UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
20–F
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
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OR
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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OR
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Date
of event requiring this shell company report
__________________________
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For
the transition period
from to
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Commission
file number 0-30070
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AUDIOCODES
LTD.
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(Exact
name of Registrant as specified in its charter
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and
translation of Registrant’s name into English)
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ISRAEL
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(Jurisdiction
of incorporation or organization)
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1
Hayarden Street, Airport City Lod 70151, Israel
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(Address
of principal executive offices)
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Nachum
Falek, CFO, 972-3-976-4061, 1 Hayarden Street, Airport City, Lod 70151
Israel
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(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)
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Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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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.
As
of December 31, 2008, the Registrant had outstanding 40,182,444 Ordinary Shares,
nominal value NIS 0.01 per share.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act:
Yes
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
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
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Indicate
by check mark whether registrant has submitted electronically and posted omits
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files)
Yes
o
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):
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Large Accelerated
filer
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Accelerated filer
x
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Non-accelerated
filer
o
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Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S. GAAP
x
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International
Financial Reporting Standards as issued by
the
International
Accounting Standards Board
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Other
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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.
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Item
17
o
Item
18
If
this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes
o
No
x
PART
I
Unless
the context otherwise requires, “AudioCodes,” “us,” “we” and “our” refer to
AudioCodes Ltd. and its subsidiaries.
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ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
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Not
applicable.
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ITEM
2. OFFER STATISTICS AND EXPECTED
TIMETABLE
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Not
applicable.
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ITEM
3. KEY
INFORMATION
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A.
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SELECTED
FINANCIAL DATA
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The
selected financial data, set forth in the table below, have been derived from
our audited historical financial statements for each of the years from 2004
through 2008. The selected consolidated statement of operations data for the
years ended December 31, 2006, 2007, and 2008, and the selected consolidated
balance sheet data as of December 31, 2007 and 2008, have been derived from our
audited consolidated financial statements set forth elsewhere in this Annual
Report. The selected consolidated statement of operations data for the years
ended December 31, 2004 and 2005, and the selected consolidated balance sheet
data as of December 31, 2004, 2005 and 2006, have been derived from our
previously published audited consolidated financial statements, which are not
included in this Annual Report. The selected financial data should be read in
conjunction with our consolidated financial statements, and are qualified
entirely by reference to these consolidated financial
statements.
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Year
Ended December 31,
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2004
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2005
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2006(*)
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2007(*)
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2008(*) (**) | ||||||||||||||||
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(In
thousands, except per share data)
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Statement
of Operations Data:
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Revenues
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$ | 82,756 | $ | 115,827 | $ | 147,353 | $ | 158,235 | $ | 174,744 | ||||||||||
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Cost
of revenues
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34,375 | 46,993 | 61,242 | 69,185 | 77,455 | |||||||||||||||
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Gross
profit
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48,381 | 68,834 | 86,111 | 89,050 | 97,289 | |||||||||||||||
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Operating
expense:
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Research
and development, net
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20,009 | 24,415 | 35,416 | 40,706 | 37,833 | |||||||||||||||
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Selling
and marketing
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19,891 | 25,944 | 37,664 | 42,900 | 44,657 | |||||||||||||||
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General
and administrative
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4,851 | 6,004 | 8,766 | 9,637 | 9,219 | |||||||||||||||
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Impairment
of goodwill and intangible assets
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— | — | — | — | 85,015 | |||||||||||||||
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Total
operating expenses
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44,751 | 56,363 | 81,846 | 93,243 | 176,724 | |||||||||||||||
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Operating
income (loss)
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3,630 | 12,471 | 4,265 | (4,193 | ) | (79,435 | ) | |||||||||||||
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Financial
income, net
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2,165 | 2,457 | 3,817 | 2,670 | 1,182 | |||||||||||||||
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Income
(loss) before taxes on income (tax benefit)
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5,795 | 14,928 | 8,082 | (1,523 | ) | (73,253 | ) | |||||||||||||
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Taxes
on income, net
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273 | 799 | 289 | 1,265 | 505 | |||||||||||||||
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Equity
in losses of affiliated companies
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516 | 693 | 916 | 1,097 | 2,582 | |||||||||||||||
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Net
income (loss)
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$ | 5,006 | $ | 13,436 | $ | 6,877 | $ | (3,885 | ) | $ | (81,340 | ) | ||||||||
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Basic
net earnings (loss) per share
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$ | 0.13 | $ | 0.33 | $ | 0.16 | $ | (0.09 | ) | $ | (1.97 | ) | ||||||||
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Diluted
net earnings (loss) per share
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$ | 0.12 | $ | 0.31 | $ | 0.16 | $ | (0.09 | ) | $ | (1.97 | ) | ||||||||
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Weighted
average number of ordinary shares used in computing basic net earnings
(loss) per share
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38,614 | 40,296 | 41,717 | 42,699 | 41,201 | |||||||||||||||
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Weighted
average number of ordinary shares used in computing diluted net earnings
per share
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42,607 | 43,086 | 43,689 | 42,699 | 41,201 | |||||||||||||||
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(*)
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Including
stock-based compensation expenses related to options granted to employees
and others as a result of the adoption of SFAS 123R as of January 1,
2006.
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(**)
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Including
impairment charge to goodwill, intangible assets and investment in an
affiliate.
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December
31,
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2004
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2005
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2006
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2007
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2008
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Balance
Sheet Data
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Cash
and cash equivalents
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$ | 166,832 | $ | 70,957 | $ | 25,171 | $ | 75,063 | $ | 36,779 | ||||||||||
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Short-term
bank deposits, structured notes, marketable securities and accrued
interest
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— | 71,792 | 58,080 | 35,309 | 78,351 | |||||||||||||||
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Working
capital
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171,447 | 152,047 | 97,454 | 124,676 | 56,438 | |||||||||||||||
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Long-term
bank deposits, structured notes and marketable securities
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50,195 | 77,572 | 50,377 | 32,670 | — | |||||||||||||||
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Total
assets
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272,145 | 292,223 | 337,056 | 344,487 | 230,482 | |||||||||||||||
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Bank
loans
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— | — | — | — | 27,750 | |||||||||||||||
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Senior
convertible notes
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120,660 | 120,836 | 121,015 | 121,198 | 71,374 | |||||||||||||||
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Total
shareholders’ equity
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121,985 | 139,106 | 164,685 | 174,492 | 83,334 | |||||||||||||||
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Capital
stock
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126,826 | 130,744 | 149,336 | 162,103 | 167,981 | |||||||||||||||
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B.
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CAPITALIZATION
AND INDEBTEDNESS
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Not
applicable.
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C.
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REASONS
FOR THE OFFER AND USE OF
PROCEEDS
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Not
applicable.
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D.
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RISK
FACTORS
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We
are subject to various risks and uncertainties relating to or arising out of the
nature of our business and general business, economic, financing, legal and
other factors or conditions that may affect us. We believe that the occurrence
of any one or some combination of the following factors could have a material
adverse effect on our business, financial condition, cash flows and results of
operations.
Risks
Related to Our Business and Industry
We
reported losses in 2007 and 2008. We may experience additional losses in the
future.
We
reported a net loss of $3.9 million in 2007 and $81.3 million in 2008. We also
reported a loss of $3.1 million in the first quarter of 2009. The loss in 2008
included a non-cash impairment charge of $86.1 million taken in the fourth
quarter of 2008 with respect to goodwill, intangible assets and investment in an
affiliate. The majority of our expenses are directly and indirectly related to
the number of people we employ. We may increase our expenses based on
projections of revenue growth. If at any given time we do not meet our
expectations for growth in revenues our expenses incurred in anticipation of
projected revenues may cause us to incur a loss. We may not be able to
anticipate a loss in advance and adjust our variable costs accordingly. We will
need to increase revenues and reduce expenses in order to return to
profitability.
We
have depended, and expect to continue to depend, on a small number of large
customers. Our largest customer, Nortel Networks, filed for bankruptcy
protection in January 2009. The loss of Nortel or one of our other large
customers or the reduction in purchases by a significant customer or failure of
such customer to pay for the products it purchases from us could have a material
adverse effect on our revenues.
Historically,
a substantial portion of our revenue has been derived from large purchases by a
small number of original equipment manufacturers, or OEMs, and network equipment
providers, or NEPs, systems integrators and distributors. For example, our top
three customers accounted for approximately 24.9% of our revenues in 2006, 26.1%
of our revenues in 2007 and 20.9% of our revenues in 2008. Based on our
experience, we expect that our customer base may change from period to period.
If we lose a large customer and fail to add new customers, or if purchases made
by such customers are significantly reduced, there could be a material adverse
effect on our results of operations.
Sales
to Nortel Networks, our largest customer, accounted for 14.4% of our revenues in
2008 compared to 17.0% of our revenues in 2007 and 15.2% of our revenues in
2006. Nortel filed for bankruptcy protection in January 2009. As a result of
this bankruptcy filing, $1.7 million of sales to Nortel in the fourth quarter of
2008 were recorded as unpaid deferred revenues which also reduced trade
receivables on our balance sheet. The effect of this bankruptcy filing by Nortel
on the business of Nortel and, in turn, the impact on the purchase of our
products by Nortel cannot be determined at this time. Any significant reduction
in sales to Nortel or the inability to collect a significant portion of amounts
owed to us by Nortel could have a material adverse effect on our results of
operations.
Recent
and future economic conditions, including turmoil in the financial and credit
markets, may adversely affect our business
.
The
current economic and credit crisis is having a significant negative impact on
business around the world. The impact of this crisis on the technology industry
and our major customers has been severe. Conditions may continue to be depressed
or may be subject to further deterioration which could lead to a further
reduction in consumer and customer spending overall, which could have an adverse
impact on sales of our products. A disruption in the ability of our significant
customers to access liquidity could cause serious disruptions or an overall
deterioration of their businesses which could lead to a significant reduction in
their orders of our products and the inability or failure on their part to meet
their payment obligations to us, any of which could have a material adverse
effect on our results of operations and liquidity. A significant adverse change
in a customer’s financial and/or credit position could also require us to assume
greater credit risk relating to that customer’s receivables or could limit our
ability to collect receivables related to previous purchases by that customer.
As a result, our reserves for doubtful accounts and write-offs of accounts
receivable may increase.
We
may not be able to raise additional financing for our capital needs on favorable
terms, or at all, which could limit our ability to grow and to continue our
longer term expansion plans.
The
conversion price of our senior convertible notes is significantly higher than
the market price of our ordinary shares and these notes are trading at a
discount to their principal amount. As a result, in November 2009, we may be
required to repay all or a portion of the $73.5 million in principal amount of
our outstanding senior convertible notes when the holders of these notes can
require us to repurchase the notes. We may need to raise additional capital to
continue our longer term expansion plans. To the extent that we cannot fund our
activities and acquisition program through our existing cash resources and any
cash we generate from operations, we may need to raise equity or debt funds
through additional public or private financings. We borrowed $30 million in 2008
that is repayable in 20 equal quarterly payments of $1.5 million from August,
2008 through July 2013. We will need to pay these installments and could also be
required to repay all or portion of these bank loans if we do not comply with
covenants in our loan agreements with respect to maintaining shareholders’
equity at specified levels or achieving certain levels of operating income. We
cannot be certain that we will be able to obtain additional financing on
commercially reasonable terms, or at all. This could inhibit our growth,
increase our financing costs or cause us severe financial
difficulties.
We
have entered into an agreement for the construction and long term lease of a new
building in Israel. If we are unable to sublease the property under reasonable
commercial terms, we may incur increased operating expenses which could
adversely affect our results of operations.
In
May, 2007, we entered into an agreement with respect to property adjacent to our
headquarters in Israel, pursuant to which a building of approximately 145,000
square feet will be erected and leased to us for period of eleven years. This
new building is expected to be completed in 2010. We estimate the annual lease
payments (including management fees) to be in the range of $2.0 million to $3.2
million, depending on the amount expended on improvements made to the building.
The leased property was intended to serve our expanding needs. However, in view
of current economic conditions and our reduction in personnel undertaken in
2008, we may not need to occupy the entire building and may seek to sublease all
or a portion of the new building to third parties. If we are unable to enter
into a sublease or enter into a sublease for an amount that is less than our
obligations under the lease, we may incur significant additional operating
expenses which could adversely affect our results of operations.
We
are dependent on the development of the VoIP market to increase our
sales.
We
are dependent on the development of the Voice over Internet Protocol, or VoIP,
market to increase our sales. Most existing networks are still not based on
Voice over Packet technology which we use in our products designed for the VoIP
market. We cannot be sure that the delivery of telephone and other
communications services over packet networks will expand or that there will be a
need to interconnect to other networks utilizing the type of technology
contained in our products. For example, the need for our Media Gateway products
depends on the need to inter connect VoIP networks with traditional non-packet
based networks. Our session border control products depend on growth in the need
to inter connect Voice over Packet networks with each other. The adaptation
process of connecting packet networks and telephone networks can be time
consuming and costly. Sales of our VoIP products will depend on the development
of packet networks and the commercialization of VoIP services. If this market
develops more slowly than we expect, we may not be able to sell our products in
a significant enough volume to be profitable.
We
intend to expand our business through acquisitions that could result in
diversion of resources and extra expenses. This could disrupt our business and
affect our results of operations.
Part
of our strategy is to pursue acquisitions of, or investments in, businesses and
technologies or to establish joint ventures to expand our business. For example,
in April 2003, we purchased a product group from Nortel Networks and in May 2004
we purchased Ai-Logix Inc., now known as AudioCodes Inc. In 2005, we invested in
two Israeli-based companies, MailVision Ltd. and CTI Squared Ltd., and continued
investing in Natural Speech Communication Ltd. We have recognized losses from
our equity investment in Natural Speech Communication in our results of
operations in each of the past three years. In December 2008, we began
consolidating the financial results of Natural Speech Communication in our
financial results since we became the primary beneficiary in accordance with
FASB Interpretation No. 46 (Revised), or FASB Interpretation (“FIN”) 46R,
“Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51”.
In July 2006, we acquired Nuera Communications, Inc. (which merged into
AudioCodes Inc.), in August 2006, we acquired Netrake Corporation (which merged
into AudioCodes Inc.), and in April 2007, we completed our acquisition of CTI
Squared Ltd.
The
negotiation of acquisitions, investments or joint ventures, as well as the
integration of acquired or jointly developed businesses or technologies, could
divert our management’s time and resources. Nuera is significantly larger than
any other acquisition we have made. As a result, we have experienced a diversion
of our management’s time and resources in connection with the integration and
operation of Nuera’s business.
Acquired
businesses, technologies or joint ventures may not be successfully integrated
with our products and operations. The markets for the products produced by the
companies we acquire may take longer than we anticipated to develop and to
result in increased sales and profits for us. We may not realize the intended
benefits of any acquisition, investment or joint venture and we may incur losses
from any acquisition, investment or joint venture. The future valuation of
acquired businesses may be less than the purchase price we paid and result in
impairment charges related to goodwill or intangible assets. During the fourth
quarter of 2008, we recognized non-cash impairment charges of $86.1 million with
respect to goodwill and intangible assets related to our acquisitions and an
investment in an affiliated company. These charges were identified in connection
with our annual impairment tests and reflect market conditions.
In
addition, acquisitions could result in:
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substantial
cash expenditures;
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potentially
dilutive issuances of equity securities;
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the
incurrence of debt and contingent
liabilities;
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a
decrease in our profit margins;
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amortization
of intangibles and potential impairment of goodwill and intangible assets,
such as occurred during 2008;
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reduction
of management attention to other parts of the business;
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failure
to invest in different areas or alternative
investments;
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failure
to generate expected financial results or reach business goals;
and
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increased
expenditures on human resources and related
costs.
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If
acquisitions disrupt our sales or marketing efforts or operations, our business
may suffer.
We
recorded significant charges during the fourth quarter of 2008 which caused us
to report a net loss for 2008. If our goodwill and other intangibles become
further impaired, we may be required to record additional charges to
earnings.
We
recorded aggregate charges of $86.1 million in the fourth quarter of 2008 for
impairment charges with respect to goodwill and intangible assets related to our
acquisitions and an investment in an affiliated company. As a result, we
reported a net loss for 2008. As of December 31, 2008, we had goodwill and other
intangibles in an aggregate amount of $32.1 million, or approximately 13.9% of
our total assets and 38.5% of our shareholders’ equity. Under accounting
principles generally accepted in the United States, we review our goodwill and
other intangibles for impairment annually during the fourth quarter of each
fiscal year and when events or changes in circumstances indicate the carrying
value may not be recoverable. The carrying value of our goodwill and other
intangibles may not be recoverable due to factors such as a decline in our stock
price and market capitalization, reduced estimates of future cash flows and
profitability and slower growth rates in our industry. Our impairment charges in
2008 were primarily the result of a decrease in our market capitalization.
Estimates of future cash flows and profitability are based on an updated
long-term financial outlook of our operations. However, actual performance in
the near-term or long-term could be materially different from these forecasts,
which could impact future estimates. A further significant decline in our market
capitalization or deterioration in our projected results could result in
additional impairment of goodwill and/or intangibles. We may be required to
record a significant charge to earnings in our financial statements during a
period in which an impairment of our goodwill is determined to exist, as
happened in 2008, which would negatively impact our results of operations and
could negatively impact our stock price.
If
new products we recently introduced or expect to introduce in the future fail to
generate the level of demand we anticipated, we will realize a lower than
expected return from our investment in research and development with respect to
those products, and our results of operations may suffer.
Our
success is dependent, in part, on the willingness of our customers to transition
or migrate to new products, such as our expanded offering of Mediant and IPmedia
products, the session border controller products that we now offer as a result
of our acquisition of Netrake, the Multi Service Business Gateways (MSBGs) we
recently introduced, the software application products that we now offer as a
result of our acquisition of CTI Squared, or expected future products. We are
involved in a continuous process of evaluating changing market demands and
customer requirements in order to develop and introduce new products, features
and applications to meet changing demands and requirements. We need to be able
to interpret market trends and the advancement of technology in order to
successfully develop and introduce new products, features and applications. If
potential customers defer transition or migration to new products, our return on
our investment in research and development with respect to products recently
introduced or expected to be introduced in the near future will be lower than we
originally anticipated and our results of our operations may
suffer.
Because
of the rapid technological development in the communications equipment market
and the intense competition we face, our products can become outmoded or
obsolete in a relatively short period of time, which requires us to provide
frequent updates and/or replacements to existing products. If we do not
successfully manage the transition process to the next generation of our
products, our operating results may be harmed.
The
communications equipment market is characterized by rapid technological
innovation and intense competition. Accordingly, our success depends in part on
our ability to develop next generation products in a timely and cost-effective
manner. The development of new products is expensive, complex and time
consuming. If we do not rapidly develop our next generation products ahead of
our competitors, we may lose both existing and potential customers to our
competitors. Further, if a competitor develops a new, less expensive product
using a different technological approach to delivering informational services
over existing networks, our products would no longer be competitive. Conversely,
even if we are successful in rapidly developing new products ahead of our
competitors and we do not cost-effectively manage our inventory levels of
existing products when making the transition to the new products, our financial
results could be negatively affected by high levels of obsolete inventory. If
any of the foregoing were to occur, then our operating results would be
harmed.
Our
industry is rapidly evolving and we may not be able to keep pace with
technological changes, which could adversely affect our business.
The
transmission of multimedia over data networks is rapidly evolving. Short product
life cycles place a premium on our ability to manage the transition from current
products to new products. Our future success in generating revenues will depend
on our ability to enhance our existing products and to develop and introduce new
products and product features. These products and features must keep pace with
technological developments and address the increasingly sophisticated needs of
our customers. The development of new technologies and products is increasingly
complex and uncertain. This increases the difficulty in coordinating the
planning and production process and can result in delay in the introduction of
new technologies and products.
The
increase in the number of IP networks may adversely affect the demand for media
gateway products.
Media
gateway products are primarily intended to transcode voice from traditional
telephony networks to IP networks and vise versa. Along with the growth in the
number of IP networks, there has been an increase in the amount of information
that is sent directly from one IP network to another IP network. This direct
network communication potentially obviates the need to use a media gateway or
transcoding. A reduction in the demand for media gateways may adversely affect
the demand for our media gateway products and, in turn, adversely affect our
results of operations.
New
industry standards, the modification of our products to meet additional existing
standards or the addition of features to our products may delay the introduction
of our products or increase our costs.
The
industry standards that apply to our products are continually evolving. In
addition, since our products are integrated into networks consisting of elements
manufactured by various companies, they must comply with a number of industry
standards and practices established by various international bodies and industry
forums. Should new standards gain broad acceptance, we will be required to adopt
those standards in our products. We may also decide to modify our products to
meet additional existing standards or add features to our products. Standards
may be adopted by various industry interest groups or may be proprietary and
nonetheless accepted broadly in the industry. It may take us a significant
amount of time to develop and design products incorporating these new standards.
We may also have to pay additional fees to the developers of the technologies
which constitute the newly adopted standards.
Our
OEM customers or potential customers may develop or prefer to develop their own
technical solutions, and as a result, would not buy our products.
Our
products are sold also as components or building blocks to large OEMs and NEPs.
These customers incorporate our products into their product offerings, usually
in conjunction with value-added services of their own or of third parties. OEM
or NEP customers or potential customers may prefer to develop their own
technology or purchase third party technology. They could also manufacture their
own components or building blocks that are similar to the ones we offer. Large
customers have already committed significant resources in developing integrated
product offerings. Customers may decide that this gives them better
profitability and/or greater control over supplies, specifications and
performance. Customers may therefore not buy components or products from an
external manufacturer such as us. This could have an adverse impact on our
ability to sell our products and our revenues.
We
have a limited order backlog. If revenue levels for any quarter fall below our
expectations, our results of operations will be adversely affected.
We
have a limited order backlog, which makes revenues in any quarter substantially
dependent on orders received and delivered in that quarter. A delay in the
recognition of revenue, even from one customer, may have a significant negative
impact on our results of operations for a given period. We base our decisions
regarding our operating expenses on anticipated revenue trends, and our expense
levels are relatively fixed, or require some time for adjustment. Because only a
small portion of our expenses varies with our revenues, if revenue levels fall
below our expectations, our results of operations will be adversely
affected.
Generally,
we sell to original equipment manufacturers, or OEMs, network equipment
providers or system integrator customers, as well as to distributors. As a
result, we have less information with respect to the actual requirements of end
users and their utilization of equipment. We also have less influence over the
choice of equipment by these end users.
We
typically sell to OEM customers, network equipment providers, and system
integrators, as well as to distributors. Our customers usually purchase
equipment from several suppliers and may be trying to fulfill one of their
customers’ specific technical specifications. We rely heavily on our customers
for sales of our products and to inform us about market trends and the needs of
their customers. We cannot be certain that this information is accurate. If the
information we receive is not accurate, we may be manufacturing products that do
not have a customer or fail to manufacture products that end users want. Because
we are selling products to OEMs, system integrators and distributors rather than
directly to end users, we have less control over the ultimate selection of
products by end users.
The
markets we serve are highly competitive and many of our competitors have much
greater resources, which may make it difficult for us to maintain
profitability.
Competition
in our industry is intense and we expect competition to increase in the future.
Our competitors currently sell products that provide similar benefits to those
that we sell. There has been a significant amount of merger and acquisition
activity and strategic alliances frequently involving major telecommunications
equipment manufacturers acquiring smaller companies, and we expect that this
will result in an increasing concentration of market share among these
companies, many of whom are our customers.
Our
principal competitors in the sale of signal processing chips are Texas
Instruments, Broadcom, Infineon, Centillium, Surf and Mindspeed. Several large
manufacturers of generic signal processors, such as Motorola, Agere Systems,
which merged with LSI Corporation in April 2007, and Intel have begun, or are
expected to begin, marketing competing processors. Our principal competitors in
the communications board market are NMS Communications, Intel, Motorola, Cantata
Technology, Aculab and PIKA Technologies, Inc.
Our
principal competitors in the area of analog media gateways (2 to 24 ports) for
access and enterprise are Cisco Systems Inc., Mediatrix Telecom, Inc., Vega
Stream Limited, Samsung, Innovaphone AG, Net.com/Quintum Technologies, Tainet
Communication System Corp., Welltech, Ascii Corp., D-Link Systems, Inc.,
Multitech Inc., Inomedia, OKI and LG. In addition we face competition in low,
mid and high density gateways from internal development at companies such as
Nortel, Alcatel-Lucent, Nokia-Siemens, Huawei, Ericsson, UTstarcom, ZTE and from
Cisco Systems, Inc., Veraz Networks, Sonus Networks, General Bandwidth,
Dialogic/Cantat Technologies and Commatch (Telrad).
Our
principal competitors in the media server market segment are Dialogic/Cantata
Technology, NMS Communications, Convedia/Radisys, IP Unity Glenayre,
Cognitronics and Aculab. In addition, we face competition in software-based and
hardware-based media servers from internal development at companies such as
Hewlett-Packard, Comverse-NetCentrex, Nortel, Alcatel - Lucent, Nokia – Siemens
and Ericsson.
With
respect to session border controllers, we compete against Acme Packets,
Nextone/Nexpoint, Juniper and Sonus Networks. In the security gateway market, we
compete against private companies such as GenBand, ACME Packets, Clavister and
NEC.
We
also face significant and increasing competition in the market for products
utilized in the VoIP market. Our competitors in the market for VolP products
include telecommunications companies, data communication companies and companies
specializing in voice over IP products, some of which have greater name
recognition, larger installed customer bases and significantly greater
financial, technical, sales and marketing resources than we do.
Many
of our competitors have the ability to offer complete network solutions and
vendor-sponsored financing programs to prospective customers. Some of our
competitors with broad product portfolios may also be able to offer lower prices
on products that compete with ours because of their ability to recoup a loss of
margin through sales of other products or services. Additionally, voice, audio
and other communications alternatives that compete with our products are being
continually introduced.
In
the future, we may also develop and introduce other products with new or
additional telecommunications capabilities or services. As a result, we may
compete directly with our customers with respect to sales to telephone companies
and other telecommunications infrastructure providers. Additional competitors
may include companies that currently provide computer software products and
services, such as telephone, media, publishing and cable television. The ability
of some of our competitors to bundle other enhanced services or complete
solutions with VoIP products could give these competitors an advantage over
us.
Offering
to sell system level products that compete with the products manufactured by our
customers could negatively affect our business.
Our
product offerings range from media gateway building blocks, such as chips and
boards, to media gateways, media servers and session border control products
(systems). These products could compete with products offered by our customers.
These customers could decide to decrease purchases from us because of this
competition. This could result in a material adverse effect on our results of
operations.
Offering
to sell directly to carriers or service providers may expose us to requirements
for service which we may not be able to meet.
We
also sell our products directly to telecommunications carriers, service
providers or other end-users. We have traditionally relied on third party
distributors and OEMs to test and or sell our products and inform us about the
requirements of end-users. We have limited experience selling our products
directly to end-user customers. Telecommunications carriers and other service
providers have great bargaining power in negotiating contracts. Generally,
contracts with end-users tend to be more complex and impose more obligations on
us than contracts with third party distributors. Contracts with end-users may
also require extensive support teams in the country where the end-user is
deploying its network. We may be unable to meet the requirements of these
contracts. If we are unable to meet the conditions of a contract with an
end-user customer, we may be subject to liquidated damages or liabilities that
could result in a material adverse effect on our results of
operations.
Selling
directly to end-users may adversely affect our relationship with our current
third party distributors upon whom we will continue to rely for a significant
portion of our sales. Loss of third party distributors and OEMs, or a decreased
commitment by them to sell our products as a result of direct sales by us, could
adversely affect our sales and results of operations.
We
rely on third-party subcontractors to assemble our products and therefore do not
directly control manufacturing costs, product delivery schedules or
manufacturing quality.
Our
products are assembled and tested by third-party subcontractors. As a result of
our reliance on third-party subcontractors, we cannot directly control product
delivery schedules. We have in the past experienced delays in delivery
schedules. Any problems that occur and persist in connection with the delivery,
quality or cost of the assembly and testing of our products could have a
material adverse effect on our business, financial condition and results of
operations. This reliance could also lead to product shortages or quality
assurance problems, which, in turn, could lead to an increase in the costs of
manufacturing or assembling our products.
We
may not be able to deliver our products to our customers, and substantial
reengineering costs may be incurred if a small number of third-party suppliers
do not provide us with key components on a timely basis.
Texas
Instruments Incorporated supplies all of the chips for our signal processor
product line. Our signal processor line is used both as a product line in its
own right and as a key component in our other product lines. Motorola
manufactures all of the communications processors currently used on our
communications boards.
We
have not entered into any long-term supply agreements or alternate source
agreements with our suppliers and, while we maintain an inventory of critical
components, our inventory of chips would likely not be sufficient in the event
that we had to engage an alternate supplier for these components.
Texas
Instruments is also one of our major competitors in providing signal processing
solutions. An unexpected termination of the supply of the chips provided by
Texas Instruments or Motorola or disruption in their timely delivery, would
require us to make a large investment in capital and manpower resources to shift
to using signal processors manufactured by other companies and may cause a delay
in introducing replacement products. Customers may not accept an alternative
product design. Supporting old products or redesigning products may make it more
difficult for us to support our products.
We
utilize other sole source suppliers upon whom we depend without having long term
supply agreements.
Some
of our sole source suppliers custom produce components for us based upon our
specifications and designs while other of our sole source suppliers are the only
manufacturers of certain components required by our products. We have not
entered into any long-term supply agreements or alternative source agreements
with our suppliers and while we maintain an inventory of components from single
source providers, our inventory would likely not be sufficient in the event that
we had to engage an alternate supplier of these single source components. In the
event of any interruption in the supply of components from any of our sole
source suppliers, we may have to expend significant time, effort and other
resources in order to locate a suitable alternative manufacturer and secure
replacement components. If no replacement components are available, we may be
forced to redesign certain of our products. Any such new design may not be
accepted by our customers. A prolonged disruption in supply may force us to
redesign and retest our products. Any interruption in supply from any of these
sources or an unexpected technical failure or termination of the manufacture of
components could disrupt production, thereby adversely affecting our ability to
deliver products and to support products previously sold to our
customers.
In
addition, if demand for telecommunications equipment increases, we may face a
shortage of components from our suppliers. This could result in longer lead
times, increases in the price of components and a reduction in our margins, all
of which could adversely affect the results of our operations.
Our
customers may require us to produce products or systems to hold in inventory in
order to meet their “just in time”, or short lead time, delivery requirements.
If we are unable to sell this inventory on a timely basis, we could incur
charges for excess and obsolete inventory which would adversely affect our
results of operations.
Our
customers expect us to maintain an inventory of products available for purchase
off the shelf subsequent to the initial sales cycle for these products. This may
require us to incur the costs of manufacturing inventory without having a
purchase order for the products. The VoIP industry is subject to rapid
technological change and volatile customer demands, which result in a short
product commercial life before a product becomes obsolete. If we are unable to
sell products that are produced to hold in inventory, we may incur write offs as
a result of slow moving items, technological obsolescence, excess inventories,
discontinued products and products with market prices lower than cost. Write
offs could adversely affect our operating results and financial condition. We
wrote-off inventory in a total amount of $1.9 million in 2006, $700,000 in 2007
and $1.2 million in 2008.
The
right of our customers to return products and their right to exchange products
may affect our ability to recognize revenues which could adversely affect the
results of our operations.
Some
of our customers expect us to permit them to return some or all of the products
they purchased from us. If we contractually agree to allow a customer to return
products, the customer may be entitled to a refund for the returned products or
to receive a credit for the purchase of replacement products. If we agree to
this type of contractual obligations, it could affect our ability to recognize
revenues. In addition, if we are not able to resell any products that are
returned and we would have to write off this inventory. This could adversely
affect our results of operations.
Our
products generally have long sales cycles and implementation periods, which
increase our costs in obtaining orders and reduce the predictability of our
revenues.
Our
products are technologically complex and are typically intended for use in
applications that may be critical to the business of our customers. Prospective
customers generally must make a significant commitment of resources to test and
evaluate our products and to integrate them into larger systems. As a result,
our sales process is often subject to delays associated with lengthy approval
processes that typically accompany the design and testing of new communications
equipment. The sales cycles of our products to new customers are approximately
six to twelve months after a design win, depending on the type of customer and
complexity of the product. This time may be further extended because of internal
testing, field trials and requests for the addition or customization of
features. This delays the time until we realize revenue and results in
significant investment of resources in attempting to make sales.
Long
sales cycles also subject us to risks not usually encountered in a short sales
span, including customers’ budgetary constraints, internal acceptance reviews
and cancellation. In addition, orders expected in one quarter could shift to
another because of the timing of customers’ procurement decisions. The time
required to implement our products can vary significantly with the needs of our
customers and generally exceeds several months; larger implementations can take
multiple calendar quarters. This complicates our planning processes and reduces
the predictability of our revenues.
Our
proprietary technology is difficult to protect, and our products may infringe on
the intellectual property rights of third parties. Our business may suffer if we
are unable to protect our intellectual property or if we are sued for infringing
the intellectual property rights of third parties.
Our
success and ability to compete depend in part upon protecting our proprietary
technology. We rely on a combination of patent, trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect our proprietary rights. These agreements and measures may
not be sufficient to protect our technology from third-party infringement, or to
protect us from the claims of others.
Enforcement
of intellectual property rights may be expensive and may divert attention of
management and of research and development personnel away from our business.
Intellectual property litigation could also call into question the ownership or
scope of rights owned by us. We believe that at least one of our patents may
cover technology related to the ITU G.723.1 standard. Because of our involvement
in the standard setting process, we may be required to license certain of our
patents on a reasonable and non-discriminatory basis to a current or future
competitor, to the extent required to carry out the G.723.1 standard.
Additionally, our products may be manufactured, sold, or used in countries that
provide less protection to intellectual property than that provided under U.S.
or Israeli laws or where we do not hold relevant intellectual property
rights.
We
believe that the frequency of third party intellectual claims is increasing, as
patent holders, including entities that are not in our industry and that
purchase patents as an investment or to monetize such rights by obtaining
royalties, use infringement assertions as a competitive tactic and a source of
additional revenue. Any intellectual property claims against us, even without
merit, could cost us a significant amount of money to defend and divert
management’s attention away from our business. We may not be able to secure a
license for technology that is used in our products and we may face injunctive
proceedings that prevent distribution and sale of our products even prior to any
dispute being concluded. These proceedings may also have a deterrent effect on
purchases by customers, who may be unsure about our ability to continue to
supply their requirements. We may be forced to repurchase our products and
compensate customers that have purchased such infringing products. We may be
forced to redesign the product so that it becomes non-infringing, which may have
an adverse impact on the results of our operations.
In
addition, claims alleging that the development, use, or sale of our products
infringes third parties’ intellectual property rights may be directed either at
us or at our direct or indirect customers. We may be required to indemnify such
customers against claims made against them. We may be required to indemnify them
even if we believe that the claim of infringement is without merit.
Multiple
patent holders in our industry may result in increased licensing
costs.
There
are a number of companies besides us that hold patents for various aspects of
the technology incorporated in our industry’s standards and our products. We
expect that patent enforcement will be given high priority by companies seeking
to gain competitive advantages or additional revenues. The holders of patents
from which we have not obtained licenses may take the position that we are
required to obtain a license from them. We cannot be certain that we would be
able to negotiate a license agreement at an acceptable price or at all. Our
results of operations could be adversely affected by the payment of any
additional licensing costs or if we are prevented from manufacturing or selling
a product.
Changes
in governmental regulations in the United States or other countries could slow
the growth of the VoIP telephony market and reduce the demand for our customers’
products, which, in turn, could reduce the demand for our products.
VoIP
and other services are not currently subject to all of the same regulations that
apply to traditional telephony. Nevertheless, it is possible that foreign or
U.S. federal or state legislatures may seek to impose increased fees and
administrative burdens on VoIP, data, and video providers. The FCC has already
required VoIP service providers to meet various emergency service requirements
relating to delivery of 911 calls, known as E911, and to accommodate law
enforcement interception or wiretapping requirements, such as the Communications
Assistance for Law Enforcement Act, or CALEA. In addition, the FCC may seek to
impose other traditional telephony requirements such as disability access
requirements, consumer protection requirements, number assignment and
portability requirements, and other obligations, including additional
obligations regarding E911 and CALEA.
The
cost of complying with FCC regulations could increase the cost of providing
Internet phone service which could result in slower growth and decreased
profitability for this industry, which would adversely affect our
business.
The
enactment of any additional regulation or taxation of communications over the
public Internet in the United States or elsewhere in the world could have a
material adverse effect on our customers’ (and their customers’) businesses and
could therefore adversely affect sales of our products. We do not know what
effect, if any, possible legislation or regulatory actions in the United States
or elsewhere in the world may have on private telecommunication networks, the
provision of VoIP services and purchases of our products.
Use
of encryption technology in our products is regulated by governmental
authorities and may require special development, export or import licenses.
Delays in the issuance of required licenses, or the inability to secure these
licenses, could adversely affect our revenues and results of
operations.
Growth
in the demand for security features may increase the use of encryption
technology in our products. The use of encryption technology is generally
regulated by governmental authorities and may require specific development,
export or import licenses. Encryption standards may be based on proprietary
technologies. We may be unable to incorporate encryption standards into our
products in a manner that will insure interoperability. We also may be unable to
secure licenses for proprietary technology on reasonable terms. If we cannot
meet encryption standards, or secure required licenses for proprietary
encryption technology, our revenues and results of operations could be adversely
affected.
We
are subject to regulations that will require us to use components based on
environmentally friendly materials, and we may be subject to various regulations
relating to management and disposal of waste with respect to electronic
equipment. Compliance with these regulations may increase our costs and
adversely affect our results of operations.
We
are subject to telecommunications industry regulations requiring the use of
environmentally-friendly materials in telecommunications equipment. For example,
pursuant to a European Community directive, telecom equipment suppliers were
required to stop using specified materials that are not “environmentally
friendly” by July 1, 2006. In addition, telecom equipment suppliers that take
advantage of an exemption with respect to the use of lead in solders are
required by this directive to eliminate the lead in solders from their products
by 2010. Some of our customers may also require products that meet higher
standards than those required by the directive, such as complete removal of
additional harmful substances from our products. We will be dependent on our
suppliers for components and sub-system modules, such as semiconductors and
purchased assemblies and goods, to comply with these requirements. This may harm
our ability to sell our products in regions or to customers that may adopt such
directives.
Compliance
with these directives, especially with respect to the requirement that products
eliminate lead solders, will require us to undertake significant expenses with
respect to the re-design of our products. In addition, we may be required to pay
higher prices for components that comply with this directive. We may not be able
to pass these higher component costs on to our customers. We cannot at this
point estimate the expense that will be required to redesign our products in
order to include “environmentally friendly” components. We cannot be sure that
we will be able to timely comply with these regulations, that we will be able to
comply on a cost effective basis or that a sufficient supply of compliant
components will be available to us. Compliance with these regulations could
increase our product design costs. New designs may also require qualification
testing with both customers and government certification boards. We cannot be
certain of the reliability of any new designs that utilize non-lead components,
in part, due to the lack of experience with the replacement materials and
assembly technologies. In addition, the incorporation of new components may
adversely affect equipment reliability and durability.
Some
of our operations use substances regulated under various federal, state, local
and international laws governing the environment, including laws governing the
management and disposal of waste with respect to electronic equipment. We could
incur substantial costs, including fines and civil or criminal sanctions, if we
were to violate or become liable under environmental laws or if our products
become non-compliant with environmental laws. We also face increasing complexity
in our product design and procurement operations as we adjust to new and future
requirements relating to the materials that compose our products. The EU has
enacted the Waste Electrical and Electronic Equipment Directive, which makes
producers of electrical goods financially responsible for specified collection,
recycling, treatment and disposal of past and future covered products. Producers
participating in the market became financially responsible for implementing
their responsibilities under the WEEE Legislation beginning in August 2005.
Similar legislation has been or may be enacted in other jurisdictions, including
the United States, Canada, Mexico, China and Japan.
Our
inability or failure to comply with these regulations could have a material
adverse effect on our results of operations. In addition, manufacturers of
components that use lead solders may decide to stop manufacturing those
components prior to the 2010 compliance date. These actions by manufacturers of
components could result in a shortage of components that could adversely affect
our business and results of operations.
A
significant portion of our revenues is generated outside of the U.S. and Israel.
We intend to continue to expand our operations internationally and, as a result,
our results of operations could suffer if we are unable to manage our
international operations effectively.
We
generated 35% of our revenues in 2006, 37% of our revenues in 2007 and 40% of
our revenues in 2008, outside of the United States and Israel. Part of our
strategy is to expand our penetration in existing foreign markets and to enter
new foreign markets. Our ability to penetrate some international markets may be
limited due to different technical standards, protocols or product requirements
in different markets. Expansion of our international business will require
significant management attention and financial resources. Our international
sales and operations are subject to numerous risks inherent in international
business activities, including:
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economic
and political instability in foreign countries;
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compliance
with foreign laws and regulations;
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different
technical standards or product requirements;
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staffing
and managing foreign operations;
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foreign
currency fluctuations;
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export
control issues;
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governmental
controls;
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import
or currency control restrictions;
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local
taxation;
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increased
risk of collection; and
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burdens
that may be imposed by tariffs and other trade
barriers.
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If
we are unable to address these risks, our foreign operations may be unprofitable
or the value of our investment in our foreign operations may
decrease.
Currently,
our international sales are denominated primarily in dollars. Therefore, any
devaluation in the local currencies of our customers relative to the dollar
could cause customers to decrease or cancel orders or default on
payment.
The
prices of our products may become less competitive due to foreign exchange
fluctuations.
Although
we have operations throughout the world, the majority of our revenues and our
operating costs in 2008 were denominated in, or linked to, the U.S. dollar.
Accordingly, we consider the U.S. dollar to be our functional currency. However,
approximately 38% of our operating costs in 2008 were incurred in New Israeli
Shekels (NIS). During 2007 and first half of 2008, the NIS appreciated against
the U.S. dollar, which resulted in an increase in the U.S. dollar cost of our
operations in Israel. As a result of this differential, from time to time we may
experience increases in the costs of our operations outside the United States,
as expressed in dollars. If there is a significant increase in our expenses, we
may be required to increase the prices of our products and may be less
competitive. We cannot be sure that our international customers will continue to
place orders denominated in dollars.
Our
sales to European customers denominated in Euros are increasing. Sales
denominated in Euros could make our revenues subject to fluctuation in the
Euro/dollar exchange rate. If the U.S. dollar appreciates against the Euro, we
may be required to increase the prices of our products that are denominated in
Euros.
We
may be unable to attract sales representatives who will market our products
effectively.
A
significant portion of our marketing and sales involves the aid of independent
sales representatives that are not under our direct control. We cannot be
certain that our current independent sales representatives will continue to
distribute our products or that, even if they continue to distribute our
products, they will do so successfully. These representatives are not subject to
any minimum purchase requirements and can discontinue marketing our products at
any time. In addition, these representatives often market products of our
competitors. Accordingly, we must compete for the attention and sales efforts of
our independent sales representatives.
Our
products could contain defects, which would reduce sales of those products or
result in claims against us.
