STATE OF ISRAEL Ministry of Industry, Trade and Employment Industrial Research and Development Administration

2.1.

The Office of the Chief Scientist supervises the implementation and execution of the Research Committee’s decisions regarding support of R&D programs that it has approved.

2.2.

This regulation is designed to determine the mechanism for company reports in all matters relating to payment of royalties from revenues derived from R&D programs approved by the Research Committee.

2.3.

This regulation is designed to determine the company’s undertaking, if the R&D program has failed, after conclusion of the R&D program.

2.4.

3.1.

3.1.1.

The company is committed to pay royalties for every revenue which originates from the developed product and its derivatives, as defined in the Law and Regulations, including the revenues from provision of consultation and training services, installation and maintenance services, provision of marketing rights, sale of knowhow etc, all as stated in the R&D Law and the Royalty Regulations.

3.1.2.

The Research Committee, in the event that it shall approve the request for R&D support, shall deliberate and decide on the basis of an expert opinion by a professional examiner, the head of the professional field, and the company’s position if it is different from the expert opinion, about the products/technologies for which royalties will be paid, and whether the company will be required to pay increased royalties.

3.1.3.

A letter of undertaking that shall be sent by the Office of the Chief Scientist shall detail the products/technologies for which royalties shall be paid. Furthermore the previous dossiers attributed to the R&D program shall be noted whereby the criteria for attribution of dossiers are:

3.1.4.

The use made of the current R&D dossier in the outcomes of development/knowhow from other dossiers/programs.

3.1.5.

The product subject of the R&D dossier is attributed to the same product line and/or directed to those same types of customers as the previous dossiers.

3.2.

3.2.1.

Programs for development of products based on the basic knowhow developed within the framework of the program which received benefits pursuant to the law or other benefits from the Office of the Chief Scientist;

3.2.2.

Programs for development of products the lifetime of which in the market is limited;

3.2.3.

Programs for development of identical or similar products to the products for which the programs for their development have received or should receive from the Research Committee approval pursuant to the law or pursuant to any law, on the condition that there is or shall be marketing competition between the applicants for the approval.

3.3.

3.3.1.

A company obligated for payment of royalties for revenues derived from the development supported by the Office of the Chief Scientist, as stated in the Royalties Regulations, up to a repayment ceiling calculated according to the level of the program.

3.3.2.

The ceiling of the repayment shall be calculated according to a schema of repayment ceilings for each of the program dossiers as approved by the Research Committee whereby the dossiers for which the period of their execution began before 01/01/94, the ceiling of the repayment will be calculated according to 100% or 150% of the total grant received by the company and this pursuant to the instructions of the old regulations and pursuant to the various tracks. Dossiers for which the period of their execution started after 01/01/94, the repayment ceiling (for all the tracks) will be calculated according to 100% of the total grant received by the company.

3.3.4.

Sum of the linked grant

3.3.4.1.

A company for which an R&D program is approved, will receive the grant payments throughout the period of the R&D. Each payment made by the Office of the Chief Scientist is translated on the day of the issue of the payment instruction into dollar value, accrued in these values and accredited to the debit of the company in the specific dossier.

3.3.4.2.

At the conclusion of the R&D and after the CPA’s audit on behalf of the Office of the Chief Scientist, the accrued sum of the grant which the company received for the R&D program will be ultimately determined.

3.3.4.3.

The collection of accrued grants in all the program dossiers is multiplied by the specific repayment ceiling for each dossier (according to the support track and/or according to the decision of the Committee) which creates the theoretical debt of the company to the Office of the Chief Scientist.

3.3.4.4.

It shall be noted that all the activity with the Counterpart Fund (reporting, payment, accounting, etc) will be carried out in relation to the dossier level and not in relation to the request (dossier).

3.4.

3.5.

3.5.1.

