UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 20-F





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





OR





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





For the fiscal year ended December 31, 2010





OR





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





OR





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





For the transition period from __________ to __________





Commission file number:




FUNDTECH LTD.


(Exact name of Registrant as specified in its charter)










STATE OF ISRAEL


(Jurisdiction of incorporation or organization)





10 Hamada Street


5th Floor


Herzliya, Israel 46140





(Address of principal executive offices)




Joseph Aulenti, General Counsel, Fundtech Corporation


30 Montgomery Street, Suite 501


Jersey City, New Jersey 07302


Telephone: (201) 215-6560


Fax: (201) 946-1313


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












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





Ordinary Shares, NIS 0.01 Par Value
NASDAQ Global Market(Title of each Class)
(Name of Exchange on which Registered)





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





None


(Title of Class)





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





None


(Title of Class)





Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 15,520,163 Ordinary Shares, NIS 0.01 par value per share





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





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





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




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


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





Large accelerated filer  ̈  Accelerated filer x  Non-accelerated filer  ̈





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





U.S. GAAP:   x





International Financial Reporting Standards as issued by the International Accounting Standards Board:    ̈





Other:    ̈





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





Item 17     ̈     Item 18  ̈





If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes  ̈  No x










CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION





Except for the historical information contained herein, the statements contained in this annual report are forward-looking statements, within the meaning of the Private Securities Litigation Report Act of 1995 with respect to our business, financial condition and results of operations. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, all the risks discussed or identified in this annual report and our other public filings, such as general economic and market conditions, changes in regulations and taxes and changes in competition and pricing environments.





We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and we are including this cautionary statement in connection with this safe harbor legislation. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance. We urge you to consider that statements which use the terms “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.





The forward-looking statements in this annual report are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements, include the achievement of the anticipated levels of profitability, growth, cost, the timely development and acceptance of new products, the impact of competitive pricing, the impact of general business and global economic conditions and other important factors described from time to time in the reports filed by us with the United States Securities and Exchange Commission (the “SEC”).





As used in this annual report, the terms “we,” “us,” “our,” the “Company” and “Fundtech” mean Fundtech Ltd. and its subsidiaries, unless the context requires otherwise or if otherwise indicated. All reference to dollars or “$” are to United States Dollars and all references to “NIS” are to New Israeli Shekels and all references to “Ordinary Shares” are to our Ordinary Shares, NIS 0.01 par value per share.










TABLE OF CONTENTS





PART I

2ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
2ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE.
2ITEM 3.
KEY INFORMATION.
2ITEM 4.
INFORMATION ON THE COMPANY.
11ITEM 4A.
UNRESOLVED STAFF COMMENTS.
20ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
20ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
34ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
46ITEM 8.
FINANCIAL INFORMATION.
49ITEM 9.
THE OFFER AND LISTING.
50ITEM 10.
ADDITIONAL INFORMATION.
51ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
64ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
65PART II

66ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
66ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
66ITEM 15.
CONTROLS AND PROCEDURES.
66ITEM 16.
[RESERVED]
66ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT.
66ITEM 16B.
CODE OF ETHICS.
67ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
67ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
68ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
68ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
69ITEM 16G.
CORPORATE GOVERNANCE.
69PART III

70ITEM 17.
FINANCIAL STATEMENTS.
70ITEM 18.
FINANCIAL STATEMENTS.
70ITEM 19.
EXHIBITS.
70




1




PART I





ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS





Not Applicable.





ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE





Not Applicable.





ITEM 3.  KEY INFORMATION





Selected Financial Data.





The following selected consolidated financial data for each of the years in the three-year period which ended December 31, 2010 and at December 31, 2010 and 2009 are derived from our audited consolidated financial statements set forth elsewhere in this report, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The selected consolidated financial data for the years ended December 31, 2007 and December 31, 2006, respectively, and at December 31, 2008, 2007 and 2006 are derived from other audited consolidated financial statements not appearing in this report which have also been prepared in accordance with U.S. GAAP. All of the financial data set forth below are in thousands (except per share amounts). You should read the following selected consolidated financial data in conjunction with “Operating and Financial Review and Prospects” and the consolidated financial statements and notes thereto appearing elsewhere herein. Historical results are not necessarily indicative of any results to be expected in any future period.





2010


2009


2008


2007


2006FINANCIAL DATA:Total revenues

$
141,938


$
117,757


$
121,037


$
104,634


$
85,509Operating income


13,258



4,044



2,984



6,117



2,731Net income


12,532



4,673



1,240



7,107



3,751Basic earnings per share

$
0.82


$
0.31


$
0.08


$
0.46


$
0.25Diluted earnings per share

$
0.79


$
0.30


$
0.08


$
0.43


$
0.24Cash, cash equivalents, short-term short term marketable investments and securities

$
53,245


$
42,151


$
40,620


$
42,001


$
47,167Long-term marketable securities


753



774



2,204



12,847



-Working capital


60,392



49,527



48,319



45,815



54,794Total assets


157,460



140,352



138,994



128,272



112,063Shareholders’ equity


115,462



108,182



106,147



102,132



89,786





Israeli Securities Law allows Israeli companies, such as ours, whose securities are listed on both the Tel Aviv Stock Exchange and on certain stock exchanges in the United States (including the NASDAQ Global Market) to report exclusively under the SEC rules and to utilize U.S. GAAP. All financial statements included in this report and all financial information released in Israel are presented solely under U.S. GAAP.





B.           Capitalization and Indebtedness.





Not applicable.





C.           Reasons for the Offer and Use of Proceeds.





Not applicable.





2





D. Risk Factors.





You should carefully consider the risks described below. The risks described below are not the only ones facing our company. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our Ordinary Shares could decline due to any of these risks, and you may suffer a loss on your investment.





Risk Relating to Our Business





The length of a sales cycle is variable, can be long and involves the expenditure of significant resources on our part, and may never result in actual sales.





The sales cycle, from our initial contact with a potential customer to the signing of a license agreement, has historically been variable and sometimes does not result in actual sales. During the recent economic downturn which began in 2008, we observed a protraction in the length of sales cycles.  These lengthened cycles have continued even after the downturn, particularly at larger global banks and U.S.-based banks, where any significant expenditure is approached with greater caution than before the downturn. We typically must educate our potential customers about the use and benefit of our products and services, which can require the investment of significant time and resources. In addition, the purchasing decisions of our customers are subject to the uncertainties and delays of the budgeting, approval and competitive evaluation processes that typically accompany significant capital expenditures, particularly in an uncertain economy. If our sales cycles continue to lengthen appreciably, our quarterly operating results may become less predictable and may fluctuate more than in the past. Additionally, a number of potential clients decide which products to buy through a request for proposal process. In those situations, we run the risk of investing significant resources in a proposal that does not result in revenue, whether because a competitor obtains the desired contract from the customer, the customer decides not to proceed with the project or the customer decides to internally develop the product. Due to the relatively large size of some orders, a lost or delayed sale could have a material adverse effect on our quarterly revenue and operating results.





We are, and expect to continue to be, dependent upon a limited number of customers for a significant portion of our future revenues.





We believe that the market for our payments, cash management and securities software products and services consists of a relatively small number of customers who have very large potential accounts. These large accounts may from time to time comprise a significant percentage of our revenues in a specific fiscal period. Our failure to attract and retain these large accounts may have a material adverse effect on our business, financial condition and results of operations.





We have entered into contracts with three large customers for the sale of one of our payments products. Sales to these customers accounted for 20.6%, 20.8%, and 22.1% of our revenues for 2010, 2009 and 2008, respectively. The cessation of projects of this size, which have an indefinite term, could have a material adverse effect on our business, financial condition and results of operations. Presently, these major customers consist of large global banks which had been significantly impacted by the global recession. Although larger financial institutions are again reentering the marketplace for financial transaction solutions following the downturn, a significant portion of our anticipated future revenues may be impacted by the financial issues continuing to face these larger customers.  See Item 5, “Operating Results and Financial Review and Prospects – Major Customers.”




Greater market acceptance of our competitors’ products or bank reliance on internally developed products could result in reduced revenues.





While the market for our solutions continues to develop, with expansion into Asia and South America showing signs of accelerating, competition for the business of global or national and regional financial services organizations that seek to support complex and sophisticated products remains intense. Also, some larger financial institutions have developed products that are similar in function to our global payments, FX settlement and cash management products, in lieu of purchasing our products. These internally developed solutions may then be marketed to other banks or implemented in banks that they have acquired. Thus we may compete with both software vendors within our industry and the in-house IT departments of certain of our potential clients. In some instances, customers may seek to develop part of a given solution, such as interfaces, in an attempt to retain staff and/or control costs. This could result in a reduction of successful bid projects.





Our competitors currently include, but are not limited to, BankServ, Logica PLC, Digital Insights, Inc., S1 Corporation, Fidelity Information Services, Banklink, TietoEnator, Sunguard, Smartstream Technologies, ACI Worldwide Inc., Dovetail, Fiserv, GIFTS Software, Bottomline, Technologies, Nucleus Software, Goldleaf Financial Solutions, EFunds, OB, Harbor Payments, Clear2Pay and Sterci.





3




We believe that there are several principal competitive factors in the industry in which we operate, including:





·
product performance;




·
technical features;




·
compatibility with existing operating systems;




·
reliability;




·
security;




·
relational database power;




·
price;




·
customer service and support; and




·
ease of use.




Our competitors may be in a better position to devote significant funds and resources to the development, promotion and sale of their products, thus enabling them to respond more quickly to new or emerging technologies and changes in customer requirements or preferences. We also expect that competition will intensify as a result of consolidation within the industry and in response to the recent global economic downturn. Additionally, as we develop new products, we may begin to compete with companies with which we have not previously competed.





We may be unable to differentiate our products from the products of our competitors or successfully develop and introduce new products that are less costly than, or superior to, those of our competitors. In addition, existing and new competitors may establish relationships with our existing and potential customers. This could have a material adverse effect on our ability to compete effectively.





A number of our existing and potential competitors have, or are likely to have, more extensive engineering, development, marketing, distribution, financial, technological and personnel resources than us. This increased competition may result in our loss of market share and pricing pressure which may have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that competition with both competitors within our industry and with the in-house IT departments of certain of our clients or prospective clients will not result in price reductions for our products and services, fewer customer orders, deferred payment terms, reduced revenues or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. See Item 4, “Information on the Company — Business Overview — Competition.”





Marketing and distributing our products outside of the United States may require increased expenses and greater exposure to risks that we may not be able to successfully address.





We market and sell our products and services throughout the world. We received 59.3% of our total revenues in 2008, 58.8% of our total revenues in 2009 and 56.3% of our total revenues in 2010 from sales to customers located outside of the United States. The continued market and sale of our products outside the United States as well as the expansion of our existing operations and entry into additional international markets requires significant management attention and financial resources. We are subject to a number of risks customary for international operations, including:





·
economic or political changes in international markets;




·
currency and exchange rate fluctuations;




·
greater difficulty in accounts receivable collection and longer collection periods;




·
difficulties and costs of staffing and managing foreign operations;




·
the uncertainty of protection for intellectual property rights in some countries, particularly in southeast Asia; and




·
multiple and possibly overlapping tax structures.




4




We may be unable to expand our development or support organizations which may hinder our ability to grow and meet customer demands; on the other hand, rapid expansion of these resources could increase our cost and reduce our operating profit.





We increasingly have the need to supplement our technical and customer support staff to support both new customers and the expanding needs of existing customers. With the addition of Fundtech India in 2004, we are increasingly looking to India to source these requirements. Since our products are complex, we expect that the training process will continue to require a significant period of time before these employees and other newly hired personnel can support our customers. Qualified individuals are in demand throughout the software industry globally and there is significant competition for qualified personnel. Competition for qualified staff may also lead to increased labor and personnel costs. If we do not succeed in retaining our personnel or in attracting new qualified employees, our business could suffer significantly.





If we are unable to accurately predict and respond to market developments or demands, our business will be adversely affected.





The market for financial institutions payments and cash management solutions continues to develop and evolve. The constant development and evolution of this market makes it difficult to predict demand for our products. We cannot guarantee that the market for our products will grow or that our products will become widely accepted. If the market for our products does not develop in the time frames and with the demand that we have projected, our future revenues and profitability will be adversely affected. In addition, changes in technologies, industry standards, the regulatory environment, customer requirements and new product introductions by existing or future competitors could render our existing products obsolete and unmarketable, or require us to develop new products. A significant increase in the number of customers and/or a significant increase in our development of new product offerings would require us to expend significant amounts of money, time and other resources to meet demand. These expenditures could strain our personnel and financial resources.





Undetected defects may increase our costs and impair the market acceptance of our products and technology.





Our software products are complex and may contain undetected defects, particularly when first introduced or when new versions or enhancements are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of customer environments into which our products are deployed. Despite testing conducted by us and our customers, some defects have been discovered after commercial shipment of our products. Our products are frequently more critical to our customers’ operations compared to other software solutions used by such customers, and as a result, our customers may have a greater sensitivity to product defects relating to our products.





The discovery of defects in current or future products and versions after the start of commercial shipment may result in:





·
a delay or failure of our products to achieve market acceptance;




·
adverse customer reaction;




·
negative publicity and damage to our reputation;




·
diversion of resources; and




·
increased service and maintenance costs.







Defects could also subject us to legal claims, particularly given that the applications we provide serve important functionalities for our customers. Although our license agreements contain limitation of liability provisions, these provisions may not be sufficient to protect us against such legal claims. The sale and support of our products, as well as our professional services, may also expose us to product liability claims.





Our business is affected by adverse conditions in the financial services industry and the global economy in general.





Our customers are highly concentrated in the financial services industry, which was directly affected both by an industry-specific crisis and the general economic downturn.  While major financial institutions have generally recovered from this crisis, we believe that financial institutions, particularly in the United States, continue to be cautious regarding expenditures. We should also note that financial institutions around the world have consolidated and may continue to consolidate which somewhat decreases the overall potential market for our products and services. These factors, as well as other changes occurring in the financial services industry, could have a material adverse effect on our business, financial condition and results of operations.





5




Any future acquisitions of companies or technologies may distract our management and disrupt our business.





We have in the past made a number of acquisitions and may in the future acquire or make investments in complementary businesses, technologies, services or products, if appropriate opportunities arise. We may also engage in discussions and negotiations with companies about acquiring or investing in those companies’ businesses, products, services or technologies. We cannot provide assurances that we will be able to identify future suitable acquisition or investment candidates, or if we do identify suitable candidates, that we will be able to make the acquisitions or investments on commercially acceptable terms or at all or that we will have sufficient available resources for such acquisitions or investments. Additionally, if we acquire or invest in another company, we could have difficulty assimilating that company’s personnel, operations, customers, technology or products and service offerings into our own. The key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. We may incur indebtedness or issue equity securities to pay for any future acquisitions, which would adversely impact our balance sheet or dilute our existing shareholders (as applicable).





We may be unable to adequately protect our proprietary rights in our internally developed technology, which may limit our ability to compete effectively.





We have spent considerable time, effort and money developing our next generation software. As a general proposition, the larger the number of software installations, the greater the number of individuals who gain access to our products, thereby increasing the risk of misappropriation and infringement.  During the period from 2006 through 2010, Global PAYplus® has been installed at 15 banks, PAYplus USATM at 141 banks and Global CASHplus at 17 banks and CASHplus® has been installed at or operating on behalf of 114 banks. As we continue to increase the number of our product installations, we increase the risk that we may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.





Our success and ability to compete are substantially dependent upon our internally developed technology. Our intellectual property consists primarily of proprietary or confidential information that is not subject to patent protection. We have relied on a combination of technical leadership, trade secret, copyright and trademark law and nondisclosure agreements to protect our proprietary know-how. We have no patents or patent applications pending for our products and services. Unauthorized third parties may attempt to copy or obtain and use the technology protected by these rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States.





Additionally, we have placed, and in the future may place, our software source code in escrow. The software source code may, under specified circumstances, be made available to our customers. In certain limited instances, we have also provided our software source code directly to customers. This may increase the likelihood of misappropriation or other misuse of our software.




Substantial litigation over intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the functionality of products in different industry segments overlaps.





We believe that many industry participants have filed or intend to file patent and trademark applications covering aspects of their technology. We cannot be certain that they will not make a claim of infringement against us based on our products and technology. Any claims, with or without merit, could:





·      be expensive and time-consuming to defend;




·      cause product shipment and installation delays;




·      affect the decision by prospective customers to enter into agreements with us;




·      divert management’s attention and resources; or




·      require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component.




If we are required to enter into royalty or licensing agreements, such agreements may not be available on acceptable terms, if at all. Therefore, a successful claim of product infringement against us and our failure or inability to license the infringed or similar technology at all or to license the infringed or similar technology for reasonable commercial terms, could have a material adverse effect on our business, financial condition and results of operations.





6




Government regulatory policy for the financial services industry affects our business.





Our current and prospective customers, which include state and federally chartered banks and savings and loan associations, operate in markets that are subject to extensive and complex regulation. While we are not ourselves directly subject to this regulation, our products and services must be designed to work within the regulatory constraints under which our customers operate. Given the intense regulatory scrutiny and increased regulatory burden to which the financial services industry is subject and will likely continue to be subject in light of the recent crisis in financial markets, this may be a continuous challenge for us in the design of our products and services. The inability of our products and services to work properly within the regulatory framework may have a material adverse effect on our business, financial condition and results of operations.





Risks Related to our Ordinary Shares





Our stock ownership is highly concentrated, and, as a result, certain shareholders may influence our affairs significantly.





Clal Industries and Investments Ltd., or Clal, owns approximately 55.7% of our Ordinary Shares, or 56.4% when taken together with Ordinary Shares owned by Clal’s affiliate IDB Development Corporation, Ltd. As a result, Clal has the voting power to elect a majority of our Board of Directors and to significantly influence our policies, business and affairs, and also has the ability to influence the outcome of any corporate transaction or other matter, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration in control may have the effect of delaying, deterring or preventing a change of control that otherwise would yield a premium upon the price of our Ordinary Shares. This concentration of ownership also reduces the amount of stock in the public float, which may impact share trading values.





We are trending toward a lower percentage of license fees and a greater percentage of service revenues in our revenue models, which tends to compress our margins and adversely affect our share price.





Sales to major clients generally already contain a significant services component to implement software globally and also require significant modifications to meet customer specific demands.  Additionally, the increasing selection of our application service provider (“ASP”) hosted solution in lieu of our licensed solution, particularly with respect to our CASHplus software, has reduced overall margins and may result in a change in the way our shares are valued by the marketplace.  Although we continue to believe that a solutions and hosting based revenue model has numerous advantages, particularly in recurring revenue and visibility into our future earnings, the marketplace may view our share value in light of our solutions-based business differently than it views such value when considering our license-based business. This may lead to volatility in our share price.





The market price of our Ordinary Shares may be volatile.





The stock market in general, including the technology market sector in particular, has historically experienced price and volume fluctuations. Additionally, it is unclear when technology company stocks will fully rebound from the decline in market values experienced during the recent downturn.  For additional information on our stock price performance during this period, see the table in Item 9, “The Offer and Listing — Market Price Information.” Market fluctuations could adversely affect the market price of our Ordinary Shares. The market price of our Ordinary Shares may fluctuate substantially due to a variety of factors, including:





·
the general state of the securities markets (with particular emphasis on the technology and Israeli sectors thereof);




·
any actual or anticipated fluctuations in our financial condition and operating results;




·
public announcements concerning us or our competitors, or the financial services industry;




·
our inability to meet any guidance or forward looking information, which we provide from time to time;




·
the introduction or market acceptance of new service offerings by us or our competitors;




·
changes in security analysts’ financial estimates;




·
changes in accounting principles;




·
tender offers for our shares initiated due to Israeli law requirements;




·
sales of our Ordinary Shares by existing shareholders;




·
the loss of any of our key personnel; and




·
changes in political conditions in Israel.




7





In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business.





We may experience significant fluctuations in our quarterly results, which makes it difficult for investors to make reliable period-to-period comparisons and may contribute to volatility in the market price for our Ordinary Shares.





Our quarterly revenues, margins and results of operations have fluctuated in the past as a result of various factors, some of which are outside our control. These factors include:





·
changes in global economic conditions in general, and conditions in our industry and target markets in particular;




·
impact of unrest or political instability in the places we do business, such as in Israel;




·
currency fluctuations;




·
the size, timing and shipment of orders for our products and services;




·
our customers’ budget cycles;




·
the timing of the release of new product upgrades;




·
any lengthening of our sales cycle;




·
changes in the proportion of service and license revenues;




·
price and product competition;




·
enhancements or introductions of products and services by us and our competitors;




·
the mix of product sales;




·
software “bugs” or other product quality problems;




·
product pricing;




·
our effectiveness in providing customer support;




·
delays in implementation; and




·
consolidation of our customers.




A substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of when revenue is generated. If our projected revenue does not meet our expectations as occurred in the latter part of 2008, we are likely to experience a shortfall in our operating profit relative to our expectations. In addition, our results may be impacted by fluctuations in the values of currencies in which certain of our fees are paid, such as British Pounds and Euros, against the United States Dollar, our reporting currency. As a result, we believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful and that you should not rely on them as an indication of future performance. It is also possible that our quarterly results of operations may be below the expectations of public market analysts and investors. Should this happen, the price of our Ordinary Shares may decrease.





Risks Related to Our Location in Israel





Political, economic and military conditions in Israel and the Middle East as a whole, could negatively impact our business.





Political, economic and military conditions in Israel have a direct influence on us because one of our significant research and development facilities and one of our executive offices is located there. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Hostility between factions in neighboring countries, varying in degree and intensity, has led to security and economic problems for Israel. Any major hostilities involving Israel, acts of terrorism or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. We cannot assure you that ongoing hostilities related to Israel, or the recent events in Egypt and other Middle Eastern nations will not have a material adverse effect on our business or on our share price. Several Arab and Muslim countries still restrict business with Israeli companies and these restrictions may have an adverse impact on our operating results, financial condition or the expansion of our business. Any on-going or future violence between Israel and the Palestinians, armed conflicts, terrorist activities, tension along the Israeli-Lebanese or the Israeli-Syrian borders, or escalating political instability in the region could disrupt international trading activities in Israel and may materially and negatively affect our business conditions and could harm our results of operations. Certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms and others doing business with Israel and Israeli companies. Thus, there have been sales opportunities that we could not pursue and there may be such opportunities in the future from which we will be precluded. We are also precluded from marketing our products to certain of these countries due to U.S. and Israeli regulatory restrictions. In addition, such boycott, restrictive laws, policies or practices may change over time and we cannot predict which countries, as well as whether certain companies and organizations, will be subject thereto. The boycott, restrictive laws, policies or practices directed towards Israel or Israeli businesses could, individually or in the aggregate, have a material adverse affect on our business in the future.





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Some of our officers and employees are currently obligated to perform annual reserve duty, depending on their age and position in the Israeli army. Additionally, they may be called to active reserve duty at any time under emergency circumstances for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our senior officers or key employees due to military service, and any significant disruption in our operations could harm our business. We believe that we have operated effectively given these requirements since we began operations. Nevertheless, the full impact on our workforce or business if some of our executive officers and employees will be called upon to perform military service, especially in times of national emergency, is difficult to predict. Although we have operated effectively under these requirements since we began operations, we cannot assess the full impact of these requirements on our workforce or business if political and military conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.





It may be difficult to effect service of process and enforce judgments against our directors and officers in Israel.





We are organized under the laws of the State of Israel. Many of our executive officers and directors named in this annual report are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of those persons. It may also be difficult to enforce civil liabilities under United States federal securities laws in actions initiated in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.





We may be adversely affected if the New Israeli Shekel appreciates relative to the dollar or if the rate of inflation in Israel exceeds the rate of devaluation (if any) of the New Israeli Shekel against the dollar.





Most of our revenues are in United States Dollars, Euros or British Pounds Sterling, while a portion of our expenses, principally salaries and related personnel expenses, are in New Israeli Shekels, or NIS. As a result, we are exposed to the risk that the NIS will appreciate relative to the dollar or, if the NIS devalues relative to the dollar, that the rate of inflation in Israel will exceed that rate of devaluation or that the timing of such devaluation will lag behind inflation in Israel.  Any such trend has the effect of increasing the dollar cost of our operations.  Based on the representative exchange rates reported by the Bank of Israel for each year in comparison to the prior year, in 2010, the NIS appreciated relative to the dollar by 5.1%, and the Israeli inflationary rate was 2.7%, thereby furthering the adverse impact of such appreciation, while in 2009, the NIS devalued relative to the dollar by 9.6%, and the Israeli inflationary rate was 3.9%, thereby offsetting, in part, the favorable impact of such devaluation on our dollar-measured results of operations. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation of the NIS against the dollar. If the dollar cost of our operations in Israel continues to increase, our dollar-measured results of operations will be adversely affected.





The tax benefits available to us from government programs may be discontinued or reduced at any time, which would likely increase our taxes.





We have received government grants in the past and currently receive tax benefits under Israeli government programs. To maintain our eligibility for these programs and benefits, we must continue to meet specified conditions. Some of these programs restrict our ability to transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay increased taxes. The government of Israel has reduced the benefits available under these programs recently and these programs and tax benefits may be discontinued or reduced in the future.





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The government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions.





From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel (“OCS”) under the Encouragement of Industrial Research and Development, 1984, or the Research and Development Law, and the regulations promulgated thereunder. The terms of these grants prohibit us from manufacturing more than 10% of the products developed using these grants outside of Israel without special approvals. There is no assurance that we will receive such OCS approval. Even if we receive approval to manufacture these products outside of Israel, we may be required to pay increased royalties, up to 300% of the grant amount plus interest, depending on the portion of the total manufacturing volume that is performed outside of Israel. A recent amendment to the Research and Development Law permits the OCS, among other things, to approve the transfer of manufacturing rights to outside of Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The Research and Development Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program. Despite these leniencies afforded under the Research and Development Law and the recent amendment adopted thereto, if we desire to transfer more than an insubstantial portion of our manufacturing processes to contractors outside of Israel, we may be required to obtain the consent of the OCS and pay higher royalties to the OCS, which may reduce or eliminate entirely the profitability of effecting such a transfer.





The Research and Development Law also provides that the technology and know-how developed under an approved research and development program may not be transferred to third parties inside or outside of Israel without the approval of the OCS (and, in the case of a transfer outside of Israel, absent certain circumstances). Such approval is not required for the sale or export of any products resulting from such research or development. Even if we receive approval to a transfer of technology outside of Israel, a percentage of the consideration paid for such transfer equal to the ratio of the aggregate amount of OCS grants received by us to the aggregate amount of all cash investments made in such technology, including the OCS grants, must be paid to the OCS.





These restrictions may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. In addition, if we fail to comply with any of the conditions imposed by the OCS, we may be required to refund any grants previously received, together with interest and penalties, and we may be subject to criminal charges.





The tax benefits to which we are currently entitled from our Approved Enterprise program require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to pay increased taxes and would likely be denied these benefits in the future.





The Investment Center of the Ministry of Industry, Trade and Labor has granted “Approved Enterprise” status to investment programs at our former facility in Ramat Gan. Assuming that we receive approval from the Investment Center for the transfer of these Approved Enterprise programs to our new facility in Herzliya, when we begin to generate taxable income from these programs, the portion of our income derived from such programs will be exempt from tax for a period of two years and will be subject to a reduced tax for an additional five to eight years thereafter, depending on the percentage of our share capital held by non-Israelis.  The benefits available to an Approved Enterprise Program are dependent upon the fulfillment of conditions stipulated under applicable law and in the certificate of approval. If we fail to comply with these conditions, in whole or in part, or fail to get approval in whole or in part, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and would likely be denied these benefits in the future. The amount by which our taxes would increase will depend on the difference between the then applicable tax rate for non-Approved Enterprises and the rate of tax, if any, that we would otherwise pay as an Approved Enterprise, and the amount of any taxable income that we may earn in the future.  For additional information regarding our Approved Enterprise status, see Item 10, “Additional Information — Taxation – Israeli Income Tax Considerations — Tax Benefits Under the Law for the Encouragement of Capital Investments, 5719-1959.”





Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.




We are incorporated under Israeli law.  The rights and responsibilities of holders of our Ordinary Shares are governed by our Memorandum of Association, Articles of Association and Israeli law.  These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations.  In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising rights and fulfilling obligations, toward the company and other shareholders and to refrain from abusing power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters.  Israeli law provides that these duties are applicable in shareholder votes at the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and transactions involving interests of officers, directors or other interested parties which require the shareholders’ approval.  In addition, a controlling shareholder of an Israeli company or a shareholder who knows that he or she possesses the power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s articles of association, the power to appoint or prevent the appointment of an office holder in the company, or any other power with respect to the company, has a duty of fairness toward the company.  The Israeli Companies Law 5759-1999 as amended, does not establish criteria for determining whether or not a shareholder has acted in good faith.  Moreover, the law is relatively new and there is no case law available on the duty of a non-controlling shareholder to act in good faith.





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Provisions of Israeli law may delay, prevent or impede an acquisition of us, which could prevent a change of control that would otherwise yield a premium to our shareholders.





Israeli corporate law regulates mergers and tender offers, requires tender offers for acquisitions of shares above specified thresholds and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. These provisions could delay, prevent or impede an acquisition of us that might otherwise yield to our shareholders a premium upon the market price of our Ordinary Shares. See Item 10, “Additional Information-Mergers and Acquisitions” in this annual report, for additional discussion about some anti-takeover effects of Israeli law.





Our United States investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.





Although we believe that we were not a passive foreign investment company, or PFIC, in 2010, we cannot assure you that the United States Internal Revenue Service will agree with our position. We would be a PFIC if (i) 75% or more of our gross income in a taxable year (including our pro rata share of the gross income of any company treated as a corporation for U.S. federal income tax purposes, in which we are considered to own directly or indirectly 25% or more of the shares by value) is passive income, or (ii) the value of our assets averaged quarterly over our the taxable year (including our pro rata share of the assets of any company treated as a corporation for U.S. Federal income tax purposes in which we are considered to own directly or indirectly 25% or more of the shares by value) that produce, or are held for the production of, passive income is at least 50%. Passive income includes interest, dividends, royalties, rents and annuities. If we are or become a PFIC, our U.S. investors could suffer adverse tax consequences, including being taxed at ordinary income tax rates and subject to an interest charge on gain from the sale or other disposition of our Ordinary Shares and on certain “excess distributions” with respect to our Ordinary Shares. For additional information regarding our PFIC status, see Item 10, “Additional Information — Taxation - United States Federal Income Taxation Considerations - Passive Foreign Investment Company Status.”





ITEM 4.  INFORMATION ON THE COMPANY.





History and Development of the Company





Both our legal and commercial name is Fundtech Ltd. We were incorporated in Israel in 1993 under the Israeli Companies Ordinance (New Version), 1983 (the “Companies Ordinance”), as a private limited company, under the name of “Fundtrust Technologies Limited”. The principal legislation under which we operate is the Israeli Companies Law, 5759-1999 as amended (the “Companies Law”), which replaced most of the provisions of the Companies Ordinance effective as of February 1, 2000.





Our registered office is located at 10 Hamada Street, 5th Floor, Herzliya, Israel, 46140, and our telephone number is 972-3-611-6500.  The name and address of our registered agent in the United States is Fundtech Corporation, 30 Montgomery Street, Suite 501, Jersey City, New Jersey 07302.





