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, 2014
 
Or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report………………..
 
For the transition period from                  to                
 
Commission File number: 000-23288
 
  SILICOM LTD.
(Exact name of Registrant as specified in its charter and as translated into English)

ISRAEL
(Jurisdiction of incorporation
or organization)
 
8 Hanagar Street,
Kfar Sava 4442537, Israel
 (Address of principal executive offices)
 
Mr. Eran Gilad, CFO and Company Secretary
Telephone: +972-9-764-4555
E-mail: erang@silicom.co.il
8 Hanagar Street,
Kfar Sava 4442537, Israel
 (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:
 
None
 
None
        Title of each class        
 
        Name of each exchange on which registered        
Ordinary Shares, NIS 0.01 nominal value per share
 
NASDAQ GLOBAL SELECT MARKET
 
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:
 
  7,218,633
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
 
Yes  o           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  o         No  x

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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  o

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   o
 
Accelerated filer   x
 
Non-accelerated filer   o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this fling:
 
US GAAP x    
 
International Financial Reporting Standards as issued
by the International Accounting Standards Board o
 
Other  o
   
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  o           Item 18  o

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  o         No  x

 (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
 
             Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    
 
Yes  o           No  o

This annual report on Form 20-F includes certain “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The use of the words “projects,” “expects,” “may,” “plans” or “intends”, or words of similar import, identifies a statement as “forward-looking.” There can be no assurance, however, that actual results will not differ materially from our expectations or projections. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this report at Item 3 titled “Risk Factors.”
 
As used herein or any in any document incorporated by reference hereto, the “Company”, “Silicom Ltd.”, “Silicom”, “Registrant”, “we”, “us”, or “our” refers to Silicom Ltd. and its subsidiaries. We have prepared our consolidated financial statements in United States dollars and in accordance with accounting principles generally accepted in the United States. All references herein to “dollars” or “$” are to United States dollars, and all references to “Shekels” or “NIS” are to New Israeli Shekels.
 
 
2
 

Table of Contents
 
6
   
6
   
6
   
6
A.           Selected Financial Data
6
B.           Capitalization and indebtedness
9
C.           Reason for the offer and use of proceeds
9
D.           Risk Factors
9
   
24
A.            History and Development of the Company
24
B.             Business Overview
25
Principal Markets
29
Manufacturing and Suppliers
29
Marketing Channels
31
Patents and Licenses
33
Competition
34
Governmental Regulation Affecting the Company
35
C.             Organizational Structure
36
D.             Property, Plant and Equipment
36
   
37
   
37
Critical Accounting Policies
37
A.            Operating Results
40
Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets
43
B.            Liquidity and Capital Resources
44
C.            Research and development, patents and licenses, etc.
45
D.            Trend Information
47
E.            Off-Balance Sheet Arrangements
48
F.             Tabular disclosure of contractual obligations
49
 
 
3
 
 
   
50
A.             Directors and Senior Management
50
B.             Compensation
52
C.            Board Practices
54
Board of Directors
56
External Directors
56
Audit Committee
60
Compensation Committee
61
Internal Auditor
66
D.            Employees
66
E.             Share Ownership
68
   
69
A.            Major Shareholders
69
B.            Related Party Transactions
70
   
75
A.            Offer and listing details
75
Markets and Share Price History
75
   
103
Interest Rate Risk
103
Foreign Currency Exchange Risk
103
   
105
   
105
   
105
   
105
   
105
Disclosure Controls and Procedures
106
Management's Annual Report on Internal Control over Financial Reporting
 
Inherent Limitations on Effectiveness of Controls
106
Changes in Internal Control over Financial Reporting
107
 
 
4
 
 
   
107
   
107
   
107
   
107
   
107
   
108
   
108
   
108
   
108
   
110
   
111
   
111
   
111
   
111
   
 
5
 

 
P AR T 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
 
A.           Selected Financial Data

The selected data presented below under the captions “Consolidated Statements of Operations Data” and “Consolidated Balance Sheets Data” for and as of the end of each of the years in the five-year period ended December 31, 2014, are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2014 , and for each of the years in the three-year period ended December 31, 2014, and the report thereon, are included elsewhere in this annual report. The selected data set forth below should be read in conjunction with our consolidated financial statements and the notes thereto, which are set forth in Item 18 – “Financial Statements” and the other financial information appearing elsewhere in this annual report.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
 
   
2010
   
2011
   
2012
   
2013
   
2014
 
Sales
  $ 30,399     $ 39,633     $ 48,729     $ 73,298     $ 75,622  
Cost of sales
    17,490       22,430       28,849       43,865       44,835  
Gross profit
    12,909       17,203       19,880       29,433       30,787  
Research and development costs
    3,280       4,165       4,401       5,465       6,480  
Sales and marketing expenses
    2,207       2,677       3,081       3,818       4,418  
General and administrative expenses
    1,523       1,890       2,369       2,572       2,843  
Total operating expenses
    7,010       8,732       9,851       11,855       13,741  
Operating income
    5,899       8,471       10,029       17,578       17,046  
Financial income, net
    617       439       752       404       263  
Income before income taxes
    6,516       8,910       10,781       17,982       17,309  
Income tax expenses
    801       667       910       905       2,704  
Net income (1)
    5,715       8,243       9,871       17,077       14,605  
Income per share
                                       
Basic income per ordinary share
  $ 0.838     $ 1.195     $ 1.424     $ 2.404     $ 2.033  
Diluted income per ordinary share
  $ 0.824     $ 1.178     $ 1.417     $ 2.357     $ 1.996  
    Weighted average number of ordinary shares used to compute basic income per share (in thousands)
    6,821       6,896       6,934       7,103       7,184  
    Weighted average number of ordinary shares used to compute diluted income per share (in thousands)
    6,938       6,995       6,968       7,246       7,319  
 
(1) Net income is after deduction of taxes on income, which have been reduced by virtue of tax benefits to which the Company is entitled in its capacity as a “Benefited Enterprise” under Israeli law.  As such, the Company was required to pay taxes at a reduced effective rate. The Company selected the 2004 tax year, the 2006 tax year, the 2009 tax year and the 2012 tax year as its Year of Election, from which the period of benefits under the Investment Law are to commence. See Note 14C to the Financial Statements and “Item 10" - Additional Information - Taxation.”
 
 
6
 

CONSOLIDATED BALANCE SHEET DATA
 
   
2010
   
2011
   
2012
   
2013
   
2014
 
Total assets
  $ 63,479     $ 72,865     $ 89,033     $ 105,257     $ 122,436  
Total current liabilities
  $ 5,827     $ 6,438     $ 11,789     $ 11,948     $ 19,006  
Long-term liability
  $ 2,222     $ 2,153     $ 2,278     $ 2,618     $ 2,698  
Shareholders' equity
  $ 55,430     $ 64,274     $ 74,966     $ 90,691     $ 100,732  
Capital stock
  $ 20     $ 20     $ 21     $ 21     $ 21  
Number of ordinary shares issued (1)
    6,894,659       6,940,059       7,022,397       7,154,984       7,233,604  
 
(1) Including 14,971 held by one of our subsidiaries - Silicom Connectivity Solutions, Inc. Under the Israeli Companies Law 5759-1999 (the "Companies Law") these shares held by such subsidiary are non-voting shares.
 
The following table sets forth information regarding the exchange rates of U.S. dollars per NIS for the periods indicated. Average rates are calculated by using the daily representative rates as reported by the Bank of Israel on the last day of each month during the periods presented.

   
NIS per U.S. $
 
Year Ended December 31,
 
High
   
Low
   
Average
   
Period End
 
2014
    3.994       3.402       3.577       3.889  
2013
    3.728       3.471       3.601       3.471  
2012
    4.028       3.715       3.844       3.733  
2011
    3.821       3.395       3.582       3.821  
2010
    3.875       3.549       3.732       3.549  

 
 
7
 
 
The following table sets forth the high and low daily representative rates for the NIS as reported by the Bank of Israel for each of the prior six months.

    NIS per U.S. $  
Month
 
High
   
Low
   
Average
   
Period End
 
February 2015
    3.966       3.844       3.892       3.966  
January 2015
    3.998       3.889       3.689       3.924  
December 2014
    3.994       3.889       3.931       3.889  
November 2014
    3.889       3.782       3.829       3.889  
October  2014
    3.793       3.644       3.736       3.784  
September  2014
    3.395       3.578       3.6271       3.695  

The NIS to U.S. Dollar exchange rate on February 28, 2015, as published by the Bank of Israel, was NIS 3.966.

Dividends

Prior to 2013, we had not paid dividends to our shareholders. On January 14, 2013, we announced that our Board of Directors adopted a policy for distributing dividends, subject to all applicable laws. According to this policy, each year we will distribute a dividend of up to 50% of our annual distributable profits. As part of the stated policy, the Company's Board of Directors reserves the right to declare additional dividend distributions, to change the rate of dividend distributions (either as a policy or on a one-time basis), to cancel a specific distribution or to cancel the policy as a whole at any time, at its sole discretion. The actual distribution of a dividend will be subject to meeting the conditions required by applicable law, including the distribution tests set forth in Section 302 of the Companies Law, and to the specific decision of the Company's Board of Directors for each distribution. Future dividend policies will be reviewed by the Board of Directors based upon conditions then existing, including our earnings, financial condition, capital requirements and other factors. Our ability to pay cash dividends may be restricted by instruments governing any of our obligations.

Dividends paid by an Israeli resident company to non-Israeli shareholders are generally subject to withholding tax in Israel at a rate of up to 25%, but the actual withholding rate may be lower or higher than 25% depending upon the type of shareholder. In our case, the applicable withholding tax rate will also depend on the particular Israeli production facilities that have generated the earnings that are the source of the specific dividend and, accordingly, the applicable withholding rate may change from time to time.

On March 18, 2013 our Board of Directors declared a dividend of US $0.55 per share payable on April 17, 2013 to shareholders of record as of April 4, 2013, and in the aggregate amount of approximately US $3.9 million for 2012. Taxes were withheld at source by the Company as required pursuant to Israeli law.
 
 
8
 
 
On March 18, 2014 our Board of Directors declared a continuing dividend for 2013 of US $1.00 per share payable on April 17, 2014 to shareholders of record at the close of the NASDAQ Global Select Market on April 3, 2014, and in the aggregate amount of approximately US $7.2 million for 2013. Taxes were withheld at source by the Company as required pursuant to Israeli law.

On March 23, 2015 our Board of Directors declared a continuing dividend for 2014 of US $1.00 per share payable on April 21, 2015 to shareholders of record at the close of the NASDAQ Global Select Market on April 6, 2015, and in the aggregate amount of approximately US $7.3 million for 2014. Taxes were withheld at source by the Company as required pursuant to Israeli law.

For more information on the taxation of dividends generally, and for our calculation of the tax withheld on the 2013 dividend, see the section entitled “ Taxation of Dividends ” in Section 10.E “ Taxation ”.
 
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state or local taxes, and of any taxes withheld at source by the Company.

B.           Capitalization and indebtedness
 
Not Applicable

C.           Reason for the offer and use of proceeds

Not Applicable

D.           Risk Factors

This annual report and statements that we may make from time to time may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations, statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include the risks and uncertainties relating to our business described below.
 
 
9
 

Risks Relating to Our Business

The markets for our products change rapidly and demand for new products is difficult to predict.

The markets for our products are characterized by rapidly changing technology and evolving industry standards. For example, the migration to higher line rate Ethernet solutions, the adaptation of new bus interfaces and increased use of emerging technologies such as Cloud, Virtualization and SDN, cause our OEM customers to demand such new products and technologies. In the event that our OEM customers decide to begin using new technologies, we may not be able to develop products for the new technologies in a timely manner. Our OEM customers may also select competing products despite our ability to develop products incorporating new technologies. For Example, with the shift  towards running applications in the Cloud we anticipate that the demand will grow for add-on adapters and products which address the challenges present by the Cloud, such as power, heat and space limitations in such environments which increase the need for essential building blocks in generic severs, which can be potentially served by our products.  However there is no assurance that our OEM customers will buy such products from us or that we will continue to generate significant sales in this area or other areas in which we operate.   Consequently, we may suffer from reduced sales to such OEMs and accumulate unusable inventory which can be used only with older technologies. We intend to continue investing in product and technology development. Although we have recorded growing sales of our line of products (to which the majority of our revenues are attributable), there can be no assurance that we will continue to be successful in the marketing of our current products and in developing, manufacturing and marketing enhanced and new products in a timely manner.

The market for cloud-based and cloud-focused solutions is at a relatively early stage of development, and if it develops in ways that are different from what we anticipate or expect, our business could be harmed.

The market for cloud-based solutions is at an early stage relative to physical appliances and on-premise networking solutions, and these types of deployments may not achieve or sustain high levels of demand and market acceptance, or may end up being implemented differently than current expectations in the market place.

In view of an anticipated increase in Cloud-based data centers utilizing virtualization and SDN, the systems are expected to be increasingly based on generic server platforms.  These platforms will all need offload capabilities in order to address the performance challenges realized due to the huge amount of traffic, the high volume of data, the need to encrypt such data, the need to run in virtualized environment, which by itself is a challenge for the server CPU, and the need to include switching within the server for high efficiency SDN. We anticipate that consequently the demand for add-on adapters which address these challenges will grow. Power, heat and space limitations in such environments increase the need for hardware accelerators. Such systems will require essential building blocks in their own generic severs, which can be served by our products.

While we believe that we address the above needs with a comprehensive suite of products, many factors may affect the market acceptance of cloud-based and cloud-focused solutions, and/or the acceptance of add-on products incorporated into such solutions.  Some of these factors include the possibility of seeing a reduction in the number of physical servers and appliances required by the providers of cloud based or virtualized solutions, or the evolving of different architecture designs which provide for functionality our products offer without the need for add on adapters.
 
 
10
 

If significant organization providing Cloud based solutions or other virtualized networks do not perceive the benefits of our cloud-focused and virtualized network based solutions, or if our competitors or new market entrants are able to develop solutions for this segment that do not require add on products such as ours, or offer features that are, or are perceived to be, more effective than ours, this trend of moving towards the cloud but without needing our products for use in such virtualization environments would have a material adverse effect on our business, results of operations and financial condition

The market for our products is highly competitive and some of our competitors may be better positioned than we are.

The market for our products is highly competitive. We face competition from numerous companies, some of which are more established, benefit from greater market recognition and have greater financial, production and marketing resources than we do. For example, in the server networking industry for which we have developed our Server Adapters, our main competitor is Intel. Recently, Intel has released several versions of 10Gbps bypass cards which can become products which compete with our Server Adapters which feature bypass functionality. There may be other solutions which might also compete with our other products. We cannot guarantee that our present or contemplated products will continue to be distinguishable from those of our competitors or that the marketplace will find our products preferable to those of our competitors. Furthermore, there can be no assurance that competitive pressures will not result in price reductions that could materially adversely affect our business and financial condition and the results of our operations.

We may need to invest significantly in research and development and business development in order to diversify our product offering and enter new markets.

Most of our revenues are generated from the sale of our networking and data infrastructure solution products. The technology industry in which we operate is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. While these changes could lead to a reduction in the demand for our existing products, they could also create an opportunity for us to expand our product offering to our existing customers and to new customers. Accordingly, our future success may depend on our ability to diversify our product offering and enter new markets, which could involve numerous risks, including:

 
·
Substantial research and development and business development expenditures, which could divert funds from other corporate uses and/or have a significant negative effect on our short-term results;
 
·
Diversion of management’s attention from our core business; and
 
·
Entering markets in which we have little or no experience.

There can be no assurance that we will be able to successfully complete the development and market introduction of new products and no assurance that we will be able to successfully enter new markets. This could have a material adverse effect on our business, results of operations and financial condition.
 
 
11
 

We may experience difficulty in developing new, commercially successful products at acceptable release times.

We conduct extensive research, development and engineering activities. Our efforts emphasize the development of new products, cost reduction of current products, and the enhancement of existing products, generally in response to rapidly changing customer preferences, technologies and industry standards. We cannot guarantee the continued success of our latest lines of products, which include Multi-Port Ethernet Server Networking Adapters and Bypass Adapters, Smart Adapters, Intelligent bypass switches, and SETAC, nor that they will be continue to be widely accepted by the marketplace or that any of our ongoing development efforts will result in other commercially successful products, that such products will be released in a timely manner or that we will be able to respond effectively to technological changes or new product announcements by others.

Significant growth in markets demanding functionality similar to the functionality offered by certain of our products may cause manufacturers to integrate such characteristics into server motherboards or increase the market share of appliances that already have such functionality in-built, eliminating the need for our add-on products.

A significant portion of our products sold are add-on adapters that are added to existing servers in order to improve their functionality. If demand for improved functionality similar to the functionality of our add-on adapters increases significantly, server manufacturers may begin incorporating such functionality as a part of the basic design of their servers, thereby eliminating the need to achieve such functionality through add-on adapters. Furthermore, the market share of special purpose appliances that already have such functionality built-in may increase, consequently reducing the market share of solutions based on servers with add-on adapters. We cannot assure you that such a trend will not occur in connection with our add-on adapters or any of our other products. Such a trend would have a material adverse effect on our business, results of operations and financial condition.

Our OEM customers may replace the appliances they currently use with appliances that do not require our cards or incorporate cards other than ours.

Many of the OEMs that use appliances which include our cards do so for a few years, and then consider migration to newer generations of appliances. We cannot guarantee that our cards will be needed or selected for such new appliances or compatible with them. A decision by a current OEM customer or customers to select a new appliance without including our cards in such new appliance may have a significant adverse effect on our results of operations.

We may experience difficulty in developing solutions for appliances with proprietary interfaces which may be used by some of our potential customers.

The market for networking appliances includes appliances that make use of proprietary interfaces. These appliances are offered to our potential customers in addition to the customary server-based appliances which use standard interfaces. Our potential customers may decide to use appliances with proprietary interfaces instead of the customary server-based appliances for which several manufacturers may provide add-on cards. There could be no assurance that we would be able to develop non-standard add-on cards for appliances with proprietary interfaces or, if we are successful in developing such cards, that manufacturers of the proprietary interfaces or the customers electing to use these interfaces will make use of our cards in such non-standard environments.
 
 
12
 

Our ability to accurately forecast future sales is severely limited due to the short lead time of customer orders.

As a result of the short lead time for firm purchase orders, we are unable to accurately forecast future revenues from product sales. As a result, even dramatic fluctuation in revenue (whether increase or decrease) might not be detected until the very end of a financial quarter, which may not enable us to monitor costs in a timely manner to compensate for such fluctuation.

The short lead time of customer orders combined with the long lead time of our suppliers when ordering certain components for our products could result in either a surplus or lack of sufficient supplies, and impact negatively on our finances.

While we are generally required to fill orders for our products within one or two weeks following the receipt of a firm purchase order, we must place orders of certain components for our products between sixteen and twenty weeks prior to delivery. As a result, we must have a significant amount of components in our inventory to be able to meet our best forecasts of projected purchase orders as opposed to on the basis of firm purchase orders. In the event that firm purchase orders are significantly lower than such forecasts, a significant part of our inventory will not be used and we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls and in the event that firm purchase orders exceed such forecasts, we will not be able to fill such purchase orders which may lead to the loss of business from a customer.

The loss of a significant customer may have a material adverse effect on us.
 
We depend on a small amount of customers for our products. Our top three customers accounted for approximately 41% of our revenues in 2014 (out of which our top customer accounted for approximately 24% of our revenues in 2014). We expect that a small number of customers will continue to account for a significant portion of our revenues for the foreseeable future. Loss or cancellation of business from, significant changes in deliveries to, or decreases in the prices of services sold to, one or more of our key customers has, in the past, significantly reduced our revenues for a reporting period and could, in the future, harm our margins, financial condition and business.
 
The loss or ineffectiveness of any of our original equipment manufacturer relationships or a reduction of purchase orders or sales efforts by such original equipment manufacturers may have a material adverse effect on our operations and financial results.

Our sales and marketing strategy is to develop and maintain strategic relationships with leading original equipment manufacturers ("OEMs") in the servers industry and server-based systems industry, which integrate our products into their systems. These OEMs are not within our control, are not obligated to purchase our products, and may select other products that may compete with our lines of products. A reduction in their sales efforts or discontinuance of sales of our products by our OEMs could lead to reduced sales and could materially adversely affect our operating results. Use of OEMs also entails the risk that they will build up inventories in anticipation of a growth in sales. If such growth does not occur as anticipated, such OEMs may substantially decrease the amount of products ordered in subsequent quarters or discontinue product orders. The termination or loss of either one of our key OEM relationships or several OEM relationships at approximately the same time, without being able to compensate this loss with sales to other OEM customers might have a material adverse effect on our operations and financial results.
 
 
13
 

We are dependent on key personnel.

Our success has been, and will be, dependent to a large degree on our ability to retain the services of key personnel and to attract additional qualified personnel in the future. Competition for such personnel is intense. There can be no assurance that we will be able to attract, assimilate or retain key personnel in the future and our failure to do so would have a material adverse effect on our business, financial condition and results of operations.

We may not be able to prevent others from claiming that we have infringed their proprietary rights.

We cannot guarantee that one or more parties will not assert infringement claims against us. The cost of responding to claims could be significant, regardless of whether the claims have merit.   Significant and protracted litigation may be necessary to determine the scope of the proprietary rights of others or to defend against claims of infringement, regardless of whether the claims have merit. Although we believe that all our products use only our intellectual property, or intellectual property which is properly licensed to us, in the event that any infringement claim is brought against us and infringement is proven, we could be required to discontinue the use of the relevant technology, to cease the manufacture, use and sale of infringing products, to incur significant litigation damages, costs and expenses, to develop non-infringing technology or to obtain licenses to the alleged infringing technology and to pay royalties to use such licenses. There can be no assurance that we would be able to develop any such alternative technologies or obtain any such licenses on terms commercially acceptable to us.

On March 2, 2012 Internet Machines LLC, a Texas limited liability company filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas (the “Court”) against numerous defendants (including many switch manufacturers) with respect to certain patents for switches, and included our US subsidiary amongst the list of defendants named in such lawsuit. The lawsuit claims that the defendants have infringed certain patents purported to be owned by Internet Machines LLC and seeks unspecified compensation for damages as well as injunctive relief. The defendants filed answers and counterclaims to the complaint asserting that they do not infringe any claims of the asserted patents and the claims of the patents are invalid and/or unenforceable. While one of our switch suppliers (which is also named as a defendant in the aforesaid lawsuit) has agreed to indemnify us with respect to certain liabilities, there is no certainty that we will ultimately be able to collect all or any amounts under  such indemnity should we be found liable under the lawsuit. On September 4, 2012, the Court granted the defendants' motion to stay the pending litigation. We are unable at this time to assess the likelihood of an unfavorable outcome or range of potential loss.
 
 
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Although in the past we have resolved a claim of infringement through a license agreement, the terms of which did not have a material effect on our business, any infringement claim or other litigation against us, including a successful pursuit of the aforesaid claim recently filed against our US subsidiary, could seriously harm our business, operating results and financial condition. While there are no other lawsuits or other claims currently pending against us or our subsidiaries regarding the infringement of patents or intellectual property rights of others, except for any such claims or legal proceedings that, if adversely determined, would not adversely affect the use or exploitation of such intellectual property right by: (i) any of our subsidiaries - Fiberblaze A/S, a Danish company with the CVR no. 31 30 12 70 ("Fiberblaze") and Fiberblaze US LLC, a limited liability company incorporated in the State of New York, Taxpayer ID TF7183404 ("Fiberblaze US"), being a 100% owned subsidiary of Fiberblaze; or (ii) the creation, development, manufacturing, marketing, provision, distribution, licensing, or sale of any product or service created, developed, manufactured or otherwise provided by any of Fiberblaze or Fiberblaze US, we have been a party to such claims in the past and may be party to such claims in the future.

We may not be able to protect our intellectual proprietary rights.

Our success, ability to compete, and future revenue growth are dependent and will depend, in part, on our ability to protect our intellectual property. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. Any of our existing, acquired, or future patents or other rights to our intellectual property may be challenged, invalidated or circumvented. If our intellectual property rights do not adequately protect our technology, our competitors may be able to offer products similar to ours.

In order to establish and protect the technology we use in our products, we primarily rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. We enter into confidentiality agreements with our employees, key consultants and other third parties with whom we conduct business. In addition, our employees and key consultants involved in the development of our technologies are required to sign non-compete and invention assignment agreements. We also control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization.

Despite perceived exclusive access to any intellectual property rights obtained via acquisition, and our best efforts during any such acquisition process to secure such rights, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization, or others may assert infringement claims against us with respect to a product of ours which utilizes such acquired intellectual property rights.

We believe that the measures we take afford only limited protection, and accordingly, there can be no assurance that the steps we take will be adequate to prevent misappropriation of our technology or the independent development of similar technologies by others. The process of seeking patent protection may take a long time and be expensive. We cannot assure you that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. In addition, we cannot assure you that other countries in which we market our services and products will protect our intellectual property rights to the same extent as the United States. Effective intellectual property enforcement may be unavailable or limited in some countries.  It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to enforce our intellectual property rights in some countries may harm our business and results of operations. Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights.
 
 
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  Further, we cannot assure you that we will at all times enforce our patents or other intellectual property rights or that courts will uphold our intellectual property rights, or enforce the contractual arrangements that we have entered into to protect our proprietary technology, which could reduce our opportunities to generate revenues.  Our confidentiality and non-competition agreements may not be enforceable and our proprietary technology may not remain a secret. Others may develop similar technology and use this technology to compete with us. Despite our efforts to protect our proprietary rights, former employees and other unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary.

Loss of our sources for certain key components could harm our operations.

Although we generally use standard parts and components for our products, certain key components used in our products are currently available from only one source, and others are available from a limited number of sources. We believe that we maintain a sufficient inventory of these components to protect against delays in deliveries. However, we cannot guarantee that we will not experience delays in the supply of critical components in the future or that we will have a sufficient inventory of critical components at such time to produce products at full capacity. For example, a key component in many of our cards is manufactured by Intel, one of our competitors. While we have not encountered difficulties in purchasing such components from Intel's distributors, we cannot guarantee that we will continue to be able to purchase such components without delays or at reasonable prices. In the event that we are not able to purchase key components of our products from our limited sources, or are able to purchase these key components only under unreasonable terms, we may need to redesign certain products. We cannot guarantee that we will have adequate resources for such a redesign or that such a redesign will be successful. Such inability to obtain alternative resources or to successfully redesign our products could have a material adverse effect on our business, results of operations and financial condition.

Inability to receive information from our key component manufacturers could affect our ability to develop new products required by our OEM customers and by the industry in which we operate.

Our products are based on networking controllers which are manufactured by either Broadcom, Cavium or Intel. In order to design our products we need to receive information that enables us to design products with the use of such controllers. There can be no assurance that we will continue to receive all the information required for designing products with the use of new controllers continuously released by the above mentioned companies. Intel and Cavium are our competitors and Broadcom may also compete with our products. Such competition may also affect their decisions regarding the sharing of information with us. The inability to obtain such information may adversely affect our ability to develop new products required by our OEM customers and by the industry in which we operate.
 
 
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Our networking and data infrastructure solution products which are sold by us mainly to OEMs, are characterized by long sales cycles.

We sell our networking and data infrastructure solution products mainly to original equipment manufacturers, or OEMs. The decision making process of our OEM customers includes several time consuming processes, resulting from the critical importance of our products in their systems. They need to define the required configuration of their server system/appliance, derive the need and type of adapters or other add-on products, evaluate our products, intensively test and qualify our products and then (or in parallel) negotiate the terms for a purchase. It may therefore take 12 months or more from the time we first contact a prospective customer before such customer implements our cards in its system constituting what is known as a Design Win. Additionally, once a Design Win for one of our products is secured, our sales of these products typically involve significant capital investment decisions by prospective end customers, as well as a significant amount of time to educate such end customers as to the benefits of systems and appliances that include our products. As a result, before purchasing systems and appliances which include our products (and consequently facilitating sales of our products), companies spend a substantial amount of time performing internal reviews and obtaining capital expenditure approvals, consequently lengthening the period of time required for a Design Win to mature into consistent sales. These long sales cycles make it difficult to predict when and to what extent discussions with potential customers will materialize into sales and could cause our revenue and operating results to fluctuate widely from period to period. In addition, our allocation of significant resources to potential sales opportunities that do not materialize into sales could have a material adverse effect on our business, results of operations and financial condition.

We may make acquisitions or pursue mergers that could disrupt our business and harm our financial condition.

As part of our business strategy, we have sought and may continue to seek to invest in or acquire other businesses, technologies or assets, and we may enter into joint ventures or other strategic relationships with third parties.

We may assume liabilities, incur amortization expenses related to intangible assets or realize large and immediate write-offs in connection with future acquisitions. In addition, the future valuation of these acquisitions may decrease from the market price paid by us, which may result in the writing-off, or impairment, of the relevant assets. In addition, our operation of any acquired or merged businesses, technologies or assets could involve numerous risks, including:
 
 
·
Post-merger integration problems resulting from the combination of any acquired operations with our own operations or from the combination of two or more operations into a new merged entity;
 
 
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·
Diversion of management’s attention from our core business;
 
·
Substantial expenditures, which could divert funds from other corporate uses;
 
·
Entering markets in which we have little or no experience; and
 
·
Loss of key employees of the acquired operations.

We cannot be certain that any acquisition or merger will be successful. If the operation of the business of any acquisition or merger disrupts our operations, our business may suffer. In addition, even if we successfully integrate the acquired business with our own, we may not receive the intended benefits of the acquisition.

We may be subject to risks associated with laws, regulations and customer initiatives relating to the environment, conflict minerals or other social responsibility issues, which may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act included disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries (“DRC”) and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. These requirements will require companies to diligence, disclose and report whether or not such “conflict” minerals originate from the DRC. The implementation of these requirements could adversely affect the sourcing, availability and pricing of minerals such as cassiterite, wolframite, coltan, and gold which are used in the manufacture of certain components used in our products. As a result, this could limit the pool of suppliers who can provide us DRC "conflict free" components and parts, and we may not be able to obtain DRC "conflict free" products or supplies in sufficient quantities for our operations. Also, because our supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders if we are unable to sufficiently verify the origins for the minerals used in our products.  In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. For additional information see "Item 4 Information on the Company – Business Overview."
 
Risks Relating to Operations in Israel and Internationally
 
The tax benefits available to us under Israeli law require us to meet several conditions and apply plan administration rules, and may be terminated or reduced in the future, which would increase our taxes.

Our production facilities have been granted “Benefited Enterprise” status and since and as such, we are entitled to certain tax benefits. To be eligible for these tax benefits, we must meet conditions and apply plan administration rules. If we fail to meet these conditions in the future, the tax benefits would be canceled and we could be required to refund any tax benefits we might already have received. These tax benefits may not be continued in the future at their current levels, or at any level. In recent years, the Israeli government has reduced the benefits available and has indicated that it may further reduce or eliminate some of these benefits in the future. The termination or reduction of these benefits may increase our income tax expense in the future. To the best of our knowledge, to date we have met the conditions for benefits under our “Benefited Enterprise” program in all material respects. There can be no assurance, however, that we will continue to meet such conditions in the future. If these tax benefits are reduced, cancelled or discontinued, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies in 2013 was 25.0% and was increased to 26.5% for 2014 and thereafter. See Item 10 "Additional Information – Taxation – Law for the Encouragement of Capital Investments, 1959" for more information about our "Benefited Enterprise" status.
 
 
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The political environment and hostilities in Israel could harm our business.

Since the establishment of the State of Israel in 1948, a state of hostility has existed between Israel and the Arab countries in the region. This state of hostility has varied in degree and intensity over time. There has also been conflict and unrest between Israel, the Palestinian Authority and certain terrorist groups operating within the Palestinian Authority and Lebanon. In addition, internal conflicts within neighboring counties such as Egypt and Syria also affect Israel, both directly and indirectly. A significant increase in violence began in September 2000 and has continued with varying levels of severity through 2013, such as Israel’s war with the Hezbollah militant group in July and August of 2006. In December 2008 and January 2009 there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities along Israel’s border with the Gaza Strip, which resulted in missiles being fired from the Gaza Strip into Southern Israel. Similar hostilities accompanied by missiles being fired from the Gaza Strip into Southern Israel, as well at areas more centrally located near Tel Aviv and at areas surrounding Jerusalem, occurred during November 2012. During the summer of 2014, another escalation in violence among Israel, Hamas, the Palestinian Authority and other groups took place. This escalation became known as "Operation Protective Edge", which resulted in missiles being fired from the Gaza Strip into Southern and Central Israel, as well as civil insurrection of Palestinians in the West Bank. Since February 2011, Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai peninsula, following the resignation of Hosni Mubarak as president. This included protests throughout Egypt, and the appointment of a military regime in his stead, followed by the elections to parliament which brought groups affiliated with the Muslim Brotherhood (which had been previously outlawed by Egypt), and the subsequent overthrow of this elected government by a military regime instead. Such political turbulence and violence may damage peaceful and diplomatic relations between Israel and Egypt, and could affect the region as a whole. Similar civil unrest and political turbulence has occurred in other countries in the region, including Syria which shares a common border with Israel, and is affecting the political stability of those countries. Since April 2011, internal conflict in Syria has escalated, and evidence indicates that chemical weapons have been used in the region. Intervention may be contemplated by outside parties in order to prevent further chemical weapon use. This instability and any intervention may lead to deterioration of the political and economic relationships that exist between the State of Israel and some of these countries, and may have the potential for additional conflicts in the region. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon. Iran is known to support the government of Syria in its battles against various rebel militia groups in Syria. Furthermore, 2014 saw the rise of an Islamic fundamentalist group, known as ISIS. Following swift conquering operations, ISIS gained control of vast areas in the Middle East, including in Iraq and Syria, which contributed to the turmoil experienced in these areas. As a result, the United States armed forces have recently engaged in limited operations to eradicate ISIS. These situations may potentially escalate in the future to more violent events which may affect Israel and us. Furthermore, several countries still restrict trade with Israeli companies and additional countries may impose such restrictions as a result of changes in the military and/or political conditions in Israel and/or the surrounding countries, which may limit our ability to make sales in, or purchase components from, those countries. Any future armed conflict, political instability, continued violence in the region or restrictions could have a material adverse effect on our business, operating results and financial condition. While such hostilities did not in the past have a material adverse impact on our business, we cannot guarantee that hostilities will not be renewed and have such an effect in the future. The political and security situation in Israel may result in parties with whom we have contracts claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital or obtain components used in our products. Since many of our facilities are located in Israel, we could experience serious disruptions if acts associated with this conflict result in any serious damage to our facilities. Any insurance coverage we may have may not adequately compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business. Any future armed conflict or political instability in the region would likely negatively affect business conditions and harm our results of operations.
 
 
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Many of our employees in Israel are required to perform military reserve duty.

All non-exempt male adult citizens and permanent residents of Israel under the age of 40, or older for reserves officers or citizens with certain occupations, as well as certain female adult citizens and permanent residents of Israel, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances. In recent years, there have been significant call-ups of military reservists, and it is possible that there will be additional call-ups in the future. While we have operated effectively despite these conditions in the past, we cannot assess what impact these conditions may have in the future, particularly if emergency circumstances arise. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of our other employees due to military service. Any disruption in our operations would harm our business.

Exchange rate fluctuations and international risks could increase the cost of our operations.

Substantially all of our international sales are denominated in U.S. dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, political instability, trade restrictions, and changes in tariffs and freight rates. Our U.S. dollar costs in Israel and Denmark will increase further to the extent that inflation in Israel and Denmark exceeds the devaluation of the NIS and Danish Krone ("DKK"), respectively, against the dollar, if the timing of such devaluation lags behind inflation in Israel or Denmark, or if the dollar devalues against the NIS or DKK.
 
 
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We are affected by worldwide downturns in industries based on technology.

The volatility in the securities markets discussed above and its effect on high-technology companies may have a ripple effect on our performance. In the downturn which the markets experienced beginning in 2001, technology companies dealing in communications and computers were severely affected and some were forced to cease operations. We felt the effects of this downturn in 2001 through 2003. We were also affected by the downturn in the economic markets which began in 2008, posing a risk to industries based on technology as well as the overall economy. We can give no assurance that our results will not be affected on a going forward basis by any economic downturns.
 
General economic conditions may adversely affect the Company’s results.
 
Uncertainty in global economic conditions, including any disruption in financial and credit markets, pose a risk to the overall economy that could impact demand for our and our customers’ products, as well as our ability to manage commercial relationships with our customers, suppliers and creditors. If the global economic situation worsens, our business could be negatively impacted, including such areas as reduced demand for our products and services, or supplier or customer disruptions, which could reduce our revenues or our ability to collect our accounts receivable and have a material adverse effect on our financial condition and results of operations.

Risks Related to our Ordinary Shares
 
We are affected by volatility in the securities markets.

The securities markets in general have experienced volatility which has particularly affected the securities of many high-technology companies and particularly those in the fields of communications, software and internet, including companies that have a significant presence in Israel. This volatility has often been unrelated to the operating performance of these companies and may cause difficulties in raising additional financing required to effectively operate and develop their businesses. Such difficulties and the volatility of the securities markets in general may affect our financial condition and results.
 
We may experience a decline in our share price and there is no guarantee that our share price will rise at all.
 
Our share price fell during recent periods of uncertainty in global economic conditions and we expect it to continue to be affected by such uncertainty to the extent that it continues. We cannot assure you that our share price will stabilize, or not decline, in the coming fiscal year.
 
 
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We may not be able to fulfill our dividend policy in the future.
 
We have announced a dividend policy for distributing up to 50% of our annual distributable profits as a dividend. Our Board of Directors declared a dividend for 2012 which was distributed in April 2013, for 2013 which was distributed in April 2014, as well as for 2014 which will be distributed in April 2015. Our ability to distribute dividends in the future may be adversely affected by the risk factors described in this report. As part of the stated dividend policy, the Company's Board of Directors reserves the right to declare additional dividend distributions, to change the rate of dividend distributions (either as a policy or on a one-time basis), to cancel a specific distribution or to cancel the policy as a whole at any time, at its sole discretion. Any dividend will depend on our earnings, capital requirements, financial condition and other business and economic factors affecting us at the time as our board of directors may consider relevant. Our ability to pay cash dividends may be restricted by instruments governing any of our obligations. We are restricted by Israeli law to pay dividends in any fiscal year only out of “profits,” as defined by the Israeli Companies Law, unless otherwise authorized by an Israeli court, and provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. There is no assurance that we will be able to continue paying dividends or increase our payment of dividends in the future, nor is there any assurance that our Board of Directors will not change our dividend policy in the future. If we are unable to fulfill our stated dividend policy, or pay dividends at levels anticipated by investors in our shares, the market price of our shares may be negatively affected and the value of our shareholders’ investment may be reduced. See “Item 8.A Consolidated Statements and Other Financial Information”, under the caption “8A – Dividend Policy” for additional information regarding the payment of dividends.
 
Our ordinary shares are traded on more than one market and this may result in price variations.
 
Our ordinary shares are traded on the Nasdaq Global Select Market and the Tel Aviv Stock Exchange. Trading in our ordinary shares on these markets takes place in different currencies (dollars on the Nasdaq Global Select Market and NIS on the Tel Aviv Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market. 

The trading volume of our shares has been low in the past and may be low in the future, resulting in lower than expected market prices for our shares.

Our shares have been traded at low volumes in the past and may be traded at low volumes in the future for reasons related or unrelated to our performance. This low trading volume may result in lower than expected market prices for our ordinary shares and our shareholders may not be able to resell their shares for more than they paid for them.

Israeli courts might not enforce judgments rendered outside of Israel.

We are incorporated in Israel. All of our executive officers and all of our directors are non-residents 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 such persons. It may also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel. However, subject to certain time limitations, Israeli courts may enforce U.S. final executory judgments for liquidated amounts in civil matters obtained after due trial before a court of competent jurisdiction (according to the rules of private international law currently prevailing in Israel) which enforces similar Israeli judgments, provided that the requisite procedural and legal requirements are adhered to. If a foreign judgment is enforced by an Israeli court, it generally will be payable in NIS, which can then be converted into foreign currency at the rate of exchange of such foreign currency on the date of payment. Pending collection, the amount of the judgment of an Israeli court stated in NIS (without any linkage to a foreign currency) ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate prevailing at such time. Judgment creditors bear the risk of unfavorable exchange rates.
 
 
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If we are characterized as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer adverse tax consequences.

We will be a passive foreign investment company, or PFIC, if 75% or more of our gross income in a taxable year, including our pro-rata share of the gross income of any company, U.S. or foreign, in which we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income. Alternatively, we will be considered to be a PFIC if at least 50% of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value and including our pro-rata share of the assets of any company in which we are considered to own, directly or indirectly, 25% or more of the shares by value, are held for the production of, or produce, passive income. If we were to be a PFIC, and a U.S. Holder does not make an election to treat us as a “qualified electing fund,” or QEF, or a “mark-to-market” election, “excess distributions” to a U.S. Holder, and any gain recognized by a U.S. Holder on a disposition or our ordinary shares, would be taxed in an unfavorable way. Among other consequences, our dividends, to the extent that they constituted excess distributions, would be taxed at the regular rates applicable to ordinary income, rather than the 15% maximum rate applicable to certain dividends received by an individual from a qualified foreign corporation, and certain "interest" charges may apply. In addition, gains on the sale of our shares would be treated in the same way as excess distributions. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to the determination of PFIC status. In addition, under the applicable statutory and regulatory provisions, it is unclear whether we would be permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income in the calculation of gross income. As a result of our substantial cash position, if the value of our shares declines, there is a substantial risk that we will be classified as a PFIC under the asset test described above. There can be no assurance that we will not be classified as a PFIC by the U.S. Internal Revenue Service. In light of the uncertainties described above, no assurance can be given that we will not be a PFIC in any year. A U.S. Holder who makes a QEF election is taxed currently on such holder's proportionate share of our earnings. If the IRS determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC, however, it might be too late for a U.S. Holder to make a timely QEF election, unless the U.S. Holder qualifies under the applicable Treasury regulations to make a retroactive (late) election. U.S. Holders who hold ordinary shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to exceptions for U.S. Holders who made a timely QEF or mark-to-market election, or certain other elections. We do not currently intend to prepare or provide the information that would enable you to make a Qualified Election Fund election. Accordingly, our shareholders are urged to consult their tax advisors regarding the application of PFIC rules.
 
 
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Our investment portfolio may be impaired by disruptions in the financial and credit markets.
 
Our investment portfolio currently consists of corporate debt securities and government debt securities, which the Company classified at December 31, 2014 as "held-to-maturity". As of December 31, 2014, we hold approximately US$ 35.5 million in corporate debt securities and government debt securities.
 
Due to possible significant disruptions in the financial and credit markets, the corporate debt securities in our portfolio are subject to a possible increased risk of default due to bankruptcy, lack of liquidity, operational failure or other factors affecting the issuers of those securities.  In addition, securities in our portfolio are subject to other risks, such as credit, liquidity, market and interest rate risks, which may be exacerbated by the recent market disruptions, and which may impair the assets. We may be required to adjust the carrying value of our investment securities due to a default, lack of liquidity or other event, if the event constitutes an impairment which is considered to be other-than-temporary. As of December 31, 2014, we were not required to adjust the carrying value of our investment securities since there were no other-than-temporary impairments. 

This loss would be recorded in our consolidated statement of operations which could materially adversely impact our consolidated results of operations and financial condition.

Item 4.     INFORMATIO N ON THE COMPANY .
 
A.           History and Development of the Company

Our legal and commercial name is Silicom Ltd. We were incorporated under the laws of the State of Israel in 1987, and we operate under Israeli law and legislation. Our registered and principal executive offices are located in Israel at 8 Hanagar Street, Kfar Sava, Israel 4442537, and our telephone number is +972-(0)9-764-4555.

Our shares have been listed on the NASDAQ Global Select Market since January 2, 2014 under the ticker symbol “SILC”. Prior thereto our shares were listed on the NASDAQ Global Market (previously known as the NASDAQ National Market) under the ticker symbol “SILC” (and previously “SILCF”) from February 11, 2008. Prior thereto, our shares were listed on the NASDAQ Capital Mark.et (previously known as the NASDAQ Small-Cap).  On December 20, 2005, we obtained the approval of the Tel Aviv Stock Exchange, or TASE, for the listing of our shares on TASE. Trading of our shares on TASE commenced on December 27, 2005. Our shares are currently included in the Tel-Aviv 100 index and in the Tel-Aviv Tech-Elite index. See Item 9. “The Offer and Listing - Markets and Share Price History”.

In March 2014, we filed a "shelf" registration statement with the Securities and Exchange Commission, or SEC. We may sell up to $80,000,000 of our ordinary shares in one or more offerings pursuant to this registration statement.
 
 
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In December 2014, we entered into a share purchase agreement with Fiberblaze, Nikolaj Herman, Fiberblaze Holding APS, a Danish company with the CVR no. 31 28 29 26, Hilmer APS, a Danish company with the CVR no. 31 28 49 96, and Jakob Hilmer, for the Purchase of the entire share capital of Fiberblaze and Fiberblaze US (the "Fiberblaze SPA") in consideration for an amount equal to $10,161,000 , plus such additional amounts in the event Fiberblaze meets pre-determined criteria. For additional information regarding the Fiberblaze SPA, see "Item 10 – Additional Information – Material Contracts."
 
Principal capital expenditures and divestitures

From January 1, 2014 to December 31, 2014, our capital expenditures totaled approximately $16,682 thousand (compared to $929 thousand during 2013 and $807 thousand during 2012), of which approximately $1,179 thousand (compared to $788 thousand during 2013 and $655 thousand during 2012) can be attributed to machinery and equipment, approximately $659 thousand (compared to $141 thousand during 2013 and $152 thousand during 2012) can be attributed to office furniture and equipment and leasehold improvements, and approximately $14,844 thousand can be attributed to the Fiberblaze SPA. We have financed our capital expenditures from our available internal resources, and expect to continue to finance our capital expenditures in a similar manner in 2015.

B.           Business Overview

We are currently engaged in the design, manufacture, marketing and support of high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices. Our products are sold to OEM customers who offer networking appliances, servers and storage devices. As the market moves to utilize applications within virtualization based Cloud Data Centers, our products are now offered in this market segment as well.

Products
 
Our products are comprised of:
 
 
(i)
High-end server network interface cards with and without bypass (Server Adapters);
 
(ii)
Intelligent and programmable cards, with features such as encryption, acceleration, data compression, redirection, time stamping, network capture solutions, FPGA based ultra-low latency solutions, and/or other offload features (Smart Adapters);
 
(iii)
Stand-alone  Bypass Switches (mostly Intelligent bypass switches); and
 
(iv)
The patented SETAC (Server To Appliance Converter) product family, a unique solution that enables standard servers to be configured as network appliances with high-density front networking ports and easy port modularity, including Switched SETAC.
 
 
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Server Adapters
 
We have developed a line of products for the server networking industry which facilitates interaction between servers and switches, allowing them to communicate with each other through a larger number of ports and with higher performance than their original manufacturer designed capabilities. Our designs have resulted in powerful products that allow server-based systems to fully exploit the high speed potential of 1/10/40/100 Gigabit Ethernet. The products have either one, two, four, six or eight ports, which plug into the servers which need to have such capabilities.
 
Following demands from customers and potential customers, we also designed some of these same server adapter products with a bypass feature. Intended for mission-critical environments, Silicom’s 1/10/40/100 Gigabit Ethernet Bypass Networking Cards feature innovative bypass circuitry to maintain continuity of network connectivity in the event of an appliance failure. Upon the occurrence of an appliance failure, the card’s bypass mechanism automatically reroutes traffic to bypass faulty components, enabling customers to have reliable and always available network accessibility. As with all of Silicom’s 1/10/40/100 Multiport Gigabit Ethernet Networking Cards, the Bypass Cards also improve server throughput and performance during normal operations by introducing more ports and better throughput while reducing network congestion, simplifying network management, and minimizing CPU utilization.

Smart Adapters
 
Our Smart Adapter products include server adapters such as: (a) redirector cards, (b) encryption and data compression hardware acceleration cards, (c) time stamping cards (d) Network processor acceleration cards (e) VHIO – a product off-loading virtualization switching from the CPU, and (f) network capture solutions, FPGA based ultra-low latency solutions, and mobile OSS solutions.
 
Our redirector cards improve performance by: (a) enabling traffic filtering in order to reduce the amount of traffic received by the server, limiting it to only essential traffic for the server CPU, and consequently improving server performance; and (b) load-balancing between external servers and/or CPUs and/or CPU cores  increasing the efficiency of the server.
 
Our product line of high-performance encryption cards is designed to improve the throughput of internet security appliances and other networking appliances. The products improve the performance of networking appliances by independently executing encryption tasks, thereby accelerating the encryption process and freeing the CPUs of such appliances for other activities. In 2013 we announced the launch of a new high-performance PCI Express Server encryption and compression card family based on the Intel® Communications Chipset 89xx series. In July 2014 we announced the achievement of our first design win of our Coleto Creek encryption and compression card, from one of our existing customers, a market-leading provider of smart network solutions, who will use the Coleto Creek and Quad-Port 10G Networking cards in one of its next-generation network appliances. This new product line can off-load not only encryption functionality, but compression functionality as well. The market need for compression off-load was previously limited to some content delivery and WAN optimization networking appliances; however, such compression off-load is now becoming more and more important in the storage market especially within the Big-Data area, which is the market segment that is the primary target of this functionality.
 
 
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Our 1G/10G Nano-Second Time-Stamping  adapters, which are based on an innovative concept technology, combine Intel’s networking silicon and our proprietary time-stamping FPGA (field programmable gate array), working at wire speed to time-imprint packets at high resolutions and accuracy. Our time-stamping solution’s unique architecture enables it to perform with a broad range of advantages, including the full feature-set of Intel’s networking silicon, much lower power consumption and much higher fan-less reliability. These features also allow such adapters to be very price competitive.
 
Our 10 Gigabit Ethernet PCI-E Network processor based Smart adapter is targeted for server acceleration by providing a packet processing platform which can be used to off-load packet processing applications from the main CPU onto a processor card, and consequently freeing CPU cycles for the main application and improving server performance.
 
In 2013, we acquired the intellectual property related to a Virtualization Off-Load Engine, which is based on technology which resolves a major performance bottleneck in today’s virtualization-based data centers: the reduced server I/O performance deriving from the need of CPUs in virtualized environments to handle both networking and switching transactions between each VM individually and between each VM and the physical world by off-loading these CPU tasks onto a separate intelligent add-on card, thereby freeing up server cycles and improving the server’s Networking and Storage I/O.
 