We
develop complex and evolving products. Despite testing by us and our customers,
undetected errors or defects may be found in existing or new products. The
introduction of products with reliability, quality or compatibility problems
could result in reduced revenues, additional costs, increased product returns
and difficulty or delays in collecting accounts receivable. The risk is higher
with products still in the development stage, where full testing or
certification is not yet completed. This could result in, among other things, a
delay in recognition or loss of revenues, loss of market share or failure to
achieve market acceptance. We could also be subject to material claims by
customers that are not covered by our insurance.
Obtaining
certification of our products by national regulators may be time-consuming and
expensive. We may be unable to sell our products in markets in which we are
unable to obtain certification.
Our
customers may expect us to obtain certificates of compliance with safety and
technical standards set by national regulators, especially standards set by U.S.
or European regulators. There is no uniform set of standards, and each national
regulator may impose and change its own standards. National regulators may also
prohibit us from importing products that do not conform to their standards. If
we make any change in the design of a product, we are usually required to obtain
recertification of the product. The process of certification may be
time-consuming and expensive and may affect the length of the sales cycle for a
product. If we are unable to obtain certification of a product in a market, we
may be unable to sell the product in that market.
We
depend on a limited number of key personnel who would be difficult to
replace.
Because
our products are complex and our market is evolving, the success of our business
depends in large part upon the continuing contributions of our management and
key personnel. Specifically, we rely heavily on the services of Shabtai
Adlersberg, our Chief Executive Officer and Chairman of our Board of Directors.
If Shabtai Adlersberg is unable or unwilling to continue with us, our results of
operations could be materially and adversely affected. We do not carry key
person insurance for Mr. Adlersberg.
The
success of our business also depends upon our continuing ability to attract and
retain other highly-qualified management, technical, sales and marketing
personnel. We need highly-qualified technical personnel who are capable of
developing technologies and products and providing the technical support
required by our customers. We experience competitive pressure with respect to
retaining and hiring employees in the high technology sector in Israel. If we
fail to hire and retain skilled employees, our business may be adversely
affected.
If
we do not manage our operations effectively, our results of operations could be
adversely affected.
We
have actively expanded our operations in the past and may continue to expand
them in the future. This expansion has required, and may continue to require,
the application of managerial, operational and financial resources. We cannot be
sure that we will continue to expand, or that we will be able to expand our
operations successfully. In particular, our business requires us to focus on
multiple markets, including the VoIP, wireline, cable and wireless markets. In
addition, we work simultaneously with a number of large OEMs and network
equipment providers each of which may have different requirements for the
products that we sell to them. We may not have sufficient manpower, or may be
unable to devote this manpower when needed, to address the requirements of these
markets and customers. If we are unable to manage our operations effectively,
our revenues may not increase, our cost of operations may rise and our results
of operations may be adversely affected.
As
we grow we may need new or enhanced systems, procedures or controls. The
transition to such systems, procedures or controls, as well as any delay in
transitioning to new or enhanced systems, procedures or controls, may seriously
harm our ability to accurately forecast sales demand, manage our product
inventory and record and report financial and management information on a timely
and accurate basis.
Our
gross profit percentage could be negatively impacted by amortization expenses in
connection with acquisitions, increased manufacturing costs and other factors.
This could adversely affect our results of operations.
Our gross
profit percentage decreased in 2006, 2007 and 2008. The decrease in our gross
profit percentage was primarily attributable to amortization expenses related to
the acquisitions of Nuera and Netrake beginning in the third quarter of 2006 and
CTI Squared beginning in the second quarter of 2007, as well as expenses related
to equity-based compensation resulting from the adoption of SFAS 123(R)
beginning in 2006. During the fourth quarter of 2008, we recognized non-cash
impairment charges of $86.1 million with respect to goodwill, intangible assets
and investment in an affiliate. As a result of these impairment charges,
non-cash amortization expense included in cost of revenues is expected to
decline in 2009.
Our
gross profit percentage has also been negatively affected in the past and could
continue to be negatively affected by an increase in manufacturing costs, a
shift in our sales mix towards our less profitable products, increased customer
demand for longer product warranties and increased cost pressures as a result of
increased competition. Acquisitions of new businesses could also negatively
affect our gross profit percentage, which could cause an adverse effect on our
results of operations.
The
growth in our product portfolio means that we have to service and support more
products. This may result in an increase in our expenses and an adverse effect
on our results of operations.
The
size of our product portfolio has increased and continues to increase. As a
result, we are required to provide to our customers sales support. Customers
have requested that we provide a contractual commitment to support a product for
a specified period of time. This period of time may exceed the working life of
the product or extend past the period of time that we may intend to manufacture
or support a product. We are dependent on our suppliers for the components
(hardware and software) needed to provide support and may be unable to secure
the components necessary to satisfy our service commitments. We do not have long
term contracts with our suppliers, and they may not be obligated to provide us
with products or services for any specified period of time. We may need to
purchase an inventory of replacement components and parts in advance in order to
try to provide for their availability when needed. This could result in
increased risk of write offs with respect to our replacement component inventory
to the extent that we cannot accurately predict our future requirements under
our customer service contracts. If any of our component suppliers cease
production, cease operations or refuse or fail to make timely delivery of
orders, we may not be able to meet our contractual commitments for product
support. We may be required to supply enhanced components or parts as
substitutes if the original versions are no longer available. Product support
may be costly and any extra service revenues may not cover the hardware and
software costs associated with providing long-term support.
We
are subject to ongoing costs and risks associated with complying with extensive
corporate governance and disclosure requirements.
As
a foreign private issuer subject to U.S. federal securities laws, we spend a
significant amount of management time and resources to comply with laws,
regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq
rules. Section 404 of the Sarbanes-Oxley Act requires management’s annual review
and evaluation of our internal control over financial reporting and attestations
of the effectiveness of these controls by our management and by our independent
registered public accounting firm. There is no guarantee that these efforts will
result in management assurance or an attestation by our independent registered
public accounting firm that our internal control over financial reporting is
adequate in future periods. In connection with our compliance with Section 404
and the other applicable provisions of the Sarbanes-Oxley Act, our management
and other personnel devote a substantial amount of time, and may need to hire
additional accounting and financial staff, to assure that we comply with these
requirements. The additional management attention and costs relating to
compliance with the Sarbanes-Oxley Act and other corporate governance
requirements could materially and adversely affect our financial
results.
Terrorist
attacks, or the threat of such attacks, may negatively impact the global economy
which may materially adversely affect our business, financial condition and
results of operation and may cause our share price to decline.
The
financial, political, economic and other uncertainties following terrorist
attacks throughout the world have led to a worsening of the global economy. As a
result, many of our customers and potential customers have become much more
cautious in setting their capital expenditure budgets, thereby restricting their
telecommunications procurement. Uncertainties related to the threat of terrorism
have had a negative effect on global economy, causing businesses to continue
slowing spending on telecommunications products and services and further
lengthen already long sales cycles. Any escalation of these threats or similar
future events may disrupt our operations or those of our customers, distributors
and suppliers, which could adversely affect our business, financial condition
and results of operations.
We
are subject to risks from our financial investments. A continuing decline in
interest rates and worsening of the credit crisis affecting capital markets
could reduce our interest-income, decrease the value of financial assets held by
us and adversely affect our profitability.
Our
investment portfolio consists of held-to-maturity marketable securities. Our
investments are exposed to market risk due to fluctuation in interest rates,
which may affect our interest income. In addition, our funds are deposited and
invested with various financial institutions. The global economic crisis has led
to the collapse of some major international financial institutions and the
weakening of others. If the financial institutions with which we invest
collapse, this may result in a loss of our deposits or investments and a
resulting material adverse effect on our financial condition and results of
operations.
Additionally,
the performance of the capital markets affects the values of funds that are held
in marketable securities. These assets are subject to market fluctuations and
the credit worthiness of the institutions issuing the securities. This could
result in uncertain returns for these securities, which may fall below our
projected return rates and could affect the fair market value of our investment
portfolio. Due to the recent credit crisis and other market developments,
including a series of rating agency downgrades, the fair value of these
marketable securities may decline on an other than temporary basis which may
adversely affect our profitability.
We
are subject to taxation in several countries.
Because
we operate in several countries, mainly in the U.S., Israel, U.K. and Singapore,
we are subject to taxation in multiple jurisdictions. We are required to report
to and are subject to local tax authorities in the countries in which we
operate. In addition, our income that is derived from sales to customers in one
country might also be subject to taxation in other countries. We cannot be sure
of the amount of tax we may become obligated to pay in the countries in which we
operate. The tax authorities in the countries in which we operate may not agree
with our tax position. Our tax benefits from carry forward losses and other tax
planning benefits such as Israeli approved enterprise programs, may prove to be
insufficient due to Israeli tax limitations, or may prove to be insufficient to
offset tax liabilities from foreign tax authorities. Foreign tax authorities may
also use our gross profit or our revenues in each territory as the basis for
determining our income tax, and our operating expenses might not be considered
for related tax calculations adversely affect our results of
operations.
Risks
Relating to Operations in Israel
Conditions
in Israel affect our operations and may limit our ability to produce and sell
our products.
We
are incorporated under the laws of the State of Israel, and our principal
executive offices and principal research and development facilities are located
in the State of Israel. Political, economic and military conditions in Israel
directly affect our operations. There has been an increase in unrest and
terrorist activity in Israel, which began in September 2000 and which has
continued with varying levels of severity through the current period of time.
This has led to ongoing hostilities between Israel, the Palestinian Authority
and other groups in the West Bank and Gaza Strip. The future effect of this
deterioration and violence on the Israeli economy and our operations is unclear.
Recently, there has been an escalation in violence among Israel, Hamas, the
Palestinian Authority and other groups, as well as a military confrontation in
December 2008 and January 2009 along Israel’s border with the Gaza Strip, which
resulted in missiles being fired from the Gaza Strip into Southern Israel. There
were also extensive hostilities along Israel’s northern border with Lebanon in
the summer of 2006. The Israeli-Palestinian conflict may also lead to political
instability between Israel and its neighboring countries. Ongoing violence
between Israel and the Palestinians, as well as tension between Israel and the
neighboring countries, may have a material adverse effect on our business,
financial conditions and results of operations.
We
cannot predict the effect on us of an increase in these hostilities or any
future armed conflict, political instability or violence in the region.
Additionally, some of our officers and employees in Israel are obligated to
perform annual military reserve duty and are subject to being called for
additional active duty under emergency circumstances, such as the recent
military confrontation in the Gaza Strip. Some of our employees live within
conflict area territories and may be forced to stay at home instead of reporting
to work. We cannot predict the full impact of these conditions on us in the
future, particularly if emergency circumstances or an escalation in the
political situation occur. If many of our employees are called for active duty,
or forced to stay at home, our operations in Israel and our business may be
adversely affected. Additionally, a number of countries continue to restrict or
ban business with Israel or Israeli companies, which may limit our ability to
make sales in those countries.
We
are adversely affected by the devaluation of the dollar against the New Israeli
Shekel and could be adversely affected by the rate of inflation in
Israel.
We
generate substantially all of our revenues in U.S. dollars and, in 2008, 38% of
our expenses, primarily salaries, related personnel expenses and the leases of
our buildings in Israel, were incurred in NIS. We anticipate that a significant
portion of our expenses will continue to be denominated in NIS.
Our
NIS related costs, as expressed in U.S. dollars, are influenced by the exchange
rate between the U.S. dollar and the NIS. During 2007 and the first half of
2008, the NIS appreciated against the U.S. dollar, which resulted in a
significant increase in the U.S. dollar cost of our operations in Israel. During
the second half of 2008 and the first half of 2009, the NIS weakened against the
U.S. dollar. To the extent the U.S. dollar weakens against the NIS, we could
experience an increase in the cost of our operations, which are measured in U.S.
dollars in our financial statements, which could adversely affect our results of
operations. In addition, in periods in which the U.S. dollar appreciates against
the NIS, we bear the risk that the rate of inflation in Israel will exceed the
rate of such devaluation of the NIS in relation to the U.S. dollar or that the
timing of such devaluations were to lag considerably behind inflation, which
will increase our costs as expressed in U.S. dollars.
The
devaluation of the U.S. dollar in relation to the NIS in 2007 and the first half
of 2008 increased the cost in U.S. dollars of our expenses. As a result, our
dollar-measured results of operations were adversely affected. This could happen
again if the U.S. dollar were to devalue against the NIS. In order to manage the
risks imposed by foreign currency exchange rate fluctuations, from time to time,
we enter into currency forward contracts and put and call options to hedge some
of our foreign currency exposure. We can provide no assurance that our hedging
arrangements will be effective. In addition, if we wish to maintain the
dollar-denominated value of our products in non-U.S. markets, devaluation in the
local currencies of our customers relative to the U.S. dollar may cause our
customers to cancel or decrease orders or default on payment.
Because
exchange rates between the NIS and the U.S. dollar fluctuate continuously,
exchange rate fluctuations have an impact on our profitability and
period-to-period comparisons of our results of operations. In 2008, the value of
the dollar decreased in relation to the NIS by 1.1%, and the inflation rate in
Israel was 3.8% and, as a result, adversely affected our results of operations
in 2008. If this trend continues, it will continue to adversely affect our
result of operations.
The
Israeli government programs in which we currently participate, and the tax
benefits we currently receive require us to meet several conditions and may be
terminated or reduced in the future, which would increase our
costs.
We
benefit from certain government programs and tax benefits, particularly as a
result of exemptions and reductions resulting from the “approved enterprise”
status of our existing production facilities and programs in Israel. In the
past, the designation required advance approval from the Investment Center of
the Israel Ministry of Industry, Trade and Labor (the Investment Center). To be
eligible for these programs and tax benefits, we must continue to meet
conditions relating principally to adherence to the approved programs and to
periodic reporting obligations. We believe that we are currently in compliance
with these requirements. However, if we fail to meet these conditions, we will
be subject to corporate tax at the rate then in effect under Israeli law for
such tax year.
In
April 2005, an amendment to the law came into effect (the “Amendment”) which
significantly changed the provisions of the law. The Amendment limited the scope
of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Privileged Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprise’s
income be derived from export. Additionally, the Amendment enacted major changes
in the manner in which tax benefits are awarded under the law so that companies
no longer require Investment Center approval in order to qualify for tax
benefits.
The
law provides that terms and benefits included in any certificate of approval
granted prior to December 31, 2004 remain subject to the provisions of the law
as they were on the date of such approval. Therefore, our existing “Approved
Enterprises” are generally not subject to the provisions of the Amendment. As a
result of the Amendment, tax-exempt income generated under the provisions of the
law as amended, will subject us to taxes upon distribution or liquidation and we
may be required to record a deferred tax liability with respect to such
tax-exempt income. None of our facilities are currently approved as an Approved
Enterprise under the amended law.
In
2008, we recognized a grant of $2,053,000 from the Government of Israel, through
the Office of the Chief Scientist, or the OCS, for the financing of a portion of
our research and development expenditures in Israel. The OCS budget has been
subject to reductions, which may affect the availability of funds for these
prospective grants and other grants in the future. As a result, we cannot be
certain that we will continue to receive grants at the same rate, or at all. In
addition, the terms of any future OCS grants may be less favorable than our past
grant.
The
government grants we have received for research and development expenditures
limit our ability to manufacture products and transfer technologies outside of
Israel and require us to satisfy specified conditions. If we fail to satisfy
these conditions, we may be required to refund grants previously received
together with interest and penalties.
In
connection with research and development grants we received from the OCS, we
must pay royalties to the OCS on the revenue derived from the sale of products,
technologies and services developed with the grants from the OCS. The terms of
the OCS grants and the law pursuant to which grants are made restrict our
ability to manufacture products or transfer technologies developed outside of
Israel if OCS grants funded the development of the products or technology. An
amendment to the relevant law facilitates the transfer of technology or know-how
developed with the funding of the OCS to third parties outside of Israel, but
any future transfer would still require the approval of the OCS, which may not
be granted, and is likely to involve a material payment to the OCS. This
restriction may limit our ability to enter into agreements for those products or
technologies without OCS approval. We cannot be certain that any approval of the
OCS will be obtained on terms that are acceptable to us, or at all.
In
order to meet specified conditions in connection with the grants and programs of
the OCS, we have made representations to the Government of Israel concerning our
Israeli operations. From time to time the conduct of our Israeli operations has
deviated from our representations. If we fail to meet the conditions related to
the grants, including the maintenance of a material presence in Israel, or if
there is any material deviation from the representations made by us to the
Israeli government, we could be required to refund the grants previously
received (together with an adjustment based on the Israeli consumer price index
and an interest factor) and would likely be ineligible to receive OCS grants in
the future. Any inability to receive these grants would result in an increase in
our research and development expenses.
It
may be difficult to enforce a U.S. judgment against us, our officers and
directors, assert U.S. securities law claims in Israel or serve process on
substantially all of our officers and directors.
We
are incorporated in Israel. Substantially all of our executive officers and
directors are nonresidents of the United States, and a majority 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 or to effect service of process upon these
persons in the United States. Israeli courts may refuse to hear a claim based on
a violation of U.S. securities laws because Israel is not the most appropriate
forum to bring such a claim. In addition, even if an Israeli court agrees to
hear a claim, it may determine that Israeli law and not U.S. law is applicable
to the claim. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact which can be a time-consuming and costly
process. Certain matters of procedure will also be governed by Israeli law.
There is little binding case law in Israel addressing these matters.
Additionally, there is doubt as to the enforceability of civil liabilities under
the Securities Act and the Securities Exchange Act in original actions
instituted in Israel.
Israeli
law may delay, prevent or make difficult a merger with or an acquisition of us,
which could prevent a change of control and therefore depress the price of our
shares.
Provisions
of Israeli law may delay, prevent or make undesirable a merger or an acquisition
of all or a significant portion of our shares or assets. Israeli corporate law
regulates acquisitions of shares through tender offers and mergers, requires
special approvals for transactions involving significant shareholders and
regulates other matters that may be relevant to these types of transactions.
These provisions of Israeli law could have the effect of delaying or preventing
a change in control and may make it more difficult for a third party to acquire
us, even if doing so would be beneficial to our shareholders. These provisions
may limit the price that investors may be willing to pay in the future for our
ordinary shares. In addition, our articles of association contain certain
provisions that may make it more difficult to acquire us, such as a staggered
board and the ability of our board of directors to issue preferred stock.
Furthermore, Israel tax considerations may make potential transactions
undesirable to us or to some of our shareholders.
Risks
Relating to the Ownership of our Ordinary Shares and our Notes
The
price of our ordinary shares may fluctuate significantly.
The
market price for our ordinary shares, as well as the prices of shares of other
technology companies, has been volatile. Between January 1, 2007 and June 15,
2009, our share price has fluctuated from a high of $10.40 to a low of $0.92.
The following factors may cause significant fluctuations in the market price of
our ordinary shares:
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fluctuations
in our quarterly revenues and earnings or those of our
competitors;
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shortfalls
in our operating results compared to levels forecast by securities
analysts;
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announcements
concerning us, our competitors or telephone companies;
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announcements
of technological innovations;
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the
introduction of new products;
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changes
in product price policies involving us or our
competitors;
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market
conditions in the industry;
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integration
of acquired businesses, technologies or joint ventures with our products
and operations;
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the
conditions of the securities markets, particularly in the technology and
Israeli sectors; and
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political,
economic and other developments in the State of Israel and
worldwide.
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In
addition, stock prices of many technology companies fluctuate significantly for
reasons that may be unrelated or disproportionate to operating results. The
factors discussed above may depress or cause volatility of our share price,
regardless of our actual operating results.
Our
quarterly results of operations have fluctuated in the past and we expect these
fluctuations to continue. Fluctuations in our results of operations may
disappoint investors and result in a decline in our share price.
We
have experienced and expect to continue to experience significant fluctuations
in our quarterly results of operations. In some periods, our operating results
may be below public expectations or below revenue levels and operating results
reached in prior quarters or in the corresponding quarters of the previous year.
If this occurs, the market price of our ordinary shares could
decline.
The
following factors have affected our quarterly results of operations in the past
and are likely to affect our quarterly results of operations in the
future:
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size,
timing and pricing of orders, including order deferrals and delayed
shipments;
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launching
of new product generations;
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length
of approval processes or market testing;
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technological
changes in the telecommunications industry;
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competitive
pricing pressures;
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the
timing and approval of government research and development
grants;
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accuracy
of telecommunication company, distributor and original equipment
manufacturer forecasts of their customers’ demands;
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changes
in our operating expenses;
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disruption
in our sources of supply; and
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general
economic conditions.
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Therefore,
the results of any past periods may not be relied upon as an indication of our
future performance.
Our
actual financial results might vary from our publicly disclosed financial
forecasts.
From
time to time, we publicly disclose financial forecasts. Our forecasts reflect
numerous assumptions concerning our expected performance, as well as other
factors which are beyond our control and which might not turn out to be correct.
As a result, variations from our forecasts could be material. Our financial
results are subject to numerous risks and uncertainties, including those
identified throughout this “Risk Factors” section and elsewhere in this Annual
Report. If our actual financial results are worse than our financial forecasts,
the price of our ordinary shares may decline.
It
is our policy that we will not provide quarterly forecasts of the results of our
operations. This policy could affect the willingness of analysts to provide
research with respect to our ordinary shares which could affect the trading
market for our ordinary shares.
It
is our policy that we will not provide quarterly forecasts of the results of our
operations. This could result in the reduction of research analysts who cover
our ordinary shares. Any reduction in research coverage could affect the
willingness of investors, particularly institutional investors, to invest in our
shares which could affect the trading market for our ordinary shares and the
price at which our ordinary shares are traded.
As
a foreign private issuer whose shares are listed on the Nasdaq Global Select
Market, we may follow certain home country corporate governance practices
instead of certain Nasdaq requirements.
As
a foreign private issuer whose shares are listed on the Nasdaq Global Select
Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the Nasdaq Marketplace
Rules.
We
do not intend to comply with the Nasdaq requirement that we obtain shareholder
approval for certain dilutive events, such as for the establishment or amendment
of certain equity based compensation plans. Instead, we follow Israeli law and
practice which permits the establishment or amendment of certain equity based
compensation plans to be approved by our board of directors without the need for
a shareholder vote, unless such arrangements are for the compensation of
directors, in which case they also require audit committee and shareholder
approval. We also post our Annual Report on Form 20-F on our web site (www.
audiocodes.com) rather than distribute it to our shareholders pursuant to the
relevant Nasdaq requirements.
We
may also follow home country practice with regard to, among other things,
executive officer compensation, director nomination, composition of the board of
directors and quorum at shareholders’ meetings. In addition, we may follow
Israeli law, instead of the Nasdaq Marketplace Rules, which require that we
obtain shareholder approval for an issuance that will result in a change of
control of the company, certain transactions other than a public offering
involving issuances of a 20% or more interest in the company and certain
acquisitions of the stock or assets of another company.
Accordingly,
our shareholders may not be afforded the same protection as provided under
Nasdaq’s corporate governance rules.
Our
ordinary shares are listed for trading in more than one market and this may
result in price variations.
Our
ordinary shares are listed for trading on the Nasdaq Global Select Market, or
Nasdaq, and on The Tel-Aviv Stock Exchange, or TASE. Trading in our ordinary
shares on these markets is made in different currencies (U.S. dollars on Nasdaq
and New Israeli Shekels on TASE), and at different times (resulting from
different time zones, different trading days and different public holidays in
the United States and Israel). Actual trading volume on the TASE is generally
lower than trading volume on Nasdaq, and as such could be subject to higher
volatility. The trading prices of our ordinary shares on these two markets often
differ resulting from the factors described above, as well as differences in
exchange rates. 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.
We
do not anticipate declaring any cash dividends on our ordinary
shares.
We
have never declared or paid cash dividends on our ordinary shares and do not
plan to pay any cash dividends in the near future. Our current policy is to
retain all funds and earnings for use in the operation and expansion of our
business.
U.S.
shareholders face certain income tax risks in connection with their acquisition,
ownership and disposition of our ordinary shares. In any tax year, we could be
deemed a passive foreign investment company, which could result in adverse U.S.
federal income tax consequences for U.S. shareholders.
Based
on the composition of our gross income and the composition and value of our
gross assets during 2004, 2005, 2006, 2007 and 2008, we do not believe that we
were a passive foreign investment company, or PFIC, for U.S. federal income tax
purposes during any of such tax years. It is likely, however, that we would be
deemed to have been a PFIC in 2001, 2002 and 2003. In addition, there can be no
assurance that we will not be deemed a PFIC for any future tax year in which,
for example, the value of our assets, as measured by the public market valuation
of our ordinary shares, declines in relation to the value of our passive assets
(generally, cash, cash equivalents and marketable securities). If we are a PFIC
for any tax year, U.S. shareholders who own our ordinary shares during such year
may be subject to increased U.S. federal income tax liabilities and reporting
requirements for such year and succeeding years, even if we are no longer a PFIC
in such succeeding years.
We
urge U.S. holders of our ordinary shares to carefully review Item 10E. –
“Taxation – United States Tax Considerations – United States Federal Income
Taxes” in this Annual Report and to consult their own tax advisors with respect
to the U.S. federal income tax risks related to owning and disposing of our
ordinary shares and the consequences of PFIC status.
We
may not have the ability to purchase our notes for cash if required to do so by
holders on November 9, 2009, November 9, 2014 or November 9, 2019, or upon the
occurrence of a fundamental change.
During
the fourth quarter of 2008, we repurchased approximately $51.5 million in
principal amount of our senior convertible notes. As of June 15, 2009,
approximately $73.5 million principal amount of our notes was outstanding. On
November 9, 2009, November 9, 2014 or November 9, 2019, or upon specified
fundamental changes relating to us, each holder of the outstanding notes may
require us to purchase for cash all or a portion of such holder’s notes at a
price equal to 100% of the principal amount, plus accrued and unpaid interest,
if any, on such notes to but excluding the date of purchase. In addition, in the
case of certain fundamental changes occurring before November 9, 2009, we may be
required to pay a make-whole premium to holders of outstanding
notes.
As
the conversion price of the senior convertible notes is significantly higher
than the market price of our ordinary shares and the notes are trading at a
discount to their principal amount, it is likely that the holders of all or a
significant portion of the outstanding notes will require that we repurchase the
notes when they are able to do so in November 2009. We cannot be sure that we
will have sufficient financial resources to purchase these notes for cash, or
will be able to raise the financing needed to purchase these notes if required
to do so in November 2009 or at any other time as required by the terms of the
notes.
The
trading prices of our notes could be significantly affected by the market price
of our ordinary shares.
We
believe that the trading price of our notes could be significantly affected by
the market price of our ordinary shares, which may be affected by a variety of
factors as set forth in these risk factors. This relationship may result in
greater volatility in the trading prices of our notes than would be expected for
non-convertible debt securities.
Our
notes are effectively subordinated to our existing and future secured
indebtedness and structurally subordinated to existing and future indebtedness
and other liabilities of our subsidiaries.
Our
notes are general, unsecured obligations and are effectively subordinated to any
existing and future secured indebtedness we may have. In addition, our notes are
not guaranteed by our subsidiaries or any future subsidiaries and, accordingly,
our notes are effectively subordinated to the existing and future indebtedness
and other liabilities of our subsidiaries. These liabilities may include
indebtedness, trade payables, guarantees, lease obligations and letter of credit
obligations. Therefore, our rights and the rights of our creditors, including
the holders of the notes, to participate in the assets of any subsidiary upon
that subsidiary’s liquidation or reorganization will be subject to the prior
claims of the subsidiary’s creditors, except to the extent that we may ourselves
be a creditor with recognized claims against the subsidiary. However, even if we
are a creditor of one of our subsidiaries, our claims would still be effectively
subordinated to any security interests in, or mortgages or other liens on, the
assets of that subsidiary and would be subordinate to any indebtedness of the
subsidiary senior to that held by us. As of June 15, 2009, our existing
subsidiaries had no outstanding indebtedness (excluding intercompany debt and
other liabilities).
There
are no restrictive covenants in the indenture for the notes relating to our
ability to incur future indebtedness or complete other
transactions.
The
indenture governing our notes does not contain any financial covenants or
restrictions on the payment of dividends. The indenture does not restrict the
issuance or repurchase of securities by us or our subsidiaries. The indenture
contains no covenants or other provisions to afford holders of our notes
protection in the event of a highly leveraged transaction, such as a leveraged
recapitalization, that would increase the level of our indebtedness, or a change
in control except for the ability of the holders to require us to redeem the
notes under certain circumstances. The indenture governing our notes does not
restrict us from incurring senior secured debt in the future or from
guaranteeing our indebtedness, nor does it limit the amount of indebtedness that
we can issue that is equal to our notes in right of payment. In 2008, we
borrowed $30 million from Israeli banks and we may borrow additional amounts
from financial institutions without violating the terms of the
indenture.
Our
indebtedness and debt service obligations increased upon the issuance of our
notes and loans, which may adversely affect our cash flow, cash position and
stock price.
If
we do not have sufficient available cash or are unable to generate cash or raise
additional financing sufficient to meet our obligations under our notes and need
to use existing cash or liquidate investments in order to fund these
obligations, we may have to delay or curtail research, development and
commercialization programs.
Our
indebtedness could have significant additional negative consequences, including,
without limitation:
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requiring
the dedication of a portion of our expected cash flow to service our
indebtedness, thereby reducing the amount of our expected cash flow
available for other purposes, including funding our research and
development programs and other capital expenditures;
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increasing
our vulnerability to general adverse economic
conditions;
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|
limiting
our ability to obtain additional financing; and
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placing
us at a possible competitive disadvantage to less leveraged competitors
and competitors that have better access to capital
resources.
|
Holders
of our notes are not entitled to any rights with respect to our ordinary shares,
but they are subject to all changes made with respect to our ordinary
shares.
Holders
of our notes are not entitled to any rights with respect to our ordinary shares
(including, without limitation, voting rights and rights to receive dividends,
if any, or other distributions on our ordinary shares), but such holders are
subject to all changes affecting our ordinary shares. Holders of our notes are
entitled to rights on the ordinary shares if and when we deliver ordinary shares
to such holders in exchange for their notes. For example, in the event that an
amendment is proposed to our articles of association requiring shareholder
approval and the record date for determining the shareholders of record entitled
to vote on the amendment occurs prior to delivery to a converting holder of our
notes of our ordinary shares, such holders will not be entitled to vote on the
amendment, although that holder will nevertheless be subject to any changes in
the powers, preferences or special rights of our ordinary
shares.
Our
ability to fulfill our obligations under our notes and loans is dependent upon
our financial and operating performance.
Our
ability to make interest and principal payments on our notes when due depends,
in part, upon our financial performance and our ability to refinance this debt
obligation or to raise additional equity or debt. We may be required to pay all
or a portion of our notes in November 2009. Prevailing economic conditions and
financial, business and other factors, many of which are beyond our control,
will affect our ability to make these payments.
If
we are unable to generate sufficient cash flow to meet our debt service
obligations or to repay the principal of our notes and/or loans, we will have to
pursue one or more alternatives, such as:
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reducing
our operating expenses;
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reducing
or delaying capital expenditures;
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selling
assets; or
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|
raising
additional debt or equity
capital.
|
We
cannot be sure that any of these alternatives could be accomplished on
satisfactory terms, if at all, or that those actions would provide sufficient
funds to retire our notes and/or repay our loans.
| ITEM 4 INFORMATION ON THE COMPANY | ||
|
A.
|
HISTORY
AND DEVELOPMENT OF THE
COMPANY
|
|
AudioCodes
Ltd. was incorporated in 1992 under the laws of the State of Israel. Our
principal executive offices are located at 1 Hayarden Street, Airport City, Lod,
70151 Israel. Our telephone number is 972-3-976-4000. Our agent in the United
States is AudioCodes Inc., 2099 Gateway Plaza, San Jose, California
95134.
Major
Developments since January 1, 2008
In
January 2008, we merged most of our U.S. subsidiaries into AudioCodes Inc. We
did this to simplify operational and financial procedures and to save costs. As
a result, most of our activities in the United States are conducted through
AudioCodes Inc.
We
have introduced the following families of products and
technologies:
High
Definition VoIP- the adoption of VoIP and broadband networks has given us the
opportunity to offer high-quality voice coding algorithms which make
communication more efficient, effective and natural and to generate the High
Definition VoIP, or HD VoIP.
High
Definition IP Phones - suitable to be integrated with third party IP-PBX
platforms for the enterprise IP telephony market, as well as into IP-Centrex
service provider solutions.
Multi-Service
Business Gateways – a product integrating multiple data, telephony and security
services into a single device. Building on our media gateway CPE line, we have
added the support of new functions such as a LAN switch, a data router, a
firewall and a session border controller, providing service providers with an
integrated demarcation point and the enterprise with an all-in-one solution for
its communications needs.
Increased
use of Open Source codes for Enterprise Telephony - Similar to the trend
experienced with respect to Linux in the IT world, open source has started to
gain momentum in the VoIP space as well. Open source based IP telephony
solutions, led by Asterisk, a well known IP-PBX implementation, is starting to
penetrate the enterprise space as a low cost alternative to the proprietary
IP-PBX solutions from the large vendors. The adoption of open source IP
telephony solutions is gaining momentum mainly in the SMB/SME space, as well as
with service providers and developers that add their own code on top of the open
source basic code to enable special services and features.
Investments
in Other Companies
Through
December 31, 2008, we had invested an aggregate of $7.2 million in Natural
Speech Communication Ltd., a privately-held development stage company engaged in
speech recognition. This investment is intended to assist that company in
achieving substantive technological milestones. As of December 1, 2008, we began
consolidating the financial results of NSC into AudioCodes’ financial results
since we became the primary beneficiary in accordance with “FIN” 46R. As of
December 31, 2008, we owned 56.6% of the outstanding share capital of NSC
and 51.0% of the share capital of NSC on a fully diluted basis.
In
July, 2005, we invested $707,000 in MailVision Ltd., a privately-held company
engaged in developing and marketing enhanced services platforms for wireless
service providers. During 2006, 2007 and 2008, we made convertible loans in the
aggregate principal amount of $403,000 to MailVision. The loans bear interest at
the rate of 9% per annum and may be converted into shares of MailVision. As of
December 31, 2008, we owned 20.2% of the outstanding share capital of this
company and 17.4% of the share capital of this company on a diluted basis
without taking into account shares that may be issued upon conversion of the
loans.
In
December 2006, we made a convertible loan in the amount of $1,000,000 to Kayote
Networks Inc., a privately-held company engaged in VoIP interconnectivity and
interoperability services. This loan bears interest at the rate of LIBOR+2% per
annum and was due and payable in December 2007. In December 2007, we requested
repayment of the loan. We received payment of $870,000 of the principal amount
of the loan in cash and the remaining balance of the loan in the amount of
$130,000 was written off.
Principal
Capital Expenditures
We
have made and expect to continue to make capital expenditures in connection with
expansion of our production capacity. The table below sets forth our principal
capital expenditures incurred for the periods indicated.
|
2006
|
2007
|
2008
|
||||||||||
|
Computers
and peripheral equipment
|
$ | 2,310 | $ | 2,023 | $ | 2,466 | ||||||
|
Office
furniture and equipment
|
677 | 436 | 166 | |||||||||
|
Leasehold
improvements
|
80 | 170 | 526 | |||||||||
|
Total
|
$ | 3,067 | $ | 2,629 | $ | 3,158 | ||||||
|
B.
|
BUSINESS
OVERVIEW
|
Introduction
We
design, develop and sell products for voice, data and video over IP networks. In
broad terms, VoP networks consist of key network elements such as software
switches, Internet protocol, or IP, phones and media gateways. Our network and
technology products primarily provide voice the media gateway element in the
network. Media gateways connect legacy and IP networks. They essentially receive
the legacy format of communication and convert it to an IP communication and
vice versa. Typically, media gateways utilize compression algorithms to compress
the amount of information and reduce the amount of bandwidth required to convey
the information (for example, a voice communication).
Gateway
equipment for Internet protocol-based packet networks has continued to
experience significant development and growth. Gateway equipment can generally
be divided into two key categories: open telecommunications architecture
systems, built around industry standard platforms (e.g., personal computers,
compact personal computer interface, or PCI, advanced telecommunications
computing architecture, or ATCA, and IBM BladeCenter) and workstation platforms
for which components are available from a number of suppliers, and proprietary
architecture-based gateways which are built around a custom design of a
telecommunications equipment manufacturer. Voice over IP gateway equipment can
be generally segmented into three classes: carrier class gateways for use in
central office facilities; enterprise gateways for use by corporations and in
small offices; and residential gateways for use in homes.
The
need to re-route voice and fax traffic from the traditional circuit-switched
networks onto the new packet networks has led to the development of interface
equipment between the two networks, generally referred to as media gateways. The
processing of voice and fax signals in gateway and access equipment is done
according to industry-wide standards. These standards are needed to ensure that
all traditional telephony traffic is seamlessly switched and routed over the
packet network and vice versa.
Packet
networks differ fundamentally from circuit-switched networks in that the packet
network’s resources and infrastructure can be shared simultaneously by several
users and bandwidth can be flexibly allocated. Packet-based communications
systems format the information to be transmitted, such as e-mail, voice, fax and
data, into a series of smaller digital packages of information called “packets.”
Each of these packets is then transmitted over the network and is reassembled as
a complete communication at the receiving end. The various packet networks
employ different network protocols for different applications, priority schemes
and addressing formats to ensure reliable communication.
Packet
networks offer a number of advantages over circuit-switched networks. Rather
than requiring a dedicated circuit for each individual call, packet networks
commingle packets of voice, fax and data from several communications sources on
a single physical link. This provides superior utilization of network resources,
especially in dealing with information sources with bursts of information
followed by periods of silence. This superior utilization means that more
traffic can be carried over the same amount of network resources.
The
integration of voice and data communications makes possible an enrichment of
services and an entire range of new, value-added applications, such as unified
messaging and voice enabled web sites. In addition, voice traffic over packet
networks is usually compressed to provide a further reduction in the use of or
demand for bandwidth. For example, the rate at which information is transmitted
over packet networks is generally between 6.3 and 8 kilobits per second as
compared to 64 kilobits per second over circuit-switched telephone
networks.
Another
recent trend in the voice over IP environment, referred to as High Definition
VoIP, or HD VoIP, now enables the improvement of voice quality,. The adoption of
both VoIP technology and broadband networks has enabled the development and
deployment of high-quality voice coding algorithms that make communication more
efficient, effective and natural. HD VoIP allows carriers to differentiate their
services with an improved audio experience, with the goal of creating customer
loyalty and affinity.
We
typically categorize our products into two main business lines: network and
technology. Sales of network products accounted for approximately 65% of our
revenues in 2007 and approximately 67% of our revenues in 2008 and sales of
technology products accounted for approximately 35% of our revenues in 2007 and
approximately 33% of our revenues in 2008. In 2008, sales of our network
products increased by 14.2% and sales of our technology products increased by
3.6%.
Network
products consist of customer premises equipment (CPE) media gateways for the
enterprise and service provider (or carrier) markets and of carrier grade
oriented low and mid density media gateways for service providers. Complementing
our media gateways as Network products are our media server, session border
controller, security gateway and value added application products.
Technology
products are enabling in nature and consist of our chips and boards business
products. These are sold primarily to original equipment manufacturers, or OEMs
through distribution channels. Our chips and boards serve as building blocks
that our customers incorporate in their products. In contrast, our networking
products are used by our customers as part of a broader technological solution
and are a box level product that interacts directly with other third party
products.
Our
Products
Our
products consist of:
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Networking
products include media servers, security gateways, session border
controllers and media gateways. Media gateways are deployed in residential
and access networks, trunking applications in carrier networks, and
enterprise networks. Additional emerging applications or segments where we
believe our media gateways could be used are unified communication, hosted
services and fixed mobile convergence, or FMC. Our media gateway products
include low density analog media gateways and low, mid and high density
digital media gateways. We are part of Microsoft solution for unified
messaging and unified communications.
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Our
media gateways enable voice, video, data and fax to be transmitted over
Internet and other protocols, and interface with third party equipment to
facilitate enhanced voice and data services. Media servers enable
conferencing, multi-language announcement functionality, and other
applications for voice over packet networks.
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Session
border controllers enable connectivity, policies and security for
real-time sessions such as VoIP and video when traversing IP to IP
networks. In addition, security gateways enable secure real-time sessions
across WIFI, broadband and wireless networks in fixed mobile convergence
deployments.
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Unified
communication applications offering solutions that enable the integration
of voice, data, fax and messaging.
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Our
signal processor chips process and compresses voice, data and fax and
enable connectivity between traditional telephone networks and packet
networks.
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Our
communications boards and modules for communication system products are
deployed on both access networks and enterprise networks. The carrier
network applications for these boards and modules include media gateways,
which terminate calls from the public switched telephone network (PSTN),
packetize and compress the call and then switch the call to the packet
network, and vice-versa. The enterprise applications for these products
include computer telephony integration, or CTI, deployments for contact
centers, providing call logging and recording utilizing either industry
standard or proprietary protocols.
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Our
IP phones include a family of high quality, high definition IP phones,
suitable to be integrated with third party IP-PBX platforms for the
enterprise IP telephony market, as well as into IP-Centrex service
provider solutions.
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Our
multi-service business gateways include an integration of multiple data,
telephony and security services into a single device. Building on our
media gateway CPE line, we have added the support of new functions such as
a LAN switch, a data router, a firewall and a session border controller,
providing service provider with an integrated demarcation point and the
enterprise with an all-in-one solution for its communications
needs.
|
Industry
Background
Market
Trends
The
networking and telecommunications industries have experienced rapid change over
the last few years. The primary factors driving this change include the
following:
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New
technologies.
The introduction of broadband access technologies
alongside related technologies, such as new voice compression algorithms,
quality of service mechanisms and security and encryption algorithms and
protocols, have enabled delivery of voice over packet to residential and
enterprise customers with more reliability, higher quality and greater
security. Examples of these broadband access technologies include: third
generation cellular, WiMax, WiFi, data over cable, digital subscriber line
technologies and fiber networks (FTTx). Packet technologies enable
delivery of real time and non-real time services by different service
providers that do not necessarily own the access network or the part of
the network through which the subscriber accesses the network. This allows
for the growth of alternative or virtual service providers that do not own
an access network.
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Competition
by alternative service providers with incumbent and traditional service
providers.
Competition by alternative service providers is causing
incumbents to deploy advanced broadband access technologies and increase
their competitiveness by offering bundled services to their subscribers,
such as voice, video and data, and online gaming. In addition, the
emergence of wide band vocoders that use a higher sampling rate than used
in legacy time domain multiplexing, or TDM, networks allows service
providers to offer higher quality voice and music over their newly
established IP network.
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New
services enabled by broadband access.
Changes in the regulatory
environment affecting service providers and the availability of new
technologies or standards allow service providers to compete with one
another in the provision of additional services over and above the
traditional telephony service of voice, fax and dial-up modem internet
connectivity. New services that could be offered include internet
connectivity over broadband access or access to rich multimedia content
such as music, video and games.
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Increasing
need for peering between VoIP networks.
Service providers and
enterprises are increasingly building out VoIP networks. As a result,
there is an increasing need to connect between two VoIP networks. In order
to interconnect between two VoIP networks, service providers and
enterprises need session border controllers to provide connectivity and
security.