Our name was changed to “Fundtech Ltd.” in June 1994. Our primary business at that time was the automation of payments for community banks. In 1998, we acquired the assets of the cash management division of CheckFree Holdings Corporation (ACCESS BankingTM). In 1999, we acquired the assets of the cash management division of Sterling Commerce (Banker product line), as well as 100% of the stock of BBP AG, Switzerland, which connects banks to the Central Bank of Switzerland and the SWIFT network for the processing and settlement of payments and securities. In 2004, we acquired 100% of the stock of Datasphere SA, Switzerland (“Datasphere”), which also offers financial messaging products, and Cashtech Solutions India Private Limited (“Cashtech”) which offers a line of cash management and financial supply chain products. In 2005, we acquired 100% of the stock of Radius Partners, Inc. (“Radius Partners”), which offers securities settlement products. In early 2007 we acquired 100% of the stock of Prang GmbH, Germany (“Prang”), which provides payments software for the German, Central European and Asian markets. In January 2008 we acquired the ACH (Automated Clearing House) transaction processing, initiation and collection software business of Troy Group, Inc. in an asset purchase. In February 2008 we acquired 100% of the stock of Accountis Limited, which offers electronic bill presentment software and which we renamed Fundtech FSC, Ltd. in 2011 (“FSC”). During 2008, we renamed Prang GmbH as Fundtech GmbH and Cashtech Solutions India Private Limited as Fundtech India Ltd. and will use those names throughout the balance of this report. In October 2008, we acquired 100% of the stock of Synergy Financial Services Limited (“Synergy”) which offers payments software and services to banks in the United Kingdom. In April 2009 our subsidiary, FSC acquired 100% of the stock of Intersoftware (UK) Limited (“Intersoftware”) which offers payments software to UK based corporate and banking clients.





On March 13, 1998, we completed our initial public offering and our Ordinary Shares began trading on the NASDAQ National Market (now known as the NASDAQ Global Market). As part of the offering, we issued and sold 3,450,000 Ordinary Shares in consideration of net proceeds of approximately $41,710,500.





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On August 19, 2003 our Ordinary Shares began trading on the Tel-Aviv Stock Exchange in Israel, and we became a dual listed company.





Cash used in the purchase of property and equipment increased by $0.46 million to $4.06 million for the year ended December 31, 2010 from $3.6 million for the year ended December 31, 2009 after having decreased by $3.0 million to $3.6 million for the year ended December 31, 2009 from $6.6 million for the year ended December 31, 2008. During 2010, we invested $0.83 million to pay additional amounts as per the terms of the acquisition agreement with Fundtech GmbH.  During 2009 we invested $5.8 million to fund the acquisition of Intersoftware as well as to pay additional amounts as per the terms of the acquisition agreements with Fundtech GmbH and FSC. During 2008 we invested $17.2 million to fund the acquisitions of Accountis, Synergy and Troy, as well as to pay additional amounts as per the terms of the acquisition agreements with Fundtech GmbH and Radius Partners. During 2007, we invested $7.5 million for the acquisition of 100% of the stock of Fundtech GmbH and additional payments per the acquisition terms of Radius Partners and Cashtech. We believe our capital expenditure program is sufficient to maintain our current level and quality of operations. We review our capital expenditures program periodically and modify it as required to meet current needs. For 2011, our anticipated capital expenditures are $4.1 million.





Business Overview





We are a leading provider of transaction banking software solutions for financial institutions and corporations. These solutions are grouped into three broad sectors: (i) payment processing; (ii) bbp (our financial messaging segment); and (iii) cash management systems.





Fundtech offers an extensive line of payment systems that are targeted to various geographies and market segments. Global PAYplus® and its SOA (Services Oriented Architecture) equivalent Global PAYplus – Service Platform are complete payments platforms usually purchased by large multi-national financial institutions. PAYplus for CLSTM is a cross-border settlement system also developed for the large bank market. Servicing the mid- to small-bank market in the United States are PAYplus USATM, a FED wire transfer system, and ACHplus® and OriginetTM, both for ACH payment processing. In Europe, we offer PAYplus FTS and Integration Suite to financial institutions and BacsActive-IP to corporations operating in the United Kingdom. Also in this product category are our financial supply chain products such as Accountis EIPP, which provides electronic invoice presentment.





In our bbp- financial messaging business we operate the single sector under four distinct geographic brands: BBP in Switzerland, Datasphere in French-speaking European countries, Synergy in the UK, and Fundtech in all other regions. These systems are used by banks and corporates to communicate with each other on matters related to the movement of funds.





In our cash management product line we offer ACCESS BankingTM, WebBanker, and CASHplus® to financial institutions in the United States, and we offer Global CASHplusTM outside the United States.





In 2010, Fundtech introduced the FIRST ServiceBureau brand which aggregates all services that are provided through Fundtech’s six service bureaus throughout the world. Available on an outsourced basis for the relevant  geographies are the following services: PAYplus USA, ACHplus, Originet, CASHplus, Accountis EIPP, Bacactive-IP, most of the financial messaging services (SWIFTNet, Swiss Interbank Clearing (“SIC”), SECOM), and in the United States, disaster recovery services.




Industry Background





During the past fifteen years, up to the onset of the recent global financial crisis, international commerce had generally increased, resulting in the adoption of new banking technologies. This was accompanied by dramatic increases in both the number of transactions consummated through electronic payment systems and the need for timely delivery of financial information. The financial crisis has highlighted the benefits of the transaction banking services portfolio of banks, due to their steady performance during the crisis, and the fact that bank revenue is driven by service fees that are not strictly interest-related. As a result, industry analysts predict that transaction banking will receive increased investment for systems that can deliver additional fee-generating services and serve to competitively differentiate the institution.





Certain trends drive demand for our products and services, including: an increasing need for centralized payment and treasury functions; global adoption of real-time gross settlement; growth in electronic commerce; continuing consolidation in the financial services industry; increased regulatory requirements imposed on banks, particularly in respect to initiatives in the European Union and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); a desire to accelerate top-line revenue growth in the form of additional fee income generating services; the need to lower operating costs; a growing move away from in-house development toward packaged applications or outsource service bureaus; increasing interest in financial supply chain solutions; and the need to develop unique services that allow an institution to differentiate itself from its competitors. While these trends were disrupted during 2009, during 2010 the larger financial institutions began to return to the marketplace to address their needs in relation to these trends.





We believe that the current dynamic market environment and several additional market trends are favorable to our products and services. The following additional trends continue to drive demand for our products and services:





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·
adoption of real-time gross settlement by central banks around the world, which has the potential expand the demand for Fundtech’s payments systems to emerging economies;




·
growth in globalization and electronic commerce which has the potential to increase demand for Fundtech’s payment systems, international cash management systems, and financial messaging systems;




·
the trends toward real-time information reporting, which has the potential to increase demand for Fundtech’s liquidity management systems and some advanced payments system features;




·
demand from clients for simplified corporate banking relationships, which require banks to re-engineer customer-facing systems in order to provide improved user experience;




·
the need among financial institutions to lower operating costs, which is driving the need among banks for centralized payment and treasury functions with a high degree of automation;




·
increased regulatory requirements imposed on banks, including, but not limited to, those in the areas of interdiction, anti-money laundering, the European Union’s conversion to a Single Euro Payments Area (“SEPA”), and new banking standards currently under consideration such as Basel III and in the United States, the Dodd-Frank Act;




·
a desire among financial institutions to unlock un-tapped value in their transaction banking franchises and accelerate top-line revenue growth in the form of additional fee income-generating services, which is increasing the interest in financial supply chain solutions such as electronic invoice presentment and payment (“EIPP”), liquidity management services, and other data-driven services;




·
a continued shift by financial institutions away from in-house development toward working with vendors for either packaged applications, SOA services, or outsourced, service bureau services;




·
a shift on the part of financial institutions to establish strategic technology partnerships with a few key vendors in order to lower the cost and risk of integrating new applications with existing infrastructure; and




·
greater emphasis on risk mitigation in areas such as liquidity management and contingency and recovery capabilities.




Products and Services





We believe we are unique in the marketplace because of our breadth of products across the transaction banking sector, our single-minded focus on this sector, and our deep client base.





Our products and related services are designed to integrate all elements of transaction banking, and we believe that they are among the most technologically advanced and cost-effective solutions in the financial services industry. Our products facilitate all aspects of the financial supply chain: from customer initiation though our cash management systems, to middle-office processing with our information reporting products, and back-office processing including payments processing and financial messaging.





We are one of the largest providers of products and services that link banks to domestic and international payment networks. In the United States, our products connect banks to the Federal Reserve System’s FedLine, which has approximately 7,500 banks connected. On a global basis, we provide banks and corporates with the capability to link to the SWIFT network for communicating cross-border transactions. SWIFT has over 9,000 banking organizations in 209 countries connected to its global network. We are also a leading provider in global settlements through the CLS Bank’s Continuous Linked Settlement System (“CLS”), which was established by the largest foreign exchange banks in the world to reduce foreign exchange settlement risk.





Payment Solutions

Short DescriptionPAYplus USATM

A payments solution for banks operating in the United States.Global PAYplus®

A solution for managing the global payments activities of large multi-national banks and financial institutions that conduct business in multiple countries.Global PAYplus®-Service Platform

A Services Oriented Architecture or “SOA” services platform providing broad services in payments, cash management and financial supply chain.Pan-European PAYplusTM

A comprehensive solution to meet the Single European Payments Area (SEPA) and the European Central Bank’s Target 2 initiative compliance.Global PAYplus® Liquidity Manager

A system that provides centralized control of a bank’s liquidity management needs, ensuring more efficient management of multi-currency, multi-bank liquidity assets across bank accounts, clearing systems, and central bank channels.





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PAYplus FTS

PAYplus FTS is a SWIFTReady application for Payments Processing, Message Management and related services. It can handle multi-entity / multi-branch environments, is rich in functionality and flexible in interfacing. PAYplus FTS is available on IBM PowerSystems (iSeries) and has a non-graphical user interface.ACHplu$®

A high volume system that automates the processing of ACH payments and provides a bank with tools to streamline this operation.OriginetTM

An Internet-based software application that corporations use to make and collect ACH payments.PAYplus for CLSTM

A solution designed to allow its members, being the largest international financial institutions, to fully participate in the CLS system.BACSTEL-IPTM

An Internet-based software application that corporations use to make and collect ACH payments over the UK BACS system, which is an automated direct debit and credit processing facility.Electronic Invoice Presentment and Payment Solutions (“EIPP”)

Software that enables the accounts receivable department of the selling organization to send an electronic invoice to the accounts payable department of the buying organization.





PAYplus USATM





PAYplus USATM is a funds transfer solution used to connect a financial institution’s wire transfer room with the Federal Reserve’s FedLine system. This solution evolved from and replaces two older products, FEDplusTM and PAY$tarTM. Our target market includes small to mid-size banks operating in the United States that do not need a global payment solution, including U.S.-based banks, thrifts, savings and loans and international agency banks operating in the United States.





PAYplus USATM supports payment processing, risk management and regulatory compliance for U.S. financial institutions that utilize the Federal Reserve Bank’s FedWire system for high value payments. PAYplus USATM also offers the same functionalities for international multi-currency payments of international banks operating in the United States.





PAYplus USATM provides financial institutions with complete funds transfer capacity at a substantially lower cost than other technologies. At the same time, it both reduces payments risk (through real-time updates of account balances by means of an on-line interface with the host computer) and improves customer service (through its comprehensive database containing relevant information about a transfer – from its creation to accounting and memo posting).





Global PAYplus®





Our Global PAYplus ® provides institutions with a real-time global view of their payments activity. This multi-tiered system addresses the needs of both local and global payment processes. At the local level, Global PAYplus ® employs a client/server funds transfer payment system that supports both the local payment processing, and risk management and regulatory compliance for the local clearing systems. At the global level, Global PAYplus ® aggregates worldwide payment activity. Global PAYplus ® is a multi-platform system supporting both UNIX and Microsoft operating systems that employ open technology standards. The system features end-to-end security and multi-currency capabilities.





Global PAYplus®-Services Platform





Our Global PAYplus ® Services Platform provides financial institutions the ability to implement SOA services in payments, cash management and financial supply chain within either a pre-configured service platform or in the form of a payments hub integrating the institution’s legacy systems into a homogeneous rules-based services platform. The services handle multiple payment types globally and use the payments power of our Global PAYplus software, a globally operational platform.





Pan-European PAYplus





Pan-European PAYplus is a solution that provides a financial institution with the payment processing and liquidity management functionality required for handling Euro payments in the Single Euro Payments Area (SEPA). Pan European PAYplus provides an integrated solution to meet SEPA high impact changes while maximizing STP and preserving income from existing payment operations. Pan-European PAYplus incorporates new technology embedded in the SEPA technical infrastructure (e.g. ISO 20022, SWIFT Cash Reporting). The product can be deployed on a stand-alone basis for banks to integrate within their existing payments infrastructure, or as an integrated component of our Global PAYplus payment solution.





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Global PAYplus® Liquidity Manager





Global PAYplus Liquidity Manager (GLM) is a management and planning tool, that ensures more efficient control and management of multi-currency liquidity assets across a bank’s accounts and real time gross settlement channels. The system provides flexible functionality which allows a bank to centralize, monitor and control the management of liquidity. GLM provides Treasury personnel with accurate, online and timely information to facilitate better decision-making and also can provide Treasury staff with efficient payment delivery and execution based upon up-to-date information. GLM interfaces with other systems within a bank to gather liquidity information, ensuring that a complete and accurate liquidity position is continuously available.





PAYplus for CLSTM





PAYplus for CLSTM is an integrated solution that assists large foreign exchange trading banks in addressing the requirements of the CLS bank. PAYplus for CLSTM provides payments, treasury, reconciliation, interface and systems management controls that assist banks in meeting the necessary requirements. In addition, PAYplus for CLSTM provides such institutions full control and functionality for its foreign exchange trading relationships.





ACHplu$®





ACHplu$® is a server-based, enterprise class software application designed to streamline processing for all levels of ACH processors. The system is built on a scalable platform that can handle increasing transaction volumes as needed. The system includes many advanced features such as continuous processing, process automation, advanced reporting, and risk management. Its web interface allows originators, bank internal staff, and ACH operators to upload files to the system for processing, search the warehouse and retrieve and view reports.





Originet®





OrigiNET® is an Internet-based software application, derivative of ACHplu$®, which allows corporations and banks to make or collect payments electronically using ACH. The software structures payment data into a standard file format that can be accepted by any financial institution, third-party processor, or ACH operator. Common applications of OrigiNET® include payroll, expense reimbursements, pensions, annuities, dividends, commissions, and benefit payments.





BACSTEL-IP





FSC’s BACSactive-IP provides organizations with a modern, well-designed, reliable and secure electronic funds transfer solution. BACSactive-IP was designed by experts in the field of Internet payments to take advantage of features of the BACS system and all it has to offer, such as the highest levels of security and easy-to-use reporting facilities.





FSC EIPP Solutions





FSC’s Enterprise AP enables corporations to automate the payables process from the creation of purchase orders and receipt of invoices, to handling disputes and submitting payments online by integrating with existing ERP or accounting systems. It can work as a stand-alone solution or in conjunction with FSC’s Enterprise AR and additional modules to provide a complete end-to-end solution. FSC’s Enterprise AP is designed for organizations that deal with large volumes of inbound transactions and wish to receive them electronically. It supports multiple currencies and languages and is fully VAT compliant across European member states. The system integrates easily with existing ERP or finance systems to save resources by automating the receivables process, from capturing purchase orders and issuing invoices to controlling debtors and collecting payments online. It can also work as a stand-alone solution. By consolidating invoice data quickly and simply, FSC’s Enterprise AR presents one-view of all receivables transactions for the benefit of both internal users and buyers alike.





Financial Messaging

Short Product DescriptionsIGTplusTM

A payments and settlement solution which provides message broker services between financial institutions and SWIFT, SIC, Swiss Securities Clearning (“SIS”) and SWX in Switzerland.ClaritySuiteTM

A modular web-based financial solution designed to exchange high value information between a financial institution and its partners. It is designed to interface interactively with all the major SWIFT Interface Systems such as SWIFTAlliance, IBM MERVA, Logica Fastwire and Sungard MINT and offers solutions in a number of key operational areas such as payments, cash management, documentary credits and foreign exchange.





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Message Converter

A unique middleware solution allows users to convert proprietary messages into SWIFT and other standard messages.Compliance Filter

The Compliance Filter monitors transaction flow based on the requirements of the OFAC (Office of Foreign Assets Control), Factiva, Worldcheck or other country-specific standards.





IGTplus





IGTplus is a message broker application for financial messages. For financial institutions it comprises the interface to their central banking system. IGTplus processes payments, securities transactions or related orders and information to/from other financial institutions, clearing organizations, and central banks, among others, using straight through processing in order to provide faster, better quality service to customers and to reduce costs. The SWIFT, SIC, SIS and FIX applications of IGTplus provide communication to/from these financial services with the option of manual investigations, exception handling and queries for liquidity information. Due to the high sensitivity and performance requirements inherent in this application, IGTplus is designed for very high throughput and 24x7 fully automated operation. The target markets are large banks, service centers and financial market infrastructures. Smaller financial institutions may obtain the same functionality as they would obtain by acquiring a license by contracting for the services of the BBP Service Bureau, which operates IGTplus on behalf of a number of such institutions.





ClaritySuite





Synergy’s ClaritySuiteTM is a modular internet-based financial solution designed to exchange high value information between a financial institution and its partners. It is designed to interface interactively with all the major SWIFT Interface Systems such as SWIFTAlliance, IBM MERVA, Logica Fastwire and Sungard MINT and offers solutions in a number of key operational areas such as payments, cash management, documentary credits and foreign exchange.





IGTplus Message Converter





The IGTplus Message Converter is a unique middleware application specifically designed for the financial services industry. It allows financial institutions to convert proprietary messages into SWIFT and other standard messages and vice versa, saving time and reducing costs of conversion.





IGTplus Compliance Filter





IGTplus Compliance Filter provides online, real time compliance protection. Every transaction is checked before it leaves or enters the bank system. It monitors transaction flow based on the requirements of the OFAC (Office of Foreign Assets Control), Factiva, Worldcheck or other country-specific standards. The IGTplus Compliance Filter is available for SWIFT, SIC/euroSIC and SECOM.





Cash Management Solutions

Short DescriptionCASHplus®

An Internet-based cash management solution designed for high end and mid-level financial institutions.webBANKERTM

A fully integrated cash management solution designed primarily for the community bank market.Global CASHplus®

A multi-currency, multi-country cash management solution to automate the handling of corporate payments and receivables, liquidly, financial supply chain and remittance.




CASHplus®





The CASHplus® product enables corporations to perform sophisticated cash management functions across accounts at multiple branches, in multiple currencies, and in multiple countries and regulatory environments. CASHplus® is designed to reduce the cost of delivering remote banking services through universal access and simplified maintenance and distribution of remote software.





16




webBANKER





web BANKER was designed for community banks – it is cost-effective to operate and easy to set up and use. It offers the features needed to be competitive in the marketplace such as wire transfer, ACH origination with federal and state tax payments, compatibility with FEDLine Advantage, information reporting, cash concentration and disbursement. Fundtech offers this system on an installed or ASP basis.





Global CASHplus®





Developed by our Fundtech India subsidiary, this multi-currency, multi-national cash management platform provides a range of functions to manage corporate payments and receivables, automate the routing of payments, mange electronic and paper based receivables, invoice reconciliation, liquidity pools, sweeps, and corporate transfer pricing, e-invoicing and receivables financing, and remittances.





Customers and Markets





Our scaleable products are sold to a wide array of financial institutions and large business enterprises.





The markets for our products consist of the following end-users:





·
U.S. Banks – This group of customers is divided into three tiers. The top tier consists of approximately 50 banks, each with more than $23 billion of assets. The second tier consists of banks with $3.5 billion in assets. The third tier consists of banks with under $3.5 billion in assets. Currently there are approximately 7,000 banks and credit unions in the United States.





·
Agency Banks and Branches of Foreign Banks located in the United States – These banks are located mainly in financial centers such as New York City, San Francisco, Los Angeles and Dallas.





·
Banks located outside of the United States – These banks are located in countries that have moved to or will move to processing payments on a real time gross settlement (RTGS) basis.





·
Corporations – With the addition of FSC’s AR and AP, OrigiNET and SWIFT Services we have a line of payments related products and services that are being sold directly to corporate entities. While we intend to continue to support the sale of these products directly to end users, we will also expand the distribution of the products through our traditional client base of financial institutions.





In 2004 we acquired Datasphere and Fundtech India and began the process of assimilating their products and services into our offerings. Likewise, we acquired Fundtech GmbH in early 2007. Fundtech GmbH has approximately 50 customers, primarily in Germany. We also acquired the ACH business of Troy Group in early 2008 which brought two new ACH products to our portfolio along with approximately 18 customer relationships. Fundtech FSC Ltd., acquired in February 2008, when consolidated with its Intersoftware subsidiary acquired in April 2009, has over 2,000 clients using its BACS payments and electronic invoicing and presentment products and services. Synergy Financial Services Limited, acquired in October 2008, has about 100 clients using its software and SWIFT connections services.





For a presentation of our consolidated revenues according to the product sectors and geographical regions to which such revenues are attributable, please see the relevant table in Item 5A, “Operating and Financial Review and Prospects —Operating Results — Significant Revenue, Segment and Earnings Information.”





Sales and Marketing





We sell our products and services primarily through our direct sales force, located in the United States, United Kingdom, Switzerland, India and Singapore. We use the services of distributors in Greece and the Balkans. Our FSC, Synergy and Intersoftware subsidiaries have arrangements with a number of financial services providers and two major UK banks to market their products and services.





Our marketing efforts include a variety of activities that promote our products including public relations and industry analyst relations, direct response marketing programs, telemarketing lead generation and lead nurturing, and industry trade shows and conferences. In addition, we receive inquiries about our products directly through our corporate website.





We maintain a working relationship with the Federal Reserve Bank in the United States to ensure that our products meet Federal Reserve requirements. We also maintain a working relationship with SWIFT, a utility for communication of global financial institutions payment and settlement instructions owned by the largest banks in the world. By ensuring that our solutions are SWIFT-compliant, we are well positioned to offer payment and settlement solutions to international banks.





17





Additionally, in 2010 we introduced First ServiceBureau, a brand that we use to market our broad line of services available to banks and corporations on an outsourced basis. Included in this are: U.S. and European payments, cash management, electronic invoice presentment, BACS, financial messaging, and disaster recovery services.  These services are hosted in one of the six service bureau centers located in either the USA (Norccross, GA and San Leandro, CA), Baden, Switzerland, Wales and Nottingham, UK).




Software Development





We believe that our software development team provides a significant competitive advantage. The team is comprised of developers with experience in visual programming design and object-oriented software development of mission-critical applications. We also believe that this assembly of diverse technical expertise contributes to the highly integrated functionality of our products. Our ability to attract and retain highly qualified employees will be one of the principal determinants of our success in achieving technological leadership. The total software development staff consisted of 308 full-time employees on December 31, 2010. All of our payments products have been developed internally by our product development staff. Our cash management, BBP, ACH, EIPP and UK payments solutions were initially developed by the personnel of the businesses we acquired (such personnel migrating to us with the acquired businesses), and have since continued to be developed by our product development staff. Some of these products are embedded, or bundled, with standardized software products developed by other companies. We believe significant investments in product development are required to remain competitive.





To ensure that our products are developed successfully, within their budgets and according to schedule, all of our products are sent through the following four distinct design and testing stages: (1) requirements descriptions are developed through consultation with prospective users to ensure that the product matches the user’s requirements; (2) an internal quality assurance team verifies the integrity of the product at each stage of development prior to beta testing; (3) beta testing data are used to evaluate the functionality of the products and their ability to perform under realistic conditions; and (4) a controlled group of users is polled regularly to identify any modifications that may be necessary. In addition, we work closely with current and potential end-users, our strategic partners and leaders in certain industry segments to identify market needs and define appropriate product requirements. Our employees also participate in numerous user focus groups to review product design. We have software development sites in Georgia, New Jersey, Massachusetts, California, Israel, Switzerland, India, Wales, England and Germany. We believe that separating development by geographic region allows for development to be in close proximity to the targeted market, while increasing our ability to attract development talent.





Customer Support





We believe that effective customer support in the software industry requires rapid, efficient and comprehensive installation of the product. Upon installation, we strive to provide superior customer support by solving problems quickly and providing customers with consistent, accurate and understandable technical information. We employ test scripts and bank production data to test our solutions and our products are shipped with back-up procedures installed. We recognize that timely solutions are essential for our mission-critical solutions in the event problems do arise. We emphasize responsiveness to our customers’ inquiries and offer telephonic support for the reporting of problems twenty-four hours a day. Customer inquiries range from production problems to user questions and hardware issues. In addition, we utilize remote access services inclusive of virtual private networks, to enhance remote customer support. Certain of our marketing representatives and contractors also provide sales, service and technical support functions for our products to end-users in specific geographic territories.





Proprietary Rights





We rely upon a combination of trademarks, contractual rights, trade secret law, copyrights, nondisclosure agreements and technical measures to establish and protect our proprietary rights in our products and technologies. We also enter into non-disclosure and confidentiality agreements with our customers, employees and marketing representatives and with certain contractors with access to sensitive information. However, we have no registered patents and these measures taken by us may not be adequate to protect our technology from third-party infringement. In addition, our competitors may also independently develop technologies that are substantially equivalent or superior to ours. See the risk factor entitled “We may be unable to adequately protect our proprietary rights in our internally developed technology, which may limit our ability to compete effectively” in Item 3D above.





Competition





The industry in which we operate is highly competitive and evolving. Our competitors include, but are not limited to, BankServ, Logica PLC, Digital Insights, Inc., S1 Corporation, Fidelity Information Services, Banklink, TietoEnator, Sunguard, Smartstream Technologies, ACI Worldwide Inc., Dovetail, Fiserv, GIFTS Software, Bottomline Technologies, Nucleus Software, Goldleaf Financial Solutions, EFunds, OB 10, Harbor Payments, Clear2Pay and Sterci.  Furthermore, several large financial institutions have developed solutions internally which they have then marketed to other banks or implemented in banks that they have acquired. In order to maintain our competitive position, we must differentiate our products from the products of our competitors and successfully develop and introduce new products that meet the changing needs of our clients.





18




Regulatory Framework





The financial services industry in which we operate is heavily subject to regulatory scrutiny. Increased regulatory requirements have been imposed on banks, including, but not limited to, those in the areas of interdiction, anti-money laundering, and in the European Union, the conversion to the Single Euro Payments Area, or SEPA. For more information, please see the risk factor entitled “Government regulatory policy for the financial services industry affects our business” in Item 3.D above.





Organizational Structure





We are organized under the laws of the State of Israel. We are the parent company of our wholly-owned operating subsidiaries that are specified in the table below.





Name of Subsidiary

Country of Incorporation/OrganizationFundtech Corporation

United StatesFundtech U.K. Limited

United KingdomFundtech Australia Pty Limited

AustraliaBBP AG (Formerly Biveroni Batschelet Partners AG)

SwitzerlandDatasphere SA

SwitzerlandFundtech India Ltd.

IndiaRadius Partners Inc.

United StatesFundtech GmbH

GermanyFundtech FSC Ltd.

United KingdomSynergy Financial Services Limited

United KingdomIntersoftware (UK) Limited

United Kingdom





Property, Plants and Equipment.





We lease the premises at each of our locations, with the exception of a facility owned by Synergy Financial Services Limited, which constitutes an approximately 2,500 square foot building in a science park in Nottingham, England which is used to house its software development and administrative personnel. As of December 31, 2010, we leased office space as specified in the table below. The aggregate annual lease payments for our facilities during 2010 were approximately $3,819,000.





Location

Approximate Aggregate Square FeetHerzliya, Israel

53,615Burlington, Massachusetts

9,800Jersey City, New Jersey

25,800San Leandro, California

6,700Norcross, Georgia

26,000Baden, Switzerland

10,500London, United Kingdom

4,700Pune, India

36,900Frankfurt, Germany

3,666Costa Mesa, California

2,330Bangor, Wales

3,250Manchester, England

1,500Mumbai, India

3,765Geneva, Switzerland

2,575





19





ITEM 4A.  UNRESOLVED STAFF COMMENTS





None.





ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS





YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH ITEM 3A “SELECTED FINANCIAL DATA” AND OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. SEE “CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS,” WHICH PRECEDES THE TABLE OF CONTENTS OF THIS ANNUAL REPORT.





Overview





Fundtech is a leading provider of end-to-end financial transaction processing software solutions for financial institutions. These solutions are grouped into three broad product sectors: (i) payment processing; (ii) bbp (our financial messaging segment); and (iii) cash management systems.





We derive our revenues principally from software licensing and from the provision of professional services. Professional services consist of (i) providing maintenance services with respect to our software, (ii) installation and training services related to the software, (iii) services to enhance or customize the software for particular client needs, inclusive of requirements analysis, (iv) operating hosting service bureaus which process transactions or messages and provide cash management services to our clients or which operate client licensed applications on their behalf and (v) providing contingency and recovery services to our clients. See “Critical Accounting Policies” below for a discussion of how we account for our revenues and their associated costs.





The demand for Fundtech products and services is influenced by a number of industry-wide factors:





(i)      An increased focus on finding new sources of fee-based income, which currently account for almost half of banks’ revenues. This is largely the result of the increased competitiveness of bank lending activities, which has resulted in lower profit margins;





(ii)    An ongoing objective to lower operating costs through automation, including enhancing the performance of legacy systems to meet current business objectives. This has become an even greater issue as new regulations such as the U.S. Patriot Act are requiring banks to perform additional complex analyses that significantly benefit from automation;





(iii)    Changes in the regulatory requirements that mandate changes in the IT systems of banks;





(iv)    The competitive marketplace for corporate accounts that is continually innovating new services that are largely driven by new and more flexible technology; and





(v)     The need to simplify banking relationships for corporate clients by eliminating “siloed” processing systems, that is, systems operating in a narrow or limited functionality spectrum.





20





Fundtech’s products offer financial institutions new capabilities that address these major industry factors. Our software products automate transaction procedures and also allow clients of our customers both to initiate transactions and access information over the Internet rather than by contacting the customer’s staff. The server-based architecture of our software also allows cost reductions in comparison to mainframe based applications. The software permits customers to easily change fee parameters and offer new financial products without having to reprogram the software.





During the period 2005 through the first half of 2008, spending on technology in the financial services industry increased. During the second half of 2008, we began to see the impact of the global recession, as there was a decline in revenue attributable to new license fees from both global and U.S-based clients. Other revenues from maintenance and services for previously installed systems were affected to a lesser degree. This trend continued throughout most of 2009 but began to reverse itself in the last quarter of 2009.  During 2010, we saw a return to more normalized activities in Europe and Asia, while the recovery in the United States continued at a slower pace.  We continue to see interest and activity from U.S. regional banks, and have shifted some of our marketing emphasis away from community banking to such regional banks while maintaining relationships with our global and large bank customers.  We continue to place additional emphasis on products such as ACHplus which are attractive within the sectors that appear to be less affected by the recent slowdown. The trends toward increasing emphasis on transaction revenue and processing/management cost optimization continue to have a favorable impact on our business.  We continually communicate with our sales personnel, clients and prospects to estimate the probability of consummating new contracts during future periods. It is difficult to predict whether the duration of these trends will continue, as well as the extent of the impact that they may have on our future revenues, results of operations or the length of the time periods for which we can forecast potential revenues.





Acquisitions of Businesses and Certain Assets





In February of 2007, we acquired all of the outstanding shares of Fundtech GmbH. The purchase price was €4.8 ($6.3) million which was paid in cash with potential additional cash consideration in an amount of up to €4 million payable when certain conditions related to the performance of Fundtech GmbH were met between the acquisition date and December 31, 2010. In 2008, we made payment of €2.3 ($3.4) million based upon Fundtech GmbH’s financial performance, which was accrued and accounted for in 2007. The parties amended the original acquisition agreement with respect to the payment of additional consideration, pursuant to which €597,000 ($830,000) was paid in January 2009 and again in January 2010. We have no further obligations to pay additional consideration under the acquisition agreement.