Pursuant to this acquisition, we announced in 2014 the launch of a new Cloud Virtualization Off-Loading solution with open stack support – the SmartSilc VHIO 1.0, which is our first product utilizing the Virtualization Off-Load Engine. As a network processor blade incorporated within cloud compute nodes and network nodes, SmartSilc VHIO 1.0 offloads all network and storage I/O tasks from the Hypervisor, significantly reducing CPU utilization and consequently improving the performance of any compute node in which it is installed. In addition, its implementation of NAT, firewall and other tasks previously carried out in the network node frees the network node to become an additional compute node .
 
In December 2014, we acquired Fiberblaze. Fiberblaze's high performance application acceleration solutions are for the mobile, telecommunication, network monitoring, cyber security, financial and related industries. Fiberblaze’s flexible embedded network processing subsystems are typically used in data-traffic heavy applications such as Network Operational Support Systems (OSS), Electronic Trading, Test & Measurement (T&M), and Lawful Intercept.
 
Fiberblaze’s proprietary technologies focus on the implementation of FPGA (Field Programmable Gate Arrays) in network cards, including the programming needed to achieve line-speed data processing with ultra-low latency. These features are required in Network Monitoring/Capture/Analysis solutions for telecommunications, Lawful Interception, data centers and the Algorithmic HFT (High Frequency Trading) niche of the financial service market, as well as the emerging mobile OSS/BSS market segments.
 
 
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Intelligent Bypass Switches
 
We developed stand-alone bypass solutions which allow the use of our solutions even where the networking component of the solution is already present.  We market stand-alone bypass units for: (a) entry level bypass switch 1/10Gbps, directed at power failure bypass; and (b) high end 1G/10G/40G/100Gbps intelligent bypass switch with self generating heartbeat and versatile monitoring and control options.

Server To Appliance Converter ("SETAC")

Our SETAC products convert standard servers to network appliances.   The SETAC product line includes SETAC converters (comprised of PCI-Express G2 and G3 adapters, cables and Silicom’s backplane), which interface with Silicom’s front loading I/O Express Modules adapters. SETAC products are installed by a simple process of placing Silicom’s I/O Express Modules adapters into a server’s hard drive slots. This combination enables standard servers to be configured as network appliances with server-grade reliability, front-end access, field replaceable architecture and a stable technology environment, thus creating a complete network appliance platform solution that provides us with a competitive edge. To the best of our knowledge we are currently the only company offering such a unique solution in the hardware networking appliance industry.

In December 2014, we announced the achievement of our first design win of our Switched SETAC solution, a new cloud platform designated to save space, energy and costs in cloud and data center services by integrating x86 standard motherboards, switching capability utilizing commercial off-the-shelf switching silicon, our Redirector features and potential support for SDN/ NFV protocols from a provider of cloud based cyber security and application delivery solutions. Pursuant to this announcement, we announced in December 2014 the achievement of another design win of our Switched SETAC (the accelerated version), from a European provider of PDI solutions. This unique product adds Network Processor acceleration to the many additional features and benefits of the Switched SETAC, by allowing applications to be offloaded from the main CPU to the Network Processor modules, thus resulting in high performance while maintaining all Switched SETAC capabilities.

We cannot assure that any of our products will be commercially successful, that our development efforts will result in commercially successful products, that such products will be released in a timely manner or that we will be able to respond effectively to technological changes or new product announcements by our competitors.
 
 
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We cannot assure you that revenue generated from our current suite of products and solutions will reach or exceed historical levels in any future period. A decrease in the price of, or demand for, any of these products or solutions, or a significant increase in our costs of manufacturing could have a material adverse effect on our business, results of operations and financial condition.
 
  Principal Markets

The principal markets in which we compete are set forth more particularly in, and are incorporated by reference to Note 12A to the consolidated financial statements set forth in Item 18 of this annual report. In 2012, 2013, and 2014 approximately 69%, 76% and 71% respectively, were in North America, 15%, 13% and 15% respectively, of our sales were in Europe, and 16%, 11% and 14% respectively, were in Asia-Pacific.   Our main business is not seasonal, and we believe that there are sufficient sources and raw materials available to sustain it.

Manufacturing and Suppliers

Our manufacturing operations consist primarily of producing finished goods from components and sub-assemblies purchased from third parties. In addition, we perform testing and quality assurance procedures with respect to the components and sub-assemblies which are incorporated into our final products and the final products themselves.

We seek to monitor quality with respect to each stage of the production process including, but not limited to, the selection of component suppliers, warehouse procedures and final testing, packaging and shipping. We have been certified as complying with "ISO 9001:2008" and "ISO 14001:2004", which are the quality control standard used in our industry. We believe that our quality assurance procedures have been instrumental in achieving a high degree of reliability for our products. We intend to continue to maintain and improve the efficiency of such procedures.

Although we generally use standard parts and components for our products, certain key components used in our products are currently available from only one source, and others are available from a limited number of sources. Components currently available from one source include proprietary Gigabit Ethernet chipsets and other components, including other semiconductor devices and transformers, as well as plastic and metal product housings. We believe that we maintain a sufficient inventory of these components to protect against delays in deliveries. The Dodd-Frank Wall Street Reform and Consumer Protection Act included disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries (“DRC”) and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. These requirements will require companies to diligence, disclose and report whether or not such “conflict” minerals originate from the DRC. This implementation of these requirements could adversely affect the sourcing, availability and pricing of minerals such as cassiterite , wolframite, coltan, gold and their derivatives (tantalum, tin, and tungsten) which are used in the manufacture of certain components used in our products, as well as affect the companies we use to manufacture components of our products. As a result, this could limit the pool of suppliers who can provide us DRC "conflict free" components and parts, and we may not be able to obtain DRC "conflict free" products or supplies in sufficient quantities for our operations. In circumstances where conflict minerals in our products are found to be sourced from the DRC, we may take actions to change materials or designs to reduce the possibility that our purchase of conflict minerals may fund armed groups in the region. These actions could add engineering and other costs to the manufacture of our products, and we may not be able to obtain "conflict free" products or supplies in sufficient quantities for our operations. In addition, we incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products, as further elaborated below. Also, because our supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders if we are unable to sufficiently verify the origins for the minerals used in our products. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. There can be no assurance that we will not experience delays in the supply of critical components in the future or that we will have a sufficient inventory of critical components at such time to produce products at full capacity. If we do experience such delays and there is an insufficient inventory of critical components at that time, our operations and financial results would be adversely affected.
 
 
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In June 2014, we issued our Specialized Disclosure Report for the year ended December 31, 2013, in compliance with Rule 13p-1 under the Exchange Act, according to which, some conflict minerals (gold, tantalum, tin, and tungsten) are necessary to the functionality or production of certain of our products. Conflict minerals are obtained, via our direct suppliers, from sources worldwide, and our desire is not to eliminate those originating in the DRC and adjourning countries but rather to obtain conflict minerals from sources that do not directly or indirectly finance or benefit armed groups in the DRC and adjourning countries.
 
We have also adopted a policy with respect to the sourcing of conflict minerals, according to which as part of our commitment to corporate responsibility and respecting human rights in our own operations and in our global supply chain, it is our goal to seek to use tantalum, tin, tungsten and gold in our products that are "DRC conflict free", while continuing to support responsible in-region mineral sourcing from the DRC and adjoining countries.

Furthermore, since the origin of conflict minerals cannot be determined with any certainty once the ores are smelted, refined and converted to ingots, bullion or other conflict minerals containing derivatives, we rely on our direct suppliers to assist with our reasonable country of origin inquiry and due diligence efforts, including the identification of smelters and refiners, for the conflict minerals contained in the materials which they supply to us.
 
For 2013, we conducted a supply chain survey with all our direct suppliers that provide materials for our products to obtain country of origin information for the necessary conflict minerals in our products. We received responses from approximately 90% of our suppliers, and compared the smelters and refiners identified in the surveys against the lists of facilities which have received a “conflict free” designation by the CFSP or other independent third party audit program.  When a smelter or refiner in our supply chain was not listed as having received a “conflict free” designation, we expect our suppliers to proactively contact such facility and requested country of origin information for the necessary conflict minerals that it processed.  We documented country of origin information for the smelters and refiners identified by the supply-chain survey.
 
 
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We are generally required to fill orders for our products within one or two weeks after receipt of a firm purchase order. Consequently, we need to maintain inventory at levels that are in accordance with our forecasts and those of our customers. There can be no assurance that such forecasts will indeed materialize into firm purchase orders and consequently we cannot guarantee that the full volume of such inventory will be delivered against firm purchase orders and not remain unused.

Marketing Channels

The principal market segments for our products are:
 
 
(i)
Network appliances, including WAN Optimization, Internet Security, Cyber Security, Application Delivery, Traffic Management, Network Monitoring and Analytics, High Frequency Trading (HFT) for the financial service market and other mission-critical segments;
 
(ii)
Servers;
 
(iii)
Data storage including Big Data; and
 
(iv)
The “Cloud” (virtualized data centers with and without SDN).

Our business model for our line of products is called the Design Win Model. The following are the main aspects of this model:

 
·
We approach a potential customer or are approached by such customer.

 
·
If the customer shows interest in the products and we believe that achievement of a business relationship with the customer is possible, we ship products for such customer’s evaluation.

 
·
During the evaluation process the customer receives a few units of the relevant product for initial basic testing. If the evaluation process is successful, we ship products for qualification.

 
·
During the qualification process the customer receives a larger amount of our products for more specific testing, which may include certain adaptations of our products to its specific needs.

 
·
If the qualification process is successful, we enter into negotiations regarding the terms of a business relationship.

 
·
In some cases, typically with the larger customers, the evaluation and qualification process may take 12 months or more.
 
 
 
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Once all phases mentioned above are concluded, the customer will purchase products from us in order to incorporate such products within its server based systems, and then sell such systems with our cards embedded in them. The sale of our products within such systems is the objective of our Design Win Model. In most cases once we secure a Design Win our customer will continue to buy our cards for as long as it continues to sell its server based system.

Over the last few years, our sales and marketing has been carried out through a network of strategic relationships with leading original equipment manufacturers which sell our products, generally as a part of their systems and sometimes under their own private labels. Our current original equipment manufacturer customers are mostly active in the WAN optimization market, Internet Security market Application Delivery market, Traffic management market, Network Monitoring market, data storage market, general servers market and other server based applications. Our customers sell their products, to the Governments, Enterprise (head quarter and branch) and to Data Centers (regular and virtualized, including to the Cloud). They are referred to in this report as OEMs, or OEM customers. Our strategy of carrying out strategic relationships with OEM customers continues to be the strategy under which we operate. We believe that these relationships enable us to take advantage of the superior financial resources and market presence of these companies to increase our sales and establish, maintain and strengthen our position and reputation in the market. In addition, we believe that relationships with OEMs improve access to new technologies developed by such OEMs, thereby ensuring smooth integration of our products and technology with those of the OEMs. In furtherance of this strategy, during the last few years we entered into strategic arrangements with OEMs and continued securing successful Design Wins with OEMs who purchase our products. Revenues from sales of our products to OEM customers in 2014 constituted approximately 99% of our revenues. We expect the percentage of our revenues that is derived from sales to OEM customers to continue at similar percentage levels, though we believe that within our group of OEM customers we will gradually increase the proportion of our sales to Cloud/Virtualized data Center/SDN customers.  This is due to the fact that: (a) the market is moving towards running applications in the Cloud; and, (b) Cloud and web 2.0 companies are typically either using standard servers or design their own “white boxes” into both of which we offer our solutions. While there are no assurances that such solutions will be accepted by such Cloud and Web 2.0 players, we believe that this trend represents significant potential for us.

The loss of some of our OEM customers, or any single key OEM customer, may have a material adverse effect on our operations and financial results and we cannot assure you that we will be able to enter into strategic relationships with OEMs in the future. Normal payment terms of our OEM customers are up to 90 days net. Substantially all of our international sales are denominated in U.S. dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, political instability, trade restrictions and changes in tariffs and freight rates. We have experienced no material difficulties to date as a result of these factors.
 
 
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Our arrangements with our OEM customers (and distributors and resellers when applicable) are generally non-exclusive. We have generally experienced good relations with our customers and are not aware of any pending terminations other than with respect to products that newer technologies have eliminated the need for.

Our OEM customers, distributors and resellers are not within our control. They are not obligated to purchase products from us and may represent other lines of products. A reduction in sales effort or discontinuance of sales of our products by our OEM customers could lead to reduced sales and could materially adversely affect our operating results. Use of OEMs also entails the risk that OEMs will build up inventories in anticipation of a growth in sales. If such growth does not occur as anticipated, these OEMs may substantially decrease the amount of products ordered from us in subsequent quarters, discontinue product orders or even attempt to return unsold products. The loss or ineffectiveness of several of our OEM relationships at approximately the same time, or the loss of any key OEM customer, might have a material adverse effect on us.
 
Patents and Licenses

Our success and ability to compete are dependent to a significant degree on our technology. In order to establish and protect the technology we develop and/or acquire to use in our products, we primarily rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patent. These measures afford only limited protection, and accordingly, there can be no assurance that the steps we take will be adequate to prevent misappropriation of our technology or the independent development of similar technologies by others. Despite our efforts to protect our technology, unauthorized parties may attempt to copy aspects of our products and develop similar hardware or software or to obtain and use information that we regard as proprietary. In addition, there can be no assurance that one or more parties will not assert infringement claims against us. The cost of responding to claims could be significant, regardless of whether the claims are valid. We cannot assure that the scope of any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.

On April 8, 2010, we filed a patent application in the United States in the United States Patents and Trademarks Office, or the USPTO, for the "Server-Based Network Appliance", to protect our proprietary intellectual property with respect to SETAC products. On June 12, 2012 we were issued patent No. 8,199,523 entitled ‘Server-Based Network Appliance’ from the United States Patent and Trademark Office with respect to our SETAC product. The patent will expire in October, 2030. The patent covers a server-based network appliance in which a computer motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side of the case. Communication adapter cards are mounted in the case so that the ports of these cards are accessible at the front panel. Bus extension circuitry inside the case connects the bus slots on the motherboard with the communication adapter cards, as though the cards were plugged into the motherboard. This configuration, which is used in the our SETAC product, gives the convenience of connecting and replacing modules via the front panel while using standard motherboards, which are not normally designed for front-panel access.
 
 
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During 2012-2013, we developed a Nano-Second Time-Stamping NIC. The NIC combines Intel’s networking silicon and the Company’s time-stamping FPGA (field programmable gate array), working at wire speed to time-imprint packets.

On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China. The Virtualization Off-Load Engine is able to off-load CPU tasks onto a separate intelligent add-on card, thereby freeing up server cycles and improving the server’s Networking and Storage I/O. Through the acquisition, we secured exclusive access to this important technology, which we anticipate will provide us with a significant competitive advantage. We intend to continue developing, improving and utilizing this technology, as we did through the SmartSilc VHIO 1.0. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure same, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization, or may assert a claim of  infringement regarding the product.

On February 8, 2015 we filed a patent application (14/616,718) in the USPTO with respect to Hybrid Networking Application Switch.

For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled “ We may not be able to protect our intellectual proprietary rights ” under Item 3.D   - “ Risk Factors ”.

Competition

The networking and data infrastructure solutions industry is highly competitive. We face competition from numerous companies, some of which are more established, benefit from greater market recognition and have greater financial, production and marketing resources than we do. We cannot guarantee that our present or any contemplated products will continue to be distinguishable from those of our competitors or that the marketplace will find our products preferable to those of our competitors. Furthermore, there can be no assurance that competitive pressures will not result in price reductions that could materially adversely affect our business and financial condition and the results of our operations.

We believe that our expanded feature set coupled with the general wide spectrum of solutions we offer gives us a competitive edge. To the best of our knowledge we are currently the only company offering such a comprehensive range of server enhancement products.
 
 
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With respect to Server Adapters, our main competitor is Intel. In the bypass cards segment of our Server Adapter product line, our competition is not as significant. To the best of our knowledge, our only significant competitors in this industry are Interface Masters, Portwell/Casewell, Lanner and Adlink. In Recent years, Intel has released several versions of 10Gbps bypass cards which can become products which compete with our bypass card products. There may be other local solutions which might also compete with our products. Although the situation may change in the future, we believe that our competition in the bypass card market is less significant than our competition in the non-bypass card market.

In the Smart Adapters product segment, our competition is fragmented, and differs with respect to the specific solution being offered by us. In this segment Cavium, Tilera (now a part of EZchip Semiconductor), Netronome, Napatech, Endace (now a part of Emulex), Solarflare and Myricom (a subsidiary of CSP) compete with certain of our Smart Adapters.  In the encryption products segment of our Smart Adapters, our main competitor is Cavium. In the compression segment, our main competitors are Cavium and Exar.

In the Intelligent Bypass Switches segment (in which solutions are offered in the form of an external box instead of an embedded card), to the best of our knowledge our main competitor is Net Optics (subsidiary of IXIA), Gigamon, and Interface Masters.

To the best of our knowledge, there is no direct competition to our unique SETAC products. As network appliances may be built based on either standard servers or special hardware appliances, our SETAC products improve and enhance the competitive positioning of standard servers in the network appliance industry compared to the special hardware appliances alternative. We believe that the products offered by suppliers of special hardware appliances such as Portwell/Casewell, Nexcom, Lanner and Advantech do not provide the advantages of the SETAC solution and therefore constitute only non-direct competition.

Governmental Regulation Affecting the Company

We are affected by the terms of research and development grants we have received from the Office of the Chief Scientist of Israel (“OCS”). Under the terms of Israeli Government participation, a royalty of 3% or up to 5% of the net sales of products developed from a project funded by the OCS must be paid, beginning with the commencement of sales of products developed with grant funds and ending when a dollar-linked amount equal to 100% of such grants plus interest at LIBOR is repaid. The terms of Israeli Government participation also impose significant restrictions on manufacturing outside Israel of products developed with government grants. The transfer to third parties of technologies developed through such projects is subject to approval of the OCS. There can be no assurance that such approval, if requested, will be granted on reasonable commercial terms.
 
 
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In addition, we receive certain tax benefits and reduced tax rates from the Israeli government due to our status as a “Benefited Enterprise” under the Law for the Encouragement of Capital Investments-1959, as amended. See “Item 10. Additional Information – Taxation”. The entitlement to these benefits is conditional upon our fulfillment of the conditions stipulated by the law, regulations promulgated thereunder and the instruments of approval for the specific investments. In the event of failure to comply with these conditions, the benefits could be canceled and we would be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences and interest.

C.           Organizational Structure

We have the following two wholly owned subsidiaries:
 
 
·
Silicom Connectivity Solutions, Inc. – a private company incorporated in the United States. Two of our founders, Messrs. Yehuda and Zohar Zisapel, are also founders of, and in certain instances still directors and/or material shareholders of some of the corporations within the “Rad Group”. See Item 7. “Major Shareholders and Related Party Transactions" for additional information on our relationships with members of this group of companies; and
 
·
Fiberblaze A/S – a private company incorporated in Denmark. On December 10, 2014, we entered into the Fiberblaze SPA for the purchase of the entire holdings in Fiberblaze, pursuant to which we became its sole shareholder. See "Item 10. Additional Information – C. Material Contracts" for additional information on the Fiberblaze SPA.
 
·
Fiberblaze US LLC – As part of the Fiberblaze SPA, we have also purchased Fiberblaze US, a private company incorporated in the United States, being a 100% owned subsidiary of Fiberblaze.

D.           Property, Plant and Equipment

We do not own any real property, but we lease property at three locations. Our executive offices and research and development facilities are located in Kfar Sava, Israel. In November 2007, we renewed the term of the lease for our Kfar Sava offices until December 31, 2008, and have been extending such lease each year. During 2013 we extended the lease further until April, 2015, when the lease will terminate in accordance with its terms. This facility is approximately 1,050 square meters in size, and we paid a monthly rent of approximately $16,000. In April 2015, following the expected termination of our lease due to our election not to renew it, we are expected to move to our new offices in Kfar Sava, which we are expected to lease for a period of five years, ending in February 28, 2020, with an option to renew the term for an additional five years period. This facility is expected to be approximately 1,500 square meters in size and the monthly payments (which shall include various management services) are expected to be approximately $30,000.

We have conducted our manufacturing in Yokneam, Israel since 2000. In January 2014, following the termination our lease (which was in effect since January 2009) due to our election not to exercise our option to renew it, we moved to a new facility in Yokneam, which we lease pursuant to a sub-lease for a period of three years, ending in December 31, 2016, with an option to renew the term for an additional period of three years. This facility is approximately 2,400 square meters in size plus additional warehouse areas of approximately 250 meters in size and the monthly payments (which include rental payments, as well as fees for various management and upkeep services) are approximately $45,000.
 
 
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As of February 2004, we sub-lease office space in Paramus, New Jersey, from our affiliate. Our current sub-lease extends until December 31, 2016. Currently, the monthly rent payments for this space are approximately $2,000. See “Item 7 – Major Shareholders and Related Party Transactions.”

As of July 2013, Fiberblaze leases office space in Søborg, Denmark. In March 7, 2014, Fiberblaze amended the lease to include additional office space, thus amounting to a total of approximately 472 square meters, until September 2016.  The monthly rent payments for this space are approximately $8,000.
As of April 1, 2014, Fiberblaze sub-leases office space in New York City, New York, for a period ending March 2015. The monthly rent payments for this space are approximately $1,000.

We believe that our facilities in Israel, the United States and Denmark are suitable and adequate for our operations as currently conducted.  In the event that additional facilities are required or we need to seek alternative rental properties, we believe that we could obtain such additional or alternative facilities at commercially reasonable prices.

Item 4A.   UNRESOLVED STAFF COMMENTS
 
There are no unresolved staff comments.

Item 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
General

Silicom was incorporated in Israel and commenced operations in 1987. We have traditionally been engaged in the design, manufacture, marketing and support of connectivity solutions for computers. We are currently engaged in the design, manufacture, marketing and support of high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices. Our products are sold to OEM customers who offer networking appliances, servers and storage devices. As the market moves to utilize applications within virtualization based Cloud Data Centers, our products are now offered in this market segment as well. In 2012, 2013 and 2014 we recorded sales from all of our networking and data infrastructure solutions of approximately $48.7 million, $73.3 million, and $75.6 million, respectively. We primarily sell our products through original equipment manufacturers and, to a lesser extent, through independent distributors (on a non-exclusive basis).
 
 
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Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below.
 
 
·
Inventories – Inventories are stated at the lower of cost or market. Cost is determined using the "weighted average-cost" method. We write down obsolete or slow moving inventory to its market value.
 
 
·
Marketable securities – We account for investments which we intend and are able to hold to maturity, that are classified as held-to-maturity investments as defined in ASC 320-10, “Accounting for Certain Investments in Debt and Equity Securities”.

When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the amortized cost basis of the investment and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.

 
·
Allowance for doubtful accounts – Trade receivables are recorded less the related allowance for doubtful accounts receivable. We consider accounts receivable to be doubtful when it is probable that we will be unable to collect all amounts, taking into account current information and events regarding our customers' ability to repay their obligations. The balance sheet allowance for doubtful debts is determined as a specific amount for those accounts the collection of which is uncertain. We perform our estimates regarding potential doubtful debts based on payment history and correspondence with our customers, and based on new information we receive about the customers’ financial situation. As of December 31, 2014, the allowance for doubtful debts was $20 thousand.
 
 
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·
Deferred Taxes – We account for income taxes under ASC 740-10, "Accounting for Income taxes". Under ASC 740-10, 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, and operating loss and tax credit carry forwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred taxes assets to the amount expected to be realized. Valuation allowances in respect of deferred taxes were recorded in respect of the following matter:

 
§
Deferred tax assets that, as we believe, are more likely than not to be realized. In assessing the potential of realization of deferred tax assets, we consider projected future taxable income and tax planning strategies.

Deferred tax assets and liabilities are classified as current or non-current items in accordance with the nature of the assets or liabilities to which they relate. When there are no underlying assets or liabilities the deferred tax assets and liabilities are classified in accordance with the period of expected reversal. Income tax expenses represent the tax payable for the period and the changes during the period in deferred tax assets and liabilities. In 2012, Silicom Connectivity Solutions, Inc. utilized all of its loss carry-forward (in 2011, all of the valuation allowance referred to loss carry-forward related to Silicom Connectivity Solutions, Inc.) and therefore all related deferred tax assets and valuation allowance were derecognized. As of December 31, 2014, the deferred tax assets were $913 thousand and the deferred tax liabilities were $543 thousand, whereas in 2013, the deferred tax assets amounted to $713 thousand.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

ASC 740, "Accounting for Uncertainty in Income Taxes" clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This interpretation prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on de-recognition of tax positions, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. ASC 740 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.
 
 
39
 

As of January 1, 2014 and for the twelve months ended December 31, 2014, we did not have any significant unrecognized tax benefits. In addition, we do not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

 
·
Impairment or disposal of long lived assets – We account for long-lived assets in accordance with the provisions of ASC subtopic 360-10, “Property plant and equipment - overall”. This Statement requires that long-lived assets be 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 future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is being determined using discounted cash flow models. Assets to be disposed would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell.

 
·
Accounting for Stock-Based Compensation – The Company recognizes compensation expense in accordance with ASC topic 718, "Compensation – stock compensation" based on estimated grant date fair value using an option-pricing model. The share-based awards granted after January 1, 2008 include features that are not supported by the Black and Scholes valuation model, such as an expiration date to occur if the closing price of the Shares falls below 50% of the grant date Share price. Therefore for share-based awards granted after January 1, 2008, the Company recognizes compensation expense based on estimated grant date fair value using the Monte Carlo option-pricing model, or the Binomial option-pricing model.

A.           Operating Results

You should read the following management’s discussion and analysis of our financial condition and operating results in conjunction with the consolidated financial statements and the related notes thereto included in this annual report. The following table sets forth, for the periods indicated, the relationship (in percentages) of items from our Consolidated Statement of Operations Data to our total sales:
 
 
40
 
 
Year Ended December 31,
 
   
2012
   
2013
   
2014
 
Sales
    100 %     100 %     100 %
Cost of sales
    59.2       59.8       59.3  
Gross profit
    40.8       40.2       40.7  
Research and development costs
    9.0       7.5       8.6  
Sales and marketing expenses
    6.3       5.2       5.8  
General and administrative expenses
    4.9       3.5       3.8  
Operating Income
    20.6       24.0       22.5  
Financial income, net
    1.5       0.5       0.4  
Income before income taxes
    22.1       24.5       22.9  
Income tax expenses
    1.8       1.2       3.6  
Net Income
    20.3       23.3       19.3  

Sales in 2014 increased moderately by 3.2% to $75,622 thousand compared to $73,298 thousand in 2013. Our modest growth in 2014 was mainly attributed to the following: On the positive side, we have continued to benefit from our traditional growth engines including the continued increase of ongoing orders from existing customers, continued integration of our products into some of our larger customers' product lines and the continued expansion of our customer base. However, on the negative side, we experienced lower demand for our products from our largest customer. All of the above, coupled with a sharp growth of 50.4% in 2013 which created high comparable sales number for 2014, lead to our modest growth in 2014.

Sales in 2013 increased by 50.4% to 73,298 thousand compared to $48,729 thousand in 2012. The increase in sales was mostly attributed to continued increase in many existing customers' ongoing orders, continued integration of our additional products into some of our larger customers' product lines, our continued expansion of our customer base and  to the growing interest of the market in our new product lines.

Gross profit in 2014 was $30,787 thousand compared to $29,433 thousand in 2013. Gross profit as a percentage of sales in 2014 was 40.7%, compared to 40.2% in 2013. Our gross profit is largely dependent on the mix of products we sell during a specific year. The higher gross profit percentage in 2014 compared to 2013 was primarily a result of changes to the mix of products we sold in 2014. Gross profit is also affected, among other factors, by write-downs of inventory made with respect to any obsolete or slow moving inventory we can no longer use. The inventory write-downs as a percentage of sales in 2014 decreased to 1.4%, compared to 2.6% in 2013.

Gross profit in 2013 was $29,433 thousand compared to $19,880 thousand in 2012. Gross profit as a percentage of sales in 2013 was 40.2%, compared to 40.8% in 2012. Our gross profit is largely dependent on the mix of products we sell during a specific year. The lower gross profit percentage in 2013 compared to 2012 was primarily a result of changes to the mix of products we sold in 2013. Gross profit was also affected, among other factors, by write-downs of inventory made with respect to any obsolete or slow moving inventory we could no longer use. The inventory write-downs as a percentage of sales in 2013 increased to 2.6%, compared to 1.8% in 2012.
 
 
41
 

Research and development costs in 2014 increased by 18.6% to $6,480 thousand compared to $5,465 thousand in 2013. This increase was mainly attributed to our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies which contributed approximately $971 thousand to such increase, and to a relative weakening of the US Dollar against the New Israeli Shekel (since a significant portion of our research and development expenses are incurred in New Israeli Shekels), which contributed approximately $44 thousand to such increase.

Research and development costs in 2013 increased by 24.2% to $5,465 thousand compared to $4,401 thousand in 2012. This increase was mainly attributed to our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies, which contributed approximately $722 thousand to such increase, and to a relative weakening of the US Dollar against the New Israeli Shekel (since a significant portion of our research and development expenses are incurred in New Israeli Shekels), which contributed approximately $342 thousand to such increase.

Sales and marketing expenses in 2014 increased by 15.7% to $4,418 thousand compared to $3,818 thousand in 2013. This increase was mainly attributed to our continued investment in the promotion of our server networking products, which contributed approximately $581 thousand to such increase, and to a relative weakening of the US Dollar against the New Israeli Shekel (since part of our selling and marketing expenses are incurred in New Israeli Shekels), which contributed approximately $ 19 thousand to such increase.

Sales and marketing expenses in 2013 increased by 23.9% to $3,818 thousand compared to $3,081 thousand in 2012. This increase was mainly attributed to our continued investment in the promotion of our server networking products, which contributed approximately $602 thousand to such increase, and to a relative weakening of the US Dollar against the New Israeli Shekel (since part of our selling and marketing expenses are incurred in New Israeli Shekels), which contributed approximately $135 thousand to such increase.

General and administrative expenses in 2014 increased by 10.5% to $2,843 thousand compared to $2,572 thousand in 2013. This increase was mainly attributed to the growth in our activity, which contributed approximately $250 thousand to such increase, and to a relative weakening of the US Dollar against the New Israeli Shekel (since a significant portion of our general and administrative expenses are incurred in New Israeli Shekels), which contributed approximately $21 thousand to such increase.
 
 
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General and administrative expenses in 2013 increased by 8.6% to $2,572 thousand compared to $2,369 thousand in 2012. This increase was mainly attributed to the growth in our activity as demonstrated by the increase in our sales which amounted to 50.4%, which contributed approximately $55 thousand to such increase, and to a relative weakening of the US Dollar against the New Israeli Shekel (since a significant portion of our general and administrative expenses are incurred in New Israeli Shekels), which contributed approximately $148 thousand to such increase.

Financial income, net in 2014 decreased by 34.9% to $263 thousand compared to $404 thousand in 2013. The decrease was primarily caused by the relative weakening of the US dollar against the New Israeli Shekel (a significant portion of our balance sheet assets and obligations are denominated in New Israeli Shekels), which created a net financial expense in US dollars from exchange rate differences, and the decrease in yields from investments in marketable securities.

Financial income, net in 2013 decreased by 46.3% to $404 thousand compared to $752 thousand in 2012. The decrease was primarily caused by the relative weakening of the US dollar against the New Israeli Shekel (a significant portion of our balance sheet assets and obligations are denominated in New Israeli Shekels), which created a net financial expense in US dollars from exchange rate differences, the decrease in yields from investments in marketable securities, and the decrease in funds available for investment.

In 2014 we recorded current income tax expenses of $2,903 thousand and deferred income tax benefit of $219 thousand compared to current income tax expenses of $1,428 thousand and deferred income tax benefit of $552 thousand in 2013.   In addition, in 2014 we recorded income tax expenses relating to prior years of $20 thousand, and in 2013 we recorded income tax expenses relating to prior years of $29 thousand.

In 2013 we recorded current income tax expenses of $1,428 thousand and deferred income tax benefit of $552 thousand compared to current income tax expenses of $900 thousand and deferred income tax expenses of $22 thousand in 2012.   In addition, in 2013 we recorded income tax expenses relating to prior years of $29 thousand, and in 2012 we recorded income tax benefit relating to prior years (tax returns) of $12 thousand.

In 2014 we recorded net income of $14,605 thousand compared to net income of $17,077 thousand in 2013, a 14.5% decrease. This decrease was mainly due to higher operating expenses which we incurred during 2014 and to a higher corporate income tax rate effective as of 2014, whereas our sales remained similar to previous years.

In 2013 we recorded net income of $17,077 thousand compared to net income of $9,871 thousand in 2012, a 73.0% increase. This increase was mainly due to higher sales in 2013.

 
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Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets

Since the majority of our revenues are denominated and paid in U.S. dollars, we believe that inflation in Israel and in Denmark   and fluctuations in the U.S. dollar exchange rates do not have any material effect on our revenue. Inflation in Israel or Denmark and the Israeli and Danish currency as well as U.S. dollar exchange rate fluctuations, may however, have an effect on our expenses and, as a result, on our net income/loss. The cost of our Israeli and Danish operations, as expressed in U.S. dollars, is influenced by the extent to which any change in the rates of inflation in Israel or Denmark are not offset (or are offset on a lagging basis) by a change in valuation of the NIS or DKK in relation to the U.S. dollar.

We do not presently engage in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake such transactions, if management determines that it is necessary to offset such risks.

B.           Liquidity and Capital Resources

As of December 31, 2014, we had working capital of $64,530 thousand and our current ratio (current assets to current liabilities) was 4.40. Cash and cash equivalents as of December 31, 2014 increased by $4,893 thousand to $17,890 thousand, compared to $12,997 thousand as of December 31, 2013. Short-term bank deposits increased by $1,000 thousand to $4,000 thousand, compared to $3,000 thousand as of December 31, 2013. Short-term marketable securities increased by $296 thousand to $15,167 thousand, compared to $14,871 thousand as of December 31, 2013, and long-term marketable securities decreased by $4,012 thousand to $20,358 thousand, compared to $24,370 thousand as of December 31, 2013. The net increase of $2,177 thousand in these four balance sheet items in 2014 was mainly due to the net cash provided by operating activities in 2014 and by proceeds received from the exercise of options, which was only partially offset by the acquisition of Fiberblaze and by the dividend distribution.

Trade receivables increased to $18,831 thousand as of December 31, 2014, compared to $14,866 thousand as of December 31, 2013. Other receivables decreased to $1,632 thousand as of December 31, 2014, compared to $2,460 thousand as of December 31, 2013.

Trade payables increased to $8,236 thousand as of December 31, 2014, compared to $6,814 thousand as of December 31, 2013. Other payables and accrued liabilities increased to $5,783 thousand as of December 31, 2014, compared to $5,134 thousand as of December 31, 2013.

Cash provided by operating activities in 2014 amounted to $20,684 thousand compared to $1,918 thousand in 2013. The cash provided by operating activities in 2014 was the result of our positive operating income.

Inventories decreased to $25,449 thousand as of December 31, 2014, compared to $28,778 thousand as of December 31, 2013.
 
 
44
 

Capital expenditures on property and equipment for the year ended at December 31, 2014 were $1,838 thousand, compared to $929 thousand as of December 31, 2013.

We have cash and cash equivalents that we believe are sufficient for our present requirements. Furthermore, our cash resources are sufficient to fund our operating needs for at least the next twelve months.

C.           Research and development, patents and licenses, etc.

Since we commenced operations, we have conducted extensive research, development and engineering activities. Our efforts emphasize the development of new products, cost reduction of current products, and the enhancement of existing products, generally in response to rapidly changing customer preferences, technologies and industry standards.

Because the market for our products is characterized by rapidly changing technology and evolving industry standards, our success depends upon our ability to select, develop, manufacture and market new and enhanced products in a timely manner to meet changing market needs. As such, we invest significant resources in research and new product development, enhancements to existing products, and the development of new networking and connectivity technologies, and we expect to continue to do so.

On April 8, 2010, we filed a patent application in the United States the "Server-Based Network Appliance", to protect our proprietary intellectual property with respect to SETAC products. In June 2012 we were issued patent No. 8,199,523 entitled ‘Server-Based Network Appliance’ from the United States Patent and Trademark Office with respect to our SETAC product.

On December 10, 2014, we entered into the Fiberblaze SPA, pursuant to which, among other things, all intellectual property and intellectual property rights in which any of Fiberblaze or Fiberblaze US have an ownership interest or a license or similar right, have been purchased by us, including Fiberblaze's high performance OEM hardware platform for Ethernet and network interface product family, registered acquired companies' names and domain name.

We cannot assure you that the scope of any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.

On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China. The Virtualization Off-Load Engine is able to off-load CPU tasks onto a separate intelligent add-on card, thereby freeing up server cycles and improving the server’s Networking and Storage I/O. Through the acquisition, we secured exclusive access to this important technology, and we intend to continue developing and improving upon this technology. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure same, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization, or assert a claim of infringement regarding the product.
 
 
45
 

On February 8, 2015 we filed a patent application (14/616,718) in the USPTO with respect to Hybrid Networking Application Switch.

For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled “ We may not be able to protect our intellectual proprietary rights ” under Item 3.D  - “Risk Factors”.

The Government of Israel encourages research and development projects oriented towards products for export or projects which will otherwise benefit the Israeli economy. In each of the three fiscal years from 1999 to 2001, we received grants from the OCS for the development of systems and products. We have received from the OCS up to 30% of certain research and development expenditures for particular projects. Under the terms of Israeli Government participation, a royalty of 2% or up to 5% of the net sales of products developed from a project funded by the OCS must be paid, beginning with the commencement of sales of products developed with grant funds and ending when a dollar-linked amount equal to 100% of such grants without interest, for projects approved prior to December 2000, and plus interest at LIBOR, for amounts received after that date, is repaid. The terms of Israeli Government participation also place restrictions on the location of the manufacturing of products developed with government grants, which, in general, must be performed in Israel, and on the transfer to third parties of technologies developed through projects in which the government participates. See “Item 10. Additional Information - Taxation”. We received approximately 20% of certain research and development expenditures for a particular project in 2003 and approximately 30% of such expenditures for a particular project in 2004. We did not have any new grant programs with the OCS from 2005 to 2014. In August 2005, we received approval for a $54 thousand dollar grant from the Korea-Israel Industrial Research and Development Foundation, or Koril-RDF, in connection with the joint development of a certain product with a Korean company. Under the terms of this grant we are required to repay the amounts received at a rate of 2.5% per year of our gross sales of the product developed with the grant in each such year, until 100% of the grant (and any other sums received from Koril-RDF) are repaid. The annual payment for every year following the first sale of the product will not exceed certain percentages of the amounts received from Koril-RDF. As of January 2006 and to date, our research and development activities have been sponsored and funded by us, and we did not participate in any new encouragement programs or received any additional grants from the OCS or Koril-RDF.

We expect that we will continue to commit resources to research and development in the future. As of February 28, 2015, we had 69 employees engaged primarily in research and development activities. In 2012, 2013 and 2014, our research and development expenses were $4,401, $5,465 and $6,480 respectively, constituting approximately 9.0%, 7.5% and 8.6% respectively, of our sales. For additional information concerning commitments to pay royalties on sales of products developed from projects funded by the OCS, see Note 10A to our financial statements included elsewhere in this annual report and see “Item 10. Additional Information - Taxation.”
 
 
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D.           Trend Information
 
In today’s network-based environment, there is a growing demand for server-based systems. We believe that the markets for such systems are continuously growing. Exploding data and internet traffic increase the need for connectivity and bandwidth, which results in the increased need of networking throughput, connectivity, compute power and storage. Such growing demand was the basis for the emerging technologies of virtualization, cloud and SDN, all of which are targeting the implementation of a more effective model for all the above mentioned tasks.
 
In view of such an anticipated increase in Cloud-based data centers utilizing virtualization and SDN, the systems are expected to be increasingly   based on generic server platforms.  These platforms will all need offload capabilities in order to address the performance challenges realized due to the huge amount of traffic, the high volume of data, the need to encrypt such data, the need to run in virtualized environment, which by itself is a challenge for the server CPU, and the need to include switching within the server for high efficiency SDN. We anticipate that consequently the demand for add-on adapters which address these challenges will grow. Power, heat and space limitations in such environments increase the need for hardware accelerators. Such systems will require essential building blocks in their own generic severs, which can be served by our products.
 
We address the above needs with a comprehensive suite of cards that integrate encryption and compression functionality, with the Virtualization Off-Load Engine which is able to off-load these CPU tasks onto a separate intelligent add-on card thereby freeing up server cycles and improving the server’s Networking and Storage I/O, with our generic off-loading platforms based on network processors and with our redirector cards which deal with load balancing between servers/CPUs/CPU cores and perform traffic filtering to  increase the efficiency of the server. We believe that our Server Adapters (with and without bypass), Smart Adapters, Intelligent Bypass Switches, and SETAC products will all continue to be key driver of our growth in the coming years. A distinct advantage of these products is that the demand in the server based industry has been continuously growing, especially as our products are suited to the growth in Big Data and the Cloud (including SDN).
 
The sales cycles in the markets for our products are long, and continuing to achieve Design Wins according to the process described above and obtaining new customers is time consuming. However, each Design Win we have achieved and do achieve may represent an opportunity for sustained, long-term revenues once we establish a relationship with a customer.
 
 
47
 

Although we expect our business and products to further develop in the coming years, there is no assurance that we will continue to generate significant sales in the areas in which we operate.

E.           Off-Balance Sheet Arrangements

On July 22, 2002, our Audit Committee and the Board of Directors approved an Indemnification Agreement with our directors and officers. Our shareholders approved the terms of this agreement in a General and Extraordinary Meeting held on January 7, 2004. In Amendment 3 to the Companies Law, the instances in which a company may indemnify its officers and directors were broadened. In December 2007 each of our Audit Committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers so as to reflect this amendment. Our shareholders approved the terms of this new Indemnification Agreement in January 2008. The Agreement provides that the directors and officers will be exempt from liability in certain circumstances. The Agreement also provides for the indemnification by us for certain obligations and expenses imposed on the officer in connection with an act performed in his or her capacity as an officer of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an officer’s duty of loyalty, a willful breach of an officer’s duty of care, or a reckless disregard for the circumstances or consequences of a breach of duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an officer or a director in favor of another person by a judgment is currently $3,000,000 for each instance of a covered scenario. In addition we would be liable to indemnify the officer or director for all reasonable litigation expenses with respect to certain proceedings. We are not aware of any material pending action that may result in anyone claiming such indemnification.

An amendment in 2011 to the Israeli Securities Law, and a corresponding amendment to the Companies Law, authorized the Israeli Securities Authority to impose administrative sanctions against companies like Silicom Ltd. and their office holders for certain violations of the Israeli Securities Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior officer of a public company for certain periods of time. The Israeli Securities Law and to the Companies Law provide that only certain types of such liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the company's articles of association, and receive the requisite corporate approvals.  In January 2012 each of our Audit Committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers serving in such capacities from time to time so as to reflect this amendment, and at the Annual General Meeting of the Shareholders held on April 11, 2012 our shareholders approved these amendments to the Articles of Association and a revised form of Indemnification Agreement for directors serving in such capacity from time to time.
 
 
48
 

As per Amendment 20 to the Companies Law, it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which was recommended by our Compensation Committee and approved by our Board of Directors.  The Executive Compensation Policy included the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and officers serving in such capacities from time to time. The Executive Compensation Policy also noted that going forward, any change to the Indemnification Agreement, including any changes which materially depart from the key terms of the current agreement (provided that such changes apply equally to all executives of the Company, including directors) will be submitted to the Company’s Compensation Committee and the Board of Directors for their approval but shall not, unless required by law or the Company’s Articles of Association, be presented at a General Meeting of the shareholders. 

We are not party to any other material off-balance sheet arrangements or contingent obligations.

F.           Tabular disclosure of contractual obligations

The following table shows our outstanding contractual obligations by category and by payments due as of December 31, 2014:

   
Payments due by period
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Operating Leases
  $ 3,701,000     $ 1,143,000     $ 1,662,000     $ 736,000     $ 61,000  
Purchase Obligations
  $ 9,924,000     $ 9,924,000                          
Total
  $ 13,625,000     $ 11,067,000     $ 1,662,000     $ 736,000     $ 61,000  
 
Our total outstanding contingencies in respect of royalty-bearing participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately $2,960 thousand as of December 31, 2014, of which $2,782 thousand are attributable to sales of our legacy products and $178 thousand are attributable to sales of a certain discontinued product.
 
Other Long-Term Liabilities Reflected on the Company's Balance Sheet:
 
The liability for employees’ severance benefits amounted to approximately $2,414 thousand as of December 31, 2014.
The liability for employees’ severance benefits is calculated on the basis of the latest monthly salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited by us into employees’ managers’ insurance and/or pension fund accounts in respect of severance obligations to such employees, including accumulated income thereon as well as by the unfunded provision reflected on the balance sheet. Such liability will be removed, either by termination of employment or retirement. While the timing of such obligations cannot be pre-determined (and as such were not included in the above table), such liability will be removed, either by termination of employment or retirement.
 
 
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Item 6.     DIRECTORS, SENIOR MANAGE M ENT AND EMPLOYEES
 
A.           Directors and Senior Management

The following table and notes thereto set forth information regarding our directors and senior management as of February 28, 2015.

Name
Age
Position with Company
Avi Eizenman (1)
57
Active Chairman of the Board
Shaike Orbach (1)
63
President, Chief Executive Officer, Director
Zohar Zisapel (1)
66
Director
Ayelet Aya Hayak
45
External Director
Ilan Erez
47
External Director
Eran Gilad
47
Chief Financial Officer

(1)
Was re-elected for an additional term, commencing as of April 30, 2014.

Avi Eizenman co-founded the Company in 1987 and has served as a Director since its inception. Mr. Eizenman also served as our President and Chief Executive Officer from the Company’s inception until April 1, 2001, and on such date, he resigned from his positions as President and Chief Executive Officer and was appointed Active Chairman of the Board of Directors. Mr. Eizenman served as head of the ASIC department at Scitex Ltd. in 1986. From 1979 until 1985, Mr. Eizenman held various positions, including project manager, ASIC specialist and engineer, with the Electronic Research & Development Department of the Israeli Ministry of Defense. Mr. Eizenman holds a B.Sc. degree, with honors, in Electrical Engineering from the Technion, and an M.B.A. from Tel Aviv University.

Shaike Orbach has been our President and Chief Executive Officer since April 2001. In December 2001, Mr. Orbach was named a Director, replacing Zohar Zisapel, who resigned from the Board of Directors. Prior to that, for a period of four and a half years, Mr. Orbach was President and CEO of Opgal Ltd., a high-tech subsidiary of Israel’s Rafael and El-Op corporations. Previously, he was General Manager of Edusoft, an Israeli company the shares of which were traded on the NASDAQ National Market (now, the NASDAQ Global Market), and Managing Director of Tecsys Ltd. He holds a B.Sc degree in Mechanical Engineering from the Technion.
 
 
50
 

Zohar Zisapel is a co-founder of the Company. He served as a Director from the Company's inception and until 2001.  In September 2010, he was elected again as Director in the Company. Mr. Zisapel is also a founder and a director of RAD Data Communications Ltd., of which he served as CEO from January 1982 until January 1998 and has served as chairman from 1998 until 2013.  Mr. Zisapel serves as chairman of two other public companies – Ceragon Networks Ltd. (Ticker Symbol CRNT) and RADCOM Ltd. (Ticker Symbol RDCM) – and as chairman or director of several private companies. The Company has certain dealings with members of the Rad Group (see “Item 7. Major Shareholders and Related Party Transactions” below). Since July 2008, Mr. Zisapel has been a director of Amdocs Limited (Ticker Symbol DOX).  Mr. Zisapel received a B.Sc. and a M.Sc. in electrical engineering from the Technion, Israel Institute of Technology, and an M.B.A. from Tel Aviv University.

Ayelet Aya Hayak was elected by the shareholders as an external director for an initial three-year term commencing July 1, 2013. Ms. Hayak serves as a director in several public companies, among which are New Horizon Group Ltd., One Software Technologies (O.S.T.) Ltd., MYDAS Fund Investments Ltd., Danel (Adir Yehushua) Ltd., B.S.R. Projects Ltd., Financitech Ltd., and M.I. Holdings Ltd. Additionally, Ms. Hayak also serves as the chairman of the board of directors of S.D.S (Star Defense Systems) Ltd. Between 2009 and 2011 Ms. Hayak served as the CEO of Paula Ltd. Ms. Hayek holds a BA degree in accounting and business administration from the Tel Aviv College of Management and is also a Certified Public Accountant.

Ilan Erez has served as Chief Financial Officer of Cimatron Ltd. (Ticker Symbol CIMT) engaged in the design and sale of CAD/CAM software for the tool-making and discrete manufacturing industries, since July 2005.  From 1998 to 2005 Mr. Erez served as the Chief Financial Officer of the Company. He also served as VP Operations of the Company from May 2001 to 2005. From 1996 to 1998 Mr. Erez served as Controller and assistant to the Chief Executive Officer at Bio-Dar Ltd. From 1994 to 1996 Mr. Erez served as an auditor at Kesselman & Kesselman, a member of Price Waterhouse Coopers. Mr. Erez is a Certified Public Accountant in Israel and holds a B.A in Accounting and Economics from the Hebrew University and an LL.M. in Business Law from Bar-Ilan University.  Mr. Ilan Erez has served as an external director of the Company since 2010, and was re-elected by the shareholders as an external director for a second three-year term commencing July 1, 2013.

Eran Gilad has been our Chief Financial Officer since May 2005 and the Secretary of the Company since 2012. From 1995 to 2005 Mr. Gilad held senior financial and operational positions in various public and private companies operating in the high-tech field. He is a Certified Public Accountant in Israel and holds an M.A in Economics from Tel-Aviv University and a B.A in Accounting and Economics from Tel-Aviv University.
 
