.
Beneficial Owner
|
Number of Ordinary
Shares Beneficially
Owned
|
Percent of Ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin Gerstel (1)
|
|
|
|
1,702,568
|
|
|
6.01
|
%
|
Clal Industries & Investments Ltd. (2)
|
|
|
|
3,017,574
|
|
|
10.65
|
%
|
AXA Assurances I.A.R.D. Mutuelle (3)
|
|
|
|
4,484,917
|
|
|
15.83
|
%
|
(1)
Includes 550,000 shares held by Shomar Corporation, an affiliate of Mr. Martin
S. Gerstel, 618,333 shares held by Merrill Lynch IRA for Martin
Gerstel, of which Martin Gerstel is the beneficiary and 534,235 shares held in
various brokerage accounts for the benefit of Martin Gerstel.
(2)
Includes 10,526 shares held by Clal Industries & Investments Ltd. and
3,007,048 shares held by Clal Biotechnology Industries Ltd. Clal Biotechnology
Industries Ltd and Clal Industries & Investments Ltds address is 3
Azrieli Center, Tel Aviv 67023, Israel. This disclosure is based on information
disclosed to us by the Legal Department of Clal Industries & Investments
Ltd. on March 23, 2008.
(3)
This disclosure is based on information disclosed by AXA Assurances I.A.R.D.
Mutuelle on Form 13G, filed with the SEC on February 14, 2008.
As
of February 29, 2008, there were a total of 91 holders of record of our ordinary shares,
of which 58 were registered with addresses in the United States. Such United States
holders were, as of such date, the holders of record of approximately 89% of the
outstanding ordinary shares.
Related Party
Transactions
It
is our policy to enter into transactions with related parties on terms that, on the whole,
are no less favorable than those that would be available from unaffiliated parties. Based
on our experience in the business in which we operate and the terms of our transactions
with unaffiliated third parties, we believe that all of the transactions described below
met our policy standards at the time they occurred.
Evogene
Ltd.
In October
1999, we formed a division focusing on agricultural biotechnology and plant genomics. On
January 1, 2002, we turned the business of this division into a majority-owned subsidiary,
Evogene.
On
June 12, 2007, Evogene successfully completed an initial public offering on the Tel Aviv
Stock Exchange, selling units consisting of ordinary shares, Series 1 warrants and Series
2 warrants. The total new capital raised was approximately $8,000,000. The full exercise
of both series of warrants would approximately generate an additional $16,800,000 of
capital. Compugen did not participate in this investment.
Therefore,
as of December 31, 2007, Compugen held 10.97% of Evogenes issued and outstanding
share capital. For more information, see Note 1b of our 2007 consolidated financial
statements and Item 5. Operating and Financial Review and Prospects; Critical
Accounting Policies; Investment in Evogene.
50
As
of December 31, 2007, Martin Gerstel, our chairman of the board, held approximately 3.33 %
of Evogenes issued and outstanding share capital (approximately 2.46% of
Evogenes share capital, on a fully-diluted basis), and the power to vote
approximately 3.33% of Evogenes share capital. Since December 19, 2004, Martin
Gerstel has served as the chairman of Evogenes board of directors.
Upon
Evogenes incorporation on January 1, 2002, we granted a Computational Tools License
to Evogene, which license was first extended on August 6, 2003. On August 1, 2004, we
entered into a Second Extension Agreement to the Computational Tools License Agreement,
under which the license was extended for two additional years, until December 31, 2007, in
consideration of the issuance to us of 350,000 ordinary shares of Evogene. During these
two years we were obligated to provide to Evogene limited support services at no
additional charge. In May 2007 we entered into a Third Extension to the Computational
Tools License Agreement with Evogene, under which we agreed to grant Evogene a license to
certain software until December 31, 2014. In consideration for the extension of the
license, Evogene agreed to pay us $150,000 and issue to us 100,000 ordinary shares in
Evogene.
In
August 2006, we entered into a Software License Agreement with Evogene, under which we
agreed to grant Evogene a license to certain software which supports the LEADS technology
licensed under the Computational Tools License Agreement. In consideration for the grant
of the license, Evogene agreed to issue to us 40,000 ordinary shares before December 31,
2006 and an additional 20,000 ordinary shares within one month of Evogene entering into
its first significant agreement. To date, we have been issued 60,000 ordinary shares under
the Software License Agreement.
Eli
Zangvil, Compugens VP Business Development, is Compugens representative on the
board of directors of Evogene.
ITEM 8.
|
|
FINANCIAL
INFORMATION
|
Consolidated Statements
and Other Financial Information
Our
consolidated financial statements are included on pages F-1 through F-31 of this annual
report.
Legal
Proceedings
Currently,
we are not a party to any material pending legal proceedings. There are no legal
proceedings pending or, to our knowledge, threatened against us or our subsidiaries and we
are not involved in any legal proceedings that our management believes, individually or in
the aggregate, would have a material adverse effect on our business, financial conditions
or operating results.
Dividend
Distributions
We
have never paid any cash dividends on our ordinary shares, and we do not intend to pay
cash dividends on our ordinary shares in the foreseeable future. Our current policy is to
retain earnings for use in our business.
In
the event that we decide to pay a cash dividend from income that is tax exempt under our
approved enterprise status, we would be liable for corporate tax on the amount distributed
at the rate of up to 25%, which would be in addition to the tax payable by the dividend
payee. See Note 13 of our 2007 Consolidated Financial Statements and Item 10.
Taxation. Cash dividends may be paid by an Israeli company only out of retained
earnings as calculated under Israeli law. We currently have no retained earnings and do
not expect to have any retained earnings in the foreseeable future.
Significant
Changes
No
significant changes have occurred since the date of the consolidated financial statements
included in this annual report.
51
ITEM 9.
|
|
THE
OFFER AND LISTING
|
Markets and Share Price
History
The
principal trading market for our ordinary shares is the Nasdaq Global Market, where our
shares have been listed and traded under the symbol CGEN since our initial
public offering in August, 2000. Our shares have also been traded on the Tel Aviv Stock
Market under the Hebrew symbol which is equivalent to CGEN since January 7,
2002. The following table sets forth, for the periods indicated, the high and low reported
sales prices of the ordinary shares on the Nasdaq Global Market and on the Tel Aviv Stock
Exchange:
|
Nasdaq
|
*TASE
|
Last Six Calendar Months
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2008
|
|
|
$
|
2.750
|
|
$
|
2.450
|
|
$
|
2.793
|
|
$
|
2.311
|
|
January 2008
|
|
|
$
|
2.800
|
|
$
|
1.600
|
|
$
|
2.811
|
|
$
|
1.613
|
|
December 2007
|
|
|
$
|
1.950
|
|
$
|
1.560
|
|
$
|
1.953
|
|
$
|
1.641
|
|
November 2007
|
|
|
$
|
2.330
|
|
$
|
1.560
|
|
$
|
2.371
|
|
$
|
1.653
|
|
October 2007
|
|
|
$
|
2.500
|
|
$
|
2.050
|
|
$
|
2.548
|
|
$
|
2.179
|
|
September 2007
|
|
|
$
|
2.650
|
|
$
|
2.320
|
|
$
|
2.638
|
|
$
|
2.407
|
|
Financial Quarters During the Past Two
|
|
|
Full Fiscal Years
|
|
|
Fourth Quarter of 2007
|
|
|
$
|
2.500
|
|
$
|
1.560
|
|
$
|
2.548
|
|
$
|
1.641
|
|
Third Quarter 2007
|
|
|
$
|
3.160
|
|
$
|
2.290
|
|
$
|
3.012
|
|
$
|
2.407
|
|
Second Quarter 2007
|
|
|
$
|
3.180
|
|
$
|
2.580
|
|
$
|
3.064
|
|
$
|
2.570
|
|
First Quarter 2007
|
|
|
$
|
3.400
|
|
$
|
2.370
|
|
$
|
3.529
|
|
$
|
2.424
|
|
Fourth Quarter of 2006
|
|
|
$
|
3.380
|
|
$
|
2.100
|
|
$
|
3.499
|
|
$
|
2.412
|
|
Third Quarter 2006
|
|
|
$
|
3.050
|
|
$
|
2.420
|
|
$
|
3.018
|
|
$
|
2.383
|
|
Second Quarter 2006
|
|
|
$
|
4.200
|
|
$
|
2.630
|
|
$
|
4.126
|
|
$
|
2.790
|
|
First Quarter 2006
|
|
|
$
|
5.220
|
|
$
|
3.200
|
|
$
|
5.304
|
|
$
|
3.457
|
|
Last Five Full Financial Years
|
|
|
2007
|
|
|
$
|
3.400
|
|
$
|
1.560
|
|
$
|
3.529
|
|
$
|
1.641
|
|
2006
|
|
|
$
|
5.220
|
|
$
|
2.100
|
|
$
|
5.304
|
|
$
|
2.383
|
|
2005
|
|
|
$
|
6.540
|
|
$
|
2.460
|
|
$
|
6.557
|
|
$
|
2.578
|
|
2004
|
|
|
$
|
8.090
|
|
$
|
3.180
|
|
$
|
8.130
|
|
$
|
3.042
|
|
2003
|
|
|
$
|
6.300
|
|
$
|
1.500
|
|
$
|
6.086
|
|
$
|
1.505
|
|
*the currency by which our stock is
traded on the Tel Aviv Stock Exchange is the New Israeli Shekel. The above dollar amounts
represent a conversion from New Israeli Shekel to Dollar amounts in accordance with the
Dollar New Israeli Shekel conversion rate as of the relevant date of trade.
ITEM 10.
|
|
ADDITIONAL
INFORMATION
|
Memorandum and Articles
of Association
Objects
and Purposes of the Company
We are
registered under the Companies Law, 1999 as a public company under the name Compugen Ltd.
and public company number 51-177-963-9. The objective stated in our Articles of
Association is to engage in any lawful activity.
Powers
of the Directors
Pursuant
to the Companies Law and our Articles of Association, a director is not permitted to vote
on a proposal, arrangement or contract in which he or she has a personal interest. Also,
the directors may not vote compensation to themselves or any members of their body without
the approval of our audit committee and our shareholders at a general meeting. The
requirements for approval of certain transactions are set forth below in Item 10.
Additional Information; Memorandum and Articles of Association; Approval of Certain
Transactions. The powers of our directors to enter into borrowing arrangements on
our behalf are limited to the same extent as any other transaction by us.
52
Approval
of Certain Transactions
The Companies
Law codifies the fiduciary duties that office holders, including directors and executive
officers, owe to a company. An office holder, as defined in the Companies Law, is a
director, general manager, chief business manager, deputy general manager, vice general
manager, executive vice president, vice president, other manager directly subordinate to
the managing director or any other person assuming the responsibilities of any of the
foregoing positions without regard to such persons title. An office holders
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty
includes avoiding any conflict of interest between the office holders position in
the company and his personal affairs, avoiding any competition with the company, avoiding
exploitation of any business opportunity of the company in order to reap personal gain for
himself or others, and revealing to the company any information or documents relating to
the companys affairs which the office holder has received due to his position as an
office holder. Each person listed in the table under Directors and Senior
Management, which is displayed under Item 6. Directors, Senior Management and
Employees; Directors and Senior Management, is one of our office holders. Under the
Companies Law, all arrangements as to compensation of office holders who are not
directors, require approval of the board of directors, or a committee thereof or of
persons to whom such power is delegated. Arrangements regarding the compensation of
directors also require audit committee and shareholder approval, with the exception of
compensation to external directors in the amounts specified in the regulations promulgated
under the Companies Law, all as described in Item 6. Directors and Senior
Management; Compensation.
The
Companies Law requires that an office holder promptly discloses 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. The disclosure must be made to
our board of directors or shareholders prior to the meeting at which the transaction is to
be discussed. In addition, if the transaction is an extraordinary transaction, as defined
under the Companies Law, the office holder must also disclose any personal interest held
by the office holders spouse, siblings, parents, grandparents, descendants,
spouses descendants and the spouses of any of the foregoing, or by any corporation
in which the office holder is a five percent (5%) or greater shareholder, or holder of
five percent (5%) or more of the voting power, director or general manager or in which he
or she has the right to appoint at least one director or the general manager. An
extraordinary transaction is defined as a transaction not in the ordinary course of
business, not on market terms, or that is likely to have a material impact on the
companys profitability, assets or liabilities.
In
the case of a transaction which is not an extraordinary transaction, after the office
holder complies with the above disclosure requirement, only board of directors
approval is required unless the Articles of Association of the company provide otherwise.
A transaction must not be adverse to the companys interest. If the transaction is an
extraordinary transaction, then, in addition to any approval required by the Articles of
Association, the transaction must also be approved by the audit committee and by the board
of directors, and under specified circumstances, by a meeting of the shareholders. An
office holder who has a personal interest in a matter that is considered at a meeting of
the board of directors or the audit committee may not be present at this meeting or vote
on this matter.
The
Companies Law applies the same disclosure requirements to a controlling shareholder of a
public company, which is defined as a shareholder who has the ability to direct the
activities of a company, other than in circumstances where this power derives solely from
the shareholders position on the board of directors or any other position with the
company, and includes a shareholder that holds 25% or more of the voting rights if no
other shareholder owns more than 50% of the voting rights in the company. Extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the terms of compensation of a controlling shareholder who is an
office holder, require the approval of the audit committee, the board of directors and the
shareholders of the company.
The
shareholders approval must either include at least one-third of the 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 one percent (1%) of the voting rights in the company.
In
addition, a private placement of securities that will increase the relative holdings of a
shareholder that holds five percent (5%) or more of the companys outstanding share
capital, assuming the exercise by such person of all of the convertible securities into
shares held by that person, or that will cause any person to become a holder of more than
five percent (5%) of the companys outstanding share capital, requires approval by
the board of directors and the shareholders of the company. However, subject to certain
exceptions, shareholder approval will not be required if the aggregate number of shares
issued pursuant to such private placement, assuming the exercise of all of the convertible
securities into shares being sold in such a private placement, comprises less than twenty
percent (20%) of the voting rights in a company prior to the consummation of the private
placement.
Under
the Companies Law, a shareholder has a duty to act in good faith towards the company and
other shareholders and refrain from abusing his power in the company. Shareholders
voting powers includes their power to vote in the general meetings of shareholders on the
following matters:
53
|
|
any
amendment to the Articles of Association;
|
|
|
an
increase of the company's authorized share capital;
|
|
|
approval
of interested party transactions.
|
In
addition, any controlling shareholder, any shareholder who knows it can determine the
outcome of a shareholders vote and any shareholder who, under our 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 Companies Law does not describe the substance of this
duty. The Companies Law requires that specified types of transactions, actions and
arrangements be approved as provided for in a companys articles of association and
in some circumstances by the audit committee, by the board of directors and by the
shareholders. In general, the vote required by the audit committee and the board of
directors for approval of these matters, in each case, is a majority of the disinterested
directors participating in a duly convened meeting.
For
information concerning the direct and indirect personal interests of some of our office
holders and principal shareholders in transactions with us, see Item 7. Major
Shareholders; Related Party Transactions above.
Rights
Attached to Ordinary Shares
Our
authorized share capital consists of 50,000,000 ordinary shares, par value NIS 0.01 per
share. Holders of ordinary shares have one vote per share, and are entitled to participate
equally in the payment of dividends and share distributions and, in the event of our
liquidation, in the distribution of assets after satisfaction of liabilities to creditors.