A revenue that owes royalties as stated in the Royalty Regulations obligates a separate record in the company’s bookkeeping for the purpose of paying royalties by recording the revenue in its books (accrued basis), the revenues shall be translated into dollar values and shall be accrued in those values until the date determined for payment of royalties. On the determining date the dollar amount will be translated into shekel values and paid by the company into the account of the Office of the Chief Scientist.

3.5.2.

Sales price owing royalties is the full price which the company recorded in its audited books and reports. You may deduct from the sales price expenses for purchase tax, VAT and exchange rate insurance only. Apart from the aforementioned and that stated in Section 4.6.5 no other expense may be deducted.

3.5.3.

3.5.4.

3.5.5.

a.

Products which were developed with the company’s financing without the assistance/support of the Chief Scientist however based on knowhow developed with the assistance of the Chief Scientist will be charged royalty payments as if it was a product developed with the assistance of the Chief Scientist.

b.

A product which was developed for the most part without the assistance of the Office of the Chief Scientist however for the purpose of completing it or its improvement it received the support of the Chief Scientist will be charged according to the rates determined in the Regulations and taken from the full sales price.

3.5.6.

a.

A product which was developed for the most part by independent financing by the company or other entities and received support for the conclusion of the development or its improvement will be charged with royalty payment from the full sales price of the product without consideration of the relative part of the investment of the company in the development.

b.

In the event that the company sells a system incorporating independent sub-systems which stand alone, whereby one was developed with the assistance of the Office of the Chief Scientist and the second was developed without assistance, the royalties shall be calculated as follows:

c.

Firstly the measure of the independence of the sub-systems shall be examined (by the Chief Scientist’s office), whereby the test is the measure of the connection between them, that is to say the measure of the technological involvement required during the development in order for these sub-systems to be integrated into one working system. If the Research Committee shall approve that indeed the sub-systems are

3.6.

3.6.1.

The company is obligated to report to the Counterpart Fund twice a year on the royalty report form (Appendix A) as regards the status of the R&D program. In the event that the company had sales during the half year, it is required to report and pay accordingly.

3.6.2.

The abovementioned report is half yearly, the determining date for report and payment is two months after the end of the half year – for example, for the first half year of 2001 (months 01-06.01) you are required to report and pay by 31.8.01. For the second half year of 2001 (months 7-12.01) you are required to report and pay by 28.2.01.

3.6.3.

It should be noted that the obligation to report is imposed also on the programs which have still not matured and have not reached sales or programs that failed for any reason whatsoever.

3.6.4.

Once a year and close to the date of reporting the second half years of each report year, the company will attach a company managers’ declaration form and a special report by the CPA confirming the company’s reports for the entire year (these should be submitted in the wording attached in Appendix B only – other wordings will not be accepted).

3.6.5.

In the event that the company has subsidiaries, financial data will be transferred (as detailed in Section 5 of Appendix A) both as regards the company itself and in regard to the later data.

3.6.6.

The company reports should be sent by post to the Office of the Chief Scientist – Counterpart Fund, 4 Mevo Hamatmid, P.O.B. 2197, Zip code 91021, Jerusalem. Please attach a photocopy of the payment slip to the reports.

3.6.7.

Proceedings shall be taken against companies that shall not report in a timely fashion pursuant to Section 45 of the Encouragement of Research and Development in Industry Law 5744-1984, the gist being: termination of payments, stay of handling of the company’s requests and finally a demand for a return of all the benefits given to the company. Furthermore, the Counterpart Fund shall recommend to other units in the Ministry of Industry and Trade to stay the handling of the company’s requests.

3.7.

3.8.

3.8.1.

A company is permitted to submit a request to exempt itself from the duty of reporting, if one of the following occurs, as stated in the Royalties Regulations: the company is not active; the R&D program has failed; the company is not selling the product.

3.8.2.

Please note, submission of a request to close a program in the Counterpart Fund does not exempt the company from continuing to report. The company is required to continue to report to the Counterpart Fund until receipt of a confirmation in writing as regards closure of the program in the Counterpart Fund.