 
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B.           Compensation
 
The aggregate direct remuneration paid to all persons as a group who served in the capacity of director or executive officer during the year ended December 31, 2014 was $2,551 thousand. The aggregate amount accrued to provide for severance payments to all persons as a group who served in the capacity of director or executive officer as of the year ended December 31, 2014 was $918 thousand. The severance terms of our Chief Executive Officer and Chairman of the Board, as previously approved by the audit committee, board of directors and shareholders of the Company, and in accordance with the Executive Compensation Policy of the Company which was approved by the shareholders, may entitle them, in certain circumstances, to additional payments. We have not paid any compensation to Zohar Zisapel for serving on our board of directors. We do pay cash compensation to Avi Eizenman who is an active Chairman of the Board, and to Shaike Orbach, who is the President and Chief Executive Officer.
 
Avi Eizenman and Shaike Orbach may also be entitled to cash   bonuses by meeting some pre-determined thresholds, and as calculated based on a pre-determined formulas set by our board of directors, as approved by the annual general meeting of our shareholders for the years 2013 and 2014-2016 on April 30, 2014. Mr. Eizenman and Mr. Orbach's 2013 cash bonuses may not exceed the value of 18 of their monthly salaries, respectively, and their cash bonus formulas are based on achieving one or more of the following thresholds: (i) the Company's actual revenue for 2013 is 80% or more of the pre-determined budget target; and (ii) the Company's actual operating profit for 2013 is 80% or more of the pre-determined budget target. Mr. Eizenman and Mr. Orbach's 2014-2016 cash bonuses may also not exceed the value of 18 of their monthly salaries, respectively, and their cash bonus formulas are taking into consideration the erosion rate from the 2013 annual bonus formulas, and are based on achieving one or more of the following thresholds: (i) the Company's actual revenue for any of the years 2014-2016 is 80% or more of the pre-determined budget target for the relevant year; and (ii) the Company's actual operating profit for any of the years 2014-2016 is 80% or more of the pre-determined budget target for the relevant year. The Compensation Committee may, in its sole discretion, raise or lower such annual cash bonuses by up to 20%. Furthermore, in accordance with the Company's recoupment policy, Mr. Eizenman and Mr. Orbach may be required to reimburse the Company for the cash bonuses (or any part thereof) paid in the previous 3 years, in the event such cash bonuses were based on financial data included in the Company's financial statements that were found to be inaccurate and were subsequently restated.

Non-employee directors, including External Directors within the meaning of the Companies Law, are entitled to be paid cash compensation for board and any committee member services, as applicable, in accordance with the amounts which are permitted under the Companies Regulations (Rules Regarding Compensation and Expenses of External Directors) - 2000 enacted pursuant to the Companies Law. Office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law.

All our officers other than the external directors and Mr. Zohar Zisapel work full time for us. We do not currently grant any variable bonus or equity based compensation, nor any separation payments to our non-employee directors. Certain of the compensation previously paid to our directors was paid in the form of options under the Silicom Directors Share Incentive Option Plan (1994) (under which there are presently no options outstanding) and certain of such compensation is paid in the form of options which were granted under the Share Option Plan (2004) or RSU’s which will be granted under the Silicom Ltd - Global Share Incentive Plan (2013), described below.
 
 
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On December 30, 2004, our shareholders adopted our Share Option Plan (2004). Under the original terms of the Share Option Plan (2004) up to a maximum of 282,750 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise of options granted to employees, directors, officers, consultants and service providers. In December 2007, the Board of Directors increased the number of our ordinary shares available for issuance under the Share Option Plan (2004) by 300,000. In August 2012, the Board of Directors increased the number of our ordinary shares available for issuance under the Share Option Plan (2004) by an additional 500,000. The Share Option Plan (2004) is administered by the board of directors, which designates the optionees, dates of grant, vesting periods and the exercise price of options. The options are non-assignable except by the laws of descent. Certain tax advantages apply to certain of our directors, officers and employees with respect to options granted to them under the Share Option Plan (2004). As of February 28, 2015, we have granted a total of 1,036,000 options under the Share Option Plan (2004), of which (i) 200,000 options were granted to Mr. Avi Eizenman, such that: (a) 30,000 were exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014); (b) 40,000 expired in July 2008, (c) 40,000 were granted at an exercise price of $3.82  a termination date of the earlier to occur of October 15, 2016 or the closing price of our shares falling below $1.91, (d) 50,000 were granted at an exercise price of $18.82 and a termination date of the earlier to occur of December 21, 2018 or the closing price of our shares falling below $9.41 and (d) 40,000 were granted with  an exercise price of $15.28 and a termination date of the earlier to occur of September 13, 2020 or the closing price of our shares falling below $7.64; (ii) 30,000 options were granted to Mr. Yehuda Zisapel (who was formerly a director of the Company) and exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014); (iii) 200,000 options were granted to Mr. Shaike Orbach, such that (a) 30,000 were exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014), (b) 40,000 expired in July 2008, (c) 40,000 at an exercise price of $3.82 and at a termination date of the earlier to occur of October 15, 2016 or the closing price of our shares falling below $1.91, (d) 50,000 at an exercise price of $18.82 and at a termination date of the earlier to occur of December 21, 2018 or the closing price of our shares falling below $9.41 and (e) 40,000 at an exercise price of $15.28 and at a termination date of the earlier to occur of September 13, 2020 or the closing price of our shares falling below $7.64; (iv) 30,000 options were granted to Ms. Einat Domb-Har (who was a former external director of the Company) and exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014) ; and (v) 30,000 options were granted to Mr. Ilan Kalmanovich (who was a former external director of the Company) and exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014). 35,250 of the options granted under the Share Option Plan (2004) were returned to the company due to certain employees who left their positions not exercising their options and 200,000 of the options granted under the Share Option Plan (2004) expired without exercise due to the expiration of their term. The Share Option Plan (2004) expired at the end of 2014, upon which expiration any unallocated shares under this plan have been returned to the general pool of registered but unissued share capital of the Company.
 
 
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On October 21, 2013, our board of directors adopted our Global Share Incentive Plan (2013). On April 30, 2014, the annual general meeting of our shareholders approved the Global Share Incentive Plan (2013) to qualify for incentive stock options for U.S. tax purposes. The Global Share Incentive Plan (2013) is administered by the board of directors, which determines the number of our ordinary shares available for issuance under the plan, designates the award recipients and types of awards, dates of grant, vesting periods and the exercise price of awards. Under the Global Share Incentive Plan (2013) the Company may grant awards of options, restricted shares, restricted share units (“RSU’s”) or other equity based awards. The board of directors has determined that initially up to a maximum of 500,000 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise of equity based awards granted to employees, directors, officers, consultants and service providers. The awards are non-assignable except by the laws of descent. Certain tax advantages apply to certain of our directors, officers and employees with respect to equity based awards granted to them under Global Share Incentive Plan (2013). As of February 28, 2015, we have granted a total of 74,000 RSUs under the Global Share Incentive Plan (2013), of which a total of (i) 25,000 RSUs were granted to Mr. Avi Eizenman, and (ii) 25,000 RSUs were granted to Mr. Shaike Orbach, pursuant to the approval of our compensation committee, board of directors and annual general meeting of our shareholders, which gave effect to such grants in its meeting on April 30, 2014.
 
In addition, in March 2015, our compensation committee and board of directors, respectively, have approved the grant of a total of 92,591 options under the Global Share Incentive Plan (2013), of which a total of  (i) 13,333 options shall be granted to Mr. Avi Eizenman, and (ii) 13,333 options  shall be granted to Mr. Shaike Orbach, both subject to the approval  of the Annual General Meeting, which is currently scheduled to convene no later than July 2015, subject to the Companies Law and our Amended and Restated Articles of Association.
 
  C.           Board Practices

Each of Zohar Zisapel, Avi Eizenman and Shaike Orbach was elected to the board of directors most recently on April 30, 2014 to serve until the next Annual general Meeting, which is currently scheduled to convene no later than July 2015, subject to the Companies Law and our Amended and Restated Articles of Association. Messrs. Zohar Zisapel and Avi Eizenman are both founders of the Company, and Avi Eizenman has served as a Director since our inception in 1987. On July 1, 2010 Mr. Ilan Erez was elected as an external director for an initial term of three years in accordance with Section 245(a) of the Israeli Companies Law, with such terms ending as of July 1, 2013. Mr. Ilan Erez replaced Mr. Ilan Kalmanovich, who served as an external director since 2004. At the Annual General Meeting of our shareholders held on April 14, 2013, the shareholders re-elected Mr. Ilan Erez as an external director for an additional second three-year term, and elected Ms. Ayelet Aya Hayak as an external director for an initial three-year term, with such terms of office for the external directors commencing as of July 1, 2013.  Ms. Hayak replaced Ms. Einat Domb-Har, who completed her third and final three-year term as an external director as of July 1, 2013.
 
 
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None of the members of the board of directors is entitled to receive any severance or similar benefits upon termination of his or her service with the board of directors, except for Avi Eizenman, who also functions as the active Chairman of the Board and Shaike Orbach, who also functions as President and Chief Executive Officer (See “Item 6.B. Directors and Senior Management – Compensation” above).

In December 2007 our Audit Committee and Board of Directors approved severance arrangements for each of Mr. Avi Eizenman and Mr. Shaike Orbach, which provide for extended notice provisions and severance payments in the event of termination. The arrangements were approved by our shareholders in January 2008, and include the following main terms and conditions (identical with respect to each of Mr. Avi Eizenman and Mr. Shaike Orbach):

Notice of Termination

The termination of the executive’s employment, by him or by us, for any reason other than cause (which is generally defined as willful conduct or omission materially injurious to the company), death or disability, shall require 12 months advance written notice. If, however, following a change in control transaction, either: (i) he shall give notice of termination of his employment for good reason (which is generally defined as an adverse change to the status, responsibilities, salary or other material terms of his employment); or (ii) we shall give notice of termination of his employment for any reason other than cause or disability, 18 months advance written notice shall be required. A change in control transaction includes transactions such as sale of all or substantially all of the company’s shares or assets, or a merger, acquisition, or other reorganization in which control of our company changes following such transaction.

Severance Payments

If the executive’s employment shall be terminated for any reason other than cause, he shall be entitled to receive his last full monthly salary multiplied by the number of years (or portions thereof) that he was employed by us (i.e. the severance amount he would be entitled to receive under the Israeli law, had we terminated his employment for any reason other than cause) (the “Severance Law Amount”). If, however, his employment shall be terminated: (i) by the company for any reason other than cause or disability; or (ii) by him for a good reason following a change in control, he shall be entitled to receive one and half times the Severance Law Amount. If the executive’s employment under the arrangement is terminated by reason of death or disability, then, in addition to the above, he shall be entitled to receive a lump sum severance payment equal to his last full monthly salary multiplied by twelve 12 months.
 
 
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As per the recently enacted Amendment 20 to the Companies Law, it was decided at the Extraordinary General Meeting of the Shareholders on July 31, 2013, to adopt the Executive Compensation Policy of the Company, which included the above referenced extended notice provisions, and severance payments in the event of termination, with respect to each of Mr. Avi Eizenman and Mr. Shaike Orbach.

Board of Directors
 
Our Articles of Association provide for a board of directors of not less than two nor more than eight members. Each director (except external directors) is elected to serve until the next annual general meeting of shareholders and until his or her successor has been elected. Other officers serve at the discretion of the board of directors. The Articles of Association of the Company provide that any director may, subject to the provisions of the Companies Law and the approval by the Board of Directors, appoint another person to serve as a substitute director and may cancel such appointment. Under the Companies Law, a person who is already serving as a director will not be permitted to act as a substitute director. Additionally, the Companies Law prohibits a person from serving as a substitute director for more than one director. Appointment of a substitute director for a member of a board committee is only permitted if the substitute is a member of the board of directors and does not already serve as a member of such committee. If the committee member being substituted is an external director, the substitute may only be another external director who possesses the same expertise as the external director being substituted. The term of appointment of a substitute director may be for one meeting of the board of directors or for a specified period or until notice is given of the cancellation of the appointment. To our knowledge, no director currently intends to appoint any other person as a substitute director, except if the director is unable to attend a meeting of the board of directors.

External Directors
 
  Under the Companies Law, companies registered under the laws of Israel the shares of which have been offered to the public in or outside of Israel are required to appoint no less than two external directors. No person may be appointed as an external director if such person is a relative (as defined in the Companies Law) of a controlling shareholder or if such person, or the person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment to serve as external director, any affiliation with any of either the company,  any entity or person controlling, controlled by or under common control with the company, or relatives of such person. The term “affiliation” includes:

 
·
an employment relationship;
 
·
a business or professional relationship maintained on a regular basis;
 
·
control; and
 
·
service as an office holder.

The Israeli Minister of Justice, in consultation with the Israeli Securities Authority, may determine that certain matters will not constitute an affiliation, and has issued certain regulations with respect thereof.
 
 
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If the company does not have a controlling shareholder or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, then the company may not appoint as an external director any person or such person’s relative, partner, employer or any entity under the person’s control, who has or had, on or within the two years preceding the date of the person’s appointment to serve as external director, any affiliation with the Chairman of the Board, Chief Executive Officer, a substantial shareholder who holds at least 5% of the issued and outstanding shares of the company or voting rights which entitle him to vote at least 5% of the votes in a shareholders meeting, or the Chief Financial Officer.
 
A person shall be qualified to serve as an external director only if he or she possesses “expertise in finance and accounting” or “professional qualifications”. At least one external director must possess expertise in finance and accounting.
 
A director can satisfy the requirements of having “expertise in finance and accounting” if due to his or her education, experience and qualifications he or she has acquired expertise and understanding in business and accounting matters and financial statements, in a manner that allows him or her to understand, in depth, the company’s financial statements and to spur a discussion regarding the manner in which the financial data is presented.

A public company's board of directors must evaluate the proposed external director's expertise in finance and accounting, by considering, among other things, such candidate’s education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates and to companies of a size and complexity similar to such company; (ii) the company's independent public accountant’s duties and obligations; (iii) preparation of the company’s consolidated financial statements and their approval in accordance with the Companies Law and the Israeli Securities Law - 1961.

A director is deemed to be “professionally qualified” if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a field that is the company’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years experience in any of the following, or has at least a cumulative total of at least five years experience in any two of the following: (A) a senior position in the business management of a corporation with a significant extent of business, (B) a senior public position or a senior position in public service, or (C) a senior position in the company's main field of operations. As with a candidate’s expertise in finance and accounting, the board of directors here too must evaluate the proposed external director's "professional qualification" in accordance with the criteria set forth above.
 
 
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The declaration required by law to be signed by a candidate to serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant, in order that the board of directors may properly evaluate whether such candidate meets the requirements of having "expertise in finance and accounting" or being "professionally qualified" as set forth in the regulations. Additionally, the candidate should submit documents and certificates that support the statements set forth in the declaration.

No person may serve as an external director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. Additionally, no person may serve as an external director if the person, the person’s relative, spouse, employer or any entity controlling or controlled by the person, has a business or professional relationship with someone with whom affiliation is prohibited, even if such relationship is not maintained on a regular basis, excepting negligible relationships, or if such person received from the company any compensation as an external director in excess of what is permitted by the Companies Law. If, at the time external directors are to be appointed, all current members of the board of directors who are not controlling shareholders or relatives of such shareholders are of the same gender, then at least one external director must be of the other gender.

External directors are to be elected for a term of three years by a majority vote at a shareholders’ meeting, provided that either:

 
·
the majority includes at least a majority of the shares held by non-controlling and disinterested shareholders who are present and voting at the meeting; or
 
·
the total number of shares held by non-controlling and disinterested shareholders that voted against the election of the director does not exceed two percent of the aggregate voting rights in the company.
 
External directors may be re-elected for two additional terms of three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred:  (i) the reappointment of the external director has been proposed by one or more shareholders holding together 1% or more of the aggregate voting rights in the company and the appointment was approved at the general meeting of the shareholders by a simple majority, provided that: (1)(a) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment as a result of an affiliation with a controlling shareholder and abstentions are disregarded and (b) the total number of shares of shareholders who do not have a personal interest in the appointment as a result of an affiliation with a controlling shareholder and/or who are not controlling shareholders, present and voting in favor of the appointment exceed 2% of the aggregate voting rights in the company, and (2) pursuant to a recently enacted amendment to the Companies Law (“ Amendment 22 ”), effective as of January 10, 2014, the external director who has been nominated in such fashion is not a linked or competing shareholder, and does not have or has not had, on or within the two years preceding the date of such person’s appointment to serve as another term as external director, any affiliation with a linked or competing shareholder. The term “linked or competing shareholder” means the shareholder(s) who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the company, provided that at the time of the reappointment, such shareholder(s) of the company, the controlling shareholder of such shareholder(s) of the company, or a company under such shareholder(s) of the company’s control, has a business relationship with the company or are competitors of the company; the Israeli Minister of Justice, in consultation with the Israeli Securities Authority, may determine that certain matters will not constitute a business relationship or competition with the company; (ii) the reappointment of the external director has been proposed by the board of directors and the appointment was approved by the majority of shareholders required for the initial appointment of an external director; or (iii) pursuant to a recently enacted amendment to the Companies Law (“ Amendment 26 ”), effective as of November 25, 2014, the external director has proposed himself for reappointment and the reappointment was approved in accordance with Sub-section (i) above.
 
 
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However, under regulations promulgated pursuant to the Companies Law, companies whose shares are listed for trading on specified exchanges outside of Israel, including the Nasdaq Global Select, Global and Capital Markets, may elect external directors for additional terms that do not exceed three years each, beyond the three three-year terms generally applicable, provided that, if an external director is being re-elected for an additional term or terms beyond three three-year terms:  (i) the audit committee and board of directors must determine that, in light of the external director’s expertise and special contribution to the board of directors and its committees, the re-election for an additional term is to the company’s benefit; (ii) the external director must be re-elected by the required majority of shareholders and subject to the terms specified in the Companies Law; and (iii) the term during which the nominee has served as an external director and the reasons given by the audit committee and board of directors for extending his or her term of office must be presented to the shareholders prior to their approval.

External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a court to be unable to perform their duties on a full time basis. External directors may also be removed by an Israeli court if they are found guilty of bribery, fraud, administrative offenses in a company or use of inside information. Each committee of a company’s board of directors which has been granted any authority normally reserved for the board of directors must include at least one external director; provided, however, that the audit committee and compensation committee must each include all external directors then serving on the board of directors.
 
Following termination of service as an external director, a public company, a controlling shareholder thereof and any entity controlled by a controlling shareholder, may not grant any benefit, directly or indirectly, to any person who served as an external director of such public company, or to his or her spouse or child, including, not appointing such person, or his or her spouse or child, as an office holder of such public company or of any entity controlled by a controlling shareholder of such public company, not employing such person or his or her spouse or child and not receiving professional services for pay from such person, either directly or indirectly, including through a corporation controlled by such person, all until the lapse of two years from termination of office with respect to the external director, his or her spouse or child; and with respect to other relatives of the former external director - until the lapse of one year from termination of office.
 
 
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An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director. At the Annual Shareholders Meeting of the Company held on April 14, 2013, the shareholders of the Company re-elected Mr. Ilan Erez as an external director for second three-year term and elected Ms. Ayelet Aya Hayak as an external director for an initial three-year term, with such terms of office for the external directors having commenced as of July 1, 2013. Ms Hayak replaced Ms. Einat Domb-Har who completed her third and final three-year term as an external director of the Company as of July 1, 2013.

Audit Committee

The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee pursuant to the Companies Law include identifying irregularities in the management of our business and approving related party transactions as required by law, classifying company transactions as extraordinary transactions or non-extraordinary transactions and as material or non-material transactions in which an officer has an interest (which will have the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company’s internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his role and to regulate the company's rules on employee complaints, reviewing the scope of work of the company’s independent accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities. Pursuant to Amendment 22, effective as of January 10, 2014, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to establish procedures to be followed in respect of related party transactions with a controlling shareholder (where such are not extraordinary transactions), which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee; and (ii) to determine procedures for approving certain related party transactions with a controlling shareholder, which were determined by the audit committee not to be extraordinary transactions, but which were also determined by the audit committee not to be negligible transactions.
 
 
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Under the Companies Law, an audit committee must consist of at least three directors, including all the external directors of the company, and a majority of the members of the audit committee must be independent or external directors. The Companies Law defines independent directors as either external directors or directors who: (1) meet the requirements of an external director, other than the requirement to possess accounting and financial expertise or professional qualifications, with Audit Committee confirmation of such; (2) have been directors in the company for an uninterrupted duration of less than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed to interrupt the duration); and, (3) were classified as such by the company.

The following persons may not be a member of the audit committee:

 
·
The chairman of the board of directors,
 
·
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling shareholder's control,
 
·
Any director who derives his salary primarily from a controlling shareholder,
 
·
A controlling shareholder, or
 
·
Any relative of a controlling shareholder.

According to the Companies Law, (1) the chairman of the audit committee must be an external director, (2) the required quorum for audit committee meetings and decisions is a majority of the committee members, of which the majority of members present must be independent and external directors, and (3) any person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel and company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the audit committee.

Currently, Ms. Ayelet Aya Hayak, Mr. Ilan Erez and Mr. Zohar Zisapel serve as members of our audit committee, and Mr. Ilan Erez serves as the chairperson.

Compensation Committee

On December 5, 2010, our board of directors established a compensation committee, composed of at least two directors who were initially Mr. Zohar Zisapel, as chairman, and Mr. Avi Eizenman. At the time, its sole function was to recommend, to the board of directors, certain executive compensation matters and any other matters as the board of directors decided from time to time.
 
 
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In December 2012, Amendment 20 to the Companies Law (“ Amendment 20 ”) went into effect, pursuant to which, the Board of Directors of Israeli publicly traded companies are required to appoint a compensation committee comprised of at least three members, including all external directors, who must also comprise a majority of the members of the compensation committee. In addition, the chairman of the compensation committee must be an external director. Following the compensation committee's recommendations, the Board of Directors is required to establish a compensation policy, which includes a framework for establishing the terms of office and employment of the office holders and guidelines with respect to the structure of the variable pay of office holders. Such guidelines are the basis for adequate balance between the components of compensation, which exists when a linkage is maintained between compensation and performance and the creation of value for shareholders in the Company, while maintaining the Company’s ability to recruit and maintain talented officeholders and incentivizing them to pursue the Company’s objectives. In particular, an appropriate balance between the fixed component (base salary and additional benefits) and the variable component and capital compensation avoids placing an exaggerated emphasis on one component.

The following persons may not be a member of the compensation committee:

 
·
The chairman of the board of directors,
 
·
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling shareholder's control,
 
·
Any director who derives his salary primarily from a controlling shareholder,
 
·
A controlling shareholder, or
 
·
Any relative of a controlling shareholder.
 
The responsibilities of the compensation committee include the following:

 
1.
To recommend to the Board of Directors as to a compensation policy for officers of the company, as well as to recommend, once every three years to extend the compensation policy subject to receipt of the required corporate approvals;
 
2.
To recommend to the Board of Directors as to any updates to the compensation policy which may be required;
 
3.
To review the implementation of the compensation policy by the Company;
 
4.
To approve transactions relating to terms of office and employment of certain Company office holders, which require the approval of the compensation committee pursuant to the Companies Law; and
 
5.
To exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval of the shareholders meeting.
 
In December 2012, our Board of Directors changed the composition of the members of our compensation committee by removing Mr. Avi Eizenman from the compensation committee, and appointing the Company’s two external directors, Mr. Ilan Erez and Ms. Einat Domb-Har to our compensation committee, and appointing Mr. Ilan Erez as chairman of our compensation committee. On July 1, 2013, following the election of Ms. Ayelet Aya Hayak as an external director instead of Ms. Einat Domb-Har, Ms. Aya Hayak replaced Ms. Domb-Har on our compensation committee. Our compensation committee has been charged by the Board of Directors to act in accordance with the powers and prerogatives delegated to it by the Companies Law and take any decisions and make any recommendations to the Board all as set forth in the Companies Law.
 
 
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Under Section 267B(a) and Parts A and B of Annex 1A of the Companies Law, which were legislated as part of Amendment 20, a company’s compensation policy shall be determined based on, and take into account, the following parameters:

 
a.
advancement of the goals of the Company, its working plan and its long term policy;
 
b.
the creation of proper incentives for the office holders while taking into consideration, inter alia, the Company’s risk management policies;
 
c.
the Company’s size and nature of its operations;
 
d.
the  contributions of the relevant office holders in achieving the goals of the Company and profit in the long term in light of their positions;
 
e.
the education, skills, expertise and achievements of the relevant office holders;
 
f.
the role of the office holders, areas of their responsibilities and previous agreements with them;
 
g.
the correlation of the proposed compensation with the compensation of other employees of the Company, and the effect of such differences in compensation on the employment relations in the company; and
 
h.
the long term performance of the office holder.

In addition, the compensation policy should take into account that in the event the compensation paid to office holders shall include variable components – it should address the ability of the board of directors to reduce the value of the variable component from time to time or to set a cap on the exercise value of convertible securities components that are not paid out in cash.  Additionally, in the event that the terms of office and employment include grants or payments made upon termination – such grants should take into consideration the length of the term of office or period of employment, the terms of employment of the office holder during such period, the company’s success during said period and the office holder’s contribution to obtaining the company’s goals and maximizing its profits as well as the circumstances and context of the termination.

In addition, the compensation policy must set forth standards and rules on the following issues: (a) with respect to variable components of compensation - basing the compensation on long term performance and measurable criteria (though a non-material portion of the variable components can be discretionary awards taking into account the contribution of the officer holder to the company); (b) establishing the appropriate ratio between variable components and fixed components and placing a cap on such variable components (including a cap on the grant date value of convertible securities components that are not paid out in cash); (c) setting forth a rule requiring an office holder to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to be erroneous and resulted in an amendment and restatement of the company’s financial statements; (d) determining minimum holding or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives; and (e) setting a cap on grants or benefits paid upon termination.
 
 
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The board of directors of a company is obligated to adopt a compensation policy after considering the recommendations of the compensation committee. The final adoption of the compensation committee is subject to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth in the Israeli Companies Law, pursuant to which one of the following must be met:

 
(i)
the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the company or who do not have a personal interest in the compensation policy and participating in the vote; abstentions shall not be included in the total of the votes of the aforesaid shareholders; or
 
(ii)
the total of opposing votes from among the shareholders described in subsection (i) above does not exceed 2% of all the voting rights in the company .

Nonetheless, even if the shareholders of the company do not approve the compensation policy, the board of directors of a company may approve the compensation policy, provided that the compensation committee and, thereafter, the board of directors determined, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of the compensation policy is for the benefit of the company.

Executive Compensation Policy

On July 31, 2013, an Extraordinary General Meeting of the Shareholders of the Company took place, approving the Executive Compensation Policy (the “Policy”), which had been recommended by the Compensation Committee and approved by the Board of Directors, for the Company’s directors and office holders, in accordance with the requirements of the Companies Law.

The Policy includes, among other issues prescribed by the Companies Law, a framework for establishing the terms of office and employment of the office holders, a recoupment policy, and guidelines with respect to the structure of the variable pay of office holders.

Each of our compensation committee and board of directors may engage compensation advisors and other professionals to assist in formulating compensation packages in line with the Policy, including, without limitation, to assist in collecting relevant data, framing the appropriate factors to be considered and evaluating the different factors being considered.
 
 
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All compensation arrangements of office holders are to be approved in the manner prescribed by applicable law.  Our office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law.

Our recoupment policy relating to office holder compensation allows for the recovery of all or a portion of any compensation paid to our office holders that was paid during the previous three years on the basis of financial data included in our financial statements in any fiscal year that were found to be inaccurate and were subsequently restated. In such event, we will seek reimbursement from the office holders to the extent such office holders would not have been entitled to all or a portion of such compensation, based on the financial data included in the restated financial statements. Our compensation committee will be responsible for approving the amounts to be recouped and for setting terms for such recoupment from time to time. Notwithstanding the aforesaid, the recoupment policy will not be triggered in the event of a financial restatement due to changes in the applicable reporting or accounting standards. The above noted recoupment policy does not derogate from any relevant recoupment or clawback provisions under any applicable law or regulatory rules which apply to us.

All of our office holders (other than non-employee directors) may be incentivized through cash bonuses and long-term equity-based incentives to provide the office holder with a stake in our success – thus linking the office holder’s long-term financial interests with the interests of our shareholders. In accordance with the Policy, the incentives are developed through a program that sets performance targets based on each office holder’s role and scope. Actual payments are driven by the business and individual performance vis-à-vis the performance targets set at the beginning of the year. The formula for the performance targets and the maximum variable components payable to each office holder (other than directors) shall be presented and recommended by our Chief Executive Officer and reviewed and approved by our compensation committee and our board of directors. The formula for the performance targets and the maximum variable components payable to any employee office holders who are also directors shall be presented and recommended by our compensation committee and reviewed and approved by our board of directors and our shareholders. The maximum value of the variable compensation components for an office holder at the Company shall not exceed eighty percent of such office holder’s total compensation package on an annual basis. The maximum annual value of the equity-based long-term compensation components and cash bonuses of all of our office holders shall not exceed two percent of our market cap.
 
 
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Unless otherwise specified in the terms of the variable compensation of an office holder, our Policy dictates that the board of directors shall not have discretion to unilaterally reduce such office holder's variable compensation. Equity based compensation may be granted in any form permitted under our equity incentive plans, as in effect from time to time (collectively, the "Equity Incentive Plans"), including stock options, restricted share units and restricted stock. Equity grants to office holders shall be made in accordance with the terms of the Equity Incentive Plans. All equity-based incentives granted to our office holders shall be subject to vesting periods in order to promote long-term retention of the awarded office holders.  Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to our office holders other than directors shall vest gradually over a period of between two to four years. We do not have any equity ownership guidelines that require any of our office holders to hold a stated number or fixed percentage of our ordinary shares, nor do they have to continue to hold for any period of time shares in the Company which they acquired as a result of the exercise of fully vested equity grants. The value of the equity-based compensation shall be calculated on the grant date, according to acceptable valuation practices at the time of grant. The board of directors shall not have discretion to limit the value of the equity-based compensation at the time of exercise. The board of directors may, following approval by our compensation committee, extend the period of time for which an award to an office holder is to remain exercisable, or make provisions with respect to the acceleration of the vesting period of any office holder’s awards, including, without limitation, in connection with a corporate transaction involving a change of control.

Our compensation committee will periodically review the Policy and monitor its implementation, and recommend to our board of directors and shareholders to amend the Policy as it deems necessary from time to time. The term of the Policy shall be three years as of the date of its adoption on July 31, 2013, during which, the Board of Directors is required to examine the Policy and revise it from time to time, if the circumstances under which it had been adopted have materially changed. Following such three year term, the Policy, including any revisions recommended by our compensation committee and approved by our board of directors, as applicable, will be brought once again to the shareholders for approval.

Internal Auditor

Under the Companies Law, the board of directors of a public company must appoint an internal auditor, who is nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether our actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined in Item 10 below), nor an affiliate, nor a relative of an office holder or affiliate, and he or she may not be our independent accountant or its representative. Doron Cohen of Fahn Kaneh Control Management Ltd. (a subsidiary of Fahn Kanne & Co. - Grant Thornton Israel) serves as our internal auditor.

D.           Employees

The number of employees over the last three financial years is set forth in the table below.

As of December 31
 
2012
   
2013
   
2014
 
Total Employees
    111       143       197  
Marketing, Sales, Customer Services
    14       17       22  
Research & Development
    37       41       66  
Manufacturing
    51       75       97  
Corporate Operations and Administration
    9       10       12  
 
 
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As of February 28, 2015, we had 203 employees, including 22 in marketing, sales and customer services, 69 in research and development, 100 in manufacturing, and 12 in corporate operations and administration. All such employees, except for 3 employees of our subsidiaries in the United States and 28 of our subsidiary in Denmark, are based in Israel. We consider our relations with our employees excellent and have never experienced a labor dispute, strike or work stoppage. None of our employees is represented by a labor union. We do not employ a significant number of temporary employees, but we do use temporary employees from time to time, as necessary.
 
In Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations including the Industrialists' Associations. These provisions of collective bargaining agreements are applicable to our Israeli employees by virtue of expansion orders issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which apply to our employees principally concern the requirement for length of the work day and workweek, mandatory contributions to a pension fund, annual recreation allowance, travel expenses payment and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.

Israeli law generally requires severance pay, which may be funded by managers' insurance and/or a pension fund described below, upon the retirement or death of an employee or termination of employment without cause (as defined in the law). The payments to the managers’ insurance and/or pension fund in respect of severance pay amount to approximately 8.33% of an employee’s wages, in the aggregate. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include payments for national health insurance. The payments to the National Insurance Institute are equal to approximately 16% of an employee’s wages, of which the employee contributes approximately 62.5% and the employer contributes approximately 37.5%.
 
 
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A general practice followed by us, is the contribution of funds on behalf of most of our employees either to a fund known as managers' insurance or to a pension fund, or to a combination of both. Such practice was further reinforced in July 1, 2008, when we entered into agreements with a majority of its employees in order to implement Section 14 to the Severance Pay Law, according to which the payment of monthly deposits by us into managers’ insurance and/or pension fund are in respect of severance obligation to such employees. See Note 9 of our consolidated financial statements. These funds provide a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay or part of it, if legally entitled, upon termination of employment. Each employee contributes an aggregate amount equal to between 5% and 5.5% of his base salary to such funds, and we contribute, in the aggregate, between 13.3% and 15.8% of the employee’s base salary, with such amount including the 8.33% which is contributed as severance pay as noted above.

E.           Share Ownership

The following table sets forth, as of February 28, 2015, the number of shares owned by our officers, directors and senior management. The percentages shown are based on 7,273,433 Ordinary shares outstanding as of February 28, 2015:

Name and Address
 
Number of Shares and Options Owned 1
   
Percent of Outstanding Shares
 
Zohar Zisapel 2
    1,511,722       20.78 %
Avi Eizenmann
    202,618       2.79 %
Shaike Orbach
    *       *  
Ayelet Aya Hayak
    *       *  
Ilan Erez
    *       *  
Eran Gilad
    *       *  
All directors and officers as a group
    1,714,340       23.57 %

* Denotes ownership of less than 1% of the outstanding shares.
 
1
The table above includes the number of shares and options that are exercisable within 60 days of February 28, 2015. Ordinary shares subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise indicated, and subject to applicable community property laws, based on information furnished to us by such owners or otherwise disclosed in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect to all shares shown as beneficially owned by them.
 
2
Based on Schedule 13D/A filed on March 5, 2009.
 
 
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See also “Item 6. Directors and Senior Management – Compensation.”

Item 7.    MAJOR SHAREHOLDERS AN D RELATED PARTY TRANSACTIONS
 
A.           Major Shareholders

The shareholders of the Company who beneficially own over 5% or more of each class of shares, as well as the number of shares owned and the percentage of outstanding shares owned by each, and additional information, is set forth below. The voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinary shares. All of the information with respect to beneficial ownership of the Ordinary Shares is given to the best of our knowledge.

Name of Shareholder
 
Number of Shares and Options Owned 1
   
Percentage of Outstanding Shares
 
Zohar Zisapel 2
    1,511,722       20.78 %
Dov Yelin/Yair Lapidot/Yelin Lapidot Holdings Management Ltd. 3
    545,787       7.50 %
Harel Insurance Investments & Financial Services Ltd . 4
    388,681       5.34 %

1
The table above includes the number of shares and options that are exercisable within 60 days of February 28, 2015. Ordinary shares subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise indicated, and subject to applicable community property laws,  based on information furnished to us by such owners or otherwise disclosed in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect to all shares shown as beneficially owned by them.
2
Based on Schedule 13D/A filed on March 5, 2009.
3 
As reported on the Schedules 13G/A filed by each of Dov Yelin, Yair Laipdot and Yelin Lapidot Holdings Management Ltd., an Israeli investment management firm (collectively, “Yelin Lapidot”) with the Securities and Exchange Commission on January 21, 2015, and as further updated in correspondence by Yelin Lapidot Holdings Management Ltd. with the Company, dated as of February 28, 2014, all 545,787 ordinary shares of the Company are beneficially owned by Yelin Lapidot via two of its wholly-owned subsidiaries (the “Subsidiaries”), Yelin Lapidot Provident Funds Management Ltd. which holds 234,209 Ordinary Shares of the Company, and Yelin Lapidot – Mutual Funds Management Ltd. which holds 311,578 Ordinary Shares of the Company. Yelin Lapidot has reported on the Schedules 13G/A that: (i) Messrs. Yelin and Lapidot each own 24.38% of the share capital and 25% of the voting rights, and are responsible for the day-to-day management, of Yelin Lapidot Holdings Management Ltd., (ii) the Subsidiaries operate under independent management and make their own independent voting and investment decisions, (iii) that any economic interest or beneficial ownership in any of the Ordinary Shares of the Company covered by the report on Schedule 13G is held for the benefit of the members of the provident funds or mutual funds, as the case may be, and (iv) the report on Schedule 13G shall not be construed as an admission by Messrs. Yelin and Lapidot, Yelin Lapidot Holdings Management Ltd. or the Subsidiaries that he or it is the beneficial owner of any of the Ordinary Shares of the Company covered by report on Schedule 13G/A, and that each of them disclaims beneficial ownership of any such ordinary shares of the Company.
4
As reported on the Schedule 13G/A filed by Harel Insurance Investments & Financial Services Ltd. ("Harel"), an Israeli insurance company publicly traded on the TASE, with the Securities and Exchange Commission on February 12, 2015, of the 388,681 Ordinary Shares (i) 380,093 are held for members of the public through, among others, provident funds and/or pension funds and/or index-linked securities and/or insurance policies, which are managed by subsidiaries of Harel, each of which subsidiaries operates under independent management and makes independent voting and investment decisions, and (ii) 8,588 Ordinary Shares are beneficially held for Harel's own account. Harel also reported that the report on Schedule 13G/A shall not be construed as an admission by Harel that it is the beneficial owner of more than 8,588 ordinary shares of the Company covered by the report on Schedule 13G/A .
 
 
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The Company's major shareholders do not have different voting rights

As of February 28, 2015, there were approximately 5 record holders of ordinary shares, including approximately 2 record holders in the United States. Collectively, these 2 record holders in the United States held less than 1% of the outstanding ordinary shares.

B.           Related Party Transactions

Messrs. Yehuda and Zohar Zisapel are brothers and are our founders. On July 15, 2010 Mr. Yehuda Zisapel resigned from serving as director on our board of directors, and on September 2, 2010, Mr. Zohar Zisapel was appointed as a director on our board. Messrs. Yehuda and Zohar Zisapel are also founders, directors and principal shareholders of several other corporations within the “Rad Group”, as described in “Item 6. Directors, Senior Management and Employees”.

There are other members of the Rad Group that are actively engaged in designing, manufacturing, marketing and supporting data communications products, none of which are currently the same as our products. Certain products of members of the Rad Group are complementary to, and may be used in connection with, our products. We and other members of the Rad Group also market certain of our products through the same distribution channels. Such products may, to a limited extent, compete with one another for the distributors’ time and efforts.

The Rad Group provides us with certain services, and is reimbursed by us for the costs of providing such services. During 2014, we purchased from the Rad Group internet services for an amount of up to $65,000, testing services for our products for an amount of up to $148,000 and car leasing services for an amount of up to $6,000. We also sub-lease office space in Paramus, New Jersey, for an amount of up to $24,000 (monthly rent payments of approximately $2,000) from Radcom Equipmet, Inc., an affiliated company of the Rad Group. We began to sub-lease this space in February 2004; the sub-lease was in effect until January 31, 2006 and was renewed for additional one-year periods through December 31, 2014. On January 1, 2015, we extended the sub-lease for an additional two-year period until December 31, 2016.

During 2014, we sold external bypass switches and Server Adapters to members of the Rad Group for an amount of approximately $1,041,000.
 
 
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The material terms of the arrangements with the Rad Group, described in the preceding paragraphs, occur within the Company's ordinary course of business, and on market terms. We believe that such arrangements are neither material to us nor unusual in their nature or conditions. We further believe that the terms of the transactions in which we have engaged and are currently engaged with other members of the Rad Group are generally no less favorable to us than terms which might be available to us from unaffiliated third parties.

Our board of directors approved a resolution under which sales to or purchases from any members of the Rad Group must meet certain criteria or otherwise be specifically approved by the relevant corporate bodies, as applicable in accordance with Israeli law. These criteria included a stipulation that transactions between us and members of the Rad Group relate to standard equipment, services and products purchased or sold by us and the Rad Group, as applicable. Our board of directors approved sales to or purchases from the Rad Group, from time to time, of standard equipment, services and products, which are (i) within our ordinary course of business and (ii) at least at market terms and at a value lower than 0.5% of our annual turnover per transaction and 2.5% of our annual turnover for all such transactions in a financial year, aggregated together. Our management is required to examine on a quarterly basis whether transactions with the Rad Group comply with such criteria. Transactions which do not meet the criteria will require specific corporate approvals in the applicable manner prescribed by Israeli law.  Further, all future related party transactions and arrangements (or modifications of existing ones) with members of the Rad Group, transactions in which office holders of the Company have a personal interest, or transactions which raise issues of such office holders’ fiduciary duties, could require additional corporate approvals as applicable under the Companies Law.

In addition to being a founder, director and principal shareholder of each member of the Rad Group, Yehuda Zisapel is the founder and principal shareholder of Bynet and its subsidiaries. Bynet acts as a distributor in Israel for us and for other members of the Rad Group and also acts as a distributor in Israel for numerous unaffiliated manufacturers of data communications and other equipment. We believe that the terms of our relationship with Bynet are generally no less favorable to us than terms which might be available to us from unaffiliated third parties.

Except as indicated above, we do not currently directly compete with other members of the Rad Group and do not currently contemplate engaging in competition with any other member of the Rad Group in the future. However, opportunities to develop, manufacture or sell new products (or otherwise enter new fields) may arise in the future, which opportunities might be pursued by us or by one or more other members of the Rad Group to the exclusion of (or in competition with) other members of the Rad Group (including us). In the event that any such opportunity arises, the directors then in office will determine whether or not we should seek to pursue it. Any such determination will be based upon such factors as the directors then deem relevant. However, in making any such determination, the directors will be bound by their fiduciary duties to the Company (and to any other corporation or other person to whom they then owe a fiduciary duty).
 
 
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On July 22, 2002, our audit committee and the Board of Directors approved an Indemnification Agreement with our directors and officers. Our shareholders approved the terms of this agreement in a General and Extraordinary Meeting held on January 7, 2004. In Amendment 3 to the Companies Law, effective as of 2005, the instances in which a company may indemnify its officers and directors were broadened. In December 2007 each of our audit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers so as to reflect this amendment. Our shareholders approved the terms of this new Indemnification Agreement in January 2008. According to Amendment 16 to the Israeli Securities Law, 5728-1968 (the "Israeli Securities Law"), and to a corresponding amendment to the Companies Law, both effective as of 2011, the Israeli Securities Authority is authorized to impose administrative sanctions against companies like  ours and their office holders for certain violations of the Israeli Securities Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior officer of a public company for certain periods of time. The Israeli Securities Law and the Companies Law provide that only certain types of such liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the company's articles of association, and receive the requisite corporate approvals. In January 2012 each of our audit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers so as to reflect this amendment, and our shareholders approved these amendments to the Articles of Association and a revised form of Indemnification Agreement for directors at the Annual General Meeting of the Shareholders held on April 11, 2012.

The Indemnification Agreement provides that our directors and officers will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by the Company for certain obligations and expenses imposed on the officer in connection with act performed in his or her capacity as an officer of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an officer’s duty of loyalty, a willful breach of an officer’s duty of care, or a reckless disregard for the circumstances or consequences of a breach of a duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an officer or a director in favor of another person by a judgment is currently $3,000,000 for each instance of a covered scenario. In addition we would be liable to indemnify the officer or director for all reasonable litigation expenses with respect to certain proceedings. We have maintained liability insurance for our directors and officers. On September 23, 2007 our shareholders approved the procurement of a policy, which provides for total coverage of up to $4,000,000. All of our directors are parties to our Indemnification Agreements and are covered by our directors and officers insurance policy.
 
 
72
 
 
As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which was recommended by our compensation committee and approved by our board of directors.  Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and officers serving in such capacities from time to time, as well as the above referenced directors and officers liability insurance policy. Under the Executive Compensation Policy, any change to the Indemnification Agreement or the insurance policy, including the cost and/or any changes which materially depart from the key terms of the current agreement and/or insurance policy (provided that such changes apply equally to all executives of the Company, including directors) will be submitted to the Company’s compensation committee and the board of directors for their approval but shall not, unless required by law or the Company’s Articles of Association, be presented at a General Meeting of the shareholders.

See also “Item 6. Directors and Senior Management – Compensation.”

Item 8.     FINANCIAL INFORMATION
 
A.           Consolidated Statements and Other Financial Information

Our consolidated financial statements and other financial information are included herein on pages F-1 through F-44.
 
A1. See Item 18 for our consolidated financial statements.
 
A2. See Item 18 for our consolidated financial statements, which cover the last three financial years.
 
A3. See page F-3 for the audit report of our accountants, entitled “Report of Independent Registered Public Accounting Firm.”
 
A4. Not applicable.
 
A5. Not applicable.
 
A6. See Note 12A to our audited consolidated financial statements included in Item 18 of this annual report for the geographic distribution of our sales based on the location of the customer.
 
A7. Litigation

On March 2, 2012 Internet Machines LLC, a Texas limited liability company filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas (the “Court”) against numerous defendants (including many switch manufacturers) with respect to certain patents for switches, and included our US subsidiary amongst the list of defendants named in such lawsuit. The lawsuit claims that the defendants have infringed certain patents purported to be owned by Internet Machines LLC and seeks unspecified compensation for damages as well as injunctive relief. The defendants filed answers and counterclaims to the complaint asserting that they do not infringe any claims of the asserted patents and the claims of the patents are invalid and/or unenforceable. While one of our switch suppliers (which is also named as a defendant in the aforesaid lawsuit) has agreed to indemnify us with respect to certain liabilities, there is no certainty that we will ultimately be able to collect all or any amounts under such indemnity should we be found liable under the lawsuit. On September 4, 2012, the Court granted the defendants' motion to stay the pending litigation.
 
 
73
 
 
Other than the above, we are not a party to any material litigation and we are not aware of any pending or threatened litigation that would have a material adverse effect on us or our business.

A8. Dividend Policy

Prior to 2013, we had not paid dividends in the past. On January 14, 2013, we announced that our Board of Directors has adopted a policy for distributing dividends, subject to all applicable laws. According to this policy, each year we will distribute a dividend of up to 50% of our annual distributable profits. As part of the stated policy, the Company's Board of Directors reserves the right to declare additional dividend distributions, to change the rate of dividend distributions (either as a policy or on a one-time basis), to cancel a specific distribution or to cancel the policy as a whole at any time, at its sole discretion.  The actual distribution of a dividend will be subject to meeting the conditions required by applicable law, including the distribution tests set forth in Section 302 of the Companies Law, and to the specific decision of the Company's Board of Directors for each distribution.  Future dividend policy will be reviewed by the Board of Directors based upon conditions then existing, including our earnings, financial condition, capital requirements and other factors. Our ability to pay cash dividends may be restricted by instruments governing any of our obligations.

Dividends paid by an Israeli company to shareholders residing outside Israel are generally subject to withholding of Israeli income tax at a rate of 25-30%. Such tax rates apply unless a lower rate is provided in a treaty between Israel and the shareholder’s country of residence. In our case, the applicable withholding tax rate will also depend on the particular Israeli production facilities that have generated the earnings that are the source of the specific dividend and, accordingly, the applicable rate may change from time to time. 
On March 18, 2013 our Board of Directors declared a dividend of US $0.55 per share which was paid on April 17, 2013 to shareholders of record as of April 4, 2013, and in the aggregate amount of approximately US $3.9 million for 2012.

On March 18, 2014 our Board of Directors declared a dividend of US $1.00 per share payable on April 17, 2014 to shareholders of record at the close of the NASDAQ Global Select Market on April 3, 2014, and in the aggregate amount of approximately US $7.2 million for 2013.

On March 23, 2015 our Board of Directors declared a dividend of US $1.00 per share payable on April 21, 2015 to shareholders of record at the close of the NASDAQ Global Select Market on April 6, 2015, and in the aggregate amount of approximately US $7.3 million for 2014.
 
 
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B.           Significant Changes

Since the date of the annual financial statements included in this Annual Report, no significant changes have occurred.

Item 9.     THE OFFER AND LISTING
 
A.           Offer and listing details

Markets and Share Price History

The primary trading market for our ordinary shares is the NASDAQ Global Select Market, where our shares have been listed and traded under the symbol SILC since January 2, 2014.  Prior thereto our shares were listed and traded on the NASDAQ Global Market (previously NASDAQ National Market) under the symbol SILC (previously SILCF) from February 11, 2008. Prior thereto, our shares were listed and traded on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap).

The table below sets forth the high and low reported sales prices in dollars of our ordinary shares, as reported by NASDAQ during the indicated periods:

PERIOD
 
LOW
   
HIGH
 
LAST 6 CALENDAR MONTHS
           
February  2015
    44.22       47.89  
January 2015
    32.15       48.43  
December 2014
    34.39       38.11  
November 2014
    32.56       36.17  
October 2014
    26.00       35.96  
September 2014
    28.41       32.68  
FINANCIAL QUARTERS DURING THE PAST TWO YEARS
               
Fourth Quarter 2014
    26.00       38.11  
Third Quarter 2014
    26.02       42.45  
Second Quarter 2014
    41.11       63.91  
First Quarter 2014
    44.98       73.44  
Fourth Quarter 2013
    33.84       46.15  
Third Quarter 2013
    29.85       42.40  
Second Quarter 2013
    25.50       35.50  
First Quarter 2013
    17.97       28.90  
FIVE MOST RECENT FULL FINANCIAL YEARS
               
2014
    26.00       73.44  
2013
    33.84       46.15  
2012
    15.02       18.50  
2011
    13.10       19.33  
2010
    13.53       19.54  
 
 
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On December 27, 2005, our shares commenced trading on the Tel Aviv Stock Exchange in Israel under the symbol “SILC” (in Hebrew letters). The following table sets forth, for the periods indicated, the high and low reported sales prices, in NIS, of the ordinary shares on the Tel Aviv Stock Exchange:

PERIOD
 
LOW
   
HIGH
 
LAST SIX CALENDAR MONTHS
           
February 2015
    171.70       188.00  
January 2015
    125.00       169.00  
December 2014
    134.00       149.70  
November 2014
    118.10       141.60  
October 2014
    100.50       124.50  
September 2014
    104.50       117.00  
FINANCIAL QUARTERS DURING THE PAST TWO YEARS
               
Fourth Quarter 2014
    100.50       149.70  
Third Quarter 2014
    89.74       144.00  
Second Quarter 2014
    142.00       223.50  
First Quarter 2014
    157.00       257.20  
Fourth Quarter 2013
    123.80       166.60  
Third Quarter 2013
    108.60       152.00  
Second Quarter 2013
    90.01       128.50  
First Quarter 2013
    66.50       102.51  
FIVE MOST RECENT FULL FINANCIAL YEARS
               
2014
    89.74       257.20  
2013
    66.50       166.60  
2012
    51.60       73.00  
2011
    44.16       80.64  
2010
    30.31       71.20  
 
 
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Item 10.   ADDITIONAL INFORMATION
 
A.           Share Capital

Not applicable
  
B.           Memorandum and Articles of Association

Articles of Association

Our shareholders approved our Amended and Restated Articles of Association (“Articles”) on January 24, 2008, as well as certain additional amendments to the Articles on April 11, 2012. Our objective as stated in the Articles is to carry on any business and perform any act which is not prohibited by law.

