VIA EDGAR [AND BY FAX]
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.W.
Washington, D.C. 20549 December 14, 2010
Attention: Ms. Kate Tillan
Re: Metalink Ltd.
Form 20-F for the fiscal year ended December 31, 2009
Filed June 30, 2010
FILE NO. 0-30394
Dear Ms. Tillan:
We are writing in response to the comments of the Staff of the
Division of Corporation Finance of the Securities and Exchange Commission
(the "COMMISSION") that were contained in your letter dated November 16,
2010 (the "COMMENT LETTER") regarding the Annual Report on Form 20-F of
Metalink Ltd. (the "COMPANY" or "WE") filed with the Commission on June 30,
2010 (the "ANNUAL REPORT").
Please note that, as discussed with you, Ms. Kate Tillan, the due date
of this response letter was extended until December 15, 2010.
Set forth below are the headings and text of the comments raised in
the Comment Letter, followed by the Company's responses thereto. We have
also included the requested Company statement below.
Ms. Kate Tillan
December 14, 2010
Page 2
FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
ITEM 15. CONTROLS AND PROCEDURES, PAGE 90
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES, PAGE 90
1. YOU DISCLOSE YOUR OFFICERS' CONCLUSIONS REGARDING YOUR DISCLOSURE
CONTROLS AND OTHER PROCEDURES. IN FUTURE FILING, INCLUDING ANY
AMENDMENTS, PLEASE DISCLOSE THE CONCLUSIONS OF YOUR OFFICERS REGARDING
THE EFFECTIVENESS OF YOUR DISCLOSURE CONTROLS AND PROCEDURES AS OF THE
END OF THE PERIOD COVERED BY THE REPORT AS REQUIRED BY ITEM 307 OF
REGULATION S-K.
RESPONSE
The Company confirms that in future filings, including any amendments,
it will revise the disclosure in Item 15 to disclose the conclusions
of its officers regarding the effectiveness of disclosure controls and
procedures as of the end of the period covered by the report as
required by Item 15T(a) of Form 20-F (the equivalent of Item 307 of
Regulation S-K).
INTERNAL CONTROL OVER FINANCIAL REPORTING, PAGE 91
2. PLEASE AMEND YOUR FORM 20-F TO INCLUDE A REPORT OF MANAGEMENT ON THE
COMPANY'S INTERNAL CONTROL OVER FINANCIAL REPORTING, INCLUDING
MANAGEMENT'S ASSESSMENT OF THE EFFECTIVENESS OF THE COMPANY'S INTERNAL
CONTROL OVER FINANCIAL REPORTING AS OF DECEMBER 31, 2009, AS REQUIRED
BY ITEM 308T(A) OF REGULATION S-K.
RESPONSE
The Company believes that the Annual Report does include a report of
management on the Company's internal control over financial reporting,
including management's assessment of the effectiveness of the
company's internal control over financial reporting, as required by
Item 15T(b) of Form 20-F (the equivalent of Item 308T(a) of Regulation
S-K), except that the Company inadvertently stated that the conclusion
of the effectiveness of the internal control over financial reporting
was as of "December 31, 2007" rather than "December 31, 2009". The
aforesaid is a non-intentional typographical error as demonstrated by,
INTER ALIA, (1) the paragraph in the Annual Report that provides in
its pertinent part that "... WE CONDUCTED AN EVALUATION OF THE
EFFECTIVENESS OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AS OF
DECEMBER 31, 2009..." and (2) the certifications of the executive
officers of the Company, filed as Exhibits 12.1 and 12.2 of the Annual
Report, that provide in their pertinent parts that each of the
executive officers "...EVALUATED THE EFFECTIVENESS OF THE COMPANY'S
DISCLOSURE CONTROLS AND PROCEDURES AND PRESENTED IN THIS REPORT OUR
CONCLUSIONS ABOUT THE EFFECTIVENESS OF THE DISCLOSURE CONTROLS AND
PROCEDURES, AS OF THE END OF THE PERIOD COVERED BY THIS REPORT BASED
ON SUCH EVALUATION..." [Underlines Added by the Undersigned]
Ms. Kate Tillan
December 14, 2010
Page 3
In light of the aforesaid circumstances, the Company respectfully
requests the Staff to conquer with the Company that filing an
amendment to the Annual Report to correct the aforesaid typographical
error is not required. The Company confirms that in its future filings
it will revise the disclosure in Item 15 to include a report of
management on the company's internal control over financial reporting,
including management's assessment of the effectiveness of the
company's internal control over financial reporting as of the end of
the period covered in the report, as required by Item 15T(b) of Form
20-F (the equivalent of Item 308T(a) of Regulation S-K).