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Increased
use of open source codes for enterprise telephony
. Similar to the
trend experienced with respect to Linux in the IT world, open source has
started to gain momentum in the VoIP space as well. Open source based IP
telephony solutions, led by Asterisk, a well known IP-PBX implementation,
is starting to penetrate the enterprise space as a low cost alternative to
the proprietary IP-PBX solutions from the large vendors. The adoption of
open source IP telephony solutions is gaining momentum mainly in the
SMB/SME space, as well as with service providers and developers that add
their own code on top of the open source basic code to enable special
services and
features.
|
The
Challenges
Despite
the inherent advantages and the economic attractiveness of packet voice
networking, the transmission of packet voice and fax poses a variety of
technological challenges. These challenges relate to quality of service,
reliability of equipment, functionality and features, and ability to provide a
good return on investment.
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Quality
of Service
. The most critical issues leading to poor quality of
service in the transmission of voice and fax over packet networks are
packet loss, packet delay and packet delay jitter. For real time signals
like voice, the slightest delay in the arrival of a packet may render that
packet unusable and, in a voice transmission, the delayed packet is
considered a lost packet. Delay is usually caused by traffic hitting
congestion or a bottleneck in the network. The ability to address delay is
compounded by the varying arrival times of packets, called packet-jitter,
which results from the different routes taken by different packets. This
“jitter” can be eliminated by holding the faster arriving packets until
the slower arriving packets can catch up, but this introduces further
delay. These idiosyncrasies of packet networks do not noticeably detract
from the quality of data transmission since data delivery is relatively
insensitive to time delay. However, even the slightest delay or packet
loss in voice and fax transmission can have severe ramifications such as
voice quality degradation or, in the case of a fax transmission, call
interruption. Therefore, the need to compensate for lost or delayed
packets without degradation of voice and fax quality is a critical
issue.
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Gateway
Reliability
. In order for a packet network to be efficient for
voice or fax transmission, the VoIP gateway equipment that is installed in
core networks must be able to deliver a higher level of performance than
existing switching equipment located at central offices. The
telecommunications providers’ central offices contain circuit-switching
equipment that typically handles tens of thousands of lines and is built
to meet severe performance criteria relating to reliability, capacity,
size, power consumption and cost.
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Connectivity
and Security
. In contrast with legacy circuit switched voice and
video communications, Internet Protocol based communications are more
susceptible to attacks, interceptions and fraud by unauthorized entities.
In addition, the complexity and relative immaturity of IP networks and
protocols pose significant quality of service and connectivity challenges
when sessions cross between separate IP
networks.
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Functionality
.
In order to effectively replace legacy circuit-switching equipment, packet
network equipment must be able to deliver equivalent and improved
functionality and features for the service providers and network
users.
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Return
on Investment
. With the reduction in profitability of service
providers there is an even greater need for them to achieve better returns
on investment from capital expenditures on new equipment. Given the
evolving nature of packet technologies and capabilities, there is greater
pressure to provide cost effective technological
solutions.
|
In
order to maximize the benefits of using packet networks for the transmission of
voice, data and fax, products must be able to address and solve these inherent
problems and challenges. These products must also be standards-based to support
interoperability among different equipment manufacturers and to allow operation
over various networks.
AudioCodes
Solution
Using
our proprietary voice compression algorithms and industry standards, advanced
digital signal processing techniques and voice communications system design
expertise, our products address the quality of service problems posed by packet
delay, packet delay jitter and packet loss. As a result, we enable our customers
to build packet networking equipment that provides communication quality
comparable to the traditional telephone networks. In addition, our
communications boards and modules improve gateway efficiency and provide the
building blocks for high performance, large capacity, open telecommunications
platform-based gateways. We work closely with our customers, tailor our products
to meet their specific needs, assist them in integrating our products within
their systems and help them bring their systems to market on a timely basis. We
also work with our customers in deploying their systems in various network
environments.
Utilizing
our investment in developing standards-based VoIP protocol support for our
products, customers can integrate our media gateways with a large number of
industry leading IP-PBXs and carrier soft switches. Our interoperability teams
test our products against a variety of other products for interoperability,
focusing on the leading standard VoIP protocols: SIP (Session Initiation
Protocol) and MEGACO/H.248.
We
believe that the following strengths have enabled us to develop our products and
provide services to our customers:
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Leadership
in voice compression technology.
We are a leader in voice
compression technology. Voice compression exploits redundancies within a
voice signal to reduce the bit rate of data required to digitally
represent the voice signal while still maintaining acceptable voice
quality. Our key development personnel have significant experience in
developing voice compression technology. We were involved in the
development of the ITU G.723.1 voice coding standard that was adopted by
the Voice over IP Forum and the International Telecommunications Union as
the recommended standard for use in voice over IP gateways. We implement
industry voice compression standards and work directly with our customers
to design state-of-the-art proprietary voice compression algorithms that
satisfy specific network requirements. We believe that our significant
knowledge of the basic technology permits us to optimize its key elements
and positions us to address further technological advances in the
industry. We also believe that our technological expertise has resulted in
us being sought out by leading equipment manufacturers to work with them
in designing their systems and provision of solutions to their
customers.
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Digital
signal processing design expertise.
Our extensive experience and
expertise in designing advanced digital signal processing algorithms
enables us to implement them efficiently in real time systems. Digital
signal algorithms are computerized methods used to extract information out
of signals. In designing our signal processors, we use minimal digital
signal processing memory and processing power resources. This allows us to
develop higher density solutions than our competitors. Our expertise is
comprehensive and extends to all of the functions required to perform
voice compression, fax and modem transmission over packet networks and
telephone signaling processing.
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Compressed
voice communications systems design expertise.
We have the
expertise to design and develop the various building blocks and the
complete gateways and media servers required for complete voice over
packet systems. In building these systems, we develop hardware
architectures, voice packetization software and signaling software, and
integrate them with our signal processors to develop a complete, high
performance compressed voice communications system. We assist our
customers in integrating our signal processors into their hardware and
software systems to ensure high voice quality, high completion rate of fax
and data transmissions and telephone signaling processing accuracy.
Further, we are able to customize our off-the-shelf products to meet our
customers’ specific needs, thereby providing them with a complete,
integrated solution and enabling them to market their products with a
reduced time to market.
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Real
time embedded software design and implementation expertise.
We have
the expertise to design and develop voice and data network elements using
embedded real time software to achieve more competitive pricing. The
development and integration of VoIP signaling protocols, routing
protocols, management and provisioning into a more cost effective solution
uses our expertise and investment in research and development resources.
We believe that the benefits we can deliver are better price performance,
smaller footprint, reduced power consumption and more attractive
products.
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●
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Media
gateway protocols design expertise.
Our extensive experience in
developing media gateway standard protocols, keeping ourselves up to date
with new request for comments, or RFCs, and adjusting our features
according to customers requirements and interoperability testing allows us
to provide our customers with a single gateway that can interface with
most of the leading solution providers in the VoIP
market.
|
We
believe that our products possess the following advantages:
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●
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Voice
over Packet signal processors.
Our multi-channel signal processors
enable our customers and us to create products that meet the reliability,
capacity, size, power consumption and cost requirements needed for
building high capacity gateways.
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●
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Multiple
and comprehensive product lines.
We address both the
standards-based open telecommunications architecture market and the
proprietary system market. We can do this because we enable our customers
to offer multiple applications and address different market segments. For
example, our voice over IP communications boards target the open
telecommunications architecture market, while our signal processors,
modules and voice packetization software target the proprietary system
market. Our analog and digital media gateways target residential, hosted,
access, trunking and enterprise applications and our digital media
gateways target wireless, wire line, cable and fixed-mobile convergence
networks. Our session border controllers target access and peering
networks.
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●
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Extensive
feature set.
Our products incorporate an extensive set of signal
processing functions and features (such as coders, fax processing and echo
cancellation), functionalities (such as H.323, media gateway control
protocol, or MGCP, trunking gateway control protocol, or TGCP, media
gateway control, or Megaco, and session initiated protocol, or SIP) and
implement a complete system. We offer the ability to manage multiple
channels of communications working independently of each other, with each
channel capable of performing all of the functions required for voice
compression, fax and modem transmission, telephone signaling processing
and other functions. These functions include voice, fax or data detection,
echo cancellation, telephone tone signal detection, generation and other
telephony signaling processing. Our Gateway products, media server and
session border controller also offer wireless/mobile features to enable
fixed mobile convergence.
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●
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Cost
effective solutions.
We are able to address different market
segments and applications with the same hardware platforms thus providing
our customers with efficient and cost effective
solutions.
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●
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Open
architecture.
Our voice over packet communications boards target
the open architecture gateway market segment, which enables our customers
to use hardware and software products widely available for standards-based
open telecommunications platforms. We believe that this provides our
customers with an improved time to market and the benefits of scalability,
upgradeability and enhanced functionality without the need to completely
redesign their systems for evolving applications. Our networking products
utilize industry standard control protocols that enable them to
interoperate with other vendors and easily integrate into enterprise IP
telephony systems as well as carrier IMS (IP Multimedia Subsystem)
networks.
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|
●
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Various
entry level products.
Our wide product range (chips to media
gateways, session border controllers and media servers) provides our
customers with a range of entry level products. We believe that these
building blocks enable our customers to significantly shorten their time
to market by adding their value added
solution.
|
|
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●
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VoIPerfect™
architecture.
Our VoIPerfect architecture serves as the underlying
technology platform common to all of our products since 1998. VoIPerfectTM
is regularly updated and upgraded with features and functionalities
required to comply with evolving standards and protocols. VoIPerfectTM
architecture comprises VoIP digital signal processing, or DSP, software
and media streaming embedded software, integrated public telephone
switched network, or PTSN, signaling protocols and VoIP standard control
protocols, provisioning and management engines. Additional features enable
carrier-grade quality and high availability. VoIPerfectTM architecture
components are available in AudioCodes’ products at various levels of
integration, from the chip level, through peripheral component
interconnect mezzanine card, or PMC, modules and PCI/compact PCI (cPCI)
blades, to high-availability and non-high-availability analog and digital
media gateway
platforms.
|
Business
Strategy
Our
goal is to be the leading provider of products and enabling technologies for the
transmission of voice, video, data and fax over packet networks. The following
are key elements of our strategy:
|
●
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Maintain
and extend technological leadership
. We intend to
capitalize on our expertise in voice compression technology and
proficiency in designing voice communications systems. We continually
upgrade our product lines with additional functionalities, interfaces and
densities. We have invested heavily and are committed to continued
investment in developing technologies that are key to providing high
performance voice, data and fax transmission over packet networks and to
be at the forefront of technological evolution in our
industry.
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●
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Strengthen
and expand strategic relationships with key customers.
Our strategy
has been to sell our products to leading enterprise channels, regional
system integrators, global equipment manufacturers and value-added
resellers, or VARs, in the telecommunications and networking industries
and to establish and maintain long-term working relationships with them.
We work closely with our customers to engineer products and subsystems
that meet each customer’s particular needs. The long development cycles
usually required to build equipment incorporating our products frequently
results in close working relationships with our customers. By focusing on
leading equipment manufacturers with large volume potential, we believe
that we reach a substantial segment of our potential customer base while
minimizing the cost and complexity of our marketing
efforts.
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●
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Expand
and enhance the development of highly-integrated products.
We plan
to continue designing, developing and introducing new product lines and
product features that address the increasingly sophisticated needs of our
customers. We believe that our knowledge of core technologies and system
design expertise enable us to offer better solutions that are more
complete and contain more features than competitive alternatives. We
believe that the best opportunities for our growth and profitability will
come from offering a broad range of highly- integrated network product
lines and product features, such as our continuously updated analog and
digital media gateways and products from our recently acquired companies,
including session boarder controllers, security gateways, messaging
platforms and cable telephony gateways.
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Build
upon existing technologies to penetrate new markets.
The technology
we developed in connection with the IP telephony market can be used to
serve similar product requirements in multiple emerging markets utilizing
similar packet networking technologies. These markets include those
providing telephony over digital subscriber lines, wireless networks and
the cable television infrastructure.
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Develop
a network of strategic partners.
Part of our strategy has been to
sell our products through customers that can offer our products as part of
a full-service solution to their customers. We expect to further develop
our strategic partner relationships with system integrators and other
service providers in order to increase our customer
base.
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Acquire
complementary businesses and technologies.
We expect to
pursue the acquisition of complementary businesses and technologies or the
establishment of joint ventures to broaden our product offerings, enhance
the features and functionality of our systems, increase our penetration in
targeted markets and expand our marketing and distribution capabilities.
As part of this strategy, we acquired the UAS business from Nortel in
April 2003 and Ai-Logix (now part of AudioCodes Inc.), in May 2004. We
also acquired Nuera (now part of AudioCodes Inc.) in July 2006, Netrake
(now part of AudioCodes Inc.) in August 2006 and CTI Squared in April
2007.
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Products
Our
products facilitate the transmission of voice, video, data and fax over packet
networks. To date, we have incorporated our algorithms, technologies and systems
design expertise in product lines, which can be divided into two main product
lines:
Networking
products
This
line of products includes products that are network level products. Our
networking products include:
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analog
media gateways for toll bypass, residential gateways, hosted, access and
enterprise applications;
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digital
media gateways (MediantTM) with various capacities for wireless, wireline,
cable, enterprise, fixed mobile convergence, and unified
communications;
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multi-service
business gateways for integrated voice, data and security access for
service providers connecting enterprise customers to their network and for
the enterprise branch office;
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media
servers for enhanced voice and video services and functionalities such as
conferencing, video sharing and messaging (IPmedia™ Media
Servers);
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session
border controllers, or SBCs (nCite), that enable connectivity, contain
protocol and connectivity policies, and provide security for real-time
sessions such as VoIP and video when traversing from a public to a private
network. In addition, security gateways enable secure real-time sessions
across wifi, broadband and wireless networks in fixed mobile convergence
deployments;
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element
management system, or EMS; and
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value
added applications for unified
communications.
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In
addition, we continue to offer customers our professional services, which
usually involve customization and development projects for
customers.
Our
products are designed to build on our core technology and competence extending
them both vertically (chips inserted into boards, boards inserted into digital
media gateways) and horizontally into different applications for different
market segments, such as enterprise, call centers, wireline, cable and
wireless.
Technology
products
This
line of products serves as a building block for network level products. Our
technology products include:
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voice
over packet processors;
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VoIP
communication boards (TrunkPack®);
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media
processing boards for enhanced services and functionalities, such as
conferencing
and messaging (IPmediaTM); and
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voice
and data logging hardware integration board
products.
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Our
Product Families
Analog
Media Gateways for Toll Bypass Access and Enterprise Applications
MediaPack
TM
, our
analog and basic rate interface, or BRI, media gateways for toll bypass access
and enterprise applications, are designed to empower the next-generation network
by providing cost-effective, cutting-edge technology solutions that deliver
voice and fax services to the corporate market, small businesses and home
offices. Our analog media gateways for access and enterprise applications
provide media streaming functionality while being either controlled by a
centralized call agent or use on box VoIP control protocols (H.323, MGCP and
SIP). Convergence of data, voice and fax is achieved by a combination of the
media gateway with any IP access technology, eliminating the cost of multiple
access circuits. This product family utilizes our experience and digital signal
processing, or DSP, technology for echo cancellation, voice compression, silence
suppression and comfort noise generation. Part of this line is composed of our
analog residential gateways whose primary target market is the large volume
residential service providers or SP, market.
The
MediaPack
TM
family
represents a feature rich product for streaming voice quality with a powerful
analog interface supporting all major control protocols such as H323, SIP, MGCP
and is also capable of supporting some unified communication and FMC
applications.
Digital
Media Gateways and Various Capacities for Wireless, Wireline and Cable
(Mediant™)
Mediant
TM
is our
family of converged media gateways for wireline, cable, wireless (GSM and CDMA),
fixed-mobile-convergence and enterprise networks. The Mediant
TM
product
family offers scalability and functionality, providing a full suite of standards
compliant control protocols and public switched telephone network, or PSTN,
signaling interfaces for a variety of enterprise, wireline, cable and wireless
media gateway applications in most softswitch controlled environments. This
product family is compatible with popular wireline, cable and wireless voice
coders and protocols including code-division multiple access (CDMA), global
system for mobile communications (GSM), CDMA2000 and universal mobile
telecommunications service (UMTS). It builds on our TrunkPack® architecture,
which is installed in millions of lines worldwide. The Mediant
TM
family
provides carriers with a comprehensive line of different sized gateways. Small
or medium-sized gateways enable cost-effective solutions for enterprise or small
points of presence, as well as entry into fast growing new and emerging markets.
The large gateway scales to central office capacities and is designed to meet
carriers’ operational requirements. The Mediant family of media gateways is
capable of supporting some of the unified communication and fixed mobile
convergence applications which may be of increased interest to enterprises and
service providers. The Mediant™ gateway family shares our same VoIP
perfect architecture, designed to provide mature, field-proven
solutions.
For
the cable market, the Mediant
TM
gateway
family complies with packet telephony standards and is designed for either
hybrid or all IP cable network architecture. The Mediant gateway enables
deployment of advanced packet-based cable telephony at multiple service
operators own pace, without costly hardware changes. The Mediant
TM
gateway
can be initially deployed as a V5.2 IP access terminal and then easily migrated
by software upgrade to a cable telephony media gateway with external call
management provided by a softswitch and an SS7 interface to the
PSTN.
Multi
service business gateways (MSBGs) are networking devices that combine multiple
multiservice functions such as a media gateway, session border controller, data
router and firewall, LAN switch, WAN access, and stand alone
survivability (SAS). The MSBG concept is designed to address the needs of
service providers and cable operators that offer IP-Centrex and SIP trunking
services and of distributed enterprises.
We
offer the Mediant 1000 MSBG, which is an all-in-one multi-service access
solution designed to provide converged voice and data services for business
customers at wire speed, while maintaining service level agreement, or SLA,
parameters for superior voice quality. The Mediant 1000 MSBG is based on
AudioCodes’ VoIPerfect best-of-breed media gateway technology, combined with
enterprise class session border controller, data and voice security elements,
data routing, LAN switching and WAN access.
Session
Border Controllers and Security Gateways
We
provide the nCite session border controller, or SBC, and security gateway
products that help service providers and network equipment providers enable
connectivity between different VoIP networks and provide security to deployments
of fixed mobile convergence, or FMC networks, for integrating wireline and
wireless networks.
nCite
session border controllers provide secure VoIP and multimedia traversal of
firewall, or FW, and network address translation, or NAT, systems, as well as
denial of service, or DoS, attack prevention at both the signaling and media
layers. NAT and FW traversal are necessary to allow VoIP and multimedia session
to pass from the Service Provider (“SP”) network to the residential or
enterprise networks. DoS attack prevention protects the SP network from attacks
that load the network until it crashes. The nCite SBCs also provide
comprehensive Quality of Service, or QoS, mechanisms and protocol interworking
(translation from one VoIP protocol to another, or between two variants of same
VoIP protocol to enable two softswitches to communicate with each other).
AudioCodes nCite solutions offer proven interoperability with major
softswitches, SIP servers, application servers, IP PBXs and a large number of
IP-based voice and video endpoints.
The
nCite security gateway enables secure (authenticated and encrypted) real-time
sessions across Wi-Fi, broadband and wireless networks in FMC deployments. The
nCite security gateway, or nCite SG, provides secure termination and aggregation
for IP phones, dual-mode Wi-Fi and cellular-capable VoIP handsets that are used
in converged wireline and wireless networks.
Element
Management System
Our
element management system, or EMS, is an advanced solution for centralized,
standards-based management of our VoP gateways, covering all areas vital to the
efficient operations, administration, management and provisioning of our
Mediant
TM
and
MediaPack
TM
VoP
gateways.
Our
EMS offers network equipment providers and system integrators fast setup of
medium and large VoP networks with the advantage of a single centralized
management system that configures, provisions and monitors all of AudioCodes
gateways deployed, either as customer premises equipment, access or core network
platforms.
CTI2
Value Added Services Applications (InTouch)
The
InTouch platform is an enhanced value added services (VAS) platform for service
providers, such as cable, class 5, class 4, fixed-line, mobile, multiservice
virtual network operator, or MVNO, and operators. InTouch provides a
suite of next generation VAS. InTouch is an IP-based, email-centric and
telco-grade platform conforming to ultimate service providers’ requirements for
high-availability, reliability, scalability, and security. InTouch is designed
to smoothly scale from a very small system to a system with millions of
subscribers based on the same software and architecture, while enabling a rich
suite of applications at all sizes. InTouch’s open architecture is based on
industry-standard protocols, facilitating interoperability and integration with
best of breed, third-party applications. InTouch acts as a mediator between
InTouch services and a large selection of clients and devices enabling service
providers to offer attractive packages.
Voice
Over Packet Processors
Our
signal processor chips compress and decompress voice, data and fax
communications. This enables these communications to be sent from
circuit-switched telephone networks to packet networks. Our chips are digital
signal processors on which we have embedded our algorithms. These signal
processor chips are the basic building blocks used by our customers and us to
enable their products to transmit voice, fax and data over packet networks.
These chips may be incorporated into our communications boards, media gateway
modules and analog media gateways for access and enterprise applications or they
may be purchased separately and incorporated into other boards or customer
products.
VoIP
Communication Boards
Our
communications boards are designed to operate in gateways connecting the
circuit-switched telephone network to packet networks based on Internet
protocols. Our boards comply with voice over IP industry standards and allow for
interoperability with other gateways. Our boards support standards-based open
telecommunications architecture systems and combine our signal processor chips
with communications software, signaling software and proprietary hardware
architecture to provide a cost efficient interoperable solution for high
capacity gateways. We believe that using open architecture permits our customers
to bring their systems to market quickly and to integrate our products more
easily within their systems.
IPmedia
TM
Boards
and Servers for Enhanced Services and Functionalities such as Conferencing,
Video Sharing and Messaging (IPmedia
TM
Platforms)
The
IPmedia
TM
product
family is designed to allow OEMs and application partners to provide
sophisticated content and services that create revenue streams and customer
loyalty through the ability to provide additional services. The IPmedia
TM
platform provides voice, video and fax processing capabilities to enable,
together with our partners, an architecture for development and deployment of
enhanced services.
IPmedia
TM
platforms are designed to answer the growing market demand for enhanced voice
and video services over packet networks, particularly network-based applications
like unified communications, call recording, conferencing and video sharing by
carriers and application service providers. IPmedia
TM
enables
our customers to develop and market applications such as: unified
communications, interactive voice response, call-centers, conferencing and
voice-activated personal assistants. IPmedia
TM
products are currently offered on our PCI and cCPI boards and on the 2000, 3000,
5000 and 8000 series (IPmedia
TM
2000,
IPmedia
TM
3000,
IPmedia
TM
5000
and IPmedia
TM
8000).
Voice
and Data Logging Hardware Integration Board Products
The
SmartWORKSTM family of products is our voice and data logging hardware
integration board product line. SmartWORKSTM boards for the call recording and
voice voice/data logging industry are compatible with a multitude of private
branch exchange, or PBX, telephone system integrations.
Core
Technologies
We
believe that one of our key competitive advantages is our broad base of core
technologies ranging from advanced voice compression algorithms to complex
architecture system design. We have developed and continue to build on a number
of key technology areas. We have named our cross platform core technology
VoIPerfect™. It essentially allows us to leverage the same feature set and
interoperability with other products across our product lines.
Low
Bit Rate Voice Compression Algorithms
Voice
compression techniques are essential for the transmission of voice over limited
bandwidth packet networks. Voice compression exploits redundancies within a
voice signal to reduce the bit rate required to digitally represent the voice
signal, from 64 kilobits per second, or kbps, down to low bit rates ranging from
5.3 kbps to 8 kbps, while still maintaining acceptable voice quality. A bit is a
unit of data. Different voice compression algorithms, or coders, make certain
tradeoffs between voice quality, bit rate, delay and complexity to satisfy
various network requirements. Use of voice activity detection techniques and
silence removal techniques further reduce the transmission rate by detecting the
silence periods embedded in the voice flow and discarding the information
packets which do not contribute to voice intelligibility.
We
are one of the innovators in developing low bit rate voice compression
technologies. Our patented MP-MLQTM coder was adopted in 1995 by the ITU as the
basis for the G.723.1 voice coding standard for audio/visual applications over
the circuit-switched telephone networks. By adhering to this standard, system
manufacturers guarantee the interoperability of their equipment with the
equipment of other vendors.
Advanced
Digital Signal Processing Algorithms
To
provide a complete voice over packet communications solution, we have developed
a library of digital signal processing functions designed to complement voice
compression coders with additional functionality, including: echo cancellation;
voice activity detection; facsimile and data modem processing; and telephony
signaling processing. Our extensive experience and expertise in designing
advanced digital signal processing solutions allows us to implement algorithms
using minimal processing memory and power resources. Our algorithms
include:
Echo
cancellation
. Low bit rate voice compression techniques introduce
considerable delay, necessitating the use of echo cancellation algorithms. The
key performance criterion of an echo canceller is its ability to deal with large
echo reflections, long echo delays, fast changing echo characteristics, diverse
telecommunications equipment and network effects. Our technology achieves low
residual echo and fast response time to render echo effects virtually
unnoticeable.
Fax
transmission.
There are two widely used techniques for real time
transmission of fax over networks based on Internet protocols: fax relay and fax
spoofing. Fax relay takes place when a fax is sent from a fax machine through a
gateway over networks based on Internet protocols in real time to a fax machine
at the other end of the network. At the gateway, the analog fax signals are
demodulated back into digital data, converted into packets, routed over the
packet network and reassembled at the receiving end. Fax relay is used when the
round trip network delay is small (typically below one second). When the round
trip network delay increases, one of the fax machines may time out while waiting
for a response from the other fax machine to arrive.
Data
modem technology.
We have developed data modem technologies that
facilitate data relay over packet networks. Our data modem relay software
algorithms support all existing data modem standards up to a bit rate of 14.4
kbps.
Telephony
signaling processing
. Various telephony signaling standards and protocols
are employed to route calls over the traditional telephone network, some of
which use “in-band” methods, which means that the signaling tones are sent over
the telephone line just like the voice signal. As a result, in-band signaling
tones may have to undergo the compression process just like the voice signal.
Most low bit-rate voice coders, however, are optimized for speech signals and
exhibit poor tone transfer performance. To overcome this, our processors are
equipped with tone detection and tone generation algorithms. To provide seamless
transparency between the traditional telephone network and packet networks for
signaling, we employ various digital signal processing techniques for efficient
tone processing.
Voice
Communications Software
To
transmit the compressed voice and fax over packet networks, voice packetization
processes are required to construct and deconstruct each packet of data for
transmission. The processing involves breaking up information into packets and
adding address and control fields information according to the specifications of
the appropriate packet network protocol. In addition, the software provides the
interface with the signal processors and addresses packet delay and packet loss
issues.
Media
Processing
Our
media processing products provide the enabling technology and platforms for
developing enhanced voice and video service applications for legacy and next
generation networks. We have developed media processing technologies such as
message recording/playback, announcements, voice and video coding and mixing and
call progress tone detection that enable our customers to develop and offer
advanced revenue generating services such as conferencing, network
announcements, voice and video mail, video share and interactive voice
response.
Our
media processing technology is integrated into our enabling technology platforms
like Voice over Packet processors and VoIP blades, as well as into our network
platforms like the Mediant media gateways and the IPMedia media servers. The
same technology is also integrated into our multi-service business gateways,
enabling the use of these platforms to run third party VoIP software, offloading
media processing from the host CPU.
Digital
Cellular Communications Technology
Convergence
of wireline and wireless networks is becoming a key driver for deployment of
voice over packet networks, enabling operators to use common equipment for both
networks, thus lowering capital expenditures and operating expenses, while
offering enriched services.
Our
voice over packet products provide a cost effective solution for these
convergence needs, complying with 2G and 3G cellular standards, for GSM/UMTS,
UMA, Femtocell and CDMA/CDMA2000 networks. These include support for cellular
vocoders (concurrently with wireline vocoders), interfaces and protocols. These
interfaces and protocols are being defined by special standardization groups
(e.g., 3GPP and 3GPP2) and include capabilities such as mediation (mobile to
mobile calls with no transcoding), support for handoff and lawful intercept and
various other cellular-specific capabilities.
VoIP
for Telephony over Cable Networks
Telephony
over cable networks is characterized by technical challenges due to the
intrinsic nature of the cable system which broadcasts across the subscriber
network. The cable telephony market is divided into two main standards:
softswitch solutions and IP access terminal, or IPAT, V5.2 solutions utilizing
Class 5 switches. We have developed media gateway technology that is capable of
supporting both standards while migration from IPAT solutions to softswitch
solutions may be done by a software only upgrade, thus protecting the end
customer’s investment. Our technology complies with PacketCable standards
including security/encryption technology, support for quality of service, call
control and signaling.
Hardware
Architectures for Dense Multi-Trunk Voice over Packet Systems
Our
voice over packet product offerings include high density, multi-trunk voice over
packet systems for standards-based open telecommunications platforms in access
equipment. Multi-trunk processing is centered around a design encompassing two
key processing elements, signal processors performing voice, fax and data
processing and a communications processor. Overall system performance,
reliability, capacity, size, cost and power consumption are optimized, based on
our hardware architecture, which supports high throughput rates for multi-trunk
processing. On-board efficient network and system interfaces relieve the system
controller from extensive real time data transfer and processing of data
streams.
Carrier
Grade System Expertise
To
provide state of the art carrier grade media gateways, we have developed a wide
expertise in a number of fields essential to such a product line. We have
developed or integrated the various components required to implement a full
digital media gateway solution that behaves as a unified entity to the external
world. This required a major investment in adapting standard cPCI platforms to
our needs. Such adaptation included optimizing power supply and cooling
requirements, adding centralized shelf controllers, fabric switches and alarm
cards to the chassis. Another aspect of the expertise we developed relates to
high availability software and hardware design. High availability is a required
feature in any carrier grade media gateway platform. We have also developed a
sophisticated EMS to complete our offering. Our EMS enables the user to
provision and monitor a number of media gateways from a centralized
location.
Customers
Our
customers consist of service providers and channels (such as distributors),
OEMs, network equipment providers and systems integrators. Historically, we have
derived the majority of our revenues from sales to a small number of customers.
The identities of our principal customers have changed and we expect that they
will continue to change, from year to year. We expect that a small number of
customers will continue to account for a large percentage of our sales. Sales to
Nortel Networks accounted for 15.2% of our revenues in 2006, 17.0% of our
revenues in 2007 and 14.4% of our revenues in 2008. No other customer accounted
for more than 10.0% of our revenues in 2006, 2007 or 2008. As a result of the
bankruptcy filing by Nortel in January 2009, we cannot be sure as to the amount
of revenues we will record in 2009 from sales to Nortel.
Sales
and Marketing
Our
sales and marketing strategy is to secure the leading channels and system
integrators in each region, partner with leading application companies and
achieve design wins with network equipment providers in our targeted markets.
Prospective customers and channels generally must make a significant commitment
of resources to test and evaluate our products and to integrate them into larger
systems, networks, and applications. As a result, our sales process is often
subject to delays associated with lengthy approval processes that typically
accompany the design and testing of new communications equipment. For these
reasons, the sales cycles of our products to new customers are often lengthy,
averaging approximately six to twelve months after achieving a design win. This
time may be further extended because of internal testing, field trials and
requests for the addition or customization of features.
We
also provide our customers with reference platform designs, which enable them to
achieve easier and faster transitions from the initial prototype designs we use
in the test trials through final production releases. We believe this
significantly enhances our customers’ confidence that our products will meet
their market requirements and product introduction schedules.
We
market our products in the United States, Europe, Asia, Latin America and Israel
primarily through a direct sales force. We have invested significant resources
in setting up local sales forces giving us a presence in relevant markets. We
have given particular emphasis to emerging markets such as Latin America and
Eastern Europe in addition to continuing to sell our products in developed
countries.
Marketing
managers are dedicated to principal customers to promote close cooperation and
communication. Additionally, we market our products in these areas through
independent sales representatives and system integrators. We select these
independent entities based on their ability to provide effective field sales,
marketing communications and technical support to our customers. We have
generally entered into a combination of exclusive and non-exclusive sales
representation agreements with these representatives in each of the major
countries in which we do business. These agreements are typically for renewable
12-month terms, are terminable at will by us upon 90 days notice, and do not
commit the sales representative to any minimum sales of our products to third
parties. Some of our representatives have the ability to return some of the
products they have previously purchased and purchase more up to date
models.
Manufacturing
Texas
Instruments Incorporated supplies all of the signal processor chips used for our
signal processors. Other components are generic in nature and we believe they
can be obtained from multiple suppliers.
We
have not entered into any long-term supply agreements. However, we have worked
for years in several countries with established global manufacturing leaders
such as Flextronics and have a good experience with their level of commitment
and ability to deliver. To date, we have been able to obtain sufficient amounts
of these components to meet our needs and do not foresee any supply difficulty
in obtaining timely delivery of any parts or components. However, an
interruption in supply from any of these sources, especially with regard to
signal processors from Texas Instruments Incorporated, or an unexpected
termination of the manufacture of certain electronic components, could disrupt
production, thereby adversely affecting our results. We generally maintain an
inventory of critical components used in the manufacture and assembly of our
products although our inventory of signal processor chips would likely not be
sufficient in the event that we had to engage an alternate supplier for these
components.
We
utilize contract manufacturing for substantially all of our manufacturing
processes. Most of our manufacturing is carried out by third-party
subcontractors in Israel and China. We have extended our manufacturing
capabilities through third party subcontractors in the United States and Mexico.
Our internal manufacturing activities consist primarily of the production of
prototypes, test engineering, materials purchasing and inspection, final product
configuration and quality control and assurance.
We
are obligated under certain agreements with our suppliers to purchase goods and
under an agreement with one of our manufacturing subcontractors to purchase
excess inventory. Aggregate non-cancellable obligations under these
agreements as of December 31, 2008 were approximately $2.3 million.
Industry
Standards and Government Regulations
Our
products must comply with industry standards relating to telecommunications
equipment. Before completing sales in a country, our products must
comply with local telecommunications standards, recommendations of
quasi-regulatory authorities and recommendations of standards-setting
committees. In addition, public carriers require that equipment connected to
their networks comply with their own standards. Telecommunication-related
policies and regulations are continuously reviewed by governmental and industry
standards-setting organizations and are always subject to amendment or change.
Although we believe that our products currently meet applicable industry and
government standards, we cannot be sure that our products will comply with
future standards.
We
are subject to telecom industry regulations and requirements set by
telecommunication carriers that address a wide range of areas including quality,
final testing, safety, packaging and use of environmentally friendly
components. We comply with the European Union’s Restriction of
Hazardous Substances Directive (under certain exemptions) that requires telecom
equipment suppliers to stop the usage of some materials that are not
environmentally friendly by July 1, 2006. These materials include
cadmium, hexavalent chromium, lead, mercury, polybrominated biphenyls and
polybrominatel diphenyl ethers. Under the directive, an extension for compliance
through 2010 was granted with respect to the usage of lead in solders in Network
Infrastructure equipment. We expect that other countries, including countries we
operate in, will adopt similar directives or other additional
regulations.
Competition
Competition
in our industry is intense and we expect competition to increase in the future.
Our competitors currently sell products that provide similar benefits to those
that we sell. There has been a significant amount of merger and acquisition
activity and strategic alliances frequently involving major telecommunications
equipment manufacturers acquiring smaller companies, and we expect that this
will result in an increasing concentration of market share among these
companies, many of whom are our customers.
Our
principal competitors in the area of analog media gateways (2 to 24 ports) for
access and enterprise are Cisco Systems Inc., Mediatrix Telecom, Inc., Vega
Stream Limited, Samsung, Innovaphone AG, Net.com/Quintum Technologies, Tainet
Communication System Corp., Welltech, Ascii Corp., D-Link Systems, Inc.,
Multitech Inc., Inomedia, OKI and LG. In addition we face competition in low,
mid and high density gateways from internal development at companies such as
Nortel, Alcatel-Lucent, Nokia-Siemens, Huawei, Ericsson, UTstarcom, ZTE and from
Cisco Systems, Veraz Networks, Sonus Networks, General Bandwidth,
Dialogic/Cantata Technologies and Commatch (Telrad).
Our
principal competitors in the media server market segment are Dialogic/Cantata
Technology, NMS Communications, Convedia/Radisys, IP Unity/Glenayre,
Cognitronics and Aculab. In addition, we face competition in
software-based and hardware-based media servers from internal development at
companies such as Hewlett-Packard, Comverse-NetCentrex, Nortel, Alcatel -
Lucent, Nokia-Siemens and Ericsson.
With
respect to session border controllers, we compete against Acme Packets,
Nextpoint, Covergence and Sonus. In the security gateway market, we
compete against companies such as GenBand, ACME Packets, Clavister and
NEC.
Our
principal competitors in the sale of signal processing chips are Texas
Instruments, Broadcom, Infineon, Centillium, Surf and Mindspeed. Several large
manufacturers of generic signal processors, such as Motorola, Agere Systems,
which merged with LSI Corporation in April 2007, and Intel have begun, or are
expected to begin marketing competing processors. Our principal competitors in
the communications board market are NMS Communications, Intel, Motorola, Cantata
Technology, Acculab and PIKA Technologies, Inc.
We
also face significant and increasing competition in the market for products
utilized in the VoIP market. Our competitors in the market for VolP products
include telecommunications companies, data communication companies and companies
specializing in voice over IP products, some of which have greater name
recognition, larger installed customer bases and significantly greater
financial, technical, sales and marketing resources than we do.
Many
of our competitors have the ability to offer vendor-sponsored financing programs
to prospective customers. Some of our competitors with broad product portfolios
may also be able to offer lower prices on products that compete with ours
because of their ability to recoup a loss of margin through sales of other
products or services. Additionally, voice, audio and other communications
alternatives that compete with our products are being continually
introduced.
In
the future, we may also develop and introduce other products with new or
additional telecommunications capabilities or services. As a result, we may
compete directly with telephone companies and other telecommunications
infrastructure providers. Additional competitors may include companies that
currently provide computer software products and services, such as telephone,
media, publishing and cable television. The ability of some of our competitors
to bundle other enhanced services or complete solutions with VoIP products could
give these competitors an advantage over us.
Intellectual
Property and Proprietary Rights
Our
success is dependent in part upon proprietary technology. We rely primarily on a
combination of patent, copyright and trade secret laws, as well as
confidentiality procedures and contractual provisions, to protect our
proprietary rights. We also rely on trademark protection concerning various
names and marks that serve to identify it and our products. While our ability to
compete may be affected by our ability to protect our intellectual property, we
believe that, because of the rapid pace of technological change in our industry,
maintaining our technological leadership and our comprehensive familiarity with
all aspects of the technology contained in our signal processors and
communication boards is also of primary importance.
We
own U.S. patents that relate to our voice compression and session border control
technologies. We also actively pursue patent protection in selected other
countries of interest to us. In addition to patent protection, we seek to
protect our proprietary rights through copyright protection and through
restrictions on access to our trade secrets and other proprietary information
which we impose through confidentiality agreements with our customers,
suppliers, employees and consultants.
There
are a number of companies besides us who hold or may acquire patents for various
aspects of the technology incorporated in the ITU’s standards or other industry
standards or proprietary standards, for example, in the fields of wireless and
cable. While we have obtained cross-licenses from some of the holders of these
other patents, we have not obtained a license from all of the holders. The
holders of these other patents from whom we have not obtained licenses may take
the position that we are required to obtain a license from them. Companies that
have submitted their technology to the ITU (and generally other industry
standards making bodies) for adoption as an industry standard are required by
the ITU to undertake to agree to provide licenses to that technology on
reasonable terms. Accordingly, we believe that even if we were required to
negotiate a license for the use of such technology, we would be able to do so at
an acceptable price. Similarly, however, third parties who also participate with
respect to the same standards-setting organizations as do we may be able to
negotiate a license for use of our proprietary technology at a price acceptable
to them, but which may be lower than the price we would otherwise prefer to
demand.
Under
a pooling agreement dated March 3, 1995, as amended, between AudioCodes and DSP
Group, Inc., on the one hand, and France Telecom, Université de Sherbrooke and
their agent, Sipro Lab Telecom, on the other hand, we and DSP Group, Inc.
granted to France Telecom and Université de Sherbrooke the right to use certain
of our specified patents, and any other of our and DSP Group, Inc. intellectual
property rights incorporated in the ITU G.723.1 standard. Likewise France
Telecom and Université de Sherbrooke granted AudioCodes and DSP Group, Inc. the
right to use certain of their patents and any other intellectual property rights
incorporated in the G.723.1 standard. In each case, the rights granted are to
design, make and use products developed or manufactured for joint contribution
to the G.723.1 standard without any payment by any party to the other
parties.
In
addition, each of the parties to the agreement granted to the other parties the
right to license to third parties the patents of any party included in the
intellectual property required to meet the G.723.1 standard, in accordance with
each licensing party’s standard patent licensing agreement. The agreement
provides for the fee structure for licensing to third parties. The agreement
provides that certain technical information be shared among the parties, and
each of the groups agreed not to assert any patent rights against the other with
respect of the authorized use of voice compression products based upon the
technical information transferred. Licensing by any of the parties of the
parties’ intellectual property incorporated in the G.723.1 standard to third
parties is subject to royalties that are specified under the
agreement.
Each
of the parties to the agreement is free to develop and sell products embodying
the intellectual property incorporated into the G.723.1 standard without payment
of royalties to other parties, so long as the G.723.1 standard is implemented as
is, without modification. The agreement expires upon the last expiration date of
any of the AudioCodes, DSP Group, Inc., France Telecom or Université de
Sherbrooke patents incorporated in the G.723.1 standard. The parties to the
agreement are not the only claimants to technology underlying the G.723.1
standard.
We
are aware of parties who may be infringing our technology that is part of the
G.723.1 standard. We evaluate these matters on a case by case basis, directly or
through our licensing partner. Although we have not yet determined whether to
pursue legal action, we may do so in the future. There can be no assurance that
any legal action will be successful.
Third
parties have claimed, and from time to time in the future may claim, that our
past, current or future products infringe their intellectual property rights.
Intellectual property litigation is complex and there can be no assurance of a
favorable outcome of any litigation. Any future intellectual property
litigation, regardless of outcome, could result in substantial expense to us and
significant diversion of the efforts of our technical and management personnel.
Litigation could also disrupt or otherwise severely impact our relationships
with current and potential customers as well as our manufacturing, distribution
and sales operations in countries where relevant third party rights are held and
where we may be subject to jurisdiction. An adverse determination in any
proceeding could subject us to significant liabilities to third parties, require
disputed rights to be licensed from such parties, assuming licenses to such
rights could be obtained, or require us to cease using such technology and
expend significant resources to develop non-infringing technology. We may not be
able to obtain a license at an acceptable price.
We
have entered into technology licensing fee agreements with third parties. We
expect that in the ordinary course of business we may be required to enter into
additional licensing agreements. Under one agreement, we agreed to pay a third
party royalty fees until 2008, based on 0.75% - 0.9% of our revenues. We are no
longer required to pay licensing fees under this agreement in 2009.
Legal
Proceedings
We
are not a party to any material legal proceedings, except for the proceeding
referred to below.