We have currently outstanding only one class of shares, our Ordinary Shares, having a nominal value of NIS 0.01 per share. Holders of Ordinary Shares have one vote per share, and are entitled to participate equally in the payment of dividends and share distributions and, in the event of a liquidation of the Company, in the distribution of assets after satisfaction of liabilities to creditors. No preferred shares are currently authorized.

Our Articles require that we hold our annual general meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place, either within or without the State of Israel, determined by the board of directors, upon 21 days’ prior notice to our shareholders or 35 days’ prior notice to the extent required with respect to certain matters as required under the regulations to the Companies Law. In general, no business may be commenced at a general meeting until a quorum of two or more shareholders holding at least 33 1/3% of the voting rights is present in person or by proxy. Shareholders may vote in person or by proxy.

In general, a simple majority is required to amend our articles of association.
 
Pursuant to the Israeli Companies Law, resolutions regarding the following matters must be passed at a general meeting of shareholders:

 
·
appointment or termination of our auditors;
 
·
appointment and dismissal of external directors;
 
·
approval of interested party acts and transactions requiring general meeting approval as provided in sections 255 and 268 to 275 of the Israeli Companies Law;
 
·
a merger as provided in section 320(a) of the Israeli Companies Law;
 
·
the exercise of the powers of the board of directors, if the board of directors is unable to exercise its powers and the exercise of any of its powers is vital for our proper management, as provided in section 52(a) of the Israeli Companies Law;
 
·
amendments to our articles of association;
 
·
approval of an increase or decrease of the registered share capital.
 
 
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An extraordinary general meeting may be convened by demand of two directors or by written request of one or more shareholders holding at least 5% of our issued share capital and 1% of the voting rights or one or more shareholders holding at least 5% of the voting rights. Shareholders requesting a special meeting must include in their request all relevant information, including the reason that such subject is proposed to be brought before the special meeting.

Our ordinary shares may generally be freely transferred under our amended and restated articles of association, unless the transfer is restricted or prohibited by applicable law or the rules of the stock exchange on which the shares are traded. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our amended and restated articles of association or the laws of the State of Israel, except under certain circumstances for ownership by nationals of certain countries that are, or have been, in a state of war with Israel.

The Companies Law

We are subject to the provisions of the Companies Law. The Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder, as defined in the Companies Law, is a general manager (also referred to as the “chief executive officer”), chief business manager, deputy general manager, vice general manager, executive Vice-President, Vice-President, any other person assuming the responsibilities of any of the foregoing positions without regard to such person's title, as well as a director, or another manager directly subordinate to the general manager. Each person listed in the table in “Item 6. Directors, Senior Management and Employees” above is an office holder of Silicom.

The Companies Law requires that an office holder of a company promptly disclose, no later than the first board meeting in which such transaction is discussed, 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, the office holder must also disclose any personal interest held by the office holder’s relative (which includes for these purposes any members of his/her (or his/her spouse's) immediate family or the spouses of any such members of his or her (or his/her spouse's) immediate family), or by any corporation in which the office holder or the office holder’s relative is a 5% or greater shareholder, holder of 5% or more of the voting power, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities.

In the case of a transaction in which an office holder of the company has a personal interest and which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, board approval is required unless the articles of association of the company provide otherwise. The transaction must be for the benefit of the company. If the transaction is an extraordinary transaction, then, in addition to any approval required by the articles of association, it must also be approved by the audit committee and by the board of directors, and, under specified circumstances, by a meeting of the shareholders, as well.
 
 
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Subject to certain exceptions provided for in the regulations to the Companies Law, agreements regarding directors’ terms of compensation require the approval of the compensation committee, board of directors and the shareholders of the company. The transaction must be for the benefit of the company.

In matters concerning an extraordinary transaction in which a person has a personal interest, as well as matters concerning his or her terms of compensation, he or she shall not be permitted to vote on the matter or be present in the audit committee or board of directors meeting in which the matter is considered, however, with respect to an office holder, he/she may be present at the meeting discussions if the chairman determines that the presence of the office holder is necessary in order to present the matter. However, if a majority of the audit committee or of the board of directors has a personal interest in the matter then:

 
·
all of the directors are permitted to vote on the matter and attend the meeting in which the matter is considered; and
 
·
the matter requires approval of the shareholders at a general meeting.

According to the Companies Law, the personal interest disclosure requirements discussed above also apply to a controlling shareholder of a public company. Such requirements also apply to certain shareholders of a public company who have a personal interest in the adoption by the shareholders of certain proposals with respect to (i) certain private placements that will increase their relative holdings in the company, (ii) certain special tender offers or forced bring along share purchase transactions, (iii) election of external directors, (iv) approval of a compensation policy governing the terms of employment and compensation of office holders, (v) approval of the terms of employment and compensation of the general manager, (vi) approval of the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company’s shareholders, and (vii) approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company. If any shareholder casting a vote at a shareholders meeting in connection with such proposals as aforesaid does not notify the company if he, she or it has a personal interest with respect to such proposal, his, her or its vote with respect to the proposal will be disqualified.
 
The term “controlling shareholder” is defined as a shareholder who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder’s position on the board of directors or any other position with the company, and the definition of "controlling shareholder" in connection with matters governing: (i) extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, (ii) certain private placements in which the controlling shareholder has a personal interest, (iii) certain transactions with a controlling shareholder or relative with respect to services provided to or employment by the company, (iv) the terms of employment and compensation of the general manager, and (v) the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company’s shareholders, also includes shareholders that hold 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company (and the holdings of two or more shareholders which each have a personal interest in such matter will be aggregated for the purposes of determining such threshold).
 
 
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In general, extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and agreements relating to non-office holder employment and compensation terms of a controlling shareholder (or a relative of such) or to the provision of services to the company by such controlling shareholder (or relative of such), require the approval of the audit committee, the board of directors and the shareholders of the company. Agreements relating to the terms of office and employment of a controlling shareholder (or relative of such) as an office holder in the company require the approval of the compensation committee, the board of directors and the shareholders of the company.

The shareholder approval for such matters requiring shareholder disclosure of a personal interest as noted above, generally must either include at least a majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. The shareholder approval for approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company, must either include at least two-thirds of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. Agreements and extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, or agreements relating to any employment terms of a controlling shareholder (or relative if such) or to the provision of services to the company by such controlling shareholder (or relative if such), as aforesaid, with duration exceeding three years, are subject to re-approval once every three years by the audit committee (or compensation committee, as applicable), the board of directors and the shareholders of the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest may be approved in advance for a period exceeding three years if the audit committee determines such approval reasonable under the circumstances. In addition, agreements and extraordinary transactions with duration exceeding three years which were approved prior to Amendment 16 to the Companies Law, which was passed by the Israeli legislature, the Knesset, in March 2011 and which came into effect gradually during the year 2011 (the “Amendment 16”) will need to be re-approved by the proper corporate actions at the later of (i) the first general meeting held after May 14, 2011, (ii) November 14, 2011 or (iii) the expiration of three years from the date on which they were originally approved, even though they were properly approved prior to the passing of the Amendment 16.
 
The board of directors of an Israeli company whose shares or debentures are publicly traded is obligated to adopt a compensation policy governing the terms of office and employment of office holders, after considering the recommendations of the compensation committee. The final adoption of the compensation policy is subject to the approval of the shareholders of the company. Such shareholder approval is subject to certain special majority requirements, as set forth in the Companies Law, pursuant to which the shareholder majority approval must also either include at least a majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who voted against the transaction must not represent more than two percent of the voting rights in the company.
 
 
80
 

Nonetheless, even if the shareholders of the company do not approve the proposed compensation policy, the board of directors of a company may approve the proposed compensation policy, provided that the compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of such compensation policy is for the benefit of the company.

Pursuant to the Companies Law, the terms of office and employment of an office holder in a public company should be in accordance with the company’s compensation policy. Nonetheless, provisions were established in the Companies Law that allow a company, under special circumstances, to approve terms of office and employment that are not in line with the approved compensation policy.

Terms of office and employment of office holders who are neither directors nor the general manager and which comply with the company’s compensation policy require approval by the (i) compensation committee; and (ii) the board of directors.  Approval of terms of office and employment for such office holders which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having  taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for such office holders by means of the special majority required for approving the compensation policy (as detailed above).
 
Terms of office and employment of the general manager which comply with the company’s compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company by means of the special majority required for approving the compensation policy (as detailed above). Approval of terms of office and employment for the general manager which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having  taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for the general manager which deviate from the compensation policy by means of the special majority required for approving the compensation policy (as detailed above).  Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the terms of office and employment of a proposed candidate for general manager if such candidate meets certain independence criteria, the terms of office and employment are in line with the compensation policy, and the compensation committee has determined for specified reasons that presenting the matter for shareholder approval would thwart the proposed engagement.
 
 
81
 

Terms of office and employment of office holders (including the general manager) that are not directors may nonetheless be approved by the company despite shareholder rejection, provided that a company’s compensation committee and thereafter the board of directors have determined to approve such terms of office and employment based on detailed reasoning, after having re-examined the proposed terms of office and employment, and having taken the shareholder rejection into consideration.

Terms of office and employment of directors which comply with the company’s compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company. Approval of terms of office and employment for directors of a company which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having  taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the special majority required for approving the compensation policy (as detailed above).

Private placements in a public company require approval by a company’s board of directors and shareholders in the following cases:
 
1.   
A private placement that meets all of the following conditions:
              ·
The private placement will increase the relative holdings of a shareholder that holds five percent or more of the company’s outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company's outstanding share capital.
              ·
20 percent or more of the voting rights in the company prior to such issuance are being offered.
              ·
All or part of the consideration for the offering is not cash or registered securities, or the private placement is not being offered at market terms.
2.   
A private placement which results in anyone becoming a controlling shareholder of the public company.

In addition, under the Companies Law, certain transactions or a series of transactions are considered to be one private placement.  A private placement that meets all of the above conditions, and which must be approved by the shareholders, must also be for the benefit of the company.

Any placement of securities that does not fit the above description may be issued at the discretion of the board of directors.
 
 
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Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders when exercising his or her rights and refrain from abusing his power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:

 
·
any amendment to the articles of association;
 
·
an increase of the company’s authorized share capital;
 
·
a merger; or
 
·
approval of interested party acts and transactions that require general meeting approval as provided in sections 255 and 268 to 275 of the Israeli Companies Law.

Furthermore, the Companies Law requires that a shareholder refrain from acting in a discriminatory manner towards other shareholders.

The Companies Law does not describe the substance of the aforementioned duties of shareholders, but provides that laws applicable to a breach of contract, adjusted according to the circumstances shall apply to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily, a shareholder that is discriminated against can petition the court to instruct the company to remove or prevent the discrimination, as well as provide instructions with respect to future actions.
 
In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company is under a duty to act with fairness towards the company. The breach of such duty is governed by Israeli contract laws. The Companies Law does not describe the substance of this duty to act with fairness, but provides that laws applicable to a breach of contract, adjusted according to the circumstances, and taking into account the status within the company of such shareholder, shall apply to a breach of such duty.

The Companies Law requires that specified types of transactions, actions and arrangements be approved as provided for in a company’s articles of association and in some circumstances by the audit committee or compensation committee, by the board of directors and by the general meeting of the shareholders.

As stated above, the Israeli legislature, the Knesset, approved Amendment 16 to the Companies Law which came into effect during 2011, Amendment 20 which came into effect at the end of 2012, and Amendment 22 which came into effect at the beginning of 2014 and Amendment 26 which came into effect at the end of 2014. The purposes of these amendments to the Companies Law were to revise and enhance existing provisions governing corporate governance practices of Israeli companies, to regulate executive pay in Israeli publicly traded companies and to revise and enhance existing provisions governing approval of executive compensation. The principal provisions set forth in these amendments to the Companies Law are incorporated into the above discussions of the Company. Additional changes to the Companies Law pursuant to these recently passed amendments include:

 
·
Code of Corporate Governance.  Under the Sixteenth Amendment, a code of recommended corporate governance practices has been attached as an annex to the Companies Law. In the explanatory notes to the legislation, the Knesset noted that an "adopt or disclose non-adoption" regulation would be issued by the Israeli Securities Authority with respect to such code. As of the date of this Annual Report, the Israeli Securities Authority has issued reporting instructions with respect to this code which are applicable only to publicly traded companies whose securities are traded solely on the Tel Aviv Stock Exchange and which report solely to the Israeli Securities Authority.
 
 
83
 
 
 
·
Fines.  The Israeli Securities Authority shall be authorized to impose fines on any person or company performing a violation, in connection with a publicly traded company which reports to the Israeli Securities Authority, and specifically designated as a violation under the Sixteenth Amendment.

Although we expect to be in compliance with the Companies Law, there is no assurance that we will not be required to adjust our current corporate governance practices, as discussed in this annual report, pursuant to the provisions of the Companies Law, and recently passed amendments to the Companies Law.
 
The Israeli Securities Law and the Securities Law Amendment

On February 27, 2011, an amendment to the Israeli Securities Law came into effect (the “Securities Law Amendment”), which applies to Israeli public companies, including companies the securities of which are also listed on NASDAQ Global Market. The main purpose of the Securities Law Amendment is creating an administrative enforcement procedure to be used by the Israeli Securities Authority ("ISA") to enhance the efficacy of enforcement in the securities market in Israel. The new administrative enforcement procedure may be applied to any company or person (including director, officer or shareholder of a company) performing any of the actions specifically designated as breaches of law under the Securities Law Amendment.

Furthermore, the Securities Law Amendment requires that the chief executive officer of a company supervise and take all reasonable measures to prevent the company or any of its employees from breaching the Israeli Securities Law.

Under the Securities Law Amendment, a company cannot obtain insurance against or indemnify a third party (including its officers and/or employees) for any administrative procedure and/or monetary fine (other than for certain legal expenses and payments of damages to an injured party). The Securities Law Amendment permits insurance and/or indemnification for expenses related to an administrative procedure, such as reasonable legal fees, provided that it is permitted under the company's articles of association. In January 2012 each of our Audit Committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers serving in such positions from time to time so as to reflect this amendment, subject to approval of our shareholders to the relevant changes required to our Articles of Association. Our shareholders approved these amendments to the Articles of Association and a revised form of Indemnification Agreement for directors serving in such capacity from time to time, at the Annual General Meeting of the Shareholders held on April 11, 2012. As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which had been recommended by our Compensation Committee and approved by or Board of Directors.  Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and officers serving in such capacities from time to time.
 
 
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We continue to examine the implications of the Securities Law Amendment and to review all of our internal policies and procedures in order to ensure compliance with all the securities laws to which we are subject; however, its effect and consequences, as well as our scope of exposure, are yet to be entirely determined in practice. There is no assurance that we will not be required to take certain actions in order to enhance our compliance with the provisions of the Securities Law Amendment, such as adopting and implementing an internal enforcement plan as well as additional internal policies and procedures in order to reduce our exposure to potential breaches of the Israeli Securities Law.

NASDAQ Listing Rules and Home Country Practices

Below is a concise summary of the significant ways in which our corporate practices, which are in accordance with Israeli law and practice, including the provisions of the Companies Law, differ from the requirements which may be applicable to domestic U.S. listed companies:
 
 
·
Distribution of annual and quarterly reports to shareholders  – Under Israeli law we are not required to distribute annual and quarterly reports directly to shareholders and the generally accepted business practice in Israel is not to distribute such reports to shareholders. We do however make our audited financial statements available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the Securities and Exchange Commission on Form 6-K.
 
·
Independence, Nomination and Compensation of Directors   – A majority of our board of directors may not necessarily be comprised of independent directors as defined in NASDAQ Listing Rule 5605(a)(2). Our board of directors contains two external directors in accordance with the provisions of the Companies Law. Israeli law does not require, nor do our external directors conduct, regularly scheduled meetings at which only they are present. In addition, with the exception of our external directors, our directors are elected for terms of one year or until the following annual meeting, by a general meeting of our shareholders. The nominations for director which are presented to our shareholders are generally made by our board of directors. One or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently serving external director for an additional three year term. Israeli law does not require the adoption of and our board has not adopted a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and other officers of the Company is determined in accordance with Israeli law.
 
·
Audit Committee  – Our audit committee does not meet with all the requirements of NASDAQ Listing Rule 5605. We are of the opinion that the members of our audit committee comply with the requirements of NASDAQ Listing Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act of 1933 and all requirements under Israeli law. Our audit committee has not adopted a formal written audit committee charter specifying the items enumerated in NASDAQ Listing Rule 5605(c)(1).
 
 
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·
Compensation Committee  -  We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended and restated articles of association, do not require that a compensation committee composed solely of independent members of our board of directors determine (or recommend to the board of directors for determination) an executive officer’s compensation, as required under NASDAQ’s listing standards related to compensation committee independence and responsibilities; nor do they require that the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our board of directors, and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements for shareholder approval of any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval under the requirements of the Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy and for certain office holder compensation, rather than seeking approval for such corporate actions in accordance with NASDAQ Listing Rules.
 
·
Quorum  – Under Israeli law a company is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our Articles of Association provide that a quorum of two or more shareholders, present in person or by proxy, holding shares conferring in the aggregate more than thirty three and a third (33 1/3 %) percent of the voting power of the Company is required for commencement of business at a general meeting.
 
·
Approval of Related Party Transactions  – All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Companies Law.
 
·
Shareholder Approval  – We seek shareholder approval for all corporate action requiring such approval, in accordance with the requirements of the Companies Law.
 
·
Equity Compensation Plans  - We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States. However, even if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws.
 
 
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C.           Material Contracts
 
All of our contracts over the past two years have been entered into in the ordinary course of business, except for our real property leases and the share purchase agreement by and among the Company, Fiberblaze A/S, Fiberblaze Holding APS and Hilmer APS.
 
Fiberblaze Share Purchase agreement
 
On December 10, 2014, we entered into a share purchase agreement (the " Fiberblaze SPA ") with Fiberblaze, Fiberblaze Holding APS, a Danish company (" Fiberblaze Holding "), Hilmer APS, a Danish company (" Hilmer "), Jakob Hilmer and Nikolaj Herman (Fiberblaze Holding and Hilmer together, the " Selling Shareholders "). Under the Fiberblaze SPA, we purchased all of the share capital of Fiberblaze and Fiberblaze US LLC, a New York company and wholly owned subsidiary of Fiberblaze,  for consideration of approximately $10,000,000 in cash (of which $3,000,000 was deposited in an escrow account to be distributed in accordance with specific terms or to be released to the Selling Shareholders upon the lapse of 18 months from the date of the Fiberblaze SPA) , subject to certain adjustments, as well as additional consideration to be paid upon the attainment of future performance milestones relating to Fiberblaze revenues and achievement of design wins until  August 31, 2015 . Ninety percent of the additional consideration shall be paid, if applicable, in cash, and the remaining ten percent shall be paid by way of a grant of stock options of the Company with an exercise price equal to the closing trading price of the Company's ordinary shares on the Nasdaq Stock Market on the date of grant.

Information regarding our real property leases is provided in “Item 4. Information on the Company – Property, Plant and Equipment” and "Item 19. Exhibits".

D.           Exchange Controls

Under current Israeli laws and regulations, any dividends or other distributions paid in respect of our ordinary shares purchased by nonresidents of Israel with certain non-Israeli currencies (including U.S. dollars) and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident, will be freely repatriable in such non-Israeli currencies, provided that Israeli income tax has been paid on (or withheld from) such payments. Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, U.S. shareholders will be subject to any such currency fluctuation during the period from when such dividend is declared through the date payment is made in U.S. dollars.
 
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except under certain circumstances, for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
 
 
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E.           Taxation

The following is a summary of some of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli tax consequences to our shareholders and government programs from which we benefit. To the extent that the discussion is based on tax legislation (including the legislation passed as part of the recent tax reform in Israel) 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.

Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, or receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state or local taxes, and of any taxes withheld at source by the Company.

General Corporate Tax

As of 2014, Israeli companies are subject to corporate tax at the rate of 26.5%. However, the effective tax rate payable by a company which derives income from a Benefited Enterprise (as further discussed below) may be considerably less.

In 2006, transfer pricing regulations came into force, following the introduction of Section 85A of the Israeli Tax Ordinance (New Version), 5721- 1961, referred to herein as the Israeli Tax Ordinance, under Amendment 132. The transfer pricing rules require that cross-border transactions between related parties be carried out implementing an arms’ length principle and reported and taxed accordingly.

In 2008, the Knesset passed an amendment to the Income Tax Law (Inflationary Adjustments), 1985, which limits the scope of the law starting in 2008 and thereafter. Starting in 2008, the revenues for tax purposes are measured in nominal values, excluding certain adjustments for changes in the consumer price index carried out in the period up to December 31, 2007. The amended law includes, among other provisions, the elimination of the inflationary additions and deductions and the additional deduction for depreciation for the period starting in 2008.

Law for the Encouragement of Capital Investments, 1959

Certain of our facilities have been granted “Benefited Enterprise” status under the Law for the Encouragement of Capital Investments, 1959, as amended (the “Investment Law”). The Investment Law provides that a capital investment in eligible facilities may, upon application to the Israel Investment Center of the Ministry of  Industry and Trade of the State of Israel (referred to as the Investment Center), be designated as a Benefited Enterprise. Each certificate of approval for a Benefited Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources and its physical characteristics, for example, the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific Benefited Enterprise.
 
 
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An amendment to the Investment Law which came into effect as of April 1, 2005 (the "First Amendment”) has significantly changed the provisions of the Investment Law. The First Amendment determined criteria for the approval of a facility as a Benefited Enterprise, such as provisions generally requiring that at least 25% of the income of a Benefited Enterprise will be derived from exports. Additionally, as explained below, the First Amendment sets forth major changes in the manner in which tax benefits were awarded under the Investment Law whereby companies would no longer require Investment Center approval (and Benefited Enterprise status) in order to qualify for tax benefits. However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Therefore the tax benefits granted to our Benefited Enterprises under the Investment Law will generally not be subject to the provisions of the First Amendment. Many of the requirements under the Investment Law following the First Amendment were amended again in a second amendment to the Investment Law (the “Second Amendment”), as will be described below.
 
Tax Benefits Prior to the First Amendment

In general, taxable income of a company derived from a Benefited Enterprise was subject to tax exemption and/or reduced corporate tax   (this will also apply to Benefited Enterprises approved after the First Amendment, as explained below). The reduced corporate tax rate applies for a period of time termed the “benefit period”. The benefit period was a period of seven years commencing with the year in which the Benefited Enterprise first generates taxable income. In any event, the benefit period was limited to 12 years from the commencement of production or operation, or 14 years from the year in which the approval was received, whichever is earlier. Under certain circumstances (as further detailed below), the benefit period may have been extended to a maximum of ten years from the commencement of the benefit period. In the event that a company was operating under more than one approval or that only part of its capital investments were approved (a “Mixed Enterprise”), its effective corporate tax rate was the result of a weighted combination of the various applicable rates.
 
Prior to the First Amendment, a company owning a Benefited Enterprise approved after April 1, 1986 (or prior thereto provided no government grants or loans had previously been granted regarding such enterprise) was entitled to elect (as we have) to forego certain Government grants extended to Benefited Enterprises in return for an “alternative route” of tax benefits (the “Alternative Route”). Under the Alternative Route, a company’s undistributed income derived from a Benefited Enterprise was exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the Benefited Enterprise within Israel, and such company was eligible for the reduced tax rates under the Investment Law for the remainder of the benefit period as mentioned above.

Our production facilities have been granted “Benefited Enterprise” status under the Alternative Route according to the Investment Law. The initial Benefited Enterprise status was granted in 1988 (“Initial Benefited Enterprise”). An extension program was granted Benefited Enterprise status in 1995 (the “Extended Benefited Enterprise”). Income derived from our Benefited Enterprises is tax exempt during six years of the seven year tax benefit period and is subject to a reduced tax rate of 25% in the seventh year. The seven year period of benefits commences in the year the Benefited Enterprise first earns taxable income but is limited to twelve years from commencement of production or fourteen years from date of approval, whichever is earlier. The period of tax benefits, relating to our Initial Benefited Enterprise, commenced in 1991 and expired in 1997. The period of tax benefits relating to our Extended Benefited Enterprise commenced in 1997 and expired in 2006, as explained below.
 
 
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In June 1995, we reached an agreement with the tax authorities regarding our entitlement to benefits under the Investment Law. The agreement, effective from tax year 1994 and thereafter, relates to the method of determination of taxable income from our research and development activities. Pursuant to the agreement, for the purpose of determining our tax liability, our income will be allocated to our manufacturing plant and to our research and development center, according to a formula based on the net costs plus royalties of the research and development center and our profitability. Income allocated to the expansion of the manufacturing plant will benefit from a ten-year tax exemption, while income allocated to the research and development center will benefit from a two-year exemption, and for a five-year period immediately following will be taxed at a 25% rate. 
 
Our income to be attributed to our Extended Benefited Enterprise in any year will be computed as a ratio of the increase in our sales turnover, if any, in that year to our turnover in the year before the Extended Benefited Enterprise commenced its tax benefits entitlement. The tax authorities have reserved their right to reconsider our claim to such tax benefits in future years.

The entitlement to the above benefits is conditional upon our fulfillment of the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in the Benefited Enterprise. In the event of failure to comply with these conditions, the benefits may be canceled and we may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences, interest and penalties. Should we derive income from sources other than the Benefited Enterprise during the relevant periods of benefits, such income will be taxable at regular corporate tax rates stated above.

A company that elected the Alternative Route prior to the First Amendment and that subsequently paid a dividend out of tax exempted income derived from the Benefited Enterprise(s) will be subject to Company Tax in the year the dividend is distributed in respect of the amount distributed (including the corporate tax thereon), at the rate that would have been applicable had the company not elected the Alternative Route (25%). In addition, the dividend recipient is taxed at the rate applicable to dividends from Benefited Enterprises (15%), if the dividend is distributed during the tax exemption period or within a specified period thereafter (in the event, however, that the company qualified as a Foreign Investors' Company, there was no such time limitation).

Subject to certain provisions concerning income subject to the Alternative Route, all dividends are considered to be attributable to the entire enterprise and the effective tax rate is the result of a weighted combination of the various applicable tax rates. Under the Investment Law, a company that has elected the alternative package of benefits was not required to distribute exempt retained profits, and may generally decide from which year’s profits to declare dividends.
 
 
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The Investment Law also provided that a Benefited Enterprise was entitled to accelerated depreciation on its property and equipment that were included in an approved investment program. We have not utilized this benefit.

Grants and certain other incentives received by a company in accordance with the Investment Law remained subject to final ratification by the Israel Investment Center and final determination by the Israel Tax Authority. Such ratification and determination were conditional upon fulfillment of all of the terms of the approved program.

Tax Benefits under the First Amendment

As a result of the First Amendment, a company was no longer required to acquire Benefited Enterprise status in order to receive the tax benefits previously available under the Alternative Route and therefore such companies did not need to apply to the Investment Center for this purpose. However, the Investment Center continued granting Benefited Enterprise status to companies seeking Governmental grants. A company could have claimed the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the First Amendment (a “Benefited Enterprise”). Companies were also entitled to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the First Amendment. The First Amendment included provisions intended to ensure that a company will not enjoy both government grants and tax benefits for the same investment program.

Tax benefits were available under the First Amendment to production facilities and other eligible facilities, which were generally required to derive more than 25% of their business income from exports. In order to receive the tax benefits, the First Amendment stated that the company must make an investment in the Benefited Enterprise exceeding a minimum amount specified in the Investment Law. Such investment could have been made over a period of no more than three years, such period concluding at the end of the year in which the company requested to have the tax benefits apply to its Benefited Enterprise (the “Year of Election”). Where the company requested to have the tax benefits apply to an expansion of existing facilities, only the expansion was considered a Benefited Enterprise and the company’s effective tax rate was the result of a weighted combination of the applicable rates. In the case of an expansion of existing facilities, the minimum investment required in order to qualify as a Benefited Enterprise was determined as a certain percentage of the company’s production assets before the expansion and in any case was not less than NIS 360,000.

The tax benefits which were available under the First Amendment to qualifying income of a Benefited Enterprise were determined by the geographic location of the Benefited Enterprise in Israel. The Investment Law divides the country into three zones – A, B and C, so that a Benefited Enterprise operating in Zone A (which generally includes areas remote from the center of Israel) received the greatest benefits and Benefited Enterprises in Zone C received the least benefits.
 
 
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The First Amendment provided that a company producing income from a Benefited Enterprise in Zone A could have elected either that (i) the undistributed income derived from the Benefited Enterprise will be fully tax exempt for the entire benefit period described below (“tax exemption”), in which case the ordinary provisions described below concerning the taxation of the company and shareholder for distribution of dividends will apply; or (ii) that the income from its Benefited Enterprise will be subject to corporate tax at a rate of a 11.5%, in which case dividends paid out of such income to a foreign resident will be taxed at a rate of 4% and to an Israeli resident will be taxed at a rate of 15%, and the company will not be subject to additional tax upon dividend distribution. Further benefits were available in the event of certain large investments by multinational companies. Benefited Enterprises located in Zones B and C was exempt from tax for six and two years, respectively, and subject to tax at a rate of 10%-25% for the remainder of the benefit period, depending on the extent of foreign investment in the Company, as described above.
 
Dividends paid out of income derived by a Benefited Enterprise, or out of dividends received from a company whose income was derived from a Benefited Enterprise, were generally subject to withholding tax at the rate of 15% (or 20% if the Year of Election is 2014 onwards) or less under certain anti double-taxation treaties, such tax being deductible at source. The reduced withholding tax rate of 15% was limited to dividends and distributions out of income derived during the benefit period and actually paid at any time up to 12 years thereafter. A company qualified for tax benefits under the First Amendment which paid 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. The rate of the tax was the rate which would have been applicable had the company not been tax exempt. Such tax rate was lower in the case of a qualified “Foreign Investors’ Company”.

The period for which tax benefits were available under the First Amendment was also determined by the geographical location of the Benefited Enterprise in Israel. The benefit period for Benefited Enterprises in Zone A ended on the earlier of (i) a period of ten years from the tax year in which the company first derived taxable income from the Benefited Enterprise (the “Commencement Year”); or (ii) twelve years (or in certain cases fourteen years) from the first day of the Year of Election. The benefit period for Benefited Enterprises in Zones B and C was extended until the earlier of (i) seven years from the Commencement Year or (ii) 12 years from the first day of the Year of Election. This period could have been extended for Benefited Enterprises owned by a “Foreign Investors’ Company” during all or part of the benefit period.
 
Additionally, the First Amendment sets forth a minimal amount of foreign investment required for a company to be regarded a Foreign Investors’ Company.

We have selected the 2004 tax year, the 2006 tax year, the 2009 tax year and the 2012 tax year to be our Year of Election, from which the period of benefits under the Investment Law commenced.
 
There can be no assurance that we will attain approval for additional tax benefits under the Amendment, or receive approval for Benefited Enterprises in the future.
 
 
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The Second Amendment to the Investment Law

The Israeli legislature, the Knesset, approved significant changes to the Investment Law, which revamped the tax incentive regime in Israel and which became effective as of January 1, 2011. The main changes enacted under the Second Amendment are, inter alia, as follows:

 
·
Replacement of all future tax incentives under the existing law as amended by the First Amendment; as a result, commencing 2011, industrial companies that meet the conditions set out by the Second Amendment will no longer be entitled to the existing tax incentives provided under the First Amendment, such as the exemption from tax on undistributed profits and a reduced tax rate thereafter, but rather to the tax incentives under the Second Amendment.
 
·
Under the transition provisions, any tax benefits obtained prior to 2011 shall continue to apply until expired, unless the company elects to apply the provisions of the Second Amendment to its income.
 
·
Pursuant to the second Amendment, a Preferred Enterprise is entitled to a reduced corporate flat 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 certain development zone, in which case the rate will be 10%. Such corporate tax rates are 12.5% and 7% with respect to 2013 and 16% and 9% with respect to 2014 and thereafter. 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. Under the Second Amendment, the tax incentives offered by the Investment Law are no longer dependant neither on minimum qualified investments nor on foreign ownership.
 
·
Companies will be able to enjoy both government grants and tax benefits concurrently. Governmental grants will not necessarily be dependent on the extent of enterprise’s investment in assets and/or equipment. Commencing 2011, the approval of “Preferred Enterprise” status by either the Israeli Tax Authorities or the Investment Center will be accepted by the other. Therefore a Preferred Enterprise will be eligible to receive both tax incentives and government grants, under certain conditions.

“Preferred Income” is defined as income from the sale of products of the Preferred Enterprise (including components that were produced by other enterprises); income from the sale of semiconductors by other non related enterprises which use the Preferred Enterprise’s self-developed know-how; income for providing a right to use the Preferred Enterprise’s know-how or software; royalties from the use of the know-how or software which was confirmed by the Head of The Investment Center to be related to the production activity of the Preferred Enterprise and services with respect to the aforementioned sales. In addition, the definition of “Preferred Income” also includes income from the provision of industrial R&D services to foreign residents to the extent that the services were approved by the Head of Research for the Industrial Development and Administration.
 
A “Preferred Enterprise” is defined as an Industrial Enterprise (including, inter alia, an enterprise which develops software, an enterprise which provides approved R&D services to foreign residents and an enterprise which the Chief Scientist confirmed is carrying out R&D in the field of alternative energy), which generally more than 25% of its business income is from export to market consisting more than 14 million residents. As mentioned above, the new tax incentives no longer depend on minimum qualified investments nor on foreign ownership.
 
 
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Chapter B2 of the Investment Law determines the conditions and limitations applying to the tax benefits offered to a “Special Preferred Enterprise”. Chapter B2 determines that a “Special Preferred Enterprise” will be able to enjoy corporate income tax rate in a rate of 5% if located in a preferred zone and 8% if not located in a preferred zone.

A “Special Preferred Enterprise” is defined following the Second Amendment as a Preferred Enterprise which meets one of the following conditions: (a) its Preferred Income is equal to or exceeds NIS 1.5 billion; (b) the total income of the company which owns the Preferred Enterprise or which operates in the same field of the Preferred Enterprise and which consolidates in its financial reports the company that owns the Preferred Enterprise equals or exceeds NIS 20 billion; and (c) its business plan was approved by the authorities as significantly benefitting the Israeli economy, either by an investment of at least NIS 400 - 800 million in assets; 100 - 150 million NIS in R&D or the employment of at least 250 to 500 new employees, for preferred zones and regular zones, respectively.

Dividends   paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at a rate of 15% (20% as of 2014) or such lower rate as may be provided in an applicable tax treaty, subject to the submission and approval of a request submitted on behalf of the recipient of such dividends to the Israel Tax Authority. However, if such dividends are paid to an Israeli company no tax will be withheld. Such an exemption may apply under the transition rules also to dividends distributed to an Israeli company by an Israeli company which owns a Benefited Enterprise or a Benefited Enterprise and which elected to convert to the new law until  June 30, 2015 (in respect to their existing programs).

The Company elected in 2014 to apply the provisions of the Second Amendment to the Investment Law to its income commencing with the 2014 fiscal year. Thus, as of the 2014 fiscal year, we will no longer be entitled to the existing tax incentives provided under the First Amendment, such as the exemption from tax on undistributed profits and a reduced tax rate thereafter, but rather to the tax incentives under the Second Amendment.

There can be no assurance that we will comply with the conditions of the Investment Law in the future or that we will be entitled to any additional benefits under the amended Investment Law under the First Amendment and/or the Second Amendment and whether the influence of the changes to the Investment Law will be beneficial to the Company or not.

Law for the Encouragement of Industrial Research and Development, 1984

Under the Law for the Encouragement of Industrial Research and Development (the “Research Law”), research and development programs approved by the Research Committee (the “Research Committee”) of the Office of the Chief Scientist (“OCS”) are eligible for grants or loans if they meet certain criteria, in return for the payment of royalties from the sale of the product developed in accordance with the program and subject to other restrictions. Once a project is approved, the OCS will award grants of up to 50% of the project’s expenditures in return for royalties, usually at the rate of 3% to 6% of sales of products developed with such grants. For projects approved after January 1, 1999, the amount of royalties payable is up to a dollar-linked amount equal to 100% of such grants plus interest at LIBOR. There is no further liability for payment.
 
 
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The terms of these grants prohibit the manufacture outside of Israel of the product developed in accordance with the program without the prior consent of the Research Committee of the OCS. Such approval, if granted, is generally subject to an increase in the total amount to be repaid to the OCS to between 120% and 300% of the amount granted, depending on the extent of the manufacturing to be conducted outside of Israel.

The Research Law also provides that know-how from the research and development, which is used to produce the product, may not be transferred to Israeli third parties without the approval of the Research Committee. Until 2005, the Research Law stated that such know-how may not be transferred to non-Israeli third parties at all. An amendment to the Research Law has set forth certain exceptions to this rule; however, the practical implications of such exceptions are quite limited. The Research Law has stressed, that it is not just transfer of know-how that is prohibited, but also transfer of any rights in such know-how. Such restriction does not apply to exports from Israel of final products developed with such technologies. Approval of the transfer may be granted only if the transferee undertakes to abide by all of the provisions of the Research Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties. There can be no assurance that such consent, if requested, will be granted or, if granted, that such consent will be on reasonable commercial terms.

Tax Benefits for Research and Development

Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Such expenditures not so approved are required to be deducted over a three-year period. Though we received such approvals for the years 2006, 2007 and 2008 and could deduct the expenditures in the year the expenditures were incurred, we chose to deduct the expenditures over a three-year period. We also received such approvals for the years 2009, 2010, 2011 and 2012 and deducted such expenditures in the year the expenditures were incurred.

Law for the Encouragement of Industry (Taxes), 1969

Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), Industrial Companies (as defined below) are entitled to the following tax benefits:
 
(a)              Amortization of purchases of know-how and patents over eight years for tax purposes.
 
 
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(b)              Amortization of expenses incurred in connection with certain public securities issuances over a three-year period.

(c)              Accelerated depreciation rates on equipment and buildings.

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, dividends, interest and linkage differences, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.

We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.

Calculation of Results for Tax Purposes

The Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Investors’ Companies and Certain Partnerships and Determining Their Taxable Income) - 1986 provide that as a Foreign Investors’ Company (as defined in the Investment Law described above) is eligible to calculate its taxable income in accordance with these regulations, and therefore, if we elect to follow such regulations, our taxable income or loss is to be calculated in dollars. We have elected to apply these regulations and accordingly our taxable income or loss is calculated in dollars in the manner set forth in such regulations.

Taxation of our Shareholders

Capital Gains Taxes Applicable to Israeli Resident Shareholders. Until the end of the year 2002 and provided we maintained our status as an industrial corporation, capital gains from the sale of our securities were generally exempt from Israeli Capital Gains Tax. This exemption did not apply to a shareholder whose taxable income is determined pursuant to the Israeli Income Tax Law (Inflationary Adjustments) 1985, or to a person whose gains from selling or otherwise disposing of our securities were deemed to be business income.
 
On January 1, 2003 an amendment to the Israeli tax regime became effective. This was followed by new amendments made to the Israeli Income Tax Ordinance which were enacted in 2011 which have an effect for income derived as of 2012

An individual is subject to a 25% tax rate on real capital gains derived from the sale of shares, as long as the individual is not a "substantial shareholder" in the company issuing the shares. A “substantial shareholder” is generally a person who alone, or together with his relative or another person who collaborates with him on a permanent basis, holds, directly or indirectly, at least 10% of any of the “Means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right.
 
 
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A substantial shareholder will be subject to tax at a rate of 30% in respect of real capital gains derived from the sale of shares issued by a company in which he or she is a substantial shareholder. The determination of whether the individual is a substantial shareholder will be made on the date on which the securities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding the date of sale, he or she was a substantial shareholder.
 
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders .  Shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our shares, provided that such shareholders did not acquire their shares prior to our initial public offering on the TASE and such gains were not derived from a permanent establishment or business activity of such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident(s) (i) have a controlling interest of 25% or more in such non-Israeli corporation or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
 
In addition, under the U.S.-Israel Income Tax Treaty, 1995, or the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel; or (iii) the shareholder, being an individual, was present in Israel for a period of time or several periods of time, which aggregate to a total of 183 days or more, during a single taxable year. In either case, the sale, exchange or disposition of the shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the 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 relate to U.S. state or local taxes.
 
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.
 
 
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Taxation of Israeli Shareholders on Receipt of Dividends.
 
Residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our shares at the rate of 25%, which tax will be withheld at the source. With respect to a person who is a substantial shareholder at the time of receiving the dividend or on any date within the 12 months preceding such date, the applicable tax rate is 30%.
 
Taxation of Non-Israeli Shareholders on Receipt of Dividends .
 
Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our shares at the rate of 25% or 30%, if such person (including a non-Israeli corporation) is a substantial shareholder at the time of recipient of the dividend or on any date in the 12 months preceding such date, which tax will be withheld at the source, unless a different rate is provided in a tax treaty between Israel and the shareholder’s country of residence. 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% or 15% in the case of dividends paid out of the profits of a Approved Enterprise (as such term is defined in the Investment Law), subject to certain conditions. However, generally, the maximum rate of withholding tax on dividends that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year and the dividend is not paid from the profits of an Approved Enterprise, the Israeli tax withheld may not exceed 12.5%, subject to certain conditions. A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of 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.

Residents of the United States will generally have taxes in Israel withheld at source.

With regards to the distribution of dividends on April 17, 2013 and April 17, 2014, we provided the following data regarding the calculation of the rate of tax being withheld at source:

Source
 
% of Dividend
   
Individual Tax %
   
Corporations Tax %
   
Foreign Resident Tax %
 
Dividend Distributed on April 17, 2013
 
Regular Income
    34.60310       25       0       25  
Benefited Enterprise
    65.3969       15       15       15  
Dividend Distributed on April 17, 2014
 
Regular Income
    52.9928       25       0       25  
Benefited Enterprise
    47.0071       15       15       15  

 
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With regards to the distribution of dividend dated April 17, 2013, the weighted tax for individuals was 18.46031%, for corporations 9.80954%, and for foreign residents 18.46031%, whereas with regards to the distribution of dividend dated April 17, 2014, the weighted tax for individuals was 20.29928%, for corporations 7.05108%, and for foreign residents 20.29928%.
 
The above noted dividend distributions with respect to the fiscal years 2012 and 2013 as well as the dividend we recently declared with respect to fiscal year 2014, are each from income sources which would not generate additional tax liability to the Company as a result of such distributions. We anticipate that any future dividends distributed pursuant to our previously announced dividend policy, will likewise be distributed from income sources which will not impose additional tax liabilities on us.
 
Passive Foreign Investment Company Status under U.S. Federal Income Tax Law

In general, a non-U.S. corporation will be classified for U.S. tax purposes as a passive foreign investment company (hereafter also referred to as a “PFIC”) in any taxable year in which either (i) 75% or more of its gross income (including the pro-rata gross income of any company (U.S. or foreign) in which it is considered to own 25% or more of the ordinary shares by value) for the taxable year is passive income, or (ii) at least 50% of the average value of all of its gross assets (including the pro-rata fair market value of the assets of any company in which it is considered to own 25% or more of the ordinary shares by value) during the taxable year, calculated quarterly by value, produce, or are held for the production of, passive income. Passive income for these purposes includes items such as dividends, interest, royalties, rents and gains from commodities and securities transactions.
 
If we are classified as a passive foreign investment company, highly complex rules will apply to our U.S. shareholders. Accordingly, U.S. shareholders are urged to consult their tax advisors regarding the application of such rules.

If a corporation is a passive foreign investment company, a U.S. shareholder will be subject to one of three alternative taxing regimes:

The simplest is the “QEF” regime. If the shareholder elects to treat the PFIC as a “qualified electing fund” (“QEF”), then each year the shareholder includes in its gross income a proportionate share of the PFIC’s ordinary income and net capital gain. We do not currently intend to prepare or provide the information that would enable you to make a Qualified Election Fund election. A second regime may be elected if the PFIC stock is “marketable.” The U.S. shareholder may elect to “mark the stock to market” each year. At the end of each taxable year, the shareholder recognizes gain equal to the excess of the fair market value of the PFIC stock over the shareholder’s tax basis in the stock. (Losses may also be recognized to the extent of previously recognized gains.)

A U.S. shareholder making neither of these elections is subject to the “excess distribution” regime. The tax is triggered when the shareholder receives an “excess distribution” from the PFIC. An excess distribution is either (1) a distribution with respect to stock that is greater than 125% of the average of such distributions over the preceding three years, or (2) 100% of the gain from the disposition of shares in the PFIC.
 
 
99
 
 
An excess distribution is subject to special tax rules. In most cases, only a portion of it is included in the gross income of the U.S. shareholder and taxed at normal rates. The remainder is never so included, but is used as the basis for calculating a “deferred tax amount”, which is simply added to the shareholder’s tax liability.

The deferred tax amount is computed as follows. The excess distribution is first ratably allocated, share by share, to each day of the shareholder’s holding period. Portions allocated to the current year, and to any pre-PFIC years (that is, years before 1987, when there were no PFICs, or years before the first year in which the company was a PFIC with respect to that shareholder), are included in ordinary income for the current year. Portions allocated to prior PFIC years are hypothetically taxed at the highest marginal rate in effect for those years (without regard to the shareholder’s actual rate or to any deductions or credits for those years). To this hypothetical tax is added the interest that the shareholder would have paid if it were simply paying that tax late for that year. The sum of the tax and the interest charge is the deferred tax amount, which cannot be offset or otherwise affected by current net operating losses or other deductions.
 
A U.S. person who inherits shares in a foreign corporation that was a PFIC in the hands of the decedent (who did not make either of the elections described above), is denied the otherwise available step-up in the tax basis of such shares to fair market value at the date of death. The U.S. person steps into the shoes of the decedent and will be subject to the rules described above.

Although a determination as to a corporation’s PFIC status is made annually, an initial determination that a corporation is a PFIC for any taxable year generally will cause the above-described consequences to apply for all future years as to U.S. shareholders who held shares in the corporation at any time during the PFIC taxable year and who made neither a valid QEF election with respect to such shares nor a valid election to mark such shares to market. This will be true even if the corporation loses its PFIC status in later years. However, with respect to a PFIC that does not make any distributions or deemed distributions, the above tax treatment would apply only to gains realized on the disposition of such shares by a U.S. shareholder.

If we are classified as a PFIC, complicated rules will apply to our U.S. shareholders. Our status in future years will depend on our assets and activities in those years, although shareholders will be treated as continuing to own an interest in a passive foreign investment company if we are a passive foreign investment company in any year in which a shareholder owns our shares, unless certain elections are made.

This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a U.S. shareholder in light of his or her particular circumstances or to a U.S. shareholder subject to special treatment under U.S. federal income tax law. We do not currently intend to prepare or provide the information that would enable you to make a Qualified Election Fund election. U.S. shareholders are urged to consult their tax advisors about the U.S. federal income taxation rules to which they will be subject, as well as the PFIC rules, including the advisability, procedure and timing of making a mark-to-market election, in connection with their holding of our shares, including warrants or rights to acquire our shares.
 
 
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Certain Reporting Requirements

Certain U.S. investors are required to file IRS Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, and certain U.S. Investors may be required to file IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, reporting transfers of cash or other property to us and information relating to the U.S. investor and us. Substantial penalties may be imposed upon a U.S. investor that fails to comply. Each U.S. investor should consult its own tax advisor regarding these requirements.

In addition, recently enacted legislation imposes new reporting requirements for the holder of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds certain thresholds. Our shares are expected to be subject to these new reporting requirements unless the shares are held in an account at a domestic financial institution. Penalties may apply to any failure to comply with such reporting requirements. U.S. investors should consult their own tax advisors regarding the application of this legislation.

Backup Withholding Tax and Information Reporting Requirements

Generally, information reporting requirements will apply to distributions with respect to our shares or proceeds on the disposition of our shares paid within the United States (and, in certain cases, outside the United States) to U.S. investors other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. investor fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. investors who are required to establish their exempt status generally must provide such certification on IRS Form W-9.

Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment may be credited against a U.S. investor’s U.S. federal income tax liability and such U.S. investor may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

Tax Assessment

The company and its subsidiaries file income tax returns in Israel, U.S.A and Denmark.
 
The Israeli tax returns of the Company are open for examination by the Israeli Tax Authority for tax years beginning in 2013.
 
The Federal tax returns of our U.S. subsidiary are open for examination by the Federal Tax Authorities for tax years beginning in 2011. The New Jersey state tax returns of the subsidiary are open to examination by the New Jersey State Tax Authority for the tax years beginning in 2010. The California State Tax returns of the U.S. subsidiary are open to examination by the California State Tax Authority for tax years beginning in 2011.
 
The Danish tax returns of our Danish subsidiary are open for examination by the Danish Tax Authority for tax years beginning on September 1, 2011.
 
The Federal tax returns or our U.S. granddaughter company held by our Danish subsidiary, as well as its New York State tax returns and New York City tax returns, are open for examination by the Federal, New York State and New York City Tax Authorities, respectively, for tax years beginning in June 2012.
 
 
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F.            Dividends and Paying Agents

Not applicable
 
G.           Statement by experts

Not applicable
 
H.           Documents on Display

We are required to file reports and other information with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”) and the regulations thereunder applicable to foreign private issuers. Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as United States companies, we generally do publicly announce our quarterly and year-end results promptly and file periodic information with the SEC under cover of Form 6-K. We are also exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and other provisions in Section 16 of the Exchange Act.