3.8.3.

On the request form (Appendix C) the company shall declare the status of the program, the progression of the events which caused the company to declare its failure and that the company did not make use of the knowhow derived from the program and did not transfer the knowhow to another company. Furthermore they shall report on the products that it sold throughout the years from the date of the Scientist’s support and until submission of the request.

3.8.4.

The Counterpart Fund Unit will transfer the company’s request to be examined by a professional examiner who handled the program during the development stage. If necessary the request will be transferred to another professional examiner after consultation with the Deputy Chief Scientist for Technology.

3.8.5.

The professional examiner, after examination of the company’s request, including an inspection at the company’s site, will submit his reasoned recommendation to the Manager of the Counterpart Fund, while focussing on the verification of the accuracy of the company’s data and the feasibility of the company implementing the knowhow acquired in the program in the future. A copy of the recommendation will be sent by him to the Head of the Professional Field.

3.8.6.

The Manager of the Counterpart Fund, after he has examined the expert opinion of the professional examiner and after he has received the comments of the various entities in the Office of the Chief Scientist, will transfer his recommendation to the Chief Scientist within 14 days. The Chief Scientist, or whoever he shall authorize, shall notify the company of his decision.

3.8.7.

When an exemption is given the company shall undertake to report to the Chief Scientist as regards any change to the status of the program and that it is aware that the provision of approval of recognition of a program as a failure does not release the company from its obligation to meet the requirements of the R&D Law.

4.

4.1.

Further to the amendment of the Regulations of Encouragement of Research and Development in Industry (Arrangement for Debt Repayment), 5761-2001 (attached), a large and investment intensive company in research and development (hereinafter: a company) that wishes to join the royalty repayment arrangement shall submit a request to the Counterpart Fund. The process of examining the request will be under the responsibility of the Counterpart Fund which will submit its recommendation to the Debt Repayment Committee headed by the Accountant General (hereinafter: the committee).

4.2.

4.2.1.

The declaration of the CEO of the company that the company meets the prerequisites determined in the Regulations in Section 2.2 “Large Company and R&D Intensive”.

4.2.2.

The last personnel report submitted to the National Insurance in which the employees employed in R&D are noted.

4.2.3.

An audited financial report for the last year ending and the quarterly reports of the current year.

4.2.4.

Details of the grants given to the company for each and every dossier as they are recorded in the company’s books.

4.2.5.

Linkage of the R&D dossiers given to the company for the research and development programs. The links between the dossiers shall be technological links thus that in the event that the supported knowhow in a certain dossier is based on supported knowhow in a previous dossier, these dossiers will be attributed to one R&D program.

4.2.6.

The division of the various company products into various R&D programs.

4.2.7.

The sales forecast for the products based on the knowhow supported by the Scientist and calculation of the current value (capitalized by a 4% interest) of royalties that the company should have paid to the Office of the Scientist for these sales. The sales forecast shall be based on the shelf reviews carried out by a recognized and independent professional entity which analyzes the market in which the firm operates. Please note, pursuant to the Regulations, a capitalized sales forecast plus royalties paid, is required to meet the minimum of 65% of the total grants paid to the company plus Libor interest in the relevant dossiers.

4.2.8.

Details of the royalties paid to the Office of the Chief Scientist in the various programs as they are recorded in the company’s books.

4.3.

4.4.

4.5.

4.5.1.

A company is permitted to submit a request for repayment of royalties on a date that is convenient for it.

4.5.2.

A company wishing to enter into an arrangement before submission of requests for grants for the next budgetary year, is required to submit a request by 16/10/XX to the Counterpart Fund.

5.

5.1.

The overall responsibility for activation of this regulation is imposed on the Deputy Chief Scientist for Administration and Operation.

5.2.

The responsibility for interpretation and update of this regulation is imposed on the Deputy Chief Scientist for Administration and Operation.

6.

7.

8.