Prior
to the acquisition of Nuera by us in 2006, one of Nuera’s customers had been
named as a defendant in a patent infringement suit involving technology the
customer purchased from Nuera. In the suit, the plaintiff alleged that the
customer used devices to offer services that infringe upon a patent the
plaintiff owns. The customer has sought indemnification from Nuera pursuant to
the terms of a purchase agreement between Nuera and the customer relating to the
allegedly infringing technology at issue.
|
C.
|
ORGANIZATIONAL
STRUCTURE
|
List
of Significant Subsidiaries
AudioCodes
Inc., our wholly-owned subsidiary, is a Delaware corporation.
AudioCodes
UK Limited and AudioCodes Europe Limited, our wholly-owned subsidiaries, are
incorporated in England.
|
D.
|
PROPERTY,
PLANTS AND EQUIPMENT
|
We
lease our main facilities, located in Airport City, Lod, Israel, which occupy
approximately 128,000 square feet for annual lease payments (including
management fees) of approximately $2.6 million. In January 2008, we increased
the amount of space we lease by approximately 74,000 square feet for annual
lease payments (including management fees) of approximately $1.4 million. In
addition, we have entered into an agreement with Airport City, Ltd. regarding
the neighboring property pursuant to which a building of approximately 145,000
square feet will be erected and leased to us for period of eleven years. This
new building is expected to be completed in 2010. We estimate the annual lease
payments (including management fees) to be in the range of $2.0 million to $3.2
million, depending on the amount expended by the lessor on improvements to the
building. In view of current economic conditions and our reduction in personnel
undertaken in 2008, we may not need to occupy the entire building and may seek
to sublease all or a portion of the new building to third
parties.
Our
U.S. subsidiary, AudioCodes Inc., leases a 7,000 square foot facility in San
Jose, California, and has additional offices with aggregate leased space of
20,000 square feet in Raleigh, Chicago, Boston and Dallas. AudioCodes Inc. also
leases a 32,000 square foot facility in Somerset, New Jersey, a 20,000 square
foot facility in San Diego, California, and a 20,000 square foot facility in
Plano, Texas. The annual lease payments (including management fees) for all our
offices in the United States is approximately $1.5 million.
We
believe that these properties are sufficient to meet our current needs. However,
we may need to increase the size of our current facilities, seek new facilities,
close certain facilities or sublease portions of our existing facilities in
order to address our needs in the future.
|
ITEM
4A
.
UNRESOLVED
STAFF
COMMENTS
|
||
None.
|
ITEM
5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
|
||
Statements
in this Annual Report concerning our business outlook or future economic
performance; anticipated revenues, expenses or other financial items; product
introductions and plans and objectives related thereto; and statements
concerning assumptions made or expectations as to any future events, conditions,
performance or other matters, are “forward-looking statements” as that term is
defined under the United States Federal securities laws. Forward-looking
statements are subject to various risks, uncertainties and other factors that
could cause actual results to differ materially from those stated in such
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those set forth under “Risk Factors” in this Annual
Report, as well as those discussed elsewhere in this Annual Report and in our
other filings with the Securities and Exchange Commission.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP. These accounting principles
require management to make certain estimates, judgments and assumptions based
upon information available at the time that they are made, historical experience
and various other factors that are believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
periods presented.
On
an on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition and allowance for sales returns, allowance
for doubtful accounts, inventories, marketable securities, business
combinations, goodwill and intangible assets, income taxes and valuation
allowance, and stock-based compensation. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.
Our
management has reviewed these critical accounting policies and related
disclosures with our Audit Committee. See Note 2 to the Consolidated Financial
Statements, which contain additional information regarding our accounting
policies and other disclosures required by US GAAP.
Management
believes the significant accounting policies that affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements and are the most critical to aid in fully understanding and
evaluating AudioCodes’ reported financial results include the
following:
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●
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Revenue
recognition and allowance for sales returns;
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|
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●
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Allowance
for doubtful accounts;
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●
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Inventories;
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●
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Marketable
securities;
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●
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Intangible
assets;
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●
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Goodwill;
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●
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Income
taxes and valuation allowance;
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●
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Stock-based
compensation; and
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●
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Senior
convertible notes
|
Revenue
Recognition and Allowance for Sales Returns
We
generate our revenues primarily from the sale of products. We sell our products
through a direct sales force and sales representatives. Our customers include
original equipment manufacturers (OEMs), network equipment providers, systems
integrators and distributors in the telecommunications and networking
industries, all of whom are considered end users.
Revenues
from products are recognized in accordance with Staff Accounting Bulleting
(“SAB”) No. 104, “Revenue Recognition in Financial Statements” when the
following criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery of the product has occurred, (iii) the fee is fixed or
determinable and (iv) collectability is probable. We have no obligation to
customers after the date on which products are delivered, other than pursuant to
warranty obligations and any applicable right of return. We grant to some of our
customers the right of return or the ability to exchange a specific percentage
of the total price paid for products they have purchased over a limited period
for other products.
We
maintain a provision for product returns and exchanges. This provision is based
on historical sales returns, analysis of credit memo data and other known
factors. This provision amounted to $636,000 in 2006, $559,000 in 2007 and
$754,000 in 2008.
Revenues
from the sale of products which were not yet determined to be final sales due to
market acceptance or technological compatibility were deferred and included in
deferred revenues. In cases where collectability is not probable, revenues are
deferred and recognized upon collection. Revenues from services are recognized
ratably over the time of the service agreement, usually one year.
Allowance
for Doubtful Accounts
Our
trade receivables are derived from sales to customers located primarily in the
Americas, the Far East, Israel and Europe. We perform ongoing credit evaluations
of our customers and to date have not experienced any material losses from
uncollected receivables. An allowance for doubtful accounts is determined with
respect to those amounts that we have recognized as revenue and determined to be
doubtful of collection. We usually do not require collateral on trade
receivables because most of our sales are to large and well-established
companies. On occasion we may purchase credit insurance to cover credit exposure
for a portion of our sales and this may mitigate the amount we need to write off
as a result of doubtful collections.
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined using the
“moving average cost” method for raw materials and on the basis of direct
manufacturing costs for finished products. We periodically evaluate the
quantities on hand relative to current and historical selling prices and
historical and projected sales volume and technological obsolescence. Based on
these evaluations, inventory write-offs are provided to cover risks arising from
slow moving items, technological obsolescence, excess inventories, discontinued
products and for market prices lower than cost. We wrote-off inventory in a
total amount of $1.9 million in 2006, $700,000 in 2007 and $1.2 million in
2008.
Marketable
Securities
We
account for investments in marketable debt securities in accordance with SFAS
No. 115, “Accounting for Certain Investments in Debt and Equity Securities”
(“SFAS 115”). Management determines the appropriate classification of its
investments in marketable debt securities at the time of purchase and
reevaluates such determinations at each balance sheet date. Debt securities are
classified as held-to-maturity since we have the intent and the ability to hold
the securities to maturity. Accordingly, debt securities are stated at amortized
cost.
The
amortized cost of held-to-maturity securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Any amortization and interest
is included in the consolidated statement of income as financial income or
expense, as appropriate. The accrued interest on short-term and long-term
marketable securities is included in the balance of short-term marketable
securities.
Intangible
assets
As
a result of our acquisitions, our balance sheet included acquired intangible
assets, in the aggregate amount of approximately $19.0 million as of December
31, 2007 and $9.1 million as of December 31, 2008.
We
allocated the purchase price of the companies we have acquired to the tangible
and intangible assets acquired and liabilities assumed, based on their estimated
fair values. These valuations require management to make significant estimations
and assumptions, especially with respect to intangible assets. Critical
estimates in valuing intangible assets include future expected cash flows from
technology acquired, trade names, backlog and customer relationships. In
addition, other factors considered are the brand awareness and market position
of the products sold by the acquired companies and assumptions about the period
of time the brand will continue to be used in the combined company’s product
portfolio. Management’s estimates of fair value are based on assumptions
believed to be reasonable, but which are inherently uncertain and
unpredictable.
If
we did not appropriately allocate these components or we incorrectly estimate
the useful lives of these components, our computation of amortization expense
may not appropriately reflect the actual impact of these costs over future
periods, which will affect our net income.
Intangible
assets are reviewed for impairment in accordance with SFAS No. 144,
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. The loss is allocated to the intangible assets on a pro rata basis
using the relative carrying amounts of those assets, except that the loss
allocated to an individual intangible asset shall not reduce the carrying amount
of that asset below its fair value whenever that fair value is
determinable.
Our
intangible assets are comprised of acquired technology, customer relations,
trade names, existing contracts for maintenance and backlog. All intangible
assets are amortized using the straight-line method over their estimated useful
life.
During
2006 and 2007, no impairment charges were identified. During 2008, we recorded
an impairment charge for intangible assets in the amount of $5.9 million
(relating to the acquisition of Nuera).
Goodwill
As
a result of our acquisitions, our balance sheet included acquired goodwill, in
the aggregate amount of approximately $111.2 million as of December 31, 2007 and
$32.1 million as of December 31, 2008.
SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) requires that
goodwill and intangible assets with an indefinite life be tested for impairment
at least annually. Goodwill and intangible assets with an indefinite life are
required to be written down when impaired, rather than amortized as previous
accounting standards required. Goodwill and intangible assets with an indefinite
life are tested for impairment by comparing the fair value of the reporting unit
with its carrying value. Fair value is generally determined using discounted
cash flows, market multiples and market capitalization. Significant estimates
used in the fair value methodologies include estimates of future cash flows,
future short-term and long-term growth rates, weighted average cost of capital
and estimates of market multiples of the reportable unit. If these estimates or
their related assumptions change in the future, we may be required to record
impairment charges for our goodwill and intangible assets with an indefinite
life. Our annual impairment test is performed in the fourth quarter each
year.
The
process of evaluating the potential impairment of goodwill is subjective and
requires significant judgment at many points during the analysis. In estimating
the fair value of a reporting unit for the purposes of our annual or periodic
analyses, we make estimates and judgments about the future cash flows of that
reporting unit. Although our cash flow forecasts are based on assumptions that
are consistent with our plans and estimates we are using to manage the
underlying businesses, there is significant exercise of judgment involved in
determining the cash flows attributable to a reporting unit over its estimated
remaining useful life. In addition, we make certain judgments about allocating
shared assets to the estimated balance sheets of our reporting units. We also
consider our and our competitor’s market capitalizations on the date we perform
the analysis. Changes in judgment on these assumptions and estimates could
result in a goodwill impairment charge.
Goodwill
represents the excess of the purchase price and related costs over the value
assigned to net tangible and identifiable intangible assets of businesses
acquired and accounted for under the purchase method. We review and test our
goodwill for impairment at the reporting unit level at least annually, or more
frequently if events or changes in circumstances indicate that the carrying
amount of such assets may be impaired. We operate in one operating segment, and
this segment comprises our only reporting unit. We perform our test in the
fourth quarter of each year using a combination of a discounted cash flow
analysis and a market approach. The discounted cash flow approach requires that
certain assumptions and estimates be made regarding industry economic factors
and future profitability. The market approach estimates the fair value based on
comparisons with the market values and market multiples of earnings and revenues
of similar public companies. The fair value derived from these two methodologies
are then compared to the carrying value of the respective segments.
During
2006 and 2007, no impairment charges were identified. As a result of the
impairment analysis for 2008, we determined that the goodwill balance was
impaired as a result of adverse equity market conditions which caused a decline
in industry market multiples and reduced fair values from our projected cash
flows. Accordingly, we recorded non-cash impairment charges of $ 79.1
million.
Income
Taxes and Valuation Allowance
As
part of the process of preparing our consolidated financial statements, we are
required to estimate our income tax expense in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure, which is accrued as taxes payable, together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets, which are included
within our consolidated balance sheet. We may record a valuation allowance to
reduce our deferred tax assets to the amount of future tax benefit that is more
likely than not to be realized.
Although
we believe that our estimates are reasonable, there is no assurance that the
final tax outcome and the valuation allowance will not be different than those
which are reflected in our historical income tax provisions and
accruals.
We
have filed or are in the process of filing federal, state and foreign tax
returns that are subject to audit by the respective tax authorities. Although
the ultimate outcome is unknown, we believe that adequate amounts have been
provided for and any adjustments that may result from tax return audits are not
likely to materially adversely affect our consolidated results of operations,
financial condition or cash flows.
In
June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized under SFAS
No. 109. FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return and also provides guidance on
various related matters such as derecognition, interest and penalties, and
disclosure. On January 1, 2007, we adopted FIN 48. The initial application
of FIN 48 to our tax position did not have a material effect on ourshareholders’
equity. We recognize interest and penalties, if any, related to unrecognized tax
benefits in tax expenses.
Stock-based
compensation
We
account for stock-based compensation in accordance with Statement of Financial
Accounting Statements Standards No. 123R-”Share-Based Payments”. We utilize the
Black-Scholes option pricing model to estimate the fair value of stock-based
compensation at the date of grant. The Black-Scholes model requires subjective
assumptions regarding dividend yields, expected volatility, expected life of
options and risk-free interest rates. These assumptions reflect management’s
best estimates. Changes in these inputs and assumptions can materially affect
the estimate of fair value and the amount of our stock-based compensation
expenses. We recognized $8.0 million of stock-based compensation expense in 2007
and $4.3 million of stock-based compensation expense in 2008. As of December 31,
2008, there was approximately $2.9 million of total unrecognized stock-based
compensation expense related to non-vested stock-based compensation arrangements
granted by us. As of December 31, 2008, that expense is expected to be
recognized over a weighted-average period of 0.9 years.
Senior
convertible notes
We
presented the outstanding principal amount of our senior convertible notes as a
long-term liability, in accordance with APB No. 14, “Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants”. The debt is classified as a
long-term liability until the date of conversion on which it would be
reclassified to equity, or within one year of the first contractual redemption
date, on which it would be reclassified as a short-term liability. As the first
contractual redemption date is November 9, 2009, the senior convertible notes
have been classified as a current liability in our balance sheet as of December
31, 2009. Accrued interest on the senior convertible notes is included in “other
payables and accrued expenses.
The
initial purchasers discount was recorded as a discount to the debt and amortized
according to the interest method over the term of the senior convertible notes
in accordance with EITF Issue No. 00-27, “Application of Issue No. 98-5 to
Certain Convertible Industries”, which is 20 years.
|
A.
|
OPERATING
RESULTS
|
You
should read this discussion with the consolidated financial statements and other
financial information included in this Annual Report.
Overview
We
design, develop and market enabling technologies and system products for the
transmission of voice, data, fax and multimedia communications over packet
networks, which we refer to as the new voice infrastructure. Our products enable
our customers to build high-quality packet networking equipment and network
solutions and provide the building blocks to connect traditional telephone
networks to the new voice infrastructure, as well as connecting and securing
multimedia communication between different packet-based networks. Our products
are sold primarily to leading original equipment manufacturers, or OEMs, system
integrators and network equipment providers in the telecommunications and
networking industries. We have continued to broaden our offerings, both from
internal development and through acquisitions, as we have expanded in the last
few years from selling chips to boards, subsystems, media gateway systems, media
servers, session border controllers and messaging platforms.
Our
headquarters and R&D facilities are located in Israel with R&D
extensions in the U.S. and in the U.K. We have other offices located in Europe,
the Far East, and Latin America.
Nortel
Networks accounted for 15.2% of our revenues in 2006, 17.0% of our revenues in
2007 and 14.4% of our revenues in 2008. Nortel filed for bankruptcy protection
in January 2009. As a result of Nortel’s bankruptcy filing, we could not
recognize $1.7 million of sales to Nortel in the fourth quarter of 2008. We
cannot determine the effect of such bankruptcy filing will have on our revenues
in 2009.
Our
top five customers accounted for 29.1% of our revenues in 2006, 32.8% of our
revenues in 2007 and 26.3% of our revenues in 2008. Based on our experience, we
expect that our largest customers may change from period to period. If we lose a
large customer and fail to add new customers to replace lost revenue our
operating results may be materially adversely affected.
Revenues
based on the location of our customers for the last three fiscal years are as
follows:
|
2006
|
2007
|
2008
|
|||||||||||
|
Americas
|
56.6 | % | 56.6 | % | 52.4 | % | |||||||
|
Far
East
|
12.8 | 11.2 | 1 6 . 4 | ||||||||||
|
Europe
|
22.2 | 25.5 | 2 3 . 4 | ||||||||||
|
Israel
|
8.4 | 6.7 | 7.8 | ||||||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | |||||||
Part
of our strategy over the past few years has involved the acquisition of
complementary businesses and technologies. We continued implementation of this
strategy with three additional acquisitions in the past three years. In July,
2006, we completed the acquisition of Nuera (merged into AudioCodes Inc. as of
December 31, 2007). Nuera provides Voice over Internet Protocol infrastructure
solutions for broadband and long distance networks.
In
August 2006, we acquired Netrake (merged into AudioCodes Inc. as of December 31,
2007), a provider of session border controller, or SBC, and security gateway
solutions. SBCs enable connectivity, policies and security for real-time media
sessions, such as VoIP, video or fax, between public or private IP networks.
Security gateways enable secure real-time sessions across wifi, broadband and
wireless networks in field mobile convergence deployments.
In
April 2007, we completed the acquisition of CTI Squared. CTI Squared is a
provider of enhanced messaging and communications platforms deployed globally by
service providers and enterprises. CTI Squared’s platforms integrate data and
voice messaging services over internet, intranet, PSTN, cellular, cable and
enterprise networks.
We
believe that prospective customers generally are required to make a significant
commitment of resources to test and evaluate our products and to integrate them
into their larger systems. As a result, our sales process is often subject to
delays associated with lengthy approval processes that typically accompany the
design and testing of new communications equipment. For these reasons, the sales
cycles of our products to new customers are often lengthy, averaging
approximately six to twelve months. As a result, we may incur significant
selling and product development expenses prior to generating revenues from
sales.
The
currency of the primary economic environment in which our operations are
conducted is the U.S. dollar, and as such, we use the dollar as our functional
currency. Transactions and balances originally denominated in dollars are
presented at their original amounts. All transaction gains and losses from the
remeasurement of monetary balance sheet items denominated in non-dollar
currencies are reflected in the statement of operations as financial income or
expenses, as appropriate.
The
demand for Voice over IP, or VoIP, technology has increased during recent years.
In recent years, the shift from traditional circuit-switched networks to next
generation packet-switched networks continued to gain momentum. As data traffic
becomes the dominant factor in communications, service providers are building
and maintaining converged networks for integrated voice and data services. In
developed countries, traditional and alternative service providers adopt bundled
triple play (voice, video and data) and quadruple play (voice, video, data and
mobile) offerings. This trend, enabled by voice and multimedia over IP, has
fueled competition among cable, wireline, ISP and mobile operators, increasing
the pressure for adopting and deploying VoIP networks. In addition,
underdeveloped markets without basic wire line service in countries such as
China and India and certain countries in Eastern Europe are adopting the use of
VoIP technology to deliver voice and data services that were previously
unavailable.
The
current economic and credit crisis is having a significant negative impact on
business around the world. The impact of this crisis on the technology industry
and our major customers has been severe. Conditions may continue to be depressed
or may be subject to further deterioration which could lead to a further
reduction in consumer and customer spending overall, which could have an adverse
impact on sales of our products. A disruption in the ability of our significant
customers to access liquidity could cause serious disruptions or an overall
deterioration of their businesses which could lead to a significant reduction in
their orders of our products and the inability or failure on their part to meet
their payment obligations to us, any of which could have a material adverse
effect on our results of operations and liquidity. In addition, any disruption
in the ability of customers to access liquidity could lead customers to request
longer payment terms from us or long-term financing of their purchases from us.
Granting extended payment terms or a significant adverse change in a customer’s
financial and/or credit position could also require us to assume greater credit
risk relating to that customer’s receivables or could limit our ability to
collect receivables related to purchases by that customer. As a result, our
reserves for doubtful accounts and write-offs of accounts receivable could
increase.
Results
of Operations
The
following table sets forth the percentage relationships of certain items from
our consolidated statements of operations, as a percentage of total revenues for
the periods indicated:
|
Year
Ended December 31,
|
||||||||||||||
|
2006
|
2007
|
2008
|
||||||||||||
|
Statement
of Operations
Data
:
|
||||||||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of revenues
|
41.6 | 43.7 | 44.3 | |||||||||||
|
Gross
profit
|
58.4 | 56.3 | 55.7 | |||||||||||
|
Operating
expenses:
|
||||||||||||||
|
Research
and development, net
|
24.0 | 25.7 | 21.6 | |||||||||||
|
Selling
and marketing
|
25.6 | 27.1 | 25.5 | |||||||||||
|
General
and administrative
|
5.9 | 6.1 | 5.3 | |||||||||||
|
Impairment
of goodwill and intangible assets
|
— | — | 48.7 | |||||||||||
|
Total
operating expenses
|
55.5 | 58.9 | 101.1 | |||||||||||
|
Operating
income
|
2.9 | (2.6 | ) | (45.4 | ) | |||||||||
|
Financial
income, net
|
2.6 | 1.7 | 0.7 | |||||||||||
|
Income
(loss) before taxes on income
|
5.5 | (0.9 | ) | (44.7 | ) | |||||||||
|
Taxes
on income
|
0.2 | 0.8 | 0.3 | |||||||||||
|
Equity
in losses of affiliated companies, net
|
0.6 | 0.7 | 1.5 | |||||||||||
|
Net
income (loss)
|
4.7 | % | (2.4 | )% | (46.5 | )% | ||||||||
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues
.
Revenues increased 10.4% to $174.7 million in 2008 from $158.2 million in 2007.
The increase in revenues was primarily due to an increase in revenues from our
networking business.
Gross
Profit
. Cost of revenues includes the manufacturing cost of hardware,
quality assurance, overhead related to manufacturing activity and technology
licensing fees payable to third parties. Gross profit increased to $97.3 million
in 2008 from $89.1 million in 2007. Gross profit as a percentage of revenues
decreased to 55.7% in 2008 from 56.3% in 2007. The decrease in our gross profit
percentage was primarily attributable to a less favorable product mix in 2008
and a decline in average selling prices of our products. The decrease in gross
profit percentage was partially offset by the higher sales volume that allowed
us to leverage our manufacturing overhead over a larger sales base as well as a
reduction in manufacturing costs due to a reduction in our raw material costs
and our cost reduction plan implemented in 2008.
Research
and Development Expenses, net
. Research and development expenses, net
consist primarily of compensation and related costs of employees engaged in
ongoing research and development activities, development-related raw materials
and the cost of subcontractors less grants from the OCS. Research and
development expenses decreased 7.1% to $37.8 million in 2008, from $40.7 million
in 2007 and decreased as a percentage of revenues to 21.7% in 2008 from 25.7% in
2007. The decrease in net research and development expenses, both on an absolute
and a percentage basis, was primarily due to our cost reduction plans
implemented during 2007 and 2008 and due to a decrease in stock-based
compensation expense which amounted to $1.5 million in 2008 and $3.0 million in
2007. We expect that research and development expenses will decrease in an
absolute dollar basis in 2009 as a result of our continued cost reduction
plan.
Selling
and Marketing Expenses
. Selling and marketing expenses consist primarily
of compensation for selling and marketing personnel, as well as exhibition,
travel and related expenses. Selling and marketing expenses increased 4.1% in
2008 to $44.7 million from $42.9 million in 2007. These expenses increased
because the effect of the higher value of the NIS compared to the U.S. dollar
increased the cost of expenses denominated in NIS and higher commissions on
sales were greater than the decrease in expenses as a result of our reduction in
personnel. As a percentage of revenues, selling and marketing expenses decreased
to 25.6% in 2008 from 27.1% in 2007. The decrease in selling and marketing
expenses on a percentage basis was primarily a result of our revenues increasing
at a faster rate than these expenses and due to a decrease in the stock-based
compensation expense included in selling and marketing expenses which was $2.0
million in 2008 compared to $3.5 million in 2007. We expect that selling and
marketing expenses will decrease on an absolute dollar basis in 2009 as a result
of our continued cost reduction plan, subject to any negative effects based on
the U.S. dollar/NIS exchange rate.
General
and Administrative Expenses
. General and administrative expenses consist
primarily of compensation for finance, human resources, general management,
rent, network and bad debt reserve, as well as insurance and professional
services expenses. General and administrative expenses decreased 4.3% to $9.2
million in 2008 from $9.6 million in 2007. As a percentage of revenues, general
and administrative expenses decreased to 5.3% in 2008 from 6.1% in 2007. The
decrease in general and administrative expenses was primarily due to our cost
reduction plans implemented during 2007 and 2008. We expect that general and
administrative expenses will continue to decrease in absolute dollar terms as a
result of our continued cost reduction plan.
Impairment
of Goodwill and Intangible Assets
. We review goodwill for impairment
annually during the fourth quarter of the fiscal year or more frequently if
events or circumstances indicate that an impairment loss may have occurred. In
the fourth quarter of fiscal 2008, in connection with the impact of weakening
market conditions on our forecasts and a sustained, significant decline in the
market capitalization to a level lower than our net book value, it was concluded
that triggering events existed and we were required to test intangible assets
and goodwill for impairment, in accordance with SFAS 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) and SFAS 142 “Goodwill
and Other Intangible Asset” (“SFAS 142”). As a result, in the fourth quarter of
2008, we recorded a goodwill impairment charge of approximately $79.1 million
and an intangible assets impairment charge of $5.9 million. These impairment
charges do not impact our business operations, cash flows or compliance with the
financial covenants in our loan agreements. There was no impairment charge in
the prior year.
Financial
Income, Net
. Financial income consists primarily of interest derived on
cash and cash equivalents, short-term and long-term marketable securities,
short-term and long-term bank deposits and structured notes, net of interest
accrued in connection with our senior convertible notes and bank loans and bank
charges. Financial income, net, in 2008 was $1.2 million compared to $2.7
million in 2007. The decrease in financial income, net in 2008 was primarily due
to lower interest rates and interest income, net, on the remaining net proceeds
from our sale of senior convertible notes in November 2004 and due to interest
expenses related to bank borrowings in the aggregate amount of $30 million
during the second and third quarters of 2008.
Taxes
on Income
. Taxes on income were $505,000 in 2008 compared to $1.3 million
in 2007. The decrease is principally attributable to a reduction in the deferred
tax liability.
Equity
in Losses of Affiliated Companies, Net
. Equity in losses of affiliated
companies, net was $2.6 million in 2008 compared to $1.1 million in 2007. The
increase in 2008 was primarily due to an impairment charge of $1.1 million
related to an investment in an affiliate.
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues
.
Revenues increased 7.4% to $158.2 million in 2007 from $147.4 million in 2006.
The increase in revenues was primarily due to an increase in revenues from our
networking business. Our results of operation include CTI Squared beginning in
April 2007, Nuera beginning in July 2006 and Netrake beginning in August
2006.
Gross
Profit
. Cost of revenues includes the manufacturing cost of hardware,
quality assurance, overhead related to manufacturing activity and technology
licensing fees payable to third parties. Gross profit increased to $89.1 million
in 2007 from $86.1 million in 2006. Gross profit as a percentage of revenues
decreased to 56.3% in 2007 from 58.4% in 2006. The decrease in our gross profit
percentage was primarily attributable to amortization expenses in 2007 related
to the acquisitions of CTI Squared during the second quarter of 2007 and Nuera
and Netrake during the third quarter of 2006. Amortization expense allocated to
cost of revenues amounted to $2.5 million in 2007 and $1.2 million in 2006. The
decrease in gross profit percentage was partially offset by the higher sales
volume that allowed us to leverage our manufacturing overhead over a larger
sales base. The decrease in gross profit percentage was also offset by a
reduction in manufacturing costs which was primarily due to a reduction in our
raw material costs.
Research
and Development Expenses
. Research and development expenses consist
primarily of compensation and related costs of employees engaged in ongoing
research and development activities, development-related raw materials and the
cost of subcontractors. Research and development expenses increased 14.9% to
$40.7 million in 2007, from $35.4 million in 2006 and increased as a percentage
of revenues to 25.7% in 2007 from 24.0% in 2006. The increase in net research
and development expenses, both on an absolute and a percentage basis, was
primarily due to our research and development personnel resulting from the
acquisitions of CTI Squared in the second quarter of 2007 and the acquisitions
of Nuera and Netrake during the third quarter of
2006.
Selling
and Marketing Expenses
. Selling and marketing expenses consist primarily
of compensation for selling and marketing personnel, as well as exhibition,
travel and related expenses. Selling and marketing expenses increased 13.9% in
2007 to $42.9 million from $37.7 million in 2006. As a percentage of revenues,
selling and marketing expenses increased to 27.1% in 2007 from 25.6% in 2006.
The increase in selling and marketing expenses was due to an increase in selling
and marketing personnel and amortization expenses as a result of the
acquisitions of CTI Squared, Nuera and Netrake. Amortization expense allocated
to sales and marketing amounted to $1.0 million in 2007 and $522,000 in
2006.
General
and Administrative Expenses
. General and administrative expenses consist
primarily of compensation for finance, human resources, general management,
rent, network and bad debt reserve, as well as insurance and professional
services expenses. General and administrative expenses increased 9.9% to $9.6
million in 2007 from $8.8 million in 2006. As a percentage of revenues, general
and administrative expenses increased to 6.1% in 2007 from 5.9% in 2006. The
increase in general and administrative expenses was due to consolidating the
expenses of our Nuera and Netrake subsidiaries, which were acquired in July 2006
and August 2006, and consolidating the expenses of our CTI Squared subsidiary,
which was acquired in April 2007.
Financial
Income, Net
. Financial income consists primarily of interest derived on
cash and cash equivalents, short-term and long-term marketable securities,
short-term and long-term bank deposits and structured notes, net of interest
accrued in connection with our senior convertible notes and bank charges.
Financial income, net, in 2007 was $2.7 million compared to $3.8 million in
2006. The decrease in financial income, net in 2007 was primarily due to lower
interest rates and interest income, net, on the remaining net proceeds from our
sale of senior convertible notes in November 2004.
Taxes
on Income
. Taxes on Income were $1.3 million in 2007 compared to
approximately $289,000 in 2006. The increase is principally attributable to a
decrease in our deferred tax asset.
Equity
in Losses of Affiliated Companies, Net
. Equity in losses of affiliated
companies, net was $1.1 million in 2007 compared to $916,000 in
2006.
Impact
of Inflation, Devaluation and Fluctuation of Currencies on Results of
Operations, Liabilities and Assets
Since
the majority of our revenues are paid in or linked to the dollar, we believe
that inflation and fluctuations in the NIS/dollar exchange rate have no material
effect on our revenues. However, a majority of the cost of our Israeli
operations, mainly personnel and facility-related, is incurred in NIS. Inflation
in Israel and dollar exchange rate fluctuations have some influence on our
expenses and, as a result, on our net income. Our NIS costs, as expressed in
dollars, are influenced by the extent to which any increase in the rate of
inflation in Israel is not offset (or is offset on a lagging basis) by a
devaluation of the NIS in relation to the dollar.
To
protect against the changes in value of forecasted foreign currency cash flows
resulting from payments in NIS, we maintain a foreign currency cash flow hedging
program. We hedge portions of our forecasted expenses denominated in foreign
currencies with forward contracts. These measures may not adequately protect us
from material adverse effects due to the impact of inflation in
Israel.
The
following table presents information about the rate of inflation in Israel, the
rate of devaluation of the NIS against the dollar, and the rate of inflation in
Israel adjusted for the devaluation:
|
Year
ended
December
31,
|
Israeli
inflation
rate
%
|
NIS
Devaluation
Rate
%
|
Israeli
inflation
adjusted
for
devaluation
%
|
|||||||||
|
2006
|
(0.1
|
)
|
(8.2
|
)
|
8.1
|
|||||||
|
2007
|
3.4
|
(9.0
|
)
|
12.4
|
||||||||
|
2008
|
3.8
|
(1.1
|
)
|
4.9
|
||||||||
|
Five
months ended May 31, 2009
|
0.1
|
4.1
|
4.0
|
|||||||||
Recent
Accounting Pronouncements
In
February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13”, and FSP No. FAS 157-2,
“Effective Date of FASB Statement No. 157”. Collectively, the Staff
Positions defer the effective date of Statement 157 to fiscal years beginning
after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at fair value on a
recurring basis at least annually, and amend the scope of Statement 157. As
described in Note 10, we adopted Statement 157 and the related FASB staff
positions except for those items specifically deferred under FSP
No. FAS 157-2.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. Earlier adoption is
prohibited. The impact of SFAS 141R on our consolidated results of
operations and financial condition will depend on the nature and size of
acquisitions, if any, subsequent to the effective date.
In
December 2007, the FASB issued SFAS No. 160, “Non controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160).
SFAS No. 160 establishes accounting and reporting standards that require
that the ownership interests in subsidiaries held by parties other than the
parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parent’s
equity; the amount of consolidated net income attributable to the parent and to
the non controlling interest be clearly identified and presented on the face of
the consolidated statement of operations; and changes in a parent’s ownership
interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The impact of SFAS 160 on our consolidated
results of operations and financial condition will depend on the nature and size
of transactions, if any, subsequent to the effective date as well as
reclassification of past minority rights into equity. We do not expect that the
adoption of SFAS 160 will have an material impact on our consolidated
financial statements.
In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7,
“Accounting for Defensive Intangible Assets”. EITF 08-7 clarifies the
accounting for certain separately identifiable intangible assets which an
acquirer does not intend to actively use but intends to hold to prevent its
competitors from obtaining access to them. EITF 08-7 requires an acquirer
in a business combination to account for a defensive intangible asset as a
separate unit of accounting which should be amortized to expense over the period
the asset diminishes in value. EITF 08-7 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. The
guidance is applicable to intangible assets acquired after the effective date.
The impact of FSP FAS 142-3 on our consolidated results of operations and
financial condition will depend on the amount of intangibles acquired, if any,
subsequent to the effective date.
In
April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,
“Determination of the Useful Life of Intangible Assets”. FSP FAS 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. FSP
FAS 142-3 is effective for fiscal years beginning after December 15,
2008 and early adoption is prohibited. The guidance is applicable to intangible
assets acquired after the effective date. The impact of FSP FAS 142-3 on
our consolidated results of operations and financial condition will depend on
the amount of intangibles acquired, if any, subsequent to the effective
date.
Effective
December 31, 2008, we adopted FASB Staff Position (FSP) APB 14-1.
“Accounting for Convertible debt Instruments that may be settled in cash upon
conversion”. FSP APB 14-1 specifies that issuers of these instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. As a result, we will record additional non-cash
interest expense during 2009 and comparative statements for 2008 presented
during 2009 will be adjusted accordingly. Thus, the comparative statements for
2008 issued when we report quarterly earnings in 2009 will not be the same as
the statements we originally issued during 2008. Based on our preliminary
assessment, the anticipated increased interest expense, net of tax income to be
recorded in 2009 in our consolidated statements of operations range between $3.0
million and $3.3 million.
In
June 2008, the FASB issued EITF No. 07-5 “Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to our own stock and (b) classified in shareholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. EITF 07-5 provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuer’s
own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope
exception. We believe adopting this statement will have no impact on our
consolidated financial statements.
In
April 2009, the FASB issued FSP, No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, or the FSP. The FSP is
intended to provide greater clarity to investors about the credit and noncredit
component of an other-than-temporary impairment event and to more effectively
communicate when an other-than-temporary impairment event has occurred. The FSP
applies to fixed maturity securities only and requires separate display of
losses related to credit deterioration and losses related to other market
factors. When an entity does not intend to sell the security and it is more
likely than not that an entity will not have to sell the security before
recovery of its cost basis, it must recognize the credit component of an
other-than-temporary impairment in earnings and the remaining portion in other
comprehensive income. upon adoption of the FSP, an entity will be required to
record a cumulative-effect adjustment as of the beginning of the period of
adoption to reclassify the noncredit component of a previously recognized
other-than-temporary impairment from retained earnings to accumulated other
comprehensive income. The FSP will be effective for us for the quarter ending
June 30, 2009. We are currently evaluating the impact of adopting the
FSP.
|
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
We
have financed our operations for the last three years, from the remaining
proceeds of our sale of convertible notes, as well as with cash from operations
in those years.
In
November 2004, we raised net proceeds of approximately $120.2 million in a
private placement of $125.0 million aggregate principal amount of our 2.00%
Senior Convertible Notes due 2024. Holders of the notes are entitled to convert
the notes into our ordinary shares at a conversion rate of 53.4474 ordinary
shares per $1,000 principal amount of notes, which is the equivalent to a
conversion price of approximately $18.71 per share. The conversion rate is
subject to adjustment in certain circumstances, such as changes in our capital
structure or upon the issuance by us of share dividends or certain cash
distributions. The notes may be redeemed by us, in whole or in part at any time
on or after November 9, 2009. The holders may require us to redeem the notes on
November 9, 2009, November 9, 2014 or November 9, 2019, or upon certain
fundamental changes. During 2008, we repurchased $51.5 million in principal
amount of our 2% Senior Convertible Notes for a total cost, including accrued
interest, of $50.2 million. As of June 15, 2009, there were $73.5 million in
principal amount of these Notes outstanding. As the conversion price of the
Notes is significantly higher than the price of our ordinary shares and as the
Notes are trading at a discount to their principal amount, it is likely that we
will be required to purchase all or a significant portion of the Notes in
November 2009 when the holders of the Notes can require us to do
so.
In
April and July 2008, we entered into loan agreements with banks in Israel that
provide for borrowings of an aggregate of $30 million. The loans bear interest
at an annual rate equal to LIBOR plus up to 1.5% with respect to $23 million of
borrowings and LIBOR plus up to 0.65% with respect to $7 million of borrowings.
The principal amount borrowed is repayable in 20 equal quarterly payments from
August 2008 through July 2013. The banks have a lien on our assets and we are
required to maintain $7 million of compensating balances with the banks. The
agreements require us, among other things, to maintain shareholders’ equity at
specified levels and to achieve certain levels of operating income. The
agreements also restrict us from paying dividends. As of March 31, 2009, we are
in compliance with the covenants contained in the loan covenants.
As
of December 31, 2008, we had $115.1 million in cash and cash equivalents,
short-term and long-term marketable securities, short-term and long-term bank
deposits, a decrease of approximately $27.9 million from $143.0 million at
December 31, 2007. During 2008, we used $50.2 million of cash to repurchase
$51.5 million in principal amount of our Senior Convertible Notes.
In
January 2008, our Board approved a program to repurchase up to 4,000,000 of our
ordinary shares. Purchases will be made from time-to-time at the discretion of
management subject, among other things, to our share price and market
conditions. If management elects to have us purchase our shares, we will use a
portion of our cash to effect these purchases. In 2008, we repurchased a total
of approximately 3.5 million ordinary shares at a total cost of $13.7
million.
Our
operating activities provided cash in the amount of $16.4 million in 2008,
primarily due to non-cash expenses in the amount of $86.1 million for impairment
charges, $7.4 million for depreciation and amortization, $4.3 million for
stock-based compensation and $1.5 million of equity in losses of affiliated
companies, as well as an increase of $3.1 million in trade and other payables,
offset, in part, by our net loss and a decrease of $3.5 million in trade and
other receivables and an increase of $1.8 million in inventories. Our trade and
other payables increased because of extended payment terms granted to us by
suppliers. Our trade and other receivables decreased because we had lower
revenues in the fourth quarter of 2008 than in the same period in 2007 and
because of increased year-end collection efforts. Inventory increased primarily
because of lower than expected revenues in the fourth quarter of 2008. Our
operating activities provided cash in the amount of $12.4 million in 2007,
primarily due to a decrease of $5.0 million in trade receivables and non-cash
charges of $8.0 million for stock-based compensation and $7.8 million for
depreciation and amortization, offset, in part, by our net loss and a decrease
of $5.1 million in trade and other payables and an increase of $2.6 million in
inventories. Our operating activities provided cash in the amount of $6.6
million in 2006, primarily due to our net income and non-cash charges of $8.7
million for stock-based compensation and $5.5 million for depreciation and
amortization, which were partially offset by an increase of $9.8 million in
trade receivables and a decrease of $4.7 million in trade and other payables.
Our receivables increased primarily as a result of higher sales volume. Our
payables decreased due to repayment of payable balances after the acquisitions
of Nuera and Netrake.
In
2008, our investing activities used cash in the amount of $20.0 million,
primarily due to the excess of our investment in marketable securities and
short-term and long-term bank deposits and payments in connection with the
acquisition of CTI Squared over proceeds from bank deposits and sale and
maturity of marketable securities. In 2007, our investing activities provided
cash in the amount of $32.7 million, primarily due to our proceeds from the
maturity of marketable securities and structured notes. In 2006, our investing
activities used cash in the amount of $61.6 million, primarily due to our
investment in Nuera and Netrake, offset in part by the net proceeds from the
maturity of bank deposits.
In
2008, our financing activities used $34.7 million due to $50.2 million used to
repurchase our Senior Convertible Notes and $13.7 million used to repurchase our
ordinary shares offset, in part, by bank borrowings in the aggregate amount of
$30 million. In 2007, financing activities provided $4.8 million due to proceeds
from issuance of our shares upon exercise of options and from purchases of our
shares under our Employee Stock Purchase Plans. In 2006, financing activities
provided $9.2 million due to proceeds from issuance of our shares upon exercise
of options and from purchases of our shares under our Employee Stock Purchase
Plans.
We
anticipate that our operating expenses will be a material use of our cash
resources for the foreseeable future. We will also likely need up to $73.5
million during 2009 to repurchase our outstanding Senior Convertible Notes. We
believe that our current working capital is sufficient to meet our operating
cash requirements for at least the next twelve months, as well as repurchasing
our Senior Convertible Notes, if required. Part of our strategy is to pursue
acquisition opportunities. If we do not have available sufficient cash to
finance our operations and the completion of additional acquisitions, as well as
to repurchase our Notes, we may be required to obtain additional debt or equity
financing. We cannot be certain that we will be able to obtain, if required,
additional financing on acceptable terms or at all.
|
C
.
|
RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES,
ETC.
|
Research
and Development
In
order to accommodate the rapidly changing needs of our markets, we place
considerable emphasis on research and development projects designed to improve
our existing products and to develop new ones. We are developing more advanced
communications boards, analog and digital media gateways for carrier and
enterprise applications, media servers and session border controllers. Our
platforms will feature increased trunk capacity, new functionalities, enhanced
signaling software and compliance with new control protocols. As of December 31,
2008, 249 of our employees were engaged primarily in research and development on
a full-time basis. We also employed 4 employees on a part-time
basis.
Our
research and development expenses were $37.8 million in 2008 compared to $40.7
million in 2007 and $35.4 million in 2006. From time to time we have received
royalty-bearing grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the OCS. As a recipient of grants from
the OCS, we are obligated to perform all manufacturing activities for projects
subject to the grants in Israel unless we receive an exemption. Know-how from
the research and development which is used to produce products may not be
transferred to third parties without the approval of the OCS and may further
require material payments. The OCS approval is not required for the export of
any products resulting from such research or development. Through December 31,
2008, we had obtained grants from the OCS aggregating $4.8 million for certain
of our research and development projects. We are obligated to pay royalties to
the OCS, amounting to 3%-4.5% of the sales of the products and other related
revenues generated from such projects, up to 100% of the grants received, linked
to the U.S. dollar and bearing interest at the rate of LIBOR at the time of
grant. The obligation to pay these royalties is contingent on actual sales of
the products and in the absence of such sales no payment is
required.
|
D.
|
TREND
INFORMATION
|
The
accelerated demand for VoIP technology has impacted our business during the last
few years. Over the past few years, the shift from traditional circuit-switched
networks to next generation packet-switched networks continued to gain momentum.