You may review a copy of our filings with the SEC, including any exhibits and schedules, at the SEC’s public reference room at 100 F Street N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on the public reference room. As a foreign private issuer, all documents which were filed after November 4, 2002 on the SEC's EDGAR system will be available for retrieval on the SEC's website at www.sec.gov. These SEC filings are also available to the public on (i) the Israel Securities Authority’s Magna website at www.magna.isa.gov.il, (ii) the Tel Aviv Stock Exchange website at http://www.maya.tase.co.il, and (iii) from commercial document retrieval services. The documents referred to in this document may be inspected at the Company’s offices, located at 8 Hanagar Street, Kfar Sava, Israel 4442537.

Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the annual report the contract or document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete description of the contract or document.

Our website is http://www.silicom.co.il . We do not intend for any information contained on our internet website to be considered part of this annual report, and we have included our website address in this annual report solely as an inactive textual reference. We will post on our website any materials required to be posted on such website under applicable corporate or securities laws and regulations, including posting any XBRL interactive financial data required to be filed with the SEC, and any notices of general meetings of our shareholders.
 
 
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I.             Subsidiary information

Not applicable

Item 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of operations or cash flows. Our primary market risk exposures relate to our investment portfolio and fluctuation of the exchange rate of the US Dollar, which is the primary currency in which we conduct our operations, against the NIS with respect to the Company's operations, and against the DKK and Euro with respect to Fiberblaze's operations.

Interest Rate Risk

As of December 31, 2014, our investment portfolio consisted of approximately 35.5 million invested in corporate debt securities and government debt securities. These securities are classified as "held to maturity". The majority of the Company's investments (approximately 33.0 million are in fixed-rate instruments, while a small portion of its investments (approximately 2.5 million) are in variable-rate instruments. Therefore, the Company's exposure to interest rate risk from variable-rate instruments is generally very limited and not material to the Company. In addition, since the securities are "held to maturity", any changes in fair value of the Company's instruments due to fluctuations in the interest rates, that are not classified as OTTI, do not affect the Company's profit or loss.

For quantitative information on the Company's marketable securities, please see Note 5 to our consolidated financial statements included elsewhere in this annual report.

As of December 31, 2014 we did not have any short or long term interest bearing loans or debts, hence with respect to the Company's business operations, we do not have any exposure to interest rate risk.
 
 
103
 
 
Foreign Currency Exchange Risk
 
Most of our revenues are generated in U.S. dollars. In addition, most of our costs are denominated and determined in U.S. dollars and NIS. According to the salient economic factors indicated in ASC 830 “Foreign Currency Matters” (formerly SFAS No. 52), “Foreign Currency Translation,” our cash flow, sale price, sales market, expense, financing and inter-company transactions, and arrangement indicators, are predominantly denominated in U.S. dollars, and so, the U.S. dollar is the primary currency of the economic environment in which we operate. Thus, the U.S. dollar is our functional and reporting currency.  In our balance sheet, we re-measure into U.S. dollars all monetary accounts (principally cash and cash equivalents and liabilities) that are maintained in other currencies. For this re-measurement, we use the relevant foreign exchange rate at the balance sheet date. Any gain or loss that results from this re-measurement is reflected in the statement of operations as appropriate. We measure and record non-monetary accounts in our balance sheet in U.S. dollars. For this measurement, we use the U.S. dollar value in effect at the date that the asset or liability was initially recorded in our balance sheet (the date of the transaction).

As of December 31, 2014 we had accounts receivable in NIS or in funds linked thereto in the amount of $1,412 thousand. Market risk was estimated as the potential decrease in balance resulting from a hypothetical 10% increase in the year-end Dollar exchange rate. Assuming such increase in the Dollar exchange rate, the balance of our accounts receivable would decrease by $128 thousand. As of December 31, 2014 we had accounts payable in NIS or linked thereto in the amount of $3,857 thousand. Market risk was estimated as the potential increase in balance resulting from a hypothetical 10% decrease in the year-end Dollar exchange rate. Assuming such decrease in the Dollar exchange rate, the balance of our accounts payable would increase by $429 thousand.

As of December 31, 2014, the market risk for Silicom deriving from Fiberblaze accounts receivable in DKK or in Euro is negligible.

In 2014 there was an increase of 12.04% in the Dollar exchange rate to the NIS which resulted in an aggregate decrease in the fair value of our assets of $560 thousand and an aggregate decrease in the fair value of our liabilities of $980 thousand.

Since the majority of our revenues is denominated and paid in U.S. dollars, we believe that fluctuations in the U.S. dollar exchange rate do not have a significant effect on our accounts receivable. Inflation in Israel and the Israeli currency as well as U.S. dollar exchange rate fluctuations may have only a limited effect on our accounts payable, as described above. Inflation in Denmark and the Danish currency as well as U.S. dollar exchange rate fluctuations are expected to have only a limited effect on Fiberblaze accounts payable.

Our operating expenses may be affected by fluctuations in the value of the U.S. dollar as it relates to the NIS. By way of example, a hypothetical 10% weakening in the value of the U.S. dollar relative to the currencies in which our operating expenses are denominated in 2014 would have resulted in an increase in operating expenses of approximately $1,010 thousand for the year ended December 31, 2014.
 
 
104
 

As of December 31, 2014, the market risk for Silicom deriving from Fiberblaze’s operating expenses in DKK is negligible.

As of December 31, 2014, all of our investments, other than a portion of our cash and cash equivalents comprising a small portion of our overall investment portfolio, consisted of investments denominated in U.S. dollars, and our portfolio is therefore not subject to significant exposure to foreign currency exchange risk.

As of December 31, 2014, we were not engaged in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations.

Credit Risk

Our investment portfolio includes held to maturity marketable securities. These securities include investments issued by highly rated corporations or investments issued by agencies of governments. As of December 31, 2014, the rating of the securities in our portfolio was at least A. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations), which were exacerbated by the recent turmoil that has affected the financial markets and the global economy and caused credit issues for a number of reputable financial institutions. Any changes in fair value of our investment securities due to credit risk do not affect our profit or loss unless there is other-than-temporary impairment (OTTI) (referred to in ASC 320-10.

As of December 31, 2014, we were not required to adjust the carrying value of our investment securities since there were no other-than-temporary impairments.

Item 12.   DESCRIPTION OF SECURITIE S OTHER THAN EQUITY SECURITIES
 
Not Applicable.

PA RT II.
 
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
None.

Item 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
None.

Item 15. CONTROLS AND PROCEDURES
 
 
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Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e) and Rule 15d-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Management's Annual Report on Internal Control over Financial Reporting

Our management 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) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Management assessed our internal control over financial reporting as of December 31, 2014, the end of our fiscal year. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control — Integrated Framework (2013)."

Based on our assessment, management has concluded that our internal control over financial reporting was effective   as of December 31, 2014 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

This annual report includes, on page F-4 of this form 20-F, an attestation report of the Company's registered public accounting firm on management's assessment of the Company's internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitation, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
        
 
106
 
 
Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Item 15T. CONTROLS A ND PROCEDURES
 
Not Applicable.

Item 16.  Reserved
 
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
 
Our board of directors had determined that both Ms. Ayelet Aya Hayak and Mr. Ilan Erez were our audit committee financial experts, and that Ms. Einat Domb-Har and Mr. Erez were independent as such term is defined under the NASDAQ Capital Market listing requirements.

Item 16B. CODE OF ETHICS
 
Our company has adopted a code of ethics, which applies to all of our employees, officers and directors, including our Chief Executive Officer, our Chief Financial Officer, our Director of Finance and our Corporate Controller. A copy of the code of ethics is attached as an exhibit to this annual report.

Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The following table presents fees for professional services for the audit of the Company’s consolidated annual financial statements for the years ended December 31, 2014 and 2013, audit-related services and tax services rendered by Somekh Chaikin, a member firm of KPMG International.

   
2013
   
2014
 
Audit Fees(1)
  $ 105,000     $ 110,000  
Audit-Related Fees(2)
  $ 8,000     $ 49,000  
Tax Fees(3)
  $ 31,000     $ 28,000  

(1) Audit fees consist of fees for professional services rendered for the audit of the Company’s annual consolidated financial statements and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements.

(2) Audit-Related Fees consist of accounting consultation and consultation on financial accounting standards, not arising as part of the audit.

(3) Tax Fees are the aggregate fees billed for professional services rendered for tax compliance, tax advice, other than in connection with the Audit. Tax compliance involves audit of original and amended tax returns, tax planning and tax advice.
 
 
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Audit committee's pre-approval policies and procedures

We are required to obtain the approval of our audit committee (and subsequently the consent of the board of directors and shareholders) before engaging our independent auditors, Somekh Chaikin, a member firm of KPMG International, to audit our consolidated financial statements, as well as to provide other audit or permitted non-audit services to us. This policy, which is designed to assure that such engagements do not impair the independence of our auditors, requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by our auditors. Our audit committee is not permitted to approve the engagement of our auditors for any services that would be inconsistent with maintaining the auditor's independence or that are not permitted by applicable law.

Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
Not Applicable.

Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
Not Applicable.

Item 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
 
Not Applicable.

Item 16G. CORPORATE GOVERNANCE
 
Our corporate governance practices differ from those followed by domestic companies as required under the listing standards of the NASDAQ Global Market, due to an exemption that we obtained from NASDAQ as foreign private issuer which enables us to comply with our home country laws of the State of Israel, including the provisions of the Companies Law, in lieu of NASDAQ Listing Rules.  Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies:

 
·
We are not required to distribute annual and quarterly reports directly to shareholders, but we do make our audited financial statements available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC on Form 6-K.
 
 
108
 
 
 
·
A majority of our board of directors may not necessarily be comprised of independent directors as defined in the NASDAQ Listing Rules, but our board of directors contains two external directors in accordance with the Companies Law. Israeli law does not require, nor do our external directors conduct, regularly scheduled meetings at which only they are present. In addition, with the exception of our external directors, our directors are elected for terms of one year or until the following annual meeting, by a general meeting of our shareholders. The nominations for director which are presented to our shareholders are also generally made by our board of directors. Pursuant to the Companies Law, one or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently serving external director for an additional three year term. Israeli law does not require the adoption of and our board has not adopted a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and other officers of the Company is determined in accordance with Israeli law.

 
·
Our audit committee has not adopted a formal written audit committee charter specifying the items enumerated in NASDAQ Listing Rule 5605(c)(1). We believe that the members of our audit committee comply with the requirements of the Israeli law, as well as NASDAQ Listing Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act of 1933. For a detailed discussion please refer to "Item 6. Directors, Senior Management and Employees- Audit Committee".

 
·
As opposed to NASDAQ Listing Rule 5620(c)(3), which sets forth a minimum quorum for a shareholders meeting, under Israeli law a company is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our current articles of association provide that a quorum of two or more shareholders, present in person or by proxy, holding shares conferring in the aggregate more than thirty three and a third (33 1/3 %) percent of the voting power of the Company is required.

 
·
All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions set forth in the Companies Law, and are not subject to the review process set forth in NASDAQ Listing Rule 5630. For a detailed discussion please refer to "Item 10. Additional Information- the Companies Law".

 
·
We seek shareholder approval for all corporate action requiring such approval in accordance with the requirements of the Companies Law rather than under the requirements of the NASDAQ Marketplace Rules, including (but not limited to) the appointment or termination of auditors, appointment and dismissal of directors, approval of interested party acts and transactions requiring general meeting approval as discussed above and a merger.
 
 
109
 
 
 
·
We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended and restated articles of association, do not require that a compensation committee composed solely of independent members of our board of directors determine (or recommend to the board of directors for determination) an executive officer’s compensation, as required under NASDAQ listing standards related to compensation committee independence and responsibilities; nor do they require that the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our board of directors, and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements for approval by the shareholders for any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval under the requirements of the Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy and for certain office holder compensation, rather than seeking approval for such corporate actions in accordance with NASDAQ Listing Rules.

 
·
We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States. However, if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws.

Item 16H. MINE SAFETY DI SCL OSURE
 
Not Applicable.

 
110
 
 
PART III.
 
Item 17.   FINANCIAL STATEMENTS
 
Not Applicable.

Item 18.   FINANCIAL STATEMENTS
 
See pages F-1 to F-44.

Item 19.   EXHIBITS
 

1.1
Amended and Restated Articles of Association, adopted on January 24, 2008, filed by us as an Exhibit to our registration statement on Form S-8, as filed with the Securities and Exchange Commission on February 11, 2008, and incorporated herein by reference.

1.2
Amendment to Articles of Association of the Registrant incorporated by reference to Proposal 5 found in Exhibit 2 to the Form 6-K as filed with the Securities and Exchange Commission on March 1, 2012, and incorporated herein by reference.

4.1
Lease between the Company and Yaakov Metzkin and Dov Segev, for premises in Kfar Sava, Israel, dated November 1, 1994, and amendment dated March 17, 2002, filed by us as an Exhibit to our annual report on Form 20-F for the fiscal year ended December 31, 2001, as filed with the Securities and Exchange Commission on June 27, 2002, and incorporated herein by reference. As this lease and the amendment are written in Hebrew, a summary of each was included in the Exhibit.

4.2
Lease between the Company, C.P.M Medical Equipment Ltd. and Klimotech Ltd., for premises in Kfar Sava, Israel, dated December 3, 2014. As this lease is written in Hebrew, a summary is being filed by us as an exhibit to this annual report on Form 20-F for the fiscal year ended December 31, 2014.
 
4.3
Sublease Agreement between the Company and Lumenis Ltd. for the site of our manufacturing facility in Yokneam, Israel, dated August 1, 2013, and an amendment dated November 21, 2013, filed by us as an Exhibit to our annual report on Form 20-F for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 20, 2014, and incorporated herein by reference. As this sublease agreement and the amendment are written in Hebrew, a summary of each was included in the Exhibit.

4.4
Lease between Silicom Connectivity Solutions, Inc. and RAD Data Communications Inc., for space in Mahwah, New Jersey, dated as of September 1, 1997, filed by us as an Exhibit to our annual report on Form 20-F for the fiscal year ended December 31, 2000, as filed with the Securities and Exchange Commission on June 30, 2001, and incorporated herein by reference.
 
 
111
 

 
4.5
Sublease Agreement between Silicom Connectivity Solutions, Inc. and Radcom Equipmet, Inc., for space in Paramus, New Jersey, dated as of February 1, 2004, filed by us as an Exhibit to our annual report on Form 20-F for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission on June 30, 2004, and incorporated herein by reference.

4.6
The Executive Compensation Policy of the Registrant approved by the Shareholders on July 31, 2013, filed by us as Annex A to Proposal 1 found in Exhibit 2 to the Form 6-K as filed with the Securities and Exchange Commission on June 26, 2013, and incorporated herein by reference.
 
4.7
Share Purchase Agreement by and among the Company, Fiberblaze A/S, a Danish company with the CVR no. 31 30 12 70, Fiberblaze Holding APS, a Danish company with the CVR no. 31 28 29 26 and Hilmer APS, a Danish company with the CVR no. 31 28 49 96, dated December 10, 2014.
 
8.
List of subsidiaries.

11.1
Code of Ethics, filed by us as an Exhibit to our annual report on Form 20-F for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission on March 26, 2008, and incorporated herein by reference.

12.1
Certification by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

12.2
Certification by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

13.1
Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2
Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
15.1
Consent of Somekh Chaikin, Independent Registered Public Accounting Firm, a member firm of KPMG International.
 
 
112
 
 
SIGNATURES
 
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.
 
 
SILICOM LIMITED
 
       
 
By:
/s/  Shaike Orbach  
   
Shaike Orbach
 
   
Chief Executive Officer
 
       
March 24, 2015
 
 
 
 
Silicom Ltd.
 
and its Subsidiaries
 
Consolidated
Financial Statements
 
As of and for the year ended
December 31, 2014
 
 
 
 
 
Silicom Ltd. and its Subsidiaries
Consolidated Financial Statements as of December 31, 2014
 
Contents
 
   
Page
 
F - 3
 
F - 5
 
F - 7
 
F - 8
 
F - 9
 
F - 10
 
 
F - 2
 
 

Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
of Silicom Ltd.:
 
We have audited the accompanying consolidated balance sheets of Silicom Ltd. and subsidiaries (hereinafter - “the Company”) as of December 31, 2013 and 2014 and the related consolidated statements of operation, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2014. We also have audited the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).   The Company ’s   management is responsible for these consolidated financial statements, 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 annual report on internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company's internal control over financial reporting is a process designed 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.
 
 
F - 3
 
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
Somekh Chaikin
 
Certified Public Accountants (Isr.)
Member Firm of KPMG International
 
Tel Aviv, Israel
March 23, 2015
 
 
F - 4
 
Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31
 
         
2013
   
2014
 
   
Note
   
US$ thousands
   
US$ thousands
 
                   
Assets
                 
                   
Current assets
                 
Cash and cash equivalents
    4       12,997       17,890  
Short-term bank deposits
    2F       3,000       4,000  
Marketable securities
    2G, 5       14,871       15,167  
Accounts receivable:
                       
 Trade, net
    2H       14,482       18,441  
 Other
            2,460       1,632  
 Related parties
            384       390  
Inventories
    6       28,778       25,449  
Deferred tax assets
    14G       274       567  
                         
Total current assets
            77,246       83,536  
                         
Marketable securities
    2G, 5       24,370       20,358  
                         
Assets held for employees' severance benefits
    9       1,543       1,425  
                         
Deferred tax assets
    14G       439       346  
                         
Property, plant and equipment ("PPE"), net
    7       1,479       2,458  
                         
Intangible assets, net
    8B       180       2,071  
                         
Goodwill
    8A       -       12,242  
                         
Total assets
            105,257       122,436  
 
         
Avi Eizenman
 
Shaike Orbach
 
Eran Gilad
Chairman of the Board of Directors
 
Chief Executive Officer
 
Chief Financial Officer
 
Kfar-Saba, Israel
March 23, 2015
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F - 5
 
Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31 (Continued)
 
         
2013
   
2014
 
   
Note
   
US$ thousands
   
US$ thousands
 
                   
Liabilities and shareholders' equity
                 
                   
Current liabilities
                 
Trade accounts payable
          6,764       8,216  
Other accounts payable and accrued expenses
          5,134       5,783  
Contingent consideration
    3       -       4,728  
Related parties
            50       20  
Deferred tax liabilities
    14G       -       259  
                         
Total current liabilities
            11,948       19,006  
                         
Long-term liability
                       
Liability for employees' severance benefits
    9       2,618       2,414  
Deferred tax liabilities
    14G       -       284  
                         
Total liabilities
            14,566       21,704  
                         
Commitments and contingencies
    10                  
                         
Shareholders' equity
    11                  
Ordinary shares, ILS 0.01 par value; 10,000,000 shares
                       
authorized; 7,154,984 and 7,233,604 issued as at
                       
December 31, 2013 and 2014, respectively;
                       
7,140,013 and 7,218,633 outstanding as at
                       
December 31, 2013 and 2014, respectively
            21       21  
Additional paid-in capital
            38,626       41,245  
Treasury shares (at cost) - 14,971 ordinary shares as at
                       
December 31, 2013 and 2014
            (38 )     (38 )
Retained earnings
            52,082       59,504  
                         
Total shareholders' equity
            90,691       100,732  
                         
Total liabilities and shareholders’ equity
            105,257       122,436  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F - 6
 
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Operations for the Year Ended December 31
 
         
2012
   
2013
   
2014
 
         
US$ thousands
 
   
Note
   
Except for share and per share data
 
                         
Sales*
    12       48,729       73,298       75,622  
Cost of sales
            28,849       43,865       44,835  
                                 
Gross profit
            19,880       29,433       30,787  
                                 
Operating expenses
                               
Research and development**
            4,401       5,465       6,480  
Sales and marketing
            3,081       3,818       4,418  
General and administrative
            2,369       2,572       2,843  
                                 
Total operating expenses
            9,851       11,855       13,741  
                                 
Operating income
            10,029       17,578       17,046  
Financial income, net
    13       752       404       263  
                                 
Income before income taxes
            10,781       17,982       17,309  
                                 
Income taxes
    14       910       905       2,704  
                                 
Net income
            9,871       17,077       14,605  
                                 
Income per share:
                               
Basic income per ordinary share (US$)
    2U       1.424       2.404       2.033  
                                 
Diluted income per ordinary share (US$)
            1.417       2.357       1.996  
                                 
Weighted average number of ordinary
                               
 shares used to compute basic income
                               
 per share (in thousands)
            6,934       7,103       7,184  
                                 
Weighted average number of ordinary
                               
 shares used to compute diluted income
                               
 per share (in thousands)
            6,968       7,246       7,319  
 
* Including sales to related parties in the amount of US$ 558 thousand, US$ 851 thousand and US$ 1,041 thousand in 2012, 2013 and 2014, respectively.
** Including services from related parties in the amount of US$ 42 thousand, US$ 133 thousand and US$ 243 thousand in 2012, 2013 and 2014, respectively.
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F - 7
 
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
 
   
Ordinary shares
   
Additional paid-in capital
   
Treasury shares
   
Retained earnings
   
Total shareholders’ Equity
 
   
Number
of shares (1)
   
US$ thousands
 
                                     
Balance at
                                   
January 1, 2012
    6,925,088       20       35,245       (38 )     29,047       64,274  
                                                 
Exercise of options
    82,338       1       276       -       -       277  
Share-based compensation
    -       -       544       -       -       544  
Net income
    -       -       -       -       9,871       9,871  
                                                 
Balance at
                                               
December 31, 2012
    7,007,426       21       36,065       (38 )     38,918       74,966  
                                                 
Exercise of options
    132,587       *-       1,893       -       -       1,893  
Share-based compensation
    -       -       668       -       -       668  
Dividend (US $0.55  per share)
    -       -       -       -       (3,913 )     (3,913 )
Net income
    -       -       -       -       17,077       17,077  
                                                 
Balance at
                                               
December 31, 2013
    7,140,013       21       38,626       (38 )     52,082       90,691  
                                                 
Exercise of options
    78,620       *-       1,353       -       -       1,353  
Share-based compensation
    -       -       1,266       -       -       1,266  
Dividend (US $1.00  per share)
    -       -       -       -       (7,183 )     (7,183 )
Net income
    -       -       -       -       14,605       14,605  
                                                 
Balance at
                                               
December 31, 2014
    7,218,633       21       41,245       (38 )     59,504       100,732  
 
(1)
Net of 14,971 shares held by the subsidiary
     
 
*
Less than 1 thousand.
     
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F - 8
 
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
 
   
2012
   
2013
   
2014
 
   
US$ thousands
 
Cash flows from operating activities
                 
Net income
    9,871       17,077       14,605  
                         
Adjustments required to reconcile net income to
                       
  net cash provided by operating activities:
                       
Depreciation and amortization
    454       659       996  
Write-down of obsolete inventory
    873       1,926       1,029  
Liability for employees' severance benefits, net
    23       174       (86 )
Discount of marketable securities
    579       729       758  
Share-based compensation expense
    544       668       1,266  
Deferred taxes
    22       (552 )     (219 )
Capital (gain) loss
    -       1       -  
Changes in assets and liabilities:
                       
Accounts receivable - trade
    (3,741 )     (2,322 )     (3,248 )
Accounts receivable - other
    (537 )     (114 )     188  
Accounts receivable - Related parties
    (37 )     (139 )     (6 )
Inventories
    (4,495 )     (15,909 )     3,416  
Trade accounts payable
    3,828       (1,474 )     1,321  
Other accounts payable and accrued expenses
    1,436       1,220       649  
Contingent consideration
    -       -       45  
Accounts payable - Related parties
    69       (26 )     (30 )
Net cash provided by operating activities
    8,889       1,918       20,684  
                         
Cash flows from investing activities
                       
Proceeds from (investments in) short term bank deposits, net
    2,483       (473 )     (1,000 )
Purchases of property, plant and equipment
    (798 )     (822 )     (1,858 )
Investment in intangible assets
    -       (100 )     (100 )
Proceeds from maturity of marketable securities
    8,955       12,500       14,750  
Purchases of marketable securities
    (17,992 )     (11,384 )     (11,740 )
Acquisition of subsidiary, net of acquired cash (see Note 3)
    -       -       (10,048 )
Net cash used in investing activities
    (7,352 )     (279 )     (9,996 )
                         
Cash flows from financing activities
                       
Exercise of options
    277       1,893       1,353  
Dividend
    -       (3,913 )     (7,183 )
Net cash provided by (used in) financing activities
    277       (2,020 )     (5,830 )
                         
Effect of exchange rate changes on cash balances held
    9       72       35  
                         
Increase (decrease) in cash and cash equivalents
    1,823       (309 )     4,893  
                         
Cash and cash equivalents at beginning of year
    11,483       13,306       12,997  
Cash and cash equivalents at end of year
    13,306       12,997       17,890  
                         
Supplementary cash flow information
                       
A. Non-cash transactions:
                       
Investments in PPE and Intangible assets
    9       207       87  
B. Cash paid during the year for:
                       
Income taxes
    635       2,154       1,277  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F - 9
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 1 - General
 
Silicom Ltd. is an Israeli corporation engaged in designing, manufacturing, marketing and supporting high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices.
 
The Company’s shares have been traded in the United States on the National Association of Securities Dealers Automated Quotation System ("NASDAQ”), since February 1994 and in Israel on the Tel Aviv Stock Exchange ("TASE"), since December 2005. Since January 2, 2014 the Company's shares have been traded on the NASDAQ Global Select Market (prior thereto they were traded on the NASDAQ Global Market). Since June 16, 2013 the Company's shares have been included in the Tel-Aviv 100 Index.
 
Silicom markets its products directly, through Original Equipment Manufacturers (“OEMs”) which sell the Company’s connectivity products under their own private labels or incorporate the Company’s products into their products.
 
On December 10, 2014, the Company completed the acquisition of 100% shares of Fiberblaze A/S, (hereinafter - Fiberblaze), a privately-held Danish company. For more details see Note 3.
 
In these financial statements the terms "Company" or Silicom refer to Silicom Ltd. and its wholly owned subsidiaries, Silicom Connectivity Solutions, Inc. (hereinafter – Silicom Inc.)  and Fiberblaze, whereas the term "subsidiaries" refers to Silicom Inc. and Fiberblaze.
 
Note 2 - Summary of Significant Accounting Policies
 
The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:
 
 
A.
Financial statements in US dollars
 
Substantially all sales of the Company are made outside of Israel (see Note 12A   regarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the functional currency of the Company is the dollar.
 
Transactions and monetary balances in other currencies are translated into the functional currency using the current exchange rate.
 
All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in earnings when they arise.
 
 
B.
Basis of presentation
 
The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
 
 
F - 10
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
 
C.
Estimates and assumptions
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of PPE, deferred tax assets, inventory, investments, goodwill, intangible assets, share-based compensation and other contingencies.
 
 
D.
Business combinations
 
The Company accounts for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.
 
 
E.
Cash and cash equivalents
 
The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.
 
 
F.
Short-term bank deposits
 
Short term bank deposits consist of bank deposits with original maturities of more than three months and up to twelve months.
 
As of December 31, 2014 the Company's short-term bank deposits consist of bank deposits in US dollars that bear fixed annual interest of 0.45% (2013 0.35%). These short-term bank deposits are held with a major Israeli bank, and their use and withdrawal are not subject to any restrictions.
 
 
G.
Marketable securities
 
The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.
 
Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method.
 
 
F - 11
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
 
G.
Marketable securities ( cont’d )
 
Such amortization and accretion is included in the "Financial income, net" line item in the consolidated statements of operations.
 
When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.
 
A decline in the market value of HTM security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an impairment is other than temporary, the Company considers all available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.
 
If the Company intends to sell the security or it is more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.
 
 
H.
Trade accounts receivable, net
 
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns.
 
As of December 31, 2013 and 2014, the provision for doubtful accounts receivable amounted to US$ 20 thousand.
 
 
I.
Inventories
 
Inventories are stated at the lower of cost or market. Cost is determined using the "weighted average-cost" method.
 
 
F - 12
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
 
I.
Inventories (cont’d)
 
The Company writes down obsolete or slow moving inventory to its market value, on a quarterly basis.
 
 
J.
Assets held for employees’ severance benefits
 
Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.
 
 
K.
Property, plant and equipment
 
Property, plant and equipment are stated at cost, net of accumulated depreciation . Depreciation is calculated on the straight-line basis over the estimated useful life of the assets at the following annual rates:
 
   
%
 
Machinery and equipment
    15 - 33  
Office furniture and equipment
    6 - 33  
Leasehold improvements
    10 - 20  
 
Depreciation methods, useful lives and residual values are reviewed at the end of each reporting year and adjusted if appropriate.
 
 
L.
Goodwill and other intangible assets
 
Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
 
The Company operates in one operating segment and this segment comprises one reporting unit.
 
Goodwill is reviewed for impairment at least annually in accordance with ASU 2011-08, Testing Goodwill for Impairment. ASU 2011-08 provides an entity the option to perform a qualitative assessment to determine whether it is more likely than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more likely than-not that the fair value of a reporting is greater than its carrying amount, the two-step goodwill impairment test is not required.
 
If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed. During the year ended December 31, 2014, no impairments were found and therefore no impairment losses were recorded.
 
 
F - 13
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
 
L.
Goodwill and other intangible assets (cont’d)
 
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives of 3 years. The acquired customer relationships, current technology and intellectual property are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in amortization of such intangible assets in the straight-line method.
 
 
M.
Impairment of Long-Lived Assets
 
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall long-lived assets, such as property, plant, equipment and purchase intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.
 
 
N.
Revenue recognition
 
Revenues from sales of products are recognized upon delivery provided that the collection of the resulting receivable is reasonably assured, there is persuasive evidence of an arrangement, no significant obligations in respect of installation remain and the price is fixed or determinable.
 
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of operations.
 
 
O.
Research and development costs
 
Research and development costs are expensed as incurred.
 
 
P.
Royalty bearing participations
 
Royalty expenses are recognized pursuant to the sale of related products and are classified as cost of sales. See Note 10A.
 
 
F - 14
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
 
Q.
Allowance for product warranty
 
The Company grants service warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience. Accordingly, these financial statements do not include an accrual for warranty obligations.
 
 
R.
Treasury shares
 
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.
 
 
S.
Income taxes
 
Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
 
 
T.
Share-based compensation
 
The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:
 
When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.
 
 
U.
Basic and diluted earnings per share
 
Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding. Diluted income per ordinary share calculation is similar to basic income per ordinary share except that the weighted average of common shares outstanding is increased to include outstanding potential common shares during the period if dilutive. Potential common shares arise from stock options and Restricted Share Units (“RSUs”), and the dilutive effect is reflected by the application of the treasury stock method.
 
 
F - 15
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
 
U.
Basic and diluted earnings per share (cont’d)
 
The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.
 
   
Year ended December 31
 
   
2012
   
2013
   
2014
 
Net income attributable to ordinary shares
                 
 (US$ thousands)
    9,871       17,077       14,605  
                         
Weighted average number of ordinary shares outstanding
                       
 used in basic income per ordinary share calculation
    6,933,576       7,103,021       7,184,114  
                         
Add assumed exercise of outstanding dilutive potential
                       
 ordinary shares
    34,729       143,011       134,792  
                         
Weighted average number of ordinary shares outstanding
                       
 used in diluted income per ordinary share calculation
    6,968,305       7,246,032       7,318,906  
                         
Basic income per ordinary shares (US$)
    1.424       2.404       2.033  
                         
Diluted income per ordinary shares (US$)
    1.417       2.357       1.996  
                         
The weighted average number of shares related  to options
                       
 and RSUs excluded from the diluted earnings per share
                       
 calculation because of anti-dilutive effect
    135,000       -       37,304  
 
 
V.
Comprehensive Income
 
For the years ended December 31, 2012, 2013 and 2014, comprehensive income equals net income.
 
 
W.
Fair Value Measurements
 
The Company's financial instruments consist mainly of cash and cash equivalents, short-term bank deposits, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.
 
 
 
F - 16
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 
W.
Fair Value Measurements (cont’d)
 
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
 
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
 
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
 
 
X.
Concentrations of risks
 
(1)            Credit risk
 
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Short-term bank deposits balances of the Company, which are subject to credit risk, consist of short-term bank deposits held with a major Israeli Bank. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations or governmental securities. As of December 31, 2013 and 2014, the ratings of the securities in the Company's portfolio were at least A. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). Concentrations of credit risk with respect to trade receivables are limited due to the Company’s diverse customer base and their wide geographical dispersion. The Company closely monitors extensions of credit and has never experienced significant credit losses.
 
(2)            Dominant customers
 
The Company depends on a small amount of customers for its products. The Company's top three customers accounted for approximately 41% of its revenues in 2014. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future.
 
 
Y.
Liabilities for loss contingencies
 
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
 
 
F - 17
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 
Z.
Recent Accounting Pronouncements
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption is not permitted. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
 
Note 3 – Acquisition of Fiberblaze
 
On December 10, 2014 (hereinafter – closing date) the Company completed the acquisition of all of the outstanding shares and voting interests of Fiberblaze. The acquired company is a privately-held Denmark-based provider of high performance application acceleration solutions for the mobile, telecommunication, network monitoring, cyber security, financial and related industries. Fiberblaze has a wholly owned subsidiary in the U.S called Fiberblaze US, LLC which markets Fiberblaze’s products in the US.
 
The financial results of Fiberblaze are included in the consolidated financial statements from the closing date.
 
The following table summarizes the major classes of consideration transferred, and the recognized amounts of assets acquired and liabilities assumed at the acquisition date:
 
   
US$ thousands
 
 
 
 
 
Cash
    10,161  
Contingent consideration (i)(a)
    3,796  
Contingent consideration (i)(b)
    887  
Total purchase price
    14,844  
 
 
F - 18
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 3 – Acquisition of Fiberblaze (cont’d)
 
 
(i)
Contingent consideration
 
Silicom has agreed to pay the selling shareholders additional milestones-based contingent consideration which is classified as a financial liability, 90% in cash and 10% in options to ordinary shares of the Company as described below:
 
 
(a)
Pursuant to the terms of the share purchase agreement (hereinafter – SPA) between the Company and Fiberblaze selling shareholders, the Company is obligated to pay to Fiberblaze's selling shareholders a contingent payment upon the attainment of future performance milestones relating to Fiberblaze revenues until August 31, 2015. In connection with this contingent payment consideration, at the closing date, the Company recorded an estimated liability of US$ 3,796 thousand. At December 31, 2014 the fair value of the contingent consideration has increased to US$ 3,833 thousand, an increase that reflects the changes related to the time value of the liability since the date of acquisition.
 
 
(b)
Pursuant to the terms of the SPA between the Company and Fiberblaze selling shareholders, the Company is obligated to pay to Fiberblaze's selling shareholders a contingent payment upon the attainment of future performance milestones relating to Fiberblaze’s achievement of design wins until August 31, 2015. In connection with this contingent payment consideration, at the closing date, the Company recorded an estimated liability of US$ 887 thousand. At December 31, 2014 the fair value of the contingent consideration has increased to US$ 895 thousand, an increase that reflects the changes related to the time value of the liability since the date of acquisition.
 
 
(c)
Pursuant to the terms of the SPA, the options to ordinary shares will be valued based on the fair market value of such options on the date of their grant according to the Black and Scholes model, will vest in three equal tranches over three years, with the first tranche vesting one year following August 31, 2015, and will have an exercise price equal to the closing trading price of the Company’s Ordinary Shares on the Nasdaq Stock Exchange on the date of grant.
 
Under the purchase method prescribed by ASC 805, the purchase price is allocated to net tangible assets, identifiable intangible assets, with any remainder allocated to goodwill:
 
   
US$ thousands
 
 
 
 
 
Cash and cash equivalents
    113  
Trade and other receivables
    764  
Inventories
    1,116  
Fixed assets
    29  
Trade and other payables
    (854 )
Customer relationships
    540  
Current technology
    1,456  
Deferred tax liability
    (562 )
Goodwill
    12,242  
Total purchase price
    14,844  

 
F - 19
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 3 – Acquisition of Fiberblaze (cont’d)
 
Measurement of fair values
 
Presented hereunder is information regarding the techniques the Company used to measure the fair value of the financial and non-financial assets and liabilities recognized as a result of the business combination:
 
 
(a)
Inventories
 
The fair value of inventories is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.
 
 
(b)
Intangible assets
 
The fair value of current technology is based on the discounted estimated royalty payments that have been avoided as a result of the current technology being owned.
 
The fair value of customer relationships is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows.
 
 
(c)
Contingent consideration in business combination
 
The fair value is calculated using the income approach based on the expected payment amounts and their associated probabilities (i.e. probability-weighted). The liability is discounted to present value using the weighted average cost of capital rate of 18%. The fair value measurement is classified at level 3 of the fair value hierarchy (for a definition of the various hierarchy levels, see Note 2W regarding the fair value measurements). After the closing date, the Company recognizes changes in the fair value of contingent consideration in general and administrative expenses.
 
If new information is obtained within one year from the acquisition date about facts and circumstances that existed at the acquisition date, the Company will retrospectively adjust the relevant amounts that were recognized at the time of the acquisition.
 
The aggregate cash flows derived for the Company as a result of the acquisition:
 
   
US$ thousands
 
 
 
 
 
Cash and cash equivalents paid
    10,161  
Cash and cash equivalents of the subsidiary
    (113 )
Purchase price paid in cash, net
    10,048  
 
 
F - 20
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 3 – Acquisition of Fiberblaze (cont’d)
 
Goodwill
 
Goodwill was recognized as a result of the acquisition as follows:
 
   
US$ thousands
 
 
 
 
 
Consideration transferred
    14,844  
Fair value of identifiable net assets
    (2,602 )
Total goodwill
    12,242  
 
The goodwill is attributable mainly to the skills and technical talent of the acquiree’s work force, and the synergies expected to be achieved from integrating the acquiree into the Company’s existing regular business (see also  Note 8A on goodwill). None of the goodwill recognized is expected to be deductible for income tax purposes.
 
Acquisition-related expenses
 
The Company incurred acquisition-related expenses of US$ 217. These expenses have been included in general and administrative expenses in the statement of operation. None of the acquisition related expenses are expected to be deductible for income tax purposes.
 
Note 4 - Cash and Cash Equivalents
         
 
   
December 31
 
   
2013
   
2014
 
   
US$ thousands
 
             
Cash
    10,593       14,172  
Cash equivalents *
    2,404       3,718  
      12,997       17,890  
 
 
*
Comprised mainly of deposits in banks as at December 31, 2013 and 2014 carrying a weighted average interest rate of 0.74% and 0.14%, respectively.
 
 
F - 21
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 5 - Marketable Securities
             
 
The Company's investment in marketable securities as of December 31, 2013 and 2014 are classified as “held-to-maturity” and consist of the following:
 
         
Gross
   
Gross
       
         
unrealized
   
unrealized
       
   
Amortized
   
holding
   
holding
   
Aggregate
 
   
cost basis**
   
gains
   
(losses)
   
fair value*
 
   
US$ thousands
 
At December 31, 2014
                       
Held to maturity:
                       
Corporate debt securities
                       
Current
    15,328       -       (69 )     15,259  
Non-Current
    20,536       -       (271 )     20,265  
                                 
      35,864       -       (340 )     35,524  
                                 
At December 31, 2013
                               
Held to maturity:
                               
Corporate debt securities and
                               
 government debt securities
                               
Current
    15,015       20       (76 )     14,959  
Non-Current
    24,617       69       (167 )     24,519  
                                 
      39,632       89       (243 )     39,478  
 
 
*
Fair value is being determined using quoted market prices in active markets (Level 1).
 
 
* *
Including accrued interest in the amount of US$ 391 thousand and US$ 339 thousand as of December 31, 2013 and 2014 respectively.
 
Activity in marketable securities in 2014
 
US$ thousands
 
       
Balance at January 1, 2014
    39,632  
         
Purchases of marketable securities
    11,740  
Discount of marketable securities
    (758 )
Proceeds from maturity of marketable securities
    (14,750 )
Balance at December 31, 2014
    35,864  
 
 
F - 22
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 5 - Marketable Securities (Cont’d)
   
 
The following table summarizes the gross unrealized losses on investment securities for which other-than-temporary impairments have not been recognized and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014:
 
   
Less than 12 months
   
12 months or more
   
Total
 
Held to maturity:
 
Unrealized Losses
   
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
   
Fair value
 
                                                 
Corporate debt securities
    (170 )      18,936       (170 )      15,573       (340 )      34,509  
 
The unrealized losses on the investments were caused by changes in interest rate. The Company has the ability and intent to hold these investments until maturity and it is more likely than not that the Company will not be required to sell any of the securities before recovery; therefore these investments are not considered other than temporarily impaired.
 
Note 6 - Inventories
         
 
   
December 31
 
   
2013
   
2014
 
   
US$ thousands
 
             
Raw materials and components
    9,041       8,275  
Products in process
    13,081       11,263  
Finished products
    6,656       5,911  
      28,778       25,449  
 
 
F - 23
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 7 - Property, Plant and Equipment, Net
         
 
   
December 31
 
   
2013
   
2014
 
   
US$ thousands
 
             
Machinery and equipment
    4,028       5,338  
Office furniture and equipment
    389       433  
Leasehold improvements
    486       1,023  
                 
Property, plant and equipment
    4,903       6,794  
                 
Accumulated depreciation
    (3,424 )     (4,336 )
                 
Property, Plant and equipment, net
    1,479       2,458  
 
Depreciation expense for the years ended December 31, 2012, 2013 and 2014 were US$ 454 thousand, US$ 639 thousand and US$ 891 thousand, respectively.
 
 
F - 24
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 8 - Goodwill and Other Intangible Assets
       
 
 
A.
Goodwill
 
Changes in goodwill as of December 31, 2014 are as follows:
 
   
US$ thousands
 
Balance at January 1, 2014
    -  
         
Acquisition of Fiberblaze
    12,242  
Balance at December 31, 2014
    12,242  
 
 
B.
Other intangible assets
 
Net other intangible assets as of December 31, 2014 are as follows:
 
         
December 31
 
         
2013
   
2014
 
   
Useful life
   
US$ thousands
 
Original cost:
                 
Intellectual property
    3       200       200  
Current technology
    3       -       1,456  
Customer relationships
    3       -       540  
              200       2,196  
Accumulated amortization:
                       
Intellectual property
            20       87  
Current technology
            -       28  
Customer relationships
            -       10  
              20       125  
                         
Other intangible assets, Net:
                       
Intellectual property
            180       113  
Current technology
            -       1,428  
Customer relationships
            -       530  
              180       2,071  
 
Amortization expense for the years ended December 31, 2013 and 2014 were US$ 20 thousand and US$ 105 thousand, respectively.
 
 
F - 25
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 9 - Assets Held and Liability for Employees' Severance Benefits
 
 
A.
Under Israeli law and labor agreements, Silicom is required to make severance payments to retired or dismissed employees and to employees leaving employment in certain other circumstances.
 
In respect of the liability to the employees, individual insurance policies are purchased and deposits are made with recognized severance pay funds.
 
The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.
 
 
B.
According to Section 14 to the Severance Pay Law ("Section 14") the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14. Commencing July 1, 2008, the Company has entered into agreements with a majority of its employees in order to implement Section 14. Therefore, as of that date, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore the Company incurs no additional liability since that date with respect to such employees. Amounts accumulated in the pension funds or insurance policies pursuant to Section 14 are not supervised or administrated by the Company and therefore neither such amounts nor the corresponding accrual are reflected in the balance sheet
 
 
C.
Consequently, the assets held for employees' severance benefits reported on the balance sheet, in respect of deposits for those employees who have signed agreements pursuant to Section 14, represent the redemption value of deposits made through June 30, 2008. The liability for employee severance benefits, with respect to those employees, represents the liability of the Company for employees' severance benefits as of June 30, 2008.
 
As a result of the implementation of Section 14, as described above, the liability with respect to those employees is calculated on the basis of number of years of employment as of June 30, 2008, multiplied by the latest salary paid. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. Such liability will be removed, either upon termination of employment or retirement.
 
 
D.
Expenses recorded with respect to employees' severance payments for the years ended December 31, 2012, 2013 and 2014 were US$ 382 thousand, US$ 578 thousand and US$ 432 thousand, respectively.
 
 
F - 26
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 10 - Commitments and Contingencies
 
 
A.
Royalty commitments
 
The Company is obligated to pay royalties to the Government of Israel and the Korea Israel Industrial Research and Development Foundation on revenues from product sales related to research and development, which was undertaken with Government grants and other grants. Since January 1, 1997, royalty rates are between 2% to 5%. The royalty rates applicable for the Company’s research and development projects are 2% - 3.5%, except for one project that took place in the period between July 1, 1997 - January 31, 2000, where the royalty rate is 4%.
 
Royalties are payable from the commencement of sales of each of these products until the cumulative amount of the royalties paid equals 100% of the dollar linked amounts of the grants received, without interest, for projects approved prior to December 31, 2000, and with LIBOR interest, for amounts received after that date.
 
The Company’s total outstanding obligation in respect of royalty-bearing participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately US$ 2,960 thousand as at December 31, 2014 (US$ 2,960 thousand as at December 31, 2013).
 
 
B.
Lease commitments
 
The premises and facilities occupied by the Company are leased under various operating lease agreements. Furthermore, the Company has entered into several operating lease agreements for motor vehicles in Israel.
 
The agreements related to leases in Israel are in Israeli Shekel (“ILS”) or in ILS, linked to the Israeli Consumer Price Index or to the US Dollars. The agreements related to leases in the USA are in US Dollars and the agreements related to leases in Denmark are in Danish Krone (“DKK”).
 
The minimum future rental payments under the above leases at exchange rates in effect on December 31, 2014, are as follows:
 
Year ended December 31
 
US$ thousands
 
2015
    1,241  
2016
    1,198  
2017 and on
    1,260  
 
Of the amounts above, US$24 thousand in 2015, relate to related parties.
 
Rental expenses under the lease agreements for the years ended December 31, 2012, 2013 and 2014 were US$  676  thousand, US$  837  thousand and US$  1,243  thousand, respectively.
 
 
C.
Credit line
 
The Company has one line of credit provided to it by a bank (approximately US$  154  thousand). The bank is allowed to cancel or change the line of credit with no advance notice. As at December 31, 2014, this credit line has not been used.
 
 
F - 27
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 10 - Commitments and Contingencies (Cont’d)
 
 
D.
Outstanding Legal Proceeding
 
On March 2, 2012 Internet Machines LLC, a Texas limited liability company filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas (the "Court") against numerous defendants (including many switch manufacturers) with respect to certain patents for switches, and included the Company's US subsidiary amongst the list of defendants named in such lawsuit. The lawsuit claims that the defendants have infringed certain patents purported to be owned by Internet Machines LLC and seeks unspecified compensation for damages as well as injunctive relief. The defendants filed answers and counterclaims to the complaint asserting that they do not infringe any claims of the asserted patents and the claims of the patents are invalid and/or unenforceable. On September 4, 2012, the Court granted the defendants' motion to stay the pending litigation. While one of the Company's switch suppliers (which is also named as a defendant in the aforesaid lawsuit) has agreed to indemnify the Company with respect to certain liabilities, there is no certainty that the Company will ultimately be able to collect all or any amounts under such indemnity should the Company be found liable under the lawsuit. The Company is unable at this time to assess the likelihood of an unfavorable outcome or range of potential loss.
 
Note 11 - Shareholders' Equity
 
Share based compensation
 
 
A.
On July 21, 2004, the Board resolved, subject to shareholders’ approval that was given on December 30, 2004, to adopt the Share Option Plan (2004) (the "2004 Plan"). Option grants to employees under the 2004 Plan, including terms of vesting and the exercise price, are subject to the Board of Directors' approval. Option grants to directors and certain other officers are generally subject to the approvals of the Compensation Committee as well as Board of Directors, and grants to directors or a CEO will also generally have to be approved by the Shareholders. The term of the options shall not exceed 10 years from the date that the option was granted.
 
The 2004 plan initially covered up to 282,750 options and subsequent to an amendment by the board in 2007 it covered up to 582,750 options.   In August 2012, the Board of Directors increased the number of the ordinary shares available for issuance under the 2004 plan by an additional 500,000. All options are at a conversion rate of 1:1.
 
On October 21, 2013 the Board resolved to adopt the Global Share Incentive Plan (2013) (the "2013 plan") and to reserve up to 500,000 ordinary shares for issuance under the Plan to employees, directors, officers and consultants of the Company or of any subsidiary or affiliate of the Company. Grants under the 2013 Plan, whether as options, restricted stock units, restricted stock or other equity based awards, including their terms, are subject to the Board of Directors' approval. Grants to directors and certain other officers are generally subject to the approvals of the Compensation Committee as well as Board of Directors, and grants to directors or a CEO (and under certain circumstances certain other officers) will also have to be approved by the Shareholders.
 
 
F - 28
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
 
B.
Options or RSUs granted to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards of options, or the ordinary shares issued upon their exercise, must be deposited with a trustee for at least two years following the date of grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares.
 
Capital gains on awards granted under the plans are subjected to tax of 25% to be paid by the employee, and the Company is not entitled to a tax deduction.
 
Gains which are not capital gains on awards under the plans are subjected to regular tax rates on individuals, and the Company is entitled to a tax deduction for such gains.
 
 
C.
On December 21, 2010, the Company granted, in the aggregate, 137,500 options to certain of its directors and employees under the 2004 Plan.  In relation to this grant:
 
 
1.
The exercise price for the options (per ordinary share) was US$ 18.82 and the Option expiration date was the earlier to occur of: (a) December 21, 2018; and (b) the closing price of the shares falling below US$ 9.41 at any time after the date of grant. 50% of the options vest and become exercisable on the second anniversary of the date of grant and the additional 50% of the options vest and become exercisable on the third anniversary of the date of the grant.
 
 
2.
No expenses were incurred during the year ended December 31, 2014 in relation to this grant. As at December 31, 2014, all expenses related to this grant were recognized.
 
 
F - 29
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
 
D.
On September 13, 2012, the Company granted, in the aggregate, 240,000 options to certain of its directors and employees under the 2004 Plan.  In relation to this grant:
 
 
1.
The exercise price for the options (per ordinary share) was US$ 15.28 and the Option expiration date was the earlier to occur of: (a) September 13, 2020; and (b) the closing price of the shares falling below US$ 7.64 at any time after the date of grant. 50% of the options vest and become exercisable on the second anniversary of the date of grant and the additional 50% of the options vest and become exercisable on the third anniversary of the date of the grant.
 
 
2.
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
 
Average Risk-free interest rate (a)
    1.33 %
Expected dividend yield
    0.0 %
Average expected volatility   (b)
    64.71 %
Termination rate
    9 %
Suboptimal rate (c)
    3.2  
 
 
(a) 
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
 
(b) 
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
 
(c) 
Suboptimal rate represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal rate of the Company and similar companies.
 