In January 2008, we acquired the ACH business of Troy Group, Inc. The purchase price was approximately $1.1 million in cash. Also in February 2008 we acquired all of the outstanding shares of Accountis Limited which provides solutions for our financial supply chain suite of services. The initial purchase price was £3.9 ($7.8) million. Additional cash consideration will be paid if and when certain conditions are met between the acquisition date and December 31, 2011, which may amount to an additional £2 million. During 2009, we paid an additional amount of $1.1 million.  No additional payments were made in 2010 pursuant to the acquisition agreement whereby we effected this acquisition.





In October, 2008, we acquired all of the outstanding shares of Synergy Financial Services Limited. The purchase price was £2.52 ($4.7) million in cash, including £300,000 payable contingent on delivery of certain reports. Additional consideration will be paid in cash if and when certain conditions are met between the acquisition date and February 28, 2012, which may amount to up to an additional £1.17 million. No additional payments were made in 2009, but in February 2011 we paid an additional £0.29 million with respect to the 2010 year.





In April 2009, we acquired all of the outstanding shares of Intersoftware (UK) Limited for a purchase price of £2.7 ($3.8) million in cash. There is no contingent amount payable in respect of this acquisition.





Critical Accounting Policies





The operating and financial condition review contained herein is based upon our consolidated financial statements, which were prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an ongoing basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.





We believe that application of the following critical accounting policies entails the more significant judgments and estimates used in the preparation of our consolidated financial statements:




·
Revenue recognition,


·
Allowance for doubtful accounts,


·
Realizability of long-lived assets,


·
Goodwill,


·
Share based compensation expense,


·
Income taxes.





21





Revenue recognition. Our revenues are generally includes multiple element arrangements and are generated from licensing the rights to use our software products directly to end-users and sales of professional services, including consulting, implementation and training. We also provide hosting services, contingency and recovery services, as well as maintenance and in some cases sales of hardware.





Software licenses revenues. Revenue from software license agreements for which professional services rendered are not considered essential to the functionality of the software,is recognized when all criteria outlined in ASC 985-605-15 “Software Revenue Recognition” are met. Therefore, revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectability is probable.





Where software arrangements involve multiple elements, revenue is allocated to each element based on vendor specific objective evidence (“VSOE”) of the relative fair values of each element in the arrangement. Our VSOE used to allocate the sales price to services and maintenance is based on the price charged when these elements are sold separately. In software arrangements in which we have fair value of all undelivered elements but not of a delivered element, we use the residual method to record revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and is recognized as revenue. In software arrangements in which we do not have VSOE of fair value of all undelivered elements, revenue is deferred until fair value is determined or all elements for which we do not have VSOE of fair value have been delivered.





Revenue from software licenses that require significant customization, integration and installation are recognized based on ASC 605-35-05 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” using contract accounting on the percentage-of-completion method, based on the relationship of actual labor costs incurred, to total labor costs estimated to be incurred over the duration of the contract. In recognizing revenues based on the percentage-of-completion method, we estimate time to completion with revisions to estimates reflected in the period in which changes become known. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future services margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. The complexity of our process for estimates and factors relating to the assumptions, risks and uncertainties inherent with the application of the percentage of completion method of accounting affects the amount of revenue and related expenses reported in our consolidated financial statements.A number of internal and external factors can affect our estimates, including changes in labor rates, estimatedpercentage of labor hours incurred to the estimated total labor hours for each contract, utilization and efficiency variances, changes in specification and testing requirements,provisions for estimated losses on uncompleted contracts and length or complexity of custom implementations.





We generally do not grant rights-of-return to our customers. We usually provide a warranty period to our customers of up to three months at no extra charge. A percentage of the license fee is allocated to such warranty and is not recognized until the warrant period expires.  As of December 31, 2010 and 2009, the provision for warranty cost is immaterial.





Professional services revenues. Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized using contract accounting as described above. When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed.





Hosting revenues. As we provide hosting services to our customers without any contractual right to take possession of the software licenses, we recognize revenue from hosting over the hosting contract period.  Revenues from set up fees are also recognized over the related hosting contract term.





Maintenance and support revenues. Revenues from customer maintenance and support contracts are deferred and recognized ratably over the term of the agreements. Revenues for maintenance and support that are bundled with license fees are deferred based on the VSOE of fair value of the bundled maintenance and support and recognized over the term of the agreement. VSOE of fair value is based on the renewal rate for continued maintenance and support arrangements.





Allowance for doubtful accounts. Our trade receivables primarily include amounts due from banks and large financial institutions. An allowance for doubtful accounts is determined for those specific amounts that we believe may not be collected. We generally do not require collateral; however, in certain circumstances, we may require letters of credit, other collateral or additional guarantees. We perform ongoing credit evaluations of our customers and in judging the probability of collection of receivables we continuously monitor collection and payments from our customers and maintain a provision for any specific customer collection issues that we have identified. For some customers, typically those with whom we have long-term relationships, we may grant extended payment terms. If the financial situation of any of our customers was to deteriorate, resulting in an impairment of its ability to pay the indebtedness it incurs with us, an additional provision for doubtful accounts might be required. If the historical data we use to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and our future results of operations could be materially affected.





22





Realizability of long-lived assets. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:





·
significant decrease in the market price of a long-lived asset or asset group;


·
significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition;


·
significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulator;


·
accumulation of costs significantly in excess of the amount originally expected for the acquisition of a long-lived asset or asset group;


·
current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; and


·
current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.





We determine the recoverability of long-lived assets based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. This estimation process is highly subjective and involves significant management judgment. Determination of impairment loss from long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.





Impairment of Goodwill. We assess the impairment of goodwill on an annual basis, and potentially more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:





·
significant underperformance relative to expected historical or projected future operating results;


·
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;


·
significant negative industry or economic trends; and


·
Adjustments, if any, related to earn-out provisions in acquisition agreements.





When we determine that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure this impairment based on the implied fair value of the goodwill.  The implied fair value is derived from the fair value of the whole unit to which the goodwill is related, determined using projected discounted cash flow. This estimation process is highly subjective and involves significant management judgment. In 2008 we recorded an impairment charge of $1.66 million. For 2010 and 2009, no impairment charge was recorded.





Share Based compensation expense. The Company accounts for stock-based compensation in accordance with ASC 718.  ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated income statements.





The Company recognizes compensation expenses for the value of its awards granted based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.





The Company selected the Black-Scholes option pricing model as the most appropriate fair value method for its stock-options awards and values restricted stock based on the market value of the underlying shares at the date of grant. 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.





23





Accounting for income tax. We are subject to income taxes in Israel, the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Based on the guidance in ASC 740 “Income Taxes”, we use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest and penalty. Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe are more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, 2010 and 2009 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 13 to our Consolidated Financial Statements for further information regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.





24


A.
Operating Results





The following table sets forth for the periods indicated the percentage of revenues represented by each of the items in our statement of operations:





Year Ended December 31,2010


2009


2008Revenues:Software license fees


12.4
%


9.8
%


13.6
%Service Fees


36.6



36.2



41.4Hosting


20.9



20.4



16.4Maintenance


30.0



33.5



28.5Hardware sales


0.1



0.1



0.1Total revenues


100.0



100.0



100.00Operating Expenses:Software license costs


0.2



0.6



0.2Maintenance and service costs


46.4



45.3



44.4Hardware Costs


-



-



-Research and development


15.4



17.3



18.1Selling and marketing, net


13.3



14.6



16.7General and administrative


14



16.7



14.1Impairment of goodwill and other intangible assets


-



-



1.7Amortization of other acquired intangible assets


1.2



1.7



1.8Provision for doubtful accounts


0.2



0.3



0.5Total operating expenses


90.7



96.5



97.5Operating income


9.3



3.5



2.5Loss on Investments


-



-



(0.6
)Financial income, net


(0.5
)


0.2



-Income before income taxes


8.8



3.7



1.9Income taxes


-



(0.3
)


0.9Net income


8.8
%


4.0
%


1.0
%





We note in particular the impact on net income of the application of ASC 718, which resulted in charges of $3.0 million in 2008, $2.8 million in 2009, and $2.8 million in 2010.





Significant Revenue, Segment and Earnings Information





The following table presents our consolidated revenues (in thousands) according to the geographical regions to which such revenues are attributable:





2010


2009


2008Total


Total


TotalRevenues


Percentage


Revenues


Percentage


Revenues


PercentageIsrael

$
575



0.4
%

$
461



0.4
%

$
1,108



0.9
%U.S.A.


62,006



43.7



48,523



41.2



49,228



40.7Switzerland


17,088



12.0



14,769



12.5



15,155



12.5India


2,087



1.5



2,066



1.8



2,350



1.9United Kingdom


26,291



18.5



19,304



16.4



17,758



14.7Germany


3,881



2.7



4,987



4.2



3,990



3.3Australia


7,583



5.3



7,026



6.0



5,938



4.9Other


22,427



15.9



20,621



17.5



25,510



21.1$
141,938



100
%

$
117,757



100
%

$
121,037



100
%





25





The following table presents (in thousands) our consolidated revenues and resultant operating income (loss) for each of our three product sectors.





2010


2009


2008Cash management revenue

$
29,410


$
26,380


$
27,914Operating income


2,523



868



821Payments revenue


85,997



69,573



75,001Operating income


23,948



15,967



17,206BBP revenue


26,531



21,804



18,122Operating income


3,885



1,210



1,071





Cash Management revenues increased during 2010 which we attribute to a continuing improvement in the general economic outlook. In addition, there was an increase in the number of banks which went live with CASHplus in both license and ASP form.  Payments revenue increased over 2009 and 2008 and was predominately due to strong sales of Global PAYplus with additional support from our Fundtech GmbH business. Cash management operating income improved as the product’s maturity resulted in lower operating costs. BBP revenue and operating income continue to increase due strong sales of IGTplus and the added revenues  and income from its Synergy subsidiary. License and services fee trends are discussed more fully in the year to year comparisons below.





Major Customers





We derived approximately 20.6% and 20.8% of our annual revenues, or approximately $29.2 million and $24.5 million, from the license, consulting and maintenance service fees earned in connection with agreements with three leading international financial institutions in 2010 and 2009, respectively. The project is quite mature at one of these institutions and may result in lower future revenues when completed.  The projects at the other two institutions continue to proceed.  The mix of institutions forming our  largest three customers is expected to shift over time. There are signs that the larger financial institutions are beginning to return to the marketplace to address their needs.





Year Ended December 31, 2010 Compared to Year Ended December 31, 2009





Revenues.





Variance2010


2009

Increase


%Total Revenues

$
141,938,000



117,757,000



24,181,000



20.5
%





Overall revenues increased from 2009 levels due to continuing improvement of the global economy which we saw reflected in strong sales of our flagship product Global PAYplus.  BBP had a strong year and benefitted from its acquisition of Synergy. Fundtech GmbH also contributed to the overall revenue growth through sales of its Payments products.





Software License Fees. Software license fees consist primarily of revenues derived from software license agreements we enter into with our customers. A comparison between our 2009 and 2010 software license fees is as follows:





Variance2010


2009


Increase


%Software License Fees

$
17,598,000


$
11,558,000


$
6,040,000



52.3
%





The majority of the increase in license revenues year to year is attributable to Global PAYplus, which had strong sales in both the United States and Europe.  The strength of the sales was due, in part,  to the introduction of Global PAYplus-Services Platform.





Maintenance, Hosting and Services Fees. Maintenance, hosting and services fees include revenues derived from maintenance contracts, customizations and product installation, training, hosting and consulting fees. We generally receive a contract for maintenance and services at the time we enter into a contract for a software license.





26




A comparison between our 2009 and 2010 maintenance and services fees is as follows:





Variance2010


2009


Increase


%Maintenance, Hosting and Services Fees

$
124,340,000


$
106,199,000


$
18,141,000



17.1
%





CashTech services revenues increased $2 million, with Payment’s revenues increasing by $7.5 million. Most of this increase related to services for our Global PAYplus license sales.





Our hosting fees increased by $5.6 million from $24 million in 2009 to $29.6 million in 2010, consisting of an increase in our BBP segment hosting fees of $4.0 million. CASHplus ASP provided $0.8 million in new revenue with Fundtech FSC responsible for an additional $0.7 million.  As we previously noted, we experienced a trending away from licensing software for use as an “in-house” solution, particularly as it applies to our business with smaller and mid-size institutions, and replacing that expenditure with the purchase of hosting services.  As we have core competencies in both license and hosting solutions, we do not attempt to direct customers toward any one methodology but rather allow the customer a choice.





Our maintenance fees increased by $3.5 million comprised of increases in maintenance fees of $2.3 million in our Payments segment, $0.5 million in our Cash Management segment, $0.25 million in BBP and $0.2 million by Fundtech FSC.





Software License Costs. Software license costs consist primarily of royalty payments and other costs related to product media, duplication, manuals, shipping and third party embedded software costs. A comparison between our 2009 and 2010 software license costs is as follows:





Variance2010


2009


Decrease


%Software License Costs

$
329,000


$
748,000


$
419,000



99.8
%





This large decrease relates to increased licenses for our next generation global payments products which do not involved embedded software.





Amortization of Other Acquired Intangible Assets. A comparison between our 2009 and 2010 amortization of other acquired intangible assets is as follows:





Variance2010


2009


Decrease


%Amortization of Other Acquired Intangible Assets

$
1,666,000


$
2,028,000


$
362,000



17.8
%





The decrease in amortization resulted from a decrease of $0.362 million attributable to the completion of amortization of Fundtech India and changes in foreign currency which impacted amortization.





Maintenance, Hosting and Services Costs. Maintenance, hosting and services costs consist primarily of personnel and related expenses, voice and data expenses and other costs related to the provision of maintenance, hosting, and professional services. A comparison between our 2009 and 2010 services costs is as follows:





Variance2010


2009


Increase


%Maintenance, Hosting and Services Costs

$
65,873,000


$
53,286,000


$
12,587,000



23.6
%





The above result reflects increases consistent with increased revenues from Maintenance, Hosting and Services fees. Also, licenses of the next generation global payments products sustained somewhat higher service costs related to employee training during the initial implementations.





Software Development. Software development expenses are related to the development of new products, enhancement of existing products and testing of products. A comparison between our 2009 and 2010 software development expenses is as follows:





Variance2010


2009


Increase


%Software Development

$
21,882,000


$
20,422,000


$
1,460,000



7.1
%




27


We did not capitalize any software development costs in 2010 or 2009 since the time period during which costs could have been capitalized from the point of technological feasibility until the time of general product release was very short. These costs were expensed as incurred as the amounts that could have been capitalized were not material to our financial position.





The increase in software development expenses from 2009 to 2010 derived mainly from costs associated with the next generation global payments product.





Selling and Marketing. A comparison between our 2009 and 2010 selling and marketing expenses is as follows:





Variance2010


2009


Increase


%Selling and Marketing

$
18,688,000


$
17,234,000


$
1,454,000



8.4
%





The increase in selling and marketing expenses was primarily due to (i) an increase in sales commissions due to new sales, and (ii) an increase in sales expenses related to opening a sales operation for the Asia Pacific region.





Provision for Doubtful Accounts. Management’s assessment for uncertainties of outstanding accounts receivable collectability is reflected in our provision for doubtful accounts. A comparison between our 2009 and 2010 provision for doubtful accounts is as follows:





Variance2010


2009


Increase


%Provision for Doubtful Accounts

$
339,000


$
333,000


$
6,000



1.8
%





The increase in doubtful accounts had no material cause, but is rather a minimal adjustment based on our view of our receivables.  In general we do not have higher levels of provision.





General and Administrative. A comparison between our 2009 and 2010 general and administrative expenses is as follows:





Variance2010


2009


Increase


%General and Administrative

$
19,903,000


$
19,662,000


$
241,000



1.2
%





The increase in general and administrative expenses was primarily due to (i) the establishment of a corporate purchasing function, and (ii) increased salary expenses due to new hiring and higher bonuses related to the Company’s performance.




28





Financial Income, Net. A comparison between our 2009 and 2010 financial income, net is as follows:





Variance2010


2009


Decrease


%Financial Income (expense), net

$
(765,000
)

$
232,000


$
997,000



429
%





The decrease in net financial income resulted primarily from an increase in foreign currency fluctuations and lower average interest income on the financial instruments that we held in 2010 compared to 2009.  Our main foreign currency exposures are associated with exchange rate movements of the U.S. dollar, our reporting and primary functional currency, against the NIS, Swiss Franc, British Pounds, Indian Rupees Australian Dollar and the Euro. In 2010 the U.S. Dollar deteriorated against these currencies causing currency losses on net assets denominated by foreign currencies.





Income Taxes. A comparison between our 2009 and 2010 income tax expense is as follows:





Variance2010


2009


Decrease


%Income Taxes

$
(39,000
)

$
(397,000
)

$
358,000



90
%





The decrease in income tax expense derived from increase in deferred tax assets (mainly in Israel and the United States) of $2.2 million in 2010 compared to $1.3 million in 2009.





Year Ended December 31, 2009 Compared to Year Ended December 31, 2008





Revenues.





Variance2009


2008

decrease


%Total Revenues

$
117,757,000



121,037,000



3,280,000



7
%





Overall revenues decreased from 2008 levels due to the continuing impact of the global economic downturn on the financial services sector.  We experienced the impact of this slowdown as a $1.5 million decrease in Cash Management products-related revenue, a $5.5 million decrease in revenue from our Payments business, mainly attributable to our Global PAYplus solution, partially offset by a $1.1 million increase due to the acquisition of new business, and higher revenue from BBP of $3.7 million, out of which $1.8 million was due to the acquisition of a new business acquired in the fourth quarter of 2008, which contributed a full year of revenue in 2009.





Software License Fees. A comparison between our 2008 and 2009 software license fees is as follows:





Variance2009


2008


Decrease


%Software License Fees

$
11,558,000


$
16,488,000


$
4,930,000



29.9
%





The impact of the revenue downturn on license fees produced a $2.1 million decrease in United States Cash Management licenses, a $2.5 million decrease in license fees from our Payments segment and a $0.3 million decrease in BBP licenses. Some of the license fee decrease, however, was offset by an increase in hosting fees, noted below.





Maintenance, Hosting and Services Fees.





A comparison between our 2008 and 2009 maintenance and services fees is as follows:





Variance2009


2008


Increase


%Maintenance, Hosting and Services Fees

$
106,199,000


$
104,549,000


$
1,650,000



1.6
%




29





Our service fees decreased by $7.6 million, which was due to a $7 million decrease in implementations of the new Global PAYplus solution combined with a decline in the sale of additional services related to Global PAYplus. We also experienced a $1.2 million decrease in our Cash Management services orders from new and existing customers, partially offset by a $0.6 million increase in BBP services revenue.





Our hosting fees increased by $4.2 million, consisting of an increase in our BBP segment hosting fees of $2.9 million, out of which $1.1 million was due to the acquisition of a new business in the fourth quarter of 2008, and a $1.0 million increase in our Cash Management fees, out of which $0.6 million was due to the acquisition of a new business in 2009, and a $0.3 million increase in payments.





Our maintenance fees increased by $5.0 million, which consisted of increases in maintenance fees of $3.7 million in our payments segment and due to acquisitions of a new business in the fourth quarter of 2008, $0.8 million in our cash management segment and $0.5 million in our BBP segment.





Software License Costs. A comparison between our 2008 and 2009 software license costs is as follows:





Variance2009


2008


Increase


%Software License Costs

$
748,000


$
291,000


$
457,000



157
%





This large increase relates solely to the presence of certain embedded third party software component sales in conjunction with new licenses for our global payments products.





Amortization of Other Acquired Intangible Assets. A comparison between our 2008 and 2009 amortization of other acquired intangible assets is as follows:





Variance2009


2008


Decrease


%Amortization of Other Acquired Intangible Assets

$
2,028,000


$
2,167,000


$
139,000



6.4
%





The decrease in amortization resulted from a decrease of $0.6 million attributable to the completion of amortization of several intangible assets during 2008 which was partially offset by amortization of the newly acquired Accountis, Synergy and InterSoftware assets, which caused an increase in amortization of $0.46 million.





Maintenance, Hosting and Services Costs. A comparison between our 2008 and 2009 services costs is as follows:





Variance2009


2008


Decrease


%Maintenance, Hosting and Services Costs

$
53,286,000


$
53,730,000


$
444,000



0.1
%





The above result reflects an increase in depreciation expenses by $0.6 million, consistent with increased revenues from hosting fees. This was offset by a decrease in travel expenses of $1.0 million, which is consistent with the decrease in services revenue.





Impairment of Goodwill and Related Intangible Assets. A comparison between our 2008 and 2009 impairment of goodwill is as follows:





Variance2009


2008


Decrease


%Impairment of Goodwill and related intangible Assets

$
0


$
2,018,000


$
2,018,000



100
%





During 2008 we realized an impairment of goodwill related to our Radius subsidiary for a total amount of $1.66 million and an additional impairment to Radius’s related intangible assets for a total amortized cost of $358,000. No impairment was recorded for 2009.




30





Software Development. A comparison between our 2008 and 2009 software development expenses is as follows:





Variance2009


2008


Decrease


%Software Development

$
20,422,000


$
21,849,000


$
1,427,000



6.5
%





We did not capitalize any software development costs in 2009 or 2008 since the time period during which costs could have been capitalized from the point of technological feasibility until the time of general product release was very short. These costs were expensed as incurred as the amounts that could have been capitalized were not material to our financial position.





The decrease in software development expenses from 2008 to 2009 derived mainly from a decrease in our workforce personnel as part of cost savings measures, and the weakness of the NIS vs. the U.S. dollar that resulted in lower salary expenses. This was partially offset by expenses related to the additional personnel that we added as a result of the acquisition of Accounts, Synergy and Intersoftware.





Selling and Marketing. A comparison between our 2008 and 2009 selling and marketing expenses is as follows:





Variance2009


2008


Decrease


%Selling and Marketing

$
17,234,000


$
20,130,000


$
2,896,00



14.4
%





The decrease in selling and marketing expenses was primarily due to (i) a $1.6 million decrease in sales commissions due to a decrease in new sales, and (ii) a decrease in salary expenses for sales and marketing employees outside the United States due to the weakness of GBP and Euro currencies vs. the U.S. Dollar.





Provision for Doubtful Accounts. A comparison between our 2008 and 2009 provision for doubtful accounts is as follows:





Variance2009


2008


Decrease


%Provision for Doubtful Accounts

$
333,000


$
753,000


$
420,000



55.8
%





The decrease in doubtful accounts resulted from the decrease in uncertainty in the market condition of the financial services industry.





General and Administrative. A comparison between our 2008 and 2009 general and administrative expenses is as follows:





Variance2009


2008


Increase


%General and Administrative

$
19,662,000


$
17,115,000


$
2,547,000



14.9
%





The increase in general and administrative expenses was primarily due to (i) the acquisition of Accountis, Synergy and Intersoftware during 2009 and 2008, and (ii) increased salary expenses due to new hiring and higher bonuses.





Financial Income, Net. A comparison between our 2008 and 2009 financial income, net is as follows:





Variance2009


2008


Increase


%Financial Income, net

$
232,000


$
48,000


$
184,000



383
%





The increase in net financial income resulted primarily from a decrease in foreign currency fluctuations notwithstanding lower average interest income on the financial instruments that we held in 2009 compared to 2008 due to (i) maturity of long term marketable securities and (ii) generally lower short term rates.





Income Taxes. A comparison between our 2008 and 2009 income tax expense is as follows:





Variance2009


2008


Decrease


%Income Taxes

$
(397,000
)

$
1,100,000


$
1,497.000



136
%





31


The decrease in income tax expense derived from increase in deferred tax assets (mainly in Israel and the United States) of $1.0 million and a decrease in tax expense of $0.5 million from operations.





Impact of Inflation and Currency Fluctuations.





For a discussion of the impact of inflation and foreign currency fluctuations upon our results, and related hedging instruments that we have utilized with respect thereto, please see the risk factor entitled “ We may be adversely affected if the rate of inflation in Israel exceeds the rate of devaluation (if any) of the New Israeli Shekel against the dollar ” in the “Risk Factors” subsection of Item 3, “Key Information,” above and the discussion below in Item 11, “Quantitative and Qualitative Disclosures About Market Risk – Effects of Government Regulations and Location on our Business.”





For a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see the “Risks Related to Our Location in Israel” in Item 3.D above, the section entitled “Effective Corporate Tax Rate” in Item 5.B below, and “Israeli Income Tax Considerations” in Item 10 below.





B.
Liquidity and Capital Resources.





We have financed our operations primarily through the sale of equity securities in an aggregate amount of approximately $139.7 million, including net proceeds from our 1998 initial public offering in an amount of approximately $29 million, proceeds from our follow-on 1999 public offering in an amount of approximately $92.3 million and grants from the Government of Israel, Office of the Chief Scientist to fund new product development. In addition, in the past we have also raised proceeds from the exercise of employee options.  In 2010, we raised  $0.9 million from the exercise of employee options. As of December 31, 2010, working capital was $60.4 million, which included cash and cash equivalents, short term investments and marketable securities of $53 million.





Cash flows from operating activities. Net cash provided by operating activities amounted to $22.7 million for the year ended December 31, 2010 as compared to net cash provided by operating activities of $17.3 million for the year ended December 31, 2009 and $13.8 million for the year ended December 31, 2008.





This increase of $5.4 million from 2009 to 2010 reflects an increase in our net income of $7.9 million, an increase in trade payables, deferred revenue, other payable and accrued expenses of $8.8 million, in the aggregate, offset by an increase in trade receivables, net, other account receivables and prepaid expenses of $9.6 million, a decrease in depreciation and amortization, stock option compensation and accrued interest on marketable securities of $0.8 million and an increase in deferred taxes of $0.9 million compared to 2009.  The increase of $3.5 million from 2008 to 2009 reflects an increase in our net income of $3.4 million, a decrease in trade receivables, net, other account receivables and prepaid expenses of $12.6 million, an increase in depreciation and amortization, stock option compensation and accrued interest on marketable securities of $0.1 million, an increase of $0.2 million in accrued severance pay offset by a decrease of impairments of marketable securities, goodwill and other intangible assets of $2.7 million, a decrease in trade payables, deferred revenue, other payable and accrued expenses of $9.0 million, in the aggregate, and an increase in deferred taxes of $1.1 million compared to 2008.





Cash flows from investing activities. Net cash used in investing activities amounted to $12.2 million for the year ended December 31, 2010 as compared to $18.9 million for the year ended December 31, 2009 and $14.8 million for the year ended December 31, 2008. During 2010, cash was used to pay additional amounts pursuant to the terms of the acquisition agreements with Fundtech GmbH in the aggregate amount of $0.8 million. Cash used in the purchase of property and equipment increased by $0.5 million to $4.1 million for the year ended December 31, 2010 from $3.6 million for the year ended December 31, 2009. Net cash used to purchase marketable securities amounted to $5.3 million for the year ended December 31, 2010 as compared to $10.3 million used to purchase marketable securities for the year ended December 31, 2009. We believe our capital expenditure program is sufficient to maintain our current level and quality of operations. We review our capital expenditures program periodically and modify it as required to meet current needs. For 2011, our anticipated capital expenditures are $4.1 million , consisting of the purchase of (i) approximately $0.7 million of leasehold improvements and furnishings for the Company’s new office in Switzerland, (ii) approximately $0.6 million for ASP infrastructure replacements in the Company’s processing center in Norcross, Georgia and (iii) approximately $2.8 million for servers, computer equipment and associated software - See Item 4, “Information on the Company”, in the subsection titled “History and Development of the Company.”





Cash flows from financing activities. Net cash used in financing activities was $8.1 million for the year ended December 31, 2010 as compared to net cash used in financing activities of $7.8 million for the year ended December 31, 2009 and as compared to net cash provided by financing activities of $0.8 million in the year ended December 31, 2008. The increase to cash used in financing activities from 2009 to 2010 was primarily due to an increase in the aggregate value of Ordinary Shares purchased by the Company from $8.5 million in the year ended December 31, 2009 to $8.9 million in the year ended December 31, 2010.  The increase to cash used in financing activities from 2008 to 2009 was primarily due to an increase in the aggregate value of Ordinary Shares purchased by the Company from $0.7 million in the year ended December 31, 2008 to $8.5 million in the year ended December 31, 2009.


32




On June 4, 2006, the Company’s Board of Directors authorized the Company to utilize up to $20 million to purchase Ordinary Shares from time to time on the open market. On November 11, 2008, the Company’s Board of Directors authorized the purchase of up to $10 million of our Ordinary Shares from time to time on the open market. An additional authorization of $15 million was granted by the Board of directors on July 21, 2010.  As of December 31, 2010, the Company had purchased a total of 1,944,016 shares, of which 657,838 shares were repurchased in 2010 (for a total cost of approximately $8.9 million in 2010).  With $8.5 million used for purchases in 2009, approximately $7.6 million remained available from both authorizations as of December 31, 2010.





We believe that cash and cash equivalents and marketable securities will provide adequate financial resources to finance our current and planned future operations for at least the next 12 months. However, in the event that we make one or more acquisitions for consideration consisting of all or a substantial part of our available cash, we might be required to seek external debt or equity financing for such acquisition or acquisitions or to fund subsequent operations.





Borrowings and Other Indebtedness





We have not relied upon bank or other debt financings to fund our working capital requirements and have no amounts outstanding under borrowing facilities as of the date of filing of this annual report.





Effective Corporate Tax Rate





Our development facility in Israel has been granted “Approved Enterprise” status under Israel’s Law for the Encouragement of Capital Investments. We have derived, and expect to continue to derive, a portion of our income from Approved Enterprise investments. The Company has elected the alternative benefits program, which provides for a waiver of grants in return for tax exemptions. Pursuant thereto, the income of the Company derived from the Approved Enterprise Program is tax-exempt for two years commencing with the year it first earns taxable income relating to each expansion program, and subject to Israeli corporate taxes at the reduced rate of 10% to 25%, for an additional eight years.





We completed our investment in accordance with our initial approved enterprise program on November 27, 1997. In 1998, we received approval for our first expansion program. In 2000, we received approval for our second expansion program and in 2005 we received approval for our third expansion program.  In 2007, we submitted a request for an approval for our forth expansion program. Income derived from the expansion programs will be tax-exempt for a period of two years and will be subject to a reduced tax rate, as mentioned above, for an additional period of eight years. The period of benefits for these programs has not yet commenced since no income has been derived from the programs. The period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of the grant of approval, whichever is earlier. See “Note 12 - Income Taxes” to our Consolidated Financial Statements included herein for additional information.





At December 31, 2010, we had net operating loss (“NOL”) carry forwards of approximately $44.5 million and $13.3 million in the United States and in Israel, respectively. The U.S. NOL carry forwards begin to expire in 2019 through 2029 and the Israeli NOL carry forwards have no expiration. See Note 12 to the Consolidated Financial Statements included elsewhere herein.





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





During 2010, we expended $21.9 million in current expense charges related to the development of our software with no capitalized costs. During 2009 and 2008, $20.4 million and $21.8 million, respectively, in current expense charges were incurred by us for our software, with no capitalized costs. There were no grants by the Office of the Chief Scientist to us in 2008, 2009 or 2010.





D.
Trend Information





Our trends are disclosed above in the “Overview” subsection of this Item 5, “Operating and Financial Review and Prospects”. Additional, industry-wide trend information that may have an impact on our revenues, income from continuing operations, profitability and liquidity is described above under “Industry Background” in the “Business Overview” subsection of Item 4, “Information on the Company” and in the “Risk Factors” subsection of Item 3, “Key Information.”