As data traffic becomes the dominant factor in communications, service providers
are building and maintaining converged networks for integrated voice and data
services. In addition, underdeveloped markets without basic wire line service in
countries such as China and India and certain countries in Eastern Europe are
beginning to use VoP technology to deliver voice and data services that were
previously unavailable. In addition, the growth in broadband access and related
technologies has driven the emergence of alternative service providers. This in
turn stimulates competition with incumbent providers, encouraging them to adopt
voice over packet technologies. The entry of new industry players and the demand
for new equipment have impacted our business in the last few years.
In
2008, we continued to experience pressure to shorten our lead times in supplying
products to customers. Some of our customers are implementing “demand pull”
programs by which they only purchase our product very close to the time, if not
simultaneously with the time, they plan to sell their product. We are increasing
our sales efforts in new markets, such as Latin America, Eastern Europe and Far
East. We have introduced new system level products, and applications in our
product lines. We are still experiencing low visibility into customer demand for
our products and our ability to predict our level of sales.
|
E
.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
We
do not have any “off-balance sheet arrangements” as this term is defined in Item
5E of Form 20-F.
|
F
.
|
TABULAR
DISCLOSURE OF CONTRACTUAL
OBLIGATIONS
|
As
of December 31, 2008, our contractual obligations were as follows (in
thousands):
|
PAYMENTS
DUE BY PERIOD
|
||||||||||||||||||||
|
LESS
THAN
1
YEAR
|
1-3
YEARS
|
3-5
YEARS
|
MORE
THAN
5
YEARS
|
TOTAL
|
||||||||||||||||
|
Senior
convertible notes
|
73,500 |
73,500
|
||||||||||||||||||
|
Bank
loans
|
27,750
|
27,750
|
||||||||||||||||||
|
Rent
and lease commitments
|
5,085 | 7,128 | 4,939 | 15,181 | 32,333 | |||||||||||||||
|
Severance
pay fund (1)
|
1,877 | |||||||||||||||||||
|
Uncertain
tax positions (2)
|
311 | |||||||||||||||||||
|
Other
commitments
|
2,300 | — | — | — | 2,300 | |||||||||||||||
(1) Our
obligation for accrued severance pay under Israel’s Severance Pay Law as of
December 31, 2008 was $12.2 million. This obligation is payable only upon
termination, retirement or death of the respective employee. $10.3 million was
funded through deposits into severance pay funds, leaving a net obligation of
approximately $1.9 million.
(2)
Uncertain income tax position under FASB Interpretation No 48, “Accounting for
Uncertainty in Income Taxes, “(“FIN 48”) are due upon settlement and we are
unable to reasonably estimate the ultimate amount of timing of settlement. See
also Note 14f in our Consolidated Financial Statements for further information
regarding the Company’s liability under FIN 48.
|
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES
|
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
The
following table sets forth certain information with respect to our directors,
senior executive officers and key employees at June 15, 2009:
|
Name
|
|
Age
|
Position
|
||||
|
Shabtai
Adlersberg
|
56
|
Chairman
of the Board, President and Chief Executive Officer
|
|||||
|
Nachum
Falek
|
38
|
Vice
President, and Chief Financial Officer
|
|||||
|
Hanan
Maoz
|
45
|
Vice
President, Business Operations
|
|||||
|
Eyal
Frishberg
|
51
|
Vice
President, Operations
|
|||||
|
Eli
Nir
|
43
|
Vice
President, Research and Development
|
|||||
|
Lior
Aldema
|
43
|
Vice
President, Marketing and Product Management
|
|||||
|
Yehuda
Hershkovici
|
42
|
Vice
President, Systems
|
|||||
|
Tal
Dor
|
40
|
Vice
President, Human Resources
|
|||||
|
Gary
Drutin
|
48
|
Vice
President, Global Sales
|
|||||
|
Moshe
Tal
|
54
|
Vice
President, North American Business Operations
|
|||||
|
Joseph
Tenne(1)(2)(3)
|
53
|
Director
|
|||||
|
Dr.
Eyal Kishon(1)(2)(3)
|
48
|
Director
|
|||||
|
Doron
Nevo(1)(2)
|
53
|
Director
|
|||||
|
Osnat
Ronen(1)(2)
|
47
|
Director
|
|||||
(1)
Member of Audit Committee
(2)
Member of Nominating Committee
(3)
Member of Compensation Committee
Shabtai
Adlersberg
co-founded AudioCodes in 1993, and has served as our Chairman
of the Board and Chief Executive Officer since inception. Mr. Adlersberg
co-founded DSP Group, a semiconductor company, in 1987. From 1987 to 1990, Mr.
Adlersberg served as the Vice President of Engineering of DSP Group, and from
1990 to 1992, he served as Vice President of Advanced Technology. As Vice
President of Engineering, Mr. Adlersberg established a research and development
team for digital cellular communication which was spun-off in 1992 as DSP
Communications. Mr. Adlersberg also serves as Chairman of the Board of Directors
of Natural Speech Communication Ltd. and as a director of MailVision Ltd and CTI
Squared Ltd. Mr. Adlersberg holds an M.Sc. in Electronics and Computer
Engineering from Tel Aviv University and a B.Sc. in Electrical Engineering from
the Technion-Israel Institute of Technology, or the
Technion.
Nachum
Falek
joined AudioCodes in April 2000 and became our Vice President, and
Chief Financial Officer in November 2003. From 2000 to 2003, he served as
Director of Finance. Prior to joining AudioCodes, Mr. Falek served as Controller
at ScanVec-Amiable Ltd. From 1998 to 1999, he was a Manager at Ernst & Young
in Israel. Mr. Falek holds a B.A. in Accounting and Economics from Haifa
University, an M.B.A. from Tel Aviv University, and is a licensed CPA in
Israel.
Hanan
Maoz
joined AudioCodes in February 2007 as Vice President of Business
Operations. Mr. Maoz has over 17 years of experience in enterprise software
sales and operations. From August 2003 until joining AudioCodes in 2007, Mr.
Maoz was a Managing Director and Co-Founder of PerformanceSoft Israel, a
privately held consulting firm providing corporate performance planning and
business monitoring. From June 1996 to June 2003, Mr. Maoz worked for Oracle
Corp. (Israel) in a variety of executive sales, alliances and business
development positions. Mr. Maoz has an MBA in Finance and a MSc. in Information
Technologies, both from the Tel-Aviv University, and is in a PhD program in
Industrial Engineering and Management at Ben-Gurion
University.
Eyal
Frishberg
has served as our Vice President, Operations since October
2000. From 1997 to 2000, Mr. Frishberg served as Associate Vice President, SDH
Operations in ECI Telecom Ltd., a major telecommunication company. From 1987 to
1997, Mr. Frishberg worked in various operational positions in ECI Telecom
including as manager of ECI production facility and production control. Mr.
Frishberg worked from 1994 until 1997 for ELTA company, part of Israeli Aircraft
Industries in the planning and control department. Mr. Frishberg holds a B.Sc.
in Industrial Engineering from Tel Aviv University and an M.B.A. from Ben-Gurion
University of the Negev.
Eli
Nir
has served as our Vice President, Research and Development since
April 2001. He has been employed by us since 1996, when he founded and headed
our System Software Group in our research and development department. Prior to
1996, Mr. Nir served as an officer in the Technical Unit of the Intelligence
Corps of the Israeli Defense Forces (Major), heading both operational units and
large development groups mostly related to digital processing. Mr. Nir holds an
M.B.A. and an M.Sc. from Tel Aviv University in Digital Speech Processing and a
B.Sc. from the Technion.
Lior
Aldema
has served as our Vice President, Product Management since January
2002. Mr. Aldema has also served as our Vice President Marketing since February
2003. He has been employed by us since 1998, when he was team leader and later
headed our System Software Group in our research and development department.
Prior to 1998, Mr. Aldema served as an officer in the Technical Unit of the
Intelligence Corps of the Israeli Defense Forces (Major), heading both
operational units and large development groups related to various technologies.
Mr. Aldema holds an M.B.A. from Tel Aviv University and a B.Sc. from the
Technion.
Yehuda
Hershkovici
has served as our Vice President, Systems Group since 2003.
From 2001 to 2003, Mr. Hershkovits served as our Vice President, Advanced
Products. From 2000 to 2001, Mr. Hershkovits served as our Director of Advanced
Technologies. From 1994 to 1998 and during 1999, Mr. Hershkovits held a variety
of research and development positions at Advanced Recognition Technologies,
Ltd., a voice and handwriting recognition company, heading its research and
development from 1999 to 2000 as Vice President, Research and Development. From
1998 to 1999, Mr. Hershkovits developed various wireless communication
algorithms at Comsys, a telecommunications company. Mr. Hershkovits holds an
M.Sc. and a B.Sc., from the Technion both in the area of
telecommunications.
Tal
Dor
has served as our Vice President of Human Resources since March 2000.
For more than three years prior to March 2000, Ms. Dor acted as a consultant in
Israel to, among others, telephone and cable businesses, as well as health and
social service organizations. Ms. Dor holds a B.A. in psychology, from
Ben-Gurion University of the Negev and an M.A. in psychology from Tel Aviv
University.
Gary
Drutin
currently serves as our VP Global Sales. Mr. Drutin was the Vice
President Sales for Europe, Middle East and Latin America from 2005 until 2007
and Vice President of Channel Operations and Marketing from 2004 until 2005.
From 2001 until 2004, Mr. Drutin was Country Manager and General Manager for
Cisco Israel, Cyprus and Malta and from 1997 until 2001 served as regional sales
manager for service providers and enterprises for Cisco Israel. From 1990 until
1997, he served in sales management roles at Digital Equipment Corporation
Israel. Mr. Drutin holds an M.B.A degree from Tel-Aviv University in Information
Systems and Marketing and a B.Sc. degree in Computer Engineering from the
Technion.
Moshe
Tal
joined us in May 2004 in connection with our acquisition of Ai-Logix,
now known as AudioCodes Inc. He serves as our Vice President, North American
Business Operations and is also the President and CEO of our AudioCodes USA
subsidiary (now called AudioCodes Inc.). Mr. Tal co-founded Ai-Logix in 1991,
and has served as its President and CEO since 1998. Mr. Tal has more than
twenty-five years of product design and engineering experience, principally
associated with analog and digital signal processing technologies. Mr. Tal holds
a B.Sc. in Electronic Engineering from Tel Aviv
University.
Joseph
Tenne
has served as one of our directors since June 2003. Mr. Tenne is
currently the Chief Financial Officer of Ormat Technologies, Inc., a company
listed on the New York Stock Exchange, which is engaged in the geothermal and
recovered energy business. Since January 2006, Mr. Tenne has served as the Chief
Financial Officer of Ormat Industries Ltd., an Israeli holding company listed on
the Tel-Aviv Stock Exchange and the parent company of Ormat Technologies, Inc.
From 2003 to 2004, Mr. Tenne was the Chief Financial Officer of Treofan Germany
GmbH & Co. KG, a German company, which is engaged in the development,
production and marketing of oriented polypropylene films, which are mainly used
in the food packaging industry. From 1997 until 2003, Mr. Tenne was a partner in
Kesselman & Kesselman, Certified Public Accountants in Israel and a member
of PricewaterhouseCoopers International Limited. Mr. Tenne holds a B.A. in
Accounting and Economics and an M.B.A. from Tel Aviv University. Mr. Tenne is
also a Certified Public Accountant in Israel.
Dr.
Eyal Kishon
has served as one of our directors since 1997. Since 1996,
Dr. Kishon has been Managing Partner of Genesis Partners, an Israel-based
venture capital fund. From 1993 to 1996, Dr. Kishon served as Associate Director
of Dovrat-Shrem/Yozma-Polaris Fund Limited Partnership. Prior to that, Dr.
Kishon served as Chief Technology Officer at Yozma Venture Capital from 1992 to
1993. Dr. Kishon serves as a director of Allot Communications Ltd and Celtro
Inc. From 1991 to 1992, Dr. Kishon was a Research Fellow in the Multimedia
Department of IBM Science & Technology. From 1989 to 1991, Dr. Kishon worked
in the Robotics Research Department of AT&T Bell Laboratories. Dr. Kishon
holds a B.A. in Computer Science from the Technion – Israel Institute of
Technology and an M.Sc. and a Ph.D. in Computer Science from New York
University.
Doron
Nevo
has served as one of our directors since 2000. Mr. Nevo is President
and CEO of KiloLambda Technologies Ltd., an optical subsystems company, which he
co-founded in 2001. From 1999 to 2001, Mr. Nevo was involved in fund raising
activities for Israeli-based startup companies. From 1996 to 1999, Mr. Nevo
served as President and CEO of NKO, Inc. Mr. Nevo established NKO in early 1995
as a startup subsidiary of Clalcom, Ltd. NKO designed and developed a full
scale, carrier grade, IP telephony system platform and established its own IP
network. From 1992 to 1996, Mr. Nevo was President and CEO of Clalcom Ltd. Mr.
Nevo established Clalcom in 1992 as a telecom service provider in Israel. He
also serves on the board of a number of companies, including Utility Wireless
Corp. (a manufacturer of radio frequency sub-systems), Elcom Technologies
(manufacturer of Satcom and digital radio synthesizers), Notox, Ltd. (a biotech
company), BioCancell, Inc. and Bank Adanim. Mr. Nevo holds a B.Sc. in Electrical
Engineering from the Technion – Israel Institute of Technology and an M.Sc. in
Telecommunications Management from Brooklyn
Polytechnic.
Osnat
Ronen
has served as one of our directors since December 2007. Ms. Ronen
has served as General Partner of Viola Private Equity since January 2008. From,
2001 until 2007, Ms. Ronen was the Deputy Chief Executive Officer of Leumi &
Co. Investment House, the private equity investment arm and investment banking
services arm of the Leumi Group. Prior to this position, she was Deputy Head of
the Subsidiaries Division of Leumi Group from 1999 until 2001. Ms. Ronen serves
as a director of Leumi Leasing and Investments Ltd., National Consultants
(Netconsultant) Ltd., Fox-Wizel Ltd., Paz Oil Company Ltd. and Keshet
Broadcasting Ltd. Ms. Ronen received an M.B.A. degree and a BSc degree in
mathematics and computer science from the Tel Aviv
University.
|
B
.
|
COMPENSATION
|
The
aggregate direct remuneration paid during the year ended December 31, 2008 to
the 14 persons who currently serve in the capacity of director or senior
executive officer was approximately $2.5 million, including approximately
$293,000 which was set aside for pension and retirement benefits. This does not
include amounts expended by us for automobiles made available to our officers,
expenses (including business, travel, professional and business association dues
and expenses) reimbursed to officers and other fringe benefits commonly
reimbursed or paid by companies in Israel.
Stock
options to purchase our ordinary shares granted to persons who served in the
capacity of director or executive officer under our 1997 and 1999 Stock Option
Plans are generally exercisable at the fair market value at the date of grant,
and expire ten years (under the 1997 Plan) and seven years (under the 1999 Plan
and the 2008 Plan), respectively, from the date of grant. The options are
generally exercisable in three or five equal annual installments, commencing one
year from the date of grant.
A
summary of our stock option activity and related information for the years ended
December 31, 2006, 2007 and 2008 for the 14 persons who currently serve in the
capacity of director or senior executive officer is as follows:
|
2006
|
2007
|
2008
|
||||||||||||||||||||||
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
|
Outstanding
at the beginning of the year
|
1,766,869 | $ | 9.51 | 1,842,269 | $ | 9.72 | 2,002,269 | $ | 7.54 | |||||||||||||||
|
Granted
|
162,500 | $ | 10.38 | 352,500 | $ | 6.42 | 85,000 | $ | 3.25 | |||||||||||||||
|
Cancelled
|
(20,000 | ) | (176,000 | ) | (225,000 | ) | ||||||||||||||||||
|
Exercised
|
(67,100 | ) | $ | 5.73 | (16,500 | ) | $ | 2.31 | (84,000 | ) | $ | 2.23 | ||||||||||||
|
Outstanding
at the end of the year
|
1,842,269 | $ | 9.72 | 2,002,269 | $ | 7.54 | 1,778,269 | $ | 7.66 | |||||||||||||||
As
of December 31, 2008, options to purchase 1,285,769 ordinary shares were
exercisable by the 14 persons who served as an officer or director during 2008
at an average exercise price of $7.98 per share.
Under
the Israeli Companies Law, the compensation arrangements for officers who are
not directors require the approval of the board of directors, unless the
articles of association provide otherwise. Our articles of association do not
provide otherwise. Arrangements regarding the compensation of directors require
the approval of the audit committee, the board and the shareholders, in that
order.
|
C
.
|
BOARD
PRACTICES
|
Corporate
Governance Practices
We
are incorporated in Israel and therefore are subject to various corporate
governance practices under the Israeli Companies Law, 1999, or the Companies
Law, relating to such matters as outside directors, the audit committee, the
internal auditor and approvals of interested party transactions. These matters
are in addition to the ongoing listing conditions of the Nasdaq Global
Select
Market
and other relevant provisions of U.S. securities laws. Under the Nasdaq rules, a
foreign private issuer may generally follow its home country rules of corporate
governance in lieu of the comparable Nasdaq requirements, except for certain
matters such as composition and responsibilities of the audit committee and the
independence of its members. For further information, see “Item 16G – Corporate
Governance.”
Independent
Directors
Under
the Israeli Companies Law, Israeli companies that have offered securities to the
public in or outside of Israel are required to appoint at least two “outside”
directors. Doron Nevo, Dr. Eyal Kishon and Osnat Ronen currently serve as our
outside directors. Under the requirements for listing on the Nasdaq Global
Select Market, a majority of our directors are required to be independent as
defined by Nasdaq rules. Doron Nevo, Dr. Eyal Kishon, Osnat Ronen and Joseph
Tenne qualify as independent directors under the applicable Securities and
Exchange Commission and Nasdaq rules.
To
qualify as an outside director under Israeli law, an individual or his or her
relatives, partners, employers or entities under the person’s control may not
have, and may not have had at any time during the previous two years, any
affiliation, as such term is defined in the Companies Law, with the company or
any entity controlling, controlled by or under common control with the company.
In addition, no individual may serve as an outside director if the individual’s
position or other activities create or may create a conflict of interest with
his or her role as an outside director or are likely to interfere with his or
her ability to serve as a director. For a period of two years from termination
from office, a former outside director may not serve as a director or employee
of the company or provide professional services to the company for
consideration. Pursuant to the Israeli Companies Law, at least one of the
outside directors appointed by a publicly-traded company must have “financial
and accounting expertise.” The other outside directors are required to possess
“financial and accounting expertise” or “professional expertise,” as these terms
are defined in regulations promulgated under the Companies Law. Joseph Tenne is
designated as the audit committee’s financial expert. This requirement does not
apply to outside directors elected prior to January 2006.
The
outside directors must be elected by the shareholders, including at least
one-third of the shares of non-controlling shareholders voted on the matter.
However, the outside directors can be elected by shareholders without this
one-third approval if the total shares of non-controlling shareholders voted
against the election do not represent more than one percent of the voting rights
in the company. The term of an outside director is three years and may be
extended for additional three-year terms. An outside director can be removed
from office only under very limited circumstances. All of the outside directors
must serve on a company’s statutory audit committee and each other committee of
a company’s board of directors is required to include at least one outside
director. If, at the time an outside director is elected, all current members of
the board of directors are of the same gender, then the elected outside director
must be of the other gender.
Pursuant
to a recent amendment to the Israeli Companies Law, an Israeli company, whose
shares are publicly traded, may elect to adopt a provision in its articles of
association pursuant to which a majority of its board of directors will
constitute individuals complying with certain independence criteria prescribed
by the Israeli Companies Law. We have not included such a provision in our
articles of association since our board of directors complies with the
independence requirements of the Nasdaq and Securities and Exchange Commission
regulations described above.
Audit
Committee
Under
the Companies Law and the requirements for listing on the Nasdaq Global Select
Market, our board of directors is required to appoint an audit committee. Our
audit committee must be comprised of at least three directors, including all of
the outside directors. The audit committee consists of: Dr. Eyal Kishon, Doron
Nevo, Joseph Tenne and Osnat Ronen. Our board of directors has determined that
Joseph Tenne is an “audit committee financial expert” and that all members of
the Audit Committee are independent under the applicable Securities and Exchange
Commission and Nasdaq rules.
The
audit committee may not include the chairman of the board of directors, a
controlling shareholder and the members of his immediate family, or any director
who is employed by the company or provides services to the company on a regular
basis. Under Israeli law, the role of the audit committee is to examine flaws in
our business management, in consultation with the internal auditor and the
independent accountants, and to propose remedial measures to the board. The
audit committee also reviews for approval transactions between us and office
holders or interested parties, as described below.
We
have adopted an audit committee charter as required by Nasdaq rules. Our audit
committee assists the board of directors in fulfilling its responsibility for
oversight of the quality and integrity of our accounting, auditing and financial
reporting practices and financial statements and the independence qualifications
and performance of our independent auditors. The audit committee also has the
authority and responsibility to oversee our independent auditors, to recommend
for shareholder approval the appointment and, where appropriate, replacement of
our independent auditors and to pre-approve audit fees and all permitted
non-audit services and fees.
Nominating
Committee
Nasdaq
rules require that director nominees be selected or recommended for the board’s
selection either by a committee composed solely of independent directors or by a
majority of independent directors. Our Nominating Committee assists the board of
directors in its selection of individuals as nominees for election to the board
of directors and/or to fill any vacancies or newly created directorships on the
board of directors. The Nominating Committee consists of Dr. Eyal Kishon, Doron
Nevo, Joseph Tenne and Osnat Ronen. All members of the Nominating Committee are
independent under the applicable Nasdaq rules.
Compensation
Committee
Nasdaq
rules also provide that the compensation of a company’s chief executive officer
and other executive officers is required to be approved either by a majority of
the independent directors on the board of directors or a committee comprised
solely of independent directors. Our board of directors has appointed Dr. Eyal
Kishon and Joseph Tenne to serve on our Compensation Committee of the board of
directors. All members of the Compensation Committee are independent under the
applicable Nasdaq rules
Internal
Auditor
Under
the Companies Law, our board of directors is also required to appoint an
internal auditor proposed by the audit committee. The internal auditor may be
our employee, but may not be an interested party or office holder, or a relative
of any interested party or office holder, and may not be a member of our
independent accounting firm. The role of the internal auditor is to examine,
among other things, whether our activities comply with the law and orderly
business procedure. Deloitte Touche was appointed as our internal auditor in
November 2008. Previously, Eitan Hashachar CPA had been our internal auditor
since January 2001.
Board
Classes
Pursuant
to our articles of association, our directors, other than our outside directors,
are classified into three classes (classes I, II and III). The members of each
class of directors and the expiration of the term of office is as
follows:
|
Vacant
|
Class
I
|
2010
|
|
|
Joseph
Tenne
|
Class
II
|
2011
|
|
|
Shabtai
Adlersberg
|
Class
III
|
2009
|
We
currently do not have a Class I director.
Our
outside directors under the Companies Law, Doron Nevo, Dr. Eyal Kishon and Osnat
Ronen, are not members of any class and serve in accordance with the provisions
of the Companies Law. Mr. Nevo’s term ends in 2009, Dr. Kishon’s term ends in
2011, and Ms. Ronen’s term ends in 2010.
|
D.
|
EMPLOYEES
|
We
had the following number of employees as of December 31, 2006, 2007 and 2008 in
the areas set forth in the table below:
|
As
of December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Research
and development
|
312 | 296 | 249 | |||||||||
|
Sales
& marketing, technical service & support
|
240 | 249 | 209 | |||||||||
|
Operations
|
102 | 99 | 92 | |||||||||
|
Management
and administration
|
47 | 44 | 45 | |||||||||
| 701 | 688 | 595 | ||||||||||
Our
employees were located in the following areas as of December 31, 2006, 2007 and
2008.
|
As
of December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Israel
|
416 | 425 | 382 | |||||||||
|
United
States
|
234 | 197 | 151 | |||||||||
|
Europe
|
25 | 29 | 27 | |||||||||
|
Far
East
|
22 | 31 | 28 | |||||||||
|
Latin
America
|
4 | 6 | 7 | |||||||||
| 701 | 688 | 595 | ||||||||||
The
decrease in the number of employees in 2007 and 2008 was primarily attributable
to our cost reduction plans implemented in 2007 and 2008. Since January 2008 we
have reduced the number of our employees by approximately 14%, from 688 to 595.
In addition, in 2009, salary reduction measures were taken with respect to our
employees worldwide.
Israeli
labor laws and regulations are applicable to our employees in Israel. These laws
principally concern matters such as paid annual vacation, paid sick days, length
of the workday, pay for overtime, insurance for work-related accidents,
severance pay and other conditions of employment. Israeli law generally requires
severance pay, which may be funded by Manager’s Insurance, described below, upon
the retirement or death of an employee or termination of employment without
cause (as defined under Israeli law). Furthermore, Israeli employees and
employers are required to pay predetermined sums to the National Insurance
Institute, which include payments for national health insurance. The payments to
the National Insurance Institute currently range from approximately 5% to 17% of
wages up to specified wage levels, of which the employee contributes
approximately 65% and the employer contributes approximately
35%.
Our
employees are subject 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) by order of the Israeli Minister of Industry, Trade and Labor.
These provisions principally concern cost of living increases, recreation pay
and other conditions of employment. We generally provide our employees with
benefits and working conditions above the required minimums. Our employees, as a
group, are not currently represented by a labor union. To date, we have not
experienced any work stoppages.
Pursuant to a recent order
issued in December 2007 by the Israeli Minister of Industry, Trade and Labor,
new provisions relating to pension arrangements in the collective bargaining
agreements between the Histadrut and the Coordination Bureau of Economic
Organizations will apply to all employees in Israel, including our employees in
Israel. We regularly contribute to a “Manager’s Insurance Fund” or to a
privately managed pension fund on behalf of our employees located in Israel.
These funds provide employees with a lump sum payment upon retirement (or a
pension, in case of a pension fund) and severance pay, if legally entitled
thereto, upon termination of employment. We provide for payments to a Manager’s
Insurance Fund and pension fund contributions in the amount of 13.3% of an
employee’s salary on account of severance pay and provident payment or pension,
with the employee contributing 5.0% of his salary. We also pay an additional
amount of up to 2.5% of certain of our employees’ salaries in connection with
disability payments. In addition, we administer an Education Fund for our
Israeli employees and pay 7.5% of these employees’ salaries thereto, with the
employees contributing 2.5% of their salary.
|
E.
|
SHARE
OWNERSHIP
|
The
following table sets forth the share ownership and outstanding number of options
of our directors and officers as of June 15, 2009.
|
Name
|
Total
Shares
Beneficially
Owned
|
Percentage
of
Ordinary
Shares
|
Number
of
Options
|
|||||
|
Shabtai
Adlersberg
|
5,565,162
|
14.3
|
284,718
|
|||||
|
Nachum
Falek
|
*
|
*
|
||||||
|
Hanan
Maoz
|
*
|
*
|
||||||
|
Eyal
Frishberg
|
*
|
*
|
||||||
|
Eli
Nir
|
*
|
*
|
||||||
|
Lior
Aldema
|
*
|
*
|
||||||
|
Yehuda
Hershkovici
|
*
|
*
|
||||||
|
Tal
Dor
|
*
|
*
|
||||||
|
Gary
Drutin
|
*
|
*
|
||||||
| Moshe Tal |
*
|
*
|
||||||
|
Joseph
Tenne
|
*
|
*
|
||||||
|
Dr.
Eyal Kishon
|
*
|
*
|
||||||
|
Doron
Nevo
|
*
|
*
|
||||||
|
Osnat
Ronen
|
*
|
*
|
* Less
than one percent.
Our
officers and directors have the same voting rights as our other
shareholders.
The
following table sets forth information with respect to the options to purchase
our ordinary shares held by Mr. Adlersberg as of June 15, 2009.
|
Number
of
Options
|
Grant
Date
|
Exercise
Price
|
Exercised
|
Cancelled
|
Vestin
g
|
Expiration
Date
|
||||||||
|
96,000
|
July
1, 1996
|
$
|
0.61
|
(96,000
|
)
|
—
|
4
years
|
July
1, 2006
|
||||||
|
96,000
|
July
1, 1998
|
$
|
1.10
|
(96,000
|
)
|
—
|
4
years
|
July
1, 2008
|
||||||
|
225,000
|
December
19, 2001
|
$
|
4.18
|
—
|
(225,000
|
)
|
4
years
|
December
19, 2008
|
||||||
|
9,718
|
August
9, 2002
|
$
|
2.04
|
—
|
—
|
2
years
|
August
9, 2009
|
|||||||
|
275,000
|
September
23, 2004
|
$
|
12.84
|
—
|
—
|
5
years
|
September
23, 2011
|
|||||||
Employee
Share Plans
We
have Employee Share Purchase Plans for the sale of shares to our employees and
Employee Share Option Plans for the granting of options to our employees,
officers, directors and consultants. Most of thesese plans are pursuant to the
Israeli Income Tax Ordinance, entitling the beneficiaries who are our employees
to tax benefits under Israeli law. There are various conditions that must be met
in order to qualify for these benefits, including registration of the options in
the name of a trustee for each of the beneficiaries who is granted options. Each
option, and any ordinary shares acquired upon the exercise of the option, must
be held by the trustee at least for a period commencing on the date of grant and
ending no later than 24 months after the date of grant, in accordance with the
period of time specified by Section 102 of Israel’s Income Tax Ordinance, and
deposited in trust with the trustee.
Employee
Share Purchase Plans
We
implemented two Employee Share Purchase Plans in May 2001. One plan, the global
plan, was for our non-U.S., employees and the other our U.S. employees. We
amended and restated the global plan in July 2007 and adopted an additional plan
for U.S. employees in July 2007. Under these Plans, a maximum of 6,500,000 of
our ordinary shares were reserved for sale to our employees at a price equal to
85% of the lesser of fair market value on the first day or last day of each
offering period under the Plans. As of December 31, 2008, we had issued
2,259,776 of our ordinary shares pursuant to purchases under these
plans.
Employee
Share Option Plans
2008
Equity Incentive Plan.
We
have adopted an equity incentive plan under Section 102 of the Israeli Income
Tax Ordinance, or Section 102, which provides certain tax benefits in connection
with share-based compensation to employees, officers and directors. This plan,
our 2008 Equity Incentive Plan, was approved by the Israeli Tax
Authority.
Under
our equity incentive plan, we may grant our directors, officers and employees
restricted shares, restricted share units and options to purchase our ordinary
shares under Section 102. We may also grant other persons awards under our
equity incentive plan. However, such other persons (controlling shareholders and
consultants) will not enjoy the tax benefits provided by Section 102. The total
number of ordinary shares that are available for grant under the 2008 Plan is
2,009,122, which is reduced by one share for each award we grant under the Plan.
During 2008, we did not grant any equity awards under the 2008
plan.
The
Israeli Tax Authority approved the 2008 Plan under the capital gains tax track
of Section 102. Based on Israeli law currently in effect and the election of the
capital gains tax track, and provided that options, restricted shares and
restricted shares units granted or, upon their exercise or vesting, the
underlying shares, issued under the plan are held by a trustee for the two years
following the date in which such awards are granted, our employees, officers and
directors will be (i) entitled to defer any taxable event with respect to the
awards until the underlying ordinary shares are sold, and (ii) subject to
capital gains tax of 25% on the sale of the shares. However, if we grant awards
at a value below the underlying shares’ market value at the date of grant, the
25% capital gains tax rate will apply only with respect to capital gains in
excess of the underlying shares’ market value at the date of grant and the
remaining capital gains will be taxed at the grantee’s regular tax rate. We may
not recognize a tax benefit pertaining to the employees’ restricted shares,
restricted share units and options for tax purposes except in the events
described above under which the gain is taxed at the grantee’s regular tax
rate.
Restricted
shares, restricted share units and options granted under the 2008 Plan will
generally vest over years from the grant date. If the employment of an employee
is terminated for any reason, the employee (or in the case of death, the
designated beneficiary) may exercise his or her vested options within ninety
days of the date of termination (or within twelve months of the date of
termination in the case of death or disability) and shall be entitled to any
rights upon vested restricted shares and vested restricted share units to be
delivered to the employee to the extent that they were vested prior to the date
his or her employment terminates. Directors are generally eligible to exercise
his or her vested options within twelve months from the date the director ceases
to serve on the board of directors.
1999
Option Plans
.
In 1999, our board
restated three 1997 Employee Share Option Plans for our Israeli employees,
officers, directors and consultants and two 1997 Share Option Plans for our U.S.
employees, officers, directors and consultants. Additionally, in 1999 our board
adopted an Employee Share Option Plan for our Israeli employees, officers,
directors and consultants, and an Employee Share Option Plan for our U.S.
employees, officers, directors and consultants. The terms of the 1999 Plans are
substantially the same as those of the 1997 Plans, but have reduced the exercise
period of options from 10 to 7 years. The board has the ability to grant options
with longer or shorter terms. The terms of the 1999 Plans have been modified
slightly since they were adopted and, in 2003, the Israeli Plan was changed to
conform to amendments to the Israeli Income Tax law. As of December 31, 2008,
options to purchase a total of 4,976,067 shares are outstanding under the 1997
and 1999 Israeli Plans and options to purchase a total of 1,380,470 shares are
outstanding under the 1997 U.S. Plan. As of December 31, 2008, the 1997 and 1999
Israeli Plans and the 1997 U.S. Plans have expired and we will no longer make
any grants under these plans.
The
holders of options under all of the plans are responsible for all personal tax
consequences relating to the options. The exercise prices of the options are
based on the fair value of the ordinary shares at the time of grant as
determined by our board of directors. The current practice of our board of
directors is to grant options with exercise prices that equal 100% of the
closing price of our ordinary shares on the applicable date of
grant.
|
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
|
|
A.
|
MAJOR
SHAREHOLDERS
|
To
our knowledge, (A) we are not directly or indirectly owned or controlled (i) by
another corporation or (ii) by any foreign government and (B) there are no
arrangements, the operation of which may at a subsequent date result in a change
in control of AudioCodes. The following table sets forth, as of June 15, 2009,
the number of our ordinary shares, which constitute our only voting securities,
beneficially owned by (i) all shareholders known to us to own more than 5% of
our outstanding ordinary shares, and (ii) all of our directors and senior
executive officers as a group.
|
Identity
of Person or Group
|
Amount
Owned
|
Percent
of Class
|
||||
|
Shabtai
Adlersberg
(1)
|
5,794,880
|
14.3
|
%
|
|||
|
Leon
Bialik
(2)
|
4,079,322
|
10.2
|
%
|
|||
|
Soros Fund
Management LLC
(3)
|
3,744,043
|
9.3
|
%
|
|||
|
FMR Corp.
(4)
|
2,222,390
|
5.5
|
%
|
|||
|
Rima Management,
LLC
(5)
|
2,886,828
|
7.2
|
%
|
|||
|
All directors
and senior executive officers as a group (14 persons)
(6)
|
6,940,931
|
16.8
|
%
|
|||
|
(1)
|
Includes
options to purchase 229,718 shares, exercisable within sixty days of June
15, 2009.
|
|
(2)
|
The
information is derived from a statement on Schedule 13G/A, dated February
11, 2009 of Leon Bialik filed with the Securities and Exchange
Commission.
|
|
(3)
|
The
information is derived from a statement on Schedule 13G, dated February
17, 2009, of Soros Fund Management LLC, George Soros, Robert Soros and
Jonathan Soros filed with the Securities and Exchange Commission. All of
the shares beneficially owned are issuable upon conversion of our senior
convertible notes.
|
|
(4)
|
The
information is derived from the joint statement on Schedule 13G/A, dated
February 17, 2009, of FMR Corp., Edward C. Johnson 3d and Fidelity
Management & Research Company filed with the Securities and Exchange
Commission.
|
|
(5)
|
The
information is derived from a statement on Schedule 13G, dated February
17, 2009, of Rima Management, LLC and Richard Mashaal filed with the
Securities and Exchange Commission.
|
|
(6)
|
Includes
1,375,769 ordinary shares which may be purchased pursuant to options
exercisable within sixty days following June 15,
2009.
|
Mr.
Adlersberg held 14.3% of our ordinary shares as of December 31, 2008, as
compared to 13.9% of our ordinary shares as of December 31, 2007 and 13.1% of
our ordinary shares as of December 31, 2006.
Mr.
Bialik held 10.2% of our ordinary shares as of December 31, 2008 as compared to
9.8% of our ordinary shares as of December 31, 2007 and 9.6% of our ordinary
shares as of December 31, 2006.
Soros
Fund Management LLC beneficially owned 9.3% our ordinary shares as of December
31, 2008 and 10.6% of our ordinary shares as of December 31, 2007 (in each case
issuable upon conversion of our senior convertible notes).
FMR
Corp. beneficially owned 5.5% of our ordinary shares as of December 31, 2008, as
compared to 7.1% of our ordinary shares as of December 31, 2007 (including
shares issuable upon conversion of our senior convertible notes) and 6.4% of our
ordinary shares as of December 31, 2006.
Rima
Management, LLC held 7.2% of our ordinary shares as of December 31, 2008 and
less than 5.0% of our ordinary shares as of December 31, 2007 and
2006.
As
of June 15, 2009, there were approximately 22 holders of record of our ordinary
shares in the United States, although we believe that the number of beneficial
owners of the ordinary shares is significantly greater. The number of record
holders in the United States is not representative of the number of beneficial
holders nor is it representative of where such beneficial holders are resident
since many of these ordinary shares were held of record by brokers or other
nominees.
The
major shareholders have the same voting rights as the other
shareholders.
|
B.
|
RELATED
PARTY TRANSACTIONS
|
None.
|
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
|
ITEM
8. FINANCIAL
INFORMATION
|
|
A.
|
Consolidated
Statements and Other Financial
Information
|
See
Item 18.
Legal
Proceedings
For
a discussion of our legal proceedings, please see “Item 4B-Information on the
Company-Business Overview-Legal Proceedings.”
Dividend
Policy
For
a discussion of our dividend policy, please see “Item 10B-Additional
Information-Memorandum and Articles of Association-Dividends.”
|
B.
|
Significant
Changes
|
No
significant change has occurred since December 31, 2008, except as otherwise
disclosed in this Annual Report.
|
ITEM
9. THE OFFER AND
LISTING
|
|
A.
|
OFFER
AND LISTING DETAILS
|
Our
ordinary shares are listed on the Nasdaq Global Select Market and The Tel Aviv
Stock Exchange under the symbol “AUDC.”
The following table sets forth, for the periods indicated, the high and low
sales prices of our ordinary shares as reported by the Nasdaq Global Select
Market.
|
Calendar
Year
|
|
Price
Per Share
|
|||||||
|
High
|
Low
|
||||||||
|
2008
|
$ | 5.26 | $ | 1.47 | |||||
|
2007
|
$ | 10.40 | $ | 4.55 | |||||
|
2006
|
$ | 14.64 | $ | 8.77 | |||||
|
2005
|
$ | 17.00 | $ | 8.67 | |||||
|
2004
|
$ | 16.88 | $ | 8.48 | |||||
|
Calendar
Period
|
|
Price
Per Share
|
|||||||
|
High
|
Low
|
||||||||
|
2009
|
|||||||||
|
Second
quarter (through June 15, 2009)
|
$ | 1.60 | $ | 1.16 | |||||
|
First
quarter
|
$ | 1.90 | $ | 0.92 | |||||
|
2008
|
|||||||||
|
Fourth
quarter
|
$ | 2.63 | $ | 1.47 | |||||
|
Third
quarter
|
$ | 4.42 | $ | 2.31 | |||||
|
Second
quarter
|
$ | 4.73 | $ | 3.62 | |||||
|
First
quarter
|
$ | 5.26 | $ | 2.50 | |||||
|
2007
|
|||||||||
|
Fourth
quarter
|
$ | 7.04 | $ | 4.87 | |||||
|
Third
quarter
|
$ | 6.59 | $ | 4.55 | |||||
|
Second
quarter
|
$ | 7.19 | $ | 5.01 | |||||
|
First
quarter
|
$ | 10.40 | $ | 6.60 | |||||
|
Calendar
Month
|
|
Price
Per Share
|
|||||||
|
High
|
Low
|
||||||||
|
2009
|
|||||||||
|
May
|
$ | 1.57 | $ | 1.27 | |||||
|
April
|
$ | 1.60 | $ | 1.16 | |||||
|
March
|
$ | 1.31 | $ | 0.92 | |||||
|
February
|
$ | 1.74 | $ | 1.11 | |||||
|
January
|
$ | 1.90 | $ | 1.55 | |||||
|
2008
|
|||||||||
|
December
|
$ | 2.05 | $ | 1.57 | |||||
The
following table sets forth, for the periods indicated, the high and low sales
prices of our ordinary shares as reported by The Tel Aviv Stock Exchange. All
share prices shown in the following table are in NIS. As of December 31, 2008,
the exchange rate was equal to approximately 3.802 NIS per U.S.
$1.00.
|
Calendar
Year
|
|
Price
Per Share
|
||||
|
High
|
Low
|
|||||
|
2008
|
NIS
20.20
|
NIS
5.71
|
||||
|
2007
|
NIS
44.00
|
NIS
18.90
|
||||
|
2006
|
NIS
66.27
|
NIS
38.10
|
||||
|
2005
|
NIS
73.80
|
NIS
40.20
|
||||
|
2004
|
NIS
74.90
|
NIS
39.10
|
||||
|
2003
|
NIS
53.50
|
NIS
10.42
|
||||
|
Calendar
Period
|
|
Price
Per Share
|
||||
|
2009
|
||||||
|
Second
quarter (through June 15, 2009)
|
NIS
6.39
|
NIS
4.70
|
||||
|
First
quarter
|
NIS
7.33
|
NIS
4.26
|
||||
|
2008
|
||||||
|
Fourth
quarter
|
NIS
9.20
|
NIS
5.72
|
||||
|
Third
quarter
|
NIS
15.22
|
NIS
8.46
|
||||
|
Second
quarter
|
NIS
15.62
|
NIS
12.14
|
||||
|
First
quarter
|
NIS
20.20
|
NIS
10.81
|
||||
|
2007
|
||||||
|
Fourth
quarter
|
NIS
28.00
|
NIS
18.90
|
||||
|
Third
quarter
|
NIS
27.78
|
NIS
19.32
|
||||
|
Second
quarter
|
NIS
28.66
|
NIS
22.00
|
||||
|
First
quarter
|
NIS
44.00
|
NIS
27.82
|
||||
|
Calendar
Month
|
|
Price
Per Share
|
||||
|
High
|
Low
|
|||||
|
2009
|
||||||
|
May
|
NIS
6.34
|
NIS
5.51
|
||||
|
April
|
NIS
6.39
|
NIS
4.70
|
||||
|
March
|
NIS
5.32
|
NIS
4.26
|
||||
|
February
|
NIS
6.89
|
NIS
4.80
|
||||
|
January
|
NIS
7.33
|
NIS
6.29
|
||||
|
2008
|
||||||
|
December
|
NIS
8.10
|
NIS
6.40
|
||||
|
B.
|
PLAN
OF DISTRIBUTION
|
Not
applicable.
|
C.
|
MARKETS
|
Our
ordinary shares are listed for trading on the Nasdaq Global Select Market under
the symbol “AUDC”. Our ordinary shares are also listed for trading on The
Tel-Aviv Stock Exchange under the symbol “AUDC”. In addition, we are aware of
our ordinary shares being traded on the following markets: Frankfurt Stock
Exchange, Berlin Stock Exchange, Munich Stock Exchange and XETRA.
|
D.
|
SELLING
SHAREHOLDERS
|
Not
applicable.
|
E.
|
DILUTION
|
Not
applicable.
|
F.
|
EXPENSES
OF THE ISSUE
|
Not
applicable.
|
ITEM
10. ADDITIONAL
INFORMATION
|
|
A.
|
SHARE
CAPITAL
|
Not
applicable.
|
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
Objects
and Purposes
We
were incorporated in 1992 under the laws of the State of Israel. Our
registration number with the Israeli Registrar of Companies is 520044132. Our
objects and purposes, set forth in Section 2 of our memorandum of association,
are:
|
●
|
to
plan, develop and market voice signal systems;
|
|
|
●
|
to
purchase, import, market and wholesale and retail distribute, in Israel
and abroad, consumption goods and accompanying
products;
|
|
|
●
|
to
serve as representatives of bodies, entrepreneurs and companies from
Israel and abroad with respect to their activities in Israel and abroad;
and
|
|
|
●
|
to
carry out any activity as determined by the lawful
management.
|
Share
Capital
Our
authorized share capital consists of NIS 1,025,000 divided into 100,000,000
ordinary shares, nominal value NIS 0.01 per share, and 2,500,000 preferred
shares, nominal value NIS 0.01 per share. As of June 15, 2009, we had
40,182,444 ordinary shares outstanding and no preferred shares
outstanding.