 
3.
Compensation expenses incurred during the year ended December 31, 2014 in relation to this grant were approximately US$ 424 thousand. As at December 31, 2014, there were approximately US$ 142 thousand of unrecognized compensation costs related to this grant to be recognized over a period of 0.7 years.
 
 
F - 30
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
 
E.
On April 30, 2014, the Company granted, in the aggregate, 74,000 RSUs to certain of its directors, employees and consultants under the 2013 Plan. In relation to this grant:
 
 
1.
50% of the RSUs vest on the second anniversary of the date of grant and the additional 50% of the RSUs vest on the third anniversary of the date of the grant.
 
 
2.
The fair value of RSUs is estimated based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.
 
 
3.
The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:
 
Expected dividend yield
    2.06 %
Termination rate
    4.35 %
 
 
4.
Compensation expenses incurred during the year ended December 31, 2014 in relation to this grant were approximately US$ 843 thousand. As at December 31, 2014, there were approximately US$ 2,194 thousand of unrecognized compensation costs related to this grant to be recognized over a weighted average period of 1.85 years.
 
 
F - 31
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 11 - Shareholders' Equity (cont'd)
 
 
Share based compensation (cont'd)
 
 
F.
The following table summarizes information regarding stock options as at December 31, 2014:
 
     
 
     
Options outstanding
   
Options exercisable
 
           
Weighted average
         
Weighted average
 
           
remaining
         
remaining
 
Exercise price
   
Number
   
contractual life
   
Number
   
contractual life
 
US$
   
of options
   
(in years)
   
of options
   
(in years)
 
                                   
15.28       192,130       5.7       78,130       5.7  
 
The aggregate intrinsic value of options outstanding as of December 31, 2013 and 2014 is US$ 8,152 thousand and US$ 3,825 thousand, respectively.
 
The aggregate intrinsic value of options exercisable as of December 31, 2013 and 2014 is US$ 1,143 thousand and US$ 1,556 thousand, respectively.
 
The total intrinsic value of options exercised during the year ended December 31, 2013 and 2014, is US$ 1,119 thousand and US$ 2,400 thousand, respectively.
 
The intrinsic value of the options at the date of grant is zero.
 
 
G.
The following table summarizes information regarding Restricted Share Units as at December 31, 2014:
 
 
Restricted
   
Vested
 
 
Share Units
   
Restricted
 
 
Outstanding
   
Share Units
 
           
    74,000       -  
 
The aggregate intrinsic value of RSUs outstanding as of December 31, 2014 is US$ 2,604 thousand.
 
 
 
F - 32
 
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 11 - Shareholders' Equity (cont'd)
 
 
Share based compensation (cont'd)
 
 
H.
The stock option activity under the abovementioned plans is as follows:
 
               
Weighted
 
         
Weighted
   
average
 
   
Number
   
average
   
grant date
 
   
of options
   
exercise price
   
fair value
 
         
US$
   
US$
 
                   
Balance at January 1, 2012
    257,425              
                     
Granted
    240,000       15.28       6.54  
Exercised
    (82,338 )     3.35       1.81  
Forfeited
    (2,000 )     15.28       6.54  
                         
Balance at December 31, 2012
    413,087                  
                         
Exercised
    (132,587 )     14.28       6.61  
Forfeited
    (7,750 )     15.28       6.54  
                         
Balance at December 31, 2013
    272,750                  
                         
Exercised
    (78,620 )     17.19       7.70  
Forfeited
    (2,000 )     15.28       6.54  
                         
Balance at December 31, 2014
    192,130                  
Exercisable at December 31, 2014
    78,130                  
 
 
I.
The Restricted Share Units activity under the abovementioned plans is as follows:
 
   
Number of
   
average
 
   
Restricted
   
grant date
 
   
Share Units
   
fair value
 
   
US$
   
US$
 
             
Balance at January 1, 2014
    -        
               
Granted
    74,000       46.07  
                 
Balance at December 31, 2014
    74,000          
 
 
F - 33
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 11 - Shareholders' Equity (cont'd)
         
 
Share based compensation (cont'd)
 
 
J.
During 2012, 2013 and 2014, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses:
 
   
Year ended December 31
 
   
2012
   
2013
   
2014
 
   
US$ thousands
   
US$ thousands
   
US$ thousands
 
                   
Cost of sales
    46       103       124  
Research and development costs
    130       193       340  
Selling and marketing expenses
    159       177       366  
General and administrative expenses
    209       195       436  
                         
      544       668       1,266  
 
 
F - 34
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 12 - Sales
             
 
 
A.
Information on sales by geographic distribution:
 
The Company has one operating segment.
 
Sales are attributed to geographic distribution based on the location of the customer.
 
   
Year ended December 31
 
   
2012
   
2013
   
2014
 
   
US$ thousands
 
                   
North America
    33,606       55,655       53,712  
Europe
    7,277       9,257       11,421  
Asia-Pacific
    7,846       8,386       10,489  
                         
      48,729       73,298       75,622  
 
All property, plant and equipment are located in Israel.
 
 
B.
Sales to single customers exceeding 10% of sales (US$ thousands):
 
   
Year ended December 31
 
   
2012
   
2013
   
2014
 
   
US$ thousands
 
                   
Customer “A”
    10,809       24,512       18,083  
Customer “B”
    8,714       *       *  
 
 
*
Less than 10% of sales.
 
Note 13 - Financial Income (Expenses), Net
 
   
Year ended December 31
 
   
2012
   
2013
   
2014
 
   
US$ thousands
 
                   
Interest income
    1,360       1,290       1,266  
Discount of marketable securities
    (561 )     (643 )     (758 )
Exchange rate differences, net
    96       (89 )     (95 )
Bank charges
    (143 )     (154 )     (150 )
                         
      752       404       263  
 
 
F - 35
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income
 
 
A.
Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986
 
As a "foreign invested company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's taxable income or loss is calculated in US Dollars.
 
 
B.
Israel tax reform
 
Presented hereunder are the regular tax rates in Israel for the years 2012-2014:
 
2012 – 25%
2013 – 25%
2014 – 26.5%

On August 5, 2013 the Knesset passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and 2014) – 2013, by which, inter alia, the corporate tax rate would be raised by 1.5% to a rate of 26.5% as from 2014.
 
 
C.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the “Law”)
 
 
1. 
Rates
 
 
a.
Through the end of 2013 tax year, the Company has elected to be taxed under the alternative benefits method, whereby the Company waives grants in return for tax exemptions. For the manufacturing plant in Yokneam the Company is entitled to an exemption from tax on its taxable income for a period of ten years beginning from the year of election; For the research and development center the Company is entitled to an exemption from tax on its taxable income for two years beginning from the year of election, and not more than 25%, on its taxable income in the next eight years.
 
 
b. 
Should the Company derive income from sources other than the “Approved Enterprise” or "Benefited Enterprise" (See Note 14C 3) during the relevant period of benefits, such income will be taxable at the regular corporate tax rates for the applicable year.
 
 
F - 36
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income (cont’d)
 
 
C.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the “Law”) (cont'd)
 
 
1. 
Rates (cont'd)
 
 
c.
In the event of distribution by the Company of cash dividends out of its retained earnings that were generated prior to 2014 tax year and were tax exempt due to the “Approved Enterprise” or "Benefited Enterprise" status, the Company would be subjected to a maximum of 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the shareholders.
 
 
Out of the Company’s retained earnings as of December 31, 2014 and 2013, approximately US$ 44,892 thousand and US$ 50,683 thousand respectively are tax-exempt, due to “Approved Enterprise” and "Benefited Enterprise" status. If such tax-exempt income is distributed by cash dividend (including a liquidation dividend), it would be taxed at the reduced corporate tax rate applicable to such profits (up to 25%) and an income tax liability of up to approximately US$ 11,223 thousand and US$ 12,671 thousand would be incurred as of December 31, 2014  and 2013, respectively. The Company anticipates that any future dividends distributed pursuant to its dividend policy, will be distributed from income sources which will not impose additional tax liabilities on the Company. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s “Approved Enterprise" or "Benefited Enterprise". If the Company was to declare a dividend from its tax-exempt income, an income tax expense would be recognized in the period a dividend is declared.
 
 
2.
Conditions for entitlement to the tax benefits
 
Entitlement to the tax benefits of the Company’s “Approved Enterprise” and "Benefited Enterprise" is dependent upon the Company fulfilling the conditions stipulated by the Law and the regulations published thereunder, as well as the criteria set forth in the approval for the specific investment in the Company’s “Approved Enterprise”.
 
In the event of failure to comply with these conditions, the tax benefits may be canceled, and the Company may be required to refund the amount of the cancelled benefits, with the addition of linkage differences and interest. As of the date of these financial statements, the Company meets the compliance with these conditions.
 
 
F - 37
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income (cont’d)
 
 
C.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the “Law”) (cont'd)
 
 
3. 
Amendments to the Law
 
On March 30, 2005, the Israeli Parliament approved a reform of the above Law. The primary changes are as follows:
 
 
(a)
Companies that meet the criteria of the “Benefited Enterprise” (formerly known as Alternative Path of “Approved Enterprise”) benefits will receive those benefits without prior approval. In addition, there will be no requirement to file reports with the Investment Center. Companies will be required to notify the Israeli Tax Authorities regarding the implementation of the “Benefited Enterprise”. Audits will take place via the Israeli Income Tax Authorities as part of the tax audits. Request for pre-ruling is possible.
 
 
(b)
Tax benefits of the “Benefited Enterprise” comparing to regular corporate tax regulations, include lower tax rates or no tax depending on the area and the path chosen, lower tax rates on dividend income and accelerated tax depreciation. The tax benefits do not differ from those prior the amendment.
 
 
(c)
In order to receive the tax benefits in the Grant Path or the “Benefited Enterprise”, the “Industrial Company” must contribute to the economic independence of Israel’s economy in one of the following ways:
 
 
1.
Its primary activity is in the Biotechnology or Nanotechnology fields and pre-approval is received from the head of research and development at the Office of the Chief Scientist;
 
 
2.
Its revenue from a specific country is not greater than 75% of its total revenues that year;
 
 
3.
25% or more of its revenues are derived from a specific foreign market of at least 14 million residents.
 
 
(d)
Upon the establishment of a “Benefited Enterprise”, an investment of at least ILS 300 thousand in production machinery and equipment within three years is required.
 
 
(e)
For an expansion, a company is required to invest within three years the higher of ILS 300 thousand in production machinery and equipment or a certain percentage of its existing production machinery and equipment.
 
The amendments to the Law do not retroactively apply for investment programs having an “Approved Enterprise” approval certificate from the Investment Center issued up to December 31, 2004. Therefore, the amendments do not impact an existing “Approved Enterprise” that received prior written approval. The new tax regime shall apply for a new “Approved Enterprise” and for an “Approved Enterprise” expansion for which the elected year is 2004 onwards.
 
 
F - 38
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income (cont’d)
 
 
C.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the “Law”) (cont'd)
 
 
3. 
Amendments to the Law (cont'd)
 
In respect to the abovementioned amendments to the Law, the Company selected the tax years 2004, 2006, 2009 and 2012 as the years of election. The Israeli Tax Authorities, in a pre-ruling issued to the Company, have established a formula for the allocation of the Company's taxable income that will be subject to the relevant different tax rates as permitted under the amendments to the Law.
 
On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – “the Amendment to the Law”). The Amendment to the Law is effective from January 1, 2011 and its provisions will apply to preferred income derived or accrued in 2011 and thereafter by a Preferred Company, per the definition of these terms in the Amendment to the Law.
 
Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period. The 2012 tax year is the last year companies can choose as the year of election, providing that the minimum qualifying investment began in 2010.
 
Under the Amendment to the Law, which the Company started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all preferred income of such company. Under the law, when the election is made, the uniform tax rate (for 2014 and on) will be 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The profits of these Preferred Companies will be freely distributable as dividends, subject to a withholding tax of 20%.
 
Furthermore, the Amendment provides relief with respect to the non-payment of tax on a dividend received by an Israeli resident company from profits of an approved/alternative/beneficiary enterprise that accrued in the benefits period according to the version of the law before its amendment, if the company distributing the dividend notifies the tax authorities by June 30, 2015 that it is applying the provisions of the Amendment and the dividend is distributed after the date of the notice (hereinafter – “the relief”). Furthermore, a distribution from profits of the exempt enterprise will be subject to tax by the distributing company.
 
 
F - 39
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income (cont’d)
 
 
D. 
Taxation of the subsidiaries
 
 
1.
The subsidiary Silicom Connectivity Solutions, Inc. files tax returns to US federal tax authorities and to state tax authorities in the states of New Jersey and California.
 
 
2.
The subsidiary Fiberblaze is taxed according to the tax laws in Denmark and its subsidiary files tax returns to US federal tax authorities, New York state tax authorities and to the city of New York tax authorities.
 
 
3.
The Company has not provided for Israeli income and foreign withholding taxes on US$ 1,850 thousands of its non-Israeli subsidiaries' undistributed earnings as of December 31, 2014. The earnings could become subject to tax if earnings are remitted or deemed remitted as dividends or upon sale of a subsidiary. The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$ 218 thousands at December 31, 2014. 
 
 
E. 
Tax assessments
 
For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2012. In December 2014 the Company has filed a request to reopen the tax assessments for 2009 through 2012, in order to obtain tax benefits that the Company believes it is entitled to. As of December 31, 2014, the Company's request has not been accepted by the Israeli tax authority.
 
For the US Federal jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2010. For the New-Jersey state jurisdiction, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2009. For the California state jurisdiction, Silicom Inc. has open tax assessments for 2011 through 2014.
 
For the Danish jurisdiction, Fiberblaze A/S has final tax assessments for all years up to and including the tax year ended August 31, 2011. Fiberblaze A/S has open Tax assessments for the tax years ended August 31, 2012, August 31, 2013, August 31, 2014, and for the four months ended December 31, 2014.
 
For the US Federal jurisdiction, New York State and New York City jurisdictions, Fiberblaze US LLC has open tax assessments for tax years ended August 31, 2012, August 31, 2013, August 31, 2014, and for the four months ended December 31, 2014.
 
 
F - 40
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income (cont'd)
 
 
F.
Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations
 
   
Year ended December 31
 
   
2012
   
2013
   
2014
 
   
US$ thousands
 
                   
Income before income taxes:
                 
Israel
    10,086       16,857       16,522  
Foreign jurisdiction
    695       1,125       787  
      10,781       17,982       17,309  
                         
Current taxes:
                       
Israel
    784       949       2,494  
Foreign jurisdiction
    116       479       409  
      900       1,428       2,903  
                         
Current tax (benefits) expenses relating
                       
  to prior years:
                       
Israel
    (12 )     29       20  
                         
Deferred taxes:
                       
Israel
    (3 )     (552 )     (200 )
Foreign jurisdiction
    25       -       (19 )
      22       (552 )     (219 )
                         
Income tax expense
    910       905       2,704  
 
 
F - 41
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income (cont’d)
 
 
G.
Deferred income taxes
 
The tax effects of significant items comprising the Company’s deferred tax assets are as follows:
 
   
December 31
   
December 31
 
   
2013
   
2014
 
   
US$ thousands
   
US$ thousands
 
             
Deferred tax assets:
           
Accrued employee benefits
    248       248  
Research and development costs
    458       636  
PPE
    5       7  
Other
    2       22  
Total gross deferred tax assets
    713       913  
                 
Deferred tax liabilities:
               
Inventory
    -       (99 )
Intangible assets
    -       (444 )
Total gross deferred tax liabilities
    -       (543 )
                 
Net deferred tax assets
    713       370  
                 
In Israel
    713       913  
Foreign jurisdictions
    -       (543 )
Net deferred tax assets
    713       370  
                 
Current deferred tax assets
    274       567  
Current deferred tax liabilities
    -       (259 )
Non-current deferred tax assets
    439       346  
Non-current deferred tax liabilities
    -       (284 )
Net deferred tax assets
    713       370  
 
 
F - 42
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 14 - Taxes on Income (cont'd)
 
 
H.
Reconciliation of the statutory tax expense to actual tax expense
 
   
Year ended December 31
 
   
2012
   
2013
   
2014
 
   
US$ thousands
 
                   
Income before income taxes
    10,781       17,982       17,309  
Statutory tax rate in Israel
    25.0 %     25.0 %     26.5 %
      2,695       4,496       4,587  
                         
Increase (decrease) in taxes resulting from:
                       
Non-deductible operating expenses
    159       205       476  
Prior year adjustments
    (12 )     29       20  
Change in valuation allowance
    (63 )     -       -  
Tax effect due to "Approved/Benefited/
                       
 Preferred Enterprise" status
    (2,063 )     (4,396 )     (2,588 )
Taxes related to foreign jurisdictions
    30       198       181  
Changes in tax rate
    (58 )     399       -  
Other
    222       (26 )     28  
                         
Income tax expense
    910       905       2,704  
 
 
I. 
Accounting for uncertainty in income taxes
 
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.
 
During 2012, 2013 and 2014 the Company and its subsidiaries did not have any significant unrecognized tax benefits and thus, no related interest and penalties were accrued.
 
In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
 
 
F - 43
 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 15 - Subsequent Events
 
On March 23, 2015 Silicom's Board of Directors declared a dividend of US $1.00 per share payable on April 21, 2015 to shareholders of record as of April 6, 2015, and in the aggregate amount of approximately US $7 . 3 million for 2014.
 
In March 2015, the Company’s compensation committee and board of directors, respectively, have approved the grant of a total of 92,591 options under the Global Share Incentive Plan (2013), of which options granted to directors and office holders are subject to the approval of the Annual General Meeting, which is currently scheduled to convene no later than July 2015, as prescribed under the Israeli Companies Law, 1999 and the Company's Amended and Restated Articles of Association.
 
F - 44
Exhibit 4.2

Summary of Lease Agreements, dated December 3, 2014, between the
Company and C.P.M Medical Equipment Ltd. ("C.P.M") and between the
Company and Klimotech Ltd. ("Klimotech") (together the "Lessors")
 
Note : this Summary does not contain a full or direct translation of the terms of the original Hebrew-language agreements, and is intended solely as a general presentation of these documents.
 
In addition, these agreements constitute the lease of the premises described herein, and are treated as one agreement (the " Agreement " or the " Lease Agreement ").
 
Leased Premises
 
1,148 square meters (gross) on the first floor and 126 square meters (gross) on the fourth floor of a building located on 14 Atir Yeda Street, Kfar Saba (the " Klimotech Premises ") and 229 square meters (gross) on the second floor of said building (the " C.P.I Premises ") (together, the " Premises ").
 
Term of Lease
 
1)
The term of Lease will be sixty (60) months, from March 1, 2015 through February 28, 2020 (the " Term of Lease ").
 
2)
We will have the option of extending the Term of Lease Agreement for additional sixty (60) months through February 28, 2025, subject to the following terms:
 
 
a.
During the Term of Lease, we met all its obligations to the full satisfaction of the Lessors, specifically with regard the due Rental Payments, as defined below.
 
 
b.
During the Term of Lease, we met all its obligations in accordance with the terms of the Agreement with regard to the lease of building parking spaces, subject to an agreement signed with an external management company.
 
 
c.
The Company had not, and will not, make use of the Premises in a manner or for a purpose which is prohibited by law.
 
 
d.
The Term of Lease will be automatically extended, unless we provided a written notice to the Lessors, 5 months prior to the termination of the initial Term of Lease, stating that it does not wish to extend the Term of Lease.
 
 
 
 
 
Purpose of Lease
 
The Premises shall be used for office space, testing lab, oven (to be used to testing products' durability under extreme heat, production lines only, and storage purposes only.
 
Rental Payments
 
1)
During the Term of the Lease (and the option, if applicable): NIS 55 per square meter, plus VAT. The aggregate monthly rental payment for the Premises of 1,503 square meters shall be NIS 82,665, plus VAT.

2)
At the Agreement's signing date, we will execute a bank transfer on the account of the first and last three months of the Term of Lease. Thereafter, Rental Payments shall be made in advance, every three months.
 
Other Payments
 
1)
During the Term of the Lease, depending on usage, we will be responsible for payments with respect to use of electricity, water, gas, air conditioning, security, maintenance services, cleaning services and other miscellaneous service related expenses.
 
2)
During the Term of the Lease, we will be responsible for payments of all taxes, whether municipal, governmental or any kind of obligatory payments, projections, tolls and others which are with respect to the Premises.

Use and Preservation of Premises

1)
We will be liable for any injury, damage or loss caused by us to the Premises or any other person or corporation, resulting from the holding and/or using the Premises or any other action or omission by us or someone on our behalf.

2)
We will be responsible for the current maintenance of the Premises and will make the repairs for the damages for which we are responsible under the Lease.

3)
We will not make any changes in the Premises without the Lessors prior written permission.

Taxes and Licenses

1)
We will pay all taxes and fees related to the property and/or business, including licensing fees and all taxes and charges for the rental of a parking space, if applicable.

2)
We will be responsible for procuring any necessary licenses from the authorities.
 
 
3)
We are liable for VAT, or any other taxes required on any and all payments required under the Lease Agreement, including electricity, maintenance, security services, and cleaning services.

 
 
 
General
 
1)
We may not assign or transfer our rights pursuant to the Lease Agreement without the prior written consent of the Lessors. We may not put a lien or pledge on the property.
 
2)
We may only use the Premises exactly as outlined in the Lease Agreement, and no other areas, including the roof of the building or the outside courtyard.
 
Insurance and Indemnity

1)
We will procure the following insurance policies: (i) property insurance, including catastrophe insurance; (ii) construction and workers insurance; (iii) third-party liability insurance; (iv) employer liability insurance; and (v) consequential damage insurance

2)
We are liable for any injury of any kind to third parties related to our use of the Premises or relating to business operations, and will indemnify the Lessors for any loss, litigation or obligation incurred due to injuries to third parties, including for attorneys fees related to same.

3)
The Lessors is obligated to procure structural insurance, including for catastrophic damages as a result of, inter alia , fire, earthquake, lightening, storm, flood and explosion damages, and limited consequential damages insurance.
 
Surrender of Premises
 
Belated surrender of the Premises will obligate us to pay the Lessors compensation in an amount equal to three times the Rental Payment for the respective period of delay in surrender of the Premises.
 
Termination of the Agreement
 
The Lease Agreement can be terminated prior to the end of the Term of Lease, the Lessors may terminate the Lease Agreement and we will be obligated to vacate the Premises immediately or within a period of time as defined by the Lessors in the notice to us of such termination, upon the occurrence of any of the following events:
 
1)
We breached any of our material obligations under the Lease Agreement.
 
2)
We breached any provision or obligation under the Lease Agreement which is not material and such breach was not cured within 14 days as of the date we received a written notice to requiring the cure of such breach.

3)
In the event that a receiver is appointed over our assets and/or a court disallows said receiver from fulfilling the Lease Agreement, and such notice or order was not cancelled within 45 days from the motion for a receivership order to the court.

4)
In the event that a motion for liquidation was filed against us or that we filed a request for voluntary liquidation or that a liquidator was appointed to us.
 
 
 
 
 
 
5)
In the event that a foreclosure order was issued against us and such proceeding is not cancelled within 45 days, or if an order which prevents us from fulfilling the Lease Agreement is levied against it, and such levy is not cancelled within 14 days.
 
6)
In the event that we, or our office holders or shareholders, have fled in order to evade our or their creditors.
 
7)
In the event that the warrants and/or securities provided by us to guarantee the Lease Agreement, in whole or in part, expire, get cancelled or rendered invalid for any reason.

Deposit

1)
We are required to provide a deposit in the amount of six months of Rental Payment.



Exhibit 4.7
 
SHARE PURCHASE AGREEMENT
 
by and among:
 
silicom Ltd. ,
an Israeli company;
 
FIBERBLAZE A/S ,
A Danish company;
 
NIKOLAJ HERMANN and FIBERBLAZE HOLDING APS
A Danish company
 
and
 
JAKOB HILMER and HILMER APS
A Danish Company
 
___________________________
 
 
Dated as of December 10, 2014
 
___________________________
 
 
 
 
TABLE OF CONTENTS
 
1
9
11
12
29
29
34
36
37
38
41
 
 
 
 
 
SH ARE PURCHASE AGREEMENT
 
This Share Purchase Agreement   is made and entered into as of December 10, 2014, by and among: silicom Ltd. , an Israeli company (company number 520041120) (“ Purchaser ”); FIBERBLAZE A/S , a Danish company with the CVR no. 31 30 12 70 (the “ Company ”), Nikolaj Hermann , FIBERBLAZE HOLDING APS , a Danish company with the CVR no. 31 28 29 26, HILMER APS , a Danish company with the CVR no. 31 28 49 96, and Jakob Hilmer (Nikolaj Hermann (for purposes of sections 3 and 6.11  ONLY), Fiberblaze Holding APS, Jakob Hilmer (for purposes of sections 3 and 6.11 ONLY) and Hilmer APS each a “ Selling Shareholder ” and, collectively, the “ Selling Shareholders ”).
 
Recitals
 
A.            The Selling Shareholders are the beneficial owners of all of the issued shares in the Company (each owning 50% of issued shares in the Company).
 
B.            The Selling Shareholders have agreed to sell to Purchaser, and Purchaser has agreed to purchase from the Selling Shareholders, the Company Shares held by the Selling Shareholders, on the terms and subject to the conditions of this Agreement.
 
Agreement
 
In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
 
1.
Terms And Definitions
 
 
1.1.
As used in this Agreement, the following terms have the following meanings:
 
Acquired Companies . “ Acquired Companies ” shall mean: (a) the Company; and (b) FIBERBLAZE US LLC, a limited liability company incorporated in the State of New York, Taxpayer ID TF7183404, being a 100% owned Subsidiary of the Company.
 
Acquired Company Contract . “ Acquired Company Contract ” shall mean any Contract: (a) to which any Acquired Company is a party; (b) by which any Acquired Company or any of its assets is or may become bound or under which any Acquired Company has, or may become subject to, any obligation; or (c) under which any Acquired Company has or may acquire any right or interest.
 
Acquired Company Employee . “ Acquired Company Employee ” shall mean any employee, director or independent contractor of any Acquired Company.
 
Acquired Company Employee Agreement .   “ Acquired Company Employee Agreement ” shall mean each management, employment, severance, consulting, relocation, repatriation or expatriation agreement or other Contract between any Acquired Company and any current Acquired Company Employee.
 
Acquired Company Employee Plan . “ Acquired Company Employee Plan ” shall mean any plan, program, policy, practice, Contract or other arrangement providing for compensation, severance, termination pay, deferred compensation, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether written, unwritten or otherwise, funded or unfunded, that is or has been maintained, contributed to, or required to be contributed to, by any Acquired Company for the benefit of any Acquired Company Employee, or with respect to which any Acquired Company has or may have any liability or obligation, excluding any Acquired Company Employee Agreement.
 
Acquired Company IP . “ Acquired Company IP ” shall mean all Intellectual Property and Intellectual Property Rights in which any Acquired Company has (or purports to have) an ownership interest or a license or similar right.
 
 
 
 
Acquisition Transaction . “ Acquisition Transaction ” shall mean any transaction or series of transactions involving:
 
(a)            the sale, license or disposition of all or a material portion of any Acquired Company’s business, properties, assets or share capital;
 
(b)            the issuance, disposition or acquisition of: (i) any shares or other equity security of any Acquired Company, (ii) any other right to acquire any securities of any Acquired Company, or (iii) any instrument or obligation that is or may become convertible into or exchangeable for any securities of any Acquired Company;
 
(c)            any merger, consolidation, business combination, reorganization or similar transaction involving any Acquired Company; or
 
(d)            any engagement of all or substantially all of the employees, consultants and contractors of any Acquired Company; or
 
(e)            any joint venture or other strategic investment in or involving any Acquired Company (other than an ongoing commercial or strategic relationship in the ordinary course of business).
 
Adjustment Amount .   “ Adjustment Amount ” shall mean the amount by which the Purchase Price will be increased or reduced following the Closing pursuant to Section 6.10, on the basis of the changes, if any, between the Estimated Closing Consideration Certificate and the Closing Consideration Certificate. To the extent that there is a difference between the Estimated Closing Consideration Certificate and the Closing Consideration Certificate, which would result in a change to the amount of the Closing Payment (had such Closing Payment been calculated on the basis of the Closing Consideration Certificate) then such change, if positive, will cause the Purchase Price to increase by the amount of the change, and if negative, will cause the Purchase Price to be reduced by the amount of the change.
 
Affiliate .   “ Affiliate ” of any Person shall mean another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person.
 
Agreement . “ Agreement ” shall mean this Share Purchase Agreement.
 
Business . “ Business ” means the business of developing, marketing, selling and supporting Network Interface Cards based on FPGA technology used either within financial trading or for packet capture. The technology used could include TOE, time stamping, and packet filtering .
 
Business Day . “ Business Day ” shall mean any day other than a Friday, Saturday or a Sunday or a day on which the banking institutions in Denmark or Israel are authorized by law or executive order to close.
 
Charter Documents . “ Charter Documents ” shall mean the articles of association or similar organizational documents, including all amendments thereto, of each of the Acquired Companies.
 
Closing . “ Closing ” shall mean as defined in Section 2.3.
 
Closing Accounts Payable Amount . “Closing Accounts Payable Amount” shall mean the amount of the Acquired Companies accounts payable immediately preceding the Closing (excluding provision for mandatory employee holiday pay commitments ( feriepengeforpligtelse )).
 
Closing Accounts Receivable Amount . “Closing Accounts Receivable Amount” shall mean the amount of the Acquired Companies accounts receivable immediately preceding the Closing (consisting of trade, accruals and VAT ( moms )).
 
Closing Balance Sheet s. “ Closing Balance Sheets ” shall mean as defined in Section 6.10.
 
Closing Cash Amount . “ Closing Cash Amount ” shall mean the cash balance and cash equivalents of the Acquired Companies (including bank deposits) immediately preceding the Closing.
 
 
- 2 -
 
 
Closing Certificate . “ Closing Certificate ” shall mean as defined in Section 7.6(f).
 
Closing Consideration Certificate . “ Closing Consideration Certificate ”   shall mean as defined in Section 6.10.
 
Closing Consideration Certificate Data . “ Closing Consideration Certificate Data ”   shall mean as defined in Section 4.4(c).
 
Closing Date . “ Closing Date ” shall mean as defined in Section 2.3.
 
Closing Indebtedness Amount . “ Closing Indebtedness Amount ” means the amount of outstanding Indebtedness immediately preceding the Closing (including principal, interest, fees and any other amounts payable in relation thereto and including for avoidance of doubt the Pay-Off Amounts).
 
Closing Payment. “ Closing Payment ” shall mean be an amount equal to $10,000,000 , plus the Purchase Price Excess Amount, if any, minus   the sum of (i) the Purchase Price Shortfall Amount, if any, and (ii) the Escrow Amount.
 
Company Financial Statements . “ Company Financial Statements ” shall mean the following financial statements and notes in English: (i) the solo audited balance sheets and related statements of income of each of the Acquired Companies as of August 31, 2014, and August 31, 2013 (it being understood, that the 2013 accounts for Fiberblaze US LLC are not fully audited) together with the notes thereto, and the solo audited balance sheet and related statements of income of the Company as of August 31, 2012, together with the notes thereto; and (ii) the Interim Balance Sheets .
 
Company IP . “ Company IP ” shall mean (a) all Intellectual Property Rights and Intellectual Property in each Company Product; (b) all other Intellectual Property Rights and Intellectual Property in which any of the Acquired Companies has (or purports to have) an ownership interest of any nature or a license or similar right, and (c) any other Intellectual Property Rights that are utilized in the Acquired Companies’ business.
 
Company IP Contract . “ Company IP Contract ” shall mean any Contract to which any Acquired Company is or was a party or by which any Acquired Company is or was bound, that contains any assignment or license of, or any covenant not to assert or enforce, any Intellectual Property Right or that otherwise relates to any Company IP or any Intellectual Property created or developed by, with or for any Acquired Company.
 
Company Option . “ Company Option ” shall mean any option or other warrant or similar right to purchase (or otherwise exercised in exchange for) Company Shares or other equity securities of the Company (or exercisable for cash) outstanding under a share incentive plan or otherwise.
 
Company Product . “ Company Product ” shall mean each product or service created, developed (or under development through the date hereof), manufactured, marketed, provided, distributed, licensed, or sold by any Acquired Company at any time.
 
Company Shares . “ Company Shares ” shall mean all of the outstanding share capital of the Company.
 
Company Software . “ Company Software ” shall mean any software (including firmware and other software embedded in hardware devices) owned, created, developed (or currently being developed), used, marketed, provided, distributed, licensed, or sold by any of the Acquired Companies at any time.
 
Consent . “ Consent ” shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization).
 
Contaminant . “ Contaminant ” includes any material, substance, chemical, gas, liquid, waste, effluent, pollutant or contaminant which, whether on its own or admixed with another, is identified or defined in or regulated by or pursuant to any Environmental Laws or which upon release into the Environment presents a danger to the Environment or to the health or safety or welfare of any person.
 
 
- 3 -
 
Contract . “ Contract ” shall mean any written, oral or other agreement, contract, subcontract, statement of work, lease, understanding, arrangement, instrument, note, warranty, insurance policy, benefit plan or legally binding commitment or undertaking of any nature.
 
Damages . “ Damages ” shall include any loss, damage, Liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including reasonable attorneys’ fees), charge, cost (including reasonable costs of investigation) or expense of any nature; but excluding any consequential losses, indirect losses or loss of profit.
 
Design Win Payment . “ Design Win Payment ” shall mean as defined in Section 2.2(b)(ii).
 
Disclosure Schedule . “ Disclosure Schedule ” shall mean the schedule (dated as of the date of the Agreement) prepared in accordance with Sections 3 and 4, delivered to Purchaser on behalf of the Company and the Selling Shareholders.
 
Due Diligence Material. "Due Diligence Material" shall mean documents disclosed in the electronic data room organized by the Company, the questions and answers set out in the e-mail correspondence between the Company and the Purchaser and the Purchaser’s Representatives, and the materials regarding the Company Products, provided in connection with the due diligence investigation conducted by Purchaser and the Purchasers Representatives. The Due Diligence Material is attached as Schedule I (CD-Rom).
 
Encumbrance . “ Encumbrance ” shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim or restriction of any nature.
 
End Date . “ End Date ” shall mean January 31, 2015.
 
Entity . “ Entity ” shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.
 
Environment . “ Environment ”   includes (a) any and all buildings, structures, fixtures, fittings, appurtenances, pipes, conduits, valves, tanks, vessels and containers whether above or below ground level, and (b) ambient air, land surface, sub-surface strata, soil, surface water, ground water, river sediment, marshes, wet lands, flora and fauna.
 
Environmental Law . “ Environmental Law ” shall mean: all Legal Requirements, by-laws, orders, instruments, directives, decisions, injunctions and judgments of any government, local government, international, supranational, executive, administrative, judicial or regulatory authority or other Governmental Body and all approved codes of practice (whether voluntary or compulsory) relating to the protection of the Environment or of human health or safety or welfare or to the manufacture, formulation, processing, treatment, storage, containment, labeling, handling, transportation, distribution, recycling, reuse, release, disposal, removal, remediation, abatement or clean-up of any Contaminant and any amendment thereto and any and all regulations, orders and notices made or served thereunder or pursuant thereto).
 
Environmental Licenses . “ Environmental License ”   means any permit, licenses, approval, permission, consent or authorization required by or pursuant to any applicable Environmental Laws.
 
Environmental Release .   “ Environmental Release ”   means the spilling, leaking, pumping, pouring, emitting, releasing, emptying, discharging, injecting, escaping, leaching, dumping, leaving, discarding or disposing of any Contaminant into or upon the Environment.
 
Escrow Account . “ Escrow Account ” shall mean as defined in Section 2.2(c).
 
 
- 4 -
 
Escrow Agent . “ Escrow Agent ” shall mean as defined in Section 2.2(c).
 
Escrow Agreement . “ Escrow Agreement ” shall mean as defined in Section 2.2(c).
 
Escrow Amount . “ Escrow Amount ” shall mean as defined in Section 2.2(c).
 
Estimated Closing Consideration Certificate. “ Estimated Closing Consideration Certificate ” shall mean as defined in Section 4.4(c).
 
Evaluation Date . “ Evaluation Date ”   means August 31, 2015.
 
Evaluation Period . “ Evaluation Period ”   means the period between September 1, 2013 and the Evaluation Date.
 
Excess Amount . “ Excess Amount ” shall mean as defined in Section 2.2(b)(i).
 
Excess Payment . “ Excess Payment ” shall mean as defined in Section 2.2(b)(i).
 
Expert. "Expert" shall mean a state-authorised public accountant appointed by an internationally recognised auditing firm, who is one of the “big four” accounting firms, not having advised any of the Parties or the Parties group for the past 2 years, among its partners.
 
Founders .   “ Founders ” shall mean each of Jakob Hilmer and Nikolaj Hermann.
 
GAAP . “ GAAP ” shall mean generally accepted accounting principles in Denmark.
 
Good Reason . " Good Reason " shall mean the situation where a Founder resigns from his employment by the Company or the Purchaser (or any other company within the Purchaser group) solely as a result of a material breach of his employment agreement by the employer; provided that such Founder has provided written notice to the employer of such breach and such breach was not cured within 15 Business Days of such notice.
 
Governmental Authorization . “ Governmental Authorization ” shall mean any: (a) permit, license, certificate, franchise, permission, clearance, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body.
 
Governmental Body . “ Governmental Body ” shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or Entity and any court or other tribunal).
 
Governmental Grant . “ Governmental Grant ” shall mean any grant, incentive, subsidy, award, participation, exemption, status, cost sharing arrangement, reimbursement arrangement or other benefit, relief or privilege provided or made available by or on behalf of or under the authority of the European Union or any other Governmental Body.
 
 
- 5 -
 
Indebtedness .   “ Indebtedness ” shall mean without duplication: (a) all obligations (including the principal amount thereof or, if applicable, the accreted amount thereof and the amount of accrued and unpaid interest thereon) of any Acquired Company, whether or not represented by bonds, debentures, notes or other securities (whether or not convertible into any other security), for the repayment of money borrowed, whether owing to banks or other financial institutions, on equipment leases or otherwise; (b) all deferred indebtedness of any Acquired Company for the payment of the purchase price of property or assets purchased (other than accounts payable incurred in the ordinary course of business); (c) all obligations of any Acquired Company to pay rent or other amounts under a lease which is required to be classified as a capital lease on the face of a balance sheet prepared in accordance with GAAP (applied on a basis consistent with the basis on which the Company Financial Statements were prepared and in accordance with the Acquired Companies’ historic past practice), or with respect to such Indebtedness at Closing, prepared in accordance with US GAAP; (d) all outstanding reimbursement obligations of any Acquired Company with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of any Acquired Company; (e) all obligations of any Acquired Company under any interest rate swap agreement, forward rate agreement, interest rate cap or collar agreement or other financial agreement or arrangement entered into for the purpose of limiting or managing interest rate risks; (f) all obligations secured by any Encumbrance existing on property owned by any Acquired Company, whether or not indebtedness secured thereby will have been assumed; (g) all guaranties, endorsements, assumptions and other contingent obligations of any Acquired Company in respect of, or to purchase or to otherwise acquire, indebtedness of others; (h) all premiums, penalties, fees, expenses, breakage costs and change of control payments required to be paid or offered in respect of any of the foregoing on prepayment, as a result of the consummation of the transactions contemplated by the Agreement or in connection with any lender Consent; and (i) all obligations of any Acquired Company, whether interest bearing or otherwise, owed to any securityholder of any Acquired Company and or any Affiliate of any securityholder of any Acquired Company.
 
Indemnitee . “ Indemnitee ” shall mean any of the following Persons: (a) Purchaser; (b) Purchaser’s current and future Affiliates; or (c) the respective successors and assigns of the Persons referred to in clauses “(a)” or “(b)” above.
 
Intellectual Property . “ Intellectual Property ” shall mean algorithms, APIs, databases, data collections, diagrams, formulae, inventions (whether or not patentable), know-how, logos, marks (including brand names, product names, logos, and slogans), methods, network configurations and architectures, processes, proprietary information, protocols, schematics, specifications, software, software code (in any form, including source code and executable or object code), subroutines, techniques, user interfaces, URLs, websites, works of authorship and other forms of technology (whether or not embodied in any tangible form and including all tangible embodiments of the foregoing, such as instruction manuals, laboratory notebooks, prototypes, samples, studies and summaries).
 
Intellectual Property Rights . “ Intellectual Property Rights ” shall mean all rights of the following types, which may exist or be created under the laws of any jurisdiction in the world: (A) rights associated with works of authorship, including exclusive exploitation rights, copyrights, moral rights and mask works; (B) trademark and trade name rights and similar rights; (C) trade secret rights; (D) patent and industrial property rights; (E) other proprietary rights in Intellectual Property; and (F) rights in or relating to registrations, renewals, extensions, combinations, divisions, and reissues of, and applications for, any of the rights referred to in clauses “(A)” through “(E)” above.
 
Interim Balance Sheets . “ Interim Balance Sheets ” shall mean the estimated solo balance sheets of each the Acquired Companies and the statements of income as of December 9, 2014 prepared in accordance with GAAP applied on a basis consistent with the basis on which the Company Financial Statements were prepared and in accordance with the Acquired Companies’ historic past practice.
 
Key Employees . “ Key Employees ” shall mean each of the Persons set forth in Schedule II .
 
Knowledge . An individual shall be deemed to have “ Knowledge ” of a particular fact or other matter if such individual is actually aware of such fact or other matter after making due inquiries regarding the relevant matter of all relevant key employees. The Company or the Selling Shareholders shall be deemed to have “ Knowledge ” of a particular fact or other matter if any Selling Shareholder, any officer, director or Key Employee of any Acquired Company has Knowledge of such fact or other matter. The Purchaser shall be deemed to have “ Knowledge ” of a particular fact or other matter if such fact or other matter has been Made Available to Purchaser in sufficient and explicit detail in the Due Diligence Material and the Disclosure Schedule.
 
Legal Proceeding . “ Legal Proceeding ” shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel.
 
 
- 6 -
 
Legal Requirement . “ Legal Requirement ” shall mean any federal, state, local, municipal, foreign (including Israeli and Denmark, as applicable) or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body.
 
Liability . “ Liability ” shall mean any debt, obligation, duty or liability of any nature (including any undisclosed, unmatured, unaccrued, unasserted, contingent, conditional, implied, vicarious, derivative, joint, several or secondary liability), regardless of whether such debt, obligation, duty or liability would be required to be disclosed on a balance sheet prepared in accordance with GAAP or US GAAP.
 
Made Available to Purchaser . Any statement made herein to the effect that any information, document or other material has been “ Made Available to Purchaser ” shall mean that such information, document or material (including the Due Diligence Material) was made available for review by Purchaser or Purchaser’s Representatives.
 
Material Adverse Effect . “ Material Adverse Effect ” shall mean any change, event, effect, claim, circumstance or matter (each, an “ Effect ”) that is, or could reasonably be expected to be or to become, materially adverse to: (a) the business, condition, assets, capitalization, Intellectual Property, Liabilities, operations, results of operations or financial performance of the Acquired Companies taken as a whole; (b) Purchaser’s right to directly or indirectly own, or to directly or indirectly receive dividends or other distributions with respect to, the shares of any Acquired Company; or (c) the ability of the Company or any of the Selling Shareholders to perform any of their covenants or obligations under this Agreement or under any other Contract or instrument executed, delivered or entered into in connection with any of the transactions contemplated by this Agreement other than any Effect (i) relating to or resulting from economic conditions in general (other than fluctuations in the value of any currency) or (ii) relating to the specific industry in which the Acquired Companies' operate.
 
Material Contracts . “ Material Contracts ” shall mean as defined in Section 4.11(a).
 
NDA . “ NDA ” shall mean the Mutual Non-Disclosure Agreement entered into by the Parties dated July 8 th , 2014.
 
Ordinary Shares .   “ Ordinary Shares ” shall mean the ordinary shares, par value DKK 1.00 per share, of the Company.
 
Open Source Code . “ Open Source Code ” means any software code that is distributed under the GNU General Public License, the Affero General Public License, the GNU Lesser General Public License, the Eclipse Public License, the Common Public License, the Mozilla Public License, or any other license identified as an open source license by either the Open Source Initiative ( www.opensource.org ) or the Free Software Foundation (an “ Open Source License ”) and any other software code made available under any license term or condition that requires or could require, or conditions or could condition, that such software or other software combined and/or distributed with such software be: (a) disclosed or distributed in source code form; (b) licensed for the purpose of making derivative works; (c) redistributable at no charge or (d) distributed with certain attribution or notice requirements.
 
 
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Pay-Off Amounts. "Pay-Off Amounts" shall mean such amounts in such currencies as notified under Section 4.4 as being the amount required: (i) to fully discharge the Indebtedness (whether or not due and payable) owed under or in connection with the Pay-Off Debt and any hedging related to the Pay-Off Debt at the Closing Date (for the avoidance of doubt, including the outstanding principal amount of any drawing and any accrued but unpaid interest thereon at the Closing Date); (ii) to release all guarantees and security in relation to the Pay-Off Debt and any hedging, swap or similar arrangements related to the Pay-Off Debt at the Closing Date (such amount being inclusive of the complete unwind and settlement of such arrangements); and (iii) to terminate the Pay-Off Debt and any hedging related to the Pay-Off Debt at the Closing Date (such amount in (i), (ii) and (iii) being inclusive of any applicable break costs or expences), assuming such discharge, release and termination takes effect from the Closing Date.
 
Pay-Off Creditor . “ Pay-Off Creditor ” shall mean Nordea Bank Danmark A/S and any other related creditor or lienholder who is party to the Pay-Off Debt or any hedging, swap or similar arrangements related to the Pay-Off Debt,
 
Pay-Off Debt.   "Pay-Off Debt" shall mean the credit line and any other Indebtedness owed by the Acquired Companies to Nordea Bank Danmark A/S and its affiliates.
 
Person . “ Person ” shall mean any individual, Entity or Governmental Body.
 
Pre-Closing Period . “ Pre-Closing Period ” shall mean the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to Section 9 or the Closing.
 
Purchase Price . “ Purchase Price ” shall mean as defined in Section 2.2(b)(ii).
 
Purchase Price Excess Amount . “ Purchase Price Excess Amount ” shall mean an amount, if a positive number, equal to: (A) the sum of (i) the Closing Cash Amount, and (ii) the Closing Accounts Receivable Amount, minus (B) the sum of (i) the Closing Indebtedness Amount, and (ii) the Closing Accounts Payable Amounts.
 
Purchase Price Shortfall Amount . “ Purchase Price Shortfall Amount ” shall mean an amount, if a positive number, equal to: (A) the sum of (i) the Closing Indebtedness Amount, and (ii) the Closing Accounts Payable Amounts, minus (B) the sum of (i) the Closing Cash Amount, and (ii) the Closing Accounts Receivable Amount.
 
Purpose . “Purpose” shall mean as defined in Section 6.6(a).
 
Registered IP . “ Registered IP ” shall mean all Company IP that is registered, filed, or issued under the authority of, with or by any Governmental Body, including all patents, registered copyrights and registered trademarks and all applications for any of the foregoing.
 
Related Party . “ Related Party ” shall mean: (a) each Selling Shareholder; (b) each individual who is or who has been at any time since inception of the respective Acquired Company, an officer or director of any such Acquired Company; (c) each member of the immediate family of each of the individuals referred to in clauses “(a)” and “(b)” above; (d) any trust or other Entity (other than an Acquired Company) in which any one of the Persons referred to in clauses “(a)” “(b)” and “(c)” above holds (or in which more than one of such Persons collectively hold), beneficially or otherwise, a material voting, proprietary or equity interest.
 
Representatives . “ Representatives ” shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives.
 
Revenues . “ Revenues ” shall mean gross proceeds received from the sale, licensing or distribution of the Company Products to a non affiliated third party.
 
Subsidiary . An Entity shall be deemed to be a “ Subsidiary ” of another Person if such Person directly or indirectly owns or purports to own, beneficially or of record: (a) an amount of voting securities of or other interests in such Entity that is sufficient to enable such Person to elect at least a majority of the members of such Entity’s board of directors or other governing body; or (b) at least 50% of the outstanding equity, voting, beneficial or financial interests in such Entity.
 
 
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Ta x . “ Tax ” includes all forms of taxation and statutory, governmental, supra-governmental, state, principal, local government or municipal impositions, duties, contributions, charges and levies, whenever imposed, and all penalties, charges, surcharges, costs, expenses and interest relating thereto and without limitation all employment taxes and any deductions or withholdings of any sort regardless of whether any such taxes, impositions, duties, contributions, charges and levies are chargeable directly or primarily against or attributable directly or primarily to any Acquired Company, or any other person and of any amount in respect of any of them is recoverable from any other person.
 
Tax Return . “ Tax Return ” shall mean any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax.
 
Termination Without Cause . “ Termination Without Cause ” shall mean termination of a Founder's employment by the Company or the Purchaser (or any other company within the Purchaser group) for any reason other than as a result of the Founder's material breach of his employment agreement.
 
US GAAP . "US GAAP" shall mean generally accepted accounting principles in the United States of America.
 
1.2.           General Terms - the definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The use of the word “or” shall not be exclusive. The word "Agreement" shall include all schedules and exhibits hereto unless the context otherwise requires. The words “herein”, “hereof” and “hereunder” and words of similar import refer to this Agreement (including the Exhibits and Schedules to this Agreement) in its entirety and not to any part hereof unless the context shall otherwise require. All references herein to Sections, Exhibits and Schedules shall be deemed references to Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Any reference in this Agreement to a “day” or a number of “days” (without explicit reference to “Business Days”) shall be interpreted as a reference to a calendar day or number of calendar days.
 
1.3.           Currency .
 
(a)               All references in this Agreement to “dollars” or “$” shall mean United States Dollars.
 
(b)               Currency conversions with respect to calculation of the trade accounts receivable amounts which are reflected in the Closing Balance Sheets will be done according to the following rules:
 
(i) invoices in dollars will not be converted into another currency.
 
(ii) invoices in EUR, DKK and other non dollar invoices will be converted into dollars according to the applicable exchange rate on the Closing Date. 
 