E.
Off-Balance Sheet Arrangements





Under the purchase agreement between our Swiss subsidiary BBP and its subsidiary Synergy, additional consideration will be paid in cash if and when certain conditions are met regarding 2011 financial performance.





33





F.
Tabular Disclosure of Contractual Obligations





The following table of our material contractual obligations as of December 31, 2010, summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:





Payments Due by PeriodContractual Obligations

Total


Less than

1 year


1-3

years


3-5

years


More than

5 yearsOperating Lease Obligations

$
23,274



4,756



11,740



3,979


$
2,799





ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.





Directors and Senior Management.





The following table lists the names and ages of the current directors and executive officers:





NAME

AGE

POSITIONAvi Fischer

54

Chairman of the Board of DirectorsReuven Ben Menachem

50

Chief Executive Officer, DirectorRobert Cobuzzi

69

DirectorGerald Dogon

71

DirectorYaffa Krindel

56

DirectorStanley Stern

54

DirectorGil Weiser

69

DirectorPeter Radcliffe

61

DirectorMichael Sgroe

55

President & Chief Operating OfficerJoseph J. Aulenti

64

Executive Vice President, General Counsel and SecretaryYoram Bibring

53

Executive Vice President, Chief Financial OfficerJoseph P. Mazzetti

70

Executive Vice President, Corporate Development





Avi Fischer was elected to serve as Chairman of the Board of Directors of Fundtech on February 17, 2009. Since May 2003, Mr. Fischer has served as the Deputy Chairman of IDB Group.  IDB Group is one of Israel’s largest business groups.  Since June 2003, Mr. Fischer has served as a Co-Chief Executive Officer and a director of Clal Industries and Investments (CII), a conglomerate that invests in a few segments of the economy, including: core industrial holdings, high-tech and biotechnology, retail and logistics.  Prior to 2003, Mr. Fischer was a managing partner of Fischer Behar Chen Well Orion & Co., one of Israel’s leading law firms.  Mr. Fischer is also a co-founder of the Ganden Group, which is the controlling shareholder of IDB Group.  Mr. Fischer currently serves on the boards of numerous Israeli companies, including: Discount Investments Corp. Ltd. (TASE: DIC), Clal Biotech Ltd. (TASE: CBI), Makhteshim Agan Industries Ltd. (TASE: MAIN), Koor Industries Ltd. (TASE: KOR) and Infinity Israel-China Fund, where he serves as a co-Chairman.  Mr. Fischer’s philanthropic activities include serving as the Co-Chairman of “Matan – Investing in the Community”, one of Israel’s largest philanthropic organizations, and as a board member of the Israel Democracy Institute (IDI). Mr. Fischer earned an L.L.B. from the Tel-Aviv University and was a faculty member at the Tel-Aviv University Law School between 1983-1989.





Reuven Ben Menachem, a co-founder of Fundtech, has served as the Chief Executive Officer and as a director of the Company since its inception in April 1993. He served as Chairman of the Board of Directors of the Company from August 1998 to July 2003. Before founding the Company, Mr. Ben Menachem was employed at Logica Data Architects, a funds transfer software provider located in Waltham, Massachusetts from 1986 until 1992, most recently as a Technical Director and a Product Manager. From January 1984 until June 1986, Mr. Ben Menachem served as Director of Banking Systems at Manof Communications Systems, a middleware software provider located in Tel Aviv, Israel. Prior to joining Manof, Mr. Ben Menachem served as a senior programmer/analyst in the Israeli Air Force.





Yaffa Krindel has served as a director since February 2004. She is currently serving as a General Partner of Tamarix Ventures, a new Cleantech venture capital fund located in Herzliya, Israel. From 1997 she served as a Managing Partner and an Investment Partner in the Herzliya office of STAR Ventures, a private venture capital partnership headquartered in Munich, Germany. Before joining STAR Ventures, between 1992 and 1996, Ms. Krindel served as CFO and VP Finance of Lannet Data Communications Ltd., then a publicly traded company on NASDAQ (now part of Avaya Inc. - NYSE: AV), a leader in data communication systems for the enterprise market, then located in Tel Aviv. From 1993 to 1997 she served as CFO and director of BreezeCOM Ltd. (now part of Alvarion Ltd. - NASDAQ: ALVR), a leading provider of innovative wireless broadband network solutions. headquartered in Tel Aviv. Prior to joining Lannet, Ms. Krindel held several executive positions in companies and banks in Israel. Ms. Krindel currently serves on the boards of Syneron Medical (NASDAQ: ELOS) and Voltaire (VOLT), publicly traded companies and on the boards of the following private companies: Siano Mobile Silicon Inc., and OrSense Ltd. Ms. Krindel has earned an M.B.A. from Tel Aviv University and a B.A. in Economics and Japanese Studies from the Hebrew University in Jerusalem.


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Stanley Stern has served as a director of Fundtech since July 2003. Since 2004, Mr. Stern has served as Head of Technology Banking of Oppenheimer & Co. Inc. in New York, New York. Prior to joining Oppenheimer & Co. Inc., Mr. Stern served as the Head of Investment Banking of C.E. Unterberg, Towbin in New York, New York from 2002 to 2004. Prior to joining C.E. Unterberg, Towbin, from 2000 to 2003, Mr. Stern served as Managing Director of the U.S.A. and a member of the Board of Directors and Investment Committee for STI Ventures, a global venture capital firm. From 1981 to 2000, he was a partner with Oppenheimer & Co., Inc. and CIBC/Oppenheimer in a number of roles including Head of Technology Investment Banking. He serves as Chairman of the board of Tucows, Inc. Mr. Stern has earned degrees from Harvard University Graduate School of Business and City University of New York.





Gil Weiser has served as a director of Fundtech since July 2000 and has served as director and chairman of the executive committee to BBP, the Company’s Swiss subsidiary from 2001 to 2006. Mr. Weiser has more than 25 years experience in management and operation, with executive posts at corporate, academic and financial entities. Mr. Weiser served as the CEO of Orsus Solutions from August 2006 to 2010. He served as the Vice President of Orama, an international investment banking group from 2000 to 2001. From 1976 until 1993, Mr. Weiser served as CEO of Digital Israel, a wholly owned subsidiary of Digital Equipment Corporation located in Herzliya. From 1993 until 1995, Mr. Weiser served as President and Chief Executive Officer of Fibronics International Inc., a worldwide provider of network solutions located in Haifa, Israel. From early 1995 until the spring of 2000, Mr. Weiser served as the CEO of Hewlett Packard (Israel) located in Tel Aviv and CMS Corporation, distributor of Hewlett Packard products and services. Mr. Weiser has held, and continues to hold, significant public positions. Mr. Weiser currently serves on the boards of Clicksoftware (CKSW) and Attunity (Attuf), both publicly traded companies. He previously served on the board of other high tech companies: Formula, BBP, Optibase, Tescom, Safebit, and Regisoft and others. He also served as a director of the Tel Aviv Stock Exchange from 2002 to 2004. Mr. Weiser has served as Chairman of the Multinational Companies Forum, Vice Chairman of the Israeli Management Center and as Chairman of the Executive Board of Haifa University from 1994 to 2006. Mr. Weiser has earned a Bachelor of Science from Technion, Israel Institute of Technology in Haifa as well as a Master of Science from the University of Minnesota.





Peter Radcliffe was elected to serve as a director of Fundtech on December 20, 2008. Mr. Radcliffe joined the Board of Directors after Fundtech acquired Accountis Limited in February 2008, a UK private company specializing in electronic invoice presentment and payment, that he was chairing.  Mr. Radcliffe serves on the boards of several companies including Monitise, the provider of mobile banking and commerce on cell phones, where he is Chairman of the International business, China, Asia Pacific, India, Middle East and Africa.  Mr. Radcliffe is also a director of Finance Wales, the main venture capital provider of Wales. Mr. Radcliffe was the Global Head of ATM Channel Management, NCR, from 1999 to 2004. From 1993 to 1997 he worked for First Data Corporation, initially as Director of Operations and Business Development Europe, before promotion to MD Asia Pacific based in Hong Kong. Between 1990 and 1993 he was Director of Banking and Money Transmission at the bank Abbey National (now part of Santander). Mr. Radcliffe is a Fellow of the Chartered Institute of Bankers.





Currently Serving External Directors under the Companies Law





Robert Cobuzzi was elected to serve as a director of Fundtech on December 20, 2007. Since 2006, Mr. Cobuzzi has served as a member of the Board of Directors of Economic Development Industrial Corporation. Prior to joining the Board of Directors of Economic Development Industrial Corporation, from 2002 until 2006, Mr. Cobuzzi served as the Chief Financial Officer of Akamai Technologies Inc., a multi-million dollar global provider of software services for accelerating and improving the delivery of content and business processes over the Internet, located in Cambridge, Massachusetts. From 2000 to 2002, Mr. Cobuzzi served as the Executive Vice President and Chief Financial Officer of Network Plus Corporation, located in Massachusetts, a network-based communications provider offering broadband data telecommunications and data hosting services to small and medium-sized businesses from New Hampshire to Florida. Prior to 2002, he served as Senior Vice President, and Chief Financial Officer of Kollmorgen Corporation, a global leader in high-performance electronic equipment, systems software from 1991 to 2000. Mr. Cobuzzi also served on the Board of Directors of Kollmorgen Corporation. He has earned degrees from Northeastern University and Bentley College of Massachusetts.





Gerald Dogon was elected to serve as a director of Fundtech as of December 20, 2007. Mr. Dogon served as the Executive Vice President, Chief Financial Officer and a member of the Board of Directors of DSP Communications Inc. DSP is a leading developer of chip sets and products for cellular, personal communication services (PCS), and wireless local loop (WLL) markets, headquartered in Cupertino, California from 1994 to 1999. DSP was acquired by Intel Corp. in 2000. Prior to joining DSP, Mr. Dogon served as the Director of Finance of Nilit Ltd., a privately held company manufacturing Nylon, Polyamide fibers from 1992 to 1994. From 1991 until 1992, he served as the Vice President of Finance and Director of Mul T Lock Ltd., Yavne, Israel, manufacturers of high security products. Prior to joining Mul T Lock Ltd., Mr. Dogon served as Manager of the International Division of Israel General Bank Ltd., a commercial bank in Tel-Aviv, Israel from 1989 to 1991. Mr. Dogon served as a member of the Board of Directors and Chairman of the Audit Committee of Contahal Ltd. and Nogatech Inc in addition to serving as a member of the Investment and Nomination Committees of Scailex Corporation from 1993 to 2006. He currently is a member of the Board of Directors of Rosetta Genomics Ltd. and serves as the Chairman of the Audit Committee and a member of the Compensation and Nomination Committees of Rosetta Genomics Ltd. from 2007 to present. Mr. Dogon earned degrees from Columbia University and University of Cape Town.


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Senior Management





Joseph Aulenti was appointed General Counsel and Secretary of Fundtech on October 1, 2002 and named Executive Vice President in February, 2007. Mr. Aulenti previously served as Associate General Counsel since joining Fundtech in August 2001. Prior to joining Fundtech, Mr. Aulenti was engaged in private practice representing IT companies from October 2000 until August 2001. From May 1995 until October 2000, Mr. Aulenti served as Senior Vice President and Chief Legal Officer of Century Technology Group, Inc., a privately held technology solutions provider located in Falls Church, Virginia. From 1991 to 1995, Mr. Aulenti served as Senior Vice President - Group Counsel of Fiserv, Inc., a leading provider of banking technology solutions located in Milwaukee, Wisconsin. Mr. Aulenti was Senior Vice President and General Counsel of Citicorp Information Resources, Inc., a leading financial IT solutions provider located in Stamford, Connecticut from January 1986 until it was acquired by Fiserv in June 1991. Mr. Aulenti graduated from the Catholic University of America with a B.A., holds a M.Sc. from the University of Bridgeport and a J.D. from Fordham University.





Yoram Bibring has served as Executive Vice President and Chief Financial Officer since joining Fundtech in September 2001. Prior to joining Fundtech, Mr. Bibring served from April 1999 until May 2001 as Chief Financial Officer of ViryaNet Ltd., a provider of software solutions to the workforce management market, located in Southborough, Massachusetts. From November 1998 until April 1999, Mr. Bibring served as a Financial Consultant for ViryaNet and others. Prior to joining ViryaNet, Mr. Bibring served from February 1998 until November 1998 as Chief Financial Officer of Americash, Inc., a leading operator of e-cash platforms located in New York, New York, which was sold to American Express. Prior to joining Americash, from January 1990 until January 1998, Mr. Bibring was employed by Geotek Communications, a wireless communications service provider located in Montvale, New Jersey, where he served initially as Chief Financial Officer and then as the President of its International Division. Mr. Bibring’s financial career also includes several years in public accounting in Israel and the United States. He holds a B.A. in Accounting and Economics from Tel-Aviv University and is a certified public accountant in both Israel and the United States.





Joseph P. Mazzetti joined Fundtech in November 1994 and is currently serving as Executive Vice President Corporate Development. Prior to joining Fundtech, Mr. Mazzetti was employed from 1992 to 1994 as an Executive Vice President at PRT Corp., a software consulting company located in New York City. From 1984 to 1992, Mr. Mazzetti was employed at Logica Data Architects, a global consulting and systems integration firm located in Waltham, Massachusetts, where he held the position of Executive Vice President of the Financial Products Group with responsibility for the funds transfer, message switching and asset/liability product lines. Mr. Mazzetti has more than 30 years of experience in IT in the public and private sectors with concentration in the banking and financial institutions market. Mr. Mazzetti holds a M.Sc. in Industrial Engineering from Stevens Institute of Technology and a B.S. in Physics from Georgetown University.





Michael Sgroe has served as President and Chief Operating Officer of Fundtech since April 2004. Prior to that time Mr. Sgroe held positions as Chief Operating Officer, President of U.S. Products & Operations and Senior Vice President and General Manager of the U.S. Payments Division since joining Fundtech in May 2000. Before joining Fundtech, Mr. Sgroe was employed for over 16 years at Chase Manhattan Bank, where he served as Vice President with responsibility for developing and deploying high-performance solutions for the bank’s Payments and Cash Management businesses. Mr. Sgroe began his career in 1979 at Morgan Guaranty Trust, where he held assignments both in New York and in London. Mr. Sgroe holds a B.A. in Anthropology from the City University of New York.





Arrangements for the Election of Directors





Avi Fischer, who was elected by our Board of Directors to the position of Chairman of the Board in February 2009, is a director and Co-Chief Executive Officer of CII, the beneficial owner of 8,797,398 of our Ordinary Shares (constituting approximately 56.1% beneficial ownership of our outstanding share capital) as of April 15, 2011. Other than as described immediately above, there are no arrangements or understandings pursuant to which any of our directors or members of senior management were elected as such. There are furthermore no family relationships among any such directors or members of our senior management.





Compensation





We have entered into an employment agreement with Reuven Ben Menachem, which provides for annual review of his compensation by our compensation committee and Board of Directors. Mr. Ben Menachem’s compensation as a director of the Company is also subject to shareholder approval. Mr. Ben Menachem’s agreement also provides for a notification period in the event that the agreement is terminated without cause and a severance payment in the event the agreement is terminated subsequent to a change of control.





The aggregate remuneration we paid for the year ended December 31, 2010 to our directors and executive officers as a group was $1,486,348 in salaries and bonuses, inclusive of the retainer payments to directors as described below. In addition, certain officers are provided a car allowance, the aggregate cost of which (for all such officers combined) totaled $85,863 for 2010. There were no amounts set aside or accrued to provide for pension, retirement or similar benefits to our directors and executive officers in 2010.


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In December of 2009, our shareholders approved payment of an annual retainer of $19,000 to non-employee directors for future annual periods, beginning January 1, 2010, payable on a quarterly basis. In addition, shareholders approved that the Chairman of the audit committee of the Board of Directors (provided that such Chairman is not an external director under the Companies Law (as described below in subsection C of this Item 6)) shall be entitled to an additional annual payment of $3,500 payable on a quarterly basis, and the Chairmen of each other committee of the Board of Directors (provided that such Chairmen are not external directors) shall be entitled to an additional annual payment of $2,000 payable on a quarterly basis. In addition, each director shall be paid a meeting fee for attendance at each meeting of either the Board of Directors or of any committee thereof. The fee for in-person attendance at any such meeting shall be $1,000 per meeting, while the fee for telephonic attendance shall be $500 per meeting. The cash fees payable to any individual non-employee directors on an annual basis are subject to an overall limitation of $30,000. In December 2010, our shareholders amended the above authorization to provide an additional $20,000 retainer for the Chairman. They also eliminated the $30,000 annual limitation for the Chairman.  The shareholders further approved grants of 4,000 restricted shares for the Chairman and 2.250 restricted shares for each non-employee director.





Director Compensation





The sole cash compensation paid to directors for attending meetings of the Board of Directors or committee meetings of the Board of Directors is the retainer, Chairman’s retainer, committee Chairman’s retainer and the meeting fees described above. We also reimburse directors for their reasonable travel and other expenses related to attendance at meetings. For our external directors, such reimbursement is made in accordance with the applicable provisions of the Companies Law. For additional information, please see the discussion set forth under “External Directors,” in subsection C of this Item 6. Subject to shareholder approval for each of the proposed grants, directors also receive options to purchase Ordinary Shares or restricted share grants as described above (on a prospective basis) and below (with respect to 2009).





Option or Restricted Share Grants in Last Fiscal Year





During 2010, options to purchase 120,000 Ordinary Shares and 85,000 shares of restricted stock were granted to our directors and executive officers. The exercise price of these options was $16.68 per share, with a vesting period for each of the restricted stock and stock options of one to three years. All options and restricted shares were granted pursuant to our 2005 Plans (as defined below). Options granted under the 2005 Plans expire 10 years from the date of grant.





Board Practices





The following table sets forth certain information concerning our current directors and executive officers:





Name

Current Office(s) Held

Commencement of

Office

Termination/Renewal

Date of OfficeAvi Fischer

Chairman

February 17, 2009

2011 Annual MeetingReuven Ben Menachem

Chief Executive Officer,

October 28, 2002

2011 Annual MeetingDirectorStanley Stern (2)(3)

Director

July 22, 2003

2011 Annual MeetingYaffa Krindel (2)(4)

Director

February 12, 2004

2011 Annual MeetingGil Weiser (2)(4)(5)

Director

October 28, 2002

2011 Annual MeetingRobert Cobuzzi (1)(2)(3)(4)(6)

Director

December 20, 2007

2013 Annual MeetingGerald Dogon (1)(2)(3)(5)(7)

Director

December 20, 2007

2013 Annual MeetingPeter Radcliffe

Director

December 20, 2008

2011 Annual MeetingJoseph Aulenti

Executive Vice President, General Counsel and Secretary

October 1, 2002

Not ApplicableYoram Bibring

Executive Vice President, Chief Financial Officer

September 6, 2001

Not ApplicableJoseph P. Mazzetti

Executive Vice President, Corporate Development

June 1, 2001

Not ApplicableMichael Sgroe

President & Chief Operating Officer

June 1, 2001

Not Applicable





(1) External Director under the Companies Law.


(2) NASDAQ Independent Director.


(3) Member of the Audit Committee.


(4) Member of the Compensation Committee.


(5) Member of the Nominating Committee.


(6) Mr. Cobuzzi was elected for a three year term as an external director on December 21, 2010.


(7) Mr. Dogon was elected for a three year term as an external director on December 21, 2010.


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Our articles of association, which we refer to as the Articles of Association, provide that, unless otherwise resolved by a resolution of a general meeting of our shareholders, our Board of Directors shall consist of not less than five and not more than nine directors. Officers serve at the discretion of the Board of Directors.





Prior to every annual meeting, the Board of Directors selects a panel of between five and nine persons to be proposed to the shareholders of Fundtech for election as directors. Such individuals, if elected, serve as directors until the next annual meeting. The above does not apply to the nomination of “external” directors under the Companies Law, as explained below. Except for such nominees, no panel of candidates for a directorship may be proposed at an annual meeting unless shareholders holding at least 10% of our issued and outstanding shares who are entitled to attend and vote at a meeting deliver to Fundtech a proper notice in writing, stating that such shareholders intend to propose candidates for such directorships instead of the nominees proposed by the Board of Directors. The directors, other than the external directors under the Companies Law, are elected by a resolution at every annual meeting, for a term of office which shall end upon the convening of the first annual shareholder meeting held after the date of their election.





The Articles of Association provide that a director may appoint, by written notice to Fundtech, any individual to serve as an alternate director, subject to the provisions of the Companies Law. Any of our residing directors cannot serve an as alternate director for any of the other directors. Any alternate director has all of the rights and obligations of the appointing director except the power to appoint an alternate for himself or herself. Unless the period or scope of any such appointment is limited by the appointing director, such appointment is effective for all purposes and for a period of time concurrent with the term of the appointing director.





We have no service contracts in place with any of our directors in their capacity as such that provide for benefits upon termination of their services as directors.





External Directors





Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel (i.e., public companies) are required to appoint two independent or “external” directors to their board of directors. A person may not be appointed as an external director if the person is a relative of the controlling shareholder of the company or the person’s relative, partner, employer, another person to whom he or she was directly or indirectly subject,  or any entity under such person’s control, has, as of the date of the person’s election as an external director, or had, during the two years preceding such election, any affiliation or one of certain other prohibited relationships with the company or any person or entity controlling (or relative of such controlling person), controlled by or under common control with the company (or, in the case of a company with no controlling shareholder, any affiliation or one of certain other prohibited relationships with a person serving as chairman of the board, chief executive officer, a substantial shareholder or the most senior office holder in the company’s finance department). The term “affiliation” and the similar types of prohibited relationships include:





·
an employment relationship;


·
business or professional relationship, even if not maintained on a regular basis (but excluding a de minimis level relationship);


·
control; and/or


·
service as an office holder (as defined in the Companies Law and described under “—Duties Under the Companies Law” below).





A person may not serve as an external director if the person’s other duties or responsibilities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may adversely impact such person’s ability to serve as an external director.  or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange.  A person may furthermore not continue to serve as an external director if he or she accepts, during his or her tenure as an external director, direct or indirect compensation from the company for his or her role as a director, other than amounts prescribed under the Companies Law regulations (as described below) or indemnification, the company's undertaking to indemnify such person, exemption and insurance coverage.  If, at the time of election of an external director, all other directors who are not the company's controlling persons or their relatives are of the same gender, the external director to be elected must be of the other gender.





Our external directors are required to possess professional qualifications as set forth in the regulations promulgated under the Companies Law.  A director is deemed to have “professional qualifications” if he or she either (i) has an academic degree in economics, business management, accounting, law or public service, (ii) has an academic or other degree or has completed other higher education, all in the field of business of the company or relevant for his/her position, or (iii) has at least five years experience as either a senior managing officer in the company’s line of business with a significant volume of business, a public office, or a senior position in the company’s main line of business.  In addition, our Board of Directors is required to determine how many of our directors must have accounting and financial expertise. A director with “accounting and financial expertise” is a director that due to his or her education, experience and skills has a high expertise and understanding in financial and accounting matters and financial statements, in such a manner which allows him to deeply understand the financial statements of the company and initiate a discussion about the presentation of financial data.  In determining such number of directors with accounting and financial expertise, the Board of Directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. The regulations promulgated under the Companies Law provide that if we have an “audit committee financial expert” as defined under the rules of the SEC that has the requisite financial sophistication as defined in the NASDAQ Listing Rules and regulations, which we refer to as the NASDAQ rules, and is independent within the meaning of the independent director standards of the NASDAQ rules and the SEC rules, then our external directors are only required to possess requisite professional qualifications.


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Under the Companies Law, each committee which is authorized to exercise one of the functions of the board of directors is required to include at least one external director.  The initial term of an external director is three years, and he or she may be reelected to two additional terms of three years provided that his or her service for each such additional term is recommended by one or more shareholders holding at least one percent (1%) of the company’s voting rights and is approved by a majority at a shareholders meeting, which majority must include both criteria described below with respect to his or her initial election.  The external directors of an Israeli company whose securities are listed on certain non-Israeli stock exchanges or stock markets (including the NASDAQ Global Market), on which our Ordinary Shares are listed)may be reelected for additional periods of up to three years each (beyond the first three three-year periods), in each case provided that (i) the audit committee and thereafter the board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, (ii) the reelection for each additional period is approved by a majority of the company’s shareholders (which majority must include both criteria described below with respect to his or her initial election) and (iii) the period of service of the external director in such office and the reasons of the audit committee and board of directors for the proposed reelection for an additional period are presented to the general meeting of shareholders prior to the shareholders’ voting on the proposed reelection.





An external director may be removed from office only: (i) by a court, upon determination that the external director to be so removed ceased to meet the statutory qualifications for his or her appointment or if he or she violated his or her duty of loyalty to the company; or (ii) by the same percentage of shareholders, acting through a shareholders meeting, as is required for his or her election, if the board of directors has determined that the external director to be so removed has ceased to meet the statutory qualifications for his or her appointment or violated his or her duty of loyalty to the company and has proposed the removal to the shareholders.  Such determination by the board of directors is to be made in the first meeting of the board of directors to be convened following learning of the said cessation or violation.  An external director who ceases to meet the conditions for his or her service as such must notify the company immediately and such service shall cease immediately upon such notification.





Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control, including engagement to serve as an executive officer or director of the company or a company controlled by its controlling shareholder or employment by, or providing services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director, for a period of two years (which prohibition also applies to other relatives of the former external director for a period of one year).





An external director is elected by a majority vote at a general meeting, provided that either (i) such majority includes at least a majority of the shares held by non-controlling shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting (abstentions are disregarded in this calculation), or (ii) the total number of shares held by non-controlling, disinterested shareholders (as described in the preceding clause (i)) voted against the election of the director does not exceed two percent (2%) of the aggregate voting rights in the company.





Robert Cobuzzi and Gerald Dogon currently serve as our “external” directors within the meaning prescribed by the Companies Law. Their current term of office ends after our 2013 annual shareholder meeting.





Independent Directors Under NASDAQ Rules





Our Ordinary Shares are listed for quotation on the NASDAQ Global Market and are subject to the NASDAQ rules applicable to listed companies. Under the NASDAQ rules, we are required to appoint a sufficient number of independent directors for them to constitute a majority of our Board of Directors. The independence standard under the NASDAQ rules excludes, among other disqualifying factors, any person (i) who is an officer or employee of the Company or its subsidiaries, or (ii) that our Board of Directors believes has a relationship that would interfere with such individual’s independent judgment as a director. Additional circumstances that preclude an individual from serving as an independent director are set forth in the NASDAQ rules, including, with certain limited exceptions, receipt by a director or his/her immediate family of consulting compensation in excess of $120,000 per annum.





Robert Cobuzzi, Gerald Dogon, Avi Fischer, Yaffa Krindel, Peter Radcliffe, Stanley Stern and Gil Weiser qualify as independent directors and meet the independence standard of the NASDAQ rules, thereby providing us with a majority of independent directors on our Board of Directors.


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Independent Directors Under the Companies Law





Under a recent amendment to the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors.  An “unaffiliated director” is defined as either an external director or a director who meets the following criteria:





·
he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and





·
he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, an interruption of less than two years in the service shall not be deemed to interrupt the continuation of the service.





The foregoing amendment to the Companies Law further provides that a company may also elect to impose, via the adoption of a proposed set of corporate governance rules, certain independence requirements with respect to the composition of the board of directors as a whole.  Those requirements, if undertaken by a company, mandate that (i) if the company has no controlling shareholder or no shareholder that holds at least 25% of the company’s voting rights, most of the members of the board must be unaffiliated directors, whereas (ii) if the company has a controlling shareholder or a shareholder that holds at least 25% of the voting rights, then at least one-third of the directors need to be unaffiliated directors.





As of the date of this annual report, we have not elected to adopt these corporate governance rules.





Board Committees





Audit Committee





Pursuant to the Companies Law, the board of directors of a public company must appoint an audit committee. In addition to being comprised of a majority of unaffiliated directors under the Companies Law, as described above, an audit committee must furthermore include at least three directors, including all of the external directors elected as such in accordance with the requirements of the Companies Law, one of whom must serve as chairman of the committee. The audit committee may not include the Chairman of the Board of Directors or any director employed by or otherwise providing services to our company or to a controlling shareholder or any entity controlled by a controlling shareholder of our company. Under the Companies Law, our audit committee is responsible for (i) determining whether there are delinquencies in the business management practices of our company, including in consultation with our internal auditor or our outside, independent auditor, and making recommendations to our Board of Directors to improve such practices, (ii) determining whether to approve certain related party transactions (including compensation of office holders (as defined under the Companies Law and described under “—Duties Under the Companies Law” below)) or transactions in which an office holder has a personal interest and whether such transaction is material, (iii) where our Board of Directors approves the working plan of our internal auditor, examining such working plan before its submission to the Board and proposing amendments thereto, (iv) examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to satisfy his responsibilities (taking into consideration our special needs and size), (v) examining the scope of our independent auditor’s work and compensation and submit its recommendation with respect thereto to a general meeting of our shareholders and (vi) determining procedures with respect to the treatment of our employees’ complaints as to the management of our business and the protection to be provided to such employees.  In compliance with new regulations under the Companies Law, our audit committee also approves our financial statements, thereby fulfilling the requirement that a committee of our Board of Directors provide such approval.  Our audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, or take any other action required under the Companies Law, unless at the time of approval a majority of the committee’s members are present, of whom a majority consist of independent directors and at least one of whom is an external director.





Under the NASDAQ rules, we are required to form an audit committee consisting of at least three independent directors. In addition, NASDAQ requires that the members of the audit committee (a) not have any relationship to the Company that may interfere with the exercise of their independence, and (b) must be financially literate.





Under the NASDAQ rules and the Sarbanes-Oxley Act of 2002, our audit committee (i) has the sole authority and responsibility to select, evaluate, and, where appropriate, replace our independent auditors, (ii) is directly responsible for the appointment, compensation and oversight of the work of the independent auditors for the purpose of preparing its audit report or related work, and (iii) is responsible for establishing procedures for (A) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and (B) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters. The audit committee is required to consult with management but may not delegate these responsibilities.





Based in large part upon the responsibilities that an audit committee must bear under the Companies Law and under the NASDAQ rules, the primary purpose of our audit committee is to assist our Board of Directors in fulfilling its responsibility to oversee management’s conduct of the financial reporting process, the systems of internal accounting and financial controls and the annual independent audit of our financial statements.  Our audit committee reviews with management and our outside auditors the audited financial statements included in our Annual Report on Form 20-F and our interim quarterly financial results.


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Our audit committee must monitor the independence of our external auditors and has the authority and responsibility to nominate for shareholder approval, evaluate and, where appropriate, recommend the replacement of our external auditors. In addition, the audit committee is responsible for pre-approving all services provided to us by our external auditors.





In discharging its oversight role, our audit committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of our company and the power to retain outside counsel, auditors or other experts for this purpose. Our audit committee has a separate budget to fund its retention of such outside assistance.  Our audit committee has also adopted a charter in accordance with the NASDAQ rules.





The members of our audit committee for the fiscal year ended December 31, 2010 were Stanley Stern, Chairman, Robert Cobuzzi and Gerald Dogon, each of whom is an independent director, as determined under the NASDAQ rules and SEC rules. Mr. Cobuzzi qualifies as an audit committee financial expert under the Sarbanes-Oxley Act of 2002 and SEC regulations.  For 2011, our audit committee will consist once again of Stanley Stern, Chairman, Robert Cobuzzi and Gerald Dogon, and Mr. Cobuzzi has once again been designated as the audit committee financial expert under the Sarbanes-Oxley Act of 2002 and SEC regulations.