No preferred shares are currently authorized. All outstanding ordinary shares are validly
issued and fully paid.
Transfer
of Shares
Fully
paid ordinary shares are issued in registered form and may be freely transferred under our
Articles of Association unless the transfer is restricted or prohibited by another
instrument.
Dividend
and Liquidation Rights
We
may declare a dividend to be paid to the shareholders of our ordinary shares according to
their rights and interests in our profits. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the
shareholders of our ordinary shares in proportion to the nominal value of their
shareholdings. This right may be affected by the grant of preferential dividend or
distribution rights to the shareholders of a class of shares with preferential rights that
may be authorized in the future. Pursuant to Israels securities laws, a company
registering its shares for trade on the Tel Aviv Stock Exchange (TASE) may not have more
than one class of shares for a period of one year following registration, after which it
is permitted to issue preference shares. Under the Companies Law, the declaration of a
dividend does not require the approval of the shareholders of the company, unless the
companys Articles of Association require otherwise. Our Articles of Association
provide that the board of directors may declare and distribute dividends without the
approval of the shareholders.
To
date, we have not declared or distributed any dividend.
Annual
and Special General Meetings
We
must hold our annual general meeting of shareholders each year no later than 15 months
from the last annual meeting, at a time and place determined by the board of directors,
upon at least 21 days prior notice to our shareholders. The board of directors may,
whenever it thinks fit, convene a special meeting as may be determined by the board of
directors. The board of directors shall be obligated to convene a special meeting, as may
be determined by the board of directors, upon requisition in writing in accordance with
the Companies Law. Not less than twenty-one (21) days prior notice, or thirty-five
(35) days prior notice to the extent required under regulations promulgated under
the Companies Law, shall be given of every general meeting. Each such notice shall specify
the place and the time of the meeting and the general nature of each item to be acted upon
thereat, as well as any other information required by the Companies Law or any regulation
promulgated thereunder, said notice to be given to all shareholders who will be entitled
to attend and vote at such meeting and delivered or publicized in any manner permitted
under the Companies Law.
54
The
quorum required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy who hold or represent between them at least 33.3% of the
issued share capital. A meeting adjourned for lack of a quorum generally is adjourned to
the same day in the following week at the same time and place or any time and place as the
directors designate in a notice to the shareholders. At the reconvened meeting, the
required quorum consists of any two members present in person or by proxy.
Voting
Rights
Our
ordinary shares do not have cumulative voting rights in the election of directors. As a
result, the holders of ordinary shares that represent more than 50% of the voting power
represented at a shareholders meeting have the power to elect all of our directors, except
the external directors whose election requires a special majority as described under the
section entitled Item 6. Directors, Senior Management and Employees; Board
Practices; External and Independent Directors.
Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. Shareholders may vote in person or by proxy. These voting rights
may be affected by the grant of any special voting rights to the holders of a class of
shares with preferential rights that may be authorized in the future.
Under
the Companies Law, unless otherwise provided in the Articles of Association or by
applicable law, all resolutions of the shareholders require a simple majority and all
shareholders meetings require prior notice of at least 21 days. Our Articles of
Association provide that, except with respect to mattes which require the approval of a
special majority under the Companies Law, all decisions may be made by a simple majority
of the voting power represented at the meeting, in person, by proxy or by proxy card, and
voting thereon. See Item 10. Additional Information; Memorandum and Articles of
Association; Approval of Certain Transactions above for certain duties of
shareholders towards the company.
Limitations
on the Rights to Own Securities
The
ownership or voting of ordinary shares by non-residents of Israel is not restricted in any
way by our articles of association or the laws of the State of Israel, except that
nationals of countries which are, or have been, in a state of war with Israel may not be
recognized as owners of our shares.
Anti-Takeover
Provisions under Israeli Law
The
Companies Law provides that an acquisition of shares in a public company must be made by
means of a tender offer if, as a result of such acquisition, the purchaser would become
shareholder with over 25% of the voting rights in the company. This rule does not apply if
there is already another shareholder of the company with 25% or more of the voting rights.
Similarly, the Companies Law provides that an acquisition of shares in a public company
must be made by means of a tender offer if, as a result of the acquisition, the
purchasers shareholdings would entitle the purchaser to over 45% of the voting
rights in the company, unless there is a shareholder with 50% or more of the voting rights
in the company. These rules do not apply if the acquisition is made by way of a merger.
Finally,
in general, Israeli tax law treats specified acquisitions less favorably than does U.S.
tax law. However, Israeli tax law provides for tax deferral in specified acquisitions,
including transactions where the consideration for the sale of shares is the receipt of
shares of the acquiring company.
Exchange Controls
Under
Israeli Law, Israeli non-residents who purchase ordinary shares with certain non-Israeli
currencies (including dollars) may freely repatriate in such non-Israeli currencies all
amounts received in Israeli currency in respect of the ordinary shares, whether as a
dividend, as a liquidating distribution, or as proceeds from any sale in Israel of the
ordinary shares, provided in each case that any applicable Israeli income tax is paid or
withheld on such amounts. The conversion into the non-Israeli currency must be made at the
rate of exchange prevailing at the time of conversion. Under Israeli law, both residents
and non-residents of Israel may freely hold, vote and trade ordinary shares.
Taxation
The
following discussion of Israeli and United States tax consequences material to our
shareholders is not intended and should not be construed as legal or professional tax
advice and does not exhaust all possible tax considerations. To the extent that the
discussion is based on new tax legislation, which has not been subject to judicial or
administrative interpretation, the views expressed in the discussion might not be accepted
by the tax authorities in question.
55
We
urge shareholders and prospective purchasers of our ordinary shares to consult their own
tax advisers as to the U.S., Israeli, or other tax consequences of the purchase, ownership
and disposition of ordinary shares, including, in particular, the effect of any foreign,
state or local taxes.
Israeli
Taxation and Investment Programs
The
following is a summary of the principal tax laws applicable to companies in Israel,
including special reference to their effect on us, and Israeli government programs
benefiting us. This section also contains a discussion of the material Israeli tax
consequences to you if you acquire Ordinary Shares of our company. This summary does not
discuss all the acts of Israeli tax law that may be relevant to you in light of your
personal investment circumstances or if you are subject to special treatment under Israeli
law. To the extent that the discussion is based on new tax legislation which has not been
subject to judicial or administrative interpretation, we cannot assure you that the views
expressed in this discussion will be accepted by the tax authorities. The discussion
should not be understood as legal or professional tax advice and is not exhaustive of all
possible tax considerations.
General
Corporate Tax Structure
Generally,
Israeli companies are subject to Corporate Tax on their taxable income. The
applicable rates are as follows: in 2006 31%, in 2007 29%, in 2008
27%, in 2009 26% and in 2010 and thereafter 25%. However, the effective tax
rate payable by a company which derives income from an approved enterprise (as further
discussed below) may be considerably less.
Tax
Benefits under the Law for the Encouragement of Industry (Taxes), 1969
The Law
for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry
Encouragement Law, provides several tax benefits for industrial companies. An industrial
company is defined as a company resident in Israel, at least 90% of the income of which in
a given tax year exclusive of income from specified government loans, capital gains,
interest and dividends, is derived from an industrial enterprise owned by it. An
industrial enterprise is defined as an enterprise whose major activity in a given tax year
is industrial production activity.
Under
the Industry Encouragement Law, industrial companies are entitled to a number of corporate
tax benefits, including:
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deduction
of purchase of know-how and patents and/or right to use a patent over an
eight-year period ;
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the
right to elect, under specified conditions, to file a consolidated tax return with
additional related Israeli industrial companies and an industrial holding company;
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accelerated
depreciation rates on equipment and buildings; and
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deductibility
of expenses related to a public offering on the Tel Aviv Stock Exchange and as of January
1, 2003, on recognized stock markets outside of Israel, are deductible in equal amounts
over three years.
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Under
some tax laws and regulations, an industrial enterprise may be eligible for special
depreciation rates for machinery, equipment and buildings. These rates differ based on
various factors, including the date the operations begin and the number of work shifts. An
industrial company owning an approved enterprise may choose between these special
depreciation rates and the depreciation rates available to the approved enterprise.
Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority.
We
believe that we currently qualify as an industrial company within the definition of the
Industry Encouragement Law. We cannot assure you that the Israeli tax authorities will
agree that we qualify, or, if we qualify, that we will continue to qualify as an
industrial company or that the benefits described above will be available to us in the
future.
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Tax
Benefits Under the Law for the Encouragement of Capital Investments, 1959
Tax
benefits prior the 2005 amendment
The
Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April
1, 2005) (the Investments Law), provides that a proposed capital investment in
eligible facilities may, upon application to the Investment Center of the Ministry of
Industry and Commerce of the State of Israel, be designated as an approved enterprise.
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 right of
use with respect to know-how developed by the approved enterprise, income generated from
royalties, and income derived from a service which is ancillary to such right of use or
royalties, provided that such income is generated within the approved enterprises
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 in the first five years of using the equipment.
Taxable
income of a company derived from an approved enterprise is subject to corporate tax at the
maximum rate of 25%, rather than the regular corporate tax rate, for the benefit period.
This period is ordinarily seven years commencing with the year in which the approved
enterprise first generates taxable income, and is limited to 12 years from commencement of
production or 14 years from the date of approval, whichever is earlier. The years
limitation does not apply to the exemption period.
However,
a company may elect to receive an alternative package of benefits under which (a) its
undistributed income derived from the approved enterprise will be exempt from corporate
tax for a period of between two and ten years from the first year it derives taxable
income under the program, depending on the geographic location of the approved enterprise
within Israel, and (b) it will be eligible for reduced tax rates for the remainder of the
benefits period
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We have elected the alternative benefits package.
A
company that has elected the alternative package of benefits that subsequently pays a
dividend out of income derived from the approved enterprise during the tax exemption
period will be subject to corporate tax in respect of the amount distributed, including
any taxes thereon, at the rate which would have been applicable had it not elected the
alternative package of benefits, generally 10%-25%, depending on the percentage of the
companys ordinary shares held by foreign shareholders. The dividend recipient is
subject to withholding tax at the rate of 15% applicable to dividends from approved
enterprises, if the dividend is distributed during the tax exemption period or within
twelve years thereafter. The company must withhold this tax at source.
A
company that has an approved enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign investors company is a
company which more than 25% of its share capital and combined share and loan capital is
owned by non-Israeli residents. A company that qualifies as a foreign investors
company and has an approved enterprise program is eligible for tax benefits for a ten-year
benefit period. As specified above, depending on the geographic location of the approved
enterprise within Israel, income derived from the approved enterprise program may be
exempt from tax on its undistributed income for a period of between two to ten years, and
will be subject to a reduced tax rate for the remainder of the benefits period. The tax
rate for the remainder of the benefits period will be 25%, unless the level of foreign
investment exceeds 49%, in which case the tax rate will be 20% if the foreign investment
is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90%
or more.
Subject
to applicable provisions concerning income under the alternative package of benefits,
dividends paid by a company are considered to be attributable to income received from the
entire company and the companys effective tax rate is the result of a weighted
average of the various applicable tax rates, excluding any tax-exempt income. Under the
Investments Law, a company that has elected the alternative package of benefits is not
obligated to distribute retained profits, and may generally decide from which years
profits to declare dividends. We currently intend to reinvest any income derived from our
approved enterprise program and not to distribute such income as a dividend.
Currently
we have two approved enterprises programs under the Investment Law. Both are under the
alternative benefits program and in both cases, the tax benefits period for these programs
has not yet begun.
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Tax
benefits under the 2005 Amendment
A
2005 amendment to the Investments Law included revisions to the criteria for investments
qualified to receive tax benefits as an Approved Enterprise. The amendment applies to new
investment programs and investment programs commencing after 2004, and does not apply to
investment programs approved prior to December 31, 2004. However, a company that was
granted benefits according to section 51 of the Investment Law would not be allowed to
commence production for a period of 3 years from the companys previous year of
commencement of benefits under the investment law (prior the amendment).
Under
the amended law, a company wishing to receive the tax benefits afforded under the law is
required to select the tax year from which the period of benefits under the Investment Law
are to commence by notifying the Israeli Tax Authority within 12 months of the end of that
year.
Our
company will continue to enjoy its current tax benefits in accordance with the provisions
of the Investment Law prior to its revision, but if our company is granted any new
benefits in the future they will be subject to the provisions of the amended Investment
Law. Therefore, the following discussion is a summary of the Investment Law prior to its
amendment as well as the relevant changes contained in the new legislation.
The
amendment simplifies the approval process: according the amendment, only Approved
Enterprises receiving cash grants require the approval of the Investment Center. The
Investment Center will be entitled, to approve such programs only until the end of 2007.
The
Amendment does not apply to benefits included in any certificate of approval that was
granted before the Amendment came into effect, which will remain subject to the provisions
of the Investment Law as they were on the date of such approval.
Tax
benefits are available under the Amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of their business income
from export (referred to as a Benefited Enterprise). In order to receive the
tax benefits, the Amendment states that the company must make an investment in the
Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the
Law. Such investment may be made over a period of no more than three years ending at the
end of the year in which the company requested to have the tax benefits apply to the
Benefited Enterprise (the Year of Election). Where the company requests to
have the tax benefits apply to an expansion of existing facilities, then only the
expansion will be considered a Benefited Enterprise and the companys effective tax
rate will be the result of a weighted combination of the applicable rates. In this case,
the minimum investment required in order to qualify as a Benefited Enterprise is required
to exceed a certain percentage or a minimum amount of the companys production assets
before the expansion.
The
duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from
the Commencement Year, or 12 years from the first day of the Year of Election. The tax
benefits granted to a Benefited Enterprise are determined according to one of the
following new tax routes, which may be applicable to us:
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Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Benefited Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%) in
respect of the gross amount of the dividend that we may distribute. The company is
required to withhold tax at the source at a rate of 15% from any dividends distributed
from income derived from the Benefited Enterprise; and
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A
special tax route, which enables companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is
required to withhold tax at source at a rate of 15% for Israeli residents and at a rate
of 4% for foreign residents.
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Generally,
a company that is Abundant in Foreign Investment (as defined in the Investments Law) is
entitled to an extension of the benefits period by an additional five years, depending on
the rate of its income that is derived in foreign currency.
58
The
Amendment changes the definition of foreign investment in the Investments Law
so that the definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of shares of a
company from another shareholder, provided that the companys outstanding and paid-up
share capital exceeds NIS 5 million. Such changes to the aforementioned definition will
take effect retroactively from 2003.
The
Amendment will apply to approved enterprise programs in which the year of election under
the Investments Law is 2004 or later, unless such programs received approval from the
Investment Center on or prior to December 31, 2004, in which case the Amendment provides
that terms and benefits included in any certificate of approval already granted will
remain subject to the provisions of the law as they were on the date of such approval.
Special Provisions
Relating to Measurement of Taxable Income
Our company is taxed under the Income
Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary
Adjustments Law. The Inflationary Adjustments Law is highly complex and represents an
attempt to overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. Its features, which are material to us, are summarized as
follows:
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Where
a companys equity, as calculated under the Inflationary Adjustments Law, exceeds
the depreciated cost of its fixed assets (as defined in the Inflationary Adjustments
Law), a deduction from taxable income is permitted equal to the excess multiplied by the
applicable annual rate of inflation. The maximum deduction permitted in any single tax
year is 70% of taxable income, with the unused portion permitted to be carried forward,
linked to the Israeli consumer price index. The unused portion that was carried forward
may be deductible in full in the following year.