2.
Description of Transaction
 
2.1.           Purchase and Sale of Company Shares . At the Closing (as defined below), upon the terms and subject to the conditions set forth in this Agreement, the Selling Shareholders shall sell, transfer and deliver to Purchaser all of the issued and outstanding Company Shares held by the Selling Shareholders as of immediately prior to the Closing, free and clear of all Encumbrances and with the benefit of all rights of whatsoever nature attaching or accruing to such Company Shares, including rights to any dividends and distributions declared, paid or made in respect of such Company Shares on or after the date of this Agreement, and Purchaser will purchase such Company Shares from the Selling Shareholders, on the terms and subject to the conditions set forth in this Agreement.
 
 
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2.2.           Purchase Price .
 
(a)                Closing Payment . As consideration for the Company Shares, at the Closing the Purchaser shall pay the Closing Payment to the Selling Shareholders. The Closing Payment shall be paid in cash by wire transfer into the account designated by the Selling Shareholders as set forth on Exhibit A attached hereto, which Exhibit A shall also include the allocation of the Closing Payment among the Selling Shareholders.
 
(b)                Earn-out Payment . As further consideration for the Company Shares, following the Closing the Selling Shareholders shall be eligible to the following payments:
 
  (i)       if the Company’s Revenues during the Evaluation Period exceed $10,000,000 (converting non US$ amounts into US$ as of the date of the invoice relating to such Revenue amount) (such excess amount, the “ Excess Amount ”), then, the Selling Shareholders shall receive a payment equal to twice the Excess Amount (the “ Excess Payment ”). 90% of the Excess Payment will be paid to the Selling Shareholders in cash by wire transfer into the account designated by them and as per the allocation as set forth on Exhibit A within 30 days of finalizing the Acquired Companies' audited financial statements.  Any invoiced sale, licensing or distribution of Company Products delivered in the ordinary course of business during the Evaluation Period which has not lead to gross proceeds received by the Acquired Companies within the Evaluation Period, but which are received subsequent to the Evaluation Period, shall entitle the Selling Shareholders to receive from the Purchaser an amount corresponding to a proportionate increase of the Excess Payment based on such additional received payments. The remaining 10% of the Excess Payment will be paid to the Selling Shareholders by way of a grant of stock options of the Purchaser within 30 days of finalizing the Purchaser’s audited financial statements directly to the Founders as per the allocation as set forth on Exhibit A . Such stock options will be valued based on the fair market value of such stock options on the date of their grant according to the B&S model, will vest in three equal tranches over 3 years, with the first tranche vesting one year following the Evaluation Date, and will have an exercise price equal to (rounded to nearest 1/100) the closing trading price of the Purchaser’s Ordinary Shares on the Nasdaq Stock Exchange on the date of their grant;
 
  (ii)       for every design win achieved from the date of the Closing until the Evaluation Date with expected Revenues of more than $1,000,000 per year, the Selling Shareholders will receive $1,000,000 (the “ Design Win Payment ” and together with the Closing Payment and the Excess Payment, the “ Purchase Price ”), 90% of which will be paid in cash by wire transfer into the account designated by them and as per the allocation among them as set forth on Exhibit A and the remainder will be paid to the Selling Shareholders by way of a grant of stock options of the Purchaser directly to the Founders as per the allocation as set forth on Exhibit A . Such stock options will be valued based on the fair market value of such stock options on the date of their grant according to the B&S model, will vest in three equal tranches over 3 years, with the first tranche vesting one year following the date of the first anniversary of Closing, and will have an exercise price equal to (rounded to nearest 1/100) the closing trading price of the Purchaser’s Ordinary Shares on the Nasdaq Stock Exchange on the date of their grant. The determination of whether any design win has been achieved shall be made on or about the date of the first anniversary of Closing in the joint discretion of Shaike Orbach and Nikolaj Hermann, and will require their joint approval. To the extent that Shaike Orbach and Nikolaj Hermann are not able to come to a determination for any reason, the Purchaser and the Selling Shareholders shall discuss and agree on the matter.
 
 
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  (i ii)      All stock options granted in connection with the transactions contemplated hereby shall be granted under the Purchaser’s standard employee option plans.
 
(c)                Escrow .  Notwithstanding anything to the contrary contained in Section 2.2 or elsewhere in this Agreement, an aggregate of $3,000,000 (the “ Escrow Amount ”) shall be withheld from the portion of the Closing Payment otherwise payable to the Selling Shareholders pursuant to Section 2.2(a), on a pro rata basis and, on the Closing Date, deposited into an escrow account (the “ Escrow Account ”), to be held and distributed by the escrow agent to be selected by the Parties (such Person, the “ Escrow Agent ”) in accordance with the terms of this Agreement and an Escrow Agreement substantially in the form of Exhibit B (the “ Escrow Agreement ”).
 
2.3.           Closing . The consummation of the transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Yigal Arnon & Co. 1 Azrieli Center, Tel Aviv 6702101, Israel on December 10, 2015 and no later than three Business Days later  subject to all of the conditions to the Closing set forth in Sections 7 and 8 having been satisfied or waived by the party entitled to waive the same (other than those conditions which, by their terms, are to be satisfied or waived at the Closing), or at such other time and date as Purchaser and the Selling Shareholders may jointly designate. The date on which the Closing actually takes place is referred to in this Agreement as the “ Closing Date ”.
 
2.4.          All proceedings, actions and occurrences required to have taken place and all documents required to be executed and delivered by the parties at the Closing will be deemed to have been taken and executed simultaneously and no such proceedings, actions or occurrences will be deemed to have been taken nor such documents executed or delivered until all have been taken, executed and delivered (unless waived in writing by the relevant party for whose benefit such action should have been completed or such document or certificate should have been delivered).
 
3.
Representations and Warranties Relating to Selling Shareholders .
 
Neither Selling Shareholder is making any other representations or warranties except as expressly set out in Sections 3 and 4 hereof.
 
Each of the Selling Shareholders hereby severally and not jointly represents and warrants to the Purchaser as follows:
 
3.1.           Execution, Delivery; Valid and Binding Agreements . This Agreement and each other agreement, document or instrument referred to in or contemplated by this Agreement to be executed by the Selling Shareholders has been duly executed and delivered by them, and assuming that this Agreement and any other agreement, document or instrument referred to in or contemplated by this Agreement have been duly executed and delivered by the other parties hereto and thereto, constitute, or, when executed by the other parties hereto and thereto, will constitute, valid and binding agreements of the Selling Shareholders, enforceable against them in accordance with their terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other laws from time to time in effect relating to creditors’ rights and remedies generally and general principles of equity.
 
3.2.           Authority . The Selling Shareholders have the absolute and unrestricted right, power, capacity and authority to perform their obligations under this Agreement and under any other agreement, document or instrument referred to in, or contemplated by, this Agreement to which a Selling Shareholder is or will be a party; and the performance by such Selling Shareholder of its obligations hereunder and thereunder (including all right, power, capacity and authority to sell, transfer, convey and surrender its Company Shares as provided for by this Agreement) has been duly authorized by all necessary action on the part of such Selling Shareholder.
 
 
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3.3.           No n−Contravention; No Consents or Approvals . Neither: the execution, delivery or performance of this Agreement or any of the other agreements, documents or instruments referred to in this Agreement; nor any of the transactions contemplated thereby, will (with or without notice or lapse of time):
 
(a)               contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under any Legal Requirement or any order, writ, injunction, judgment or decree to which such Selling Shareholder is subject; or
 
(b)               contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Contract to which such Selling Shareholder is a party or by which such Selling Shareholder is bound.
 
The Selling Shareholders are not (nor will the Selling Shareholders be) required to make any filing with or give any notice to, or to obtain any Consent from any Person in connection with: (x) the performance of this Agreement or any of the other agreements, documents or instruments referred to in this Agreement; or (y) any of the transactions contemplated by this Agreement or by any of the other agreements, documents or instruments referred to in this Agreement.
 
3.4.           Title and Ownership . The Selling Shareholders are the record and beneficial owner of the Company Shares set forth opposite such Selling Shareholder’s name in Part 3.4 of the Disclosure Schedule , and each such Selling Shareholder has good, valid and marketable title to such Company Shares, free and clear of all Encumbrances. The Selling Shareholders are not a party to any option, warrant, purchase right or other Contract that could require them to sell, transfer or otherwise dispose of any Company Shares (other than pursuant to this Agreement). The Selling Shareholders are not a party to any voting trust, proxy or other agreement or understanding with respect to the voting of any Company Shares. Upon payment of the portion of the Closing Payment payable to Selling Shareholders pursuant to Section 2.2(a) (subject to any applicable withholding), the Selling Shareholders shall transfer to Purchaser good, valid and marketable title to the Company Shares held by them, free and clear of all Encumbrances.
 
3.5.           Brokers . No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with any of the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Selling Shareholders.
 
4.
Representations and Warranties Relating to the Acquired Companies
 
The Selling Shareholders hereby represent and warrant, as follows:
 
4.1.         Due Organization; Qualification; Etc.
 
(a)                Organization . Each Acquired Company has been duly organized, and is validly existing and in good standing (to the extent that the Legal Requirements of the jurisdiction of its formation recognize the concept of good standing), under the Legal Requirements of the jurisdiction of its formation. Each Acquired Company has full power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own and use its assets in the manner in which its assets are currently owned and used; and (iii) to perform its obligations under all Contracts to which it is a party or by which it is bound.
 
(b)                Qualification . Each Acquired Company is qualified, licensed or admitted to do business as a foreign corporation, and is in good standing (or its equivalent), under the laws of all jurisdictions where the property owned, leased or operated by it or the nature of its business requires such qualification, license or admission. Part 4.1(b) of the Disclosure Schedule accurately sets forth each jurisdiction where the Acquired Companies are qualified, licensed and admitted to do business.
 
 
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(c)                Directors and Officers . Part 4.1(c) of the Disclosure Schedule accurately sets forth: (i) the names of the members of the board of directors (or similar body) of each Acquired Company; (ii) the names of the members of each committee of the board of directors (or similar body) of each Acquired Company and (iii) the names and titles of the officers and managers of each Acquired Company.
 
(d)                Subsidiaries . Except as set forth in Part 4.1(d) of the Disclosure Schedule , no Acquired Company owns or has ever owned, beneficially or otherwise, any shares or other securities of, or any direct or indirect equity interest in, any Entity, and is not a participant in, nor does it hold any interest in any partnership, joint venture or other business entity, association or organization. No Acquired Company has agreed or is obligated to make any future investment in or capital contribution to any Entity. No Acquired Company has guaranteed or is responsible or liable for any obligation of any Person. Each of the Acquired Companies are wholly owned either directly or indirectly by the Selling Shareholders.
 
(e)                Business Name . Except as set forth in Part 4.1(e) of the Disclosure Schedule , none of the Acquired Companies has conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, business name or other name, other than its respective corporate name and secondary names as set forth in this Agreement.
 
4.2.           Charter Documents; Records . The Company has Made Available to Purchaser accurate and complete copies of: (a) Charter Documents; and (b) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the shareholders or the board of directors (or similar body) of each Acquired Company, which minutes or other records contain a complete summary of all meetings of the board of directors (or similar body) and shareholders, and all actions taken thereat or by written consent. All actions taken and all transactions entered into by each Acquired Company which required the approval or consent of its board of directors or shareholders have been duly approved by all necessary action of the board of directors and shareholders of such Acquired Company. There has been no violation of any of the provisions of the Charter Documents, and no Acquired Company has taken any action that is inconsistent in any material respect with any resolution adopted by such Acquired Company’s shareholders or board of directors (or similar body). The books of account, share records, minute books and other records of each Acquired Company are accurate, up-to-date and complete in all material respects, and have been maintained in all material respects in accordance with prudent business practices and all applicable Legal Requirements.
 
4.3.           Capitalization .
 
(a)                Outstanding Securities . The authorized share capital of the Company is DKK 500,000.00, and consists of 500,000 Ordinary Shares, all of which are issued and outstanding as of the date hereof. There are no Ordinary Shares held in the Company’s treasury or held by the Company as dormant shares. Except as set forth in Part 4.3(a) of the Disclosure Schedule , the Company has never declared or paid any dividends on any Company Shares. Part 3.4 of the Disclosure Schedule of the Disclosure Schedule sets forth the names of the Company’s shareholders, the addresses of the Company’s shareholders, the number, class and series of shares of Company Shares owned of record by each of such shareholders. There are no contractual restrictions on the Company Shares and they are unrestricted Ordinary Shares. All outstanding Company Shares have been duly authorized and validly issued, are fully paid and non-assessable, and none of such shares are subject to preemptive rights, repurchase option, forfeiture provision, rights of first refusal or restriction on transfer created by statute (other than restrictions on transfer imposed by virtue of applicable securities laws), the Charter Documents, or any agreement to which the Company is a party or by which it is bound. There are no Company securities or rights convertible into Company securities (including Company Options) other than the Company Shares. Neither the Company nor its shareholders have entered into any shareholder agreement or other agreement, and the Company Shares and the rights applicable thereto are not otherwise the subject of any agreement.
 
 
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(b)                Legal Issuance . All outstanding Company Shares and all other securities that have ever been issued or granted by the Company have been issued and granted in compliance with: (i) all applicable securities laws and other applicable Legal Requirements; (ii) the Company's Charter Documents, and (iii) all requirements set forth in all applicable Contracts. No Ordinary Shares were issued in violation of any preemptive rights or other rights to subscribe for or purchase securities of the Company. There are no Acquired Company Contracts relating to any securities of the Company that contain any information rights, registration rights, financial statement requirements or other terms that would survive the Closing unless terminated or amended prior to the Closing. No Acquired Company has ever repurchased, redeemed or otherwise reacquired any shares in its share capital or other securities.
 
(c)                Stock Options . None of the Acquired Companies has ever adopted, sponsored or maintained any stock option plan or any other plan or agreement providing for equity-related compensation to any person (whether payable in shares, cash or otherwise). The Company has not granted or promised to grant any Company Options.
 
(d)                Debt . No bonds, debentures, notes or other Indebtedness of the Acquired Companies: (i) having the right to vote on any matters on which shareholders may vote (or which is convertible into, or exchangeable for, securities having such right), or (ii) the value of which is in any way based upon or derived from capital or voting shares of the Company, are issued or outstanding as of the date hereof.
 
(e)                No Other Securities . There are no options, warrants, calls, rights, convertible securities, commitments or agreements of any character, written or oral, to which any Acquired Company is a party or by which the Company is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any Company Shares (or any other securities of the Company) or obligating the Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. There are no outstanding or authorized share appreciation, phantom share, profit participation, or other similar rights with respect to the Acquired Companies. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting shares of any of the Acquired Companies, and there are no agreements to which any Acquired Company is a party relating to the registration, sale or transfer (including agreements relating to rights of first refusal, co-sale rights or “drag-along” rights) of any Company Shares. As a result of the transactions contemplated by this Agreement, as of the Closing, Purchaser will be the sole record and beneficial holder of all issued and outstanding Company Shares and all rights to acquire or receive any Company Shares, whether or not such Company Shares are outstanding.
 
(f)                 No share certificates . The Company had not delivered, and no holder of issued and outstanding Company Shares has received, a share certificate representing such shares.
 
4.4.         Financial Statements and Related Information.
 
(a)                Delivery of Company Financial Statements . The Selling Shareholders  have Made Available to the Purchaser the Company Financial Statements.
 
(b)                Delivery of Certificate for Settling the Pay-Off Debt . The Selling Shareholders  have delivered to the Purchaser certificates from each Pay-Off Creditor, containing, in each case the amounts and currency required to effect full repayment of each respective component of the Pay-Off Amounts and the wire transfer information of the Pay-Off Creditors.
 
 
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(c)               Delivery of Estimated Closing Consideration Certificate . The Selling Shareholders have delivered to the Purchaser by the date hereof a certificate (the “ Estimated Closing Consideration Certificate ”) setting forth the Company’s good faith estimates of the following information (such information being referred to collectively as the “ Closing Consideration Certificate Data ”) based on the Interim Balance Sheets, subject to the Estimated Closing Certificate Data being (i) best estimates and (ii) non audited, which shall be set forth on an accompanying spreadsheet:
 
 
(i)
the Closing Payment;
 
 
(ii)
the Closing Indebtedness Amount;
 
 
(iii)
the Closing Cash Amount;
 
(iv)
the Closing Accounts Receivables Amount;
 
 
(v)
the Closing Accounts Payable Amount, and
 
 
(vi)
the Purchase Price Excess Amount or the Purchase Price Shortfall Amount, as applicable;
 
The spreadsheet accompanying the Estimated Closing Consideration Certificate shall show with detailed specificity the basis for the calculation of each element of the Closing Consideration Certificate Data.
 
(d)                Fair Presentation . The Company Financial Statements are true and complete in all material respects and present fairly the financial position of the Acquired Companies as of the respective dates thereof and the results of operations of the Acquired Companies for the periods covered thereby. The Company Financial Statements have been prepared in accordance with GAAP (it being understood, that the Company Financial Statements related to Fiberblaze US LLC have been prepared in accordance with US GAAP) applied on a consistent basis throughout the periods covered.
 
(e)               Nothing in Section 4.4 shall be deemed to be a representation or warranty by the Selling Shareholders in respect of any information on a forward looking nature, including forecast, budgets, prospects etc.
 
4.5.           Liabilities .
 
(a)                No Liabilities . No Acquired Company has any accrued, contingent or other Liabilities of any nature, either matured or unmatured (whether or not required to be reflected in financial statements in accordance with GAAP, and whether due or to become due), except for: (i) Liabilities identified as such in the “liabilities” column of the solo audited balance sheets of each of the Acquired Companies as of 31 August 2014; (ii) Liabilities that have been incurred by each Acquired Company since the solo audited balance sheets of each of the Acquired Companies as of 31 August 2014 in the ordinary course of business and consistent with such Acquired Company’s past practices; and (iii) the Liabilities identified in Part 4.5(a) of the Disclosure Schedule , which schedule shall also list all material Liabilities relating to obligations of the Acquired Companies to purchase services or products, even if such purchases are incurred in the ordinary course.
 
(b)                Indebtedness . Part 4.5(b) of the Disclosure Schedule sets forth an accurate and complete list of all Indebtedness of the Acquired Companies as of the date of this Agreement.
 
(c)                No “Off-Balance Sheet” Arrangements . The Company is and always has been run in the ordinary course of business. No Acquired Company has ever effected or otherwise been involved in any “off-balance sheet arrangements”. Without limiting the generality of the foregoing, no Acquired Company has ever guaranteed any debt or other obligation of any other Person.
 
 
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(d)                Director and Officer Indemnification . No event has occurred, and no circumstance or condition exists, that has resulted in, or that will or would reasonably be expected to result in, any claim for indemnification, reimbursement, contribution or the advancement of expenses by any current or former Acquired Company Employee (other than a claim for reimbursement by the Company, in the ordinary course of business, of travel expenses or other out-of-pocket expenses of a routine nature incurred by such current or former Acquired Company Employee in the course of performing its duties for the Company) or any agent of any Acquired Company pursuant to: (i) the terms of the Charter Documents of any Acquired Company; (ii) any indemnification agreement or other Contract between any Acquired Company and any such current or former Acquired Company Employee or agent; or (iii) any applicable Legal Requirement.
 
(e)                Claims by Securityholders . No event has occurred, and no circumstance or condition exists, that has resulted in, or that will or would reasonably be expected to result in, any Liability of any Acquired Company to any current, former or alleged securityholder of any Acquired Company in such Person’s capacity (or alleged capacity) as a securityholder of such Acquired Company.
 
(f)                Insider Receivables . Part 4.5(f) of the Disclosure Schedule provides an accurate and complete breakdown of all amounts (including any Indebtedness) owed to any Acquired Company by any Acquired Company Employee or shareholder of the Company as of the date of this Agreement.
 
4.6.           Absence of Changes . Since the date of the solo audited balance sheets of each of the Acquired Companies as of 31 August 2014:
 
(a)              there has not been any Material Adverse Effect, and no event has occurred or circumstance has arisen that, in combination with any other events or circumstances, will or could reasonably be expected to have or result in a Material Adverse Effect;
 
(b)              there has not been any material loss, damage or destruction to, or any material interruption in the use of, any of the Acquired Companies’ material assets (whether or not covered by insurance); and
 
(c)              none of the Acquired Companies has taken any action that would have been prohibited or otherwise restricted under Sub-Sections 6.1(a), 6.1(d), 6.1(e), 6.1(f), 6.1(g), 6.1(m), 6.1(o), or 6.1(p) hereof, had such action been taken during the Pre-Closing Period.
 
4.7.           Title to Assets .
 
(a)                Good Title . Each of the Acquired Companies owns, and has good and valid title to, all assets purported to be owned by it, including: (i) all assets reflected on the Interim Balance Sheets; (ii) all Intellectual Property assets and all of the rights of the Acquired Companies under the Acquired Company Contracts; and (iii) all other assets reflected in the books and records of the Acquired Companies as being owned by such Acquired Company. Except as set forth in Part 4.7(a) of the Disclosure Schedule , all such assets are owned by the Acquired Companies free and clear of any Encumbrances.
 
(b)                Leased Assets . Part 4.7(b) of the Disclosure Schedule identifies all assets of the Acquired Companies that are being leased to any of the Acquired Companies and the location of each such leased assets.
 
(c)                Sufficiency of Assets . The assets of the Acquired Companies collectively constitute all of the properties, rights, interests and other tangible and intangible assets used in or necessary to enable each Acquired Company to conduct its business in the manner in which such business is currently being conducted.
 
4.8.           Receivables; Products; Customers and Suppliers .
 
(a)              All existing accounts receivable of the Acquired Companies reflected on the Company Financial Statements that have not yet been collected represent valid obligations of customers arising from bona fide transactions entered into in the ordinary course of business. None of their customers have notified the Acquired Companies that any of such accounts receivable will not be paid.
 
 
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(b)              No Acquired Company has, as of the Closing Date and during the period starting 6 months prior to the date hereof, received any notice from any material customer stating that any such customer plans to cease dealing with the applicable Acquired Company or may otherwise materially reduce the volume of business transacted by such customer with the applicable Acquired Company.
 
(c)              Each of the Acquired Companies has as of the date of this Agreement timely paid in full all amounts owed to their respective suppliers and service providers.
 
(d)              No Acquired Company has, as of the Closing Date and during the period starting 12 months prior to the date hereof, received any notice from any material supplier indicating that it plans to cease dealing with the Acquired Companies or otherwise materially reduce the volume of business transacted by such supplier with the Acquired Companies.
 
4.9.           Bank Accounts .   Part 4.9 of the Disclosure Schedule provides the following information with respect to each account maintained by or for the benefit of the Acquired Companies at any bank or other financial institution: (a) the name of the bank or other financial institution at which such account is maintained; (b) the account number; (c) the type of account; (d) account balance as of the Business Day immediately prior to the date hereof; and (e) the names of all Persons who are authorized to sign checks or other documents or effect other transactions with respect to such account.
 
4.10.         Intellectual Property .
 
(a)                Intellectual Property Disclosures . Part   4.10(a) of the Disclosure Schedule accurately identifies and describes:
 
(i)            in Part 4.10(a)(i) of the Disclosure Schedule , each Company Product, including a detailed description about such Company Product, including its performance and features;
 
(ii)          The Acquired Companies do not have or purport to have an ownership interest of any nature (whether exclusively, jointly with another Person or otherwise) in any Registered IP;
 
(iii)          in Part 4.10(a)(iii) of the Disclosure Schedule : (A) all Intellectual Property Rights or Intellectual Property licensed to any Acquired Company (other than Open Source Code that is identified in Part 4.10(i) of the Disclosure Schedule and any non-customized software that is generally available on standard terms for less than $5,000 per copy, seat or user, as applicable); (B) the corresponding Contract or Contracts pursuant to which such Intellectual Property Rights or Intellectual Property is licensed to such Acquired Company; (C) whether the license or licenses so granted to such Acquired Company are exclusive or nonexclusive; and (D) each Company Product in which such licensed Intellectual Property Rights or Intellectual Property are used or incorporated;
 
(iv)          in Part 4.10(a)(iv) of the Disclosure Schedule , each Contract pursuant to which any Person has been granted any license under, or otherwise has received or acquired any right (whether or not currently exercisable) or interest in, any Company IP and whether such license is exclusive or non-exclusive; and
 
(v)            in Part 4.10(a)(v) of the Disclosure Schedule , a list of each item of Company Software that is distributed by any Acquired Company to third parties.
 
(b)                IP Agreements . The Company has Made Available to Purchaser a complete and accurate copy of each Company IP Contract used by any Acquired Company at any time, including each: (i) end user license and/or service agreement; (ii) development agreement; (iii) distributor or reseller agreement; (iv) agreement, whether with an employee, consultant, other person in the creation or development of any Company IP, or otherwise, containing any assignment or license of Intellectual Property or Intellectual Property Rights or any confidentiality provision; (v) professional services, outsourced development, consulting, or independent contractor agreement containing any assignment or license of Intellectual Property or Intellectual Property Rights or any confidentiality provision; or (vi) confidentiality or nondisclosure agreement.
 
 
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(c)                Ownership Free and Clear .The Acquired Companies exclusively own all right, title and interest to and in the Company IP (other than Intellectual Property Rights or Intellectual Property licensed to such Acquired Company, as identified in Part 4.10(a)(iii) of the Disclosure Schedule ) free and clear of any Encumbrances (other than nonexclusive licenses granted pursuant to the Contracts listed in Part 4.10(a)(iv) of the Disclosure Schedule ), and such Company IP is valid, subsisting and enforceable. Without limiting the generality of the foregoing:
 
(i)     To the Selling Shareholders' Knowledge, no Key Employee, or other Acquired Company Employee is: (A) bound by or otherwise subject to any Contract restricting them from performing their duties for an Acquired Company, or (B) affiliated with any Governmental Body or any public or private university, college, or other educational, medical or research institution;
 
(ii)          no funding, facilities or personnel of any Governmental Body or any public or private university, college, or other educational, medical or research institution, was used, directly or indirectly, to create or develop, in whole or in part, any Company IP; no Company IP was created with any involvement or contribution by any current or former director, officer, or independent contractor of or consultant who held any position with any Governmental Body, foundation or any public or private university, college, or other educational, medical or research institution.
 
(iii)          each of the Acquired Companies has taken reasonable steps to maintain the (A) validity and enforceability of all Intellectual Property Rights owned by or exclusively licensed to the Company and (B) confidentiality of and otherwise protect and enforce its rights in all proprietary information held by such entity, or purported to be held by such entity, as a trade secret;
 
(iv)          no Acquired Company has ever assigned or otherwise transferred ownership of, or agreed to assign or otherwise transfer ownership of, any Intellectual Property Right to any other Person, except in the ordinary course of business;
 
(v)             no Acquired Company is currently, or has ever been, a member or promoter of, or a contributor to, any industry standards body or similar organization that could require or obligate any Acquired Company to grant or offer to any other Person any license or right to any Company IP; No Acquired Company is subject to any license or other Contract with, any standards bodies or other entities for a determination of essentiality to or inclusion in an industry standard or that would obligate any Acquired Company to grant licenses or other rights to, or otherwise impair its control of, any Intellectual Property, nor has any third-party request been made for such licenses or other rights in connection with the activities of or any participation in any forum, consortium, standards body, or similar entity.
 
(vi)          e ach of the Acquired Companies owns or otherwise has all Intellectual Property Rights needed to conduct the business of such entity as currently conducted and such Intellectual Property Rights shall not be adversely impacted by the Closing; and
 
(vii)          none of the Acquired Companies is bound by, and no Company IP is subject to, any Contract containing any covenant or other provision that in any way limits or restricts the ability of any Acquired Company to use, exploit, assert, or enforce any Company IP anywhere in the world.
 
(d)               No Intellectual Property or product or service of any Acquired Company is subject to any order, action, settlement, or other right that restricts, or that could reasonably be expected to restrict, in any manner the current use, transfer or licensing of any Company IP.
 
 
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(e)                Effects of This Transaction . Neither the execution, delivery or performance of this Agreement or any other agreements referred to in this Agreement nor the consummation of any of the transactions contemplated by this Agreement or any such other agreement will, with or without notice or the lapse of time, result in or give any other Person the right or option to cause or declare: (i) a loss of, or Encumbrance on, any Company IP; (ii) a breach or right of termination of any Company IP Contract; (iii) other than as identified in Part 4.10(e) of the Disclosure Schedule, the release, disclosure or delivery of any Company IP by or to any escrow agent or other Person; (iv) the grant, assignment or transfer to any other Person of any license or other right or interest under, to or in any of the Company IP (v) the grant of any right exclusivity, covenant not to sue, noncompetition or nonsolicitation or (vi) an obligation on any of the Acquired Companies to pay royalties under any Contract.
 
(f)                 No Third Party Infringement of Company IP . To the Selling Shareholders' Knowledge, no Person has infringed, misappropriated, or otherwise violated, and no Person is currently infringing, misappropriating or otherwise violating, any Company IP.
 
(g)               No Infringement of Third Party IP Rights . No Acquired Company has ever infringed (directly, contributorily, by inducement or otherwise), misappropriated or otherwise violated any Intellectual Property Right of any other Person. Without limiting the generality of the foregoing:
 
(i)            no product, information or service ever manufactured, produced, distributed, licensed, published, used, provided or sold by or on behalf of any Acquired Company has ever infringed, misappropriated or otherwise violated any Intellectual Property Right of any other Person;
 
(ii)          no infringement, misappropriation or similar claim or legal proceeding is pending or has been threatened against any Acquired Company or against any other Person who may be entitled to be indemnified, defended, held harmless or reimbursed by any Acquired Company with respect to such claim or legal proceeding;
 
(iii)          no Acquired Company has ever received any notice or other communication (in writing or otherwise) relating to any actual, alleged or suspected infringement, misappropriation or violation of any Intellectual Property Right of another Person;
 
(iv)          no Acquired Company is bound by any Contract to indemnify, defend, hold harmless or reimburse any other Person with respect to any intellectual property infringement, misappropriation or similar claim;
 
(v)           no Acquired Company has ever assumed, or agreed to discharge or otherwise take responsibility for, any existing or potential liability of another Person for infringement, misappropriation or violation of any Intellectual Property Right; and
 
(vi)          to the Knowledge of the Selling Shareholders, no claim or legal proceeding involving any Intellectual Property or Intellectual Property Right licensed to any Acquired Company is pending or has been threatened, except for any such claim or legal proceeding that, if adversely determined, would not adversely affect: (A) the use or exploitation of such Intellectual Property or Intellectual Property Right by any Acquired Company; or (B) the creation, development, manufacturing, marketing, provision, distribution, licensing, or sale of any Company Product.
 
(h)                No Harmful Code . None of the Company Software contains any “back door,” “drop dead device,” “time bomb,” “Trojan horse,” “virus,” or “worm” (as such terms are commonly understood in the software industry) or any other code designed or intended to have, or capable of performing, any of the following functions: (i) disrupting, disabling, harming or otherwise impeding in any manner the operation of, or providing unauthorized access to, a computer system or network or other device on which such code is stored or installed; or (ii) damaging or destroying any data or file without the user’s consent.
 
 
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(i)                 Use of Open Source Code .
 
(i)     Part 4.10(i) of the Disclosure Schedule accurately identifies and describes: (A) each item of Open Source Code that is contained in, distributed with or used in the development of any Company Software or from which any part of any Company Software is derived; (B) the applicable license terms for each such item of Open Source Code; and (C) the Company Software to which each such item of Open Source Code relates.
 
(ii)     No Acquired Company has used, modified, or distributed any Open Source Code in a manner that: (A) could or does require (or could or does condition the use or distribution of such software on) (1) the disclosure, licensing or distribution of any source code for, or (2) the licensing for purposes of making modifications or derivative works of, any Company Software owned by or licensed to any Acquired Company; (B) could or does require (or could or does condition the use or distribution of such software on) the granting of a license under any Acquired Company patent rights; or (C) could or does otherwise impose any material limitation, restriction or condition on the right or ability of any Acquired Company to use or distribute any Company Software owned by or licensed to any Acquired Company.
 
(iii)          Each of the Acquired Companies has complied with all of, and the use, marketing, distribution, licensing, and sale of Company Software does not violate any of, the terms and conditions of each applicable Open Source License, including all requirements pertaining to attribution and copyright notices.
 
(j)                 No License of Source Code . Except as set forth in Part 4.10(j) of the Disclosure Schedule , no source code for any Company Software has been delivered, licensed or made available to any escrow agent or other Person. No Acquired Company has any duty or obligation (whether present, contingent or otherwise) to deliver, license or make available the source code for any Company Software to any escrow agent or other Person. No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, result in the delivery, license or disclosure of any source code for any Company Software to any Person.
 
(k)               Except for bugs and defects experienced in the ordinary course of business, all Company Software performs in all material respects in conformance with the purposes and functionality for which it is intended.  No Acquired Company Contract requires any Acquired Company to maintain a disaster recovery plan to safeguard its customers’ information in the event of a disaster. All Acquired Companies have made back-ups of all material software and data that cannot be easily recreated or restored, and has arranged for such back-ups at a reasonable secure location.
 
(l)                 Data Privacy .  In connection with its collection, processing, storage, transfer (including, without limitation, any transfer across national borders) and/or use of any personally identifiable information from any individuals, including, without limitation, any customers, prospective customers, employees and/or other third parties (collectively “ Personal Information ”), the Acquired Companies  are and have been in compliance with all applicable laws in all relevant jurisdictions, the Company’s and its Subsidiaries’ privacy policies and the requirements of any contract or codes of conduct to which they are a party and this Agreement does not detrimentally affect such legal and permitted use of such Personal Information. The Acquired Companies  have at all times implemented commercially reasonable physical, technical, organizational and administrative security measures and policies to protect all Personal Information collected by them or on their behalf from and against loss, unauthorized access, use and/or disclosure and there has been no loss, unauthorized access, use and/or disclosure of such Personal Information. The Acquired Companies  are and have been in compliance in all material respects with all laws relating to data loss, theft and breach of security notification obligations. There is no complaint to, or any audit, proceeding, investigation (formal or informal) or claim currently pending against, any Acquired Company, by any private party or any governmental body, foreign or domestic, with respect to Personal Information.
 
 
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4.11.         Agreements, Contracts and Commitments .
 
(a)                List of Contracts . Part   4.11(a) of the Disclosure Schedule identifies, in each subpart that corresponds to the subsection listed below, any Contract entered into up to the date hereof, (x) to which any Acquired Company or a Selling Shareholder (with respect to clause  (xiii) hereunder) is a party, (y) by which any of the Acquired Companies or any of their assets is or may become bound or under which any Acquired Company has, or may become subject to, any obligation, or (z) under which any Acquired Company has or may acquire any right or interest:
 
(i)     with one of the Acquired Company’s customers;
 
(ii)           pursuant to which any Acquired Company has been appointed a partner, reseller or distributor;
 
(iii)          pursuant to which any Acquired Company has appointed another Person as a partner, reseller, or distributor;
 
(iv)          that is with any Acquired Company’s suppliers by spending during the last calendar year or the first 3 months of the current calendar year;
 
(v)     imposing any restriction on the right or ability of any Acquired Company: (A) to compete with any other Person; (B) to acquire any product or other asset or any services from any other Person, to sell any product or other asset to or perform any services for any other Person or to transact business or deal in any other manner with any other Person; or (C) to develop or distribute any technology;
 
(vi)          that is an Acquired Company Employee Plan or an Acquired Company Employee Agreement, including all indemnification agreements with current or former officers or directors;
 
(vii)         relating to the acquisition, transfer, use, development, sharing or license of any Intellectual Property or Intellectual Property Right, together with (A) the Intellectual Property or Intellectual Property Right that is the subject of such Contract; (B) whether the Intellectual Property or Intellectual Property Right is being licensed to or acquired by any Acquired Company, or licensed to or acquired by another Person; and (C) the product or service of the applicable Acquired Company to which such Intellectual Property or Intellectual Property Right relates (other than (x) Open Source Licenses listed in Part 4.10(i) of the Disclosure Schedule and licenses for any non-customized software that is generally available on standard terms for less than $5,000 per copy, seat or user, as applicable; (y) Contracts identified in Part 4.10 of the Disclosure Schedule );
 
(viii)        relating to the acquisition, issuance or transfer of any securities;
 
(ix)          relating to the creation of any Encumbrance with respect to any asset of any Acquired Company;
 
(x)     involving or incorporating any guaranty (except for product warranties in the ordinary course of business), any pledge, any performance or completion bond, any indemnity or any surety arrangement;
 
(xi)          creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities;
 
(xii)         Contracts identified or required to be identified in Part 4.10 of the Disclosure Schedule ;
 
(xiii)        involving any Related Party;
 
 
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(xiv)         constituting or relating to any (A) prime contract, subcontract, letter contract, purchase order or delivery order executed or submitted to or on behalf of any Governmental Body or any prime contractor or higher-tier subcontractor, or under which any Governmental Body or any such prime contractor or subcontractor otherwise has or may acquire any right or interest, or (B) quotation, bid or proposal submitted to any Governmental Body or any proposed prime contractor or higher-tier subcontractor of any Governmental Body;
 
(xv)           that was entered into outside the ordinary course of business;
 
(xvi)         that has a term of more than 30 days and that may not be terminated by any Acquired Company (without penalty) within 30 days after the delivery of a termination notice by any Acquired Company, disregarding employment agreements; and
 
(xvii)        that contemplates or involves: (A) the payment or delivery of cash or other consideration in an amount or having a value in excess of $20,000 in the aggregate; or (B) the performance of services having a value in excess of $20,000 in the aggregate.
 
The Contracts in the respective categories described in clauses (i) through (xvii) above are referred to in this Agreement as “ Material Contracts .”
 
(b)                Delivery of Contracts . The Company has Made Available to Purchaser accurate and complete copies of all written Contracts identified in Part 4.11(a) of the Disclosure Schedule , including all exhibits, addendums, attachments and amendments thereto. Part 4.11(a) of the Disclosure Schedule provides an accurate description of the terms of each Company Contract that is not in written form. To the Selling Shareholders' Knowledge, each Contract identified in Part 4.11(a) of the Disclosure Schedule is valid and in full force and effect and is enforceable by the Company in accordance with its terms, subject to: (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.
 
(c)                No Breach .
 
(i)            no Acquired Company has violated or breached in any material respect, or committed any material default under, any material contract or any Contract otherwise described in Section 4.11(a) above, and, to the Selling Shareholders' Knowledge, no other Person has violated or breached, or committed any default under, any such Contract;
 
(ii)          To the Selling Shareholders' Knowledge, no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to: (A) result in a material violation or breach of any of the provisions of any such Contract; (B) give any Person the right to declare a default or exercise any remedy under any such Contract; (C) give any Person the right to accelerate the maturity or performance of any such Contract; or (D) give any Person the right to cancel, terminate or modify any Company Contract;
 
(iii)          no Acquired Company has received any notice or other communication regarding any actual or possible violation or breach of, or default under, any Contract described in Section 4.11(a) above; and
 
(iv)          no Acquired Company has waived any of its material rights under any Material Contract.
 
(d)                No Renegotiation . Except as in the ordinary course of business, no Person is renegotiating, or has a right pursuant to the terms of any Contract described in Section 4.11(a) above to renegotiate, any amount paid or payable to any Acquired Company under any Material Contract or any other material term or provision of any Material Contract. No Person has threatened to terminate or refuse to perform its obligations under any Contract described in Section 4.11(a) above (regardless of whether such Person has the right to do so under such Contract).
 
 
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(e)                Sufficiency of Disclosed Material Contracts . Other than the Material Contracts identified in Part 4.11(a) of the Disclosure Schedule no other Contracts are necessary to enable the Acquired Companies to conduct their respective businesses in substantially in the manner in which their businesses are currently being conducted.
 
(f)                 Proposed Contracts . Part 4.11(f) of the Disclosure Schedule identifies and provides a brief description of each proposed material Contract outside the ordinary course of business as to which any bid, offer, award, written proposal, term sheet or similar document has been submitted or received by any Acquired Company since January 1, 2014.
 
4.12.        Compliance with Legal Requirements .
 
(a)               Each Acquired Company is, and has at all times been, in compliance in all material respects with each Legal Requirement that is applicable to it or to the conduct of its business or the ownership of its assets including Legal Requirements relating to money laundering, banking import/export and employment matters. To the Selling Shareholders' Knowledge, no event has occurred, and no condition or circumstance exists, that will (with or without notice or lapse of time) constitute or result in a violation by any Acquired Company of, or a failure on the part of any Acquired Company to comply with, any Legal Requirement. No Acquired Company has received any notice or other communication from any Person regarding any actual or possible violation of, or failure to comply with, any Legal Requirement.
 
4.13.        Governmental Authorizations; No Subsidies .
 
(a)                Governmental Authorizations . Part 4.13(a) of the Disclosure Schedule identifies, each Governmental Authorization held by the Acquired Companies, and the Company has Made Available to Purchaser accurate and complete copies of such Governmental Authorizations. Such Governmental Authorizations are valid and in full force and effect, and collectively constitute all Governmental Authorizations necessary to enable each Acquired Company to conduct its respective business in the manner in which such business is currently being conducted. Each Acquired Company is, and has at all times been, in material compliance with the terms and requirements of the respective Governmental Authorizations identified in Part 4.13(a) of the Disclosure Schedule . No Acquired Company has received any notice or other communication from any Governmental Body regarding: (i) any actual or possible violation of, or failure to comply with, any term or requirement of any Governmental Authorization; or (ii) any actual or possible revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization.
 
(b)                Governmental Grants . Except as set forth in Part 4.13(b) of the Disclosure Schedule , none of the Acquired Companies has at any time received any Governmental Grant that has been available or applicable to any Acquired Company and no Governmental Body: (i) has awarded any participation or provided any support to the Company; or (ii) is or may become entitled to receive any royalties or other payments from any Acquired Company.
 
4.14.         Tax Matters .
 
(a)                Tax Returns and Payments . Other than as set forth on Part 4.14(a) of the Disclosure Schedule , all Tax Returns required to be filed by or on behalf of any Acquired Company have been timely and properly filed and are true, accurate and complete. All Taxes of the Acquired Companies that are due and payable have been timely and properly paid. All Taxes required to be withheld by the Acquired Companies have been properly and timely withheld and remitted. The Company has Made Available to Purchaser accurate and complete copies of all Tax Returns filed by any Acquired Company. Part 4.14(a) of the Disclosure Schedule lists each jurisdiction in which any Acquired Company is required to file a Tax Return. No claim has ever been made by an authority in a jurisdiction where an Acquired Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. The Company Financial Statements properly and adequately accrue or reserve for Tax Liabilities in accordance with GAAP. Except as set forth in Part 4.14(a) of the Disclosure Schedule , none of the Acquired Companies is subject to sales Tax, use Tax or value added Tax in any jurisdiction.
 
 
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(b)                Audits; Claims . Except as set forth in Part 4.14(b) of the Disclosure Schedule , no Tax Returns have ever been examined or audited by any Governmental Body. No Acquired Company has received from any Governmental Body any: (i) notice indicating an intent to open an audit or other review; (ii) request for information related to Tax matters; or (iii) notice of deficiency or proposed Tax adjustment. No extension or waiver of the limitation period applicable to any Tax Returns has been granted by or requested from any Acquired Company. No claim or Legal Proceeding is pending or threatened against any Acquired Company in respect of any Tax. There are no liens for Taxes upon any of the assets of any Acquired Company except liens for current Taxes not yet due and payable (and for which there are adequate accruals, in accordance with GAAP).
 
(c)                Closing Agreements; Etc . No Acquired Company will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing as a result of any change in method of accounting, closing agreement, intercompany transaction, installment sale or prepaid amount received for a taxable period ending on or prior to the Closing. No Acquired Company is a party to or bound by any Tax allocation or sharing agreement. No Acquired Company has any Liability for the Taxes of any Person (other than such Acquired Company).
 
(d)                Tax Incentives . Part 4.14(d) of the Disclosure Schedule sets forth all Tax exemptions, Tax holidays or other Tax reduction agreements or arrangements applicable to any of the Acquired Companies. Each Acquired Company has Made Available to Purchaser all documentation relating to any applicable Tax holidays or incentives. Each Acquired Company is in compliance with the requirements for any applicable Tax holidays or incentives and none of the Tax holidays or incentives will be jeopardized by the transactions contemplated in this Agreement. The consummation of the transactions contemplated by this Agreement will not adversely affect the remaining duration or the extent of the incentive or require any recapture of any previously claimed incentive, and no Consent of any Governmental Body is required prior to the consummation of such transactions in order to preserve the entitlement of the Company to any such incentive. The consummation of the transactions contemplated hereby will not have any adverse effect on such qualification as an Industrial Company.
 
(e)                No Liability . No Acquired Company has any Liability for the Taxes of any Person as a transferee or successor, by Contract or otherwise.
 
(f)                Withholdings . Each Acquired Company has complied with all applicable Legal Requirements relating to the payment, reporting and withholding of Taxes, has, within the time and in the manner prescribed by law, withheld from employee wages or consulting compensation and timely paid over to the proper governmental authorities (or is properly holding for such timely payment) all amounts required to be so withheld and paid over under all applicable Legal Requirements, and has timely filed all withholding Tax Returns, for all periods.
 
(g)                Tax Rulings . Except as set forth in Part 4.14(g) of the Disclosure Schedule , no Acquired Company has requested or received a ruling from any Tax authority or signed a closing or other agreement with any Tax authority.
 
(h)                VAT . Except as set forth in Part 4.14(h) of the Disclosure Schedul e, each Acquired Company has complied in all respects with all laws concerning VAT, including with respect to the making on time of accurate returns and payments and the maintenance of records. No Acquired Company has made any exempt supplies in the current or preceding VAT year applicable to them, and there are no circumstances by reason of which there might not be a full entitlement to credit for all VAT chargeable on supplies and acquisitions received and imports made (or agreed or deemed to be received or made) by them.
 
 
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(i)                 Filing of Tax Returns . No Acquired Company is subject to Tax in any country other than its country of incorporation or formation by virtue of having a permanent establishment or other place of business in that country. No claim that is unresolved has ever been made by a Governmental Body that the Acquired Company is or may be subject to Tax in a jurisdiction in which it does not file Tax Returns.
 
4.15.         Employee and Labor Matters; Benefit Plans .
 
(a)                Employee List . Part 4.15(a) of the Disclosure Schedule contains a list of all employees and consultants of each Acquired Company as of the date of this Agreement, and correctly reflects all benefits which each such employee or consultant is entitled, including their salaries, any other cash compensation payable to them (including compensation payable pursuant to bonus, deferred compensation or commission arrangements), social benefits, their dates and term (if applicable) of employment, their positions, their work location by city and state, and their visa status, if applicable. There are no written or unwritten policies or customs that, by extension, could entitle any current or former Acquired Company Employees to benefits in addition to those to which they are entitled pursuant to applicable Legal Requirements (including unwritten customs concerning the payment of statutory severance pay when it is not legally required), other than those included in the Acquired Company Employee Plans or the Acquired Company Employee Agreements or employment agreement with respect to former Acquired Company Employees. The Acquired Companies are in compliance with all applicable Legal Requirements and Contracts relating to employment, employment practices, wages, pensions, bonuses and terms and conditions of employment, including employee compensation matters.
 
(b)               All of the salaries, bonuses and other compensation and benefits to which the Acquired Companies’ employees and consultants are eligible (including, without limitation, salaries, fees, social benefits, pension benefits, welfare benefits, bonuses or other incentive compensation, deferred compensation, severance, salary continuation or other employee fringe benefit plans or arrangements, automobile, reimbursement of expenses and benefits in kind) have been duly paid in full by the Acquired Companies, all pensions payments and reserves are fully funded, and no Acquired Company has any obligation or liability (contingent or otherwise) with respect to such salaries, bonuses, compensation benefits or pensions.
 
(c)                Employment Termination . The employment of each of the current Acquired Company Employees is terminable by the respective Acquired Company, subject only to the terms of the respective Acquire Company Employee Agreement and applicable Legal Requirements. The Acquired Companies have no obligations towards any former employees of the Acquired Companies. Neither the execution, delivery or performance of this Agreement, nor the consummation of any of the other transactions contemplated by this Agreement, will result in any payment or Acquired Company Liability to any current or former employee, officer, consultant or director of any Acquired Company, or result in an increase to the salary, compensation or other benefits payable thereto.
 
(d)                Employee Plans and Agreements . Part 4.15(d) of the Disclosure Schedule contains an accurate and complete list of each Acquired Company Employee Agreement and each Acquired Company Employee Plan. No Acquired Company intends and no Acquired Company has committed to establish or enter into any new Acquired Company Employee Plan or Acquired Company Employee Agreement, or to modify any Acquired Company Employee Plan or Acquired Company Employee Agreement.
 
(e)                Independent Contractors . Except as set forth on Part 4.15(e) of the Disclosure Schedule , no Person is, or ever was, an independent contractor or outsourced worker of (or consultant to) of the Company. No Persons were incorrectly classified as external consultants or contractors as opposed to employees.
 
 
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(f)                 No Unions, Etc.   No Acquired Company is a party to or bound by, and no Acquired Company has ever been a party to or bound by, any union contract, collective bargaining agreement or similar Contract. The Company is not and never has been a member of any employers' organization and there is no, and never has been, an employees' committee in the Company.
 
(g)                Severance, Etc. Except as set forth in Part 4.15(g) of the Disclosure Schedule : (i) the employment of each current Acquired Company Employee is subject to termination upon not more than three months’ prior written notice under the termination notice provisions included in the applicable Acquired Company Employment Agreement with such Acquired Company Employee identified or required to be identified in Part 4.15(d) of the Disclosure Schedule or under applicable Legal Requirements; (ii) all obligations of the Acquired Companies to provide severance pay to all current Acquired Company Employees are fully funded and are accrued on the Company Financial Statements to the extent required under applicable law; and (iii) no current Acquired Company Employee's employment by any Acquired Company requires any special license, permit or other Governmental Authorization.
 
(h)               None of the Key Employees has expressed an intention or interest (whether formally or informally) in, or taken any action toward terminating his or her employment with an Acquired Company before or after the Closing.
 
4.16.         Environmental Matters . Each of the Acquired Companies is in compliance in all material respects with all applicable Environmental Laws, which compliance includes the possession by each of the Acquired Companies of all Environmental Licenses and other Governmental Authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof. No Acquired Company has received any notice or other communication, whether from a Governmental Body, citizens group, a current or former Acquired Company Employee or otherwise, that alleges that any Acquired Company is not in compliance with any Environmental Law, and there are no circumstances that may prevent or interfere with such Acquired Company’s compliance with any Environmental Law in the future. To the Selling Shareholders' Knowledge, no current or prior owner of any property leased or controlled by any of the Acquired Companies has received any notice or other communication, whether from a Governmental Body, citizens group, current or former Acquired Company Employee or otherwise, that alleges that such current or prior owner or such Acquired Company is not in compliance with any Environmental Law. The Acquired Companies have not caused or contributed to any Environmental Release in any material respects and there are no circumstances which may give rise to any Environmental Release by any of the Acquired Companies. To the Selling Shareholders' Knowledge, no Contaminants are stored or contained on or under any of the leasehold properties held or occupied by any Acquired Company, whether in storage tanks, land fills, pits, ponds, lagoons or otherwise. All Governmental Authorizations currently held by each of the Acquired Companies pursuant to Environmental Laws are identified in Part 4.16 of the Disclosure Schedule .
 