CONSOLIDATED FINANCIAL STATEMENT, PAGE F-1
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, PAGE F-9
3. ON PAGE F-10, YOU DISCLOSE THAT TRANSACTIONS AND BALANCES WHICH ARE
NOT IN U.S. DOLLARS ARE REMEASURED INTO U.S. DOLLARS AT THE SPOT RATE
ON THE DAY OF THE TRANSACTION. PLEASE TELL US HOW YOUR ACCOUNTING
POLICY CONSIDERED FASB ASC 830-20-35-2 UNDER WHICH YOU SHOULD ADJUST
RECORDED BALANCES THAT ARE DOMINATED IN A CURRENCY OTHER THAN THE
FUNCTIONAL CURRENCY TO REFLECT THE CURRENT EXCHANGE RATE AT EACH
BALANCE SHEET DATE.
RESPONSE
The Company notes the Staff's comment and advises the Staff that the
policy it follows is in accordance with FASB ASC 830-20-35-2.
Specifically, transactions and balances denominated in currencies
other than U.S. dollars are being adjusted to the end of period
prevailing spot rate. Note 2B to the financial statement included in
the Annual Report refers to balances that are being adjusted
throughout the period and finally adjusted to the end of period rate
with all adjustments recognized in earnings. The Company confirms that
in its future filings it will revise the disclosure to clarify the
foregoing.
Ms. Kate Tillan
December 14, 2010
Page 4
4. WE NOTE THAT YOU DISCLOSE THE WEIGHTED AVERAGE FOR THE ASSUMPTIONS
UNDERLYING YOUR BLACK-SCHOLES OPTION PRICING MODELS IN 2007, 2008 AND
2009. PLEASE REVISE FUTURE FILINGS TO DISCLOSE THE RANGES UTILIZED
CONSISTENT WITH FASB ASC 718-10-50-2(F)(2).
RESPONSE
The Staff is advised that we do not employ different risk free rates
or different volatility rates during the contractual term. As
described in Note 2M to the financial statement included in the Annual
Report, the Company employs the Black Scholes option pricing model.
The Company believes that, consistent with ASC 718-10-50-2(f)(2), such
model requires one parameter and not a range as may be required in
certain lattice models, and that, consequently, future filings need
not provide a range.
5. PLEASE TELL US HOW YOU DETERMINED THE RISK-FREE INTEREST RATE FOR EACH
PERIOD PRESENTED. REFER TO FASB ASC 718-10-55-28. IN FUTURE FILINGS
PLEASE INCLUDE A DESCRIPTION OF THE METHOD USED DURING EACH YEAR TO
ESTIMATE THE RISK-FREE INTEREST RATE CONSISTENT WITH FASB ASC
718-10-50-2(F).
RESPONSE
The Staff is advised that our share based payments are denominated in
US dollars. Consequently, in accordance with ASC 718-10-55-28, we
looked for the yields on US dollars denominated governmental bonds
with maturity that is commensurate with the expected term of the
award. The Company confirms that in its future filings it will revise
the disclosure to clarify the foregoing.
6. WE NOTE THAT THE EXPECTED LIFE OF YOUR OPTIONS IN 2007, 2008 AND 2009
IS 2.43, 2.51, AND 2.97 YEARS. YOU DISCLOSE THAT YOU DETERMINED THE
EXPECTED LIFE BASED UPON THE SIMPLIFIED METHOD. ON PAGE F-24 YOU
DISCLOSE THAT OPTIONS VEST OVER PERIODS UP TO FIVE YEARS. UNDER FASB
ASC 718-10-55-31(A) AND QUESTION 3 OF SAB TOPIC 14.D(2), THE EXPECTED
TERM CANNOT BE SHORTER THAN THE VESTING PERIOD. PLEASE SHOW US HOW YOU
DETERMINED THE EXPECTED TERM OF YOUR OPTIONS FOR EACH PERIOD PRESENTED
AND TELL US WHETHER THE OPTION TERMS ARE PLAIN VANILLA OPTIONS. REFER
TO QUESTION 6 OF SAB TOPIC 14.D(2).
Ms. Kate Tillan
December 14, 2010
Page 5
RESPONSE
The Staff is advised that information provided on page F-12 relates
only to share based awards to employees. Further, as discussed in
comment no. 7 of the Staff, we utilized the simplified method that
averages the contractual and the vesting periods and con not result in
expected life shorter than the vesting period. In none of the awards
to employees that have requisite service period, the expected term was
shorter than the vesting period, consistent with ASC 718-10-55-31(a).