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Where
a companys depreciated cost of fixed assets exceeds its equity, then the excess
multiplied by the applicable annual rate of inflation is added to taxable income.
(hereinafter: Inflation supplement). Note, the inflation supplement will only
be added to the corporate income but not to other incomes such as capital gains.
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Subject
to specified limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the change in the consumer price index.
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In
the event that the Israeli consumer price index did not rise in a particular year by 3.0%,
then the Israeli government may decide that some or all of the provisions of the
Inflationary Adjustments Law shall not apply with respect to such fiscal year, or that the
rate of increase of the Israeli consumer price index relating to such fiscal year shall be
deemed to be 0%, and to make the adjustments required to be made as a result of such
determination
In
early 2008, the Inflationary Adjustments Law was amended with the result being that its
scope will be significantly limited beginning in 2008. Please see Note 13 to our
consolidated financial statements for additional details.
Tax
Benefits of Research and Development
Israeli
tax law permits, under some conditions, a tax deduction in the year incurred for
expenditures, including capital expenditures, in scientific research and development
projects, if the expenditures are approved by the relevant government ministry and if the
research and development is for the promotion of the enterprise and is carried out by, or
on behalf of, a company seeking the deduction.
The
OCS has approved some of our research and development programs and we have been able to
deduct, for tax purposes, a portion of our research and development expenses net of the
grants received. Other research and development expenses that are not approved may be
deducted for tax purposes in 3 equal installments during a 3-year period.
Capital
Gains Tax on Sales of Our Ordinary Shares
Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents
of Israel, as defined for Israeli tax purposes, and on the sale of assets located in
Israel, including shares in Israeli companies, by both residents and non-residents of
Israel, unless a specific exemption is available or unless a tax treaty between Israel and
the shareholders country of residence provides otherwise. The law distinguishes
between real gain and inflationary surplus. The inflationary surplus is a portion of the
total capital gain which is equivalent to the increase of the relevant assets
purchase price which is attributable to the increase in the Israeli consumer price index
or, in certain circumstances, a foreign currency exchange rate, between the date of
purchase and the date of sale. The real gain is the excess of the total capital gain over
the inflationary surplus.
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Generally,
until the 2006 tax year, capital gains tax was imposed on Israeli resident individuals at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale of shares
in, among others, Israeli companies publicly traded on Nasdaq or on a recognized stock
exchange or regulated market in a country that has a treaty for the prevention of double
taxation with Israel. This tax rate was contingent upon the shareholder not claiming a
deduction for financing expenses in connection with such shares (in which case the gain
was generally be taxed at a rate of 25%), and did not apply to: (i) the sale of
shares to a relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of
shares by dealers in securities; (iii) the sale of shares by shareholders that report in
accordance with the Inflationary Adjustments Law (that were taxed at corporate tax rates
for corporations and at marginal tax rates for individuals); or (iv) the sale of
shares by shareholders who acquired their shares prior to an initial public offering
(which shares may be subject to a different tax arrangement).
As
of January 1, 2006, the tax rate applicable to capital gains derived from the sale of
shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless
such shareholder claims a deduction for financing expenses in connection with such shares,
in which case the gain will generally be taxed at a rate of 25%. Additionally, if such
shareholder is considered a material shareholder at any time during the
12-month period preceding such sale, i.e., such shareholder holds directly or indirectly,
including with others, at least 10% of any means of control in the company, the tax rate
shall be 25%. Israeli companies are subject to the Corporate Tax rate on capital gains
derived from the sale of shares, unless such companies were not subject to the Adjustments
Law (or certain regulations) at the time of publication of the aforementioned amendment to
the Tax Ordinance that came into effect on January 1, 2006, in which case the applicable
tax rate is 25%. However, the foregoing tax rates do not apply to: (i) dealers in
securities; and (ii) shareholders who acquired their shares prior to an initial public
offering (which shares may be subject to a different tax arrangement).
The
tax basis of shares acquired prior to January 1, 2003 will be determined in accordance
with the average closing share price in the three trading days preceding January 1, 2003.
However, a request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.
Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange or regulated
market outside of Israel, provided however that such capital gains are not derived from a
permanent establishment in Israel, such shareholders are not subject to the Adjustments
Law, and such shareholders did not acquire their shares prior to an initial public
offering. 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
some instances where our shareholders may be liable to Israeli tax on the sale of their
ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.
Pursuant
to the Convention Between the government of the United States of America and the
government of Israel with Respect to Taxes on Income, as amended (the U.S.-Israel
Tax Treaty), the sale, exchange or disposition of ordinary shares by a person who
(i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the
United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to
claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will
not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such
Treaty U.S. 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, or (ii) the capital gains from such sale,
exchange or disposition can be allocated to a permanent establishment in Israel. In such
case, the sale, exchange or disposition of ordinary shares would be subject to Israeli
tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S.
Resident would be permitted to claim a credit for such taxes against the U.S. federal
income tax imposed with respect to such sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty
does not relate to U.S. state or local taxes.
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Taxation
of Non-Resident Holders of Shares
Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
Such sources of income include passive income such as dividends, royalties and interest,
as well as non-passive income from services rendered in Israel. On distributions of
dividends other than bonus shares, or stock dividends, income tax is withheld at the
source at the following rates: (i) for dividends distributed prior to January 1, 2006
25%; (ii) for dividends distributed on or after January 1, 2006 20%, or 25%
for a shareholder that is considered a material shareholder at any time during
the 12-month period preceding such distribution, unless a different rate is provided in a
treaty between Israel and the shareholders 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 Treaty U.S. Resident is 25%. However, under the Investments Law, dividends
generated by an Approved Enterprise (or Benefited Enterprise) are taxed at the rate of
15%. Furthermore, dividends not generated by an Approved Enterprise (or Benefited
Enterprise) paid to a U.S. corporation holding at least 10% of our issued voting power
during the part of the tax year which precedes the date of payment of the dividend and
during the whole of its prior tax year, are generally taxed at a rate of 12.5%.
For
information with respect to the applicability of Israeli capital gains taxes on the sale
of ordinary shares by United States residents, see above Capital Gains Tax
on Sales of Our Ordinary Shares.
United
States Federal Income Tax Considerations
Subject
to the limitations described below, the following discussion summarizes certain U.S.
federal income tax consequences of the purchase, ownership and disposition of our ordinary
shares to a U.S. holder that owns our ordinary shares as a capital asset (generally, for
investment). A U.S. holder is a holder of our ordinary shares that is:
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an
individual citizen or resident of the United States;
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a
corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) created or organized in the United States or under the laws of the
United States, any state or political subdivision thereof or the District of
Columbia;
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an
estate, the income of which is subject to U.S. federal income tax regardless of its
source; or
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a
trust if (i) a court within the United States is able to exercise primary supervision
over its administration and one or more U.S. persons have the authority to
control all of its substantial decisions or (ii) that has in effect a valid
election under applicable U.S. Treasury Regulations to be treated as a U.S.
person.
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If
a partnership (or any other entity treated as a partnership for U.S. federal income tax
purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in
such partnership will generally depend on the status of the partner and the activities of
the partnership. Such a partner or partnership should consult its tax advisor as to its
tax consequences.
Certain
aspects of U.S. federal income taxes relevant to a holder of our ordinary shares that is
not a U.S. holder (a Non-U.S. holder) are also discussed below.
This
discussion is based on current provisions of the Internal Revenue Code of 1986, as amended
(the Code), current and proposed Treasury Regulations, and administrative and
judicial decisions as of the date of this annual report, all of which are subject to
change, possibly on a retroactive basis. This discussion does not address all aspects of
U.S. federal income taxation that may be relevant to any particular U.S. holder in light
of the holders individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the U.S. federal
income tax consequences to U.S. holders that are subject to special treatment, including
U.S. holders that:
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are
broker-dealers or insurance companies;
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have
elected mark-to-market accounting;
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are
tax-exempt organizations or retirement plans;
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are
certain former citizens or long-term residents of the United States;
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are
financial institutions or financial services entities;
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hold
ordinary shares as part of a straddle, hedge or conversion transaction with other
investments;
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acquired
their ordinary shares upon the exercise of employee stock options or otherwise as
compensation;
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are
real estate investment trusts or regulated investment companies;
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own
directly, indirectly or by attribution at least 10% of our voting power; or
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have
a functional currency that is not the U.S. dollar.
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This
discussion is not a comprehensive description of all of the tax considerations that may be
relevant to each persons decision to purchase our ordinary shares. For example, this
discussion does not address any aspect of state, local or non-U.S. tax laws or the
possible application of United States federal gift or estate taxes.
Each
holder of our ordinary shares is advised to consult his or her own tax advisor with
respect to the specific tax consequences to him or her of purchasing, owning or disposing
of our ordinary shares, including the applicability and effect of federal, state, local
and foreign income and other tax laws to his or her particular circumstances.
Taxation
of Distributions Paid on Ordinary Shares
Subject
to the discussion below under Tax Consequences if We Are a Passive Foreign
Investment Company, a U.S. holder will be required to include in gross income as
dividend income the amount of any distribution paid on our ordinary shares, including any
non-U.S. taxes withheld from the amount paid, on the date the distribution is received to
the extent the distribution is paid out of our current or accumulated earnings and
profits, as determined for U.S. federal income tax purposes. Distributions in excess of
earnings and profits will be applied against and will reduce the U.S. holders tax
basis in its ordinary shares and, to the extent in excess of that basis, will be treated
as gain from the sale or exchange of ordinary shares. The dividend portion of such
distribution generally will not qualify for the dividends received deduction otherwise
available to corporations.
Dividends
that are received by U.S. holders that are individuals, estates or trusts will be taxed at
the rate applicable to long-term capital gains (currently a maximum rate of 15% for
taxable years beginning on or before December 31, 2010), provided that such dividends meet
the requirements of qualified dividend income. Dividends that fail to meet
such requirements, and dividends received by corporate U.S. holders, are taxed at ordinary
income rates. No dividend received by a U.S. holder will be a qualified dividend if (1)
the U.S. holder held the ordinary share with respect to which the dividend was paid for
less than 61 days during the 121-day period beginning on the date that is 60 days before
the ex-dividend date with respect to such dividend, excluding for this purpose, under the
rules of Code Section 246(c), any period during which the U.S. holder has an option to
sell, is under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect to, such
ordinary share (or substantially identical securities) or (2) the U.S. holder is under an
obligation (pursuant to a short sale or otherwise) to make related payments with respect
to positions in property substantially similar or related to the ordinary share with
respect to which the dividend is paid. If we were to be a passive foreign investment
company (as such term is defined in the Code) for any taxable year, dividends paid
on our ordinary shares in such year or in the following taxable year would not be
qualified dividends. See the discussion below regarding our passive foreign investment
company status under Tax Consequences if We Are a Passive Foreign Investment
Company. In addition, a non-corporate U.S. holder will be able to take a qualified
dividend into account in determining its deductible investment interest (which is
generally limited to its net investment income) only if it elects to do so; in such case
the dividend will be taxed at ordinary income rates.
Distributions
of current or accumulated earnings and profits paid in foreign currency to a U.S. holder
(including any non-U.S. taxes withheld from the distributions) will be includible in the
income of a U.S. holder in a dollar amount calculated by reference to the exchange rate on
the date of the distribution. A U.S. holder that receives a foreign currency distribution
and converts the foreign currency into dollars after the date of distribution will have
foreign exchange gain or loss based on any appreciation or depreciation in the value of
the foreign currency against the dollar, which will generally be U.S. source ordinary
income or loss.
U.S.
holders will have the option of claiming the amount of any non-U.S. income
taxes withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their U.S. federal income tax liability.
Individuals who do not claim itemized deductions, but instead utilize the
standard deduction, may not claim a deduction for the amount of the non-U.S.
income taxes withheld, but the amount may be claimed as a credit against the
individuals U.S. federal income tax liability. The amount of non-U.S.
income taxes that may be claimed as a credit in any taxable year is subject to
complex limitations and restrictions, which must be determined on an individual
basis by each shareholder. These limitations include rules which limit foreign
tax credits allowable for specific classes of income to the U.S. federal income
taxes otherwise payable on each such class of income. The total amount of
allowable foreign tax credits in any taxable year cannot exceed the pre-credit
U.S. tax liability for the taxable year attributable to non-U.S. source taxable
income. Distributions of current or accumulated earnings and profits will
generally be non-U.S. source passive income for U.S. foreign tax credit
purposes; however, special rules will apply if we are a United
States-owned foreign corporation. In that case, distributions of current
or accumulated earnings and profits will be treated as U.S. source and non-U.S.
source income in proportion to our earnings and profits in the taxable year of
the distribution allocable to U.S. and non-U.S. sources. We will be treated as
a United States-owned foreign corporation as long as stock representing 50% or
more of the voting power or value of our ordinary shares is owned, directly or
indirectly, by United States persons. Non-U.S. taxes allocable to the portion
of our distributions treated as from U.S. sources under these rules may not be
creditable against a U.S. holders U.S. federal income tax liability on
such portion.
62
A
U.S. holder will be denied a foreign tax credit for non-U.S. income taxes withheld from a
dividend received on the ordinary shares if (1) the U.S. holder has not held the ordinary
shares for at least 16 days of the 31day period beginning on the date which is 15
days before the ex-dividend date with respect to such dividend or (2) to the extent the
U.S. holder is under an obligation to make related payments with respect to positions in
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 required 16-day holding period.
Taxation
of the Disposition of Ordinary Shares
Subject
to the discussion below under Tax Consequences if We Are a Passive Foreign
Investment Company, upon the sale, exchange or other disposition of our ordinary
shares, a U.S. holder will recognize capital gain or loss in an amount equal to the
difference between the U.S. holders basis in the ordinary shares, which is usually
the cost to the U.S. holder of the ordinary shares, and the amount realized on the
disposition. A disposition of ordinary shares will be considered to occur on the trade
date, regardless of the U.S. holders method of accounting. Capital gain from the
sale, exchange or other disposition of ordinary shares held more than one year will be
long-term capital gain and may, in the case of non-corporate U.S. holders, be subject to a
reduced rate of taxation (long-term capital gains are currently taxable at a maximum rate
of 15% for taxable years beginning on or before December 31, 2010). Gain or loss
recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares
will generally be treated as U.S. source income for U.S. foreign tax credit purposes. The
deductibility of a capital loss recognized on the sale, exchange or other disposition of
ordinary shares is subject to limitations.
A
U.S. holder that uses the cash method of accounting calculates the dollar value of the
proceeds received on the sale as of the date that the sale settles. However, a U.S. holder
that uses the accrual method of accounting is required to calculate the value of the
proceeds of the sale as of the trade date and may therefore realize foreign currency gain
or loss. A U.S. holder may avoid realizing foreign currency gain or loss by electing to
use the settlement date to determine the proceeds of sale for purposes of calculating the
foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency
upon disposition of ordinary shares and converts the foreign currency into dollars after
the settlement date or trade date (whichever date the U.S. holder is required to use to
calculate the value of the proceeds of sale) will have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the foreign currency against the
dollar, which will generally be U.S. source ordinary income or loss.