Compensation Committee





In addition to our audit committee, our Board of Directors has furthermore created a compensation committee consisting solely of independent directors, in accordance with NASDAQ rule requirements. The members of the compensation committee for the fiscal year ended December 31, 2010 were Yaffa Krindel, Chairman, Robert Cobuzzi and Gil Weiser. No member of the compensation committee is an officer or employee of the Company and each is an independent director, as determined under the NASDAQ rules. As required under the NASDAQ rules, which require that this committee be responsible for setting and approving salaries for our executive officers, the responsibilities of the compensation committee include administering our stock plans and approving the compensation of our executive officers. For 2011, the compensation committee will consist once again of Yaffa Krindel, Chairman, Gil Weiser and Robert Cobuzzi.





Nominating Committee





In accordance with the NASDAQ rules, which require our Board of Directors to appoint a wholly independent nominating committee that is responsible for the nomination of directors, our Board of Directors established our nominating committee in 2004. Its members during 2010 were Gil Weiser, Chairman, Gideon Argov and Gerald Dogon, each of whom is or was  an independent director, as determined under the NASDAQ rules. The nominating committee is responsible for making recommendations with respect to (i) the nomination by the Board of Directors of qualified candidates to serve as our directors, (ii) Board committee assignments and (iii) chair appointments. The nominating committee has adopted a charter, as well as policies and procedures governing its activities. The committee has also adopted and published policies and procedures governing communications from shareholders or other interested parties to our Board of Directors. For 2011, the nominating committee will consist of Gil Weiser, Chairman, Gerald Dogon and Yaffa Krindel.


41




Duties Under the Companies Law





The Companies Law codifies the fiduciary duties that an “office holder,” including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the same level of skill with which a reasonable office holder in the same position would act under the same circumstances. This includes a duty to use reasonable means to obtain information on the advisability of a given action brought for such office holder’s approval or performed by him by virtue of his position, and all other significant information pertaining to such action. The duty of loyalty requires an office holder to act in good faith and for the company’s benefit, and includes avoiding any conflict of interest between the office holder’s position in the company and any other position held by him or his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder. The Companies Law requires that an office holder of the company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing. In addition, the office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction other than in the ordinary course of business, otherwise than on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities. Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the board of directors, in certain cases with the prior approval of the audit committee, and, with respect to indemnification and insurance of these office holders, also require audit committee approval. Arrangements regarding the compensation of directors, regardless of whether to be paid in such director’s position as a director or employee of the company, require the approval of the audit committee, board of directors and shareholders. In any event, the transaction must not be adverse to the company’s interest.





Internal Auditor





Under the Companies Law, the board of directors of a public company must appoint an internal auditor proposed by the audit committee. The duty of the internal auditor is to examine, inter alia, whether the company’s conduct complies with applicable law and orderly business procedure. The internal auditor may participate in all audit committee meetings and has the right to demand that the chairman of the audit committee convene a meeting. Under the Companies Law, the internal auditor may not be an interested party, an office holder or a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative. The Companies Law defines the term “interested party” to include a person who holds 5% or more of the company’s outstanding share capital or voting rights, a person who has the right to appoint one or more directors or the general manager, or any person who serves as a director or as the general manager. We have appointed Yarel+ Partners, as our internal auditor.





Disclosure Committee





A disclosure committee consisting solely of Company employees was established in 2004 under the auspices of our audit committee to assist our Chief Executive Officer and Chief Financial Officer with monitoring developments within the Company and with the preparation of annual and quarterly reports (when appropriate). The committee is chaired by the General Counsel and has members from the finance, operations and marketing departments as well as from our BBP and Fundtech India subsidiaries. Meetings are held periodically as warranted. The committee has also adopted and published policies and procedures governing its activities. The charter of the committee was approved by our audit committee. No directors serve on the committee.





42





Employees





The following table summarizes the main category of activity and geographic location of our employees as of December 31, 2010, 2009 and 2008 respectively:





As of December 31, 2010Software

Development


Operations


Sales and

Marketing


Administration


Total

EmployeesUnited States


129



61



25



38



253Israel


37



192



3



20



252Switzerland


43



18



11



9



81United Kingdom


21



19



9



16



65Australia


5



0



1



0



6India


160



154



9



31



354Germany


6



4



1



2



13





As of December 31, 2009Software

Development


Operations


Sales and

Marketing


Administration


Total

EmployeesUnited States


128



70



40



41



257Israel


79



118



3



13



213Switzerland


33



19



11



10



73United Kingdom


21



20



9



16



66Australia


4



0



1



0



5India


215



110



8



35



368Germany


6



4



2



3



15





As of December 31, 2008Software

Development


Operations


Sales and

Marketing


Administration


Total

EmployeesUnited States


128



70



40



41



279Israel


66



101



0



12



179Switzerland


33



19



9



10



71United Kingdom


16



19



7



10



52Australia


3



0



0



0



3India


215



110



8



35



368Germany


6



4



2



3



14





We consider ourselves to have good relations with our employees and have never experienced a labor dispute, strike or work stoppage. Our employees are not represented by a labor union.





None of our employees is a party to a collective bargaining agreement with us. However, we are subject to certain provisions of collective bargaining agreements among the Government of Israel, the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists’ Association) that are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Labor and Welfare. In addition, Israeli labor laws are applicable to all of our employees in Israel. Those provisions and laws principally concern the length of the workday, minimum daily wages for workers, procedures for dismissing employees, determination of severance pay and other conditions of employment. Under these provisions, the wages of most of our employees are automatically adjusted based on changes in the Israeli Consumer Price Index. The amount and frequency of these adjustments are modified occasionally.





As a general practice, which became legally required in May 2006, we contribute funds on behalf of most of our full-time employees in Israel to an individual insurance policy known as “Managers’ Insurance.” This policy provides a combination of savings plan, insurance and severance pay benefits to the insured employee, provides for payments to the employee upon retirement or death and secures severance pay, if any, to which the employee is legally entitled upon termination of employment. The remaining part of this obligation is presented on our balance sheet as a provision for severance pay. See Note 2(l) to our Consolidated Financial Statements included herein.


43





Our Fundtech India subsidiary, as required by Indian regulations, provides a severance payment to any employee who resigns after working for five years with Fundtech India. This obligation, the valuation of which is carried out by an independent actuary, is reflected on the Fundtech India balance sheet.





We have to comply with various labor and immigration laws throughout the world, including laws and regulations in Israel, the United Kingdom, Switzerland, Australia, Singapore, India and Germany. Compliance with these laws has not been a material burden for us. If the number of our employees increases over time, our compliance with these regulations could become more burdensome.





Share Ownership of Management and Directors





Security Ownership of Directors, Senior Management and Certain Key Employees





As of April 15, 2011, the aggregate number of our Ordinary Shares beneficially owned by our directors, senior managers and certain key employees was as follows:





Owner:

No. of Ordinary Shares:Avi Fischer

Beneficially owns less than one percent (1)Reuven Ben Menachem

439,966 (2.8%)Robert Cobuzzi

Beneficially owns less than one percent.Stanley Stern

Beneficially owns less than one percent.Gil Weiser

Beneficially owns less than one percent.Gerald Dogon

Beneficially owns less than one percent.Yaffa Krindel

Beneficially owns less than one percent.Peter Radcliffe

Beneficially owns less than one percent.Joseph J. Aulenti

Beneficially owns less than one percent.Yoram Bibring

237,292 (1.5%)Joseph P. Mazzetti

Beneficially owns less than one percent.Michael Sgroe

360,847 (2.3%)Total

1,091,414 (7.0%)





(1)           Excludes shares beneficially owned by Clal Industries and Investments Ltd. (for which Mr. Fischer serves as Co-Chief Executive Officer), with respect to which Mr. Fischer disclaims beneficial ownership.





Beneficial ownership by a person, as of a particular date, is determined in accordance with the rules of the SEC and includes Ordinary Shares that are issuable upon the exercise of all options and warrants held by such person that are currently exercisable or are exercisable within 60 days of such date and all restricted shares that will complete vesting (and/or be released from relevant restrictions) within 60 days of such date. Applicable percentage ownership in the table set forth above is based on 15,588,984 Ordinary Shares outstanding as of April 15, 2011. No director, other than Mr. Fischer, is affiliated with a major shareholder. In addition, none of the shares held by our directors or members of management possesses different voting rights than shares held by any of our other shareholders.


44





As of April 15, 2011, options to purchase up to 1,094,097 Ordinary Shares were outstanding and 102,103 restricted shares have been granted to our directors and executive employees under our 2005 Plans (as described below).  The weighted average exercise price of such options was $6.58 per share. Among such options and restricted shares, options to purchase 785,633 Ordinary Shares and 363,441 restricted shares granted to our directors and executive employees are currently exercisable or will become exercisable within 60 days of April 15, 2011.





Equity Compensation Plans





Fundtech had initially established two plans for granting share options to our employees and one plan for granting share options to our directors: the Fundtech Limited 1997 Israeli Share Option Plan for the Employees of Fundtech Ltd., or the 1997 Plan; the Fundtech Ltd. 1999 Employee Option Plan, or the 1999 Option Plan; and the Fundtech Ltd. Directors’ Option Plan, or the Directors’ Option Plan.  The 1997 Plan has expired. On December 21, 2005, our shareholders approved the adoption of two new equity plans, the 2005 International Share Option and Restricted Share Incentive Plan and the 2005 Israeli Share Option and Restricted Share Incentive Plan, which we refer to as the 2005 Plans, and which, together with the 1997 Plan, the 1999 Option Plan and the Directors’ Option Plan, we refer to collectively as the Company Option Plans), which are discussed below.





Under the Company Option Plans, options to purchase our Ordinary Shares or restricted shares may be granted to the officers, directors, employees or consultants of the Company or of any of our subsidiaries. Pursuant to the Company Option Plans, a total of 5,642,815 options and restricted shares have been allocated for grant to employees and directors of Fundtech and its subsidiaries; for each option outstanding, an equivalent underlying Ordinary Share has been reserved for issuance upon the exercise thereof. As of December 31, 2010, an aggregate of 1,748,322 of the options and restricted shares granted under the Company Option Plans remained outstanding, 1,876,917 of the options granted had been exercised, and 762,845 shares (including both restricted shares and shares underlying options) remain available to be granted.





1999 Option Plan





The 1999 Option Plan was adopted in September 1999. The compensation committee or the Board of Directors determines the vesting period and expiration period for options granted under the 1999 Option Plan at the time of the grant. Options granted under this plan generally vest over a period of four years from the date of grant. As of December 20, 2005, 3,155,815 Ordinary Shares were reserved under, and allocated to, the 1999 Option Plan. Of the 3,155,815 options available for grant under the 1999 Option Plan, as of December 20, 2005, 2,131,521 options were outstanding and 232,306 options had been exercised. By authorization of the shareholders granted on December 21, 2005, the remaining 391,988 options available for grant under the 1999 Option Plan were transferred to the 2005 Plans and no options remain available for grant thereunder. As of April 15, 2011, 1,731,562 options remain outstanding under the 1999 Option Plan.





Directors’ Option Plan





The Directors’ Option Plan was adopted in May 1998. The compensation committee or the Board of Directors determines the vesting period and expiration period for options granted under the Directors’ Option Plan at the time of the grant. The options granted under the Directors’ Option Plan generally vest over a period between one and two years and expire five years from the date of grant. By authorization of the shareholders granted on December 21, 2005, the remaining 130,000 options available for grant under the Directors’ Option Plan were transferred to the 2005 Plans and no options remain available for grant thereunder. As of April 15, 2011, no options remain outstanding under the Directors’ Option Plan.





2005 Plans





On December 21, 2005, the shareholders of the Company approved the adoption of the 2005 Plans. The 2005 Plans as adopted did not increase the maximum number of the Company’s Ordinary Shares that may be issued under the Company’s option plans. Rather, the Company transferred the aggregate number of Ordinary Shares that were available for issuance (as of the date on which the 2005 Plans were adopted) under the Company’s 1999 Employee Stock Option Plan and the Director’s Option Plan (the “Previous Plans”) to the 2005 Plans. Any options that remain available for grants under the Previous Plans are now available for subsequent grants of awards under the 2005 Plans. In addition, if any outstanding award under the Previous Plans should, for any reason, expire, be canceled or be forfeited without having been exercised in full, the shares subject to the unexercised, canceled or terminated portion of such award shall become available for subsequent grants of awards under the 2005 Plans. On December 20, 2007 and December 18, 2008, our shareholders approved the allocation of an additional 300,000 shares and 1,000,000 shares, respectively, to the 2005 Plans. On December 21, 2010, our shareholders approved the allocation of an additional 750,000 shares to the 2005 Plans. The cumulative number of shares that may be issued under the 2005 Plans, inclusive of any award or grant under the Previous Plans, may not exceed 5,642,815 shares. Grants under the 2005 Plans vest over periods of between one and four years. As of April 15, 2010, 1,343,934 restricted shares and 722,500 options have been granted under the 2005 Plans.


45





Administration of Our Equity Compensation Plans





The compensation committee of the Board of Directors administers the Company Option Plans. Under such plans, the compensation committee has the authority to set the exercise price of options that are granted. The compensation committee also determines the vesting schedule for option and restricted share grants. Restricted share grants and stock option grants to directors are also approved by the audit committee of the Board of Directors, the Board of Directors and the shareholders.





ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.





Major Shareholders.





The following table summarizes information about the beneficial ownership of our outstanding Ordinary Shares as of April 15, 2011. for each person or group that we know owns 5% or more of our Ordinary Shares.





We determine beneficial ownership of shares under the rules of Form 20-F promulgated by the SEC and include any Ordinary Shares over which a person possesses sole or shared voting or investment power, or the right to receive the economic benefit of ownership, or for which a person has the right to acquire any such beneficial ownership at any time within 60 days. Applicable percentage ownership in the table set forth below is based on 15,588,984 Ordinary Shares outstanding as of April 15, 2011.





NAME OF BENEFICIAL OWNER

NUMBER OF

SHARES

BENEFICIALLY

OWNED


PERCENTAGE

BENEFICIALLY

OWNEDClal Industries and Investments Ltd.(1)


8,797,398



56.4
%All directors and executive officers as a group (12 persons)


1,091,414



7.0
%





1.
Based upon information provided to us and as of April 26, 2011, Clal Industries and Investments Ltd. (“Clal”), is an Israeli corporation and is controlled by IDB Development Corporation Ltd. ("IDBD"), a wholly-owned subsidiary of IDB Holding Corporation Ltd. ("IDBH"), an Israeli public company traded on the Tel Aviv Stock Exchange.





Ganden Holdings Ltd. ("Ganden Holdings"), a private Israeli company, held, directly and through Ganden Investments I.D.B. Ltd. ("Ganden Investments"), a private Israeli company which is an indirect wholly owned subsidiary of Ganden Holdings, approximately 54.72% of the issued share capital and voting rights of IDBH as follows: Ganden Investments held approximately 37.22% of the issued share capital and voting rights of IDBH, and Ganden Holdings held approximately 17.50% of the issued share capital and voting rights of IDBH and Shelly Bergman, through a private Israeli company which is wholly owned by her, held approximately 4.17% of the issued share capital and voting rights of IDBH.





The controlling shareholders of Ganden Holdings are Nochi Dankner, who held, directly and through a company controlled by him, approximately 56.30% of the issued share capital and voting rights of Ganden Holdings, and his sister, Shelly Bergman, who held approximately 12.41% of the issued share capital and voting rights of Ganden Holdings. The aforementioned controlling shareholders are considered joint holders of approximately 68.71% of the issued share capital and voting rights of Ganden Holdings by virtue, inter alia, of a co-operation and pre-coordination agreement between them. Nochi Dankner's control in Ganden Holdings also arises from an agreement signed by all the shareholders of Ganden Holdings, pursuant to which Nochi Dankner was granted, inter alia, veto rights at meetings of the Board of Directors and the shareholders of Ganden Holdings and its subsidiaries.





Manor Holdings B.A. Ltd. ("Manor Holdings"), a private Israeli company, held, directly and through Manor Investments - IDB Ltd. ("Manor Investments"), a private Israeli company, which is a subsidiary of Manor Holdings, approximately 13.30% of the issued share capital and voting rights of IDBH as follows: Manor Investments held approximately 10.25% of the issued share capital and voting rights of IDBH and Manor Holdings held approximately 3.05% of the issued share capital and voting rights of IDBH.





Isaac Manor and Ruth Manor and their four children, Dori Manor, Tamar Manor Morel, Michal Topaz and Sharon Vishnia, held all of the shares of Manor Investments through two private companies - Manor Holdings and Euro Man Automotive Ltd. ("Euro Man"), as follows: Ruth and Isaac Manor held all the shares of Manor Holdings, which held 60% of the shares of Manor Investments; In addition, Ruth and Isaac Manor and their aforementioned children held all of the shares of Euro Man, which held 40% of the shares of Manor Investments, as follows: Ruth Manor and Isaac Manor each held 10% of the shares of Euro Man; Dori Manor, Tamar Manor Morel, Michal Topaz and Sharon Vishnia each held 20% of the shares of Euro Man.


46




Avraham Livnat Ltd. ("Livnat"), a private Israeli company, held, directly and through Avraham Livnat Investments (2002) Ltd. ("Livnat Investments"), a private Israeli company which is a wholly-owned subsidiary of Livnat, approximately 13.31% of the issued share capital and voting rights of IDBH as follows: Livnat Investments held 10.2% of the issued share capital and voting rights of IDBH and Livnat  held approximately 3.11% of the issued share capital and voting rights of IDBH.





Livnat Investments is wholly owned by Livnat, which is entirely held by Avraham Livnat and his three sons, Zeev Livnat, Zvi Livnat and Shay Livnat, as follows: Avraham Livnat held 75% of the voting rights in Livnat and Zvi Livnat held 25% of the voting rights in Livnat. In addition, each of Messrs. Zeev Livnat, Zvi Livnat and Shay Livnat held approximately 33.3% of the rights to capital in Livnat.





Ganden Investments, Manor Investments and Livnat Investments are parties to a shareholders agreement (as amended) (the "IDBH Shareholders Agreement"), for the maintaining and exercising of their joint control of IDBH, with respect to their aggregate holdings of approximately 51.7% of the issued share capital of IDBH, as follows: (i) Ganden Investments - approximately 31.02%; (ii) Manor Investments - approximately 10.34%; and (iii) Livnat Investments - approximately 10.34% (directly and through their parent companies). The term of the IDBH Shareholders Agreement expires in May 2023.





The additional holdings in IDBH as follows: Ganden Holdings ( approximately 17.5%, Ganden Investments - approximately 6.2%, Shelly Bergman (through a private Israeli company which is wholly owned by her) - approximately 4.17%, Manor Holdings - approximately 2.96% and Livnat - approximately 2.97%, are not included in the "controlling stake" as defined in the IDBH Shareholders Agreement.



Our major shareholders do not have voting rights that differ from those of our other shareholders.





Related Party Transactions





New Israeli Lease





On August 17, 2009, we entered into a lease agreement with respect to our new Herzliya, Israel facilities. Our landlord with respect to such leased facilities, Gav Yam Properties Ltd., is an Israeli limited company that is affiliated with the IDB group of companies, which control our controlling shareholder, Clal Industries and Investments Ltd. The term of the lease is ten (10) years, and our total current monthly and yearly costs under the lease (including rent, maintenance and parking rent) are approximately 368,594 NIS and 4,423,128 NIS, respectively (approximately $81,817 and $981,626, respectively, based on an exchange rate of NIS 3.71 for each U.S. dollar as of May 3, 2010).


47





Our entry into the transaction followed upon a careful, detailed financial analysis of competing facilities into which we considered moving upon the expiration of our then-current Israeli lease in Ramat Gan, Israel. We examined various alternatives for a period of three months, and, after looking at such alternatives, we entered into preliminary negotiations with five landlords and advanced negotiations with three landlords prior to choosing the new Herzliya facilities. Based on such analysis, our Board of Directors determined that the new Herzliya facilities offered the best value (the lowest rent for comparable space, saving us approximately $170,000 per year) relative to the other locations and also offered flexibility as to future growth. Our Board of Directors (with the exception of Avi Fischer, who did not participate in discussions or the relevant vote, due to his affiliation with the IDB group of companies) approved the transaction in accordance with the Companies Law, which allows for mere board approval for a related party transaction that (i) is in a company’s best interests (based on the financial analysis that we conducted) and (ii) is not an extraordinary transaction (which our Israeli legal counsel determined to be true, given that the lease merely replaced our existing facilities with new facilities at a less expensive cost and did not therefore have a material effect on our profitability, properties or liabilities).





A copy of our new Israeli lease agreement has been filed as an exhibit to our annual report on Form 20-F for the 2009 year.





Directors and Officers’ Insurance





We have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, for a breach of his duty of care.





Our Articles of Association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders for acts which he or she performed in his or her capacity as an office holder in relation to:





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


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


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





Our directors and officers insurance policy is competitively bid for each year through brokers operating in the United States and Israel. As part of this process, bids were solicited by our Israeli broker from major carriers, inclusive of Clal Insurance Ltd., which is owned by Clal Industries and Investments Ltd., our largest shareholder. The Clal proposal was the most economical and provided coverage equivalent to that offered by every other bidder, and we therefore accepted it for the current, 2010-2011 coverage year. This transaction, made in the ordinary course of business and with a premium cost substantially below one percent (1%) of our revenues, was approved by our management in accordance with our policy for approval of related party transactions.





Indemnification





Our shareholders have approved our entering into undertakings to indemnify in advance our directors and office holders for the breach of their duty of care to the fullest extent permitted by the Companies Law, and entering into indemnification agreements with our directors.





Under Section 260 of the Companies Law, we are entitled to undertake in advance to indemnify an office holder for the breach of his or her duty of care, provided that the articles of association of the Company permit such indemnification in advance (our Articles of Association, as amended at our 2007 annual meeting, so permit) and further provided that such indemnification shall be limited to the type of events that, in the discretion of the board of directors of the Company, may be anticipated at such time of undertaking and that such undertaking shall be limited to an amount or standard which the Board of Directors deems reasonable in light of the applicable circumstances. This allowance for indemnification is specifically limited in its scope by Section 263 of the Companies Law, which provides that a company may not indemnify an office holder nor enter into an insurance contract which would provide coverage for any liability incurred as a result of the following: (a) a breach by the office holder of his or her fiduciary duty unless he or she acted in good faith and had a reasonable basis to believe that the act would not prejudice the interests of the company; (b) a breach by the office holder of his or her duty of care if such breach was done intentionally or recklessly; (c) any act or omission done with the intent to derive an unlawful personal benefit; or (d) any fine levied against such office holder. In addition, under Section 259 of the Companies Law a company may exempt an office holder from his or her duty of care to the company, in whole or in part and subject to the limitations of Section 263 of the Companies Law described above, provided that such actions are authorized by the Company’s articles of association (our Articles of Association, as amended at our 2007 annual meeting, so authorize).





Fees and Reimbursement of Expenses for Members of the Board of Directors.





Our members of the Board of Directors are entitled to compensation and reimbursement of expenses for their services to the Company. See Item 6 above.


48




Interests of Experts and Counsel





Not applicable.





ITEM 8.  FINANCIAL INFORMATION.





Consolidated Statements and Other Financial Information.





The following Consolidated Financial Statements of Fundtech Ltd. and its subsidiaries for the years ended December 31, 2008, 2009 and 2010, together with the report of our independent auditors thereon, are presented under Item 18 of this annual report:





Report of Independent Auditors


F-1 – F-2Consolidated Balance Sheets


F-3Consolidated Statements of Operations


F-4Statements of Changes in Shareholders’ Equity


F-5 – F-6Consolidated Statements of Cash Flows


F-7 – F-8Notes to Consolidated Financial Statements


F-9 – F-34





Legal Proceedings





We are not a party to any litigation or legal proceeding of a material nature, either in Israel or abroad, and are not aware of any other pending or threatened litigation that we believe may have a material adverse effect on us or our business.





Dividend Distribution Policy





We have never declared or paid dividends to our shareholders, but we intend to do so beginning in 2011.  Because we have received benefits under Israel’s Law for the Encouragement of Capital Investments, 1959, as amended, which we refer to as the Investment Law, we will be required to recapture the deferred corporate income tax applicable to the amount distributed out of tax-exempt income generated by our Approved Enterprise (grossed up to reflect such tax) at the rate which would have been applicable to such income had such income not been exempted from tax under the Investment Law. This rate generally ranges from 10% to 25%, depending on the extent of non-Israeli shareholdings in the Company. In addition, dividends paid out of any income generated by our Approved Enterprise are generally subject to withholding tax at the rate of 15%, or at the lower rate under an applicable tax treaty. The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 25%, or at the lower rate under an applicable tax treaty.





Under the Israeli Companies Law, dividends may be paid by an Israeli company only out of its profits, as defined in such law. Under our Articles of Association, the authority to declare dividends is vested in our Board of Directors. In the event we pay dividends, it is anticipated that any dividends paid to non-residents of Israel would be paid in NIS.





Significant Changes.





Since the date of our consolidated financial statements included in this annual report, there has not been a significant change in our Company other than as described (if at all) in the notes to such financial statements.


49





ITEM 9.  THE OFFER AND LISTING.





Market and Price Information.





Our Ordinary Shares are listed on the NASDAQ Global Market under the symbol “FNDT”. The following table sets forth, for the periods indicated, the high and low closing sales prices for the Ordinary Shares:





HIGH


LOWFive most recent full financial years:2006

$
12.94


$
8.722007


17.78



11.332008


15.20



6.142009


14.24



5.112010


16.75



10.19Quarterly information for two most recent years and subsequent quarters:2009First Quarter

$
8.52


$
5.11Second Quarter


10.12



8.01Third Quarter


12.00



8.37Fourth Quarter


14.24



11.472010First Quarter

$
14.21


$
12.63Second Quarter


14.04



10.36Third Quarter


14.05



10.19Fourth Quarter


16.75



13.502011First Quarter

$
18.88


$
16.49Most recent six monthsNovember 2010

$
15.79


$
13.90December 2010


16.75



15.96January 2010


18.33



16.49February 2011


18.88



17.24March  2011


18.16



16.63April 2011


60.12



39.00





On April 15, 2011, the last closing sale price of the Ordinary Shares, as reported by the NASDAQ Global Market, was $17.84 per share. As of April 15, 2011, we had 77 shareholders of record. 17,135,485 of the Company’s Ordinary Shares (of which 13,452,673 are in CEDE accounts), constituting 79% of the Company’s outstanding Ordinary Shares, are held by record holders located in the United States and that there are 45 record holders located in the United States.  The Company estimates that in excess of 77% of the Company’s Ordinary Shares are beneficially owned by non-United States persons. We believe that the number of beneficial owners of our Ordinary Shares is approximately 1,794.





Since August 19, 2003, our Ordinary Shares have also been listed on the Tel Aviv Stock Exchange under the symbol “FNDT”. The following table sets forth, for the periods indicated, the high and low closing sales prices in NIS of our Ordinary Shares on the Tel Aviv Stock Exchange.


50





HIGH


LOWMost recent full financial years:2006
NIS
58.88

NIS
39.212007

71.65


37.482008

53.93


23.572009

53.86


21.232010

60.70


38.66Quarterly information for two most recent years and subsequent quarters:2009First Quarter
NIS
34.99

NIS
21.23Second Quarter

40.05


34.64Third Quarter

45.03


33.40Fourth Quarter

53.86


43.212010First Quarter
NIS
53.22

NIS
47.04Second Quarter

52.65


39.00Third Quarter

52.76


39.21Fourth Quarter

60.12


49.162011First Quarter
NIS
68.10

NIS
58.12Most recent six monthsNovember 2010
NIS
56.11

NIS
50.08December 2010

60.12


58.15January 2010

65.80


58.12February 2011

68.10


62.74March  2011

64.77


59.10April 2011

62.26


59.34





As of April 15, 2011, the exchange rate of the NIS to the U.S. Dollar was $1 = 3.42 NIS.





ITEM 10.  ADDITIONAL INFORMATION





Share Capital.





Not Applicable.





Memorandum and Articles of Association





Register





The Company’s registration number at the Israeli registrar of companies is 52-004375-3.





Company’s Objectives





The Company’s objectives, as set forth in our Articles of Association, are to carry on any business and do any act which is not prohibited by law. We may also make contributions of reasonable sums to worthy purposes even if such contributions are not made on the basis of business considerations.


51





Duties and Approval of Certain Transactions Under the Companies Law





The Companies Law codifies the fiduciary duties that an “office holder,” owe to a company. An office holder is defined in the Companies Law as a (i) director, (ii) general manager, (iii) chief business manager, (iv) deputy general manager, (v) vice general manager, (vi) another manager directly subordinate to the managing director or (vii) any other person assuming the responsibilities of any of the forgoing positions without regard to such person’s title.  An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the same level of skill with which a reasonable office holder in the same position would act under the same circumstances. This includes a duty to use reasonable means to obtain information on the advisability of a given action brought for such office holder’s approval or performed by him by virtue of his position, and all other significant information pertaining to such action. The duty of loyalty requires an office holder to act in good faith and for the company’s benefit, and includes avoiding any conflict of interest between the office holder’s position in the company and any other position held by him or his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder. The Companies Law requires that an office holder of the company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. A personal interest, as defined under the Companies Law, includes any personal interest held by the office holder’s spouse, siblings, parents, grandparents or descendants; spouse’s descendants, siblings or parents; and the spouses of any of the foregoing, and also includes any interest held by any corporation in which the office holder owns 5% or more of the share capital, is a director or general manager or in which he or she has the right to appoint at least one director or the general manager.  A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the matter.  In the case of a transaction which is not an extraordinary transaction (as defined below) and does not involve the compensation of the office holder, after the office holder complies with the above disclosure requirement, only approval by the board of directors is required unless the articles of association of the company provide otherwise (ours do not provide otherwise).  If the transaction is an extraordinary transaction as defined under Israeli law (i.e., a transaction other than in the ordinary course of business, otherwise than on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities), then, in addition to any approval required by the articles of association, the transaction must be approved by both the audit committee and the board of directors. Notwithstanding having been approved in compliance with the foregoing processes, any transaction in which an office holder has a personal interest must, in addition, not be adverse to the company’s interest in order for it to be properly approved.





Under the Companies Law, all arrangements as to compensation, indemnification and insurance of office holders who are not directors require approval of the board of directors, with the prior approval of the audit committee (or a compensation committee of the board of directors that meets all of the requirements applicable to an audit committee).  The amendment of existing compensation terms of office holders who are not directors merely requires the approval of the audit committee, if that committee determines that the amendment is not substantial in relation to the existing terms.  Arrangements regarding the compensation of directors, regardless of whether to be paid to a director in his or her position as a director or employee of the company, require the approval of the audit committee, board of directors and shareholders, except in certain circumstances prescribed in regulations promulgated under the Companies Law.





The Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights in the company 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, or a transaction with a controlling shareholder or his or her relative, directly or indirectly, including for receipt of services from an entity controlled by him or her (or his or her relative), and the terms of engagement and compensation of a controlling shareholder who is an office holder or an employee of the company, require the approval of the audit committee, the board of directors and the shareholders of the company.  The shareholder approval must include the holders of a majority of the shares held by all shareholders who have no personal interest in the transaction and are voting on the subject matter (with abstentions being disregarded) or, alternatively, the total shares of shareholders who have no personal interest in the transaction and who vote against the transaction must not represent more than two percent (2%) of the voting rights in the company.  To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.  In certain cases provided in regulations promulgated under the Companies Law, shareholder approval is not required.