Fair value of warrants granted to non-employees or investors is
determined by OV model of Bloomberg and utilize the full contractual
life of the warrant and not the expected life. In future filings, the
Company will revise the disclosure to clarify that expected life of
warrants granted to employees that require a service period in never
shorter than the required service period.
7. FURTHER, AS REQUIRED BY QUESTION 6 OF SAB TOPIC 14.D(2), PLEASE
DISCLOSE IN THE NOTES TO YOUR FINANCIAL STATEMENTS IN FUTURE FILINGS
THE REASON WHY YOU USED THE SIMPLIFIED METHOD.
RESPONSE
The Staff is advised that we considered the guidance in Question 6 of
SAB Topic 14.D(2) and believe that it is applicable to us. As more
fully described in the Annual Report, we have changed our main focus
from Digital Subscriber Line (DSL) to Wireless Local Area Network
(WLAN) that was eventually sold to Lantiq. In parallel, our workforce
decreased significantly, from 230 employees in 2007 to 69 employees in
2009. We believe that these business structural changes have made
historical information less relevant and reliable and, consequently,
we implemented the simplified method consistent with the guidance in
Question 6 of SAB Topic 14.D(2). In future filings, the Company will
revise the disclosure to include the reason for the use of the
simplified method.
8. YOU DISCLOSE THAT YOU DETERMINED YOUR VOLATILITY USING HISTORICAL
QUOTES. PLEASE TELL US IN MORE DETAIL HOW YOU DETERMINED YOUR
VOLATILITY FOR EACH PERIOD PRESENTED. DISCUSS HOW YOU CONSIDERED FASB
ASC 718-10-55-35 THROUGH 55-41 AND SAB TOPIC 14.D(1).
Ms. Kate Tillan
December 14, 2010
Page 6
RESPONSE
The Staff is advised that we determined volatility by taking
historical quotes of our shares back in the past that resemble the
expected term of the warrant being valued. We use consistently daily
quotes we extract from [publicly available online sources] and apply
to it the formula to determine daily volatility that is then converted
into annual volatility that we use in the Black Scholes model. The
Staff is further advised that there are no traded instruments of the
Company, other than shares, that implied volatility can be derived
from and we believe that in our case market participant would rely on
historical volatility in estimating the value of warrants.
NOTE 8- SHORT-TERM LOAN, PAGE F-21
9. PLEASE TELL US THE NATURE OF THE TERMS OF THE WARRANTS THAT CAUSED YOU
TO ACCOUNT FOR THEM AS LIABILITIES. IN THIS REGARD, PLEASE EXPLAIN
UNDER WHAT CIRCUMSTANCES YOU WOULD HAVE TO PAY THE HOLDER IN CASH FOR
THE WARRANTS. DISCUSS HOW YOU EVALUATED THESE TERMS UNDER ASC 815-10
IN DETERMINING THAT THE WARRANTS SHOULD BE CLASSIFIED AS LIABILITIES.
RESPONSE
The Staff is advised, that the warrants issued to the lender
stipulated, among other things, that if the Company issues shares or
Common Stock Equivalents (as defined in the warrants) within the
earlier of 90 calendar days of the Second Closing Date or 200 calendar
days of the First Closing Date at an effective price of less than
$1.00 per share, than the warrants issued, at the lender's own
discretion, may be redeemed for cash at the then fair value. Since the
share price of the Company at that time was significantly lower than
$1.0 and due to the Company's financial situation where the Company
sought a capital investment, we could not assert that such issuance is
not probable and hence an obligation as defined in ASC 480-10 was
undertaken. We believe that had any issuance opportunity would have
been available at the time, we would have used it even if the purchase
price per share was lower than $1.0. As such, at first the warrants
were classified as liability until the 200 days provision would lapse.
Upon adoption of ASC 815-40-15 (formerly EITF 07-5), we reevaluated
the warrants and, due to the fact that it also contained an
anti-dilution clause that is triggered by issuance of future dilutive
issuances, it was classified as liability in accordance with ASC
815-40-15. As a result, even after the 200 days lapsed, the warrants
were still classified as liability.
Ms. Kate Tillan
December 14, 2010
Page 7
10. WITH RESPECT TO THE SECOND AMENDMENT TO THE LOAN AGREEMENT ON
SEPTEMBER 6, 2009, AND THE THIRD AMENDMENT ON DECEMBER 30, 2009,
PLEASE TELL US HOW YOU CONSIDERED FASB ASC 470-50-40 IN DETERMINING
WHETHER THE CHANGES RESULTED IN A MODIFICATION OR AN EXTINGUISHMENT.