Tax
Consequences if We Are a Passive Foreign Investment Company
For
U.S. federal income tax purposes, we will be classified as a passive foreign investment
company, or PFIC, for any taxable year in which either, after applying certain look-thru
rules, (i) 75% or more of our gross income is passive income or (ii) at least 50% of the
average value of our total assets for the taxable year produce or are held for the
production of passive income. For this purpose, cash is considered to be an asset which
produces passive income. Passive income includes dividends, interest, royalties, rents,
annuities and the excess of gains over losses from the disposition of certain assets which
produce passive income.
Based
on our income, assets, activities and market capitalization, we do not believe that we
were a PFIC for the taxable year ended December 31, 2007. However, there can be no
assurances that the United States Internal Revenue Service (IRS) will not
challenge this conclusion. There is a risk that we were a PFIC for the taxable years 2001,
2002 and 2003 as a result of our substantial cash position and the performance of our
ordinary shares during those taxable years. If we were a PFIC during 2001, 2002 and 2003,
U.S. holders who acquired or held our ordinary shares during those taxable years generally
will be subject to the PFIC rules described below regardless of whether we were a PFIC for
2007. However, if we were not a PFIC for 2007, U.S. holders who acquired our ordinary
shares in 2007 will not be subject to the PFIC rules unless we are classified as a PFIC in
future years. The tests for determining PFIC status are applied annually and it is
difficult to make accurate predictions of our future income, assets, activities and market
capitalization, which are relevant to this determination.
If
we are a PFIC, a U.S. holder of our ordinary shares could be subject to increased tax
liability upon the sale or other disposition (including gifts) of its ordinary shares or
upon the receipt of amounts treated as excess distributions, which could
result in a reduction in the after-tax return to such U.S. holder. In general, an excess
distribution is the amount of distributions received during a taxable year that exceed
125% of the average amount of distributions received by a U.S. holder in respect of the
ordinary shares during the preceding three taxable years, or if shorter, during the U.S.
holders holding period prior to the taxable year of the distribution. Under these
rules, the excess distribution and any gain on the disposition of ordinary shares would be
allocated ratably over the U.S. holders holding period for the ordinary shares. The
amount allocated to the current taxable year and any taxable year prior to the first
taxable year in which we were a PFIC would be taxed as ordinary income. The amount
allocated to each of the other taxable years would be subject to tax at the highest
marginal rate in effect for the applicable class of taxpayer for that taxable year, and an
interest charge for the deemed deferral benefit would be imposed on the resulting tax
allocated to such other taxable years. The tax liability with respect to the amount
allocated to taxable years prior to the year of the disposition or distribution cannot be
offset by net operating losses. In addition, holders of stock in a PFIC may not receive a
step-up in basis on PFIC shares acquired from a decedent.
63
As
an alternative to the tax treatment described above, a U.S. holder could elect to treat us
as a qualified electing fund (QEF), in which case the U.S. holder
would be required to include in income, for each taxable year that we are a PFIC, its pro
rata share of our ordinary earnings as ordinary income and its pro rata share of our net
capital gains as long-term capital gain, subject to a separate election to defer payment
of taxes which deferral is subject to an interest charge. Any income inclusion will be
required whether or not such U.S. holder owns our ordinary shares for an entire taxable
year or at the end of our taxable year. The amount so includable will be determined
without regard to our prior year losses or the amount of cash distributions, if any,
received from us. Special rules apply if a U.S. holder makes a QEF election after the
first taxable year in its holding period in which we are a PFIC. We will supply U.S.
holders that make a request in writing with the information needed to report income and
gain under a QEF election if we are a PFIC. A U.S. holders tax basis in its ordinary
shares will increase by any amount included in income and decrease by any amounts not
included in income when distributed because such amounts were previously taxed under the
QEF rules. So long as a U.S. holders QEF election is in effect with respect to the
entire holding period for its ordinary shares, any gain or loss realized by such holder on
the disposition of its ordinary shares held as a capital asset ordinarily would be capital
gain or loss. Such capital gain or loss ordinarily would be long-term if such U.S. holder
had held such ordinary shares for more than one year at the time of the disposition. For
non-corporate U.S. holders, long-term capital gain is generally subject to a maximum
federal income tax rate of 15% for taxable years beginning on or before December 31, 2010.
The QEF election is made on a shareholder-by-shareholder basis, applies to all ordinary
shares held or subsequently acquired by an electing U.S. holder and can be revoked only
with the consent of the IRS.
As
an alternative to making a QEF election, a U.S. holder of PFIC stock which is
marketable stock (e.g., regularly traded on the Nasdaq Global
Market) may in certain circumstances avoid certain of the tax consequences generally
applicable to holders of stock in a PFIC by electing to mark the stock to market as of the
beginning of such U.S. holders holding period for the ordinary shares. As a result
of such an election, in any taxable year that we are a PFIC, a U.S. holder would generally
be required to report gain or loss to the extent of the difference between the fair market
value of the ordinary shares at the end of the taxable year and such U.S. holders
tax basis in its ordinary shares at that time. Any gain under this computation, and any
gain on an actual disposition of the ordinary shares, would be treated as ordinary income.
Any loss under this computation, and any loss on an actual disposition of the ordinary
shares, generally would be treated as ordinary loss to the extent of the cumulative
net-mark-to-market gain previously included. Any remaining loss from marking ordinary
shares to market will not be allowed, and any remaining loss from an actual disposition of
ordinary shares generally would be capital loss. A U.S. holders tax basis in its
ordinary shares is adjusted annually for any gain or loss recognized under the
mark-to-market election. There can be no assurances that there will be sufficient trading
volume with respect to the ordinary shares for the ordinary shares to be considered
regularly traded or that our ordinary shares will continue to trade on the
Nasdaq Global Market. Accordingly, there are no assurances that the ordinary shares will
be marketable stock for these purposes. As with a QEF election, a mark-to-market election
is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by an electing U.S. holder and can only he revoked with consent of
the IRS (except to the extent the ordinary shares no longer constitute marketable
stock).
The U.S. federal income tax
consequences to a U.S. holder if we were to be a PFIC are complex. A U.S. holder should
consult with his or her own advisor with regard to those consequences, as well as with
regard to whether he or she should make either of the elections described above.
Tax
Consequences for Non-U.S. Holders of Ordinary Shares
Except
as described in Information Reporting and Backup Withholding below, 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,
our ordinary shares, unless, in the case of U.S. federal income taxes:
|
the
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, the item is attributable to a permanent establishment in
the United States, or in the case of an individual, the item is attributable to a fixed
place of business in the United States; or
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64
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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.
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Information
Reporting and Backup Withholding
U.S.
holders generally are subject to information reporting requirements with
respect to dividends paid in the United States on, or proceeds from the
disposition of, our ordinary shares. In addition, a U.S. holder may be subject,
under certain circumstances, to backup withholding at a rate of up to 28% with
respect to dividends paid on, or proceeds from the disposition of, our ordinary
shares unless the U.S. holder provides proof of an applicable exemption or
correct taxpayer identification number and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. holder of our ordinary
shares who provides an incorrect taxpayer identification number may be subject
to penalties imposed by the IRS. Amounts withheld under the backup withholding
rules are not an additional tax and may be refunded or credited against the
U.S. holders federal income tax liability, provided the required
information is furnished to the IRS.
Non-U.S.
holders generally are not subject to information reporting or backup
withholding with respect to dividends paid on, or proceeds from the disposition
of, our ordinary shares, provided that the Non-U.S. holder provides its
taxpayer identification number, certifies to its foreign status, or establishes
another exemption to the information reporting or back-up withholding
requirements.
Documents on Display
We
are required to file reports and other information with the SEC under the Securities
Exchange Act of 1934 and the regulations thereunder applicable to foreign private issuers.
You may inspect and copy reports and other information filed by us with the SEC at the
SECs public reference facilities described below. Although as a foreign private
issuer we are not required to file periodic information as frequently or as promptly as
United States companies, we generally announce publicly our quarterly and year-end results
promptly and file periodic information with the SEC under cover of Form 6-K. As a foreign
private issuer, we are also 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 other provisions in Section 16 of the
Exchange Act.
You
may review a copy of our filings with the SEC, including any exhibits and schedules, at
the SECs public reference facilities in 100F Street N.W., Washington, D.C. 20549 and
at offices of the Israel Securities Authority at 22 Kanfei Nesharim St., Jerusalem,
Israel. You may also obtain copies of such materials from the Public Reference Section of
the SEC, 100 F Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. As a foreign
private issuer we were only required to file through the SECs EDGAR system as of
November 2002. Our periodic filings are therefore available on the SECs Website
www.sec.gov from that date. You may read and copy any reports, statements or other
information that we file with the SEC, through the SECs EDGAR system available on
the SECs website and at the SEC facilities listed above. These SEC filings are also
available to the public on the Israel Securities Authoritys website at
www.isa.gov.il and from commercial document retrieval services.
Any
statement in this annual report about any of our contracts or other documents is not
necessarily complete. If the contract or document is filed as an exhibit to this annual
report, the contract or document is deemed to modify the description contained in this
annual report. We urge you to review the exhibits themselves for a complete description of
the contract or document.
ITEM 11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We
are exposed to a variety of risks, including changes in interest rates and foreign
currency exchange risk and inflation.
Interest Rate Risk
As
of December 31, 2007, we had $15.1 million in cash, cash equivalents, deposits and
marketable securities. We invest our cash surplus in bank deposits and marketable
securities. Since these investments typically carry fixed interest rate, and since our
policy and practice is to hold these investments to maturity, financial income over the
holding period is not sensitive to changes in interest rates. For more information, see
Note 5 of our 2007 consolidated financial statements.
65
Foreign Currency
Exchange Risk and Inflation
We
hold most of our cash, cash equivalents deposits and marketable securities in U.S. dollars
but incur a significant portion of our expenses, principally salaries and related
personnel expenses and administrative expenses, in New Israeli Shekels. As a result, we are
exposed to the risk that the U.S. dollar will be devalued against the New Israeli Shekel.
In 2007, and until February 29, 2008, the dollar depreciated against the NIS by
approximately 14%. This has impacted us accordingly. Further depreciation could have a
material adverse effect on our results of operation and financial condition. However, our
operations could also be adversely affected if we will be unable in the future to guard
against devaluation of the dollar against the New Israeli Shekel.
ITEM 12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not
applicable.
66
PART II
ITEM 13.
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DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
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None.
ITEM 14.
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MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
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Material Modifications
to the Rights of Security Holders
None.
Use of Proceeds
None.
ITEM 15T.
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CONTROLS
AND PROCEDURES
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Disclosure Controls and
Procedures
Our
disclosure controls and procedures are designed to ensure that information required to be
disclosed in the reports we are required to file are recorded, processed, summarized and
reported on a timely basis. Under the supervision of our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934 (the Exchange Act).
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this annual report. Our Chief Executive Officer and Chief Financial
Officer have also concluded that there were no significant changes in our internal
controls or in other factors that could significantly affect the internal controls
subsequent to that date of evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Management Annual Report
on Internal Control over Financial Reporting
Our board of directors and audit
committee are responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of our
consolidated financial statements for external purposes in accordance with generally
accepted accounting principles.
Under the supervision of our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting, as such term is defined
under Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. In making this
assessment, we used the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our internal control over financial reporting was effective as of the
end of the period covered by this annual report.
Notwithstanding the foregoing, all
internal control systems no matter how well designed have inherent limitations. Therefore,
even those systems determined to be effective may not prevent or detect misstatements and
can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Firm Report of the
Registered Public Accounting Firm
This annual report does not include an
attestation report of our registered public accounting firm assessing our internal control
over financial reporting. Our managements report was not subject to attestation by
our registered public accounting firm pursuant to current rules of the SEC that permit us
to provide only the managements report in this annual report.
67
Changes in Internal
Control over Financial Reporting
There were no changes in our internal
control over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 16A.
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AUDIT
COMMITTEE FINANCIAL EXPERT
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Our
board of directors has determined that each of Prof. Yair Aharonowitz, Mr. Arie Ovadia and
Prof. Joshua Shemer qualifies as an independent director and Mr. Arie Ovadia
qualifies as a financial expert as defined by the Nasdaq Marketplace Rules.
Our
board of directors adopted a code of ethics that applies to our chief executive officer,
chief financial officer, controller, and other persons performing similar functions.
The
code of ethics is posted on our website, addressed www.cgen.com.
ITEM 16C.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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The following
table presents the fees paid to our external auditors for professional services rendered
in the years ended December 31, 2007 and 2006:
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2007
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2006
|
|
|
|
|
|
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Audit Fees
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$
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65,000
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$
|
55,000
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Audit Related Fees
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|
|
$
|
15,000
|
|
|
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Tax Fees
|
|
|
$
|
10,000
|
|
$
|
10,000
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All Other Fees
|
|
|
$
|
10,000
|
|
$
|
10,000
|
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Total
|
|
|
$
|
100,000
|
|
$
|
75,000
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Audit
Fees are fees for professional services rendered by our principal accountant in
connection with the audit of our consolidated annual financial statements and review of
our unaudited interim financial statements, including valuation of options granted to
chairman of the board in 2007;
Audit
Related Fees are fees for professional services rendered by our principal accountant
in connection with the audit and other assignments, relating to internal accounting
functions and procedures;
Tax
Fees are fees for services rendered by our principal accountant in connection with
tax compliance, tax planning and tax advice; and
All
Other Fees are fees for other consulting services rendered by our principal
accountant to us including tax rulings for re-pricing of options in 2006 and preparation
of response letter to SEC in 2007.
ITEM 16D.
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EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
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None.
ITEM 16E.
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PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
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None.
68
PART III
ITEM 17.
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FINANCIAL
STATEMENTS
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We
have elected to furnish financial statements and related information specified in Item 18.
ITEM 18.
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FINANCIAL
STATEMENTS
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See
pages F-1 to F-31.
Index to Exhibits
Exhibit Number
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Description
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*1.1
|
Form
of Articles of Association of Issuer
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12.1
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Certification
by Chief Executive Officer pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.
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12.2
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Certification
by Chief Financial Officer pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.
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13.1
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Certification
by Chief Executive Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
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13.2
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Certification
by Chief Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
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15.1
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Consent
of Kost Forer Gabbay & Kasierer, a member of
Ernst & Young Global, dated March 31, 2008.
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15.2
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Consent
of Kesselman & Kesselman, member of
PriceWaterhouseCoopers, independent auditors
of Keddem Bioscience, dated March 31, 2008.
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15.3
|
Audit
Report by Kesselman & Kesselman, member of PriceWaterhouseCoopers, independent
auditors of Keddem Bioscience, dated March 13, 2008.
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* Filed as exhibit to our
registration statement on Form F-1, registration number 333-12316, as amended, filed with
the Securities and Exchange Commission, and is hereby incorporated by reference.
69
SIGNATURES
Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant
hereby certifies that it meets all the requirements for filing on Form 20-F and has duly
caused this annual report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Tel Aviv, State of Israel, on this 2
nd
day of April,
2008.
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COMPUGEN LTD.
By: /s/ Mr. Alex Kotzer
Alex Kotzer
President, Chief Executive Officer and Director
April 2, 2008
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70
COMPUGEN LTD. AND ITS
SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS
AS OF DECEMBER 31, 2007
U.S. DOLLARS IN
THOUSANDS
INDEX
F - 1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders of
COMPUGEN LTD.