The approvals of the board of directors and shareholders are required for a private placement of securities (or a series of related private placements during a 12-month period or that are part of one continuous transaction or transactions conditioned upon each other) in which:




·
the securities issued represent at least 20% of the company’s actual voting power prior to the issuance of such securities, and such issuance increases the relative holdings of a 5% shareholder or causes any person to become a 5% shareholder, and the consideration in the transaction (or a portion thereof) is not in cash or in securities listed on a recognized stock exchange, or is not at a fair market value; or




·
a person would become, as a result of such transaction, a controlling shareholder of the company.




The foregoing approvals with respect to a private placement do not apply to a company like ours, whose securities were offered only outside of Israel, or to a company whose securities are listed only outside of Israel.





Under the Companies Law, a shareholder has a duty to act in good faith towards the company in which he holds shares and towards other shareholders and to refrain from abusing his power in the company including voting in the general meeting of shareholders on:







·
any amendment to the articles of association;




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




·
a merger; or




·
approval of actions of office holders in breach of their duty of loyalty and of interested party transactions.


52


A shareholder has the general duty to refrain from depriving rights of other shareholders. Any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, under the provisions of the articles of association, has the power to appoint an office holder in the company, is under a duty to act in fairness towards the company. The rules pertaining to a breach of contract apply to a breach of the duty to act in fairness, mutatis mutandis, bringing into account the shareholder’s position in the company. The Companies Law does not describe the substance of this duty.





Directors





Any director is entitled to vote in a meeting of our Board of Directors, except that a director who has a personal interest in any matter which is considered at a meeting of our Board of Directors, may not be present at such meeting or vote on such matter, subject to certain exceptions, including an allowance for him or her to be present in order to present the transaction, if the chairman of the audit committee or board of directors (as applicable) determines that such presentation by him or her is necessary.  If the majority of our Board members or members of our audit committee, as applicable, have a personal interest in a transaction, they may all be present for the presentation of, and voting upon, the transaction, but it must also then be approved by the shareholders of the company.





A quorum at a meeting of our Board of Directors shall be constituted by the presence in person, by alternate or by telephone or similar communication equipment, of a majority of the directors then in office who are lawfully entitled to participate and vote at the meeting.





If within one-half hour (or within such longer time not to exceed one (1) hour, as the Chairman of the meeting, at his discretion, may decide) from the time appointed for the convening of the Board meeting, a quorum is not present, the Board meeting shall stand adjourned to the same day in the next week at the same time and place (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday).





Our business is managed by our Board of Directors, which may exercise all such Company powers and perform on our behalf all such acts as are not, by the Companies Law or by our Articles of Association, required to be exercised or performed through a general meeting of our shareholders. Our Articles of Association provide that the Board of Directors may from time to time, at its discretion, cause us to borrow or secure the payment of any sum or sums of money for the Company’s purposes, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking of the whole or any part of our property, both present and future, including its uncalled or called but unpaid capital for the time being.





There is no age limit as to the ability of individuals to serve as members of our Board of Directors.





A director is not required to hold our shares as a condition to his or her nomination or election as a director.





Rights Attached to our Ordinary Shares





All dividends (if any) declared by our Board of Directors shall be declared and paid in proportion to the amount paid up on account of the nominal value of the Ordinary Shares in respect of which the dividend is being paid. As regards to Ordinary Shares not fully paid throughout the period in respect of which the dividend is paid, dividends in respect thereto shall be apportioned and paid pro rata according to amounts deemed under our Articles of Association to be paid up on account of the nominal value of such shares during any portion or portions of the period in respect of which the dividend is paid.





The distribution of dividends is at the discretion of our Board of Directors, which is under no obligation to distribute dividends to our shareholders out of the Company’s profits.





Under our Articles of Association, every shareholder who is present, in person, by proxy, or by written ballot or is deemed under the Companies Law to be present at a general meeting of the shareholders, shall be entitled to one vote for each Ordinary Share of which he or she is the holder.





Upon liquidation, all available surpluses, after payments of all debts, shall be distributed to the holders of our Ordinary Shares on a pro-rata basis.





Changes to Rights Attached to our Shares





Changes to the rights attached to our Ordinary Shares require the approval of shareholders present, in person, by proxy, or by written ballot, or deemed under the Companies Law to be present, holding greater than fifty percent (50%) of the total voting power attached to the Ordinary Shares whose holders were present, in person, by proxy, or by written ballot, or deemed under the Companies Law to be present, at such general meeting, and voted thereon. If, at any time, the share capital of the Company is divided into different classes of shares, the right attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied only upon consent of a separate general meeting of the holders of the shares of that class and the provisions of our Articles of Association relating to general meetings shall apply to every such separate general meeting. The enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed to vary, modify or abrogate the rights attached to previously issued shares of such class or of any other class of shares.


53




General Meetings





We are required to hold an annual general shareholders meeting once in every calendar year within a period of not more than fifteen (15) months after the last preceding annual general shareholders meeting. All general shareholders meetings other than the annual general shareholders meeting are deemed to be special shareholders meetings. Our Board of Directors may call a general shareholders meeting whenever it sees fit, and, under the Companies Law, is required to call a general shareholders meeting upon a demand in writing by (i) a shareholder or shareholders holding at least 5% of the outstanding shares and 1% of the voting rights in the Company or (ii) a shareholder or shareholders holding at least 5% of the voting rights in the Company. Subject to applicable law and regulations, prior notice of at least 35 days of any general shareholders meeting, specifying the place, date and hour of the meeting, shall be given to the shareholders of the Company. No business shall be transacted at any general shareholders meeting unless a quorum is present when the meeting proceeds to business. Our Articles of Association provide that for all purposes, the quorum shall not be less than two (2) shareholders present in person, or by proxy, or deemed by the Companies Law to be present at such meeting, holding, in the aggregate, at least, thirty-three and one-third percent (33 1/3%) of the voting rights in our issued share capital. If, within half an hour from the time appointed for the meeting, a quorum is not present (or within such longer time not exceeding one hour as the Chairman of the meeting may decide), the meeting, if convened upon the requisition of the shareholders, shall be dissolved; in any other case, it shall stand adjourned to the same day in the next week at the same place and time (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday), or any other day, hour and/or place as the directors shall notify the shareholders. If a quorum is not present at the second meeting within half an hour from the time appointed for the meeting, any two shareholders present personally or by proxy or any other valid instrument, shall nevertheless constitute a quorum, and shall be entitled to deliberate and to resolve in respect of the matters for which the meeting was convened.





Ownership of Our Shares





Our Articles of Association and the laws of the State of Israel do not restrict in any way the ownership or voting of our shares by non-residents of Israel, except for shareholders who are subjects of countries that are in a state of war with Israel.





Change of Control





Our Articles of Association do not contain specific provisions intended to delay, defer or prevent a change of control.





The Companies Law provides that the acquisition of shares in a public company on the open market (i.e., from other shareholders of the company) must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of 25% of the voting rights of a public company. The rule does not apply if there already is another holder of 25% of the voting rights of the public company. Similarly, the law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would hold greater than 45% of the voting rights of the public company, unless there already is another holder of greater than 45% of the voting rights of the public company.





The foregoing provisions do not apply to:




·
a private placement in which the company’s shareholders approved such holder owning 25% or more of the voting rights in the company (if there is no other shareholder that holds 25% or more of the voting rights in the company); or more than 45% of the voting rights in the company (if there is no other shareholder that holds more than 45% of the voting rights in the company); or




·
a purchase from an existing holder of 25% or more of the voting rights in the company that results in another person becoming a holder of 25% or more of the voting rights in the company or a purchase from an existing holder of more than 45% of the voting rights in the company that results in another person becoming a holder of more than 45% of the voting rights in the company.





Regulations adopted under the Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading outside of Israel if, according to the law in the country in which the shares are traded, including the rules and regulations of the stock exchange on which the shares are traded, there is either a limitation on acquisition of any level of control of the company, or the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public.




54


The Companies Law also provides that if following any acquisition of shares, the acquirer holds 90% or more of the company’s shares or of a class of shares, the acquisition must be made by means of a tender offer for all of the target company’s shares or all of the shares of the class, as applicable, not held by the acquirer. An acquirer who wishes to eliminate all minority shareholders must do so by way of a tender offer and hold, following consummation of the tender offer, more than 95% of all of the company’s outstanding shares (and provided that a majority of the offerees that do not have a personal interest in such tender offer shall have approved it, which condition shall not apply if, following consummation of the tender offer, the acquirer holds at least 98% of all of the company’s outstanding shares). If, however, following consummation of the tender offer the acquirer would hold 95% or less of the company’s outstanding shares, the acquirer may not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares of the target company. Appraisal rights are available with respect to a successfully completed full tender offer for a period of six months after such completion, although the acquirer may provide in the tender offer documents that a shareholder that accepts the offer may not seek appraisal rights.





Mergers and Acquisitions





A merger of a company requires the approval of the holders of a majority of the voting power represented at the annual or special general meeting in person or by proxy or by written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Companies Law, excluding shares held by the other party to the merger, or by any person holding at least 25% of the means of control of the other party to the merger, or anyone acting on behalf of either of them, including any of their affiliates.  If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling shareholders (as described above in this Item 10 under “—Duties and Approval of Certain Transactions Under the Companies Law”).  Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.





The Companies Law further provides that the foregoing approval requirements will not apply to shareholders of a wholly-owned subsidiary in a rollup merger transaction, or to the shareholders of the acquirer in a merger or acquisition transaction if:




·
the transaction does not involve an amendment to the acquirer’s memorandum or articles of association;




·
the transaction does not contemplate the issuance of more than 20% of the voting rights of the acquirer which would result in any shareholder becoming a controlling shareholder; and




·
there is no “cross ownership” of shares of the merging companies, as described above.




Material Contracts





During the past two years, we have not been party to any contracts that have been material to our business and that were or had been entered into outside of the ordinary course of business.





Exchange Controls





There are currently no Israeli currency control restrictions on remittances of dividends on the Ordinary Shares or the proceeds from the sale of the shares.





Neither our Memorandum of Association nor our Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of Ordinary Shares by non-residents of Israel, except for shareholders who are subjects of countries that are in a state of war with Israel.





Taxation





United States Federal Income Tax Considerations





Subject to the limitations described herein, the following discussion summarizes the material United States federal income tax consequences to a U.S. Holder 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 for U.S. federal income tax purposes:





·
an individual citizen or resident of the United States;


·
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or any political subdivision thereof, or the District of Columbia;


·
an estate, the income of which is subject to U.S. federal income tax regardless of its source; or


·
a trust, (i) if 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.




55


This discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each U.S. Holder’s decision to purchase our Ordinary Shares. Certain aspects of U.S. federal income taxation relevant to a holder of Ordinary Shares that is not a U.S. Holder (a “non-U.S. Holder”) are also discussed below. If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds Ordinary Shares, the tax treatment of the partnership as a partner in such partnership will generally depend on the activities of the partnership. Such a partner or partnership should consult its advisor as to its tax consequences.





This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury Regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. Holder in light of such holder’s individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or U.S. federal income tax consequences to shareholders that are subject to special treatment, including U.S. Holders that:





·
are broker-dealers or insurance companies;


·
are regulated investment companies or real estate investment trusts;


·
have elected mark-to-market accounting;


·
are tax-exempt organizations or retirement plans;


·
are financial institutions or “financial services entities”;


·
hold Ordinary Shares as part of a straddle, “hedge” or “conversion transaction” with other investments;


·
acquired their Ordinary Shares upon the exercise of employee stock options or otherwise as compensation;


·
are grantor trusts;


·
are certain former citizen or long-term residents of the United States; or


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





In addition, this discussion does not address any aspect of state, local or non-U.S. tax laws or the possible application of U.S. federal gift or estate taxes.





Each holder of Ordinary Shares is advised to consult such holder’s own tax advisor with respect to the specific tax consequences to such holder of purchasing, owning or disposing of our Ordinary Shares, including the applicability and effect of federal, state, local and foreign income tax and other tax laws in such holder’s particular circumstances.





Taxation of Distributions Paid On Ordinary Shares. A U.S. Holder will be required to include in gross income as ordinary 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 such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in our Ordinary Shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of our Ordinary Shares. The dividend portion of such distributions generally will not qualify for the dividends received deduction available to corporations.





Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder (including any non-U.S. taxes withheld therefrom) generally will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.





The maximum U.S. federal income tax rate on certain “qualified dividends” paid to non-corporate U.S. Holders for taxable years beginning on or before December 31, 2012 is currently 15% and subject to U.S. ordinary tax rates thereafter. This reduced rate generally will not apply, however, to dividends paid by us if we are treated as a passive foreign investment company in the taxable year the dividends are paid or in the prior taxable year, or if certain holding period or other requirements are not met. See the discussion below under the heading “Passive Foreign Investment Company Status.” U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax rate that will be applicable to their receipt of any dividends paid with respect to our Ordinary Shares.





56




U.S. Holders will have the option of claiming the amount of any non-U.S. income taxes withheld on a dividend distribution 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 such amount may be claimed as a credit against the individual’s U.S. federal income tax liability. The amount of foreign income taxes that may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. These limitations include, among others, rules that limit foreign tax credits allowable with respect to specific classes of income and the U.S. federal income taxes otherwise payable with respect to each such class of income. The total amount of allowable foreign tax credits in any year cannot exceed the U.S. Holder’s regular U.S. tax liability for the year attributable to foreign source taxable income.





A U.S. Holder will be denied a foreign tax credit with respect to non-U.S. income taxes withheld from a dividend received on our Ordinary Shares if (1) such U.S. Holder has not held the Ordinary Shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend, or (2) to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the Ordinary Shares are not counted toward meeting the required 16-day holding period. Distributions of current or accumulated earnings and profits generally will be foreign source passive income for U.S. foreign tax credit purposes.





Taxation of the Disposition of Ordinary Shares. Upon the sale, exchange or other disposition of our Ordinary Shares, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in such Ordinary Shares, which is usually the cost of such shares, and the amount realized on the disposition. A U.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles, while 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,” unless such U.S. Holder has elected to use the settlement date to determine its proceeds of sale. A U.S. Holder that receives foreign currency upon disposition of Ordinary Shares and converts the foreign currency into U.S. dollars subsequent to the settlement date or trade date (whichever date the taxpayer was 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 U.S. dollar, which will generally be U.S. source ordinary income or loss.





Capital gain from the sale, exchange or other disposition of Ordinary Shares held more than one year is long-term capital gain, and is eligible for a reduced rate of taxation for certain individuals, trusts and estates of 15% for taxable years beginning on or before December 31, 2012 and generally subject to a maximum capital gain rate of 20% thereafter. Gains recognized by a U.S. Holder on a sale, exchange or other disposition of Ordinary Shares generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Under the income tax treaty between the United States and Israel (the “Tax Treaty”), certain gains derived from the sale, exchange or other disposition of Ordinary Shares by a holder who qualifies as a resident of the United States and is entitled to claim the benefits under the Tax Treaty, and who sells the Ordinary Shares within Israel, may be treated as foreign-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 certain limitations.





Anti-Deferral Regimes. Notwithstanding the above rules regarding distributions and dispositions, special rules may apply to some U.S. Holders (or to the direct or indirect beneficial owners of some non-U.S. Holders) if one or more anti-deferral regimes discussed below are applicable. The rules regarding each of these regimes, as well as their interaction with each other, are complex, and U.S. Holders should consult their tax advisers with respect to any impact these regimes may have on the tax consequences of their purchase, ownership or disposition of our Ordinary Shares.





Controlled Foreign Corporation Status. If more than 50% of the voting power of all classes of our stock or the total value of the stock of our company is owned, directly or indirectly, by U.S. Holders, each of whom own after applying rules of attribution 10% or more of the total combined voting power of all classes of our stock, we would be treated as a “controlled foreign corporation” or “CFC” under Subpart F of the Code. This classification would bring into effect many complex rules including the required inclusion in income by such 10% U.S. Holders of their pro rata share of our “Subpart F income” (as defined by the Code) and our earnings invested in “U.S. property” (as defined by Section 956 of the Code). In addition, under Section 1248 of the Code, if we are considered a CFC at any time during the five-year period ending with the sale or exchange of our Ordinary Shares by such a 10% U.S. Holder, gain from such sale or exchange of our Ordinary Shares will generally be treated as ordinary dividend income to the extent of our earnings and profits attributable to the stock sold or exchanged. We do not believe that we are a CFC, but if we were to become a CFC, we would not be a passive foreign investment company, as discussed below, with regard to any such 10% U.S. Holder. Because of the complexity of Subpart F, and because we may never be a CFC, a more detailed review of these rules is beyond of the scope of this discussion.





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Passive Foreign Investment Company Status. We would be classified as a passive foreign investment company, or PFIC, if either (i) 75% or more of our gross income in a taxable year (including our pro rata share of the gross income of any company treated as a corporation for U.S. federal income tax purposes, in which we are considered to own directly or indirectly 25% or more of the shares by value) is passive income, or (ii) the value of our assets averaged quarterly over the taxable year (including our pro rata share of the assets of any company treated as a corporation for U.S. federal income tax purposes in which we are considered to own directly or indirectly 25% or more of the shares by value) that produce, or are held for the production of, passive income is at least 50%.  If we are a PFIC, each U.S. Holder will generally be required to file an annual report with the IRS for taxable years beginning on or after March 18, 2010.  As discussed below, we believe that we were not a PFIC for 2010.





If we were a PFIC, each U.S. Holder would (unless it made one of the elections discussed below on a timely basis) be taxable on gain recognized from the disposition of Ordinary Shares (including gain deemed recognized if our Ordinary Shares are pledged as security for a loan) and upon receipt of certain “excess distributions” with respect to our Ordinary Shares as if such income had been recognized ratably over the U.S. Holder’s holding period for the Ordinary Shares. The U.S. Holder’s income for the current taxable year would include (as ordinary income) amounts allocated to the current taxable year and to any period prior to the first day of the first taxable year for which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other period to which income is allocated, and an interest charge on the tax as so computed would also apply. Additionally, if we were a PFIC, U.S. Holders who acquire our Ordinary Shares from decedents may not receive the normally-available step-up in basis for such shares.





As an alternative to the tax treatment described above, a U.S. Holder could elect to treat us as a “qualified electing fund” (a “QEF”), in which case, in any taxable year in which we are a PFIC, the U.S. Holder would be taxed currently on its pro rata share of our ordinary earnings and net capital gain (subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge). Special rules apply if a U.S. Holder makes a QEF election after the first year in its holding period in which we are a PFIC. We have agreed to supply U.S. Holders with the information needed to report income and gain under a QEF election if we are a PFIC.





As another alternative to the tax treatment described above, in any taxable year in which we are a PFIC, a U.S. Holder could elect to mark our Ordinary Shares to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of our Ordinary Shares and the shareholder’s adjusted tax basis in the Ordinary Shares. Losses would be allowed only to the extent of net mark-to-market gain previously included in income by the U.S. Holder.





Based on our income, assets, market capitalization and discussions with our advisors, we believe that we were not a PFIC for our taxable year ended December 31, 2010. However, there can be no assurance that the United States Internal Revenue Service (“IRS”) will not challenge this conclusion. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, and our market capitalization which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC in 2011 or in subsequent taxable years. U.S. Holders who hold Ordinary Shares during a period when we are a PFIC (whether we were determined to be a PFIC in 2010, or any earlier taxable year) will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF election or the mark-to-market election.





U.S. Holders are urged to consult their tax advisors about the PFIC rules, including eligibility for and the manner and advisability of making, the QEF election or the mark-to market election.





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





Except as described in “Information Reporting and Back-up Withholding” below, a non-U.S. Holder of Ordinary Shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, Ordinary Shares, unless, in the case of U.S. federal income taxes:





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·
such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States; or


·
in the case of a disposition of our Ordinary Shares, 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 requirements are met.





Information Reporting and Backup Withholding





U.S. Holders (other than exempt recipients such as corporations) generally are subject to information reporting requirements with respect to dividends paid in the United States on, and proceeds from the disposition of, Ordinary Shares. Under the Code, a U.S. Holder may be subject, under certain circumstances, to backup withholding (currently at a rate of up to 28%) with respect to such 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 Ordinary Shares who does not provide a correct 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 Holder’s U.S. 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 the proceeds from the disposition of, Ordinary Shares, provided that such non-U.S. Holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.





Israeli Income Tax Considerations





The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of certain Israeli Government programs benefiting us. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.





General Corporate Tax Structure





Israeli companies are generally subject to corporate tax at the rate of 24% of their taxable income in 2011 (25% in 2010).  The corporate tax rate is scheduled to decline to 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter. Notwithstanding these rates, we are subject to a lower rate with respect to portions of our income, as described below, due to our participation in certain government incentive programs.





As of 2010, Israeli companies are subject to regular corporate tax rate for their capital gains. In 2009, Israeli companies were generally subject to capital gains tax at a rate of 25% for such gains (other than capital gains from the sale of listed securities derived by companies with respect to which the provisions of Section 6 of the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985, or the Inflationary Adjustments Law, or the provisions of Section 130A of the Ordinance, applied immediately before the 2006 Israeli tax reform came into force, which were subject to the regular corporate tax rate).





Tax Benefits under the Law for the Encouragement of Industry (Taxes), 5672 - 1969




An “Industrial Enterprise” is defined as an enterprise whose major activity, in a given tax year, is industrial production. Under the Law for the Encouragement of Industry (Taxes), 5672-1969, generally referred to as the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel that derives at least 90% of its income in a given tax year (exclusive of income from specified government loans) is derived from an “Industrial Enterprise” owned by it.




Under the Industry Encouragement Law, Industrial Companies are entitled to certain tax benefits, including:





·
a deduction of the cost of purchases of patents or the right to use a patent or know how for the development or promotion of the Industrial Enterprise, over an eight-year period, commencing on the year in which such rights were first exercised;


·
the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli industrial companies;


·
accelerated depreciation rates on equipment and buildings; and


·
A straight-line deduction of expenses related to a public offering over a three–year period.





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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 on which 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. Even though 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 or that we will continue to qualify as an industrial company or be able to take advantage of any of the benefits described above under the Industry Encouragement Law in the future.





Law for the Encouragement of Capital Investments, 5719- 1959





The Law for Encouragement of Capital Investments, 5719-1959, which is referred to below as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets).





The Investment Law was significantly amended effective on April 1, 2005 (which we refer to as the 2005 Amendment), and as of January 1, 2011 (which we refer to as the 2011 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011 Amendment introduces new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 may choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead to forego such benefits and elect the benefits of the 2011 Amendment.




The following discussion is a summary of the Investment Law prior to its amendments as well as the relevant changes contained in the new legislation.





Tax benefits prior to the April 2005 Amendment




An investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to as an “Approved Enterprise”, is entitled to certain benefits. A company that wished to receive benefits had to receive an approval from the Investment Center of the Israeli Ministry of Industry, Trade and Labor, or the Investment Center. Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.




An Approved Enterprise was entitled to receive a grant from the government of Israel or an alternative package of tax benefits, which we refer to as alternative benefits. Taxable income derived from an Approved Enterprise under the Investment Law grants program during the benefits period is subject to tax at the maximum rate of 10%-25%, depending on the extent of foreign investment in the company These tax benefits are granted for a limited period not exceeding 7 years, or 10 years for a company whose foreign investment level exceeds 25%, from the first year in which the Approved Enterprise has taxable income, after the year in which production commenced (as determined by the Investment Center). The period of benefits may in no event, however, exceed the lesser of 12 years from the year in which the production commenced (as determined by the Investment Center) or 14 years from the year of receipt of Approved Enterprise status, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved, its effective tax rate reflects a weighted combination of the applicable rates. The tax benefits from any certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits.





An Approved Enterprise may elect to forego any entitlement to the grants otherwise available under the Investment Law and, in lieu of the foregoing, may participate in an Alternative Benefits Program. Under the Alternative Benefits Program, a company’s undistributed income derived from an Approved Enterprise will be tax-exempt for a period of between 2 and 10 years from the first year of taxable income, depending on the geographic location of the Approved Enterprise within Israel, and the company will be eligible for a reduced tax rate of 10%-25% for an additional five to eight years, depending on the extent of foreign investment in the company. There can be no assurance that the current benefit programs will continue to be available or that we will continue to qualify for benefits under the current programs.





The tax benefits under the Investment 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 Enterprise’s ordinary course of business.  The tax benefits under the Investment Law are not, generally, available with respect to income derived from products manufactured outside of Israel.




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A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, or FIC. An FIC eligible for benefits is essentially a Foreign Investment Company which holds an Approved Enterprise. The determination as to whether or not a company qualifies as an FIC is made on an annual basis. An FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. If a company that has an Approved Enterprise program is a wholly owned subsidiary of another company, then the percentage of foreign investments is determined based on the percentage of foreign investment in the parent company.





The tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following table:





Percentage of non-Israeli ownership

Tax RateOver 25% but less than 49%

25%49% or more but less than 74%

20%74% or more but less than 90%

15%90% or more

10%




Dividends paid out of income generated by an Approved Enterprise (or out of dividends received from a company whose income is generated by an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at the lower rate under an applicable tax treaty. This withholding tax is deductible at source by the company. The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to twelve years thereafter. After this period, the withholding tax is applied at a rate of up to 25%, or at the lower rate under an applicable tax treaty. In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply. Under the Investment Law, a company that has elected the alternative package of benefits is not obligated to distribute retained profits, and may generally decide from which year’s profits to declare dividends. In addition, a company that pays a dividend out of tax-exempt income generated by its Approved Enterprise will be required to recapture the deferred corporate income tax applicable to the amount distributed (grossed up to reflect such tax) at the rate which would have been applicable to such income had such income not been exempted from tax under the Investment Law. This rate generally ranges from 10% to 25%, depending on the extent of non-Israeli shareholdings in the company.




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




We have three Approved Enterprises, with benefit periods expiring between 2004 through 2014, subject to our fulfilling all conditions of these programs. If we will not meet these conditions, we will be required to refund the amount of tax benefits, as adjusted by the Israeli Consumer Price Index (“CPI”) and interest.




Under the benefits that we receive from these programs, our undistributed income derived from an Approved Enterprise is exempt from corporate tax for two years from the year during which we first derive taxable income under the program, and we are then eligible for a reduced tax rate for an additional eight-year period. Alternative benefits are available to us until the earliest of (i) 7 years commencing with the year in which the Approved Enterprise first generates taxable income, (ii) 12 years from commencement of production or (iii) 14 years from the date of approval.





Tax benefits Subsequent to the 2005 Amendment





The 2005 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. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment came into effect will remain subject to the provisions of the Investment Law as they were on the date of such approval. Furthermore, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however,  limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income will be derived from export.





The 2005 Amendment provides that Approved Enterprise status will only be necessary for receiving cash grants. As a result, it is no longer necessary for a company to acquire Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Benefits Program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the amendment. Companies are entitled to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the amended Investment Law.





Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export to specific markets with a population of at least 12 million. In order to receive the tax benefits, the amendment states that the company must make an investment that meets all the conditions set out in the amendment for tax benefits and exceeds a minimum amount specified in the Investment Law. Such investment allows the company to receive a Benefited Enterprise status, and may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise. Where the company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise and the company’s effective tax rate will be the weighted average of the applicable rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage of the value of the company’s production assets before the expansion.





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





Dividends paid out of income derived by a Benefited Enterprise will be treated similarly to payment of dividends by an Approved Enterprise under the alternative benefits track. Therefore, dividends paid out of income derived by a Benefited Enterprise (or out of dividends received from a company whose income is derived from a Benefited Enterprise) are generally subject to withholding tax at the rate of 15%.  The reduced rate of 15% is limited to dividends and distributions out of income derived from a Benefited Enterprise during the benefits period and actually paid at any time up to twelve years thereafter, except with respect to an FIC, in which case the 12-year limit does not apply.  A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 25%, or lower in the case of a qualified FIC which is owned at least 49% by non-Israeli residents.





The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations.  If a company does not meet these conditions, it may be required to refund the amount of tax benefits, together with CPI linkage adjustment and interest, or other monetary penalty.





We currently have three Benefited Enterprises under the Investment Law, to our belief, entitle us to certain tax benefits. However, no assurance can be given that such investments will be approved as in fact qualifying for such tax benefits by the Israeli Tax Authority. Additionally, no assurance can be given that we will, in the future, be eligible to receive additional tax benefits under this law.In the event that the above conditions are violated, in whole or in part, we would be required to refund the amount of tax benefits, together with linkage differences to the CPI and interest.





Tax benefits under the 2011 Amendment





The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such term is defined in the Investment Law) effective as of January 1, 2011 and onward.  A Preferred Company is defined as either (i) a company incorporated in Israel and not fully owned by a governmental entity or (ii) a limited partnership (a) that was registered under the Israeli Partnerships Ordinance and (b) all limited partners of which are companies incorporated in Israel, but not all of them are governmental entities, which, in the case of the company and limited partnership referenced in clauses (i) and (ii), have, among other things, Preferred Enterprise status and are controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income derived by its Preferred Enterprise in 2011-2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 10%. Such corporate tax rate will be reduced to 12.5% and 7%, respectively, in 2013-2014 and to 12% and 6% in 2015 and thereafter, respectively.  Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone.





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





The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits. These transitional provisions provide, among other things, that: (i) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment came into effect, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, while, provided that certain conditions are met, the 25% tax rate applied to income derived by an Approved Enterprise during the benefit period will be replaced with the regular corporate income tax rate (24% in 2011), unless a request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011 (such request should be made by way of an application to the Israeli Tax Authority by June 30, 2011 and may not be withdrawn); and (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which had participated in an alternative benefits program, before the 2011 Amendment came into effect will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met.  However, a company that has such an Approved Enterprise can file a request with the Israeli Tax Authority, according to which its income derived as of January 1, 2011 will be subject to the provisions of the Investment Law, as amended in 2011; and (iii) a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met, or file a request with the Israeli Tax Authority according to which its income derived as of January 1, 2011 will be subject to the provisions of the Investment Law as amended in 2011. We have evaluated the likely effect of these provisions of the 2011 Amendment and, at this time, do not intend to file a request to apply the new benefits under the 2011 Amendment.





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From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or substantial reduction of any of the benefits available under the Investment Law could materially impact the cost of our future investments.




Taxation of our Non-Israeli Shareholders





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




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




Capital Gains Taxes Applicable to Non-Israeli Shareholders





Israeli law generally imposes a capital gains tax on the sale of capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between the “Real Gain” and the “Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli CPI 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.





Shareholders that are non-residents of Israel are generally exempt from any capital gains tax on any gains derived from the sale, exchange or disposition of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel (including from the sale of our Ordinary Shares), provided however that (i) such capital gains are not derived through a permanent establishment in Israel; (ii) such shareholders are not subject to the Adjustments Law; (iii) such shareholders did not acquire their shares prior to an initial public offering; and (iv) so long as our Ordinary Shares remain listed for trading as described above. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (x) has a controlling interest of 25% or more in such non-Israeli corporation, or (y) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.





In addition, a sale of securities may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended (the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of our Ordinary Shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the Ordinary Shares as a capital asset and is entitled to claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty (called a “Treaty U.S. Resident”) is generally exempt from Israeli capital gains tax unless either (i) such Treaty U.S. Resident is an individual and was present in Israel for more than 183 days during the relevant taxable year ;or (ii) 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 (iii the capital gains arising from such sale, exchange or disposition are attributable to a permanent establishment of the Treaty U.S. Resident located in Israel.  In either 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 the tax against the U.S. federal income tax imposed with respect to the 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 provide a credit against any U.S. state or local taxes.




In some instances where our shareholders may be liable for Israeli tax on the sale of our Ordinary Shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.