RESPONSE
The Staff is advised that the changes to the loan were considered as
an extinguishment, within the meaning of ASC 470-50-40.
On September 6, 2009, the Company entered into a second amendment to
the Loan Agreement (the "SECOND AMENDMENT"). The Second Amendment
stipulated an increase in the principal amount of up to additional 15%
(or a total of $4,312,500) if payment is extended beyond January 1,
2010. At the time of the Second Amendment, we considered the repayment
of the loan before January 1, 2010 to be remote and, consequently, in
considering the expected change in cash flows, we assumed that the
increase in the principal amount is of 15%. As the original loan was
already due at the time of the Second Amendment, it was clear that an
increase in principal amount of 15% for a period of 4 months would
result in more than 10% change in cash flows. Moreover, when taking
into account the fair value of the reduction in exercise price of the
warrants from $0.50 to $0.03 that was considered part of the
calculation, it was clear that it will result in more than a 10%
change in cash flows. All in all, we had to account for the Second
Amendment as an extinguishment. The effect of the extinguishment was
that the excess of the new loan's fair value over the carrying amount
of the original loan (including any unamortized discount thereon) and
the change in fair value of the warrants were recorded in earnings.
On December 30, 2009, the Company entered into a third amendment to
the Loan Agreement (the "Third Amendment"). The Third Amendment
stipulated that pending the closing of an asset sale to a third party
(which closing took place on February 15, 2010), the repayment amount
would be reduced to $4,100,000, of which $3,750,000 was due upon
completion of the asset sale. We considered the pending reduction of
the principal amount as contingent payment as of December 30, 2009.
[That reduction, that eventually occurred on February 15, 2010, and
the contingency resolved resulting in a loan principal of $4,100.
Hence, the loan amount presented as of December 31, 2009, on $4,100.]
Ms. Kate Tillan
December 14, 2010
Page 8
NOTE 10. SHARE CAPITAL, PAGE F-23
11. WITH RESPECT TO YOUR ISSUANCE OF COMMON STOCK AND WARRANTS IN AUGUST
2007, PLEASE TELL US WHERE YOU RECORDED THE VALUE OF THE WARRANTS IN
YOUR FINANCIAL STATEMENTS. YOU DISCLOSE ON PAGE F-22 THAT THE ISSUANCE
OF THE WARRANTS TRIGGERED AN ADJUSTMENT OF THE EXERCISE PRICE OF THE
WARRANTS ISSUED IN AUGUST 2007. PLEASE TELL US THE SIGNIFICANT TERMS
OF THOSE WARRANTS, INCLUDING THE TERMS THAT CAUSED THE ADJUSTMENTS.
DISCUSS HOW YOU CONSIDERED THESE TERMS IN DETERMINING TO ACCOUNT FOR
THE WARRANT AS EQUITY. SPECIFICALLY DISCUSS YOUR ADOPTION FASB ASC
815-40-15 (FORMERLY EITF 07-5) ON JANUARY 1, 2009.
RESPONSE
In August 2007, we issued to certain investors an aggregate of
3,200,000 ordinary shares in consideration for an aggregate of $19.2
million, or $6.00 per share. In addition, we issued to these investors
warrants, exercisable until August 7, 2012, to purchase an aggregate
of an additional 800,000 ordinary shares at an exercise price of $8.00
per share, subject to certain adjustments, including an anti-dilution
adjustment in the event that we issue securities at a price per share
lower than the exercise price. Under the warrants, we were also
entitled to force the exercise of the warrants in the event the market
price for our ordinary shares exceeds certain thresholds.
The Staff is advised that the anti-dilution mechanism in the warrants
is a broad based weighted average, i.e., the adjustment is based on
the relative dilutive effect of new issuance of securities, with a
floor price of $6.50. That anti-dilution mechanism would require
classification as liability under ASC 815-40-15. The Staff is further
advised that in light of the significantly lower share price at the
time of initial application of ASC 815-40-15, and throughout the year
(a rough average of $0.1 per share), the effect of the adoption FASB
ASC 815-40-15 (formerly EITF 07-5) on January 1, 2009 was de minimis.
The Company will continue monitoring the value of the warrants and, if
and when such value will be more than nominal, it would be recognized
through earnings in accordance with FASB ASC 815-40-15.