We
have audited the accompanying consolidated balance sheets of Compugen Ltd. (the
Company) and its subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in shareholders equity and cash flows
for each of the three years in the period ended December 31, 2007. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits. We did not audit
the financial statements of Keddem BioScience Ltd., a wholly-owned subsidiary, for the
years ended December 31, 2007, 2006 and 2005 which statements reflect total assets
constituting 0% and 2% as of December 31, 2007 and 2006 and no revenues, in 2007, 2006 and
2005, respectively, of the related consolidated totals. Those statements were audited by
other auditors whose unqualified report which has been furnished to us included an
explanatory paragraph on circumstances which raise substantial doubts on Keddem BioScience
Ltd.s ability to continue as a going concern. Our opinion, insofar as it relates to
the amounts included for Keddem BioScience Ltd. is based solely on the report of the other
auditors.
We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits and
the report of the other auditors provide a reasonable basis for our opinion.
In
our opinion, based on our audits and the report of the other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2007 and 2006, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
As
discussed in Note 2l to the consolidated financial statements, in 2006 the company adopted
Statement of Financial Accounting Standards Board No. 123 (R), Share-Based
Payment.
As
discussed in Note 13i to the consolidated financial statements, in 2007 the Company
adopted Statement of FIN No. 48, Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No.109".
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Tel-Aviv, Israel
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KOST FORER GABBAY & KASIERER
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March 31, 2008
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A Member of Ernst & Young Global
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F - 2
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands (except share and per share data)
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December 31,
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Note
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2007
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2006
|
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ASSETS
|
|
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CURRENT ASSETS:
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Cash and cash equivalents
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4
|
|
$
|
1,298
|
|
$
|
6,251
|
|
Cash held in favor of other consortium partners
|
|
|
|
3
|
|
|
118
|
|
|
-
|
|
Short-term deposits and marketable securities held to maturity
|
|
|
|
5
|
|
|
13,784
|
|
|
19,152
|
|
Trade receivables
|
|
|
|
|
|
|
40
|
|
|
10
|
|
Other accounts receivable and prepaid expenses
|
|
|
|
6
|
|
|
950
|
|
|
824
|
|
Assets related to discontinued operations
|
|
|
|
|
|
|
54
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
|
16,244
|
|
|
26,638
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM INVESTMENTS:
|
|
|
Long-term deposits and marketable securities held to maturity
|
|
|
|
5
|
|
|
2,080
|
|
|
1,000
|
|
Long-term lease deposits
|
|
|
|
|
|
|
33
|
|
|
40
|
|
Investment in Evogene, net
|
|
|
|
1b
|
|
|
510
|
|
|
-
|
|
Severance pay fund
|
|
|
|
|
|
|
1,382
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,005
|
|
|
2,370
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
7
|
|
|
1,417
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
$
|
21,666
|
|
$
|
30,856
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
CURRENT LIABILITIES:
|
|
|
Trade payables
|
|
|
|
|
|
$
|
881
|
|
$
|
803
|
|
Other accounts payable and accrued expenses
|
|
|
|
8
|
|
|
1,860
|
|
|
1,991
|
|
Deferred revenue
|
|
|
|
|
|
|
150
|
|
|
75
|
|
Liabilities related to discontinued operations
|
|
|
|
|
|
|
4
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
2,895
|
|
|
3,156
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
Long-term accounts payable
|
|
|
|
|
|
|
-
|
|
|
60
|
|
Accrued severance pay
|
|
|
|
|
|
|
1,486
|
|
|
1,436
|
|
Excess of losses over investment in Evogene
|
|
|
|
1b
|
|
|
-
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
|
|
|
|
1,486
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
9, 3
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
10
|
|
|
|
|
|
|
|
Share capital:
|
|
|
Ordinary shares of NIS 0.01 par value; 50,000,000 shares
|
|
|
authorized at December 31, 2007 and 2006; and 28,323,811 and
|
|
|
28,162,202 shares issued and outstanding at December 31, 2007
|
|
|
and 2006, respectively
|
|
|
|
|
|
|
77
|
|
|
76
|
|
Additional paid-in capital
|
|
|
|
|
|
|
161,158
|
|
|
158,416
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
976
|
|
|
-
|
|
Accumulated deficit
|
|
|
|
|
|
|
(144,926
|
)
|
|
(132,754
|
)
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
|
|
|
|
17,285
|
|
|
25,738
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
|
|
|
|
$
|
21,666
|
|
$
|
30,856
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 3
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
U.S. dollars in thousands (except share and per share data)
|
|
|
Year ended December 31,
|
|
Note
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
$
|
180
|
|
$
|
215
|
|
$
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
-
|
|
|
6
|
|
|
148
|
|
Research and development expenses, net of governmental
|
|
|
and other grants amounted to $ 1,354, $ 1,670 and
|
|
|
$ 1,952 for the years 2007, 2006 and 2005,
|
|
|
respectively
|
|
|
|
3
|
|
|
8,386
|
|
|
9,117
|
|
|
9,563
|
|
Selling and marketing expenses
|
|
|
|
|
|
|
1,324
|
|
|
1,719
|
|
|
1,772
|
|
General and administrative expenses
|
|
|
|
|
|
|
2,930
|
|
|
2,377
|
|
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses *)
|
|
|
|
|
|
|
12,640
|
|
|
13,213
|
|
|
14,229
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
(12,460
|
)
|
|
(13,004
|
)
|
|
(13,731
|
)
|
|
|
|
Financial income, net
|
|
|
|
12
|
|
|
868
|
|
|
866
|
|
|
682
|
|
Other income, net
|
|
|
|
|
|
|
134
|
|
|
89
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes on income
|
|
|
|
|
|
|
(11,458
|
)
|
|
(12,049
|
)
|
|
(12,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
|
|
|
|
|
32
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
$
|
(11,490
|
)
|
$
|
(12,049
|
)
|
$
|
(12,831
|
)
|
Loss from discontinued operations
|
|
|
|
1c
|
|
|
(624
|
)
|
|
(971
|
)
|
|
(1,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
$
|
(12,114
|
)
|
$
|
(13,020
|
)
|
$
|
(13,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share from continuing
|
|
|
operations
|
|
|
|
|
|
$
|
(0.41
|
)
|
$
|
(0.44
|
)
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share from discontinued
|
|
|
operations
|
|
|
|
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
|
|
|
|
$
|
(0.43
|
)
|
$
|
(0.47
|
)
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares used in
|
|
|
computing basic and diluted net loss per share
|
|
|
|
|
|
|
28,266,273
|
|
|
27,985,957
|
|
|
27,774,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
Includes
stock based compensation, see Note 10.
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 4
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
U.S. dollars in thousands (except share and per share data)
|
|
Ordinary shares
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income
|
Total other
comprehensive
loss
|
Deferred
stock
compensation
|
Accumulated
deficit
|
Total
shareholders'
equity
|
|
Number
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2005
|
|
|
|
27,726,022
|
|
$
|
74
|
|
$
|
155,444
|
|
|
-
|
|
|
|
|
$
|
(196
|
)
|
$
|
(105,756
|
)
|
$
|
49,566
|
|
|
|
|
Employee options exercised
|
|
|
|
120,398
|
|
|
1
|
|
|
281
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
282
|
|
Amortization of deferred stock
|
|
|
compensation, net of reversal due to
|
|
|
forfeitures
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(24
|
)
|
|
-
|
|
|
(24
|
)
|
Stock-based compensation
|
|
|
|
-
|
|
|
-
|
|
|
396
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
396
|
|
Stock-based compensation relating to
|
|
|
options and warrants issued to scientific
|
|
|
advisory board members, consultants and
|
|
|
others
|
|
|
|
-
|
|
|
-
|
|
|
6
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
6
|
|
Forfeited options
|
|
|
|
-
|
|
|
-
|
|
|
(204
|
)
|
|
-
|
|
|
|
|
|
204
|
|
|
-
|
|
|
-
|
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,978
|
)
|
|
-
|
|
|
(13,978
|
)
|
|
(13,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
|
27,846,420
|
|
|
75
|
|
|
155,923
|
|
|
-
|
|
|
(13,978
|
)
|
|
(16
|
)
|
|
(119,734
|
)
|
|
36,248
|
|
|
|
|
Employee options exercised
|
|
|
|
315,782
|
|
|
1
|
|
|
560
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
561
|
|
Reclassification due to adoption of SFAS 123(R)
|
|
|
|
-
|
|
|
-
|
|
|
(16
|
)
|
|
-
|
|
|
|
|
|
16
|
|
|
-
|
|
|
-
|
|
Stock-based compensation relating to
|
|
|
options and warrants issued to scientific
|
|
|
advisory board members and consultants
|
|
|
|
-
|
|
|
-
|
|
|
(47
|
)
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(47
|
)
|
Stock-based compensation relating to
|
|
|
options issued to employees
|
|
|
|
-
|
|
|
-
|
|
|
1,996
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
1,996
|
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,020
|
)
|
|
-
|
|
|
(13,020
|
)
|
|
(13,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
28,162,202
|
|
|
76
|
|
|
158,416
|
|
|
-
|
|
|
(13,020
|
)
|
|
-
|
|
|
(132,754
|
)
|
|
25,738
|
|
|
|
|
Employee options exercised
|
|
|
|
152,347
|
|
|
1
|
|
|
294
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
295
|
|
Stock-based compensation related to the
|
|
|
issuance of shares to the CEO
|
|
|
|
9,262
|
|
|
*
|
)
|
|
28
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
28
|
|
Stock-based compensation relating to
|
|
|
options and warrants issued to scientific
|
|
|
advisory board members and consultants
|
|
|
|
-
|
|
|
-
|
|
|
28
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
28
|
|
Stock-based compensation relating to
|
|
|
options issued to employees
|
|
|
|
|
|
|
|
|
|
2,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,303
|
|
Expired options granted to subsidiary's
|
|
|
employees
|
|
|
|
-
|
|
|
-
|
|
|
89
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
89
|
|
Cumulative impact of change in accounting
|
|
|
for uncertainties in income taxes
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
(58
|
)
|
|
(58
|
)
|
Unrealized gain on the investment in Evogene
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
976
|
|
|
976
|
|
|
-
|
|
|
-
|
|
|
976
|
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,114
|
)
|
|
-
|
|
|
(12,114
|
)
|
|
(12,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
28,323,811
|
|
$
|
77
|
|
$
|
161,158
|
|
$
|
976
|
|
|
|
|
$
|
-
|
|
$
|
(144,926
|
)
|
$
|
17,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
Represent
an amount lower than $1.
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 5
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
U.S. dollars in thousands
|
|
Year ended December 31,
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
$
|
(12,114
|
)
|
$
|
(13,020
|
)
|
$
|
(13,978
|
)
|
Adjustments required to reconcile net loss to net cash used in
|
|
|
operating activities:
|
|
|
Compensation relating to options and warrants issued to
|
|
|
scientific advisory board members and consultants
|
|
|
|
28
|
|
|
(47
|
)
|
|
6
|
|
Compensation relating to options issued to employees
|
|
|
|
2,303
|
|
|
1,996
|
|
|
372
|
|
Fair value of stock-based compensation related to the shares
|
|
|
issued to the CEO
|
|
|
|
28
|
|
|
-
|
|
|
-
|
|
Depreciation
|
|
|
|
633
|
|
|
911
|
|
|
1,111
|
|
Accrued severance pay, net
|
|
|
|
(2
|
)
|
|
(28
|
)
|
|
(205
|
)
|
Interest and amortization of premium on deposits and
|
|
|
marketable securities
|
|
|
|
932
|
|
|
261
|
|
|
1,096
|
|
Capital loss (gain)
|
|
|
|
2
|
|
|
(76
|
)
|
|
-
|
|
Decrease (increase) in trade receivables
|
|
|
|
(30
|
)
|
|
(10
|
)
|
|
143
|
|
Decrease (increase) in other accounts receivable
|
|
|
and prepaid expenses
|
|
|
|
(126
|
)
|
|
(301
|
)
|
|
631
|
|
Increase (decrease) in trade payables and other accounts
|
|
|
payable and accrued expenses
|
|
|
|
(289
|
)
|
|
257
|
|
|
(486
|
)
|
Increase (decrease) in deferred revenue
|
|
|
|
75
|
|
|
(125
|
)
|
|
(76
|
)
|
Net cash used in discontinued operations operating activities
|
|
|
|
153
|
|
|
249
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
|
(8,407
|
)
|
|
(9,933
|
)
|
|
(11,110
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
|
(4,824
|
)
|
|
(3,237
|
)
|
|
-
|
|
Proceeds from redemption of deposits and marketable securities
|
|
|
|
8,180
|
|
|
22,302
|
|
|
15,488
|
|
Investment in bank deposits
|
|
|
|
-
|
|
|
(12,000
|
)
|
|
-
|
|
Purchase of property and equipment
|
|
|
|
(205
|
)
|
|
(157
|
)
|
|
(862
|
)
|
Decrease in long-term lease deposits
|
|
|
|
7
|
|
|
34
|
|
|
28
|
|
Proceeds from sale of property and equipment
|
|
|
|
1
|
|
|
82
|
|
|
-
|
|
Net cash provided by discontinued operations investing activities
|
|
|
|
-
|
|
|
3
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
|
3,159
|
|
|
7,027
|
|
|
15,058
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Exercise of options
|
|
|
|
295
|
|
|
665
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
295
|
|
|
665
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
(4,953
|
)
|
|
(2,241
|
)
|
|
4,126
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
|
6,251
|
|
|
8,492
|
|
|
4,366
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
$
|
1,298
|
|
$
|
6,251
|
|
$
|
8,492
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information on
financing activities not involving cash flow:
In December 2005, the Company issued
shares as a result of exercise of options in the amount of $ 104. The Company
received the proceeds from the exercise of the options in January 2006.
The accompanying notes are an
integral part of the consolidated financial statements.
F - 6
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
|
a.
|
Compugen
Ltd. (the Company or Compugen) is an early stage drug
and diagnostic discovery company. The Companys business is focused on
developing and using predictive computer-based discovery platforms to discover
potential therapeutic drug candidates and diagnostic biomarker candidates. The
Company current focus is drug and biomarker discovery. The Company uses
experimental biological processes to validate product candidates discovered by
our predictive platforms. The Company seeks to enter into early stage
commercial collaborations with third parties, to develop candidates that the
Company has validated. The Companys initial discovery efforts have
focused mainly on cancer, cardiovascular and immune-related diseases.
|
|
The
Companys headquarters and research facilities are located in Israel.
|
|
In
1999, the Company established a division which focused on agricultural biotechnology and
plant genomics called Evogene Ltd (Evogene). Evogene is an Israeli
corporation focused on the development of improved traits in commercially important
plants through gene discovery, genome remodeling and advanced classical breeding
techniques. Following an equity investment round with certain investors in February 2006,
in which the Companys holdings were diluted to less than 20% of Evogenes
ordinary shares and through June 2007, the investment in Evogene was accounted for under
the cost method of accounting, in accordance with Accounting Principles Board Opinion No.