4.17.         Insurance . Part 4.17 of the Disclosure Schedule identifies each insurance policy maintained by, at the expense of or for the benefit of each of the Acquired Companies as of the date of this Agreement and identifies any material claims made thereunder as of the date of this Agreement. Each of such insurance policies is in full force and effect. Since January 1, 2012, none of the Acquired Companies has received any notice or other communication regarding any actual or possible: (i) cancellation or invalidation of any insurance policy; (ii) refusal of any coverage or rejection of any claim under any insurance policy; or (iii) material adjustment in the amount of the premiums payable with respect to any insurance policy. Neither (A) the execution, delivery or performance of this Agreement or any of the other agreements, documents or instruments referred to in this Agreement, nor (B) the consummation of the transactions contemplated by this Agreement or any such other agreement, document or instrument, will (with or without notice or lapse of time): (1) result in the cancellation, invalidation or termination, or give any Person the right to cancel, invalidate or terminate, any of the insurance policies of the Acquired Companies; (2) result in the reduction of coverage, or give any Person the right to reduce the coverage, under any such insurance policies; or (3) have any impact on any Acquired Company’s right or ability to make a claim under any such insurance policies in respect of or relating to events or circumstances that have occurred prior to the Closing.
 
 
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4.18.         Related Party Transactions .   Other than   as set forth in Part 4.18 of the Disclosure Schedule , no Related Party has, and no Related Party has had, any interest in any material asset used in or otherwise relating to the business of any Acquired Company; (b) no Related Party is, or has been, indebted to any Acquired Company (other than for ordinary travel advances); (c) no Related Party has entered into, or has had any financial interest in, any material Contract, transaction or business dealing with or involving any Acquired Company; (d) to the Selling Shareholders' Knowledge, no Related Party is competing, or has at any time competed, with any Acquired Company; and (e) no Related Party has any claim or right against any Acquired Company (other than rights to receive compensation for services performed as an employee or consultant of any Acquired Company or other rights arising in the ordinary course of employment or consultancy). No member of the board of directors of any Acquired Company has ever had a conflict of interest with respect to such Acquired Company, and each such member has provided confirmation of the foregoing to such Acquired Company in accordance with applicable Legal Requirements.
 
4.19.         Legal Proceedings; Orders .
 
(a)                Legal Proceedings . Other than   as set forth in Part 4.19 of the Disclosure Schedule , there is no pending Legal Proceeding and, to the Selling Shareholders' Knowledge, no Person has threatened to commence any Legal Proceeding: (i) that involves any Acquired Company, any Company Product or any of the assets owned or used by any Acquired Company or any Person whose liability any Acquired Company has or may have retained or assumed, either contractually or by operation of law; (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the transactions contemplated by this Agreement; or (iii) that relates to the ownership of any securities of any Acquired Company, or right to receive consideration as a result of this Agreement. To the Selling Shareholders' Knowledge, no event has occurred, and no claim, dispute or other condition or circumstance exists, that will or could reasonably be expected to, give rise to or serve as a basis for the commencement of any such Legal Proceeding. Except as set forth in Part 4.19(a) of the Disclosure Schedule , no Legal Proceeding has ever been commenced by, and no Legal Proceeding has ever been pending against, any Acquired Company.
 
(b)                Orders . There is no order, writ, injunction, judgment or decree to which any Acquired Company, or any of the assets owned or used by any Acquired Company, is subject. To the Selling Shareholders' Knowledge, no officer or other employee of any Acquired Company is subject to any order, writ, injunction, judgment or decree that prohibits such officer or other employee from engaging in or continuing any conduct, activity or practice relating to any Acquired Company’s business.
 
4.20.         Authority; Binding Nature of Agreement . Each Acquired Company has the absolute and unrestricted right, power and authority to perform its obligations under each agreement, document or instrument referred to in or contemplated by this Agreement to which such Acquired Company is or will be a party. Each agreement, document and instrument referred to in or contemplated by this Agreement to which an Acquired Company is a party constitutes the legal, valid and binding obligation of such Acquired Company, enforceable against such Acquired Company in accordance with its terms, subject to: (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.
 
 
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4.21.         Non-Contravention; Consents . Neither: (1) the execution, delivery or performance of this Agreement or any of the other agreements, documents or instruments referred to in this Agreement; nor (2) any of the transactions contemplated by this Agreement or any such other agreement, document or instrument, will (with or without notice or lapse of time):
 
(a)               contravene, conflict with or result in a violation of: (i) any of the provisions of any Charter Documents; or (ii) any resolution adopted by the shareholders, members or board of directors (or similar body) of any Acquired Company;
 
(b)               contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under, any Legal Requirement or any order, writ, injunction, judgment or decree to which any Acquired Company or any of the assets owned or used by any Acquired Company, is subject;
 
(c)               contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by any Acquired Company or that otherwise relates to any Acquired Company’s business or to any of the assets owned or used by any Acquired Company;
 
(d)               contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Acquired Company Contract, or give any Person the right to: (i) declare a default or exercise any remedy under any such Acquired Company Contract; (ii) accelerate the maturity or performance of any such Acquired Company Contract or any of its terms or become eligible for any rights or benefits; or (iii) cancel, terminate or modify any such Acquired Company Contract; or
 
(e)               result in the imposition or creation of any lien or other Encumbrance upon or with respect to any asset owned or used by any Acquired Company (except for minor liens that will not, either individually or in the aggregate, materially detract from the value of the assets subject thereto or materially impair the operations of any Acquired Company) or result in a transfer, distribution or sale of such asset.
 
No Acquired Company is and no Acquired Company will be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with: (x) the performance of this Agreement or any of the other agreements, documents or instruments referred to in this Agreement; or (y) any of the transactions contemplated by this Agreement or by any of the other agreements, documents or instruments referred to in this Agreement.
 
4.22.         Brokers. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with any of the transactions contemplated by this Agreement based upon arrangements made by or on behalf of any Acquired Company. No Person is or may become entitled to receive any fee or other amount from any Acquired Company for professional services performed or to be performed in connection with any of the transactions contemplated by this Agreement.
 
4.23.         Full Disclosure .   This Agreement (including the Disclosure Schedule, the Due Diligence Material, Closing Certificate and Estimated Closing Consideration Certificate) does not as of the date hereof, and will not as of the Closing: (i) contain any representation, warranty or information that is false or misleading with respect to any material fact; or (ii) omit to state any material fact necessary in order to make the representations, warranties and information contained and to be contained herein and therein (in the light of the circumstances under which such representations, warranties and information were or will be made or provided) not false or misleading. The Company and the Selling Shareholders have no Knowledge of any information or other fact that is or may become materially adverse to the business, condition, assets, capitalization, Intellectual Property, Liabilities, operations, results of operations, financial performance or prospects of the Acquired Companies that has not been set forth in this Agreement or in the Disclosure Schedule.
 
 
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5.
Re pr esentations and Warranties of Purchaser
 
Purchaser represents and warrants to the Selling Shareholders as follows:
 
5.1.            Due Organization . Purchaser is a company duly incorporated, organized and validly existing under the laws of the State of Israel.
 
5.2.            Authority; Binding Nature of Agreement . Purchaser has the absolute and unrestricted right, power and authority to enter into and perform its obligations under this Agreement and under each other agreement, document and instrument referred to in this Agreement to which Purchaser is a party; and the execution, delivery and performance by Purchaser of this Agreement or any such other agreement, document and instrument have been duly authorized by all necessary action on the part of Purchaser. This Agreement and each other agreement, document or instrument referred to in this Agreement to which Purchaser is a party constitutes the legal, valid and binding obligation of Purchaser, enforceable against it in accordance with its terms, subject to: (a) laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (b) rules of law governing specific performance, injunctive relief and other equitable remedies.
 
6.
Covenants
 
6.1.            Operation of the Business of the Company . During the Pre-Closing Period, the Selling Shareholders shall ensure and shall procure that the Company ensures that:
 
(a)               each Acquired Company shall conduct its business and operations in the ordinary course and in substantially the same manner as such business and operations have been conducted prior to the date of this Agreement;
 
(b)               each Acquired Company shall use commercially reasonable efforts to preserve intact its current business organization, keep available the services of its current officers, managers and employees and maintain its relations and good will with all suppliers, customers, landlords, creditors, employees and other Persons having business relationships with any Acquired Company;
 
(c)               the Selling Shareholders shall report to Purchaser any material changes in the status of the business of such Acquired Company;
 
(d)               no Acquired Company shall declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares or other securities, or repurchase, redeem or otherwise reacquire any shares or other securities;
 
(e)               no Acquired Company shall sell, issue or authorize the issuance of: (i) any shares or other security; (ii) any option or right to acquire any shares (or cash based on the value of shares) or other security; or (iii) any instrument convertible into or exchangeable for any shares (or cash based on the value of shares) or other security;
 
(f)                no Acquired Company shall amend or permit the adoption of any amendment to such Acquired Company’s Charter Documents, or effect or permit such Acquired Company to become a party to any Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;
 
(g)               no Acquired Company shall form any Subsidiary or acquire any equity interest or other interest in any other Entity;
 
(h)               no Acquired Company shall make any capital expenditure exceeding in the aggregate $ 20,000;
 
(i)                no Acquired Company shall: (i) enter into, or permit any of the assets owned or used by it to become bound by, any Contract that is or would constitute a material Contract; or (ii) amend or prematurely terminate, or waive any material right or remedy under, any such Contract;
 
 
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(j)               no Acquired Company shall: (i) acquire, lease or license any right or other asset from any other Person for an aggregate value in excess of $ 10,000; (ii) sell or otherwise dispose of, or lease or license, any right or other asset to any other Person; or (iii) waive or relinquish any right, in the case of each of clauses “(i)” through “(iii)”, except in the ordinary course of business consistent with past practices;
 
(k)              no Acquired Company shall: (i) lend money to any Person (except that an Acquired Company may make routine travel advances to its current employees in the ordinary course of business consistent with past practices); or (ii) incur or guarantee any indebtedness for borrowed money;
 
(l)               no Acquired Company shall: (i) establish, adopt, amend or terminate any Acquired Company Employee Plan; (ii) pay any bonus or make any profit-sharing payment, cash incentive payment or similar payment, other than commissions paid in the ordinary course of business and consistent with past practices; (iii) increase the amount of the wages, salary, commissions, fringe benefits or other compensation (including equity-based compensation, whether payable in cash or otherwise) or remuneration payable to any of its directors, officers, managers or other employees; (iv) promote or change the title of any of its employees (retroactively or otherwise); or (v) hire or make an offer to hire any new employee;
 
(m)             no Acquired Company shall change any of its methods of accounting or accounting practices in any material respect;
 
(n)              no Acquired Company shall make any payments in respect of Tax, unless due, make or change any Tax election, adopt or change a material accounting method in respect of Taxes, enter into a Tax allocation agreement, Tax sharing agreement, Tax indemnity agreement or closing agreement, settle or comprise a claim, notice, audit report or assessment in respect of Taxes, or consent to an extension or waiver of the statutory limitation period applicable to a claim or assessment in respect of Taxes;
 
(o)               no Acquired Company shall commence or settle any Legal Proceeding;
 
(p)               no Acquired Company shall enter into any material transaction or take any other material action outside the ordinary course of business or inconsistent with its past practices; and
 
(q)               no Acquired Company shall agree or commit to take any of the actions described in clauses “(d)” through “(p)” above.
 
Notwithstanding the foregoing, the Company may take any action described in: (i) clauses“(d)” through “(q)” above if: (A) Purchaser gives its prior written consent to the taking of such action by such Acquired Company; or (B) such action is expressly contemplated by this Agreement.
 
6.2.          Notification
 
(a)               Notification . During the Pre-Closing Period, the Selling Shareholders or the Company shall promptly notify Purchaser in writing of: (i) the discovery by any Selling Shareholder or the Company of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement or that occurs, arises or exists after the date of this Agreement and that would cause or constitute a breach of or an material inaccuracy in any representation or warranty made by the Company or the Selling Shareholders in this Agreement; (ii) any breach of any covenant or obligation of the Company or the Selling Shareholders; and (iii) any event, condition, fact or circumstance that would make the timely satisfaction of any of the conditions set forth in Section 7 impossible or unlikely.
 
 
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(b)               No such notification or update shall be deemed to supplement or amend the representation or warranty made by the Company or the Selling Shareholders in this Agreement or the Disclosure Schedule for the purpose of: (i) determining the accuracy of any of the representations and warranties made by the Company or the Selling Shareholders in this Agreement; or (ii) determining whether any of the conditions set forth in Section 7 have been satisfied.
 
6.3.           No Shop . During the Pre-Closing Period, the Company and the Selling Shareholders shall not, and shall ensure that each Acquired Company or Selling Shareholder or each Representative of any Acquired Company or of any Selling Shareholder does not: (a) solicit or encourage the initiation or submission of any proposal or offer relating to a possible Acquisition Transaction; or (b) participate in any discussions or negotiations or enter into any agreement, understanding or arrangement with, or provide any information to, any Person (other than Purchaser or its Representatives) relating to or in connection with a possible Acquisition Transaction. The Company and the Selling Shareholders shall promptly (and in any event within 48 hours of receipt thereof) notify Purchaser in writing of any inquiry, indication of interest, proposal or offer relating to a possible Acquisition Transaction that is received by any of the Selling Shareholders or any Acquired Company during the Pre-Closing Period (including the identity of the Person making or submitting such inquiry, indication of interest, proposal or offer, and the terms thereof).
 
6.4.            Restriction on Transfer . The Selling Shareholders agree that, during the Pre-Closing Period, the Selling Shareholders shall not directly or indirectly sell or otherwise transfer or dispose of, or pledge or otherwise permit to be subject to any Encumbrance, any Company Shares or any other security of the Company, or any direct or indirect beneficial interest therein.
 
6.5.          Filings and Consents.
 
(a)                Filings . Each party shall use commercially reasonable efforts to file, as soon as practicable after the date of this Agreement, all notices, reports and other documents, if any, required to be filed by such party with any Governmental Body with respect to the transactions contemplated by this Agreement, and to submit promptly any additional information requested by any such Governmental Body.
 
(b)                Efforts . Subject to Section 6.5(c), each party hereto shall use commercially reasonable efforts to take, or cause to be taken, all actions necessary to consummate and make effective the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, but subject to Section 6.5(c), each party to this Agreement: (i) shall make all filings (if any) and give all notices (if any) required to be made and given by such party in connection with the transactions contemplated by this Agreement; and (ii) shall use commercially reasonable efforts to obtain each Consent (if any) required to be obtained (pursuant to any applicable Legal Requirement or Contract, or otherwise) by such party in connection with the transactions contemplated by this Agreement.
 
(c)                Limitations . Notwithstanding anything to the contrary contained in Section 6.5(b) or elsewhere in this Agreement, Purchaser shall not have any obligation under this Agreement: (i) to divest or agree to divest (or cause any of its Affiliates or any Acquired Company to divest or agree to divest) any of its respective businesses, product lines or assets, or to take or agree to take (or cause any of its Affiliates or any Acquired Company to take or agree to take) any other action or to agree (or cause any of its Affiliates or any Acquired Company to agree) to any limitation or restriction on any of its respective businesses, product lines or assets; or (ii) to contest any Legal Proceeding relating to the transactions contemplated by this Agreement.
 
6.6.            Confidentiality; Public Announcements .
 
(a)              The provisions of the NDA, are hereby incorporated into this Agreement and each of the Parties hereto agrees to maintain the confidentiality of all information received from the other party and its representatives in connection with this Agreement and the transaction described herein, and not to use any of such information for any purpose except to evaluate and perform the transaction contemplated by the parties hereto (the “ Purpose ”).
 
 
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(b)               Notwithstanding anything to the contrary in this agreement or the NDA, in case any Confidential Information (as defined in the NDA) is information that may be considered "material non-public information" pursuant to the securities laws and regulations governing Purchaser and the securities exchanges on which its shares are traded – the Company and Selling Shareholders hereby undertakes (and undertake to cause their Representatives) not to make any unlawful use of such Confidential Information, including by way of effecting a transaction in a security of Purchaser while the Confidential Information or any part thereof is in their possession. The Company and Selling Shareholders are aware, and will advise their Representatives who are informed of any of the matters that are the subject of this Agreement, of the restrictions imposed by the applicable securities laws on the purchase or sale of securities by any person who has received material, non-public information regarding a company with publicly traded securities, as well as the restrictions making it unlawful to communicate such information to any other person when it is reasonably foreseeable that such other person is likely to purchase or sell securities in reliance upon such information.
 
(c)               From and after the date of this Agreement, the Company and each Selling Shareholder hereby covenants with and undertakes to Purchaser that the Company and such Selling Shareholder shall not (and the Company and such Selling Shareholder shall ensure that its Representatives, the Acquired Companies and the Acquired Companies’ Representatives do not) issue any press release or make any public statement (including to any Acquired Company Employee) regarding (or otherwise disclose to any Person the existence or terms of) this Agreement or any of the other transactions or documents contemplated by this Agreement, without Purchaser’s prior written consent. For avoidance of doubt, and notwithstanding anything herein or in the NDA to the contrary, the Purchaser will entitled to make any public statement and deliver any notice to a Governmental Body as it is legally required to issue or make under any Legal Requirement (including any applicable securities law, or by the applicable rules of any stock exchange on which Purchaser lists its securities).
 
6.7.           Resignation of the board of directors; Credit Cards . The Company and the Selling Shareholders shall (and shall cause each Acquired Company to) obtain and deliver to Purchaser the resignation of each member of the board of directors of each Acquired Company effective as of the Closing. Immediately following Closing the Purchaser shall cause an extraordinary general meeting of each of the Acquired Companies to be held, at which meetings the Purchaser shall appoint new board members of the Company (it being understood that such new board members are registered at the Danish Business Authority effective as at the Closing Date). Prior to the Closing, the Company shall take all action necessary to revoke, effective as of the Closing, all signatory rights of all officers and board members of the Acquired Companies, and shall suspend and cancel all Acquired Company credit cards and debit cards.
 
6.8.           Retention . Each Key Employee shall be eligible for the retention terms set forth in Schedule 6.8 attached hereto.
 
6.9.           Repayment of Shareholder Loans . By Closing the Selling Shareholders shall have repaid any amounts which are owed and outstanding by them to any Acquired Company, and no amounts shall be owed and outstanding with respect to loans made by any Acquired Company to the Selling Shareholder or any other employee.
 
6.10.       Closing Balance Sheets and Closing Consideration Certificate; Post-Closing Purchase Price Adjustment
 
(a)               Not later than 90 Business Days following the Closing, the Purchaser shall prepare and deliver to the Selling Shareholders: (x) final audited solo balance sheets and statements of income for each of the Acquired Companies as of the Closing Date prepared in accordance with US GAAP (the “ Closing Balance Sheets ”); and (y) a certificate setting forth the final Closing Consideration Certificate Data as of Closing based on GAAP (the “ Closing Consideration Certificate ”), which shall be set forth on an accompanying spreadsheet. The Selling Shareholders shall assist and make available all necessary information to enable the preparation of the Closing Balance Sheets and the Closing Consideration Certificate.
 
 
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(b)               If the Selling Shareholders agree to the Closing Consideration Certificate prepared by the Purchaser, it will be final and binding on the Parties.
 
(c)               If the Selling Shareholders disagree with the Purchaser's Closing Consideration Certificate, the Selling Shareholders must give notice of an objection to the Purchaser no later than 20 Business Days after receipt of the Closing Consideration Certificate. Failure to do so will be deemed to be agreement of the Selling Shareholders to the Closing Consideration Certificate prepared by the Purchaser. The Parties must attempt to reach an agreement on the disputed matters no later than 15 Business Days after the Purchaser's receipt of the Selling Shareholder's objection. If the Parties are unable to reach an agreement within this time limit, either Party may demand that the disputed matters be referred to the Expert.
 
(d)               The Expert will decide on the disputed matters in accordance with the Agreement and will revise the Closing Consideration Certificate to the extent that the Expert's decision on the disputed matters deviates from the Closing Consideration Certificate prepared by the Purchaser. If the decision of the disputed matters depends on an accounting estimate, the Expert must make an independent estimate on the basis of what he considers to be fair and reasonable under the Agreement. The Expert is not authorised to decide on any legal dispute concerning the interpretation of the Agreement. Any such dispute must be decided in accordance with section 11.8.
 
(e)               The final Closing Consideration Certificate prepared by the Expert will be final and binding on the Parties, and it can only be challenged in accordance with section 11.8 in the event of fraudulent acts or obvious errors.
 
(f)                The Expert will make decisions as to the apportionment of his fees and other costs between the Parties, taking into account the amount by which each Party’s calculation deviated from the Closing Consideration Certificate finally determined by him.
 
(g)               No later than 15 Business Days after the Closing Consideration Certificate has become final and binding on the Parties, the Adjustment Amount, if any, must be settled between the parties as follows: (i) in the event of a positive Adjustment Amount and an increase in the Purchase Price, the Purchaser shall pay the sum of such Adjustment Amount to the Selling Shareholders in the same manner as the Closing Payment was paid pursuant to Section 2.2(a), and (ii) in the event of a negative Adjustment Amount and a decrease in the Purchase Price, the Selling Shareholders shall pay the sum of such Adjustment Amount to the Purchaser  or such amount shall be set-off against the Escrow Account at the Purchaser’s discretion.
 
6.11.       Non-Competition and Non-Solicitation. 
 
As further consideration for the transactions contemplated by this Agreement and the payment of the Purchase Price by Purchaser, for a period ending on the second anniversary of the Closing Date, the Founders shall not, and shall require their Affiliates not to directly or indirectly, whether as an employee, director, officer, consultant, shareholder, joint venturer, or otherwise:
 
(a)               develop, market, manufacture, sell or distribute any goods or services or otherwise act in any manner which competes with the Business; or
 
(b)               call upon, solicit or communicate with any Person who is an Acquired Company Employee for the purpose or with the intent of enticing, or in a manner reasonably likely to entice, such Person to terminate his or her employment or contracting relationship with Purchaser, any Acquired Companu, or their affiliates.
 
 
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To the extent tha t e ither of the Founders shall resign or be terminated during the Evaluation Period from the Company or Purchaser (except for a resignation for Good Reason or a Termination Without Cause) then the Founders shall forfeit any entitlement to the Excess Payment.
 
6.12.       No Distribution. 
 
For the period beginning on the date hereof and ending on the date on which all funds remaining in the Escrow Account have been disbursed: (i) both of Fiberblaze Holding APS and Hilmer APS may grant any dividends or other distributions as long as an amount of $1,000,000 is retained by each of them (which amount may not be distributed by dividend or otherwise); and (ii) neither Fiberblaze Holding APS nor Hilmer APS may otherwise enter into a process of winding-up, dissolution, administration, liquidation, conservatorship, rearrangement, receivership, insolvency, reorganization, which would have the result of releasing the assets of such companies to their shareholders or creditors.
 
7.
Conditions Precedent to Obligations of Purchaser
 
The obligations of Purchaser to cause the transactions contemplated by this Agreement to be consummated are subject to the satisfaction (or waiver by Purchaser), at or prior to the Closing, of each of the following conditions:
 
7.1.           Accuracy of Representations .
 
(a)                Accuracy at Signing . Each of the representations and warranties made by the Company or the Selling Shareholders in this Agreement shall have been true and correct in all material respects when made (without giving effect to any qualification as to materiality).
 
(b)                Accuracy at Closing . Each of the representations and warranties made by the Company or the Selling Shareholders in this Agreement shall be true and correct as of the Closing Date in all material respects as if made on and as of the Closing Date (without giving effect to any qualification as to materiality), other than representations and warranties which by their terms are made as of a specific date, which shall have been true and correct as of such date, it being understood, that any inaccuracies in the Selling Shareholder's good faith estimates of the Closing Consideration Certificate Data (section 4.4(c)) does not constitute a breach of warranty.
 
7.2.            Performance of Covenants . Each of the covenants and obligations that the Company or the Selling Shareholders are required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects.
 
7.3.            Consents .
 
(a)                 Governmental Consents . All filings with, notices to and other Consents of any Governmental Body, if any, required to be made or obtained on or prior to the Closing Date in connection with the transactions contemplated by this Agreement shall have been made or obtained and shall be in full force and effect and any waiting period under any applicable antitrust or competition law, regulation or other Legal Requirement shall have expired or been terminated.
 
7.4.           No Material Adverse Effect .   Since the date of this Agreement, there shall not have occurred any Material Adverse Effect, and no event shall have occurred or circumstance shall exist that, in combination with any other events or circumstances, could reasonably be expected to have or result in a Material Adverse Effect.
 
 
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7.5.            Share Register .   The Selling Shareholders shall be the only holders of Company Shares and shall have delivered to Purchaser (i) documentary evidence that the Company's board of directors has been notified of the transfer to the Purchaser of title to all the Company Shares and confirmation from the Company's board of directors of its receipt of said notification and (ii) a true and correct copy of the Company's share register representing all of the Company Shares outstanding as of immediately after the Closing, certified as such by the chief executive officer of the Company, evidencing the transfer of all Company Shares to the Purchaser.
 
7.6.            Agreements and Documents .   Purchaser shall have received the following agreements and documents, each of which shall be in full force and effect:
 
(a)              the Escrow Agreement, duly executed by the Selling Shareholders;
 
(b)               the Founders' employment agreements in the form of Exhibit C attached hereto, duly executed by each of the Founders.
 
(c)               assignments and releases, in form and substance reasonably satisfactory to Purchaser, duly executed by each of the Founders pursuant to which the Founders irrevocably assign all of their rights in the Acquired Company IP to the Company.
 
(d)               a Release Agreement  substantially in the form of Exhibit D attached hereto, duly executed by each of the Selling Shareholders, and each other Person identified on Schedule 7.6(d) ;
 
(e)               the Key Employees' employment agreements substantially in the form of Exhibit E , duly executed by each of the Key Employees;
 
(f)                a certificate duly executed by the chief executive officer or manager of each of the Selling Shareholders and containing the representation and warranty of such Selling Shareholders that the conditions set forth in Sections 7.1, 7.2 (expressly including Section 6.7), 7.4, 7.5, 7.8, 7.9, and 7.10 have been duly satisfied (the “ Closing Certificate ”);
 
(g)               a duly executed waiver and release from Anritsu A/S, in the form of Exhibit F ;
 
(h)               a duly executed consent from Xilinx Inc., in the form of Exhibit G;
 
(i)                a duly executed consent from Maxeler, in the form of Exhibit H ;
 
(j)                a duly executed consent from GSI Technology Inc., in the form of Exhibit I ;
 
(k)              duly executed payoff letters or other evidence, in form and substance reasonably satisfactory to Purchaser, from each outside legal counsel and any financial advisor or accountant who is entitled to any compensation from any Acquired Company due to services performed in connection with this Agreement or any of the transactions contemplated by this Agreement, in which such Person acknowledges: (A) the total amount of fees, costs and expenses of any nature that is payable to such Person in connection with this Agreement and any of the transactions contemplated by this Agreement; and (B) that, upon receipt of the amount referred to in clause “(A),” it will have been paid in full and will not be owed any other amount by any Acquired Company with respect to this Agreement or the transactions contemplated by this Agreement;
 
(l)                duly executed payoff letters from each Pay-Off Creditor, containing, in each case the amounts and currency required to effect full repayment of each respective component of the Pay-Off Amounts and the wire transfer information of the Pay-Off Creditors;
 
(m)              the written resignation letters from all the members of the board of directors of each Acquired Company referred to in Section 6.7;
 
(n)               the shareholders' register and minute books (complete and written up to the date of Closing) of each Acquired Company;
 
(o)               a legal opinion regarding the Company executed by counsel for the Company, in substantially the form of Exhibit J .
 
 
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7.7.            No Res tr aints . No temporary restraining order, preliminary or permanent injunction or cease and desist or other order preventing the consummation of the transactions contemplated by this Agreement, or imposing fines, assessments, costs, liabilities or penalties in respect thereof, shall have been issued by any court of competent jurisdiction or Governmental Body and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the transactions contemplated by this Agreement that makes consummation of such transactions illegal.
 
7.8.            Employee Matters .
 
(a)               The Company shall have paid in full any wage, bonus, commission, vacation pay and other employment related benefits due through the Closing.
 
(b)               The Selling Shareholders shall have repaid any amounts which are owed and outstanding by them to any Acquired Company, and no amounts shall be owed and outstanding with respect to loans made by any Acquired Company to the Selling Shareholder or any other employee.
 
7.9.            No Legal Proceedings . No Governmental Body and no other Person shall have commenced or threatened (or made any determination) to commence any Legal Proceeding: (a) challenging any of the transactions contemplated by this Agreement or seeking the recovery of damages in connection with any of the transactions contemplated by this Agreement; (b) seeking to prohibit or limit the exercise by Purchaser of any material right pertaining to its ownership of shares of the Company; (c) seeking to materially restrict or condition, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the transactions contemplated by this Agreement; or (d) seeking to compel any Acquired Company, Purchaser or any Affiliate of Purchaser to dispose of or hold separate any material assets as a result of the transactions contemplated by this Agreement.
 
7.10.          Termination of Authorized Signatories . Purchaser shall have received evidence, in form and substance reasonably satisfactory to Purchaser, that the individuals set forth in Part 4.1(c) of the Disclosure Schedule have ceased to have any signatory rights in connection with FIBERBLAZE US LLC.
 
8.
Conditions Precedent to Obligations of Selling Shareholders
 
The obligations of Selling Shareholders to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver), at or prior to the Closing, of the following conditions:
 
8.1.            Accuracy of Representations .
 
(a)                Accuracy at Signing . Each of the representations and warranties made by Purchaser in this Agreement shall have been accurate in all material respects as of the date of this Agreement.
 
(b)                Accuracy at Closing . Each of the representations and warranties made by Purchaser in this Agreement shall be accurate in all material respects as of the Closing Date as if made on and as of the Closing Date, other than representations and warranties which by their terms are made as of a specific date, which shall have been accurate in all material respects as of such date.
 
8.2.            Performance of Covenants . Each of the covenants and obligations that Purchaser is required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects.
 
 
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8.3.            Agre em ents and Documents .
 
(a)               The Company shall have received the Escrow Agreement, duly executed by Purchaser and the Escrow Agent.
 
(b)               The Company shall have received a certificate duly executed on behalf of Purchaser by an officer of Purchaser and containing the representation and warranty of Purchaser that the conditions set forth in Section 8.1 and 8.2 have been satisfied.
 
8.4.            Closing Payment. The Selling Shareholders shall have received documentation that the Purchaser has paid the Closing Payment according to clause 2.2(a) in immediately available cash funds with the Closing Date as value date.
 
8.5.            Founder's employment agreements. The Selling Shareholders shall have received the Founder's employment agreements in the form of Exhibit C attached hereto, duly executed by the Purchaser or the Company, whatever the case may be.
 
8.6.            Settlement of Pay-Off Debt. The Selling Shareholders shall have received documentation that the Purchaser has transferred the Pay-Off Amounts into the accounts notified by the Selling Shareholders to the Purchaser according to Section 4.4(b) in immediately available funds.
 
8.7.            No Restraints . No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the transactions contemplated by this Agreement shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the transactions contemplated by this Agreement that makes consummation of such transactions illegal.
 
9.
Termination
 
9.1.            Termination Events . This Agreement may be terminated prior to the Closing:
 
(a)              by the mutual written consent of Purchaser and Selling Shareholders;
 
(b)               by Purchaser if the Closing has not taken place on or before the End Date (other than as a result of any failure on the part of Purchaser to comply with or perform any covenant or obligation of Purchaser set forth in this Agreement or in any other agreement or instrument delivered to the Company in connection with the transactions contemplated by this Agreement);
 
(c)               by Selling Shareholders if the Closing has not taken place on or before the End Date (other than as a result of any failure on the part of the Company or the Selling Shareholders to comply with or perform any covenant or obligation of the Company or the Selling Shareholders set forth in this Agreement or in any other agreement or instrument delivered to Purchaser in connection with the transactions contemplated by this Agreement);
 
(d)               by either Purchaser or the Selling Shareholders if: (i) a court of competent jurisdiction or other Governmental Body shall have issued a final and nonappealable order, decree or ruling, or shall have taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement; or (ii) there shall be any Legal Requirement enacted, promulgated, issued or deemed applicable to the transactions contemplated by this Agreement by any Governmental Body that would make consummation of such transactions illegal;
 
(e)               by Purchaser if: (i) any of the representations and warranties of the Company or the Selling Shareholders contained in this Agreement shall not be true and correct as of the date of this Agreement, or shall have become inaccurate as of a date subsequent to the date of this Agreement, such that the condition set forth in Section 7.1 would not be satisfied; (ii) any of the covenants of the Company or the Selling Shareholders contained in this Agreement shall have been breached such that the condition set forth in Section 7.2 would not be satisfied; or (iii) a Material Adverse Effect shall have occurred and the change or effect resulting therefrom continues in effect such that the condition set forth in Section 7.4 would not be satisfied; or
 
 
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(f)                by th e Selling Shareholders if: (i) any of Purchaser’s representations and warranties contained in this Agreement shall be inaccurate as of the date of this Agreement, or shall have become inaccurate as of a date subsequent to the date of this Agreement, such that the condition set forth in Section 8.1 would not be satisfied; or (ii) if any of Purchaser’s covenants contained in this Agreement shall have been breached such that the condition set forth in Section 8.2 would not be satisfied.
 
9.2.            Termination Procedures . If Purchaser wishes to terminate this Agreement pursuant to Section 9.1, Purchaser shall deliver to the Selling Shareholders a written notice stating that Purchaser is terminating this Agreement and setting forth a brief description of the basis on which Purchaser is terminating this Agreement. If the Selling Shareholders wish to terminate this Agreement pursuant to Section 9.1, the Selling Shareholders shall deliver to Purchaser a written notice stating that the Selling Shareholders are terminating this Agreement and setting forth a brief description of the basis on which the Selling Shareholders are terminating this Agreement.
 
9.3.            Effect of Termination . If this Agreement is terminated pursuant to Section 9.1, all further obligations of the parties under this Agreement shall terminate; provided, however , that: (a) with respect to a termination pursuant to Section 9.1(e), neither the Company nor the Selling Shareholders shall be relieved of any obligation or liability arising from any inaccuracy in or breach of any representation or warranty or of any covenant, obligation or other provision contained in this Agreement; (b) with respect to a termination pursuant to Section 9.1(f), the Purchaser shall not be relieved of any obligation or liability arising from any inaccuracy in or breach of any representation or warranty or of any covenant, obligation or other provision contained in this Agreement; (c) the parties shall, in all events, remain bound by and continue to be subject to the provisions set forth in Section 10.1; and (d) the parties shall, in all events, remain bound by and continue to be subject to Section 6.6 and the NDA.
 
10.
Indemnification, Etc.
 
10.1.         Indemnification . From and after the Closing, each Selling Shareholder shall, subject to the limitations set out in Section 10.3, severally hold harmless and indemnify each of the Indemnitees from and against, and shall severally compensate and reimburse each of the Indemnitees for any Damages that are suffered or incurred by any of the Indemnitees or to which any of the Indemnitees may otherwise become subject (regardless of whether or not such Damages relate to any third party claim) and which arise from or as a result of, or are connected with:
 
(a)                any  breach of any representation or warranty made by the Selling Shareholders in Sections 3 or 4;
 
(b)               any breach of any covenant or obligation of the Company or the Selling Shareholders in this Agreement or in any other agreement or document to be delivered to Purchaser in connection with the transactions contemplated by this Agreement and to which the Selling Shareholders or an Acquired Company are a party;
 
(c)               regardless of the disclosure of any matter set forth in the Disclosure Schedule, any Liability of any Acquired Company relating to any Tax arising from, in connection with or incident to any transactions effected or activities conducted at or prior to the Closing, but related to the period prior to Closing, (including Liability for Tax Returns for periods prior to the Closing which were not filed on time), and any Liability relating to the shareholder loans or other amounts paid by the Company to any of its shareholders during the period prior to Closing;
 
(d)               regardless of the disclosure of any matter set forth in the Disclosure Schedule, any Liability of any Acquired Company relating to claims by former or current Acquired Company Employees or unions on their behalf to rights in any Acquired Company IP and any claims to increased compensation or change of employment contracts relating to intellectual property rights, including resulting from assignment of rights or waiver of claims or failure to implement such assignment prior to Closing, by any former or current Acquired Company Employees;
 
 
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(e)               regardless of the disclosure of any matter set forth in the Disclosure Schedule:
 
(A) any Liability of any Acquired Company relating to non-compliance with the Danish Act on Employment Contracts, or claims for compensation by former or current Acquired Company Employees or a union on their behalf pursuant to either (i) the Danish Act on Employment Contracts, (ii) termination of employment agreements, or (iii) employee salaries, compensation or other benefits (including pensions) owed with respect to periods prior to the Closing; or
 
(B) any Liability of any Acquired Company relating to salary, wages, any other compensation or bonus, or claims thereto, by or on behalf of Henrik Lilja in excess of the salary, wages, compensation and bonus that Henrik Lilja would have been eligible for pursuant to the terms of his employment agreement with the Company dated as of April 1, 2014, plus ten percent, with respect to the period from and after the Closing and until the Parties have agreed otherwise in writing;
 
(f)                regardless of the disclosure of any matter set forth in the Disclosure Schedule, any Liability of any Acquired Company relating to the financial consultancy engagement with De La Cour Capital LLC as set out in the agreement between the Company and De La Cour Capital LLC;
 
(g)               regardless of the disclosure of any matter set forth in the Disclosure Schedule, any Liability of any Acquired Company relating to insufficient in-bound licensing for Mentor Graphics and Cadence Allegro development tools.
 
10.2.         Indemnification from Escrow .
 
(a)                Indemnification Payment from Escrow . The Purchaser may claim any amount for which it is eligible for indemnification hereunder as well as any amounts which the Selling Shareholders owe the Purchaser in the event of a binding post-Closing Purchase Price decrease according to Sections 6.10(b) or 6.10(g) from the Selling Shareholders, or to the extent that any funds remain in the Escrow Account, directly from the Escrow Account, at its sole discretion. A claim against the Escrow Account shall be made by the Purchaser by written instruction to the Escrow Agent with a copy to the Selling Shareholders and shall include a description of the claim, and a calculation of the Damages or the estimated Damages. Subject to the idemnification in question not having been disputed by the Selling Shareholders in writing within 15 Business Days (other than with respect to indemnification with respect to a binding Post-Closing Purchase Price Decrease according to Sections 6.10(b) or 6.10(g), with respect to which the Selling Shareholders may not dispute the Purchaser’s instructions to the Escrow Agent), the Escrow Agent shall release any amounts specified in such written instruction directly to the Purchaser within 20 Business Days of receipt of such written instruction. The consent of the Selling Shareholders for such payment shall not be required.
 
(b)                Release of Escrow .  Any amounts remaining in the Escrow Account which have not been claimed in accordance with the Escrow Agreement within 18 months of the Closing Date shall be automatically released to the Selling Shareholders pro rata within 10 Business Days of such 18 month anniversary of the Closing Date without need for further written instructions to the Escrow Agent. Notwithstanding the aforementioned, if there is a dispute between the Purchaser and the Selling Shareholders regarding indemnification under this Agreement, which dispute has not been resolved by the 18 month anniversary of the Closing Date, then any amounts relating to such unresolved dispute shall remain in the Escrow Account pending final resolution of the dispute and shall not be released prior to such resolution.
 
 
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10.3.         Limitations on Indemnification .
 
(a)              The Selling Shareholders are entitled to remedy any breach within 20 Business Days after receipt of the Indemnitee's notice of the claim. The claim will cease to exist if the Selling Shareholders succeed in curing the breach such that the Indemnitee suffers no Damages from such claim as a result.
 
(b)               The Selling Shareholders must pay indemnification on a $ 1 for $ 1 basis without double counting or application of multiples.
 
(c)               The Indemnitee is always required to use all reasonable commercial efforts to mitigate the Damages.
 
(d)               If the Indemnitee subsequently receives payment from a third party in respect of Damages for which the Selling Shareholders have already indemnified the Indemnitee, the Indemnitee must repay an amount equal to the net amount received from such third party to the Selling Shareholders within 20 Business Days from the date on which the amount was received from such third party.
 
(e)               The Selling Shareholders are not liable for the Damages unless: (i) each Damage exceeds $10,000 per event (De Minimis Threshold); and (ii) the total amount of the Damages, each exceeding the De Minimis Threshold, amounts to at least $70,000 (Basket) in which case liability will arise for the whole amount and not just the excess.
 
(f)                The Selling Shareholders are not liable for any Damages exceeding 30% of the Closing Payment (Cap).
 
(g)               The Selling Shareholders are not liable for Damages if the Indemnitee has not given notice of the claim to each of the Selling Shareholders: (i) no later than 11:59 CET on the day 18 months following the Closing Date and (ii) in any event no later than 60 Business Days after the Indemnitee has become aware of the basis of a claim. Any notice of a claim must include a detailed description of the claim, its actual and legal basis and a calculation of the Damages or the estimated Damages.
 
(h)               If the Selling Shareholders reject a claim, in full or in part, the Indemnitee must initiate legal proceedings against the Selling Shareholders no later than 3 months after receipt of the Selling Shareholder's written notice of rejection of a claim. Otherwise, the Selling Shareholders' obligation to indemnify the Indemnitee of the Damages related to the claim in question will cease to exist.
 
(i)               Notwithstanding the aforementioned in Sections 10.3(e), 10.3(f), and 10.3(g), the De Minimis Threshold, Basket, Cap and time limitations set forth in such Sections shall not apply with respect to indemnification for Damages: (i) resulting from  breach of any representation or warranty made by the Selling Shareholders in Sections 3, 4.3, 4.14, and 4.16, (ii) pursuant to Sections 10.1(b) -  10.1(f), or (iii) in the event of fraud or intentional misrepresentation.
 
(j)               The right to indemnification described in Section 10 is the Purchaser’s only remedy for breach of the Agreement except for intentional breach and fraud.
 
 
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11.
Miscellaneous Pr ovisions
 
11.1.         Further Assurances .   Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (at or after the Closing Date) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement.
 
11.2.         No Waiver Relating to Claims for Intentional Misrepresentation, Willful Misconduct or Fraud .   The liability of any Person under Section 10 will be in addition to, and not exclusive of, any other liability that any Person may have at law or in equity based on such Person’s intentional misrepresentation, willful misconduct or fraud. Notwithstanding anything to the contrary contained in this Agreement, none of the provisions set forth in this Agreement, including the provisions set forth in Section 10, shall be deemed a waiver by any party to this Agreement of any right or remedy which such party may have at law or in equity based on any other Person’s intentional misrepresentation, willful misconduct or fraud, nor will any such provisions limit, or be deemed to limit: (a) the amounts of recovery sought or awarded in any such claim; (b) the time period during which any such claim may be brought; or (c) the recourse which any such party may seek against another Person with respect to such a claim.
 
11.3.         Fees and Expenses .   Subject to Section 10, each party to this Agreement shall bear and pay all fees, costs and expenses that have been incurred or that are incurred in the future by such party in connection with the transactions contemplated by this Agreement, including fees of attorneys, financial advisors or brokers, if any; provided, however , that the Selling Shareholders shall bear all such fees, costs and expenses of the Acquired Companies.   The parties have agreed, that the Purchaser shall bear all fees, costs and expenses related to preparing the Closing Balance Sheets.
 
11.4.        T axes . All applicable taxes resulting from the contemplated transaction which are borne by the Selling Shareholders will be paid by them. The parties, together with their respective legal and tax advisors, will coordinate their efforts to structure the transactions described herein to the extent possible to obtain the most favorable treatment possible for the parties.
 
11.5.         Notices .   Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received by the receiving party: (i) 3 Business Days after being sent by registered, certified or first class mail delivery; (ii) upon delivery, if sent by messenger, and (iii) upon transmission and electronic confirmation of receipt, or (if transmitted and received on a day which is not a Business Day) on the first Business Day (at the receiving end) following transmission and electronic confirmation of receipt, if sent via facsimile or email; provided , however , that any notice of change of address shall only be valid upon receipt.
 
If to Purchaser:
 
Silicom Ltd.
8 Hanagar St.
Kefar-Saba,
4442537
ISRAEL
Attention: Chief Executive Officer
Facsimile: +972 – 9 -7651977
Email: shaike@silicom.co.il
 
 
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with a copy (which shall not constitute notice) to:
 
David H. Schapiro, Adv., Eliran Furman, Adv.
Yigal Arnon & Co.
1 Azrieli Center
46th Floor, The Round Tower
Tel-Aviv, 6702101
ISRAEL
Facsimile: +972 3 608 7714
Email: davids@arnon.co.il , eliranf@arnon.co.il
 
                       If to the Selling Shareholders:
 
Jakob Hilmer
Aalekistevej 220 st. tv.
DK-2720 Vanloese
Denmark
Jakob@hilmer.dk
Nikolaj Hermann
Kildevangsvej 9
DK-4000 Roskilde
Denmark
nh@fiberblaze.com
 
with a copy (which shall not constitute notice) to:
 
Thomas Weincke, Attorney-at-Law
Accura Advokatpartnerselskab
Tuborg Boulevard 1
DK-2900 Hellerup, Copenhagen
Denmark
Facsimile: +45 3945 2801
Email: Thomas.weincke@accura.dk
 
 
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11.6.         Headings .   The headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement.
 
11.7.         Counterparts and Exchanges by Electronic Transmission or Facsimile .   This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. The exchange of a fully executed Agreement (in counterparts or otherwise) by electronic transmission or by facsimile shall be sufficient to bind the parties to the terms and conditions of this Agreement.
 
11.8.         Governing Law; Dispute Resolution .
 
(a)               Governing Law . This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the United Kingdom (without giving effect to principles of conflicts of laws).
 
(b)                Venue . Any action, suit or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may only be brought or otherwise commenced in London, England and each party waives any objection which such party may now or hereafter have to the laying of the venue of any such action, suit or proceeding, and irrevocable submits to the jurisdiction of any such court in any such action, suit or proceeding.
 
11.9.         Successors and Assigns .   This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their permitted successors and assigns. No Party shall be permitted to assign any of it's rights or delegate any of it's obligations under this Agreement without the other Party's prior written consent. Any attempted assignment or delegation by any party in violation of this Section 11.9 shall be null and void.
 
11.10.       Waiver .   No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
 
11.11.       WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY .
 
11.12.       Amendments .   This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of all parties hereto, or, subsequent to Closing, by means of a written instrument duly executed and delivered by the Purchaser, the Selling Shareholder, and the Company.
 
11.13.       Severability . In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law.
 
 
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11.14.       Entire Agreement .   This Agreement and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof.
 
11.15.       No Third Party Beneficiary .   Nothing in this Agreement shall confer any right, remedies or claims upon any Person not a party or permitted assignee of a party to this Agreement.
 
[Remainder of page intentionally left blank]
 
 
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The parties hereto have caused this Agreement to be executed and delivered as of the date first written above.
 
  Silicom Ltd.,
   
  By:________________________________
  Name:______________________________
  Title:_______________________________
 
 
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The parties hereto have caused this Agreement to be executed and delivered as of the date first written above
 
  FIBERBLAZE A/S
   
  By:________________________________
  Name:______________________________
  Title:_______________________________
 
SELLING SHAREHOLDERS:
 
FIBERBLAZE HOLDING APS    HILMER APS
   
By:________________________________
By:________________________________
 
Name:______________________________
Name:______________________________
 
Title:_______________________________
Title:_______________________________
 
_____________________________________________
Nikolaj Hermann (solely for purposes of sections 3 and 6.11)
 
_____________________________________________
Jakob Hilmer (solely for purposes of sections 3 and 6.11)
 
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Exhibit 8

List of Subsidiaries

Company Name
Country of Incorporation
Silicom Connectivity Solutions, Inc.
The United States
  Fiberblaze A/S Denmark

 
Exhibit 12.1
 
CERTIFICATION
 
I, Shaike Orbach, certify that:

1.  I have reviewed this annual report on Form 20-F of Silicom Ltd.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.  The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have:

 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 
(c)
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; and

 
(d)
disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 
 
 
5.  The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of Company’s board of directors:

 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: March 24, 2015
 
  /S/ Shaike Orbach  
  Shaike Orbach, Chief Executive Officer  
 
Exhibit 12.2
 
CERTIFICATION
 
I, Eran Gilad, certify that:

1.  I have reviewed this annual report on Form 20-F of Silicom Ltd.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.  The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Company and have:

 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 
(c)
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; and

 
(d)
disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and;

 
 
 

5.  The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of Company’s board of directors:

 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
 
  /S/ Eran Gilad  
  Eran Gilad, Chief Financial Officer  
 
Date: March 24, 2015

Exhibit 13.1

Certification Pursuant to 18.U.S.C. Section 1350,
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the annual report of Silicom Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I the undersigned, being the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1)
The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: March 24, 2015
 
    Signature: /S/ Shaike Orbach
    Shaike Orbach, Chief Executive Officer
 
 



Exhibit 13.2

Certification Pursuant to 18.U.S.C. Section 1350,
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the annual report of Silicom Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I the undersigned, being the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
1)
The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: March 24, 2015
 
   
Signature: /S/ Eran Gilad
   
Eran Gilad, Chief Financial Officer
 

 
Exhibit 15.1
 
Consent of Independent Registered Public Accounting Firm
 
The Board of Directors
Silicom Ltd.:

We consent to the incorporation by reference in registration statements No. 333-149144, No. 333-185230 and No. 333-193034 on Form S-8 and registration statements No. 333-194813 on Form F-3 of Silicom Ltd of our report dated March 23, 2015, with respect to the consolidated balance sheets of Silicom Ltd. and its subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2014, and the effectiveness of internal control over financial reporting as of December 31, 2014, which report appears in the December 31, 2014 annual report on Form 20-F of Silicom Ltd.
 
Somekh Chaikin
Certified Public Accountants (Israel)
A member firm of KPMG International
 
Tel Aviv, Israel
March 24, 2015