Ms. Kate Tillan
December 14, 2010
Page 9
12. WE NOTE THAT IN FEBRUARY 2010 YOU IMPLEMENTED A ONE-FOR-TEN REVERSE
STOCK SPLIT. HOWEVER, ON THE FACE OF YOUR BALANCE SHEET, WITHIN YOUR
STATEMENT OF SHAREHOLDERS' EQUITY AND IN FOOTNOTE 10, YOU HAVE
PRESENTED COMMON SHARES ON A PRE-SPLIT BASIS. IN ACCORDANCE WITH SAB
TOPIC 4C, PLEASE REVISE FUTURE FILINGS TO GIVE RETROACTIVE EFFECT TO
THE REVERSE STOCK SPLIT ON YOUR FINANCIAL STATEMENTS AND RELATED
DISCLOSURES.
RESPONSE
We noted the Staff comment and will revise the disclosure in future
filings to give effect to the reverse stock split in accordance with
SAB Topic 4C.
C. STOCK OPTIONS, PAGE F-24
13. YOU DISCLOSE THAT OPTIONS GRANTED VEST OVER PERIODS OF UP TO FIVE
YEARS WHILE MOST OF THE OPTIONS GRANTED AFTER 2005 EXPIRE AFTER FOUR
YEARS. PLEASE REVISE YOUR DISCLOSURE IN FUTURE FILINGS TO RECONCILE
THE DISCLOSURE AND INCLUDE A DESCRIPTION OF THE REQUISITE SERVICE
PERIOD AND MAXIMUM CONTRACTUAL TERM SO THAT A READER UNDERSTANDS THE
NATURE AND TERMS OF EACH OF YOUR SHARE-BASED PAYMENT ARRANGEMENTS
CONSISTENT WITH FASB ASC 718-10-50-1 AND 50-2.
RESPONSE
We noted the Staff comment and advise that contractual life of stock
options granted after 2005 is 4 years whereas vesting is up to 3
years. Before 2005, the contractual life was 10 years and vesting was
up to 5 years. While we believe the current disclosure is technically
correct, we will revise the disclosure in future filings to clarify
the foregoing.
14. IN FUTURE FILING PLEASE DISCLOSE FOR EACH YEAR FOR WHICH AN INCOME
STATEMENT IS PROVIDED THE TOTAL INTRINSIC VALUE OF OPTION EXERCISED
AND THE TOTAL FAIR VALUE OF SHARES VESTED DURING THE YEAR CONSISTENT
WITH FASB ASC 718-10-50-2(D)(2).
RESPONSE
We noted the Staff comment and will revise the disclosure in future
filings to include the information required by ASC 718-10-50-2(d)(2).
Ms. Kate Tillan
December 14, 2010
Page 10
15. IN FUTURE FILINGS PLEASE DISCLOSE THE AGGREGATE INTRINSIC VALUE OF
OPTION OUTSTANDING AND CURRENTLY EXERCISABLE AND THE WEIGHTED-AVERAGE
REMAINING CONTRACTUAL TERM OF OPTIONS CURRENTLY EXERCISABLE CONSISTENT
WITH FASB ASC 718-10-50-2(E).
RESPONSE
We noted the Staff comment and will revise the disclosure in future
filings to include the information required by ASC 718-10-50-2(e).
16. IN FUTURE FILINGS PLEASE DISCLOSE AS OF THE LATEST BALANCE SHEET DATE
PRESENTED, THE TOTAL COMPENSATION COST RELATED TO NON VESTED AWARDS
NOT YET RECOGNIZED AND THE WEIGHTED-AVERAGE PERIOD OVER WHICH YOU
EXPECT TO RECOGNIZE THE COMPENSATION CONSISTENT WITH FASB ASC
718-10-50-2(I).
RESPONSE
We noted the Staff comment and will revise the disclosure in future
filings to include the information required by ASC 718-10-50-2(i).
****
GENERAL - COMPANY STATEMENT
At your request, the Company further acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the Form 20-F;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action
with respect to the Form 20-F; and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Ms. Kate Tillan
December 14, 2010
Page 11
We appreciate your comments and welcome the opportunity to discuss
with you our response provided above. If you have any questions or comments
regarding the foregoing, please do not hesitate to contact me at
972-54-806-6855 or Mrs. Neta Eshed, General Counsel, at 972-54-950-9933.
Very truly yours,
by: /s/ Rony Eizenshtein
------------------------
Rony Eizenshtein
Chief Financial Officer
cc: Gerald L. Baxter, Esq. (Greenberg Traurig LLP) Ido Zemach, Adv.
(Goldfarb, Levy, Eran, Meiri, Tzafrir Co.)