18, The Equity Method of Accounting for Investments in Common Stock. During
June 2007
,
Evogene completed an Initial Public Offering (IPO) on the
Tel Aviv Stock Exchange (TASE). Prior to the IPO, the excess of losses over
investment in Evogene amounted to $ 466 and was presented as a liability included in
the Companys balance sheet that represents excess of losses absorbed by Compugen
over its investment through the deconsolidation date. The Company currently holds
2,150,000 shares, which represent approximately 11% of Evogenes outstanding
ordinary shares. As of June 30, 2007, the investment in Evogene was reclassified and
accounted for as available-for-sale marketable securities in accordance with Statement of
Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS 115). According to a lock-up agreement signed by the
Company on May 10, 2007 and according to TASE regulations, the Companys holdings in
Evogene prior to the IPO, will be restricted for a period of up to 18 months, subject to
a vesting schedule as defined in the TASE regulations. Accordingly, as of December 31,
2007, all shares held by the Company are restricted and the Company presented its
investment as available for sale according to the applicable fair value only on that part
of investment that will be released from restriction in the following year.
|
|
c.
|
In
August 2004, the Company spun off its computational chemistry activity into a
wholly-owned subsidiary, Keddem BioScience Ltd. (Keddem).
|
F - 7
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 1:
|
|
GENERAL (Cont.)
|
|
Keddem
experienced recurring losses from operations since its inception and had a net capital
deficiency of approximately $2,917,000 as of December 31, 2006. These matters raised
substantial doubts about Keddems ability to continue as a going concern. During the
second quarter of 2007, in view of the fact that there were no assurances that additional
financing would be achieved, the Company decided to suspend Keddems operations and
as such, it is a discontinued operation in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets and EITF No. 03-13, Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in
Determining Whether to Report Discontinued Operations.
|
|
Accordingly,
the results of operations, including the results for the years ended December 31,
2007, 2006 and 2005, have been reclassified in the accompanying statements of operations
as discontinued operations. The Companys balance sheets at December 31, 2007 and
December 31, 2006 reflect the net assets and net liabilities of discontinued operations
within current liabilities and current assets.
|
|
In
November 2005, Keddem received from the Investment Center of the Israeli Ministry of
Industry, Trade and Labor (the Investment Center), a grant of approximately
$400 on account of the investment made by the Company, prior to the spin off of Keddem.
In connection with the decision to discontinue Keddems operations, the Company has
reached a settlement with the Investment Center according to which it has paid $37 as a
partial refund of such amount at present and as agreed with the Investment Center,
Compugen has no further obligations to the Investment Center with respect to this grant
made to Keddem.
|
|
d.
|
In
January 2008, the Company established a wholly owned subsidiary,
Compugen UK Ltd. (Compugen UK) in the United Kingdom. Compugen
UK provides business development services to Compugen
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES
|
|
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States
("U.S. GAAP").
|
|
The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
|
F - 8
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
b.
|
Financial
statements in U.S. dollars:
|
|
The
functional currency of the Company and its subsidiaries is the U.S. dollar, as the Companys
management believes that the U.S. dollar is the primary currency of the economic
environment in which the Company and its subsidiaries have operated and expect to
continue to operate in the foreseeable future. A majority of the Companys sales
were made and are expected to be made outside Israel in U.S. dollars. The majority of the
Company and its subsidiaries operations are currently conducted in Israel and most
of the expenses in Israel are currently paid in new Israeli shekels (NIS).
|
|
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into U.S.
dollars in accordance with Statement of the Financial Accounting Standard Board (SFAS)
No. 52 Foreign Currency Translation. All transaction gains and losses of the
remeasured monetary balance sheet items are reflected in the statement of operations as
financial income or expenses, as appropriate.
|
|
c.
|
Basis
of consolidation:
|
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary Compugen USA Inc. Intercompany transactions and balances have
been eliminated upon consolidation.
|
|
d.
|
Cash
and cash equivalents:
|
|
The
Company and its subsidiaries consider all highly liquid investments that are convertible
to cash with maturities of three months or less at their acquisition date as cash
equivalents.
|
|
e.
|
Marketable
securities:
|
|
The
Company accounts for its investments in marketable securities using SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
|
|
Management
determines the appropriate classification of its investments in marketable debt at the
time of purchase and re-evaluates such determinations at each balance sheet date. To
date, all debt securities have been classified as held-to-maturity as the Company has the
positive intent and ability to hold the securities to maturity.
|
|
These
investments are stated at amortized cost, including accrued interest. Amortization of the
premium and the accretion of discounts and interest are included in financial income,
net. The Companys investment holdings have been classified in the consolidated
balance sheet according to the maturity date.
|
F - 9
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
Company accounts for its investment in structured notes in accordance with the provisions
of EITF No. 96-12, Recognition of Interest Income and Balance Sheet Classification
of Structured Notes, according to which the Company uses the Retrospective
interest method.
|
|
Securities
classified as available-for-sale are stated at fair value, with unrealized gains and
losses reported in accumulated other comprehensive income, a separate component of
stockholders equity. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in the consolidated
statements of income (see also Note 1b).
|
|
According
to Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity
Securities (SAB No. 59), management is required to evaluate each period
whether a securitys decline in value is other than temporary. The Company also
follows the guidance provided by EITF 03-1 The meaning of Other-than-Temporarily
and Its Application to Certain Investments and FAS 115-1 The Meaning of
Other-Then-Temporary Impairment and Its Application to Certain Investments, to
assess whether its investment with unrealized loss position are other than temporarily
impaired. Realized gains and declined in value judged to be other than temporary are
determined based on the specific identification method and are reported to the Statement
of Operations.
|
|
f.
|
Long-term
lease deposits:
|
|
Long-term
lease deposits include long-term deposits as security for facilities and motor vehicles
leases.
|
|
g.
|
Property
and equipment:
|
|
Property
and equipment are stated at cost, net of related investment grants and of accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets at the following annual rates:
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers, software and related equipment
|
33
|
|
Laboratory equipment and office furniture
|
6 - 30
|
|
Leasehold improvements
|
Over the term of the lease
|
|
|
|
F - 10
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
h.
|
Impairment
of long-lived assets:
|
|
The
long-lived assets of the Company and its subsidiaries are reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset with the future
undiscounted cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. During the
years 2005, 2006 and 2007, no impairment losses have been identified.
|
|
During
2007 the Company recognized revenues from a collaboration research agreement under which
the Company delivered a number of biomarkers to and performed related services for a
customer. The Company recognized revenues from this agreement in accordance with SAB 104
Revenue recognition and EITF No. 00-21, Revenue Arrangements with
Multiple Deliverables.
|
|
During
the years 2006 and 2005, the Company generated revenues from license fees for software
products, sales of services including maintenance, support, customization, professional
services, integration and installation as follows:
|
|
Revenues
from software license recognized in accordance with Statement of Position (SOP)
97-2, Software Revenue Recognition (SOP 97-2), as amended, when
persuasive evidence of an agreement exists, delivery of the product or service has
occurred, no significant obligations with regard to implementation remain, the fee is
fixed or determinable, and collectability is probable. SOP 97-2 generally requires
revenues earned on software arrangements involving multiple elements to be allocated to
each element based on the relative fair value of the elements. SOP 98-9 requires that
revenues be recognized under the Residual Method when vendor specific
objective evidence (VSOE) of fair value exists for all undelivered elements and no VSOE
exists for the delivered elements and all revenue recognition criteria of SOP 97-2, as
amended, are satisfied.
|
|
Maintenance
and support revenues included in these arrangements 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 professional services)
is determined based on the price charged for the undelivered element when sold separately
or based on renewal rate.
|
F - 11
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Revenues
from software license fees that involve customization of the Companys software to
customer specific specifications, development services, integration and installation are
recognized in accordance with SOP 81-1 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (SOP 81-1),
using contract accounting on a percentage of completion method, over the period from
signing of the license through to customer acceptance in accordance with the Input
Method. After delivery, if uncertainty exists about customer acceptance of the
software, license revenue is not recognized until acceptance. In the years ended December
31, 2006 and 2005, the Company recognized revenues in accordance with SOP 81-1 in the
amount of $ 200 and $ 178 respectively.
|
|
Deferred
revenues include amounts received from customers for which revenue has not been
recognized.
|
|
j.
|
Research
and development expenses, net:
|
|
Research
and development expenses are charged to the statement of operations as incurred.
|
|
SFAS
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
|
|
Based
on the Companys product development process, technological feasibility is
established upon completion of a working model. The Company does not incur material costs
between the completion of the working model and the point at which the products are ready
for general release. Therefore, research and development costs associated with the
development of software products are also charged to the statement of operations as
incurred.
|
|
Royalty
and non-royalty bearing grants from the Office of the Chief Scientist of the Israel
Ministry of Industry, Trade and Labor (OCS), the Bi-national
Industrial Research and Development Foundation (BIRD) and the European 6
th
framework
for funding approved research and development projects, are recognized at the time the
Company is entitled to such grants, on the basis of the research and development expenses
incurred. Such grants are presented as a reduction from research and development expenses.
|
|
The
Companys liability for severance pay for its Israeli employees is calculated
pursuant to Israels Severance Pay Law based on the most recent salary of the
employees multiplied by the number of years of employment, as of the balance sheet date.
Some employee arrangements are under section 14 to the Israeli Severance Pay Law,
pursuant to which the severance pay liability is fully covered by the deposits with the
severance pay funds. Employees are entitled to one months salary for each year of
employment or a portion thereof. The Companys liability for all of its employees is
fully provided by monthly deposits with insurance policies and by an accrual. The value
of these policies is recorded as an asset in the Companys balance sheet.
|
F - 12
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to
Israels Severance Pay Law or labor agreements. The value of the deposited funds is
based on the cash surrendered value of these policies, and includes immaterial profits
accumulated up to the balance sheet date.
|
|
Severance
expenses for the years ended December 31, 2007, 2006 and 2005 amounted to approximately $
329, $ 317and $ 422, respectively.
|
|
l.
|
Accounting
for stock-based compensation:
|
|
At
December 31, 2007, the Company maintains two stock-based employee compensation plan,
which is described more fully in Note 10. Effective January 1, 2006 the Company
adopted SFAS No. 123 (revised 2004), Share-Based Payment
,
or SFAS 123R,
which requires all share-based payments to employees, including grants of employee stock
options, restricted stock units and employee stock purchase rights, to be recognized in
the financial statements based upon their respective grant date fair values, and does not
allow the previously permitted pro forma disclosure-only method as an alternative to
financial statement recognition. SFAS 123R supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related
interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R
also requires the benefits of tax deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating cash flow as required
under previous literature. In March 2005 the Securities and Exchange Commission (SEC)
issued SAB No. 107, Share-Based Payment,
or SAB 107, which provides
guidance regarding the interaction of SFAS 123R and certain SEC rules and
regulations. The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123R. Prior to January 1, 2006, the Company accounted for those plans under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, as permitted by FASB Statement
No. 123, Accounting for Stock-Based Compensation(FASB 123). No
stock-based employee compensation cost was recognized in the Statement of Operations for
the years prior to the adoption of FAS 123(R), as all options granted under this plan had
an exercise price equal to the market value of the underlying common stock on the date of
grant.
|
|
Effective
January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R,
using the modified-prospective-transition method. Under that transition method,
compensation cost recognized includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of Statement 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the provisions of
SFAS 123R. Results for prior periods have not been restated.
|
F - 13
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
following table illustrates the effect on loss and loss per share if the Company had
applied the fair value recognition provisions of FASB 123 to options granted under the
Companys stock option plans in all periods presented. For purposes of this pro
forma disclosure, the value of the options is estimated using a Black-Scholes
option-pricing formula and amortized to expense over the options vesting periods.
|
|
|
Year ended
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss as reported
|
|
|
$
|
(13,978
|
)
|
|
Deduct (add) total stock-based compensation - intrinsic value
|
|
|
|
(24
|
)
|
|
Add - stock-based compensation - fair value
|
|
|
|
(1,423
|
)
|
|
Add - stock-based compensation - fair value
|
|
|
|
(discontinued operations)
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
|
$
|
(15,751
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share - as reported
|
|
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share - pro forma
|
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
The
pro forma effect of equity-based compensation expense on net income and earnings per
share for the year ended December 31, 2005 was estimated at the date of grant using the
Black-Scholes model based on the following assumptions for the Company (annualized
percentages):
|
|
|
Year ended
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
|
51
|
%
|
|
Risk-free interest rate
|
|
|
|
3.79
|
%
|
|
Dividend yield
|
|
|
|
0
|
%
|
|
Expected life (years)
|
|
|
|
3
|
|
|
|
|
|
m.
|
Concentrations
of credit risks:
|
|
Financial
instruments that potentially subject the Company and its subsidiaries to concentrations
of credit risk consist principally of cash and cash equivalents, structured notes,
marketable securities, trade receivables and long-term lease deposits.
|
|
Cash
and cash equivalents are invested in major banks in Israel. Management believes that the
financial institutions that hold the Companys investments are financially sound and
accordingly, minimal credit risk exists with respect to these investments.
|
F - 14
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
Companys marketable securities include investments in corporate bonds. Management
believes that those corporations are financially sound, the portfolio is well
diversified, and accordingly, minimal credit risk exists with respect to these marketable
securities.
|
|
The
Company and its subsidiaries have no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other foreign hedging
arrangements.
|
|
The
Company and its subsidiaries account for income taxes in accordance with SFAS No.109,
Accounting for Income Taxes (SFAS No.109). This Statement
prescribes the use of the liability method whereby deferred tax assets and liability
account balances are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
|
|
In
July 2006 the FASB issued Interpretation, or FIN, No. 48, Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement No. 109, or FIN 48.
FIN 48 provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an enterprises
financial statements in accordance with SFAS 109. Income tax positions must meet a
more-likely-than-not recognition threshold at the effective date to be recognized upon
the adoption of FIN 48 and in subsequent periods. The Company adopted FIN 48
effective January 1, 2007 and the provisions of FIN 48 have been applied to all
income tax positions commencing from that date. As of January 1, 2007 the
accumulated effect on the financial statements in the amount of $ 58 representing the
difference between the provisions of SFAS 109 and FIN 48 was recognized as an adjustment
to the retained earnings.
|
|
Prior
to 2007 the Company determined its tax contingencies in accordance with SFAS No. 5,
Accounting for Contingencies, or SFAS 5. The Company recorded estimated tax
liabilities to the extent the contingencies were probable and could be reasonably
estimated.
|
|
Basic
net loss per share is calculated based on the weighted average number of ordinary shares
outstanding during each year. Diluted net loss per share is calculated based on the
weighted average number of ordinary shares outstanding during each year, plus dilutive
potential in accordance with SFAS No. 128, Earnings per Share.
|
|
All
outstanding stock options have been excluded from the calculation of the diluted net loss
per share because all such securities are anti-dilutive for all periods presented. The
total number of shares related to outstanding options excluded from the calculations of
diluted net loss per share was 7,058,845, 6,652,541 and 4,733,307 for the years ended
December 31, 2007, 2006 and 2005, respectively.
|
F - 15
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
p.
|
Fair
value of financial instruments:
|
|
The
following methods and assumptions were used by the Company and its subsidiaries in
estimating their fair value disclosures for financial instruments:
|
|
The
carrying amounts of cash and cash equivalents, other accounts receivable, trade payables
and other accounts payable approximate their fair value due to the short-term maturity of
such instruments.
|
|
The
fair value of marketable securities is based on quoted market prices and does not differ
significantly from the carrying amount (see Note 5).
|
|
q.
|
Recently
issued accounting pronouncements:
|
|
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
No. 157) which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements and,
accordingly, does not require any new fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 for financial assets and liabilities, as
well as for any other assets and liabilities that are carried at fair value on a
recurring basis, and should be applied prospectively. The adoption of the provisions of
SFAS 157 related to financial assets and liabilities and other assets and liabilities
that are carried at fair value on a recurring basis is not anticipated to materially
impact the Companys consolidated financial position and results of operations.
Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS 157 for
non-financial assets and liabilities that are recognized or disclosed at fair value in
the consolidated financial statements on a non-recurring basis. The Company is currently
evaluating the impact of adopting the provisions of SFAS 157 for non-financial assets and
liabilities that are recognized or disclosed on a non-recurring basis.
|
|
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on items for
which the fair value option has been elected be reported in earnings. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years, although earlier adoption is
permitted. The Company has determined that the adoption of SFAS 159 will not have an
impact on its consolidated financial statements since it has not elected the fair value
option for any of its existing assets or liabilities as of FAS 159 effective date.
|
|
In
June 2007 the FASB ratified EITF No. 07-3, or EITF 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities. EITF 07-3 requires non-refundable advance payments for
goods and services to be used in future research and development activities to be
recorded as an asset and the payments to be expensed when the research and development
activities are performed. EITF 07-3
is effective for fiscal years beginning after December 15, 2007. The
Company is currently assessing the impact of the adoption of EITF 07-3.
|
F - 16
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, or SFAS 141R.
SFAS 141R establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the financial
statement to evaluate the nature and financial effects of the business combination. SFAS 141R
applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December
15, 2008. SFAS 141R will have an impact on accounting for future business combinations
once adopted and not on prior acquisitions. As such the adoption of the provisions of FAS
141R is not expected to impact the Companys consolidated financial statements.
|
|
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements. SFAS 160 amends Accounting Research Bulletin 51, Consolidated
Financial Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 also changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest.
SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the parent
owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008 and should be applied prospectively. However, the presentation
and disclosure requirements of the statement shall be applied retrospectively for all
periods presented. The adoption of the provisions of Statement No. 160 is not anticipated
to materially impact the Companys consolidated financial position and results of
operations.
|
F - 17
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 3:
|
|
GOVERNMENTAL AND OTHER GRANTS
|
|
The
Company received several grants as follows:
|
|
Royalty
and non-royalty bearing grants from the Office of the Chief Scientist of the Israel
Ministry of Industry, Trade & Labor (OCS), the Bi-national
Industrial Research and Development Foundation (BIRD) and the European 6
th
framework
for funding approved research and development projects, are presented as a reduction from
research and development expenses.
|
|
a.
|
Under
the OCS royalty bearing programs, the Company is not obligated to repay
any amounts received from the OCS if it does not generate any income from
the results of the funded research program. If income is generated and the
research program is successful, the Company is committed to pay royalties
at a rate of 3% to 5% of sales of the products arising from such research
program, up to a maximum of 100% of the amount received, linked to the $ US
(for grants received under programs approved subsequent to January 1,
1999, the maximum to be repaid is 100% plus interest at LIBOR). For the
years ended December 31, 2007, 2006 and 2005, the Company has an aggregate
of paid and accrued royalties to the OCS in the amount of $ 6, $ 7 and
$ 18, respectively.
|
|
b.
|
Under
the BIRD royalty bearing program, the Company is not obligated to repay
any amounts received from BIRD if no income is generated from the results
of the funded research program. If such income is generated, the Company
is required to repay BIRD 100% of the grant that the Company received
provided that the repayment to BIRD is made within the first year
following expiry of the term of the project. For every year that the
Company does not make these repayments, the amounts to be repaid
incrementally increase up to an amount of 150% in the fifth year following
expiry of the term of the project. All amounts to be repaid to BIRD are
linked to the U.S. Consumer Price Index.
|
|
c.
|
As
of December 31, 2007, the Companys aggregate contingent obligations
for payments to OCS and BIRD, based on royalty-bearing participation received
or accrued, net of royalties paid or accrued, totaled approximately to $ 5,228
and $ 500, respectively. The liability for royalties is recorded as cost of
revenues at the time the related royalty-bearing sales are recognized as
revenues in the statement of operations.
|
|
d.
|
The
Company is coordinating a consortium, SIMAP, in a three year collaborative
project, which commenced on January 1, 2006, funded by the European 6
th
framework.
The grants the Company receives from this project do not bear any
repayment royalties. The Company will enjoy the generic knowledge
accumulated in the collaborative project. As a coordinator of this
project, the Company receives the consortium funds from the European
Commission and distributes those funds to the consortium members based on
an agreement between the consortium members. As of December 31, 2007, the
Company held a pre-payment from the European Commission amounting to $ 118
that will be distributed to the consortium members during 2008, according
to the payment schedule detailed in the consortium agreement. The Company
presented this amount as Cash held in favor of other consortium
partners.
|
F - 18
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 4:
|
|
CASH AND CASH EQUIVALENTS
|
|
|
December 31,
|
|
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits in U.S. dollars (bearing an annual average interest
|
|
|
|
|
|
|
|
|
|
rate of 4.39% and 4.99% for 2007 and 2006, respectively)
|
|
|
$
|
301
|
|
$
|
4,907
|
|
|
Bank deposits in Euro (bearing an annual average interest rate of
|
|
|
|
2.57% and 2.19% for 2007 and 2006, respectively)
|
|
|
|
294
|
|
|
20
|
|
|
Bank deposits in NIS (bearing an annual average interest rate of
|
|
|
|
3.67% and 4.97% for 2007 and 2006, respectively)
|
|
|
|
344
|
|
|
462
|
|
|
Cash in banks (current accounts)
|
|
|
|
359
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,298
|
|
$
|
6,251
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5:
|
|
DEPOSITS AND MARKETABLE SECURITIES
|
|
|
Amortized cost
|
Gross unrealized
gains
|
Gross unrealized
losses
|
Fair value
|
|
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
$
|
4,864
|
|
$
|
3,196
|
|
$
|
-
|
|
$
|
-
|
|
$
|
58
|
|
$
|
11
|
|
$
|
4,806
|
|
$
|
3,185
|
|
|
Structured notes
|
|
|
|
-
|
|
|
4,956
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,956
|
|
|
Bank deposits
|
|
|
|
11,000
|
|
|
12,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,000
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,864
|
|
$
|
20,152
|
|
$
|
-
|
|
$
|
-
|
|
$
|
58
|
|
$
|
11
|
|
$
|
15,806
|
|
$
|
20,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007 and 2006, all the Companys securities above were classified as
held-to-maturity (see Note 2e).
|
|
In
the years 2007, and 2006, the Company did not sell any securities prior to their maturity
and accordingly, did not realize any gains or losses on held-to-maturity securities.
|
|
The
unrealized losses on the Companys investments in held-to-maturity securities were
caused mainly by interest rate increases, and are considered insignificant. The
contractual terms of these investments do not permit the issuer to settle the securities
at a price less than the amortized cost of the investment. Since the Company has the
ability and intent to hold these investments until the maturity date, the Company does
not consider these investments to be other-than-temporarily impaired at December 31, 2007.
|
|
The
Companys management believes that the unrealized losses for each of the bonds are
considered temporary since the Company has an intent and ability to hold debt securities
until maturity. In addition, the unrealized losses are in continuous position for a
period not more than twelve months.
|
F - 19
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 5:
|
|
DEPOSITS AND MARKETABLE SECURITIES (Cont.)
|
|
The
scheduled maturities of held-to-maturity securities at December 31, 2007, are as follows:
|
|
|
Amortized
cost
|
Estimated
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
$
|
13,784
|
|
$
|
13,778
|
|
|
Due after one year through two years
|
|
|
|
2,080
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,864
|
|
$
|
15,806
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6:
|
|
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
December 31,
|
|
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants receivable from the Office of the Chief Scientist
|
|
|
$
|
254
|
|
$
|
139
|
|
|
Government authorities
|
|
|
|
9
|
|
|
37
|
|
|
Prepaid expenses
|
|
|
|
263
|
|
|
234
|
|
|
Accrued interest
|
|
|
|
352
|
|
|
315
|
|
|
Other
|
|
|
|
72
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
950
|
|
$
|
824
|
|
|
|
|
|
|
|
NOTE 7:
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
December 31,
|
|
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
Computers, software and related equipment
|
|
|
$
|
4,883
|
|
$
|
4,852
|
|
|
Laboratory equipment and office furniture
|
|
|
|
3,692
|
|
|
2,214
|
|
|
Leasehold improvements
|
|
|
|
465
|
|
|
1,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,040
|
|
|
8,943
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
Computers, software and related equipment
|
|
|
|
4,675
|
|
|
4,537
|
|
|
Laboratory equipment and office furniture
|
|
|
|
2,652
|
|
|
1,745
|
|
|
Leasehold improvements
|
|
|
|
296
|
|
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,623
|
|
|
7,095
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
|
$
|
1,417
|
|
$
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 31, 2007, 2006 and 2005, depreciation expenses were
approximately $ 633, $ 911and $ 1,111, respectively.
|
F - 20
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 8:
|
|
OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
December 31,
|
|
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees and related accruals
|
|
|
$
|
834
|
|
$
|
1,225
|
|
|
Commitments related to European grant plan (a)
|
|
|
|
118
|
|
|
-
|
|
|
Unrecognized grants (a)
|
|
|
|
192
|
|
|
170
|
|
|
Consultants and Board members
|
|
|
|
125
|
|
|
261
|
|
|
Accrued expenses
|
|
|
|
501
|
|
|
335
|
|
|
Other
|
|
|
|
90
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,860
|
|
$
|
1,991
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9:
|
|
COMMITMENTS AND CONTINGENCIES
|
|
a.
|
The
Companys headquarters and research facilities are located in Israel.
Annual minimum future rental commitments under such non-cancelable
operating leases are approximately as follows:
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
$
|
575
|
|
|
2009
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,150
|
|
|
|
|
|
|
|
|
|
Rent
expenses for the Company and subsidiary facilities were approximately $ 560, $ 552
and $ 552 for the years ended December 31, 2007, 2006 and 2005, respectively.
|
|
b.
|
The
Company provided a bank guarantee in the amount of $ 123 in favor of
its offices lessor in Israel.
|
|
c.
|
See
Note 3 for details on commitments in favor of governmental and other grants.
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY
|
|
The
Ordinary shares confer upon their holders the right to receive notice to participate and
vote in general shareholders meetings of the Company and to receive dividends, if
declared.
|
F - 21
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY (Cont.)
|
|
In
June 1998, the Company adopted the Compugen Ltd. Share Option Plan (1998) (the 1998
Plan), which provided for the grant of options to purchase up to an aggregate of
2,500,000 ordinary shares to directors, employees and consultants of the Company and its
subsidiaries. On October 22, 2007 the board of directors resolved to cancel the then
remaining available for grant options remaining under the 1998 Option Plan
and we will therefore not make any further grants under this plan.
|
|
In
March 2000, the Company adopted the Compugen Ltd. Share Option Plan (2000) (the
2000 Plan), which provides for the grant of options to purchase 1,500,000 ordinary
shares to employees and consultants of the Company and its subsidiaries. The number of
shares authorized for issuance under the 2000 Plan automatically increases each January 1
by the lesser of 1,500,000 or 4% of the total number of the Companys then
outstanding shares or such lower amount as shall be determined by the board of directors.
|
|
On
October 22, 2007, the board of directors resolved not to have an automatic increase for
2008, of the number of shares reserved for issuance under our 2000 Option Plan.
|
|
In
general, options granted under these plans vest over a four-year period and expire 10
years from the date of issuance. The exercise price of the options granted under the
plans may not be less than the nominal amount of the shares into which such options are
exercised. Any options that are cancelled or forfeited before expiration become available
for future grants. Subject to the 2000 plan, there were 1,502,153 options to purchase
shares available for future grants as of December 31, 2007.
|
|
All
information below relates to options granted to employees, directors (including Chairman
of the Board (see Note 10d)) and consultants (see Note 10c)
|
|
Transactions
related to the grant of options to employees, directors and consultants under the above
plans during the year ended December 31, 2007, were as follows:
|
F - 22
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
Year ended December 31,
|
|
|
2007
|
|
|
Amount of
options
|
Weighted
average
exercise
price
|
|
|
|
$
|
|
|
|
|
|
Options outstanding at beginning of year
|
|
|
|
6,652,541
|
|
|
3.64
|
|
|
Options granted
|
|
|
|
1,982,000
|
|
|
2.58
|
|
|
Options exercised
|
|
|
|
(152,347
|
)
|
|
1.93
|
|
|
Options forfeited
|
|
|
|
(1,423,349
|
)
|
|
3.72
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
|
7,058,845
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at end of year (*)
|
|
|
|
6,678,162
|
|
|
3.38
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
The options expected to vest are based on the Companys historical
forfeiture rate.
|
|
Weighted
average fair value of options granted during the years 2007, 2006 and 2005 were $ 1.02,
$ 1.15 and $ 1.48.
|
|
The
aggregate intrinsic value of the Companys options is the difference between the
fair value of the Companys Ordinary shares and the exercise price, times the number
of options. The total intrinsic value of options exercised during the years ended
December 31, 2007 and 2006 was $ 154 and $ 479, respectively. The total intrinsic value
of options outstanding at December 31, 2007 was $ 16 . The total intrinsic value of
options vested and expected to vest at December 31, 2007 was $ 16.
|
|
The
following table summarizes information about options outstanding at December 31, 2007:
|
|
|
Options outstanding
|
Options exercisable
|
|
Range of
exercise price
|
Number
outstanding
at December
31, 2007
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Number
outstanding at
December 31,
2007
|
Weighted
average
exercise
price
|
|
$
|
|
Years
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.33 - 1.80
|
|
|
|
246,614
|
|
|
1.50
|
|
|
1.65
|
|
|
233,614
|
|
|
1.65
|
|
|
2.04 - 2.38
|
|
|
|
1,321,968
|
|
|
7.03
|
|
|
2.26
|
|
|
434,968
|
|
|
2.37
|
|
|
2.72 - 3.91
|
|
|
|
2,643,202
|
|
|
6.3
|
|
|
3.07
|
|
|
1,136,362
|
|
|
3.17
|
|
|
3.95 - 4.13
|
|
|
|
2,601,846
|
|
|
4.37
|
|
|
4.13
|
|
|
2,081,338
|
|
|
4.13
|
|
|
4.27 - 6.84
|
|
|
|
245,215
|
|
|
0.87
|
|
|
5.83
|
|
|
244,236
|
|
|
5.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,058,845
|
|
|
5.37
|
|
|
|
|
|
4,130,518
|
|
|
3.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007, the total unrecognized estimated compensation cost related to
non-vested stock options granted prior to that date was $ 4,093, which is expected
to be recognized over a period of up to four years. During the years ended December 31,
2007, 2006 and 2005, the Company recorded cash received from the exercise of stock
options of $ 295, $ 665 and $ 178, respectively.
|
F - 23
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY (Cont.)
|
|
In
2004, the Company extended the term of the vested employee stock options held by the
Companys former CEO on the date of his departure. As a result, the Company recorded
in 2005 compensation expenses in an amount of $ 396. The employee stock options that
were unvested as at the above date were forfeited, and the deferred stock compensation in
the amount of $ 204 was canceled.