63





Taxation of Non-Israeli Shareholders on Receipt of Dividends




Under the Ordinance, non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares other than bonus shares, or stock dividends at the rate of 20% (25% if the dividend recipient is a Controlling Shareholder, at the time of distribution or at any time during the preceding 12-month period), unless a reduced rate is provided under an applicable tax treaty.  However, such distribution of dividends is subject to withholding tax at source at a rate of 20% or 15% if the dividend is distributed from income attributed to an Approved Enterprise, Benefited Enterprise or Preferred Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our Ordinary Shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends that are paid to a U.S. corporation that holds 10% or more of our Ordinary Shares from the start of the tax year preceding the distribution of the dividend up until (and including) the distribution of the dividend is 12.5%, provided that not more than 25% of our gross income for such preceding year consists of certain types of dividends and interest.  Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise, Benefited Enterprise or Preferred Enterprise are subject to a withholding tax rate of 15% for such a U.S. corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income derived from an Approved Enterprise, Benefited Enterprise or Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.





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





Dividends and Paying Agents.





Not Applicable.





Statement by Experts.





Not Applicable.





Documents on Display.





We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), applicable to foreign private issuers and fulfill the obligation with respect to such requirements by filing reports with the SEC. You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, NE., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s website at http://www.sec.gov. Please call the SEC at l-800-SEC-0330 for further information on the public reference room.





As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicable U.S. law is available for public review at our principal executive offices.





Subsidiary Information.





Not Applicable.





ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Our main foreign currency exposures are associated with exchange rate movements of the U.S. dollar, our reporting currency as well as our primary functional currency, against the NIS, Swiss Franc, British Pounds, Indian Rupees and the Euro. Our diverse base of local currency costs, financings, and foreign exchange forward contracts will partially counterbalance the impact of changing foreign currency exchange rates on revenues, earnings, cash flows and fair values of assets and liabilities. Nevertheless, when those anticipated transactions are realized, actual effects of changing foreign currency exchange rates could have a material impact on earnings and cash flows in future periods.





To protect against some of the reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we utilize foreign currency forward contracts in order to minimize part of the impact of foreign currency fluctuations on our financial position and results of operations. In order to mitigate our exposure to risk of fluctuations in the NIS/dollar exchange rate with respect to our NIS denominated expenses, mainly payroll, we entered into foreign currency forward contracts. As of December 31, 2010 the Company had $26.1 million of open exchange rate agreements which will expire throughout 2011. The aggregate amount of unrealized gains as of December 31, 2010 from the foreign exchange forward contracts was $324,000.




64





Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Germany, United Kingdom, Switzerland, India and Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in all the currencies of these countries from their levels against the dollar as of December 31, 2010, with all other variables held constant, would decrease the fair value of our net assets denominated in foreign currencies, held at December 31, 2010, by approximately $5.4 million.





ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.





Not Applicable.




65




PART II





ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.





None.





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





Not Applicable.





ITEM 15.  CONTROLS AND PROCEDURES





(a) Disclosure Controls and Procedures. Our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information relating to us and our subsidiaries required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow for timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of December 31, 2010. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of such time.





(b) Management’s annual report on internal control over financial reporting. Our management, under the supervision of our CEO and our CFO, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company and its subsidiaries. Based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework , which was issued by the Committee of Sponsoring Organizations of the Treadway Commission, management has assessed the Company’s internal control over financial reporting as of December 31, 2010 and has concluded that it is effective as of such time.





(c) Attestation Report of the registered public accounting firm. The attestation report of our registered public accounting firm on management’s assessment of our internal control over financial reporting is included in page F-1 of our audited consolidated financial statements set forth in “Item 18. Financial Statements,” and is incorporated herein by reference.





(d) Changes in internal control over financial reporting.  Based on the evaluation carried out in accordance with Rules 13a-15(d) and 15d-15(d) under the Exchange Act, our management, under the supervision of our CEO and our CFO, concluded that there were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





ITEM 16.    [RESERVED]





ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT





Our Board of Directors has determined that the Company has at least one audit committee financial expert, Robert Cobuzzi, serving on our audit committee. Mr. Cobuzzi also qualifies as an independent director, as defined under the NASDAQ rules.





66




ITEM 16B.    CODE OF ETHICS





We have adopted a written Code of Ethics that applies to all Company employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics was filed as an exhibit to our annual report on Form 20-F for the year ended December 31, 2003.





Our Code of Ethics is also posted on our website at http://www.fundtech.com or you may request a copy, at no cost, by writing to, or calling, us as follows:





Fundtech Ltd.


10 Hamada Street, 5th Floor


Herzliya, Israel 46140


Telephone: 011-972-3-611-6500





ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES





In our annual shareholders meeting held on December 21, 2010, our shareholders re-appointed Brightman Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu to serve as our independent auditors for the 2010 fiscal year.





Deloitte Touche Tohmatsu billed the following fees to us for professional services in each of the last two fiscal years:





Year Ended December 31,2010


2009Audit fees

$
252,349


$
280,342Audit related fees


25,055



16,605Tax fees [a]


59,551



45,671All other fees


13,531



31,925Total

$
350,486


$
374,543





[a] Amount represents tax fees for a subsidiary of Fundtech Ltd. Tax fees for Fundtech Ltd. are included in audit fees under a fixed fee arrangement.





Audit Fees





Audit fees are the aggregate fees associated with the annual audit of our financial statements included in our annual report on Form 20-F and reviews of our quarterly interim financial results submitted on Form 6-K, and consultations on various accounting issues.





Audit-Related Fees





Audit-related services principally include due diligence examinations as well as assistance with the requirements of the Sarbanes-Oxley Act of 2002 and related SEC regulations that are not reasonably related to the performance of the audit or review of our financial statements but which are not reported under Audit Fees.





Tax Fees





Tax fees are the aggregate fees associated with professional services rendered for tax compliance, tax advice on actual or contemplated transactions, tax planning and assistance with tax audits.





67




All Other Fees





In fiscal 2010, there were no material Other Fees (for products or services rendered by our principal accountant other than those reported under the above three categories).





Audit Committee’s Pre-Approval Policies And Procedures





Our audit committee is responsible for the oversight of our independent auditor’s work. The audit committee’s policy is to pre-approve all audit and non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services, as described above. The audit committee sets forth the basis for its pre-approval in detail, listing the particular services or categories of services which are pre-approved, and approving a specific budget for such services. Additional services may be pre-approved by the audit committee on an individual basis. Once services have been pre-approved, our independent auditors and our management team report to our audit committee on a periodic basis regarding the extent of services actually provided in accordance with the applicable pre-approval, and regarding the fees for services performed. In fiscal 2009, our audit committee approved all of the services provided by our independent auditor in accordance with the foregoing policies and procedure.





ITEM 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES





Not Applicable.





ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED





Issuer Purchases of Equity Securities





Period

(a) Total Number of

Shares (Or Units)

Purchased


(b) Average Price Paid

per Share (or Units)


(c) Total Number of

Shares (or Units)

Purchased as Part of

Publicly Announced

Plans or Programs


(d) Maximum Number (or

Approximate Dollar

Value) of Shares (or Units)

that May Yet Be

Purchased Under the Plans

or ProgramsJanuary 2010

—





—


$
10,804,517February 2010


2,285


$
12.58



2,285



10,775,765March 2010


129,012



13.60



129,012



9,020,968April 2010


—







—



9,020,968May 2010


170,801



12.96



170,801



6,806,768June 2010


33,964



12.02



33,964



6,398,461July 2010


—







—



6,398,461August 2010


165,178



13.04



165,178



4,244,108September 2010


3,500



13.32



3,500



4,197,497October 2010


—







—



4,197,497November 2010


71,290



14.87



71,290



3,137,486December 2010


81,808



16.14



81,808



1,817,388





On November 11, 2008, the Company’s Board of Directors authorized the purchase of up to $10 million of our Ordinary Shares from time to time on the open market. On July 23, 2009, the Company’s Board of Directors authorized the purchase of up to an additional $10 million of our Ordinary Shares, subject to the approval of the Tel Aviv Court. Court approval was obtained on October 12, 2009. On July 21, 2010, the Company’s Board of Directors authorized the purchase of up to an additional $15 million of our Ordinary Shares, subject to the approval of the Tel Aviv Court. Court approval was obtained on October 10, 2010. As of December 31, 2010, the Company had purchased a total of 1,944,016 shares, of which 657,838 shares were repurchased in 2010 (for a total cost of approximately $8.9 million in 2010).  With $8.5 million used for purchases in 2009, approximately $7.6 million remained available from both authorizations as of December 31, 2010.





68




ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.





None.





ITEM 16G.  CORPORATE GOVERNANCE.





None.





69




PART III





ITEM 17.  FINANCIAL STATEMENTS.





We have elected to provide financial statements and related information pursuant to Item 18.





ITEM 18.  FINANCIAL STATEMENTS.





The Financial Statements required by this Item are found at the end of this Annual Report, beginning on page F-1, and are incorporated by reference herein.





ITEM 19.  EXHIBITS.





The exhibits filed with or incorporated into this annual report are listed on the index of exhibits immediately below.





EXHIBIT

NUMBER

DESCRIPTION OF EXHIBIT1.1

Amended Memorandum of Association of the Company(1)1.2

Amended and Restated Articles of Association of the Company(1)1.3

Amendment to Amended and Restated Articles of Association of Company (2)2.1

Form of Ordinary Share Certificate(1)4.2

Fundtech Ltd. 1999 Employee Option Plan(4)4.3

Fundtech Ltd. Directors Option Plan(5)4.4

Employment Agreement between Reuven Ben Menachem and the Company, dated November 25, 1997(3)4.5

Lease Agreement for Fundtech India’s facility in Bombay, India(9)4.6

Lease Agreement relating to Company’s Facility in Herzliya, Israel (English translation)(12)4.7

Lease Agreement relating to Company’s Facility in Norcross, Georgia(3)4.8

Lease Agreement relating to Company’s Facility in Jersey City, New Jersey(6)4.9

Lease Agreement relating to Company’s Facility in Burlington, Massachusetts(7)4.10

Fundtech Ltd. 2005 International Share Option and Restricted Share Incentive Plan(8)4.11

Fundtech Ltd. 2005 Israeli Share Option and Restricted Share Incentive Plan(10)8

Subsidiaries of Company(12)11

Code of Ethics(11)12.1

Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act*12.2

Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act*13.1

Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*13.2

Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*15.1

Consent of Brightman Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu *









(1)
Incorporated by reference to an exhibit to the Registrant’s Registration Statement on Form F-1, as amended, filed with the SEC on March 13, 1998.





(2)
Incorporated by reference to Proposal 7 of the Company’s Proxy Statement for its 2007 Annual Shareholders Meeting, included as Exhibit 99.1 to the Company’s Form 6-K that was filed with the SEC on November 14, 2007.





(3)
Incorporated by reference to Exhibits 10.12 and 10.14 (as appropriate) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, filed with the SEC on March 31, 1999.





(4)
Incorporated by reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A for its 1999 Annual Meeting of Shareholders, filed with the SEC on August 23, 1999.





(5)
Incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-8, as amended (SEC Registration No. 333-9380).




70




(6)
Incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2002, filed with the SEC on June 12, 2003.





(7)
Incorporated by reference to Exhibit 4.11 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2002, filed with the SEC on June 12, 2003.





(8)
Incorporated by reference to Annex A to the Company’s Proxy Statement for its 2005 Annual Shareholders Meeting, included as Exhibit 99.1 to the Company’s Report on Form 6-K, filed with the SEC on November 30, 2005.





(9)
Incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2004, filed with the SEC on May 27, 2005.





(10)
Incorporated by reference to Annex B to the Company’s Proxy Statement for its 2005 Annual Shareholders Meeting, included as Exhibit 99.1 to the Company’s Report on Form 6-K, filed with the SEC on November 30, 2005.





(11)
Incorporated by reference to Exhibit 11 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2003, filed with the SEC on June 29, 2004.





(12)
Incorporated by reference to the Company’s Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on May 28, 2010.





*
Filed herewith.





71




SIGNATURE





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





FUNDTECH LTD.By:
/s/ Reuven Ben MenachemName: Reuven Ben MenachemTitle: Chief Executive Officer


Date: May 31, 2011




72




FUNDTECH LTD.





CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER 31, 2010









FUNDTECH LTD.





CONSOLIDATED FINANCIAL STATEMENTS





INDEX





PageReport of Independent Registered Public Accounting Firm

F-1 – F-2Consolidated Financial Statements:Balance Sheets as of December 31, 2010 and 2009

F-3Statements of Operations for the years ended December 31, 2010, 2009 and 2008

F-4Statements of Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008

F-5 – F-6Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

F-7 – F-8Notes to Consolidated Financial Statements

F-9 – F-34








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Shareholders of
 Fundtech Ltd.
 
 We have audited the accompanying consolidated balance sheets of FundtechLtd. ("the Company") and its subsidiaries as ofDecember 31, 2010 and 2009 and the related statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedules listed in the Index at Item 18. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our 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.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
  
 In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2010 and 2009 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
 We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 31, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
 
 
 /s/ Brightman Almagor Zohar & Co.  Brightman Almagor Zohar & Co.
 Certified Public Accountants
 A member firm of Deloitte Touche Tohmatsu
 
 Tel Aviv, Israel
 May 31, 2011


F-1








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Shareholders of
 Fundtech Ltd.
 
 We have audited the internal control over financial reporting of Fundtech Ltd. and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
 A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
 Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and its subsidiaries as ofDecember 31, 2010 and 2009, the related statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010, and financial statement schedules, and our report dated May 31, 2011 expressed an unqualified opinion on those financial statements and financial statement schedules.
 
 
 /s/ Brightman Almagor Zohar & Co.  Brightman Almagor Zohar & Co.
 Certified Public Accountants
 A member firm of Deloitte Touche Tohmatsu
 
 Tel Aviv, Israel
 May 31, 2011
    F-2
  FUNDTECH LTD.
 CONSOLIDATED BALANCE SHEETS
 (In thousands)
 December 31,2010


2009ASSETSCURRENT ASSETSCash and cash equivalents

$
24,916


$
20,903Short term investments


1,910



-Marketable securities (Note 4)


26,419



21,248Trade receivables, net of allowance for doubtful accounts of $ 1,626 and $ 1,345  at December 31, 2010 and 2009, respectively (Note 5)


29,706



23,445Deferred taxes (Note 13)


4,552



2,334Prepaid expenses and other current assets


6,411



6,527Total current assets


93,914



74,457LONG-TERM ASSETSMarketable Securities (Note 4)


753



774Severance pay fund (Note 9)


1,953



1,508Deposits


1,931



1,769Prepaid expenses


2,289



2,574Deferred taxes (Note 13)


583



265Property and equipment, net (Note 6)


11,453



13,305Goodwill


41,041



40,228Other intangible assets, net (Note 7)


3,543



5,472Total long-term assets


63,546



65,895Total assets

$
157,460


$
140,352LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESTrade payables

$
2,309


$
2,035Deferred revenues


11,541



9,141Employees and payroll accruals


11,099



7,467Accrued expenses and other liabilities (Note 8)


8,573



6,287Total current liabilities


33,522



24,930LONG-TERM LIABILITIESAccrued severance pay and  pension obligation (Note 9)


5,554



3,344Deferred taxes (Note 13)


1,190



1,119Other long term liabilities


1,732



2,777Total long-term liabilities


8,476



7,240Total liabilities


41,998



32,170SHAREHOLDERS' EQUITY (Note 11)Share capital


51



50Additional paid-in capital


163,252



159,556Accumulated other comprehensive income


1,867



1,829Accumulated deficit


(28,265
)


(40,797
)136,905



120,638Treasury shares at cost 1,944,016 and  1,286,178 shares as of December  31, 2010 and 2009  respectively


(21,443
)


(12,456
)Total shareholders' equity


115,462



108,182Total liabilities and shareholders’ equity

$
157,460


$
140,352
 The accompanying notes are an integral part of the consolidated financial statements.
  F-3
 FUNDTECH LTD.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 
 Year ended December 31,2010


2009


2008RevenuesSoftware license

$
17,598


$
11,558


$
16,488Software hosting


29,662



24,088



19,889Maintenance


42,670



39,531



34,506Services


52,008



42,580



50,154Total revenues


141,938



117,757



121,037Operating ExpensesCost of revenueSoftware license costs


329



748



291Maintenance, hosting and services costs


65,873



53,286



53,730Amortization of acquired intangible assets


1,666



2,028



2,167Impairment of goodwill and related intangible assets


-



-



2,018Research and development


21,882



20,422



21,849Selling and marketing


19,027



17,567



20,883General and administrative


19,903



19,662



17,115Total operating expenses


128,680



113,713



118,053Operating income


13,258



4,044



2,984Impairment of marketable securities


-



-



(692
)Financial income (expense), net (Note 15)


(765
)


232



48Income before income taxes


12,493



4,276



2,340Income taxes (Note 13)


39



397



(1,100
)Net income

$
12,532


$
4,673


$
1,240Basic earnings per share

$
0.82


$
0.31


$
0.08Diluted earnings per share

$
0.79


$
0.30


$
0.08
  The accompanying notes are an integral part of the consolidated financial statements.
  F-4
  FUNDTECH LTD.
 CONSOLIDATED STATEMENTS OF
 SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
 (In thousands, except share data)
 
 Ordinary shares








Accumulated other





Total


TotalNumber of

Shares


Amount


Additional

paid-in Capital


Treasury

shares


comprehensive

income (loss)


Accumulated

deficit


comprehensive

Income


shareholders'

equityBalance as of January 1, 2008


15,561,908


$
47


$
151,547


$
(3,258
)

$
(284
)

$
(46,710
)




$
101,342Exercise of stock options


242,590



2



1,422



-



-



-



-



1,424Vested restricted stock – net of forfeited and cancelled


190,931



-



-



-



-



-



-



-Stock based compensation


-



-



3,007



-



-



-



-



3,007Change in unrealized gain on cash flow hedges


-



-



-



-



126



-



126



126Purchase of Treasury shares


(82,239
)


-



-



(650
)


-



-



-



(650
)Foreign currency translation adjustments


-



-



-



-



(342
)


-



(342
)


(342
)Net income


-



-



-



-



-



1,240



1,240



1,240Total comprehensive income

























$
1,024Balance as of December 31, 2008


15,913,190


$
49


$
155,976


$
(3,908
)

$
(500
)

$
(45,470
)


-


$
106,147Exercise of stock options


111,539



-



754



-



-



-



-



754Vested restricted stock -net of forfeited and cancelled


224,525



1



(1
)


-



-



-



-



-Stock based compensation


-



-



2,827



-



-



-



-



2,827Employees pension


-



-



-



-



111



-



111



111Change in unrealized gain on cash flow hedges


-



-



-



-



(65
)


-



(65
)


(65
)Foreign currency translation adjustments


-



-



-



-



2,283



-



2,283



2,283Purchase of Treasury shares


(883,056
)


-



-



(8,548
)


-



-



-



(8,548
)Net income


-



-



-



-



-



4,673



4,673



4,673Total comprehensive income

























$
7,002Balance as of December 31, 2009


15,366,198


$
50


$
159,556


$
(12,456
)

$
1,829


$
(40,797
)





$
108,182
 
 The accompanying notes are an integral part of the consolidated financial statements.
  F-5
 
 FUNDTECH LTD.
 CONSOLIDATED STATEMENTS OF
 SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
 (In thousands, except share data)
 
 Ordinary shares


Additional





Accumulated

other





Total


TotalNumber of

Shares


Amount


paid-in

capital


Treasury

shares


comprehensive

income (loss)


Accumulated

deficit


Comprehensive

Income


shareholders'

equityBalance as of January 1, 2010


15,366,198


$
50


$
159,556


$
(12,456
)

$
1,829


$
(40,797
)


-


$
108,182Exercise of stock options


166,602



-



935



-



-



-



-



935Vested restricted stock -net of forfeited and cancelled


182,249



1



(1
)


-



-



-



-



-Stock based compensation


-



-



2,762



-



-



-



-



2,762Employees pension


-



-



-



-



(881
)


-



(881
)


(881
)Change in unrealized gain on cash flow hedges


-



-



-



-



263



-



263



263Foreign currency translation adjustments


-



-



-



-



656



-



656



656Purchase of Treasury shares


(657,838
)


-



-



(8,987
)


-



-



-



(8,987
)Net income


-



-



-



-



-



12,532



12,532



12,532Total comprehensive income

























$
12,570Balance as of December 31, 2010


15,057,211


$
51


$
163,252


$
(21,443
)

$
1,867


$
(28,265
)





$
115,462
  The accompanying notes are an integral part of the consolidated financial statements.
 F-6
 
 FUNDTECH LTD.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Year ended December 31,2010


2009


2008Cash flows provided by operating activities :Net income

$
12,532


$
4,673


$
1,240Adjustments to reconcile net income to net cashprovided by operating activities (Appendix A):


10,145



12,633



12,576Net cash provided by operating activities


22,677



17,306



13,816Cash flows used in investing activities :Investments in marketable securities –short term


(41,510
)


(26,610
)


(5,362
)Redemption of marketable securities-short term


36,246



16,292



14,252Acquisition of subsidiaries, net of cash acquired (Appendix B)


-



(3,837
)


(13,651
)Payments made in connection with prior years acquisitions


(830
)


(1,942
)


(3,546
)Increase in long-term deposits


(151
)


(749
)


(277
)Realization of (Investment in) short term deposits


(1,910
)


1,538



316Purchase of property and equipment


(4,058
)


(3,612
)


(6,570
)Net cash used in investing activities


(12,213
)


(18,920
)


(14,838
)Cash flows provided by financing activities:Proceeds from exercise of stock options, net


935



754



1,424Purchase of Treasury shares at cost


(8,987
)


(8,548
)


(650
)Decrease of long-term debt


(52
)


(36
)


(10
)Net cash provided by (used in) financing activities


(8,104
)


(7,830
)


764Effect of exchange rate on cash and cash equivalents


1,653



705



(1,712
)Increase (decrease) in cash and cash equivalents


4,013



(8,739
)


(1,970
)Cash and cash equivalents at the beginning of the year


20,903



29,642



31,612Cash and cash equivalents at the end of the year

$
24,916


$
20,903


$
29,642Supplemental disclosure of cash flows activities:Cash paid during the year for:Interest

$
33


$
8


$
71Income taxes

$
1,214


$
2,415


$
1,748Supplemental disclosure of non-cash investing activities:Accrual made in connection with payments to prior years acquisitions

$
454


$
830


$
1,660
 
 The accompanying notes are an integral part of the consolidated financial statements.
  F-7
 FUNDTECH LTD.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 
 Year ended December 31,2010


2009


2008Appendix A - Adjustments to reconcile net income to net cash provided by operating activities :Depreciation and amortization

$
7,649


$
8,436


$
8,103Accrued interest on marketable securities and accretion amortization


114



63



122Impairment of marketable securities


-



-



692Impairment of goodwill and other intangible assets


-



-



2,018Shares-based compensation


2,762



2,827



3,007Change in assets and liabilities:Decrease (increase) in trade receivables , net of allowance for doubtful accounts


(6,105
)


5,251



(6,272
)Decrease (increase) in other accounts receivable and prepaid expenses


803



(981
)


(2,019
)Increase (decrease) in trade payables


219



(884
)


1,334Increase (decrease) in deferred revenues, employees and payroll accruals and other accounts payable and accrued expenses


6,405



(1,285
)


5,524Decrease in accrued restructuring expenses


-



-



(62
)Increase in accrued severance pay, net


443



406



230Changes in deferred taxes


(2,145
)


(1,200
)


(101
)$
10,145


$
12,633


$
12,576Appendix B - Acquisition of subsidiaries, net of cash Acquired : (see Note 3)Working capital, excluding cash and cash equivalents

$
-


$
(167
)

$
(1,130
)Property and equipment


-



-



1,074Long term liabilities


-



-



(189
)Other assets


-



1,804



6,365Goodwill


-



2,200



7,531$
-


$
3,837


$
13,651
  The accompanying notes are an integral part of the consolidated financial statements.
  F-8
  FUNDTECH LTD.
 
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 1        -     GENERAL OVERVIEW
 
 Fundtech Ltd., an Israeli corporation, and its subsidiaries (the “Company”), is a leading provider of software solutions and services to financial institutions that facilitate payments, settlement and cash management by enabling banks and their customers to electronically manage cash, process payments and transfer funds. The Company's client-server and Internet-based systems automate the process of transferring funds among corporations, banks and clearance systems and enable businesses to manage global cash positions efficiently and in real-time.
 
 The Company sells and supports its products worldwide.
 
 The Company operates in three business segments: Cash Management, Payments, and its Swiss subsidiary, Biveroni Batschelet Partners AG including its subsidiaries Datasphere S.A and Synergy Financial Systems Ltd (Collectively “BBP”).
 
 The Company’s cash management solutions enable small, mid and large-tier financial institutions to deliver a complete set of cash management services through the Internet and other delivery channels. The Company’s payment solutions automate all aspects of the funds transfer, including foreign exchange, compliance, settlement and customer notification process, enabling straight-through-processing (STP) of transactions. BBP develops implements, maintains and operates systems for the automated processing and transport of data in the finance industry, primarily over the SWIFT Network. BBP also provides interbank gateway services. Its products include system solutions for interbank applications, as well as integration modules for host connections.
 
 NOTE 2        -     SIGNIFICANT ACCOUNTING POLICIES
 
 The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
 
 a.
Use of estimates
 
 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. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. Actual results could differ from those estimates.
 
 b.
Financial statements in U.S. dollars
 
 The majority of the revenues of Fundtech Ltd. and certain of its subsidiaries are generated in U.S. dollars ("dollar" or "dollars"). In addition, substantial portions of the Company’s costs are incurred in dollars. The Company believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar.
 
 F-9
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 Accordingly, monetary accounts maintained in currencies other than the dollar are re measured into dollars in accordance with ASC 830-10, “Foreign Currency Matters”. All transaction gains and losses from the re measurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate. The financial statements of foreign subsidiaries, whose functional currency is not the dollar (Swiss Franc, Euro, British Pound, Indian Rupee), have been translated into dollars. Assets and liabilities have been translated using the exchange rates in effect on the balance sheet date. Statement of Operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are charged or credited to other comprehensive income (loss).
 
 c.
Principles of consolidation
 
 The consolidated financial statements include the accounts of Fundtech Ltd. and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions have been eliminated in consolidation.
 
 d.
Cash equivalents
 
 Cash equivalents include short-term, highly liquid investments that are readily convertible to cash, with original maturities of three months or less.
 
 e.
Marketable securities
 
 The Company accounts for its investments in marketable securities in accordance with ASC 320, "Investments in Debt and Equity Securities".
 Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date.
 
 Held-to-maturity securities include debt securities for which the Company has the intent and ability to hold to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity would be classified as available-for-sale.
 
 Marketable securities that are designated as held-to-maturity are stated at amortized cost. Interest income including the amortization of premium or discount, are included in the consolidated statement of operations.
 
 Investments in auction rate securities are classified as available-for-sale and are recorded at fair value. Changes in fair value, net of taxes, if applicable, are reflected in other comprehensive income (loss). Unrealized losses considered to be temporary are reflected in other comprehensive income (loss); unrealized losses that are considered to be other-than-temporary are charged to income as an impairment charge.
  F-10
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 e.
Marketable securities (Cont.)
 
 DNE No. 115, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment" and SAB Topic 5M "Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities" provides guidance for determining when an investment is considered impaired, whether impairment is other-than temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment decreased below its cost in other-than temporary manner. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other than - temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value.
 
 During 2008 the Company recognized other-than-temporary impairment in a total amount of $75 related to auction rate securities and wrote-off $617 related to Lehman Brothers corporate notes.
 
 f.
Property and equipment
 
 Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, as follows:
 YearsOffice furniture and equipment

6-17Computers and software

3-5Motor vehicles

6Leasehold improvements

Over the shorter of the lease term or the

useful life of the asset
 
 The Company periodically assesses the recoverability of the carrying amount of property and equipment based on expected undiscounted cash flows. If an asset’s carrying amount is determined to be not recoverable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with ASC 360-10, “Property, Plant and Equipment”. During 2008, 2009 and 2010, no impairment losses were recorded.
  F-11
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 g.
Software development costs
 The Company accounts for capitalized software development costs in accordance with ASC 985-20, “Software”, Capitalization of software development costs begins upon the establishment of technological feasibility, and continues up to the time the software is available for general release to customers. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors including, but not limited to, anticipated future gross product revenue, estimated economic life and changes in software and hardware technology.
 
 Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general release has been insignificant. Therefore, all research and development costs have been expensed. During 2010 and 2009  no software development costs where capitalized.
 
 h.
Goodwill and other intangible assets
 
 The Company accounts for Goodwill and other intangible assets in accordance with ASC 350-20, “Goodwill and Other Intangible Assets”.
 
 The Company records goodwill when the purchase price of business acquired exceeds the fair value of identifiable assets. Goodwill is not amortized. Goodwill is required to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing its implied fair value with its carrying value. Fair value is determined using discounted cash flows or market multiples. In 2008 the Company recorded an impairment charge of $1,660 related to its Radius investment. During 2010 and 2009, no impairment losses were identified.
 
 Acquisition related intangible assets result from the Company's acquisitions of businesses. Intangible assets subject to amortization are initially recognized at fair value, and subsequently stated at amortized cost. Identifiable intangible assets other than goodwill are amortized on a straight-line basis over their estimated useful lives. During 2010, an amount of $ 1,666 was recorded as amortization expenses.
 
 Definite lives identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cashflow expected to be generated by such assets. If such assets are considered not recoverable, the impairment to be recognized is measured as the amount by which the carrying amount exceeds the fair value of the assets. During 2008 the Company recorded an amount of $358 as impairment loss related to its Radius investment. During 2010 and 2009, no impairment losses were identified.
 
 i.
Income taxes
 
 Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense (benefit) is generally comprised of the taxable payable (receivable) for the period and the change in deferred income tax assets and liabilities during the period. Valuation allowances are recorded to reduce deferred tax assets to the amount that is more likely than not be realized.
  F-12
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 j.
Revenue recognition
 
 The Company generates revenues from licensing the rights to use its software products directly to end-users, sales of professional services, including consulting, implementation and training. The Company also provides hosting services, contingency and recovery services, as well as maintenance and sales of hardware.
 
 The Company recognizes revenue for software products and related services in accordance with the ASC 985-605, “Software Revenue Recognition”, when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collection is probable.
 
 Where software arrangements involve multiple elements, revenue is allocated to each element based on vendor specific objective evidence ("VSOE") of the relative fair values of each element in the arrangement. The Company's VSOE used to allocate the sales price to services and maintenance is based on the price charged when these elements are sold separately. In software arrangements in which a fair value of all undelivered elements is known but not of a delivered element, the Company uses the residual method to record revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and is recognized as revenue. In software arrangements in which the Company does not have VSOE of fair value of all undelivered elements, revenue is deferred until fair value is determined or until all elements for which the Company does not have VSOE of fair value have been delivered.
 
 The Company does not grant right-of-return to its customers. The Company generally provides a warranty period for three months. The provision for warranty as of December 31, 2010 is immaterial.
 
 Revenue from software licenses that require significant customization, integration and installation are recognized based on ASC 605-35, "Accounting for Performance of Construction Type and Certain Production Type Contracts", using contract accounting on the percentage of completion method, based on the relationship of actual labor costs incurred to total labor costs estimated to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract.
 
 As the Company provides hosting services to its customers without any contractual right to take possession of the software license, the Company recognizes revenue from hosting over the hosting contract period. Revenues from set up fees are also recognized over the related hosting contract.
 
 Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized using contract accounting.
 
 When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed.
 
