MNDO

Business Context and Reporting Period

Company: MIND C.T.I. Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: MIND C.T.I. Ltd. develops, manufactures, and markets real-time and off-line billing and customer care software for telecommunications service providers (wireline, wireless, VoIP, and broadband). The company also offers enterprise call management systems. Operations are global, with approximately 95% of revenues generated outside Israel in 2008.

Key Financial Metrics (Year Ended Dec 31, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 6.0% to $19.5 million, driven primarily by the acquisition of Omni Consulting Company Limited (UK) in late 2007. Service revenues grew 6.4% to $13.3 million, while license sales increased 5.1% to $6.2 million.
• Operating Loss: The company reported an operating loss of $2.3 million in 2008, compared to an operating profit of $1.3 million in 2007. This reversal was primarily due to a $3.7 million impairment charge related to goodwill and intangible assets from the Omni and Sentori acquisitions.
• Net Loss Improvement: Net loss narrowed significantly to $6.4 million from $12.0 million in 2007. This improvement was largely due to a reduction in the impairment charge on auction rate securities (from $15.2 million in 2007 to $4.2 million in 2008).
• Liquidity: Cash and cash equivalents decreased by approximately $2.7 million to $9.7 million. Financing activities used $5.9 million, primarily for cash dividends ($4.3 million) and share repurchases ($1.6 million).

Guidance, Outlook, Risks, and Unusual Items

• Auction Rate Securities (ARS): The company holds a $20.3 million par value investment in auction rate securities. As of December 31, 2008, the fair value was estimated at $0.9 million, resulting in a $4.2 million impairment charge for 2008. The filing notes that as of June 1, 2009, the fair value had dropped to approximately $55,000, indicating a likely further impairment charge in the second quarter of 2009. This illiquidity limits the company's ability to pursue acquisitions.
• Legal Proceedings: The company is engaged in arbitration against Credit Suisse Securities (LLC) regarding the unauthorized investment of funds in collateralized debt obligations (CDOs) instead of liquid auction-rate securities. The claim seeks return of funds plus damages.
• Share Repurchases: In 2008, the company repurchased 2.1 million shares for approximately $1.6 million. As of June 1, 2009, total repurchases under the plan reached 2.38 million shares for $1.8 million.
• Dividends: Despite the net loss, the company paid a cash dividend of $0.20 per share in 2008 (totaling approx. $4.3 million), approved by an Israeli court due to insufficient retained earnings.
• Risks: Key risks include the continued deterioration of the credit market affecting the ARS investment, intense competition from larger global billing companies, reliance on a limited number of customers, and potential political/military instability in Israel.

Investor Verification Checklist

• ARS Valuation: Verify the current fair value of the $20.3 million auction rate security investment and the magnitude of any additional impairment charges recorded in 2009.
• Liquidity Position: Assess whether the remaining cash of $9.7 million is sufficient to sustain operations given the illiquidity of the ARS investment and the potential for further impairments.
• Legal Arbitration: Monitor the status and potential outcome of the arbitration against Credit Suisse regarding the CDO investment.
• Dividend Sustainability: Evaluate the company's ability to continue paying dividends from tax-exempt income or retained earnings given the recent net losses.
• Goodwill Impairment: Review the assumptions used in the $3.7 million goodwill impairment test for the Omni and Sentori acquisitions to assess future risks.