Borrowing
Powers
The
board of directors has the power to cause us to borrow money and to secure the
payment of borrowed money. The board of directors specifically has the power to
issue bonds or debentures, and to impose mortgages or other security interests
on all or any part of our property.
Amendment
of Articles of Association
Shareholders
may amend our articles of association by a resolution adopted at a shareholders
meeting by the holders of 50% of voting power represented at the meeting in
person or by proxy and voting thereon.
Dividends
Under
the Israeli Companies Law, we may pay dividends only out of our profits. The
amount of any dividend to be distributed among shareholders is based on the
nominal value of their shares. Our board of directors has determined that we
will not distribute any amounts of our undistributed tax exempt income as
dividend. We intend to reinvest our tax-exempt income and not to distribute such
income as a dividend. Accordingly, no deferred income taxes have been
provided on income attributable to our Approved Enterprise program as the
undistributed tax exempt income is essentially permanent in
duration.
Voting
Rights and Powers
Unless
any shares have special rights as to voting, every shareholder has one vote for
each share held of record. A shareholder is not entitled to vote at any
shareholders meeting unless all calls then payable by him in respect of his
shares have been paid (this does not apply to separate meetings of the holders
of a particular class of shares with respect to the modification or abrogation
of their rights).
Under
our articles of association, we may issue preferred shares from time to time, in
one or more series. However, in connection with our listing on The Tel-Aviv
Stock Exchange in 2001, we agreed that for such time as our ordinary shares are
traded on The Tel-Aviv Stock Exchange, we will not issue any of the 2,500,000
preferred shares, nominal value NIS 0.01, authorized in our articles of
association. Notwithstanding the foregoing, we may issue preferred shares if the
preference of those shares is limited to a preference in the distribution of
dividends and such preferred shares have no voting rights.
Business
Combinations
Our
articles of association impose restrictions on our ability to engage in any
merger, asset or share sale or other similar transaction with a shareholder
holding 15% or more of our voting shares.
Winding
Up
Upon
our liquidation, our assets available for distribution to shareholders will be
distributed to them in proportion to the nominal value of their
shares.
Redeemable
Shares
Subject
to our undertaking to the Tel-Aviv Stock Exchange as described above, we may
issue and redeem redeemable shares.
Modification
of Rights
Subject
to the provisions of our memorandum of association, and without prejudice to any
special rights previously conferred upon the holders of our existing shares, we
may, from time to time, by a resolution approved by the holders of 75% voting
power represented at the meeting in person or by proxy and voting thereon,
provide for shares with such preferred or deferred rights or rights of
redemption, or other special rights and/or such restrictions, whether in regard
to dividends, voting repayment of share capital or otherwise, as may be
stipulated in such resolution.
If
at any time our share capital is divided into different classes of shares, we
may modify or abrogate the rights attached to any class, unless otherwise
provided by the articles of association, by a resolution approved by the holders
of 75% voting power represented at the meeting in person or by proxy and voting
thereon, subject to the consent in writing of the holders of 75% of the issued
shares of that class.
The
provisions of our articles of association relating to general meetings also
apply to any separate general meeting of the holders of the shares of a
particular class, except that two or more members holding not less than 75% of
the issued shares of that class must be present in person or by proxy at that
separate general meeting for a quorum to exist.
Unless
otherwise provided by our articles of association, the increase of an authorized
class of shares, or the issuance of additional shares thereof out of the
authorized and unissued share capital, shall not be deemed to modify or abrogate
the rights attached to previously issued shares of that class or of any other
class.
Shareholders
Meetings
An
annual meeting of shareholders is to be held once a year, within 15 months after
the previous annual meeting. The annual meeting may be held in Israel or outside
of Israel, as determined by the board of directors.
The
board of directors may, whenever it thinks fit, convene a special shareholders
meeting. The board of directors must convene a special shareholders meeting at
the request of:
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at
least two directors;
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at
least one-quarter of the directors in office; or
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one
or more shareholders who hold at least 5% of the outstanding share capital
and at least 1% of the voting rights, or one or more shareholders who hold
at least 5% of the outstanding voting
rights.
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A
special shareholders meeting may be held in Israel or outside of Israel, as
determined by the board of directors.
Notice
of General Meetings; Omission to Give Notice
The
provisions of the Companies Law and the related regulations override the
provisions of our articles of association, and provide for notice of a meeting
of shareholders to be sent to each registered shareholder at least 21 days or 35
days in advance of the meeting depending on the items included in the meeting
agenda. Notice of a meeting of shareholders must also be published in
two Israeli newspapers at least five days prior to the record date for the
meeting.
Notice
of a meeting of shareholders must specify the type of meeting, the place and
time of the meeting, the agenda, a summary of the proposed resolutions, the
majority required to adopt the proposed resolutions, and the record date for the
meeting. The notice must also include the address and telephone number of our
registered office, and a list of times at which the full text of the proposed
resolutions may be examined at the registered office.
The
accidental omission to give notice of a meeting to any shareholder, or the
non-receipt of notice sent to such shareholder, does not invalidate the
proceedings at the meeting.
Limitations
on Foreign Shareholders to Hold or Exercise Voting Rights
There
are no limitations on foreign shareholders in our articles of association.
Israeli law restricts the ability of citizens of countries that are in a state
of war with Israel to hold shares of Israeli companies.
Fiduciary
Duties; Approval of Transactions under Israeli Law
The
Companies Law imposes fiduciary duties that “office holders,” including
directors and executive officers, owe to their company. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty.
Duty
of care.
The duty of care generally requires an office holder to act with
the level of care which a reasonable office holder in the same position would
have acted under the same circumstances. This includes the duty to use
reasonable means to obtain information regarding the advisability of a given
action submitted for his or her approval or performed by virtue of his or her
position and all other relevant information material to these
actions.
Duty
of loyalty.
The duty of loyalty generally requires an office holder to
act in good faith and for the benefit of the company. Specifically, an office
holder must avoid any conflict of interest between the office holder’s position
in the company and his or her other positions or personal affairs. In addition,
an office holder must avoid competing against the company or exploiting any
business opportunity of the company for his or her own benefit or the benefit of
others. An office holder must also disclose to the company any information or
documents relating to the company’s affairs that the office holder has received
due to his or her position in the company. A company may approve any of the acts
mentioned above provided that all the following conditions apply: the office
holder acted in good faith and neither the act nor the approval of the act
prejudices the good of the company, and the office holder disclosed the essence
of his or her personal interest in the act, including any substantial fact or
document, a reasonable time before the date for discussion of the
approval.
The
term “office holder” includes any person who, either formally or in substance,
serves as a director, general manager or chief executive officer, or who reports
directly to the general manager or chief executive officer. Each person listed
in the table under “Item 6. Directors, Senior Management and Employees—A.
Directors and Senior Management” above is an “office holder” of
AudioCodes.
Compensation.
Under the Companies Law, all arrangements as to compensation of office
holders who are not directors require approval of the board of directors and, in
certain cases, the prior approval of the audit committee. Arrangements as to
compensation of directors also require audit committee and shareholder
approval.
Disclosure
of personal interest.
The Companies Law requires that an office holder
promptly disclose any personal interest that he or she may have, and all related
material information known to him or her, in connection with any existing or
proposed transaction by the company. A “personal interest” of an office holder,
as defined in the Companies Law, includes a personal interest of the office
holder’s relative or a corporation in which the office holder or the office
holder’s relative is a 5% or greater shareholder, director or general manager or
has the right to appoint at least one director or the general manager. “Personal
interest” does not apply to a personal interest stemming merely from holding
shares in the company.
The
office holder must make the disclosure of his personal interest no later than
the first meeting of the company’s board of directors that discusses the
particular transaction. The office holder’s duty to disclose shall not apply in
the event that the personal interest only results from a personal interest of
the office holder’s relative in a transaction that is not an “extraordinary
transaction”. The Companies Law defines an “extraordinary transaction” as a
transaction not in the ordinary course of business, not on market terms, or
likely to have a material impact on the company’s profitability, assets or
liabilities, and a “relative” as a spouse, sibling, parent, grandparent,
descendent, spouse’s descendant and the spouse of any of the
foregoing.
Approvals.
For a transaction that is not an extraordinary transaction, under the
Companies Law, once the office holder complies with the above disclosure
requirement, the board of directors is authorized to approve the transaction,
unless the articles of association provide otherwise. Our articles of
association do not provide otherwise. Such approval must determine that the
transaction is not adverse to the company’s interest. If the transaction is an
extraordinary transaction, or if it concerns exculpation, indemnification or
insurance of an office holder, then it also must be approved by the company’s
audit committee and board of directors, and, under certain circumstances, by the
shareholders of the company. An office holder who has a personal interest in a
matter that is considered at a meeting of the board of directors or the audit
committee generally may not be present at this meeting or vote on this matter
unless a majority of the board of directors or the audit committee has a
personal interest in the matter. If a majority of the board of
directors or the audit committee has a personal interest in the transaction,
shareholder approval also would be required.
Duties
of Shareholders
Under
the Companies Law, the disclosure requirements that apply to an office holder
also apply to a controlling shareholder of a public company. A controlling
shareholder is a shareholder who has the ability to direct the activities of a
company, including a shareholder that owns 25% or more of the voting rights if
no other shareholder owns more than 50% of the voting rights, but excluding a
shareholder whose power derives solely from his or her position on the board of
directors or any other position with the company. Two or more shareholders with
a personal interest in the approval of the same transaction are deemed to be one
shareholder for the purpose of being a “controlling shareholder.”
Approval
of the audit committee, the board of directors and our shareholders, in that
order, is required for:
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extraordinary
transactions, including a private placement, with a controlling
shareholder or in which a controlling shareholder has a personal interest;
and
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the
terms of compensation or employment of a controlling shareholder or his or
her relative, as an officer holder or employee of our
company.
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The
shareholders approval must include the majority of shares voted at the
meeting. In addition to the majority vote, the shareholder approval
must satisfy either of two additional tests:
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the
majority includes at least one-third of the shares voted by shareholders
who have no personal interest in the transaction; or
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the
total number of shares, other than shares held by the disinterested
shareholders, that voted against the approval of the transaction does not
exceed 1% of the aggregate voting rights of our
company.
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Under
the Companies Law, a shareholder has a duty to act in good faith and in a
customary manner towards the company and other shareholders, and to refrain from
abusing his or her power in the company, including when voting in a shareholders
meeting or in a class meeting on matters such as the following:
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an
amendment to our articles of association;
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an
increase in our authorized share capital;
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a
merger; or
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approval
of related party transactions that require shareholder
approval.
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In
addition, any controlling shareholder, any shareholder who knows that he or she
possesses the power to determine the outcome of a shareholders meeting or a
shareholders class meeting and any shareholder who has the power to prevent the
appointment of an office holder, is under a duty to act with fairness towards
the company. The Companies Law does not define the substance of this
duty of fairness, except to state that the remedies generally available upon a
breach of contract will also apply in the event of a breach of the duty to act
with fairness, taking into account the position in the company of those who
breached the duty of fairness.
Insurance,
Indemnification and Exculpation of Directors and Officers; Limitations on
Liability
Insurance
of Office Holders
The
Companies Law permits a company, if permitted by its articles of association, to
insure an office holder in respect of liabilities incurred by the office holder
as a result of:
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the
breach of his or her duty of care to the company or to another person,
or
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the
breach of his or her duty of loyalty to the company, to the extent that
the office holder acted in good faith and had reasonable cause to believe
that the act would not prejudice the
company.
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A company
can also insure an office holder against monetary liabilities imposed on the
office holder in favor of a third party as a result of an act or omission that
the office holder committed in connection with his or her serving as an office
holder.
Indemnification
of Office Holders
Under
the Companies Law, a company can, if permitted by its articles of association,
indemnify an office holder for any of the following obligations or expenses
incurred in connection with his or her acts or omissions as an office
holder:
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monetary
liability imposed upon the office holder in favor of other persons
pursuant to a court judgment, including a settlement or an arbitrator’s
decision approved by a court;
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reasonable
litigation expenses, including attorney’s fees, incurred by the office
holder as a result of an investigation or proceeding instituted against
the office holder by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment
against the office holder; and either:
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no
financial liability was imposed on the office holder in lieu of criminal
proceedings, or
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financial
liability was imposed on the office holder in lieu of criminal proceedings
but the alleged criminal offense does not require proof of criminal
intent, and
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reasonable
litigation expenses, including attorneys’ fees, actually incurred by the
office holder or imposed upon the office holder by a
court:
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in
an action brought against the office holder by the company, on behalf of
the company or on behalf of a third party;
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in
a criminal action in which the office holder is found innocent;
or
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in
a criminal action in which the office holder is convicted but in which
proof of criminal intent is not
required.
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A
company may indemnify an office holder in respect of these liabilities either in
advance of an event or following an event. If a company undertakes to
indemnify an office holder in advance of an event, the indemnification, other
than legal costs, must be limited to foreseeable events in light of the
company’s actual activities when the company undertook such indemnification, and
reasonable amounts or standards, as determined by the board of
directors.
Exculpation
of Office Holders
Under
the Companies Law, a company may, if permitted by its articles of association,
also exculpate an office holder in advance, in whole or in part, from liability
for damages sustained by a breach of duty of care to the company, other than in
connection with distributions.
Limitations
on Exculpation, Insurance and Indemnification
Under
the Companies Law, a company may indemnify or insure an office holder against a
breach of duty of loyalty only to the extent that the office holder acted in
good faith and had reasonable grounds to assume that the action would not
prejudice the company. In addition, a company may not indemnify,
insure or exculpate an office holder against a breach of duty of care if
committed intentionally or recklessly (excluding mere negligence), or committed
with the intent to derive an unlawful personal gain, or for a fine or forfeit
levied against the office holder in connection with a criminal
offense.
Our
articles of association allow us to insure, indemnify and exculpate office
holders to the fullest extent permitted by law, provided such insurance or
indemnification is approved in accordance with law. Pursuant to the
Companies Law, exculpation of, procurement of insurance coverage for, and an
undertaking to indemnify or indemnification of, our office holders must be
approved by our audit committee and our board of directors and, if the office
holder is a director, also by our shareholders.
We
have entered into agreements with each of our directors and senior officers to
insure, indemnify and exculpate them to the full extent permitted by law against
some types of claims, subject to dollar limits and other limitations. These
agreements have been ratified by our audit committee, board of directors and
shareholders. We have acquired directors’ and officers’ liability insurance
covering our officers and directors and the officers and directors of our
subsidiaries against certain claims.
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C.
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MATERIAL
CONTRACTS
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In
April 2007, we acquired the remaining outstanding common stock of CTI Squared
Ltd. Prior to this acquisition, we had an investment in CTI Squared in the
amount of $1.6 million. In consideration for the acquisition, we paid $4.9
million in cash at the closing of the transaction in April 2007 and committed to
pay an additional $5.0 million by April, 2008. In February 2008, we
paid the additional amount of $5.0 million.
In
April 2008, we entered into a loan agreement with First International Bank of
Israel that provides for borrowings in the aggregate amount of $15 million. The
loan bears interest at LIBOR plus 1.5% with respect to $11.5 million of the loan
and LIBOR plus 0.65% with respect to the remaining amount of $3.5 million of the
loan. The principal amount borrowed is repayable in 20 equal quarterly payments
through April 2013. The bank has a lien on our assets and we are required to
maintain $3.5 million of compensating balances with the bank. The
agreement requires us, among other things, to maintain shareholders’ equity at
specified levels and to achieve certain levels of operating income. The
agreement also restricts us from paying dividends.
In
July 2008, we entered into a loan agreement with Mizrachi Tfachot Bank that
provides for borrowings in the aggregate amount of $15 million. The loan bears
interest at LIBOR plus 1.3% with respect to $11.5 million of the loan and LIBOR
plus 0.50% with respect to the remaining amount of $3.5 million of the loan. The
other terms of the loan with Mizrachi Tfachot Bank are the same as the loan
agreement with First International Bank described in the preceding paragraph.
Mizrachi and First International share the lien on our assets.
In
May, 2007, we entered into an agreement with respect to property adjacent to our
headquarters in Israel, pursuant to which a building of approximately 145,000
square feet will be erected and leased to us for period of eleven years.
Information with respect to this lease agreement is set forth under “Property,
Plants and Equipment” in Item 4.D.
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D.
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EXCHANGE
CONTROLS
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Non-residents
of Israel who own our ordinary shares may freely convert all amounts received in
Israeli currency in respect of such ordinary shares, whether as a dividend,
liquidation distribution or as proceeds from the sale of the ordinary shares,
into freely-repatriable non-Israeli currencies at the rate of exchange
prevailing at the time of conversion (provided in each case that the applicable
Israeli income tax, if any, is paid or withheld).
Since
January 1, 2003, all exchange control restrictions on transactions in foreign
currency in Israel have been eliminated, although there are still reporting
requirements for foreign currency transactions. Legislation remains
in effect, however, pursuant to which currency controls may be imposed by
administrative action at any time.
The
State of Israel does not restrict in any way the ownership or voting of our
ordinary shares by non-residents of Israel, except with respect to subjects of
countries that are in a state of war with Israel.
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E
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TAXATION
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The
following is a summary of the material Israeli and United States federal tax
consequences, Israeli foreign exchange regulations and certain Israeli
government programs affecting us. To the extent that the discussion is based on
new tax or other legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed in the discussion will be accepted by the tax or other authorities in
question. The discussion is not intended, and should not be construed, as legal
or professional tax advice, is not exhaustive of all possible tax considerations
and should not be relied upon for tax planning purposes. Potential investors are
urged to consult their own tax advisors as to the Israeli tax, United States
federal income tax and other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any
foreign, state or local taxes.
Israeli
Tax Considerations
General
Corporate Tax Structure
Generally,
Israeli companies are subject to corporate tax on taxable income at the rate of
27% for the 2008 tax year. Following an amendment to the
Israeli Income Tax Ordinance (new version) 1961 (the “Tax
ordinance”), which came into effect on January 1, 2006, the corporate tax rate
in Israel is scheduled to decrease as follows: 26% for the 2009 tax
year and 25% for the 2010 tax year and thereafter. Israeli companies are
generally subject to capital gains tax at a rate of 25% for capital gains (other
than the gains deriving from the sale of listed securities) derived after
January 1, 2003. However, the effective tax rate payable by us that derives
income from an approved or privileged enterprise may be considerably
less.
Following
an Ordinance, which came into effect on January 1, 2009, an Israeli corporation
may elect a 5% rate of corporate tax (instead of 25%) for dividend distributions
received from a foreign subsidiary which is used in Israel in 2009, or within
one year after actual receipt of the dividend, whichever is later. The 5% tax
rate is subject to various conditions, which include conditions with regard to
the identity of the corporation that distributes the dividends, the source of
the dividend, the nature of the use of the dividend income, and the period
during which the dividend income will be used in Israel.
Tax
Benefits Under the Law for the Encouragement of Capital Investments,
1959
Our
facilities have been granted approved enterprise status pursuant to the Law for
the Encouragement of Capital Investments, 1959 or the Investment Law, which
provides certain tax and financial benefits to investment programs that have
been granted such status.
The
Investment Law provides that a proposed capital investment in eligible
facilities may be designated as an “approved enterprise.” Until 2005, the
designation required advance approval from the Investment Center of the Israel
Ministry of Industry, Trade and Labor (the Investment Center). Each certificate
of approval for an approved enterprise relates to a specific investment program
delineated both by its financial scope, including its capital sources, and by
its physical characteristics, such as the equipment to be purchased and utilized
pursuant to the program. The tax benefits under the Investment Law are not
available for income derived from products manufactured outside of
Israel.
A
company owning an approved enterprise may elect to receive either governmental
grants or an alternative package of tax benefits. Under the alternative package,
a company’s undistributed income derived from an approved enterprise will be
exempt from corporate tax for a period of two to ten years (depending on the
geographic location of the approved enterprise within Israel). The
exemption commences in the first year of taxable income, and the company is
taxed at a reduced corporate rate of 10% to 25% for the following five to eight
years, depending on the extent of foreign shareholders’ ownership of the
company’s ordinary shares. The benefits period is limited to twelve years from
completion of the investment under the approved plan or fourteen years from the
date of approval, whichever is earlier (these limits do not apply to the
exemption period). A Foreign Investors Company, or FIC, defined in
the Investment Law as a company of which more than 25% of its shareholders are
non-Israeli residents, may enjoy benefits for a period of up to ten years, or
twelve years if it complies with certain export criteria stipulated in the
Investment Law (the actual length of the benefits period is graduated based on
the percentage of foreign ownership).
We
have elected the alternative package of tax exemptions and reduced tax rates for
our production facilities that have received Approved Enterprise status.
Accordingly, income derived from these facilities is generally entitled to a
tax-exemption period of two years and a reduced corporate tax rate of 10% to 25%
for an additional period of five to eight years, based on our percentage of
foreign investment. The tax benefits for our existing Approved Enterprise
programs are scheduled to gradually expire by 2013. The period of tax benefits
for each capital investment plan expires upon the earlier of: (1) twelve years
from completion of the investment under the approved plan, or (2) fourteen years
from receipt of approval (these limits do not apply to the exemption
period).
Out
of our retained earnings as of December 31, 2008, approximately $540,000 are
tax-exempt. If we were to distribute this tax-exempt income before our complete
liquidation, it would be taxed at the reduced corporate tax rate applicable to
these profits (10% to 25%), and an income tax liability of up to approximately
$135,000 would be incurred. Our board of directors has currently determined that
we will not distribute any amounts of our undistributed tax exempt income as
dividend. We intend to reinvest our tax-exempt income and not to distribute such
income as a dividend. Accordingly, no deferred income taxes have been provided
on income attributable to our Approved Enterprise.
If
we fail to meet the requirements of an Approved Enterprise we would be subject
to corporate tax in Israel at the regular statutory rate. We could also be
required to refund tax benefits, with interest and adjustments for inflation
based on the Israeli consumer price index.
The
tax benefits derived from any certificate of approval relate only to taxable
income attributable to the specific approved enterprise. If a company has more
than one approval or only a portion of its capital investments are approved, its
effective tax rate is the result of a weighted combination of the applicable
rates.
Our
production facilities have been granted the status of approved enterprise.
Income arising from our approved enterprise facilities is tax-free under the
alternative package of benefits described above and entitled to reduced tax
rates based on the level of foreign ownership for specified periods. We have
derived, and expect to continue to derive, a substantial portion of our
operating income from our approved enterprise facilities. The tax benefits
attributable to our current approved enterprises are scheduled to expire
gradually until 2017.
Distribution
of earnings derived from approved enterprise which were previously taxed at
reduced tax rates, would not result in additional tax consequences to
us. However, if retained tax-exempt income is distributed in a
manner, we would be taxed at the reduced corporate tax rate applicable to such
profits (between 10%-25%). We are not obliged to distribute exempt
retained earnings under the alternative package of benefits, and may generally
decide from which source of income to declare dividends. We currently intend to
reinvest the amount of our tax-exempt income and not to distribute such income
as a dividend. Dividends from approved enterprises are generally
taxed at a rate of 15% (which is withheld and paid by the company paying the
dividend) if such dividend is distributed during the benefits period or within
twelve years thereafter. The twelve-year limitation does not apply to an
FIC.
Future
approved enterprises will be reviewed separately, and the decisions whether to
approve or reject a designation as an approved enterprise or privileged
enterprise will be based, among other things, on the criteria set forth in the
Investment Law and related regulations (as amended in April 2005 as described
below), the then prevailing policy of the Investment Center, and the specific
objectives and financial criteria of the company. Accordingly, there can be no
assurance that any new investment programs will be approved as approved
enterprises. In addition, the benefits available to an approved enterprise are
conditional upon the fulfillment of conditions stipulated in the Investment Law
and related regulations and the criteria set forth in the specific certificate
of approval. In the event that a company does not meet these conditions, it will
be subject to corporate tax at the rate then in effect under Israeli law for
such tax year. As of December 31, 2008, management believes that we
meet all of the aforementioned conditions.
On
April 1, 2005, an amendment to the law came into effect (the “Amendment”) and
has significantly changed the provisions of the law. The Amendment limits the
scope of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Privileged Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprise’s
income will be derived from export. Additionally, the Amendment enacted major
changes in the manner in which tax benefits are awarded under the law so that
companies no longer require Investment Center approval in order to qualify for
tax benefits.
In
addition, the law provides that terms and benefits included in any certificate
of approval granted prior to December 31, 2004 will remain subject to the
provisions of the law as they were on the date of such approval. Therefore, our
existing “Approved Enterprises” will generally not be subject to the provisions
of the Amendment. As a result of the Amendment, tax-exempt income generated
under the provisions of the law as amended, will subject us to taxes upon
distribution or liquidation and we may be required to record a deferred tax
liability with respect to such tax-exempt income.
Law
for the Encouragement of Industrial Research and Development, 1984
Under
the Law for the Encouragement of Industrial Research and Development, 1984 and
the related regulations, or the Research Law, research, development and
pre-manufacturing programs that meet specified criteria and are approved by a
governmental committee (the Research Committee) of the Office of Chief Scientist
(OCS) are eligible for grants of up to 50% of the expenditures on the
program. Each application to the OCS is reviewed separately, and
grants are based on the program approved by the Research
Committee. Expenditures supported under other incentive programs of
the State of Israel are not eligible for OCS grants. As a result, we cannot be
sure that applications to the OCS will be approved or, if approved, that we will
receive the amounts for which we apply.
Recipients
of these grants are required to pay royalties on the revenues derived from the
sale of product developed in accordance with the program. The
royalties are payable at the rate of 3% of revenues during the first three
years, 4% of revenues during the following three years, and 5% of revenues in
the seventh year and thereafter, with the total royalties not to exceed 100% of
the dollar value of the OCS grant.
The
terms of the Israeli government participation require that products developed
with OCS grants must generally be manufactured in Israel. If we
receive OCS approval for any portion of this manufacturing to be performed
outside of Israel, the royalty rate would be increased and the repayment
schedule would be accelerated, based on the extent of the manufacturing
conducted outside of Israel. Depending upon the extent of the
manufacturing volume that is performed outside of Israel, the ceiling on
royalties would increase to 120%, 150% or 300% of the grant. Under an amendment
to the Research Law effective since 2005, the authority of the Research
Committee to approve the transfer of manufacture outside of Israel was
expanded.
The
technology developed pursuant to the terms of these grants may not be
transferred to third parties without the prior approval of the Research
Committee. This approval is required only for the export of the technology, and
not for the export of any products that incorporate the sponsored
technology. Approval of the transfer of technology may be granted
only if the recipient agrees to abide by all the provisions of the Research Law,
including the restrictions on the transfer of know-how and the obligation to pay
royalties in an amount that may be increased. The 2005 amendment to
the Research Law granted authority to the Research Committee to approve the
transfer of sponsored technology outside of Israel, subject to various
conditions.
We
have received grants from the OCS, and therefore we are subject to various
restrictions under the Research Law on the transfer of technology or
manufacturing. These restrictions do not terminate upon the full
payment of royalties.
In
order to meet specified conditions in connection with the grants and programs of
the OCS, we have made representations to the Government of Israel about our
Israeli operations. From time to time the conduct of our Israeli
operations has deviated from our representations. If we fail to meet
the conditions to grants, including the maintenance of a material presence in
Israel, or if there is any material deviation from the representations made by
us to the Israeli government, we could be required to refund the grants
previously received (together with an adjustment based on the Israeli consumer
price index and an interest factor) and would likely be ineligible to receive
OCS grants in the future.
Tax
Benefits Under the Law for the Encouragement of Industry (Taxation),
1969
According
to the Law for the Encouragement of Industry (Taxation), 1969, or the Industry
Encouragement Law, an “industrial company” is a company resident in Israel, that
at least 90% of its income, in any tax year (determined in Israeli currency,
exclusive of income from certain government loans, capital gains, interest and
dividends) 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 currently believe that we qualify as an
industrial company within the definition of the Industry Encouragement Law.
Under the Industry Encouragement Law, industrial companies are entitled to the
following preferred corporate tax benefits:
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deduction
of purchases of know-how and patents over an eight-year period for tax
purposes;
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the
right to elect, under specified conditions, to file a consolidated tax
return with related Israeli industrial companies; and
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accelerated
depreciation rates on equipment and buildings; and
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deductions
over a three-year period of expenses involved with the issuance and
listing of shares on the Tel Aviv Stock Exchange or, on or after January
1, 2003, on a recognized stock market outside of
Israel.
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Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. The Israeli tax authorities
may determine that we do not qualify as an industrial company, which would
entail our loss of the benefits that relate to this status. In
addition, no assurance can be given that we will continue to qualify as an
industrial company, in which case the benefits described above will not be
available in the future.
Israeli
Transfer Pricing Regulations
On
November 29, 2006, Income tax regulation (Determination of Market Terms), 2006,
promulgated under Section 85A of the tax ordinance, came into force (the
“Transfer Pricing Regulations”). Section 85A of the tax Ordinance and the
Transfer Pricing Regulations generally require that all cross-border
transactions carried out between related parties will be conducted on an arm’s
length basis and will be taxed accordingly. As the Transfer Pricing Regulations
are broadly similar to transfer pricing regimes already in place in other
jurisdictions in which we operate outside of Israel, we do not expect the
Transfer Pricing Regulations to have a material impact on us.
Special
Provisions Relating to Measurement of Taxable Income
We
elected to measure our taxable income and file our tax return under the Israeli
Income Tax Regulations (Principles Regarding the Management of Books of Account
of Foreign Invested Companies and Certain Partnerships and the Determination of
Their Taxable Income), 1986. Accordingly, commencing taxable year 2003, results
for tax purposes are measured in terms of earnings in dollars.
Capital
Gains Tax
Israeli
law generally imposes a capital gains tax on the sale of publicly traded
securities. Pursuant to changes made to the Israeli Income Tax Ordinance in
January 2006, capital gains on the sale of our ordinary shares will be subject
to Israeli capital gains tax, generally at a rate of 20% unless the holder holds
10% or more of our voting power during the 12 months preceding the sale, in
which case it will be subject to a 25% capital gains tax.
However,
as of January 1, 2003, non-Israeli residents are exempt from Israeli capital
gains tax on any gains derived from the sale of shares publicly traded on the
TASE, provided such gains do not derive from a permanent establishment of such
shareholders in Israel. Non-Israeli residents are also exempt from Israeli
capital gains tax on any gains derived from the sale of shares of Israeli
companies publicly traded on a recognized stock exchange or regulated market
outside of Israel, provided that such capital gains are not derived from a
permanent establishment in Israel and that such shareholders did not acquire
their shares prior to the issuer’s initial public offering. However, non-Israeli
corporations will not be entitled to the exemption with respect to gains derived
from the sale of shares of Israeli companies publicly traded on the TASE, if an
Israeli resident (i) has a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or
more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
In
some instances where our shareholders may be subject to Israeli tax on the sale
of their ordinary shares, the payment of the consideration may be subject to the
withholding of Israeli tax at the source.
United
States-Israel Tax Treaty
Pursuant
to the Convention Between the Government of the United States of America and the
Government of Israel with respect to Taxes on Income, as amended, or the United
States-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares
by a person who holds the ordinary shares as a capital asset and who qualifies
as a resident of the United States within the meaning of the United States-
Israel Tax Treaty and who is entitled to claim the benefits afforded to such
person by the United States-Israel Tax Treaty, or a Treaty United States
Resident, generally will not be subject to the Israeli capital gains tax unless
such Treaty United States Resident holds, directly or indirectly, shares
representing 10% or more of the voting power of our company during any part of
the twelve-month period preceding such sale, exchange or disposition, subject to
certain conditions. A sale, exchange or disposition of shares by a Treaty United
States Resident who holds, directly or indirectly, shares representing 10% or
more of the voting power of our company at any time during such preceding
twelve-month period would be subject to such Israeli tax, to the extent
applicable; however, under the United States-Israel Tax Treaty, such Treaty
United States Resident would be permitted to claim a credit for such taxes
against the United States federal income tax imposed with respect to such sale,
exchange or disposition, subject to the limitations in United States laws
applicable to foreign tax credits. The United States-Israel Tax Treaty does not
relate to state or local taxes.
Tax
on Dividends
Non-residents
of Israel are subject to Israeli income tax on income accrued or derived from
sources in Israel or received in Israel. These sources of income include passive
income such as dividends, royalties and interest, as well as non-passive income
from services rendered in Israel. Generally, on distributions of dividends,
other than bonus shares and stock dividends, income tax at the rate of 25% is
withheld at the source (except that dividends distributed on or after January 1,
2006 to an individual who is deemed “a non-substantial shareholder” are subject
to tax at the rate of 20%), unless a different rate is provided in a treaty
between Israel and the shareholder’s country of residence. Under the U.S.-Israel
Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who
is a Treaty United States Resident will be 25%, however that tax rate is reduced
to 12.5% for dividends not generated by an approved enterprise to a corporation
which holds 10% or more of the voting power of our company during a certain
period preceding distribution of the dividend. Dividends derived from an
approved enterprise will still be subject to 15% tax withholding.
Foreign
Exchange Regulations
Dividends,
if any, paid to the holders of the ordinary shares, and any amounts payable upon
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli
currency or, if paid in Israeli currency, may be converted into freely
repatriable dollars at the rate of exchange prevailing at the time of
conversion, provided that Israeli income tax has been paid or withheld on such
amounts.
United
States Tax Considerations
United
States Federal Income Taxes
The
following summary describes the material U.S. federal income tax consequences to
“U.S. Holders” (as defined below) arising from the acquisition, ownership and
disposition of our ordinary shares. This summary is based on the Internal
Revenue Code of 1986, as amended, or the “Code,” the final, temporary and
proposed U.S. Treasury Regulations promulgated thereunder and administrative and
judicial interpretations thereof, all as of the date hereof and all of which are
subject to change (possibly with retroactive effect) or different
interpretations. For purposes of this summary, a “U.S. Holder” will be deemed to
refer only to any of the following holders of our ordinary shares:
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an
individual who is either a U.S. citizen or a resident of the U.S. for U.S.
federal income tax purposes;
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a
corporation or other entity taxable as a corporation for U.S. federal
income tax purposes created or organized in or under the laws of the U.S.
or any political subdivision thereof;
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an
estate the income of which is subject to U.S. federal income tax
regardless of the source of its income; and
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a
trust, if (a) a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust, or (b) the
trust has a valid election in effect under applicable U.S. Treasury
Regulations to be treated as a U.S.
person.
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This
summary does not consider all aspects of U.S. federal income taxation that may
be relevant to particular U.S. Holders by reason of their particular
circumstances, including potential application of the U.S. federal alternative
minimum tax, or any aspect of state, local or non-U.S. federal tax laws or U.S.
federal tax laws other than U.S. federal income tax laws. In addition, this
summary is directed only to U.S. Holders that hold our ordinary shares as
“capital assets” within the meaning of Section 1221 of the Code and does not
address the considerations that may be applicable to particular classes of U.S.
Holders, including financial institutions, regulated investment companies, real
estate investment trusts, pension funds, insurance companies, broker-dealers,
tax-exempt organizations, grantor trusts, partnerships or other pass-through
entities and partners or other equity holders in such partnerships or other
pass-through entities, holders whose functional currency is not the U.S. dollar,
holders who have elected mark-to-market accounting, holders who acquired our
ordinary shares through the exercise of options or otherwise as compensation,
holders who hold our ordinary shares as part of a “straddle,” “hedge” or
“conversion transaction,” holders selling our ordinary shares short, holders
deemed to have sold our ordinary shares in a “constructive sale,” and holders,
directly, indirectly or through attribution, of 10% or more (by vote or value)
of our outstanding ordinary shares.
Each
U.S. Holder should consult with its own tax advisor as to the particular tax
consequences to it of the acquisition, ownership and disposition of our ordinary
shares, including the effects of applicable tax treaties, state, local, foreign
or other tax laws and possible changes in the tax laws.
Distributions
With Respect to Our Ordinary Shares
For
U.S federal income tax purposes, the amount of a distribution with respect to
our ordinary shares will equal the amount of cash distributed, the fair market
value of any property distributed and the amount of any Israeli taxes withheld
on such distribution as described above under “Israeli Tax Considerations – Tax
on Dividends.” Other than distributions in liquidation or in redemption of our
ordinary shares that are treated as exchanges, a distribution with respect to
our ordinary shares to a U.S. Holder generally will be treated as a dividend to
the extent of our current and accumulated earnings and profits, as determined
for U.S. federal income tax purposes. The amount of any distribution that
exceeds these earnings and profits will be treated first as a non-taxable return
of capital, reducing the U.S. Holder’s tax basis in its ordinary shares (but not
below zero), and then generally as capital gain from a deemed sale or exchange
of such ordinary shares. Corporate U.S. Holders generally will not be allowed a
deduction under Section 243 of the Code for dividends received on our ordinary
shares and thus will be subject to tax at the rate applicable to their taxable
income. Currently, a noncorporate U.S. Holder’s “qualified dividend income”
generally is subject to tax at a rate of 15%. For this purpose, “qualified
dividend income” generally includes dividends paid by a foreign corporation if,
among other things, the noncorporate U.S. Holder meets certain minimum holding
period requirements and either (a) the stock of such corporation is readily
tradable on an established securities market in the U.S., including the Nasdaq
Global Select Market, or (b) such corporation is eligible for the benefits of a
comprehensive income tax treaty with the U.S. which includes an information
exchange program and is determined to be satisfactory by the U.S. Secretary of
the Treasury. The U.S. Secretary of the Treasury has indicated that the income
tax treaty between the U.S. and Israel is satisfactory for this purpose.
Dividends paid by us will not qualify for the 15% U.S. federal income tax rate,
however, if we are treated, for the tax year in which the dividends are paid or
the preceding tax year, as a “passive foreign investment company” for U.S.
federal income tax purposes. See the discussion below under the heading “Passive
Foreign Investment Company Status.” U.S. Holders are urged to consult their own
tax advisors regarding the U.S. federal income tax consequences of their receipt
of any distributions with respect to our ordinary shares.
A
dividend paid by us in NIS will be included in the income of U.S. Holders at the
U.S. dollar amount of the dividend, based on the “spot rate” of exchange in
effect on the date of receipt or deemed receipt of the dividend, regardless of
whether the payment is in fact converted into U.S. dollars. U.S. Holders will
have a tax basis in the NIS for U.S. federal income tax purposes equal to that
U.S. dollar value. Any gain or loss upon the subsequent conversion of the NIS
into U.S. dollars or other disposition of the NIS will constitute foreign
currency gain or loss taxable as ordinary income or loss and will be treated as
U.S.-source income or loss for U.S. foreign tax credit purposes.
Dividends
received with respect to our ordinary shares will constitute “portfolio income”
for purposes of the limitation on the use of passive activity losses and,
therefore, generally may not be offset by passive activity losses. Dividends
received with respect to our ordinary shares also generally will be treated as
“investment income” for purposes of the investment interest deduction limitation
contained in Section 163(d) of the Code, and as foreign-source passive income
for U.S. foreign tax credit purposes or, in the case of a U.S. Holder that is a
financial services entity, financial services income. Subject to certain
limitations, U.S. Holders may elect to claim as a foreign tax credit against
their U.S. federal income tax liability any Israeli income tax withheld from
distributions with respect to our ordinary shares which constitute dividends
under U.S. income tax law. A U.S. Holder that does not elect to claim a foreign
tax credit may instead claim a deduction for Israeli income tax withheld, but
only if the U.S. Holder elects to do so with respect to all foreign income taxes
in such year. In addition, special rules may apply to the computation of foreign
tax credits relating to “qualified dividend income,” as defined above. The
calculation of foreign tax credits and, in the case of a U.S. Holder that elects
to deduct foreign income taxes, the availability of deductions are complex and
involve the application of rules that depend on a U.S. Holder’s particular
circumstances. U.S. Holders are urged to consult their own tax advisors
regarding the availability to them of foreign tax credits or deductions in
respect of any Israeli tax withheld or paid with respect to any dividends which
may be paid with respect to our ordinary shares.
Disposition
of Our Ordinary Shares
Subject
to the discussion below under “Passive Foreign Investment Company Status,” a
U.S. Holder’s sale, exchange or other taxable disposition of our ordinary shares
generally will result in the recognition by such U.S. Holder of capital gain or
loss in an amount equal to the difference between the U.S. dollar value of the
amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed
of (measured in U.S. dollars). This gain or loss will be long-term capital gain
or loss if such ordinary shares have been held or are deemed to have been held
for more than one year at the time of the disposition. Individual U.S. Holders
currently are subject to a maximum tax rate of 15% on long-term capital gains
recognized during tax years beginning on or before December 31, 2010. If the
U.S. Holder’s holding period on the date of the taxable disposition is one year
or less, such gain or loss will be a short-term capital gain or loss. Short-term
capital gains generally are taxed at the same rates applicable to ordinary
income. See “Israeli Tax Considerations – Capital Gains Tax” for a discussion of
taxation by Israel of capital gains realized on sales of our ordinary shares.
Any capital loss realized upon the taxable disposition of our ordinary shares
generally will be deductible only against capital gains and not against ordinary
income, except that noncorporate U.S. Holders generally may deduct annually from
ordinary income up to $3,000 of net capital losses. In general, any capital gain
or loss recognized by a U.S. Holder upon the taxable disposition of our ordinary
shares will be treated as U.S.-source income or loss for U.S. foreign tax credit
purposes. However, under the tax treaty between the United States and Israel,
gain derived from the taxable disposition of ordinary shares by a U.S. Holder
who is a resident of the U.S. for purposes of the treaty and who sells the
ordinary shares within Israel may be treated as foreign-source income for U.S.
foreign tax credit purposes.