 Revenues from customer maintenance and support contracts are deferred and recognized ratably over the term of the agreements. Revenues for maintenance and support that are bundled with license fees are deferred based on the VSOE of fair value of the bundled maintenance and support and recognized over the term of the agreement. VSOE of fair value is based on the renewal rate for continued maintenance and support arrangements.
  F-13
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 k.
Concentration of credit risks
 
 Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and long-term trade receivables. The Company's cash, cash equivalents and marketable securities are maintained with high-quality institutions, and the composition and maturities of investments are regularly monitored by management. Generally, these securities and deposits are traded in a highly liquid market, may be redeemed upon demand and bear minimal risk.
 
 The Company’s marketable securities include government bonds, corporate bonds and asset-backed securities. The Company's investment policy limits the amount the Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations. The trade receivables of the Company include amounts owed by banks and large financial institutions. The Company generally does not require collateral; however, in certain circumstances, the Company may require letters of credit, other collateral or additional guarantees. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. The Company performs ongoing credit evaluations of its customers (see Note 5).
 
 l.
Derivatives and hedging
 
 The Company accounts for derivatives and hedging based on ASC 815-10, “Derivatives and Hedging”. ASC 815-10 requires the Company to recognize all derivatives on the balance sheet at fair value. If the derivatives meet the definition of a hedge and are so designated, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings.
 
 It is the policy of the Company to enter into forward foreign exchange contracts to cover specific foreign currency payments mainly salary expenses paid in Israel. As of December 31, 2010 the Company held forward foreign exchange contracts in the amount of $14,657. These contracts were for a period of up to twelve months. The aggregate amount of unrealized gains under forward foreign exchange contracts deferred in other comprehensive income relating to these foreign exchange contracts is $263.
  F-14
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 m.
Basic and diluted earnings per share
 
 Basic earnings per share are computed by dividing net income by the weighted average number of ordinary shares outstanding during the applicable period. Diluted earnings per share is computed by dividing net income by the weighted average number of ordinary shares outstanding during the period, plus dilutive potential ordinary shares outstanding during the period, in accordance with ASC 260-10, "Earnings Per Share". In 2010, 2009 and 2008, certain outstanding stock options were excluded from the calculation of the diluted earnings per ordinary share because of their anti-dilutive effect. The total weighted average number of shares related to the outstanding options excluded from the calculations of diluted earnings per share was 130,000, 203,364 and 7,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
 
 n.
Stock-based compensation
 
 The Company accounts for stock-based compensation in accordance with ASC 718-10, "Share-Based Payment". ASC 718-10 requires companies to estimate the fair value of equity-based payment awards at the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.
 
 The Company recognizes compensation expenses for the value of its awards granted based on the straight line method over the requisite service period, net of estimated forfeitures. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
 
 The following table summarizes the share – based compensation expenses included in the consolidated statements of operations:
 
 2010


2009


2008Cost of revenue

$
351


$
487


$
575Research and development


237



187



262Selling and marketing


650



734



642General and administrative


1,524



1,419



1,528Total

$
2,762


$
2,827


$
3,007
 
 The Company selected the Black-Scholes Merton option pricing model as the most appropriate fair value method for its stock-options awards and values restricted stock based on the market value of the underlying shares at the date of grant. 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.
  F-15
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 n.
Stock-based compensation (Cont.)
 
 The fair value for options granted in 2010, 2009 and 2008 is estimated at the date of grant using a Black-Scholes Merton options pricing model with the following weighted average assumptions:
 2010


2009


2008Risk-free interest rate


1.48
%


1.48
%


1.28
%Expected life of options (In years)


6



6



5.5Expected volatility


40
%


41
%


40
%Expected dividend yield

None


None


None
 
 o.
Fair value of financial instruments
 
 The Company measures its cash equivalents, short term deposits, marketable securities, ARS, accounts receivable, accounts payable, accrued liabilities and foreign currency derivative contracts at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
 
 Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
 Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
 Level 3 - Unobservable inputs which are supported by little or no market activity (See Note 4).
 
 The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
 p.
Reclassification
 
 Certain prior period amounts have been reclassified to conform to the current period presentation.
 
 q.
Recent Accounting Pronouncements
 
 ASU 2010-6 - Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures”, that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. The new and revised disclosures are required to be implemented in interim or annual periods beginning after December 15, 2009, except for the gross presentation of the Level 3 roll-forward, which is required for annual reporting periods beginning after December 15, 2010. The adoption of this standard did not have any effect on the Company’s financial position and results of operations.
  F-16
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
  q.
Recent Accounting Pronouncements (Cont.)
 
 ASU 2010-17- Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition (a consensus of the FASB Emerging Issues Task Force). In April 2010, the FASB issued Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition (a consensus of the FASB Emerging Issues Task Force). The amendments in this update provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive as defined in the ASU. A vendor’s decision to use the milestone method of revenue recognition for transactions within the scope of the amendments in this update is a policy election. Other proportional revenue recognition methods also may be applied as long as the application of those other methods does not result in the recognition of consideration in its entirety in the period the milestone is achieved. The update is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of this update did not have any impact on the Company’s consolidated financial statements.
 ASU 2010-25 - Plan Accounting-Defined Contribution Pension Plans (Topic 962): Reporting Loans to Participants by Defined Contribution Pension Plans. In September 2010, the FASB issued this ASU to clarify how loans to participants should be classified and measured by defined contribution pension benefit plans. Existing guidance requires participant loans to be classified as plan investments, which are generally measured at fair value.  The amendments in this Update require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The amendments in this Update should be applied retrospectively to all prior periods presented, effective for fiscal years ending after December 15, 2010. The ASU did not have any influence on the company's results of operations.
  ASU 2010-29 - Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, In December 2010, the FASB issued this ASU to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for 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, 2010. Early adoption is permitted. The ASU is not expected to have an influence on the company's results of operations.
 
 ASU 2010-28 Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. In December 2010, the FASB issued this ASU to address questions about entities with reporting units with zero or negative carrying amounts. Under Topic 350 on goodwill and other intangible assets, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). Because some entities concluded that Step 1 of the test is passed in circumstances of zero or negative carrying amounts, because the fair value of their reporting unit will generally be greater than zero, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. The ASU is not expected to have any material effect on the company's results of operations.
  F-17
 
 ASU 2009-13 - Multiple Deliverable Revenue Arrangements. In October 2009, the FASB issued ASU 2009-13, “Multiple Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force” (formerly topic 08-1) an amendment to ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments in this update will also replace the term “fair value” in the revenue allocation guidance with the term “selling price” in order to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. The update is effective for revenue arrangements entered into or modified in fiscal years beginning on or after June 15, 2010 with earlier adoption permitted. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
  NOTE 3
- ACQUISITIONS
 
 a.
In October 2008, the Company acquired through its Swiss subsidiary BBP all outstanding shares of Synergy Financial Systems Ltd. a provider of SWIFT services located in London and Nottingham, England for an aggregate purchase price of approximately GBP 2,538 ($ 4,737) in cash. Additional consideration will be paid in cash if and when certain conditions are met between the acquisition date and February 28, 2012, which may amount to an additional GBP 1,200. In 2010 Synergy met the performance targets and is qualified for additional funds of GBP 292 ($ 454). The payments will be paid during 2011. The Company already accounted for this payment on its 2010 financial statements.
 
 b.
In February 2007, the Company acquired all outstanding shares of Prang GmbH. (“Prang”), a provider of payments software solutions, located in Frankfurt, Germany, for an aggregate purchase price of approximately € 4,879 ($6,339). This includes € 4,505 ($5,839) paid in cash directly to the shareholders and € 374 ($500) of acquisition costs.
 Under the terms of the acquisition agreement, Fundtech was to pay additional amounts of up to €4,000 in cash over four years following the acquisition, contingent upon the financial performance of Prang. In March 2008 Fundtech paid € 2,307 ($3,345) based on Prang’s 2007 financial performance, which was already accounted for in 2007.
 
 In March 2008, an amendment agreement was signed pursuant to which the terms of the additional payments were changed as follows: € 597 ($831) paid in January 2009 and additional € 597 ($ 830) paid in January 2010, which was already accounted for in 2008.
  F-18
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 4 -MARKETABLE SECURITIES
 
 December 31,Maturity year

2010


2009Short-term investmentsHeld to maturity -Corporate bonds



$
-


$
1,129Bank certificate of deposits

2011


3,535



11,027Government bonds

2011


22,884



9,092$
26,419


$
21,248Fair value



$
26,421


$
21,259
 
 December 31,Maturity year


2010


2009Long-term InvestmentsAvailable for sale -Taxable auction securities


-



753



774$
753


$
774Fair value





$
753


$
774
 
 The investments held by the Company include Auction Rate Securities (ARS). The ARS held are securities issued by municipalities and closed end preferred funds which had ratings of AAA and Aaa at the time of purchase. An unprecedented number of auctions for ARS failed and it has become increasingly difficult for the industry to value certain ARS. These failed auctions do not represent a default by the issuer. Upon an auction failure, coupons were reset at the maximum reset rate.
 
 These failures to sell are primarily a liquidity event not a credit event. Issuers continue to pay interest and dividends to all ARS holders. Investments in auction rate securities are classified within Level 3 because they are valued using valuation techniques.
 
 During 2010 and 2009, the Company successfully liquidated ARS at the original cost amount of $25 and $275 respectively.
 
 The Company reviews various factors in determining whether it should recognize an impairment charge for its marketable securities, including its intent and ability to hold the investment for a period of time sufficient for any anticipated recovery in market value, the length of time and extent to which the fair value has been less than its cost basis, the credit ratings of the securities, the nature of underlying collateral, as applicable and the financial condition and near-term prospects of the issuer. Based on the Company's consideration of these factors, the Company recognized in 2008 an other-than-temporary impairment in a total amount of $75 related to ARS and a write-off of $617 related to Lehman Brothers corporate notes. The Company may recognize additional losses in the future should the market prospects of the issuers of these securities continue to deteriorate.
  F-19
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 5
-
TRADE RECEIVABLES
 
 December 31,2010


2009Accounts receivable, net of allowance for doubtful accounts

$
24,688


$
19,109Unbilled receivables


5,018



4,336$
29,706


$
23,445
 
 Management's assessment for uncertainties of outstanding debt collectability resulted in doubtful accounts expenses of $339 for 2010, $333 for 2009 and $753 for 2008 in the statement of operations.
 
 NOTE 6
-
PROPERTY AND EQUIPMENT, NET
  December 31,2010


2009Cost:Office furniture and equipment

$
3,446


$
3,325Computers and software


46,832



44,720Motor vehicles


643



766Leasehold improvements


5,071



4,41455,992



53,225Accumulated depreciation


44,539



39,920Net book value

$
11,453


$
13,305
  NOTE 7 -  INTANGIBLE ASSETS, NET
 December 31,Useful life


2010


2009Intangible assetsCost:Developed technology and know-how


5


$
14,096


$
11,918Customer base


3-5



6,349



6,36020,445



18,278Accumulated Amortization:Developed technology and know-how






(12,371
)


(9,008
)Customer base






(4,531
)


(3,798
)(16,902
)


(12,806
)Net book value





$
3,543


$
5,472
  F-20
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 8
-
OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 December 31,2010


2009Accrued expenses

$
5,583


$
5,251Government authorities


2,712



984Other


278



52$
8,573


$
6,287
  F-21
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 9
-
ACCRUED SEVERANCE PAY AND PENSION OBLIGATION
 
 a.
Severance expenses for the years ended December 31, 2010, 2009 and 2008, amounted to approximately $1,488, $1,297 and $1,159 respectively.
 
 b.
Israel
 
 The Company's agreements with the majority of its employees in Israel are under section 14 of the Severance Pay Law -1963. The Company's contributions for severance pay shall be instead of its severance liability. Upon contribution of the full amount of the employee's monthly salary, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee. Further, the related obligation and amounts deposits on behalf of such obligation are not stated on the balance sheet, as they are legally released from obligation to employees once the deposit amounts have been paid.
 
 Other Israeli employees that are not under section 14 are entitled to severance pay in the amount of one month’s salary for each year of employment or a portion thereof. Accordingly, the Company’s liability for severance pay is calculated pursuant to Israeli 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.  The Company’s liability for all of its Israeli employees is fully provided for by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company’s balance sheet.
 The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the conditions pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies, including profits which were immaterial for all periods presented.
 
 c.
Switzerland
 
 The company is providing pension plan for its employees in Switzerland, the pension costs are allocated over the service period of employees in the plan. The Company records a net periodic pension cost in the consolidated statement of operations. The liabilities and annual income or expense of the pension plan is determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, and the long-term rate of asset return (based on the market-related value of assets). The fair values of plan assets are determined based on prevailing market prices.
 
 NOTE 10
-
COMMITMENTS AND CONTINGENCIES
 
 a.
Lease commitments
 
 The Company leases its facilities and vehicles under various operating lease agreements, which expire on various dates, the latest of which is in 2020. The minimum lease commitments including facilities and car leases under non-cancelable operating leases are as follows:
 
 Year ended December 31,2011

$
4,7562012


4,4112013


4,0212014


3,3082015- thereafter


6,778$
23,274
 
 Total facilities lease expenses for the years ended December 31, 2010, 2009 and 2008, were approximately $3,819, $3,896 and $3,615 respectively.
  F-22
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 b.
Guarantees:
 
 1.
The Company has obtained a bank guarantee of $758 for BBP as required by Swiss Law.
 2.
The Company has obtained a bank guarantee of $610 for customer to ensure performance of a software system.
 
 NOTE 11
-
SHAREHOLDERS’ EQUITY
 
 a.
The ordinary shares of the Company are traded on the NASDAQ Global Market and on the Tel-Aviv Stock Exchange.
 
 b.
The ordinary shares confer upon the holders the right to receive notice to participate and vote in general meetings of the Company and the right to receive dividends, if declared.
 
 c.
Treasury shares:
 
 The Company received a court approval to purchase up to $25 million of the Company’s ordinary shares from time to time on the open market. As of December 31, 2010 and 2009, the Company had purchased a total of 1,944,016 and 1,286,178 shares respectively at an aggregated amount of $21.4 million and $12.5 million respectively.
 
 d.
Stock -based compensation:
 
 1.
On December 21, 2005, the shareholders of the Company approved two new equity plans, the 2005 Israeli Share Option and Restricted Share Plan and 2005 International Share Option and Restricted Share Plan (the “2005 Plans”). No new shares were allocated to the 2005 Plans. These plans replaced the Company's 1998 Director’s Stock Option Plan and the 1999 Employee Stock Option Plan (the “Old Plans”), and all shares available for grant under the Old Plans, inclusive of shares which are returned to the share pool due to terminations or expirations, were transferred to the 2005 Plans. On December 20, 2007, the shareholders approved the addition of 300,000 shares for the 2005 Plans. On December 21, 2010, the shareholders approved the addition of 750,000 shares for the 2005 Plans. A total of 5,642,815 shares are reserved for grants to employees and directors of the Company under the Old Plans and the 2005 Plans.
 
 2.
Pursuant to the 2005 Plans, as of December 31, 2010, an aggregate of 762,845 shares of the Company are still available for future grants.
 
 3.
The Company began issuing restricted shares to certain employees and directors in the fourth quarter of 2005. Shares are issued on the date the restricted stock units vest, with employees being responsible for payment of any taxes due on the shares. The Company has the right to retain amounts sufficient to cover statutory withholding requirements related to grants. Grantees have ownership of shares, but shares may not be transferred and accrue no voting or other rights until they are issued upon vesting.
 
 4.
Each option granted to employees and directors under the 2005 Plans expires not later than ten years from the date of the grant, except for grants to persons holding 10% or more of the Company’s stock, which expire in five years. Each option granted to directors under the Old Plans expires no later than five years from the date of grant. The options and restricted shares vest primarily over four years. Any options or restricted shares that are canceled or forfeited before expiration become available for future grants. Options or restricted shares granted to directors are vested over a one year period from their date of grant. The exercise price of the options granted under the plans may not be less than the nominal value of the shares into which such options are exercised.
  F-23
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
  NOTE 11
-
SHAREHOLDERS’ EQUITY (Cont.)
 e. Summary of the Company's option activity under the Plans is as follows:
 
 Year ended December 31,2010


2009


2008Weighted





Weighted





WeightedAverage





Average





AverageNumber


Exercise


Number


Exercise


Number


Exerciseof options


Price


of options


Price


of options


PriceOutstanding atJanuary 1


1,752,210


$
7.92



1,572,062


$
7.00



1,609,387


$
6.74Granted


170,000



15.68



330,000



12.02



222,500



7.81Exercised


(166,602
)


5.62



(111,539
)


6.76



(242,590
)


5.86Forfeited/cancelled


(7,286
)


9.85



(38,313
)


8.94



(17,235
)


9.41Outstanding at December 31


1,748,322


$
8.83



1,752,210


$
7.92



1,572,062


$
7.00Exercisable options at December 31


1,268,396


$
7.45



1,272,440


$
6.88



1,316,308


$
6.78
  F-24
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 11
-
SHAREHOLDERS’ EQUITY (Cont.)
 
 e.
(Cont.)
 
 As of December 31, 2010 the stock price was $16.13, the options outstanding as of December 31, 2010, have been separated into ranges of exercise price, as follows:
 
 Options


Weighted





OptionsOutstanding


Average


Weighted


Exercisable


WeightedRanges of


as of


Remaining


Average


as of


AverageExercise


December 31,


Contractual


Exercise


December 31,


ExercisePrice


2010


Life (years)


Price


2010


Price$
3.55-9.35



1,030,822



3.10



6.94



1,030,822



6.94$
7.81-10.52



587,500



8.62



10.45



237,574



9.74$
16.68



130,000



9.8



16.68



-



-1,748,322



5.47



8.83



1,268,396



7.45
 
 All options granted during 2004 to 2010 were at an exercise price that is equal to the fair value of the stock at the grant date.
 
 The intrinsic value for stock options exercised during years 2010, 2009 and 2008 was $1.34 million, $0.58 million and $1.89 million respectively.
 
 As of December 31, 2010, out of 1,748,322 outstanding options, 1,618,322 are “in-the-money” with intrinsic value of $13 million.
 
 The weighted average fair value at grant date of stock options granted during years 2010, 2009 and 2008 were $6.43, $5.03 and $2.98 respectively.
 
 The unrecognized compensation expense calculated under the fair value method for stock options expected to be vested as of December 31, 2010 was approximately $2.38 million and is expected to be recognized over a weighted-average period of 2.62 years.
 
 f.
Summary of the Company's restricted shares activity under the Plans is as follows:
 
 Year ended December 31,2010


2009


2008Weighted





Weighted





WeightedAverage





Average





AverageNumber


Grant date


Number


Grant date


Number


Grant dateof shares


Fair value


of shares


Fair value


of shares


Fair valueOutstanding atJanuary 1


417,971



10.61



488,037


$
10.87



421,377


$
12.49Granted


248,250



16.46



164,832



10.76



288,316



9.51Vested


(182,249
)


11.10



(224,525
)


11.24



(190,931
)


12.14Forfeited


(21,020
)


10.36



(10,373
)


10.58



(30,725
)


12.69Outstanding at December 31


462,952



13.57



417,971


$
10.61



488,037


$
10.87
  F-25
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 The total fair value of restricted shares vested during the years ended December 31, 2010, 2009, and 2008 were $2.5 million, $2.3 million, and $2.2 million, respectively.
 
 The unrecognized compensation expense calculated under the fair value method for restricted shares expected to be vested as of December 31, 2010 was approximately $6 million and is expected to be recognized over a weighted-average period of 3.1 years.
 
 g.
Dividends
 
 In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company intends to pay cash dividends in year 2011.
 
 NOTE 12
-
EARNINGS PER SHARE
 
 The following table sets forth the computation of historical basic and diluted net earnings per share:
 
 Year ended December 31,2010


2009


2008Numerator:Net income

$
12,532


$
4,673


$
1,240Numerator for basic earnings  per share - income available to OrdinaryShareholders

$
12,532


$
4,673


$
1,240Numerator for diluted net earnings  per share - income available to Ordinary shareholders after assumed exercises

$
12,532


$
4,673


$
1,240
  F-26
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 12
-
EARNINGS PER SHARE (Cont.)
 
 Number of sharesDenominator:Denominator for basic net earnings per share - weighted - average shares


15,208,862



15,145,625



15,769,588Effect of dilutive securities:Employee stock options


709,082



471,485



664,175Denominator for diluted net earnings per share


15,917,944



15,617,110



16,433,763
 
 NOTE 13
-
INCOME TAXES
 
 a.
Measurement of taxable income under the Israeli Income Tax Law (Inflationary adjustments), 1985
 
 The Company is assessed for tax purposes on an unconsolidated basis. Each of the Company’s subsidiaries is subject to the tax rules prevailing in its country of incorporation.
 
 b.
Israeli Taxation
 
 1.
Corporate tax structure:
 
 Taxable income of Israeli companies is subject to tax at the rate of 25% in 2010 (“Regular Tax Rate”). This rate is to be reduced to 24% in 2011and thereafter.
 
 2.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959:
 The Company was granted in November 1995 the status of an "Approved Enterprise", under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Investment Law") and the Company has elected the alternative benefits program, waiver of grants in return for tax exemptions. Pursuant thereto, the income of the Company derived from the "Approved Enterprise" program is tax-exempt for two years commencing with the year it first earns taxable income relating to each expansion program, and subject to corporate taxes at the reduced rate of 10% to 25%, for an additional eight years. The Company completed its investment according to certain of its first program on November 27, 1997. Income derived from this program was tax exempt for two years commencing in 1998 and was subject to the reduced tax rates for eight years ending in 2007 (subject to an adjustment based upon the foreign investors' ownership of the Company). In 1998, the Company received approval for its first expansion program. In 2000, the Company received approval for its second expansion program. In 2005, under the Amendment to the Investment Law (see below for additional information), the Company received approval for its third expansion program. Income derived from the expansion programs will be tax-exempt for a period of two years and will be subject to a reduced tax rate as mentioned above for an additional period of eight years. In 2007 the Company submitted a request for an approval for its fourth expansion program. The period of benefits for these programs has not yet commenced since no income was derived. The period of tax benefits
  F-27
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 NOTE 13
-
INCOME TAXES (Cont.)
 
 b.
(Cont.)
 
 Detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of granting the approval, whichever is earlier.
  The tax-exempt profits that will be earned by the Company's "Approved Enterprise" can be distributed to shareholders, without imposing tax liability on the Company only upon the complete liquidation of the Company. As of December 31, 2010, retained earnings included approximately $ 5,270 in tax exempt income earned by the Company's "Approved Enterprise". The Company has decided to permanently reinvest its tax exempt income. Accordingly, no deferred income taxes have been recorded on income attributable to the Company's "Approved Enterprise".
  If such tax-exempt income is distributed in a manner other upon the complete liquidation of the Company, it would be taxed at the reduced corporate tax rate applicable to such profits (between 20%-25%) and an income tax liability of up to approximately $1,318 would be incurred as of December 31, 2010.
 On April 1, 2005, an amendment to the Investment Law came into effect (“the Amendment”) that has significantly changed the provisions of the Investment Law.
  The Amendment limits the scope of enterprises which may be approved by the Israeli Investment Center of the Ministry of Industry, Trade and Labor (the “Investment Center”) by setting criteria for the approval of a facility as a Privileged Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. In addition, the Investment Law 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.
  As a result of the Amendment, tax-exempt income generated under the provisions of the amended law, will subject the Company to taxes upon dividend distribution or complete liquidation.
 As of December 31, 2010, none of Fundtech income was generated under the provisions of the Amendment.
  The Investment Law also grants entitlement to claim accelerated depreciation on equipment used by the "Approved Enterprise" during five tax years. The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above law, regulations published there under and the instruments 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.
  Income not eligible for “Approved Enterprise” benefits mentioned above is taxed at the Regular Tax Rate.
  F-28
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 13
-
INCOME TAXES (Cont.)
 
 c.
Net operating loss carry forwards
 
 As of December 31, 2010, the Company had approximately $13.3 million of Israeli net operating loss carry forwards. The Israeli loss carry forwards have no expiration date.
 
 As of December 31, 2010, Fundtech Corporation had a U.S. federal net operating loss carry forward of approximately $44.5 million that can be carried forward and offset against taxable income for 9-19 years and begin to expire in 2019 through 2029. Utilization of 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.
 
 d.
Deferred income taxes
 
 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
 
 Significant components of the Company and its subsidiaries assets are as follows:
 
 December 31,2010


2009Deferred tax assets:U.S. net operating loss carry forward

$
17,806


$
17,149Israel  net operating loss carry forward


3,317



5,201Other reserve and allowances


4,273



3,730Total deferred tax assets


25,396



26,080Valuation allowance


(20,261
)


(23,481
)5,135


$
2,599Deferred tax liabilities:


(1,275
)


(1,170
)$
3,860


$
1,429
 
 Deferred tax assets for carry forward losses in the US are calculated using the applicable tax rate at the time of expected realization of the carry forward losses.
 
 Deferred tax assets for carry forward losses in Israel are calculated using the enacted tax rate of 25%.
 Deferred income tax assets and liabilities at December 31, 2010 are included in the accompanying consolidated balance sheets as follows:
  December 31,2010


2009Short term deferred assets, net

$
4,467


$
2,283Long Term deferred tax liability, net


(607
)


(854
)Net deferred income tax liabilities

$
3,860


$
1,429
  F-29
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 13
-
INCOME TAXES (Cont.)
 
 The Company has provided valuation allowances in respect of deferred tax assets resulting from net operating loss carry forwards in the US and for part of its net operating loss carry forwards in Israel. Management currently believes that it is more likely than not that those deferred tax losses will not be realized in the foreseeable future.
 
 e.
Tax assessments
 
 The Company received final tax assessments through the tax year ended December 31, 2006. Fundtech U.K. Ltd. received final tax assessment through the tax year ended December 31, 2008. BBP received final tax assessment through the tax year ended December 31, 2006 Fundtech India received final tax assessment through the tax year ended March 31, 2005. Prang received final tax assessment through the tax year 2006.Accountis Ltd. received final tax assessment through the tax year ended December 31, 2008. Synergy Financial Systems Ltd received final tax assessment through the tax year ended December 31, 2008.
  f.
Composition of income tax expenses
 
 Year ended December 31,2010


2009


2008Income before income taxes:Domestic

$
4,048


$
1,122


$
1,397Foreign


8,445



3,154



943$
12,493


$
4,276


$
2,340Income taxes :Current:Domestic

$
153


$
(13
)

$
159Foreign


1,953



870



1,2172,106



857



1,376Deferred:Domestic

$
(714
)

$
(524
)

$
(940
)Foreign


(1,431
)


(730
)


664
)(2,145
)


(1,254
)


(276
)$
(39
)

$
(397
)

$
1,100
  F-30
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 13
-
INCOME TAXES (Cont.)
 
 g.
Theoretical taxes
 
 The following is a reconciliation of the theoretical tax expense, assuming that all income is taxed at the ordinary statutory corporate tax rate in Israel and other jurisdictions and the actual tax expense in the statement of operations, is as follows:
 
 Year ended December 31,2010


2009


2008Income before income taxes

$
12,493


$
4,276


$
2,340Theoretical tax on the above amount

$
3,437


$
1,502


$
760Decrease  in valuation allowance


(3,220
)


(3,021
)


(989
)Taxes in respect of previous years


(432
)


-



-Non deductible expenses and other


244



973



1,433Other, net


(68
)


149



(104
)$
(39
)

$
(397
)

$
1,100
 
 The following reconciliation summarizes the total gross unrecognized tax benefits:
 2010


2009Beginning balance

$
400


$
400Reduction in tax position of prior years


(111
)


-Ending balance

$
289


$
400
  F-31
  FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 14
-
OPERATING SEGMENT AND GEOGRAPHICAL INFORMATION
 
 a.
The Company evaluates its business activities in accordance with the provisions of ASC 280-10 "Disclosure about Segments of an Enterprise and Related Information".
 
 The Company has three operating business segments: Cash Management, Payments and BBP.
 
 The Company’s cash management solutions enable small, mid and large-tier financial institutions to deliver a complete set of cash management services through the Internet and other delivery channels. The Company’s payments solutions automate all aspects of the funds transfer, including foreign exchange settlement and customer notification process, enabling straight-through-processing (STP) of payments. BBP develops implements, maintains and operates systems for the automatic processing and transport of data in the finance industry. BBP also provides interbank gateway services. Its products include system solutions for interbank applications, as well as integration modules for host connections. The Company's chief operating decision makers evaluate performance of each segment based on income (loss) from operations before restructuring expenses, interest expenses and income taxes.
 
 The Company does not identify or allocate its assets by operating segments as part of the assessment of segment performance.
 
 The following table sets forth the Company’s revenue and operating income from all reportable segments:
  Year ended December 31,2010


2009


2008Cash Management:Revenues

$
29,410


$
26,380


$
27,914Operating income

$
2,523


$
868


$
821Payments:Revenues

$
85,997


$
69,573


$
75,001Operating income

$
23,948


$
15,967


$
17,206BBP:Revenues

$
26,531


$
21,804


$
18,122Operating income

$
3,885


$
1,210


$
1,071
 
 b.
Following is a reconciliation of the operating loss of the reportable segments to the data included in the consolidated financial statements:
 
 Year ended December 31,2010


2009


2008Total operating income of the reportable segments:

$
30,356


$
18,045


$
19,098Amounts not allocated to segments:Stock based compensation


2,762



2,827



3,007General and administrative expenses


10,860



9,960



10,582Marketing expenses


3,476



1,214



2,525Consolidated operating income

$
13,258


$
4,044


$
2,984
  F-32
 
 FUNDTECH LTD.
 NOTES TO THE FINANCIAL STATEMENTS
 (In thousands)
 
 NOTE 14 - OPERATING SEGMENT AND GEOGRAPHICAL INFORMATION (Cont.)
 
 c.
Geographic information:
 The total revenues are attributed to geographic information, based on the customers' location.
 
 Year ended December 31,2010


2009


2008Long -





Long -





Long -Total


Lived


Total


Lived


Total


livedrevenues


Assets


revenues


Assets


revenues


assetsIsrael

$
575


$
3,665


$
461


$
2,701


$
1,108


$
2,304United States


62,006



13,080



48,523



16,078



49,228



25,059Switzerland


17,088



14,053



14,769



13,154



15,155



8,578India


2,087



6,728



2,066



6,337



2,350



6,448United Kingdom


26,291



13,393



19,304



14,925



17,758



12,595Germany


3,881



9,326



4,987



10,137



3,990



10,383Others


30,010



12



27,647



16



31,448



4$
141,938


$
60,257


$
117,757


$
63,348


$
121,037


$
65,371
 
 d.
Major customer’s data as a percentage of total revenue:
 
 Year ended December 31,2010


2009


2008Customer A


6
%


7
%


8
%Customer B


7
%


9
%


10
%Customer C


8
%


5
%


7
%
 
 NOTE 15      - FINANCIAL INCOME (EXPENSES), NET
 
 Year ended December 31,2010


2009


2008Financial expenses:Interest and other

$
60


$
65


$
39Foreign currency translation differences, net


923



78



1,439$
983


$
143


$
1,478Financial income:Interest and other

$
218


$
375


$
1,526$
(765
)

$
232


$
48
  F-33
 
 SCHEDULE II
 
 FUNDTECH LTD.
 VALUATION AND QUALIFYING ACCOUNTS
 (In thousands)
 
 Year ended December 31,2010


2009


2008Allowance for doubtful accounts at  beginning of year

$
1,345


$
1,588


$
859Provision


339



333



753Translation adjustments


1



22



(24
)Accounts receivable written off


(59
)


(598
)


-Allowance for doubtful accounts at end of year

$
1,626


$
1,345


$
1,588
  F-34