|
|
The
Company estimates the fair value of stock options granted using the Black-Scholes- option
pricing model (except for options granted to Chairman of the Board (see note 10d)). The
option pricing model requires a number of assumptions, of which the most significant are
the expected stock price volatility and the expected option term. Expected volatility was
calculated based upon actual historical stock price movements. The expected term of
options granted is based upon historical experience and represents the period of time
that options granted are expected to be outstanding. The risk-free interest rate is based
on the yield from U.S. treasury bonds with an equivalent term. The Company has
historically not paid dividends and has no foreseeable plans to pay dividends.
|
|
The
Company used the following weighted-average assumptions for granted options:
|
|
|
Year ended December 31,
|
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
|
56
|
%
|
|
62
|
%
|
|
51
|
%
|
|
Risk-free interest rate
|
|
|
|
4.5
|
%
|
|
4.72
|
%
|
|
3.79
|
%
|
|
Dividend yield
|
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
Expected life (years)
|
|
|
|
5.9
|
|
|
2.9
|
|
|
3
|
|
|
|
|
|
|
|
The
stock based compensation expenses are based on the straight line method and included in
the following expense categories:
|
|
|
Year ended December 31,
|
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
$
|
1,244
|
|
$
|
1,400
|
|
$
|
17
|
|
|
Selling and marketing expenses
|
|
|
|
513
|
|
|
269
|
|
|
-
|
|
|
General and administrative expenses
|
|
|
|
573
|
|
|
264
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,330
|
|
$
|
1,933
|
|
$
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
March 10, 2006, the Companys Board of Directors approved a reduction in the
exercise price of 1,793,149 stock options that had been granted to employees and not
exercised as at the date of the resolution. Such employee stock options with an exercise
price higher than $ 4.13 were reduced to the share price as of the close of the last
trading day immediately preceding the time of the resolution, this was $ 4.13.
|
F - 24
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY (Cont.)
|
|
c.
|
Options
to consultants:
|
|
|
Year ended December 31,
|
|
|
2007
|
|
|
Amount of
options
|
Weighted
average
exercise
price
|
|
|
|
$
|
|
|
|
|
|
Options outstanding at beginning of year
|
|
|
|
793,065
|
|
|
3.97
|
|
|
Options granted
|
|
|
|
192,000
|
|
|
2.8
|
|
|
Options exercised
|
|
|
|
-
|
|
|
-
|
|
|
Options forfeited
|
|
|
|
(47,250
|
)
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
|
937,815
|
|
|
3.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at end of year
|
|
|
|
937,815
|
|
|
3.73
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company accounts for its options and warrants to consultants under the fair value method
of SFAS No. 123 and EITF No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. The fair value of these options was estimated using a Black-Scholes
option-pricing model with the following weighted-average assumptions for 2007, 2006 and
2005 risk-free interest rates of 4.15, 4.83% and 3.79%, respectively, dividend yields of
0%, volatility factors of the expected market price of the Companys ordinary shares
of 49%, 56% and 51%, respectively and a weighted-average contractual life of the options
of six years. As for compensation expenses, see also b above.
|
|
d.
|
On
July 31, 2007 the Company issued to its Chairman of the Board of Directors
options to purchase 500,000 ordinary shares of the Company at an exercise
price $ 2.91, which was the Companys market share price at the date
of grant. Even if vested, these options shall not be exercisable if at the
time of exercise, the Companys share price is less than $10 per
share. The vesting schedule is monthly over a period of 4 years. 83,333
options vested as of August 1, 2007 and the remaining 416,667 options
shall vest as follows: 10,416 options vest on a monthly basis over a
period of 39 months thereafter, and 10,443 options shall vest in month 40
thereafter. Each vested options shall not be exercisable if at the time of
exercise, the closing price of the Companys share is less than $ 10
per Ordinary share.
|
|
The
fair value of these options was estimated using a Monte Carlo simulation model with the
following assumptions: risk-free interest rates of 4.85%, dividend yields of 0%, expected
volatility in range between 35%-65%, and an expected term of the options of seven years.
|
|
The
total compensation cost related to this grant is $ 567. As of December 31, 2007, the
Company recognized the amount of $ 260.
|
F - 25
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands (except share and per share data)
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY (Cont.)
|
|
e.
|
The
Company granted to its CEO 9,262 of ordinary shares and accordingly recorded an
amount of $ 28, which represent the shares fair value as a compensation cost in
the financial statements.
|
|
f.
|
In
addition, on February 5, 2007, the Company extended the contractual life of
770,171 options of employees who have left the company and some of whom are
still working as Companys consultants. Pursuant to guidance of FAS 123R,
the Company treated the extension of terms as a re-measurement and since all of
the options were vested, the expense in the amount of $ 353 thousand was
recorded in the Companys financial statements
|
NOTE 11:
|
|
GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
|
|
The
Companys business is currently comprised of one operating segment, the research,
development and commercialization of therapeutic and diagnostic biomarker product
candidates. The nature of the products and services provided by the Company and the type
of customers for these products and services are similar. Operations in Israel and the
United States include research and development, sales and business development. The
Company follows SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information. Total revenues are attributed to geographic areas based on the
location of the end customer. The following represents the total revenues for the years
ended December 31, 2007, 2006 and 2005 and long-lived assets as of December 31, 2007,
2006 and 2005:
|
|
|
Year ended December 31,
|
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
$
|
180
|
|
$
|
15
|
|
$
|
423
|
|
|
Europe
|
|
|
|
-
|
|
|
200
|
|
|
218
|
|
|
Israel
|
|
|
|
-
|
|
|
-
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
$
|
180
|
|
$
|
215
|
|
$
|
646
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
$
|
1,417
|
|
$
|
1,841
|
|
|
|
|
|
United States
|
|
|
|
-
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,417
|
|
$
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2007
|
2006
|
2005
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Sales to a single customer exceeding 10%:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
|
-
|
|
|
93
|
|
|
59
|
|
|
Customer B
|
|
|
|
-
|
|
|
-
|
|
|
39
|
|
|
Customer C
|
|
|
|
100
|
|
|
-
|
|
|
-
|
|
F - 26
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands
|
NOTE 12:
|
|
FINANCIAL INCOME, NET
|
|
|
Year ended December 31,
|
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
$
|
1,031
|
|
$
|
890
|
|
$
|
757
|
|
|
Bank fees
|
|
|
|
(43
|
)
|
|
(38
|
)
|
|
(36
|
)
|
|
Exchange rate differences
|
|
|
|
(120
|
)
|
|
14
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
868
|
|
$
|
866
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13:
|
|
TAXES ON INCOME
|
|
a.
|
Measurement
of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:
|
|
Results
for tax purposes are measured in terms of earnings in NIS after certain adjustments for
increases in Israels Consumer Price Index (CPI). As explained in Note
2b, the financial statements are measured in U.S. dollars. The difference between the
annual change in Israels CPI and in the NIS/dollar exchange rate causes a further
difference between taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not
provided deferred income taxes on the difference between the functional currency and the
tax basis of assets and liabilities.
|
|
In
February 2008, the Knesset (Israeli Parliament) passed an amendment to the
Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law,
commencing 2008 and thereafter. Commencing 2008, the results for tax purposes will be
measured in nominal values, excluding certain adjustments for changes in the Consumer
Price Index, carried out in the period up to December 31, 2007. The amended law includes,
inter alia, the elimination of the inflationary additions and deductions, and the
additional deduction for depreciation commencing 2008.
|
|
b.
|
Tax
benefits under the Law for the Encouragement of Capital Investments, 1959 (the
Law):
|
|
In
1994, the production facilities of the Company related to its computational technologies
were granted the status of an Approved Enterprise under the Law. In 1996 and
2000, two expansion programs related to the Companys computational technologies
were granted the status of Approved Enterprise. In 1999 and 2003, the
production facilities of the Company related to the Companys molecular biology
wet lab were granted the status of an Approved Enterprise.
|
|
According
to the provisions of the Law, the Company has chosen to enjoy the Alternative
Benefits track. Accordingly, its income from the Approved Enterprisewill
be tax-exempt for a period of two years, commencing in the first year the Company has
taxable income (after commencement of production as defined in the Law), and subject to
an additional period of five to eight years of reduced tax rates between 10% to 25%,
depending upon the proportion of foreign ownership in the Company in each tax year. Due
to the reported losses, the benefit period has not commenced. The period during which
reduced tax rates of between 10%
and 25% apply expires on the earlier of 12 years from the commencement of production, or
14 years, from the date of approval, all in accordance with the final approval of the
investment center. Given the aforementioned conditions, the period of the reduced tax
rates (but not the two year period of tax exemption) for the two above mentioned programs
will terminate in 2008 and 2017 respectively.
|
F - 27
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands
|
NOTE 13:
|
|
TAXES ON INCOME (Cont.)
|
|
The
entitlement to the above benefits is conditional upon the Companys fulfilling the
conditions stipulated by the above Law, regulations published there under and the letters
of approval for the specific investments in Approved Enterprises. In the
event of failure to comply with these conditions, the benefits may be canceled and the
Company may be required to refund the amount of the benefits, in whole or in part
including interest and linked to the Israeli Consumer Price Index.
|
|
As
of December 31, 2007, management believes that the Company meets all of the
aforementioned conditions.
|
|
If
the Company pays a dividend out of income derived from the approved enterprise during the
tax exemption period, it will be subject to corporate tax in respect of the amount
distributed, including any taxes thereon, at the rate which would have been applicable
had it not enjoyed the alternative benefits, generally 10%-25%, depending on the
percentage of the Companys Ordinary shares held by foreign shareholders. The
dividend recipient is subject to withholding tax at the rate of 15% applicable to
dividends from approved enterprises, if the dividend is distributed during the tax
exemption period or within twelve years thereafter.
|
|
Should
the Company derive income from sources other than the Approved Enterpriseduring
the relevant period of benefits; such income will be taxable at the regular corporate tax
rate.
|
|
The
Investment Law was significantly amended effective April 1, 2005. The amendment includes
revisions to the criteria for investments qualified to receive tax benefits as an
Approved Enterprise and among other things, simplifies the approval process. The
amendment applies to new investment programs. Therefore, investment programs commencing
after December 31, 2004, do not affect the approved programs of the Company.
|
|
c.
|
Tax
benefit under the Law for the Encouragement of Industry (Taxation), 1969:
|
|
Management
believes that the Company is currently qualified as an industrial companyunder
the above law and as such, enjoys tax benefits, including:
|
F - 28
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands
|
NOTE 13:
|
|
TAXES ON INCOME (Cont.)
|
|
(1)
|
Deduction
of purchase of know-how and patents and/or right to use a patent over an
eight-year period;
|
|
(2)
|
The
right to elect, under specified conditions, to file a consolidated tax
return with additional related Israeli industrial companies and an
industrial holding company;
|
|
(3)
|
Accelerated
depreciation rates on equipment and buildings; and
|
|
(4)
|
Expenses
related to a public offering on the Tel-Aviv Stock Exchange and as of
1.1.2003 on recognized stock markets outside of Israel, are deductible in
equal amounts over three years.
|
|
d.
|
Net
operating losses carry forward:
|
|
As
of December 31, 2007, the Companys net operating loss carry forward for tax
purposes in Israel amounted to approximately $ 89 million. These net operating
losses may be carried forward
indefinitely and may be offset against future taxable income. The Company expects that
during the period in which these tax losses are utilized its income would be
substantially tax-exempt.
|
|
Compugen
Inc. is subject to U.S. income taxes. As of December 31, 2007, Compugen Inc. has net
operating loss carry forwards for federal income tax purposes of approximately $ 15
million which expires in the years 2018 to 2027. Compugen Inc. also has net operating
loss carry forwards for state income tax purposes of approximately $ 6 million which
expires in the years 2013 to 2027. Utilization of the U.S. net operating losses may be
subject to substantial annual limitation due to the change in ownership provisions
of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation
may result in the expiration of net operating losses before utilization.
|
|
As
of December 31, 2007 the net operating losses for discontinued operations are in amount
of approximately $ 3 million.
|
|
e.
|
Loss
before taxes is comprised as follows:
|
|
|
Year ended December 31,
|
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (Israel)
|
|
|
$
|
12,141
|
|
$
|
13,099
|
|
$
|
14,047
|
|
|
Foreign
|
|
|
|
(59
|
)
|
|
(79
|
)
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,082
|
|
$
|
13,020
|
|
$
|
13,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The Company and its subsidiaries deferred tax assets are
comprised of operating loss carry forward and other temporary differences. Significant
components of the Company and its subsidiaries deferred tax assets are as follows:
|
F - 29
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands
|
NOTE 13:
|
|
TAXES ON INCOME (Cont.)
|
|
|
December 31,
|
|
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Social Benefits
|
|
|
$
|
89
|
|
$
|
156
|
|
|
R&D credit
|
|
|
|
2,253
|
|
|
2,384
|
|
|
Operating loss carry forward
|
|
|
|
27,627
|
|
|
25,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
|
29,969
|
|
|
27,812
|
|
|
Valuation allowance
|
|
|
|
(29,969
|
)
|
|
(27,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company and its subsidiaries have provided valuation allowances in respect of deferred
tax assets resulting from operating loss carryforward and other temporary differences.
|
|
Management
currently believes that since the Company and its subsidiaries have a history of losses
it is more likely than not that the deferred tax regarding the loss carryforward and
other temporary differences will not be realized in the foreseeable future.
|
|
g.
|
Reconciliation
of the theoretical tax expense (benefit) to the actual tax expense (benefit):
|
|
The
main reconciling items between the statutory tax rate of the Company and the effective
tax rate are the non-recognition of tax benefits from accumulated net operating losses
carryforward among the Company and
various subsidiaries due to the uncertainty of
the realization of such tax benefits and the effect of approved enterprise.
|
|
The
Company recorded an accrual in the amount of $ 32 in respect with the withholding taxes
due to the conversion of the interest accrued on the inter-company loan.
|
|
h.
|
Tax
rates applicable to the income of the Company:
|
|
In
June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision),
2004 was passed by the Knesset (Israeli parliament) and on July 25, 2005,
another law was passed, the amendment to the Income Tax Ordinance (No. 147)
2005,according to which the corporate tax rate is to be progressively reduced to the
following tax rates: 2005 34%, 2006 31%, 2007 29%, 2008 27%,
2009 26%, 2010 and thereafter 25%.
|
|
i.
|
The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the adoption, we recognized an increase of $ 58 in the liability for
unrecognized income tax benefits.
|
F - 30
COMPUGEN LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands
|
NOTE 13:
|
|
TAXES ON INCOME (Cont.)
|
|
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits balance at January 1, 200
|
|
|
$
|
-
|
|
|
Increase for tax positions of prior years
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2007
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
NOTE 14:
|
|
RELATED PARTY TRANSACTIONS
|
|
In
August 2006, the Company entered into a Software License Agreement with Evogene, under
which the Company agreed to grant Evogene a license to certain software. In consideration
for the grant of the license, Evogene agreed to issue the Company 40,000 ordinary shares
before December 31, 2006 and an additional 20,000 ordinary shares within one month
of Evogene entering into its first significant agreement. To date, the Company has been
issued 60,000 ordinary shares under the software license agreement.
|
|
In
May 2007, the Company entered into an extension to the 2006 Software License Agreement
with Evogene, under which the Company agreed to grant Evogene a license to certain
software in the period between January 1, 2008 until December 31, 2014. In consideration
for the grant of the license, Evogene agreed to pay the Company $ 150 and issue the
Company 100,000 ordinary shares in Evogene. The payment consideration is presented in
deferred revenues as of December 31, 2007.
|
F - 31
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