A
U.S. Holder’s tax basis in its ordinary shares generally will be the U.S. dollar
purchase price paid by such U.S. Holder to acquire such ordinary shares. The
U.S. dollar cost of ordinary shares purchased with foreign currency generally
will be the U.S. dollar value of the purchase price on the date of purchase or,
in the case of our ordinary shares that are purchased by a cash basis U.S.
Holder (or an accrual basis U.S. Holder that so elects), on the settlement date
for the purchase. Such an election by an accrual basis U.S. Holder must be
applied consistently from year to year and cannot be revoked without the consent
of the U.S. Internal Revenue Service. The holding period of each ordinary share
owned by a U.S. Holder will commence on the day following the date of the U.S.
Holder’s purchase of such ordinary share and will include the day on which the
ordinary share is sold by such U.S. Holder.
In
the case of a U.S. Holder who uses the cash basis method of accounting and who
receives NIS in connection with a taxable disposition of our ordinary shares,
the amount realized will be based on the “spot rate” of exchange on the
settlement date of such taxable disposition. If such U.S. Holder subsequently
converts NIS into U.S. dollars at a conversion rate other than the spot rate in
effect on the settlement date, such U.S. Holder may have a foreign currency
exchange gain or loss treated as ordinary income or loss for U.S. federal income
tax purposes. A U.S. Holder who uses the accrual method of accounting may elect
the same treatment required of cash method taxpayers with respect to a taxable
disposition of ordinary shares, provided that the election is applied
consistently from year to year. Such election may not be changed without the
consent of the U.S. Internal Revenue Service. If an accrual method U.S. Holder
does not elect to be treated as a cash method taxpayer (pursuant to U.S.
Treasury Regulations applicable to foreign currency transactions), such U.S.
Holder may be deemed to have realized an immediate foreign currency gain or loss
for U.S. federal income tax purposes in the event of any difference between the
U.S. dollar value of the NIS on the date of the taxable disposition and the
settlement date. Any such currency gain or loss generally would be treated as
U.S.-source ordinary income or loss and would be subject to tax in addition to
any gain or loss recognized by such U.S. Holder on the taxable disposition of
ordinary shares.
Passive
Foreign Investment Company Status
Generally,
a foreign corporation is treated as a passive foreign investment company
(“PFIC”) for U.S. federal income tax purposes for any tax year if, in such tax
year, either (i) 75% or more of its gross income (including its pro rata share
of the gross income of any company in which it is considered to own 25% or more
of the shares by value) is passive in nature (the “Income Test”), or (ii) the
average percentage of its assets during such tax year (including its pro rata
share of the assets of any company in which it is considered to own 25% or more
of the shares by value) which produce, or are held for the production of,
passive income (determined by averaging the percentage of the fair market value
of its total assets which are passive assets as of the end of each quarter of
such year) is 50% or more (the “Asset Test”). Passive income for this purpose
generally includes dividends, interest, rents, royalties and gains from
securities and commodities transactions.
There
is no definitive method prescribed in the Code, U.S. Treasury Regulations or
relevant administrative or judicial interpretations for determining the value of
a foreign corporation’s assets for purposes of the Asset Test. While the
legislative history of the U.S. Taxpayer Relief Act of 1997 (the “1997 Act”)
indicates that for purposes of the Asset Test, “the total value of a
publicly-traded foreign corporation’s assets generally will be treated as equal
to the sum of the aggregate value of its outstanding stock plus its
liabilities,” it is unclear whether other valuation methods could be employed to
determine the value of a publicly-traded foreign corporation’s assets for
purposes of the Asset Test.
Based
on the composition of our gross income and the composition and value of our
gross assets during 2004, 2005, 2006, 2007 and 2008, we do not believe that we
were a PFIC during any of such tax years. It is likely, however, that under the
asset valuation method described in the legislative history of the 1997 Act, we
would have been classified as a PFIC in 2001, 2002 and 2003 primarily because
(a) a significant portion of our assets consisted of the remaining proceeds of
our two public offerings of ordinary shares in 1999, and (b) the public market
valuation of our ordinary shares during such years was relatively low. There can
be no assurance that we will not be deemed a PFIC in any future tax
year.
U.S.
Holders are urged to consult their own tax advisors for guidance as to our
status as a PFIC in any tax year.
For those U.S. Holders who determine
that we are a PFIC in any tax year and notify us in writing of their request for
the information required in order to effectuate the QEF Election described
below, we will promptly make such information available to
them.
If
we are treated as a PFIC for U.S. federal income tax purposes for any year
during a U.S. Holder’s holding period of our ordinary shares and the U.S. Holder
does not make a QEF Election or a “mark-to-market” election (both as described
below):
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“Excess
distributions” by us to the U.S. Holder would be taxed in a special way.
“Excess distributions” with respect to any U.S. Holder are amounts
received by such U.S. Holder with respect to our ordinary shares in any
tax year that exceed 125% of the average distributions received by such
U.S. Holder from us during the shorter of (i) the three previous years, or
(ii) such U.S. Holder’s holding period of our ordinary shares before the
then-current tax year. Excess distributions must be allocated ratably to
each day that a U.S. Holder has held our ordinary shares. Thus, the U.S.
Holder would be required to include in its gross income amounts allocated
to the current tax year as ordinary income for that year, pay tax on
amounts allocated to each prior tax year in which we were a PFIC at the
highest rate on ordinary income in effect for such prior year and pay an
interest charge on the resulting tax at the rate applicable to
deficiencies of U.S. federal income tax.
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The
entire amount of any gain realized by the U.S. Holder upon the sale or
other disposition of our ordinary shares also would be treated as an
“excess distribution” subject to tax as described
above.
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The
tax basis in ordinary shares acquired from a decedent who was a U.S.
Holder would not receive a step-up to fair market value as of the date of
the decedent’s death, but instead would be equal to the decedent’s basis,
if lower.
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Although
we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC
for any year during the U.S. Holder’s holding period, if we cease to be a PFIC,
the U.S. Holder may avoid the consequences of PFIC classification for subsequent
years by electing to recognize gain based on the unrealized appreciation in its
ordinary shares through the close of the tax year in which we cease to be a
PFIC.
A
U.S. Holder who beneficially owns shares of a PFIC must file U.S. Internal
Revenue Service Form 8621 (Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund) with the U.S. Internal Revenue
Service for each tax year in which such U.S. Holder holds shares in a PFIC. Once
properly completed, this form describes any distributions received with respect
to these shares and any gain realized upon the disposition of these
shares.
For
any tax year in which we are treated as a PFIC, a U.S. Holder may elect to treat
its ordinary shares as an interest in a qualified electing fund (a “QEF
Election”), in which case the U.S. Holder would be required to include in income
currently its proportionate share of our earnings and profits in years in which
we are a PFIC regardless of whether distributions of our earnings and profits
are actually made to the U.S. Holder. Any gain subsequently recognized by the
U.S. Holder upon the sale or other disposition of its ordinary shares, however,
generally would be taxed as capital gain and the denial of the basis step-up at
death described above would not apply.
A
U.S. Holder may make a QEF Election with respect to a PFIC for any tax year. A
QEF Election is effective for the tax year in which the election is made and all
subsequent tax years of the U.S. Holder. Procedures exist for both retroactive
elections and the filing of protective statements. A U.S. Holder making the QEF
Election must make the election on or before the due date, as extended, for the
filing of its U.S. federal income tax return for the first tax year to which the
election will apply. A U.S. Holder must make a QEF Election by completing U.S.
Internal Revenue Service Form 8621 and attaching it to its U.S. federal income
tax return, and must satisfy additional filing requirements each year the
election remains in effect. Upon a U.S. Holder’s request, we will provide to
such U.S. Holder the information required to make a QEF Election and to make
subsequent annual filings.
As
an alternative to a QEF Election, a U.S. Holder generally may elect to mark its
ordinary shares to market annually, recognizing ordinary income or loss (subject
to certain limitations) equal to the difference, as of the close of the tax
year, between the fair market value of its ordinary shares and the adjusted tax
basis of such shares. If a mark-to-market election with respect to ordinary
shares is in effect on the date of a U.S. Holder’s death, the normally available
step-up in tax basis to fair market value will not be available. Rather, the tax
basis of the ordinary shares in the hands of a U.S. Holder who acquired them
from a decedent will be the lesser of the decedent’s tax basis or the fair
market value of the ordinary shares. Once made, a mark-to-market election
generally continues unless revoked with the consent of the U.S. Internal Revenue
Service.
The
implementation of many aspects of the Code’s PFIC rules requires the issuance of
Treasury Regulations which in many instances have yet to be promulgated and
which may have retroactive effect when promulgated. We cannot be sure that any
of these regulations will be promulgated or, if so, what form they will take or
what effect they will have on the foregoing discussion.
Accordingly,
and due to the complexity of the PFIC rules, U.S. Holders should consult their
own tax advisors regarding our status as a PFIC and the eligibility, manner and
advisability of making a QEF Election or a mark-to-market election if we are
treated as a PFIC.
Information
Reporting and Backup Withholding
Payments
in respect of our ordinary shares that are made in the U.S. or by certain
U.S.-related financial intermediaries may be subject to information reporting
requirements and U.S. backup withholding tax at rates equal to 28% through 2010
and 31% after 2010. The information reporting requirements will not apply,
however, to payments to certain U.S. Holders, including corporations and
tax-exempt organizations. In addition, the backup withholding tax will not apply
to a U.S. Holder that furnishes a correct taxpayer identification number on U.S.
Internal Revenue Service Form W-9 (or substitute form). The backup withholding
tax is not an additional tax. Amounts withheld under the backup withholding tax
rules may be credited against a U.S. Holder’s U.S. federal income tax liability,
and a U.S. Holder may obtain a refund of any excess amounts withheld under the
backup withholding tax rules by filing the appropriate claim for refund with the
U.S. Internal Revenue Service. U.S. Holders should consult their own tax
advisors regarding their qualification for an exemption from the backup
withholding tax and the procedures for obtaining such an exemption, if
applicable.
The
foregoing discussion of certain U.S. federal income tax considerations is a
general summary only and should not be considered as income tax advice or relied
upon for tax planning purposes. Accordingly, each U.S. Holder should consult
with its own tax advisor regarding U.S. federal, state, local and non-U.S.
income and other tax consequences of the acquisition, ownership and disposition
of our ordinary shares.
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DIVIDENDS
AND PAYING AGENTS
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Not
applicable.
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G.
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STATEMENT
BY EXPERTS
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Not
applicable.
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H.
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DOCUMENTS
ON DISPLAY
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We
are subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission, or SEC. You may read and copy any document
we file, including any exhibits, with the SEC without charge at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such
material may be obtained by mail from the Public Reference Branch of the SEC at
such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Certain of our SEC filings are
also available to the public at the SEC’s website at
http://www.sec.gov
.
As
a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or as promptly as
United States companies whose securities are registered under the Exchange Act.
However, we file with the Securities and Exchange Commission an annual report on
Form 20-F containing consolidated financial statements audited by an independent
accounting firm. We also furnish reports on Form 6-K containing unaudited
financial information after the end of each of the first three quarters. We
intend to post our Annual Report on Form 20-F on our website
(www.audiocodes.com) promptly following the filing of our Annual Report with the
Securities and Exchange Commission.
|
I.
|
SUBSIDIARY
INFORMATION
|
|
Not
applicable.
|
|
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
We
are exposed to financial market risk associated with changes in foreign currency
exchange rates. To mitigate these risks, we use derivative financial
instruments. The majority of our revenues and expenses are generated in U.S.
dollars. A portion of our expenses, however, is denominated in NIS. In order to
protect ourselves against the volatility of future cash flows caused by changes
in foreign exchange rates, we use currency forward contracts and currency
options. We hedge the part of our forecasted expenses denominated in NIS. If our
currency forward contracts and currency options meet the definition of a hedge,
and are so designated, changes in the fair value of the contracts will be offset
against changes in the fair value of the hedged assets or liabilities through
earnings. For derivative instruments not designated as hedging instruments, the
gain or loss is recognized in current earnings during the period of change. Our
hedging program reduces, but does not eliminate, the impact of foreign currency
rate movements and due to the general economic slowdown along with the
devaluation of the dollar, our results of operations may be adversely affected.
Without taking into account the mitigating effect of our hedging activity, a 10%
decrease in the U.S. dollar exchange rates in effect for the year ended
December 31, 2008 would cause a decrease in net income of approximately $5
million.
We
are subject to market risk from exposure to changes in interest rates relating
to borrowings under our loan agreements. The interest rate on these borrowings
is based on LIBOR. Based on our the scheduled amount of these borrowings to be
outstanding in 2009, we estimate that each 100 basis point increase in our
borrowing rates would result in additional interest expense to us of
approximately $250,000.
Our investment portfolio includes held to maturity
marketable securities.
The
contractual cash flows of these investments are either agencies of the U.S.
government that have implied guaranty by the U.S. government or were issued by
highly rated corporations.
As of December 31, 2008, the securities in our
portfolio were rated at least as AA. The recent declines in interest rates may
reduce our interest income.
Disclosure
Controls and Procedures
Our
management, with the participation of its chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in 13a-15(e) under the Securities Exchange Act) as of
December 31, 2008. Based on this evaluation, our chief executive officer and
chief financial officer have concluded that, as of such date, our disclosure
controls and procedures were (i) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to our management, including our chief executive officer and chief
financial officer, by others within those entities, as appropriate to allow
timely decisions regarding required disclosure, particularly during the period
in which this report was being prepared and (ii) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management, under the supervision of our Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over our financial reporting, as defined in Rules 13a-15(f) of
the Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance to our management and board of directors regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes
policies and procedures that:
|
●
|
pertain
to the maintenance of our records that in reasonable detail accurately and
fairly reflect our transactions and asset dispositions;
|
|
●
|
provide
reasonable assurance that our transactions are recorded as necessary to
permit the preparation of our financial statements in accordance with
generally accepted accounting principles;
|
|
●
|
provide
reasonable assurance that our receipts and expenditures are made only in
accordance with authorizations of our management and board of directors
(as appropriate); and
|
|
●
|
provide
reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial
statements.
|
Due
to its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, 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.
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2008 based on the framework for Internal Control - Integrated
Framework set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our assessment under that framework and the criteria
established therein, our management concluded that the Company’s internal
control over financial reporting were effective as of December 31,
2008.
Attestation
Report of the Registered Public Accounting Firm
This
annual report includes an attestation report of our registered public accounting
firm regarding internal control over financial reporting on page F-3 of our
audited consolidated financial statements set forth in “Item 18 - Financial
Statements”, and is incorporated herein by reference.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting identified
with the evaluation thereof that occurred during the period covered by this
annual report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting
Our
Board of Directors has determined that Joseph Tenne is an “audit committee
financial expert” as defined in Item 16A of Form 20-F and is “independent” as
defined in the applicable regulations.
|
ITEM
16B. CODE OF
ETHICS
|
||
We
have adopted a Code of Conduct and Business Ethics that applies to our chief
executive officer, chief financial officer and other senior financial officers.
This Code has been posted on our website,
www.audiocodes.com
.
|
ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
|
Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served as
our independent public accountants for each of the years in the three-year
period ended December 31, 2008. The following table presents the aggregate
fees for professional audit services and other services rendered by Kost Forer
Gabbay & Kasierer in 2007 and 2008.
|
Year
Ended December 31
(Amounts
in thousands)
|
||||||||||
|
2007
|
2008
|
|||||||||
|
Audit
Fees
|
$ | 331 | $ | 434 | ||||||
|
Audit
Related Fees
|
21 | 55 | ||||||||
|
Tax
Fees
|
94 | 30 | ||||||||
|
Total
|
$ | 446 | $ | 519 | ||||||
Audit
Fees consist of fees billed for the annual audit of the company’s consolidated
financial statements and the statutory financial statements of the company. They
also include fees billed for other audit services, which are those services that
only the external auditor reasonably can provide, and include services rendered
for the integrated audit over internal controls as required under Section 404 of
the Sarbanes-Oxley Act applicable in 2007 and 2008, the provision of consents
and the review of documents filed with the SEC.
Audit
Related Fees consist of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the company’s
financial statements and include operational effectiveness of systems. They also
include fees billed for other services in connection with merger and acquisition
due diligence.
Tax
Fees include fees billed for tax compliance services, including the preparation
of tax returns and claims for refund; tax consultations, such as assistance and
representation in connection with tax audits and appeals, transfer pricing, and
requests for rulings or technical advice from taxing authorities; tax planning
services; and expatriate tax compliance, consultation and planning
services.
Audit
Committee Pre-approval Policies and Procedures
The
Audit Committee of AudioCodes’ Board of Directors is responsible, among other
matters, for the oversight of the external auditor subject to the requirements
of Israeli law. The Audit Committee has adopted a policy regarding pre-approval
of audit and permissible non-audit services provided by our independent auditors
(the “Policy”).
Under
the Policy, proposed services either (i) may be pre-approved by the Audit
Committee without consideration of specific case-by-case services as “general
pre-approval”; or (ii) require the specific pre-approval of the Audit Committee
as “specific pre-approval”. The Audit Committee may delegate either type of
pre-approval authority to one or more of its members. The appendices to the
Policy set out the audit, audit-related, tax and other services that have
received the general pre-approval of the Audit Committee, including those
described in the footnotes to the table, above; these services are subject to
annual review by the Audit Committee. All other audit, audit-related, tax and
other services must receive a specific pre-approval from the Audit
Committee.
The
Audit Committee pre-approves fee levels annually for the audit services.
Non-audited services are pre-approved as required. The Chairman of the audit
committee may approve non-audit services of up to $25,000 and then request the
audit committee to ratify his decision.
During
2008, no services provided to AudioCodes by Kost Forer Gabbay & Kasierer
were approved by the Audit Committee pursuant to the de minimis exception to the
pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
|
ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR
AUDIT COMMITTEES
|
|
|
Not
applicable.
|
|
ITEM
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER
AND AFFILIATED
PURCHASERS
|
|
(a)
|
(b)
|
(c)
|
(d)
|
|||||||||||||
|
Period
|
Total
Number
of
Ordinary
Shares
Purchased
|
Average
Price
Paid per
Ordinary
Share
|
Total
Number
of
Ordinary
Shares
Purchased
as
Part
of Publicly
Announced
Program(1)
|
Maximum
Number
of
Ordinary Shares
that
May Yet Be
Purchased
Under
the
Program(1)
|
||||||||||||
|
January
1- January 31
|
0 | 0 | 0 | 4,000,000 | ||||||||||||
|
February
1 - February 29
|
304,757 | $ | 4.37 | 304,757 | 3,695,243 | |||||||||||
|
March
1 - March 31
|
756,094 | $ | 3.81 | 756,094 | 2,939,149 | |||||||||||
|
April
1 - April 30
|
855,156 | $ | 3.99 | 855,156 | 2,083,993 | |||||||||||
|
May
1 - May 31
|
340,528 | $ | 4.24 | 340,528 | 1,743,465 | |||||||||||
|
June
1 - June 30
|
567,265 | $ | 4.09 | 567,265 | 1,176,200 | |||||||||||
|
July
1 - July 31
|
626,417 | $ | 3.71 | 626,417 | 549,783 | |||||||||||
|
August
1 - August 31
|
0 | 0 | 0 | 549,783 | ||||||||||||
|
September
1 - September 30
|
0 | 0 | 0 | 549,783 | ||||||||||||
|
October
1- October 31
|
0 | 0 | 0 | 549,783 | ||||||||||||
|
November
1- November 30
|
0 | 0 | 0 | 549,783 | ||||||||||||
|
December
1 – December 31
|
0 | 0 | 0 | 549,783 | ||||||||||||
|
Total
|
3,450,217 | $ | 4.04 | 3,450,217 | 549,783 | |||||||||||
(1) On
January 28, 2008, we announced a program to repurchase up to 4,000,000 of our
ordinary shares. There is no set expiration date for this
program.
As
a foreign private issuer whose shares are listed on the Nasdaq Global Select
Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the Nasdaq Marketplace
Rules.
We
do not comply with the Nasdaq requirement that we obtain shareholder approval
for certain dilutive events, such as for the establishment or amendment of
certain equity based compensation plans. Instead, we follow Israeli law and
practice which permits the establishment or amendment of certain equity based
compensation plans approved by our board of directors without the need for a
shareholder vote, unless such arrangements are for the compensation of
directors, in which case they also require audit committee and shareholder
approval. We also post our Annual Report on Form 20-F on our web site
(www.audiocodes.com) rather than distribute it to our shareholders pursuant to
the relevant Nasdaq requirements.
We
may elect to follow in the future Israeli practice with regard to, among other
things, executive officer compensation, director nomination, composition of the
board of directors and quorum at shareholders’ meetings. In addition, we may
follow Israeli law, instead of the Nasdaq Marketplace Rules, which require that
we obtain shareholder approval for an issuance that will result in a change of
control of the company, certain transactions other than a public offering
involving issuances of a 20% or more interest in the company and certain
acquisitions of the stock or assets of another company.
A
foreign private issuer that elects to follow a home country practice instead of
NASDAQ requirements, must submit to NASDAQ in advance a written statement from
an independent counsel in its home country certifying that its practices are not
prohibited by the home country’s laws. In addition, a foreign private issuer
must disclose in its annual reports filed with the Securities and Exchange
Commission or on its website each such requirement that it does not follow and
describe the home country practice followed by the issuer instead of any such
requirement. Accordingly, our shareholders may not be afforded the same
protection as provided under NASDAQ’s corporate governance rules.
For
a discussion of the requirements of Israeli law with respect to these matters,
see Item 6.C. “Directors, Senior Management and Employees –Board Practices,” and
Item 10.B. “Additional Information – Memorandum and Articles of
Association.”
|
Exhibit
No.
|
Exhibit
|
|||
|
1.1
|
Memorandum
of Association of Registrant.*†
|
|||
|
1.2
|
Articles
of Association of Registrant, as amended.**
|
|||
|
2.1
|
Indenture,
dated November 9, 2004, between AudioCodes Ltd. and U.S. Bank National
Association, as Trustee, with respect to the 2.00% Senior Convertible
Notes due 2024.****
|
|||
|
4.1
|
AudioCodes
Ltd. 1997 Key Employee Option Plan (C).*
|
|||
|
4.2
|
AudioCodes
Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S.
Employees (D).*
|
|||
|
4.3
|
Founder’s
Agreement between Shabtai Adlersberg and Leon Bialik, dated January 1,
1993.*†
|
|||
|
4.4
|
License
Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as of May 6,
1999.*†
|
|||
|
4.5
|
Lease
Agreement between AudioCodes Inc. and Spieker Properties, L.P., dated
January 26, 2000.**
|
|||
|
4.6
|
Shareholders
Agreement by and among DSP Group, Inc., Shabtai Adlersberg, Leon Bialik,
Genesis Partners I, L.P., Genesis Partners I (Cayman) L.P., Polaris Fund
II (Tax Exempt Investors) L.L.C., Polaris Fund II L.L.C., Polaris Fund II
L.P., DS Polaris Trust Company (Foreign Residents) (1997) Ltd., DS Polaris
Ltd., Dovrat, Shrem Trust Company (Foreign Funds) Ltd., Dovrat Shrem-Skies
92 Fund L.P. and Chase Equity Securities CEA, dated as of May 6,
1999.*
|
|||
|
4.7
|
AudioCodes
Ltd. 1997 Key Employee Option Plan
(D).*
|
|||
|
Exhibit
No.
|
Exhibit
|
|||
|
4.8
|
AudioCodes
Ltd. 1997 Key Employee Option Plan (E).*
|
|||
|
4.9
|
AudioCodes
Ltd. 1999 Key Employee Option Plan (F), as amended.***
|
|||
|
4.10
|
AudioCodes
Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S.
Employees (E).*
|
|||
|
4.11
|
AudioCodes
Ltd. 1999 Key Employee Option Plan, Qualified Stock Option Plan—U.S.
Employees (F).***
|
|||
|
4.12
|
AudioCodes
Ltd. 2001 Employee Stock Purchase Plan—Global Non U.S., as
amended.§
|
|||
|
4.13
|
AudioCodes
Ltd. 2001 U.S. Employee Stock Purchase Plan, as
amended.§
|
|||
|
4.13a
|
AudioCodes
Ltd. 2007 U.S. Employee Stock Purchase Plan.§§§§§§
|
|||
|
4.14
|
Lease
Agreement between AudioCodes Ltd. and Nortel Networks (Marketing and
Sales) Israel Ltd., effective as of December 31,
2002.**†
|
|||
|
4.15
|
Sublease
Agreement between AudioCodes USA, Inc. and Continental Resources, Inc.,
dated December 30, 2003.§§
|
|||
|
4.16
|
Stock
Purchase Agreement by and among AudioCodes Ltd., AudioCodes Inc.,
Ai-Logix, Inc. and AI Technologies N.V, dated as of May 12,
2004.§§
|
|||
|
4.17
|
OEM
Purchase and Sale Agreement No. 011449 between AudioCodes Ltd and Nortel
Networks Ltd., dated as of April 28, 2003 *****§§
|
|||
|
4.18
|
Amendment
No. 1 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of May 1, 2003 *****§§
|
|||
|
4.19
|
Purchase
and Sale Agreement by and among Nortel Networks, Ltd., AudioCodes Inc. and
AudioCodes Ltd., dated as of April 7, 2003.§§
|
|||
|
4.20
|
Purchase
Agreement, dated as of November 9, 2004, between AudioCodes Ltd. and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Lehman Brothers Inc., as representatives of the initial
purchasers of AudioCodes’ 2.00% Senior Convertible Notes due
2024.****
|
|||
|
4.21
|
Amendment
No. 2 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of January 1, 2005
*****§§§
|
|||
|
4.22
|
Amendment
No. 3 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of February 15, 2005
*****§§§
|
|||
|
Exhibit
No.
|
Exhibit
|
|||
|
4.23
|
Amendment
No. 5 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of January 1, 2005
*****§§§
|
|||
|
4.24
|
Amendment
No. 6 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of April 1, 2005 §§§
|
|||
|
4.25
|
Lease
Agreement between AudioCodes Inc. and CA-Gateway Office Limited
Partnership, effective as of December, 2004. §§§
|
|||
|
4.26
|
Amendment
No. 4 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of April 28, 2005 *****
§§§§
|
|||
|
4.27
|
Agreement
and Plan of Merger, dated as of May 16, 2006, among AudioCodes Ltd.,
AudioCodes, Inc., Green Acquisition Corp., Nuera Communications, Inc. and
Robert Wadsworth, as Sellers’ Representative. §§§§
|
|||
|
4.28
|
Building
and Tenancy Lease Agreement, dated May 11, 2007, by and between Airport
City Ltd. and AudioCodes Ltd. †§§§§§
|
|||
|
4.29
|
Agreement
and Plan of Merger, dated as of July 6, 2006, by and among AudioCodes
Ltd., AudioCodes, Inc., Violet Acquisition Corp., Netrake Corporation and
Will Kohler, as Sellers’ Representative.§§§§§
|
|||
|
4.30
|
Series
E Preferred Share Purchase Agreement, dated as of November 13, 2005, by
and between CTI Squared Ltd. and AudioCodes Ltd.§§§§§
|
|||
|
4.31
|
Amended
and Restated Second Option Agreement, dated as of October 6, 2006, by and
among CTI Squared Ltd., AudioCodes Ltd. and each of the other parties
thereto.§§§§§
|
|||
|
4.32
|
Amendment
No. 7 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd. and
Nortel Networks Ltd., dated as of December 15,
2006.§§§§§
|
|||
|
4.33
|
Endorsement
and Transfer of Rights Agreement, dated March 29, 2007, by and between
Nortel Networks (Sales and Marketing) Ltd. Israel and AudioCodes Ltd.
†§§§§§
|
|||
|
4.34
|
Amendment
No. 9 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd. and
Nortel Networks Ltd., dated as of October 30, 2007. §§§§§§§
*****
|
|||
|
4.35
|
Letter
Agreements, dated April 30, 2008 between First International Bank of
Israel, as lender, and AudioCodes Ltd., as borrower.
†§§§§§§§
|
|||
|
4.36
|
Waiver
dated November 24, 2008 to Letter Agreement, dated April 30, 2008, between
First International Bank of Israel, as lender, and AudioCodes Ltd., as
borrower. †
|
|||
|
Exhibit
No.
|
Exhibit
|
|||
|
4.37
|
Amendment
dated February 16, 2009 to Letter Agreements, dated April 30, 2008,
between First International Bank of Israel, as lender, and AudioCodes
Ltd., as borrower. †
|
|||
|
4.38
|
Letter
Agreements, dated July 14, 2008, between Bank Mizrahi Tefahot Ltd., as
lender, and AudioCodes Ltd., as borrower. †
|
|||
|
4.39
|
Amendment
dated November 2, 2008 to Letter Agreement, dated July 14, 2008, between
Bank Mizrahi Tefahot Ltd., as lender, and AudioCodes Ltd., as borrower.
†
|
|||
|
4.40
|
Amendment
dated April 1, 2009 to Letter Agreement, dated July 14, 2008, between Bank
Mizrahi Tefahot Ltd., as lender, and AudioCodes Ltd., as borrower.
†
|
|||
|
4.41
|
AudioCodes
Ltd. 2008 Equity Incentive Plan.
|
|||
|
8.1
|
Subsidiaries
of the Registrant. §§§§§§§
|
|||
|
12.1
|
Certification
of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
12.2
|
Certification
of Nachum Falek, Vice President and Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
13.1
|
Certification
by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|||
|
13.2
|
Certification
by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|||
|
15.1
|
Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global.
|
|||
|
15.2
|
Consent
of Squar, Milner, Peterson, Miranda and Williamson,
LLP.
|
|||
|
*
|
Incorporated
herein by reference to Registrant’s Registration Statement on Form F-1
(File No. 333-10352).
|
|
†
|
English
summary of Hebrew original.
|
|
‡
|
Incorporated
herein by reference to Registrant’s Registration Statement on Form S-8
(File No. 333-13268).
|
|
§
|
Incorporated
herein by reference to Registrant’s Registration Statement on Form S-8
(File No. 333-144823).
|
|
**
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31, 2000.
|
|
***
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31,
2002.
|
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 Form 20-F on its behalf.
|
AUDIOCODES
LTD.
|
|||
|
By:
|
/s/
NACHUM FALEK
|
||
|
Nachum
Falek
|
|||
|
Vice
President Finance and
|
|||
|
Chief
Financial Officer
|
|||
|
Date:
June 30, 2009
|
|||
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2008
IN
U.S. DOLLARS
INDEX
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
- F-3
|
|
Consolidated
Balance Sheets
|
F-4
- F-5
|
|
Consolidated
Statements of Operations
|
F-6
|
|
Statements
of Changes in Shareholders' Equity
|
F-7
|
|
Consolidated
Statements of Cash Flows
|
F-8
- F-9
|
|
Notes
to Consolidated Financial Statements
|
F-10
- F-43
|
-
- - - - - - - - - -
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the board of directors and Shareholders of
AudioCodes
LTD.
We have
audited the accompanying consolidated balance sheets of AudioCodes Ltd.
("AudioCodes" or "the Company") and its subsidiaries as of December 31, 2007 and
2008, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of a wholly-owned subsidiary, which statements reflect total revenues
of 5% for the period from July 6, 2006 through December 31, 2006. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for this
subsidiary, is based solely on the report of the other auditors.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion and the opinion of the other auditors, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries at
December 31, 2007 and 2008, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States.
As
discussed in Note 2r to the consolidated financial statements, in 2007 the
Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB Statement No. 109", effective January
1, 2007.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company and subsidiaries' internal control
over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
June 28, 2009 expressed an unqualified opinion thereon.
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
June
28, 2009
|
A
Member of Ernst & Young Global
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
AudioCodes
LTD.
We have
audited AudioCodes Ltd's ("AudioCodes" or "the Company") internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). AudioCodes'
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of 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
included in the accompanying
Management
'
s Annual Report on Internal Control Over
Financial Reporting
.
Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A Company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial
statements.
Because
of 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, AudioCodes maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of AudioCodes
and its subsidiaries as of December 31, 2007 and 2008 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2008 and our
report dated June 28, 2009 expressed an unqualified opinion thereon. We did not
audit the financial statements of a wholly-owned subsidiary, which statements
reflect total revenues of 5% for the period from July 6, 2006 through December
31, 2006. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for this subsidiary, is based solely on the report of the other
auditors.
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
June
28, 2009
|
A
Member of Ernst & Young Global
|
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2007
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 75,063 | $ | 36,779 | ||||
|
Short-term
bank deposits
|
18,157 | 61,870 | ||||||
|
Short-term
marketable securities and accrued interest
|
17,244 | 16,481 | ||||||
|
Trade
receivables (net of allowance for doubtful accounts of $ 521 and
$ 519 at December 31, 2007 and 2008, respectively)
|
25,604 | 29,564 | ||||||
|
Other
receivables and prepaid expenses
|
6,500 | 3,373 | ||||||
|
Deferred
tax assets
|
1,001 | 972 | ||||||
|
Inventories
|
18,736 | 20,623 | ||||||
|
Total
current
assets
|
162,305 | 169,662 | ||||||
|
LONG-TERM
ASSETS:
|
||||||||
|
Long-term
bank deposits
|
32,670 | - | ||||||
|
Investment
in companies
|
1,343 | 1,245 | ||||||
|
Deferred
tax assets
|
1,057 | 1,255 | ||||||
|
Severance
pay funds
|
9,799 | 10,297 | ||||||
|
Total
long-term
assets
|
44,869 | 12,797 | ||||||
|
PROPERTY
AND EQUIPMENT, NET
|
7,094 | 6,844 | ||||||
|
INTANGIBLE
ASSETS, DEFERRED CHARGES AND OTHER, NET
|
19,007 | 9,084 | ||||||
|
GOODWILL
|
111,212 | 32,095 | ||||||
|
Total
assets
|
$ | 344,487 | $ | 230,482 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
The
accompanying notes are an integral part of the consolidated financial
statements.
|
June
28, 2009
|
||||
|
Date
of approval of the
financial
statements
|
Nachum
Falek
Vice
President and
Chief
Financial Officer
|
Shabtai
Adlersberg
Chief
Executive Officer
|
|
Year
ended December 31,
|
||||||||||||||||
|
2006
|
2007
|
2008
|
||||||||||||||
|
Revenues
|
$ | 147,353 | $ | 158,235 | $ | 174,744 | ||||||||||
|
Cost
of revenues
|
61,242 | 69,185 | 77,455 | |||||||||||||
|
Gross
profit
|
86,111 | 89,050 | 97,289 | |||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development, net
|
35,416 | 40,706 | 37,833 | |||||||||||||
|
Selling
and marketing
|
37,664 | 42,900 | 44,657 | |||||||||||||
|
General
and administrative
|
8,766 | 9,637 | 9,219 | |||||||||||||
|
Impairment
of goodwill and other intangible assets
|
- | - | 85,015 | |||||||||||||
|
Total
operating
expenses
|
81,846 | 93,243 | 176,724 | |||||||||||||
|
Operating
income (loss)
|
4,265 | (4,193 | ) | (79,435 | ) | |||||||||||
|
Financial
income, net
|
3,817 | 2,670 | 1,182 | |||||||||||||
|
Income
(loss) before taxes on income
|
8,082 | (1,523 | ) | (78,253 | ) | |||||||||||
|
Taxes
on income, net
|
289 | 1,265 | 505 | |||||||||||||
|
Equity
in losses of affiliated companies, net
|
916 | 1,097 | 2,582 | |||||||||||||
|
Net
income (loss)
|
$ | 6,877 | $ | (3,885 | ) | $ | (81,340 | ) | ||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | 0.16 | $ | (0.09 | ) | $ | (1.97 | ) | ||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
|
Accumulated
|
Retained
|
|||||||||||||||||||||||||||||||
|
Additional
|
Deferred
|
other
|
earnings
|
Total
|
Total
|
|||||||||||||||||||||||||||
|
Share
|
paid-in
|
Treasury
|
stock
|
comprehensive
|
(accumulated
|
comprehensive
|
shareholders'
|
|||||||||||||||||||||||||
|
capital
|
capital
|
stock
|
compensation
|
income
|
deficit)
|
income
(loss)
|
equity
|
|||||||||||||||||||||||||
|
Balance
as of January 1, 2006
|
$ | 128 | $ | 130,616 | $ | (11,320 | ) | $ | (72 | ) | $ | 84 | $ | 19,670 | $ | 139,106 | ||||||||||||||||
|
Issuance
of shares upon exercise of options and employee stock purchase
plan
|
3 | 9,178 | - | - | - | - | 9,181 | |||||||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | 8,707 | - | - | - | - | 8,707 | |||||||||||||||||||||||||
|
Excess
tax benefit from net operating loss utilization
|
- | 776 | - | - | - | - | 776 | |||||||||||||||||||||||||
|
Reclassification
of deferred stock compensation due to implementation of SFAS
123R
|
- | (72 | ) | - | 72 | - | - | - | ||||||||||||||||||||||||
|
Comprehensive
income, net:
|
||||||||||||||||||||||||||||||||
|
Unrealized
gain on forward contracts, net
|
- | - | - | - | 38 | - | $ | 38 | 38 | |||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 6,877 | 6,877 | 6,877 | ||||||||||||||||||||||||
|
Total
comprehensive income, net
|
$ | 6,915 | ||||||||||||||||||||||||||||||
|
Balance
as of December 31, 2006
|
131 | 149,205 | (11,320 | ) | - | 122 | 26,547 | 164,685 | ||||||||||||||||||||||||
|
Issuance
of shares upon exercise of options and employee stock purchase
plan
|
2 | 4,798 | - | - | - | - | 4,800 | |||||||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | 7,967 | - | - | - | - | 7,967 | |||||||||||||||||||||||||
|
Comprehensive
income, net:
|
||||||||||||||||||||||||||||||||
|
Unrealized
gains on foreign currency cash flow hedges
|
- | - | - | - | 925 | - | $ | 925 | 925 | |||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (3,885 | ) | (3,885 | ) | (3,885 | ) | |||||||||||||||||||||
|
Total
comprehensive loss, net
|
$ | (2,960 | ) | |||||||||||||||||||||||||||||
|
Balance
as of December 31, 2007
|
133 | 161,970 | (11,320 | ) | - | 1,047 | 22,662 | 174,492 | ||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(10 | ) | - | (13,737 | ) | - | - | - | (13,747 | ) | ||||||||||||||||||||||
|
Issuance
of shares upon exercise of options and employee stock purchase
plan
|
2 | 1,545 | - | - | - | - | 1,547 | |||||||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | 4,341 | - | - | - | - | 4,341 | |||||||||||||||||||||||||
|
Comprehensive
income, net:
|
||||||||||||||||||||||||||||||||
|
Unrealized
losses on foreign currency cash flow hedges
|
- | - | - | - | (1,959 | ) | - | $ | (1,959 | ) | (1,959 | ) | ||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (81,340 | ) | (81,340 | ) | (81,340 | ) | |||||||||||||||||||||
|
Total
comprehensive loss, net
|
$ | (83,299 | ) | |||||||||||||||||||||||||||||
|
Balance
as of December 31, 2008
|
125 | $ | 167,856 | $ | (25,057 | ) | $ | - | $ | (912 | ) | $ | (58,678 | ) | $ | 83,334 | ||||||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Year
ended December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Cash flows from operating
activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 6,877 | $ | (3,885 | ) | $ | (81,340 | ) | ||||
|
Adjustments
required to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
5,543 | 7,789 | 7,441 | |||||||||
|
Impairment
of goodwill, other intangible assets and investment in
affiliate
|
- | - | 86,111 | |||||||||
|
Amortization
of marketable securities premiums and accretion of discounts,
net
|
225 | 39 | 112 | |||||||||
|
Equity
in losses of affiliated companies, ne
t
|
916 | 1,097 | 1,486 | |||||||||
|
Stock-based
compensation expenses
|
8,707 | 7,967 | 4,341 | |||||||||
|
Amortization
of senior convertible notes discount and deferred charges
|
199 | 203 | 142 | |||||||||
|
Increase
in accrued interest on marketable securities, bank deposits and structured
notes
|
(130 | ) | (611 | ) | 125 | |||||||
|
Decrease
(increase) in deferred tax assets, net
|
(1,001 | ) | 2,390 | (169 | ) | |||||||
|
Decrease
(increase) in trade receivables, net
|
(9,751 | ) | 5,014 | (3,960 | ) | |||||||
|
Decrease
(increase) in other receivables and prepaid expenses
|
1,457 | (1,412 | ) | 450 | ||||||||
|
Increase
in inventories
|
(1,954 | ) | (2,643 | ) | (1,840 | ) | ||||||
|
Increase
(decrease) in trade payables
|
(2,671 | ) | 1,263 | 2,728 | ||||||||
|
Increase
(decrease) in other payables and accrued expenses
|
(2,005 | ) | (5,181 | ) | 333 | |||||||
|
Increase
in accrued severance pay, net
|
203 | 356 | 451 | |||||||||
|
Other
|
15 | - | - | |||||||||
|
Net
cash provided by operating activities
|
6,630 | 12,386 | 16,411 | |||||||||
|
Cash flows from investing
activities:
|
||||||||||||
|
Investments
in affiliated companies
|
(3,453 | ) | (1,003 | ) | (1,330 | ) | ||||||
|
Purchase
of property and equipment
|
(3,067 | ) | (2,629 | ) | (3,158 | ) | ||||||
|
Purchase
of marketable securities
|
- | - | (16,795 | ) | ||||||||
|
Investment
in short-term and long-term bank deposits
|
(20,000 | ) | (29,065 | ) | (100,864 | ) | ||||||
|
Proceeds
from short-term bank deposits
|
51,300 | 28,700 | 90,142 | |||||||||
|
Proceeds
from structured notes called by the issuer
|
- | 10,000 | - | |||||||||
|
Proceeds
from redemption of marketable securities upon maturity
|
9,000 | 31,600 | 17,000 | |||||||||
|
Proceeds
from sale of held-to-maturity marketable securities
|
979 | - | - | |||||||||
|
Payment
for acquisition of Nuera Communication Inc. (1)
|
(82,520 | ) | - | - | ||||||||
|
Payment
for acquisition of Netrake Corporation. (2)
|
(13,836 | ) | - | - | ||||||||
|
Payment
for acquisition of CTI
Squared
Ltd ("CTI
2
")
(3)
|
- | (4,897 | ) | (5,000 | ) | |||||||
|
Net
cash provided by (used in) investing activities
|
(61,597 | ) | 32,706 | (20,005 | ) | |||||||
|
Cash flows from financing
activities:
|
||||||||||||
|
Purchase
of treasury stock
|
- | - | (13,747 | ) | ||||||||
|
Purchase
of senior convertible note
|
- | - | (50,240 | ) | ||||||||
|
Proceeds
from long-term bank loans
|
- | - | 30,000 | |||||||||
|
Repayment
of long-term bank loans
|
- | - | (2,250 | ) | ||||||||
|
Proceeds
from issuance of shares upon exercise of options and employee stock
purchase plan
|
9,181 | 4,800 | 1,547 | |||||||||
|
Net
cash provided by (used in) financing activities
|
9,181 | 4,800 | (34,690 | ) | ||||||||
|
Increase
(decrease) in cash and cash equivalents
|
(45,786 | ) | 49,892 | (38,284 | ) | |||||||
|
Cash
and cash equivalents at the beginning of the year
|
70,957 | 25,171 | 75,063 | |||||||||
|
Cash
and cash equivalents at the end of the year
|
$ | 25,171 | $ | 75,063 | $ | 36,779 | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
| (1) |
Payment for acquisition of Nuera Communication
Inc.
|
||||||||||||
|
Net
fair value of assets acquired and liabilities assumed of Nuera at the date
of acquisition (see also Note 1b):
|
|||||||||||||
|
Working
capital, net (excluding cash and cash equivalents)
|
$ | (6,728 | ) | $ | - | $ | - | ||||||
|
Technology
|
6,020 | - | - | ||||||||||
|
Backlog
|
750 | - | - | ||||||||||
|
Customer
relationship
|
8,001 | - | - | ||||||||||
|
Trade
name
|
466 | - | - | ||||||||||
|
Deferred
tax liability
|
(6,176 | ) | - | - | |||||||||
|
Existing
contracts
|
204 | - | - | ||||||||||
|
Deferred
tax assets
|
1,201 | - | - | ||||||||||
|
Goodwill
|
78,782 | - | - | ||||||||||
| $ | 82,520 | $ | - | $ | - | ||||||||
| (2) |
Payment for acquisition of Netrake
Corporation.
|
||||||||||||
|
Net
fair value of assets acquired and liabilities assumed of Netrake at the
date of acquisition (see also Note 1c)
|
|||||||||||||
|
Working
capital, net (excluding cash and cash equivalents)
|
$ | (2 | ) | $ | - | $ | - | ||||||
|
Core
technology
|
5,688 | - | - | ||||||||||
|
Backlog
|
87 | - | - | ||||||||||
|
Deferred
tax liability
|
(2,310 | ) | - | - | |||||||||
|
Goodwill
|
10,373 | - | - | ||||||||||
| $ | 13,836 | $ | - | $ | - | ||||||||
| (3) |
Payment for acquisition of CTI Squared
Ltd.
|
||||||||||||
|
Net
fair value of assets acquired and liabilities assumed of CTI
2
at
the date of acquisition (see also Note 1d):
|
|||||||||||||
|
Working
capital, net (excluding cash and cash equivalents)
|
$ | - | $ | (7,519 | ) | $ | - | ||||||
|
Technology
|
- | 1,530 | - | ||||||||||
|
Backlog
|
- | 41 | - | ||||||||||
|
Goodwill
|
- | 10,845 | - | ||||||||||
| $ | - | $ | 4,897 | $ | - | ||||||||
| (4) |
Supplemental disclosure of cash flow
activities
:
|
||||||||||||
|
Cash
paid during the year for income taxes
|
$ | 1,237 | $ | 403 | $ | $ 646 | |||||||
|
Cash
paid during the year for interest
|
$ | 2,500 | $ | 2,500 | $ | 2,455 | |||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1:-
|
GENERAL
|
|
|
a.
|
Business
overview:
|
AudioCodes
Ltd. ("the Company") and its subsidiaries (together "the Group") design, develop
and market products for voice, data and video over IP networks to service
providers and channels (such as distributors), OEMs, network equipment providers
and systems integrators.
The
Company operates through its wholly-owned subsidiaries in the United States,
Europe, Asia, Latin America and
Israel
.
During
2008, the Group faced an adverse change in its business as a result of the
current economic and credit crisis. As a result, the Company concluded that an
impairment test for the Company's goodwill and intangible assets was required
based on the annual impairment test conducted during the fourth quarter of
2008.
As a
result, in the fourth quarter of 2008, the Company recorded a non-cash
impairment charge with respect to goodwill and intangible assets as
follows:
Goodwill
– $ 79,117 (see also Note 2m).
Intangible
assets – $ 5,898 (see also Note 2m).
|
|
b.
|
Acquisition
of Nuera Communications Inc. (renamed: AudioCodes California
Inc.):
|
On July
6, 2006, the Group acquired all of the outstanding common stock of Nuera
Communications Inc, a provider of Voice over Internet Protocol ("VoIP")
infrastructure solutions for broadband and long distance with a client base in
North America, as well as in Asia and Europe.
The Group
paid $ 82,520 in cash at the closing of the transaction including
acquisition costs in the amount of $ 2,376.
Nuera
Communications Inc. became a wholly-owned subsidiary of AudioCodes Inc. and,
accordingly, its results of operations have been included in the consolidated
financial statements of the Group since the acquisition date.
This
acquisition was accounted for under the purchase method of accounting in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 141
"Business Combinations"("SFAS No. 141").
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1:-
|
GENERAL
(Cont.)
|
Based
upon an independent valuation of tangible and intangible assets acquired, the
Group allocated the total acquisition cost of Nuera Communication Inc.'s assets
and liabilities as follows:
|
July
6, 2006
|
|||||
|
Trade
receivables
|
$ | 2,213 | |||
|
Inventories
|
931 | ||||
|
Other
receivables and prepaid expenses
|
356 | ||||
|
Deferred
tax asset
|
1,201 | ||||
|
Property
and equipment
|
673 | ||||
|
Total
tangible
assets acquired
|
5,374 | ||||
|
Technology
(five years useful life)
|
6,020 | ||||
|
Backlog
(one year useful life)
|
750 | ||||
|
Customer
relationship (nine years useful life)
|
8,001 | ||||
|
Existing
contracts (three years useful life)
|
204 | ||||
|
Trade
name (three years useful life)
|
466 | ||||
|
Goodwill
|
78,782 | ||||
|
Total
intangible assets acquired
|
94,223 | ||||
|
Total
tangible
and intangible assets acquired
|
99,597 | ||||
|
Trade
payables
|
(1,292 | ) | |||
|
Deferred
tax liability
|
(6,176 | ) | |||
|
Other
current liabilities and accrued expenses
|
(9,609 | ) | |||
|
Total
liabilities assumed
|
(17,077 | ) | |||
|
Net
assets acquired
|
$ | 82,520 | |||
Goodwill
includes, but is not limited to, the synergistic value and potential competitive
benefits that could be realized by the Company from the acquisition. Goodwill is
not deductible for tax purposes. In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets", goodwill arising from this acquisition is not
amortized (see Note 2m with respect to the impairment recorded relating to
goodwill).
The value
assigned to tangible assets, intangible assets and liabilities has been
determined as follows:
Current
assets and liabilities were recorded at their carrying amounts. The carrying
amounts of current assets and liabilities were reasonable proxies for their fair
value due to their short-term maturity. Property and equipment are presented at
current replacement cost. The fair value of intangible assets was determined
using the income approach.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1:-
|
GENERAL
(Cont.)
|
|
|
c.
|
Acquisition
of Netrake Corporation. (renamed: AudioCodes Texas
Inc.):
|
On August
14, 2006, the Group acquired all of the outstanding common stock of Netrake
Corporation, a provider of session border controller ("SBC") and security
gateway solutions. SBC'S enable connectivity, policies and security for
real-time applications such as VoIP and video when traversing IP to IP networks.
Security gateways enable secure real-time session across wifi, broadband and
wireless networks in field mobile convergence ("FMC") deployments.
The Group
paid $ 13,836 in cash at the closing of the transaction including
acquisition costs in the amount of $ 649.
Netrake
Corporation became a wholly-owned subsidiary of AudioCodes Inc. and,
accordingly, its results of operations have been included in the consolidated
financial statements of the Group since the acquisition date.
This
acquisition was accounted for under the purchase method of accounting in
accordance with SFAS No. 141.
Based
upon an independent valuation of tangible and intangible assets acquired, the
Group has allocated the total acquisition cost of Netrake Corporation's assets
and liabilities, as follows:
|
August
14,
2006
|
|||||
|
Trade
receivables
|
$ | 554 | |||
|
Inventories
|
1,646 | ||||
|
Other
receivables and prepaid expenses
|
311 | ||||
| 2,511 | |||||
|
Property
and equipment
|
528 | ||||
|
Total
tangible
assets acquired
|
3,039 | ||||
|
Technology
(ten years useful life)
|
5,688 | ||||
|
Backlog
(two years useful life)
|
87 | ||||
|
Goodwill
|
10,373 | ||||
|
Total
intangible assets acquired
|
16,148 | ||||
|
Total
tangible
and intangible assets acquired
|
19,187 | ||||
|
Trade
payables
|
(1,127 | ) | |||
|
Deferred
tax liability
|
(2,310 | ) | |||
|
Other
current liabilities and accrued expenses
|
(1,914 | ) | |||
|
Total
liabilities assumed
|
(5,351 | ) | |||
|
Net
assets acquired
|
$ | 13,836 | |||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1:-
|
GENERAL
(Cont.)
|
Goodwill
includes, but is not limited to, the synergistic value and potential competitive
benefits that could be realized by the Company from the acquisition. Goodwill is
not deductible for tax purposes. In accordance with SFAS No. 142, goodwill
arising from this acquisition is not amortized (see Note 2m with respect to the
impairment recorded relating to goodwill).
The value
assigned to tangible assets, intangible assets and liabilities has been
determined as follows:
Current
assets and liabilities are recorded at their carrying amounts. The carrying
amounts of current assets and liabilities were reasonable proxies for their fair
value due to their short-term maturity. Property and equipment are presented at
current replacement cost. The fair value of intangible assets was determined
using the income approach.
|
|
d.
|
Acquisition
of CTI Squared Ltd.:
|
On April
1, 2007, the Group acquired the remaining outstanding common stock of CTI
Squared Ltd ("CTI
2
"), a
leading provider of enhanced messaging and communications platforms deployed
globally by service providers and enterprises. CTI
2
's
platforms integrate data and voice messaging services over internet, intranet,
PSTN, cellular, cable and enterprise networks. Prior to this acquisition, the
Group had an investment in CTI
2
in the
amount of $ 1,565.
In
consideration for the acquisition, the Group paid $ 4,897 in cash at the
closing of the transaction in April 2007 and was committed to pay an additional
$ 5,000 by April, 2008. In February 2008, the Group paid the additional
amount of $ 5,000.
CTI
2
became a
wholly-owned subsidiary of the Company and, accordingly, its results of
operations have been included in the consolidated financial statements of the
Group since the acquisition date.
This
acquisition was accounted for under the purchase method of accounting in
accordance with SFAS No. 141.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1:-
|
GENERAL
(Cont.)
|
Based
upon an independent valuation of tangible and intangible assets acquired, the
Group has allocated the total acquisition cost of CTI
2
's assets
and liabilities as follows:
|
April
2,
2007
|
|||||
|
Trade
receivables
|
$ | 117 | |||
|
Other
receivables and prepaid expenses
|
134 | ||||
|
Property
and equipment
|
10 | ||||
|
Total
tangible
assets acquired
|
261 | ||||
|
Technology
(six years useful life)
|
1,530 | ||||
|
Backlog
(one year useful life)
|
41 | ||||
|
Goodwill
|
10,845 | ||||
|
Total
intangible assets acquired
|
12,416 | ||||
|
Total
tangible and intangible assets
acquired
|
12,677 | ||||
|
Trade
payables
|
(64 | ) | |||
|
Other
current liabilities and accrued expenses
|
(822 | ) | |||
|
Accrued
severance pay, net
|
(329 | ) | |||
|
Total
liabilities assumed
|
(1,215 | ) | |||
|
Net
assets acquired
|
$ | 11,462 | |||
Goodwill
includes, but is not limited to, the synergistic value and potential competitive
benefits that could be realized by the Company from the acquisition. Goodwill is
not deductible for tax purposes. In accordance with SFAS No. 142, goodwill
arising from this acquisition is not amortized (see Note 2m with respect to the
impairment recorded relating to goodwill).
The value
assigned to tangible assets and liabilities has been determined as
follows:
Current
assets and liabilities are recorded at their carrying amounts. The carrying
amounts of current assets and liabilities were reasonable proxies for their fair
value due to their short-term maturity. Property and equipment are presented at
current replacement cost. The fair value of intangible assets was determined
using the income approach.
|
|
e.
|
Acquisition
of Natural Speech Communication
Ltd.:
|
Through
December 31, 2008, the Group had invested an aggregate of $ 6,765 in
Natural Speech Communication Ltd. ("NSC"), a privately-held company engaged in
speech recognition.
As of December
1, 2008
,
the Company
began consolidating the financial
results of
NSC
into AudioCodes
'
financial results
since we
became the primary
beneficiary
in accordance
with
FASB Interpretation No. 46 (Revised), or FASB Interpretation ("FIN")
46R, "Consolidation of Variable Interest Entities - An Interpretation of ARB No.
51".
As of
December 31, 2008, the Group owned 56.6% of the outstanding share capital
of NSC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1:-
|
GENERAL
(Cont.)
|
This
acquisition was accounted for under the consolidation method of accounting in
accordance with "FIN" 46R.
|
December
1,
2008
|
|||||
|
Other
receivables and prepaid expenses
|
$ | 152 | |||
|
Inventory
|
47 | ||||
|
Property
and equipment
|
194 | ||||
|
Total
tangible assets
acquired
|
393 | ||||
|
Trade
payables
|
(84 | ) | |||
|
Other
current liabilities and accrued expenses
|
(305 | ) | |||
|
Accrued
severance pay, net
|
(57 | ) | |||
|
Minority
interest
|
(228 | ) | |||
|
Total
liabilities assumed
|
(674 | ) | |||
|
Net
assets acquired
|
$ | (281 | ) | ||
Based
upon an independent valuation of tangible and intangible assets acquired, the
reported amount of NSC (plus the fair value of any consideration paid) was less
than the fair value of the net assets of the NSC (that is, "negative goodwill"
exists). Therefore, the excess fair value was allocated and reported as a
pro-rata adjustment of all of the newly consolidated assets.
The
following unaudited pro forma information does not purport to represent what the
Group's results of operations would have been had the acquisition of NSC been
consummated on January 1, 2007, nor does it purport to represent the results of
operations of the Group for any future period.
|
Year
ended December 31,
|
|||||||||
|
2007
|
2008
|
||||||||
|
Revenues
|
$ | 159,358 | $ | 175,489 | |||||
|
Net
loss
|
$ | (5,621 | ) | $ | (83,604 | ) | |||
|
Basic
and diluted net loss per share
|
$ | (0.13 | ) | $ | (2.03 | ) | |||
|
|
f.
|
The
Group is dependent upon sole source suppliers for certain key components
used in its products, including certain digital signal processing chips.
Although there are a limited number of manufacturers of these particular
components, management believes that other suppliers could provide similar
components at comparable terms. A change in suppliers, however, could
cause a delay in manufacturing and a possible loss of sales, which could
adversely affect the operating results of the Group and its financial
position.
|
|
|
g.
|
In January 2009, the
Group'
s
largest
customer
announced that it would seek
creditor protection for itself and some of its subsidiaries.
The
loss of the this customer, a significant reduction of the amount of
products purchased by this customer or the Group's inability to obtain a
satisfactory replacement of this customer in a timely manner may have a
significant impact on the Group's revenues and the results of operations.
As of December 31, 2006, 2007 and 2008, this customer accounted for 15%,
17% and 14%, respectively, of the Group's
revenues.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S.
GAAP").
|
|
a.
|
Use
of estimates:
|
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates, judgments and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The Company's management believes that the estimates,
judgment and assumptions used are reasonable based upon information available at
the time they are made. Actual results could differ from those
estimates.
|
|
b.
|
Financial
statements in U.S. dollars:
|
A
majority of the group's revenues is generated in U.S dollars. In addition, most
of the group's costs are denominated and determined in U.S. dollars and in New
Israeli Shekels. The Company's management believes that the U.S dollar is the
currency in the primary economic environment in which the group operates. Thus,
the functional and reporting currency of the group is the U.S
dollar.
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured
into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation". All transaction gains and losses of the remeasured monetary
balance sheet items are reflected in the statements of operations as financial
income or expenses, as appropriate.
|
|
c.
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. Intercompany transactions and balances, including
profits from intercompany sales not yet realized outside the Group, have been
eliminated upon consolidation.
|
|
d.
|
Cash
equivalents:
|
Cash
equivalents are short-term highly liquid investments that are readily
convertible into cash with original maturities of three months or less, at the
date acquired.
|
|
e.
|
Short-term
bank deposits:
|
Short-term
bank deposits are deposits with maturities of more than three months but less
than one year. The deposits are mainly in U.S. dollars and bear interest at an
average rate of 4.57% and 4.00% for 2007 and 2008, respectively. Short-term
deposits are presented at their cost, including accrued interest. (See also
Notes 11)
|
|
f.
|
Marketable
securities:
|
The
Company accounts for investments in debt securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity
Securities".
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Management
determines the appropriate classification of its investments in marketable debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Marketable debt securities are classified as
held-to-maturity since the Company has the intent and ability to hold the
securities to maturity and, accordingly, debt securities are stated at amortized
cost.
For the
years ended December 31, 2007 and 2008, all securities covered by SFAS No. 115
were designated by the Company's management as held-to-maturity.
The
amortized cost of held-to-maturity securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in the consolidated statement of operations as financial income or
expenses, as appropriate. The accrued interest on short-term and long-term
marketable securities is included in the balance of short-term marketable
securities.
FASB
Staff Position ("FSP") No. 115-1 and 124-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investment" ("FSP 115-1") and Sec
Staff Accounting Bulletin Topic 5M "Other Than Temporary Impairment Of Certain
Investments In Debt And Equity Securities" provides guidance for determining
when an investment is considered impaired, whether impairment is other-than
temporary, and measurement of an impairment loss. An investment is considered
impaired if the fair value of the investment is less than its cost. If, after
consideration of all available evidence to evaluate the realizable value of its
investment, impairment is determined to be other-than-temporary, then an
impairment loss should be recognized equal to the difference between the
investment's cost and its fair value.
For the
year ended December 31, 2006, 2007 and 2008, no other than temporary
impairment losses have been identified.
|
|
g.
|
Inventories:
|
Inventories
are stated at the lower of cost or market value. Cost is determined as
follows:
Raw
materials - using the "moving average" method.
Finished
products - using the "moving average" method with the addition of direct
manufacturing costs.
The Group
periodically evaluates the quantities on hand relative to current and historical
selling prices and historical and projected sales volume and technological
obsolescence. Based on these evaluations, inventory write-offs are taken based
on slow moving items, technological obsolescence, excess inventories,
discontinued products and for market prices lower than cost.
|
|
h.
|
Long-term
bank deposits:
|
Bank
deposits with maturities of more than one year are included in long-term
investments and presented at their cost including accrued interest. The deposits
are in U.S. dollars and bear interest at an average rate of 5.10% for 2007.
Long-term deposits are presented at their cost. Accrued interest is included in
other receivables and prepaid expenses.
As of
December 31, 2008, the Group does not hold any long-term bank
deposits.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
i.
|
Investment
in companies:
|
The
Company accounts for investments in companies in which it has the ability to
exercise significant influence over the operating and financial policies using
the equity method of accounting in accordance with the requirements of
Accounting Principle Board ("APB") No. 18, "The Equity Method of Accounting for
Investments in Common Stock". If the Company does not have the ability to
exercise significant influence over operating and financial policies of a
company, the investment is stated at cost.
Investment
in companies represents investments in ordinary shares, preferred shares and
convertible loans. The Company applies Emerging Issues Tasks Force Issue ("EITF"
No. 99-10, "Percentage Used to Determine the Amount of Equity Method Losses".
Accordingly, losses of such companies are recognized based on the ownership
level of the particular security held by the Company.
The
Company's investments are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investment may not be
recoverable in accordance with APB No. 18. As of December 31, 2007, no
impairment losses had been identified. During 2008, based on management's most
recent analyses, the Company recognized an impairment loss of $ 1,096
relating to its investment in NSC.
|
|
j.
|
Property
and equipment:
|
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
is calculated by the straight-line method over the estimated useful lives of the
assets, at the following annual rates:
|
%
|
|||
|
Computers
and peripheral equipment
|
33
|
||
|
Office
furniture and equipment
|
6 -
20 (mainly 15%)
|
||
|
Leasehold
improvements
|
Over
the shorter of the term of
the
lease or the life of the asset
|
|
|
k.
|
Deferred
charges:
|
Cost
incurred in respect of issuance of senior convertible notes are deferred and
amortized using the effective interest method and classified as a component of
interest expense, over the period from issuance to maturity, which is 20 years,
in accordance with APB No. 21 "Interest on Receivables and
Payables".
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
l.
|
Impairment
of long-lived assets:
|
The
Group's long-lived assets are reviewed for impairment in accordance with SFAS
No. 144, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted cash flows expected to be generated by the asset If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. The loss is allocated to the long-lived assets of the
Group on a pro rata basis using the relative carrying amounts of those assets,
except that the loss allocated to an individual long-lived asset of the Group
shall not reduce the carrying amount of that asset below its fair value whenever
that fair value is determinable As of December 31, 2006, 2007 and 2008, no
impairment losses have been identified for property and equipment since the fair
value of those assets was higher than its carrying amounts.
Intangible
assets are comprised of acquired technology, customer relations, trade names,
existing contracts for maintenance and backlog. All intangible assets are
amortized using the straight-line method over their estimated useful
life.
During
2006 and 2007, no impairment charges were identified. During 2008, the Company
recorded an impairment charge for intangible assets in the amount of
$ 5,898.
|
|
m.
|
Goodwill
and other intangible assets:
|
Goodwill
and certain other purchased intangible assets have been recorded in the
Company's financial statements as a result of acquisitions. Goodwill represents
the excess of the purchase price in a business combination over the fair value
of net tangible and intangible assets acquired under SFAS No. 142, "Goodwill and
Other Intangible Assets". Goodwill is not amortized, but rather is subject to an
annual impairment test. SFAS No. 142 requires goodwill to be tested for
impairment at least annually or between annual tests in certain circumstances,
and written down when impaired, rather than being amortized as previous
accounting standards required. Goodwill is tested for impairment at the
reporting unit level by comparing the fair value of the reporting unit with its
carrying value. The Company performs an annual impairment test during the fourth
quarter of each fiscal year, or more frequently if impairment indicators are
present. The Group operates in one operating segment, and this segment comprises
its only reporting unit. In 2008, fair value was determined using discounted
cash flows, market multiples and market capitalization. Significant estimates
used in the methodologies include estimates of future cash-flows, future
short-term and long-term growth rates, weighted average cost of capital and
market multiples for the reporting unit. In 2006 and 2007, fair value was
determined based on the market approach. Intangible assets that are not
considered to have an indefinite useful life are amortized using the
straight-line basis over their estimated useful lives, which range from one to
ten years. Recoverability of these assets is measured by a comparison of the
carrying amount of the asset to the undiscounted future cash flows expected to
be generated by the assets. If the assets are considered to be impaired, the
amount of any impairment is measured as the difference between the carrying
value and the fair value of the impaired assets.
During
2006 and 2007, no impairment charges were identified. During 2008, an impairment
charge to goodwill in the amount of $ 79,117 was recorded. (See Notes 1 and
7).
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
n.
|
Revenue
recognition:
|
The Group
generates its revenues primarily from the sale of products through a direct
sales force and sales representatives. The Group's products are delivered to its
customers, which include original equipment manufacturers, network equipment
providers, systems integrators and distributors in the telecommunications and
networking industries, all of whom are considered end-users.
Revenues
from products are recognized in accordance with Staff Accounting Bulleting
("SAB") No. 104, "Revenue Recognition in Financial Statements", when the
following criteria are met: persuasive evidence of an arrangement exists,
delivery of the product has occurred, the fee is fixed or determinable, and
collectability is probable. The Group has no remaining obligation to customers
after the date on which products are delivered other than pursuant to warranty
obligations and right of return.
The Group
grants to certain customers a right of return or the ability to exchange a
specific percentage of the total price paid for products they have purchased
over a limited period for other products. The Group maintains a provision for
product returns and exchanges based on its experience with historical sales
returns, analysis of credit memo data and other known factors, in accordance
with SFAS No. 48, "Revenue Recognition When Right of Return Exists". The
provision was deducted from revenues and amounted to $ 636, $ 559 and
$ 754, as of December 31, 2006, 2007 and 2008,
respectively.
Revenues
from the sale of products which were not yet determined to be final sales due to
market acceptance were deferred and included in deferred revenues. In cases
where collectability is not probable, revenues are deferred and recognized upon
collection.
|
|
o.
|
Warranty
costs:
|
The Group
generally provides a warranty period of 12 months at no extra charge. The Group
estimates the costs that may be incurred under its basic limited warranty and
records a liability in the amount of such costs at the time product revenue is
recognized. Factors that affect the Group's warranty liability include the
number of installed units, historical and anticipated rates of warranty claims,
and cost per claim. The Group periodically assesses the adequacy of its recorded
warranty liability and adjusts the amount as necessary. A tabular reconciliation
of the changes in the Group's aggregate product warranty liability was not
provided due to immateriality.
|
|
p.
|
Research
and development costs:
|
Research
and development costs, net of government grants received, are charged to the
statement of operations as incurred.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
q.
|
Income
taxes:
|
The Group
accounts for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes". This Statement prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and for carryforward losses. Deferred taxes are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Group provides a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.
In June
2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized under SFAS No. 109.
FIN 48 prescribes a recognition threshold and measurement attribute for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return and also provides guidance on various
related matters such as derecognition, interest and penalties, and disclosure.
On January 1, 2007, the Company adopted FIN 48. The initial application of
FIN 48 to the Company's tax positions did not have a material effect on the
Company's shareholders' equity. The Company recognizes interest and penalties,
if any, related to unrecognized tax benefits in tax expenses.
|
|
r.
|
Comprehensive
income (loss)
|
The
Company accounts for comprehensive income (loss) in accordance with SFAS No.
130, "Reporting Comprehensive Income". This statement establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income generally
represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders. The Company
determined that its items of comprehensive income (loss) relates to gains and
losses on hedging derivatives instruments.
|
|
s.
|
Concentrations
of credit risk:
|
Financial
instruments that potentially subject the Group to concentrations of credit risk
consist principally of cash and cash equivalents, bank deposits, marketable
securities, trade receivables and foreign currency derivative
contracts.
The
majority of the Group's cash and cash equivalents and bank deposits are invested
in U.S. dollar instruments with major banks in Israel and the United States.
Such investments in the United States may be in excess of insured limits and are
not insured in other jurisdictions. Management believes that the financial
institutions that hold the Group's investments are in corporations with high
credit standing. Accordingly, management believes that minimal credit risk
exists with respect to these financial investments.
Marketable
securities include investments in debentures of U.S corporations. Marketable
securities consist of highly liquid debt instruments of corporations with high
credit standing. Management believes that the portfolio is well diversified, and
accordingly, minimal credit risk exists with respect to these marketable debt
securities.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
As a
result of the recent turmoil in the capital markets, the Group tightened its
control and monitoring over its marketable securities portfolio in order to
minimize potential risks stemming from the capital markets environment. Such
measures included, among others: the Group's investment policy approved by the
Investment Committee that limits the amount the Group may invest in any one type
of investment or issuer, thereby reducing credit risk concentrations, and the
grade of the security.
The trade
receivables of the Group are derived from sales to customers located primarily
in the Americas, the Far East, Israel and Europe. However, under certain
circumstances, the Group may require letters of credit, other collateral,
additional guarantees or advance payments. Regarding certain credit balances,
the Group is covered by foreign trade risk insurance. The Group performs ongoing
credit evaluations of its customers and establishes an allowance for doubtful
accounts based upon a specific review.
Allowance
for doubtful accounts amounted to $ 521 and $ 519 as of December 31,
2007 and 2008, respectively. The Group charges off receivables when they are
deemed uncollectible. Actual collection experience may not meet expectations and
may result in increased bad debt expense.
Total bad
debt expenses (income) during 2006, 2007 and 2008 amounted to $ 45,
($ 73) and $ 207, respectively.
|
|
t.
|
Senior
convertible notes:
|
The
Company presents the outstanding principal amount of its senior convertible
notes as a long-term liability, in accordance with APB No. 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants". The debt is
classified as a long-term liability until the date of conversion on which it
would be reclassified to equity, or within one year of the first contractual
redemption date, on which it would be reclassified as a short-term liability.
Accrued interest on the senior convertible notes is included in "other payables
and accrued expenses".
The
Initial Purchasers discount is recorded as a discount to the debt and amortized
according to the interest method over the term of the senior convertible notes
in accordance with EITF No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Industries", which is 20 years.
Please
refer also to Note 2 aa and Note 10.
|
|
u.
|
Basic
and diluted net earnings per share:
|
Basic net
earnings per share are computed based on the weighted average number of ordinary
shares outstanding during each year. Diluted net earnings per share are computed
based on the weighted average number of ordinary shares outstanding during each
year, plus potential dilutive ordinary shares considered outstanding during the
year, in accordance with SFAS No. 128, "Earnings Per Share".
Senior
convertible notes and certain outstanding stock options and warrants have been
excluded from the calculation of the diluted net earnings per ordinary share
since such securities are anti-dilutive for all years presented. The total
weighted average number of shares related to the senior convertible notes and
outstanding options and warrants that have been excluded from the calculations
of diluted net income per share was 9,924,624, 11,765,438 and 12,156,728 for the
years ended December 31, 2006, 2007 and 2008, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
v.
|
Equity-based
compensation expenses:
|
The
Company accounts for stock-based compensation in accordance with SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R)
requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company's consolidated statement of
operations.
The
Company recognizes compensation expenses for the value of its awards based on
the accelerated method over the requisite service period of each of the awards,
net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Estimated forfeitures are
based on actual historical pre-vesting forfeitures.
The Group
applies SFAS No. 123 and EITF No. 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling,
Goods or Services", with respect to options and warrants issued to
non-employees. SFAS No. 123 requires the use of option valuation models to
measure the fair value of the options and warrants at the measurement
date.
The
Company estimates the fair value of stock options granted under
SFAS No. 123(R)
using the
Black-Scholes option-pricing model that uses the weighted-average
assumptions noted in the
following table.
The
Company used its historical volatility in accordance with SFAS No. 123(R). The
computation of volatility uses historical volatility derived from the Company's
exchange traded shares. In 2008, the expected term of options granted is
estimated based on historical experience and represents the period of time that
options granted are expected to be outstanding. In 2006 and 2007, the expected
term was determined based on the simplified method in accordance with SAB 107.
The risk free interest rate assumption is the implied yield currently available
on United States treasury zero-coupon issues with a remaining term equal to the
expected life of the Company's options. The dividend yield assumption is based
on the Company's historical experience and expectation of no future dividend
payouts and may be subject to substantial change in the future. The Company has
historically not paid cash dividends and has no foreseeable plans to pay cash
dividends in the future.
The
weighted-average estimated fair value of employee stock options granted during
the years ended December 31, 2006, 2007 and 2008, was $ 5.81, $ 3.23
and $ 1.89 per share, respectively, using the Black-Scholes option pricing
formula. Fair values were estimated using the following weighted-average
assumptions (annualized percentages):
|
Year
ended December 31,
|
|||||||
|
2006
|
2007
|
2008
|
|||||
|
Dividend
yield
|
0%
|
0%
|
0%
|
||||
|
Expected
volatility
|
61.9%
|
54.7%
|
52.0%
|
||||
|
Risk-free
interest
|
4.6%
|
4.6%
|
2.6%
|
||||
|
Expected
life
|
4.8
years
|
4.8
years
|
4.8
years
|
||||
|
Forfeiture
rate
|
5.1%
|
7.0%
|
11.0%
|
||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company's equity-based compensation expenses for the years ended December 31,
2006, 2007 and 2008 totaled $ 8,707, $ 7,967 and $ 4,341,
respectively.
The total
equity-based compensation expense relating to all of the Company's equity-based
awards recognized for the twelve months ended December 31, 2006, 2007 and 2008
was included in items of the consolidated statements of income as
follows:
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
Cost
of revenues
|
$ | 620 | $ | 613 | $ | 318 | |||||||
|
Research
and development, net
|
3,053 | 3,011 | 1,467 | ||||||||||
|
Selling
and marketing expenses
|
3,628 | 3,476 | 2,026 | ||||||||||
|
General
and administrative expenses
|
1,407 | 867 | 530 | ||||||||||
|
Total
equity-based compensation expenses
|
$ | 8,707 | $ | 7,967 | $ | 4,341 | |||||||
|
|
w.
|
Treasury
stock:
|
|
|
The
Company has repurchased its ordinary shares from time to time in the open
market and holds such shares as treasury stock. The Company presents the
cost to repurchase treasury stock as a reduction of shareholders'
equity.
|
|
|
x.
|
Severance
pay:
|
The
liability for severance pay for Israeli employees is calculated pursuant to
Israel's Severance Pay Law, based on the most recent salary of the employees
multiplied by the number of years of employment as of the balance sheet date for
all employees in Israel. Employees are entitled to one month's salary for each
year of employment, or a portion thereof. The Group's liability for all of its
Israeli employees is fully provided for by monthly deposits with severance pay
funds, insurance policies and by an accrual. The value of these deposits is
recorded as an asset in the Company's balance sheet.
The
deposited funds include profits accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israel's Severance Pay Law or labor agreements.
Severance
pay expenses for the years ended December 31, 2006, 2007 and 2008, amounted to
approximately $ 1,766, $ 2,409 and $ 2,701,
respectively.
|
|
y.
|
Employee
benefit plan
|
During 2007, the Group merged its
separate 401(k) defined contribution plans into one plan covering employees in
the U.S. All eligible employees may elect to contribute a portion of their
annual compensation to the plan through salary deferrals, subject to the IRS
limit of $ 15.5 during 2008 ($ 20.5 including catch-up contributions
for participants age 50 or over). The Group matches employee contributions to
the plan up to a limit of 3.75% of their eligible compensation, subject to IRS
limits. In 2006, 2007 and 2008, the Group matched contributions in the amount of
$ 271, $ 361 and $ 380, respectively
.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
z.
|
Advertising
expenses:
|
Advertising
expenses are charged to the statements of operations as incurred. Advertising
expenses for the years ended December 31, 2006, 2007 and 2008, amounted to
$ 402, $ 350 and $ 407, respectively.
|
|
aa.
|
Fair
value of financial instruments:
|
The
estimated fair value of financial instruments has been determined by the Group
using available market information and valuation methodologies. Considerable
judgment is required in estimating fair values. Accordingly, the estimates may
not be indicative of the amounts the Company could realize in a current market
exchange.
The
following methods and assumptions were used by the Group in estimating its fair
value disclosures for financial instruments:
The
carrying amounts of cash and cash equivalents, short-term bank deposits, trade
receivables and trade payables approximate their fair value due to the
short-term maturity of such instruments.
The
carrying amount of senior convertible notes does not approximate its fair value
which amounts to $ 67,618 based on quoted market values.
The fair
value of foreign currency contracts (used for hedging purposes) is estimated by
obtaining current quotes from banks.
Effective
January 1, 2008, the Group adopted SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157") and, effective October 10, 2008, adopted FASB Staff Position
("FSP") No. 157-3, "Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active" ("FSP 157-3"), except as it applies to the
nonfinancial assets and liabilities subject to FSP No. 157-2 "Effective Date of
FASB Statement No. 157" ("FSP 157-2"). SFAS No. 157 clarifies that fair value is
an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an
asset or a liability. As a basis for considering such assumptions, SFAS No. 157
establishes a three-tier value hierarchy, which prioritizes the inputs used in
the valuation methodologies in measuring fair value:
Level 1 —
Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 —
Include other inputs that are directly or indirectly observable in the
marketplace.
Level 3 —
Unobservable inputs which are supported by little or no market
activity.
The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value (see also
Note 3 and Note 8).
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
ab.
|
Derivative
instruments:
|
Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), requires companies to recognize all of
its derivative instruments as either assets or liabilities in the statement of
financial position at fair value.
For those
derivative instruments that are designated and qualify as hedging instruments, a
Company must designate the hedging instrument, based upon the exposure being
hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in
a foreign operation.
For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings
during the period of change. For derivative instruments not designated as
hedging instruments, the gain or loss is recognized in current earnings during
the period of change.
Cash flow
hedging strategy - To hedge against the risk of overall changes in cash flows
resulting from forecasted foreign currency, rent and salary payments during the
year, the Company hedges portions of its forecasted expenses denominated in NIS
with currency forwards and options. These option contracts are designated as
cash flow hedges, as defined by SFAS No. 133 and Derivative Implementation
Group No. G20, "Cash Flow Hedges: Assessing and Measuring the Effectiveness of a
Purchased option Used in a Cash Flow Hedge" ("DIG 20") and are all
effective.
During
2008, the Company recorded accumulated other comprehensive loss in the amount of
$ 912 from its currency forward and option transactions with respect to
payroll and rent expenses expected to be incurred during 2008. Such amount will
be recorded into earnings during 2009.
|
|
ac.
|
Reclassification:
|
Certain
amounts in prior years' financial statements have been reclassified to conform
to the current year's presentation.
|
|
ad.
|
Impact
of recently issued accounting
standards:
|
In
February 2008, the FASB issued FSP No. FAS 157-1, "Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13", and FSP No. FAS 157-2,
"Effective Date of FASB Statement No. 157". Collectively, the Staff
Positions defer the effective date of Statement 157 to fiscal years beginning
after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at fair value on a
recurring basis at least annually, and amend the scope of Statement 157. As
described in Note 10, the Company adopted Statement 157 and the related
FASB staff positions except for those items specifically deferred under FSP
No. FAS 157-2.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquire and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. Earlier adoption is
prohibited. The impact of SFAS 141R on the Company's consolidated results
of operations and financial condition will depend on the nature and size of
acquisitions, if any, subsequent to the effective date.
In
December 2007, the FASB issued SFAS No. 160, "Non controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51" (SFAS No.
160). SFAS No. 160 establishes accounting and reporting standards that
require that the ownership interests in subsidiaries held by parties other than
the parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parent's
equity; the amount of consolidated net income attributable to the parent and to
the non controlling interest be clearly identified and presented on the face of
the consolidated statement of operations; and changes in a parent's ownership
interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.
The
impact of SFAS No. 160 on the Company's consolidated results of operations
and financial condition will depend on the nature and size of transactions if
any, subsequent to the effective date as well as reclassification of past
minority rights into equity. The Company does not expect that the adoption of
SFAS No. 160 will have an material impact on its consolidated financial
statements.
In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7,
"Accounting for Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7
clarifies the accounting for certain separately identifiable intangible assets
which an acquirer does not intend to actively use but intends to hold to prevent
its competitors from obtaining access to them. EITF 08-7 requires an
acquirer in a business combination to account for a defensive intangible asset
as a separate unit of accounting which should be amortized to expense over the
period the asset diminishes in value. EITF 08-7 is effective for fiscal
years beginning after December 15, 2008, with early adoption prohibited.
The guidance is applicable to intangible assets acquired after the effective
date. The impact of FSP FAS 142-3 on the Company's consolidated results of
operations and financial condition will depend on the amount of intangibles
acquired, if any, subsequent to the effective date.
In April
2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3, "Determination
of the Useful Life of Intangible Assets". FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, "Goodwill and Other Intangible Assets". FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited. The guidance is applicable to intangible assets acquired
after the effective date. The impact of FSP FAS 142-3 on the Company's
consolidated results of operations and financial condition will depend on the
amount of intangibles acquired, if any, subsequent to the effective
date.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Effective
December 31, 2008, the Company adopted FSP APB 14-1. "Accounting for
Convertible debt Instruments that may be settled in cash upon conversion". FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity's nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Effective January 1, 2009 the Company adopted APB 14-1. As a
result of the Company's preliminary assumptions the unaudited effect of APB
14-1on the Company's consolidated statements of operations in 2009 will be an
increase in interest expense, net of tax income of between $ 3 million and
$ 3.3 million.
In June
2008, the FASB issued EITF No. 07-5, "Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the company's own stock and (b) classified in shareholders'
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer's own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. The Company believes adopting this statement
will have no impact on its consolidated financial statements.
In April
2009, the FASB issued FSP, No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, or the FSP. The FSP is
intended to provide greater clarity to investors about the credit and noncredit
component of an other-than-temporary impairment event and to more effectively
communicate when an other-than-temporary impairment event has occurred. The FSP
applies to fixed maturity securities only and requires separate display of
losses related to credit deterioration and losses related to other market
factors. When an entity does not intend to sell the security and it is more
likely than not that an entity will not have to sell the security before
recovery of its cost basis, it must recognize the credit component of an
other-than-temporary impairment in earnings and the remaining portion in other
comprehensive income. upon adoption of the FSP, an entity will be required to
record a cumulative-effect adjustment as of the beginning of the period of
adoption to reclassify the noncredit component of a previously recognized
other-than-temporary impairment from retained earnings to accumulated other
comprehensive income. The FSP will be effective for us for the quarter ending
June 30, 2009. The Company is currently evaluating the impact of adopting the
FSP.
|
NOTE
3:-
|
MARKETABLE
SECURITIES AND ACCRUED
INTEREST
|
The following is a summary of held to maturity marketable
securities.
|
December
31,
|
|||||||||||||||||||||||||
|
2007
|
2008
|
||||||||||||||||||||||||
|
Net
|
Net
|
||||||||||||||||||||||||
|
Amortized
|
unrealized
|
Fair
|
Amortized
|
unrealized
|
Fair
|
||||||||||||||||||||
|
cost
|
losses
|
Value
|
cost
|
losses
|
Value
|
||||||||||||||||||||
|
Corporate
debentures:
|
|||||||||||||||||||||||||
|
Maturing
within one year
|
12,985 | $ | 21 | $ | 12,964 | $ | 16,253 | $ | 1 | $ | 16,252 | ||||||||||||||
| 12,985 | 21 | 12,964 | 16,253 | 1 | 16,252 | ||||||||||||||||||||
|
U.S.
government and
agencies
debts:
|
|||||||||||||||||||||||||
|
Maturing
within one year
|
4,000 | - | 4,000 | - | - | - | |||||||||||||||||||
| 4,000 | - | 4,000 | - | - | - | ||||||||||||||||||||
|
Accrued
interest
|
259 | - | 259 | 228 | - | 228 | |||||||||||||||||||
| $ | 17,244 | $ | 21 | $ | 17,223 | $ | 16,481 | $ | 1 | $ | 16,480 | ||||||||||||||
The
unrealized losses on the Company's investments in all types of securities are
due to interest rate increases. The contractual cash flows of these investments
were issued by highly rated corporations. Accordingly, it is expected that the
securities would not be settled at a price less than the amortized cost of the
Company's investment. Since the Company has the ability and intent to hold these
investments until a recovery of fair value, which may be until maturity, the
Company does not consider these investments to be other-than-temporarily
impaired as of December 31, 2007 and 2008.
|
NOTE
4:-
|
INVENTORIES
|
|
December
31,
|
|||||||||
|
2007
|
2008
|
||||||||
|
Raw
materials
|
$ | 9,879 | $ | 9,346 | |||||
|
Finished
products
|
8,857 | 11,277 | |||||||
| $ | 18,736 | $ | 20,623 | ||||||
In the
years ended December 31, 2006, 2007 and 2008, the Group wrote-off inventory in a
total amount of $ 1,900, $ 700 and $ 1,200,
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
5:-
|
INVESTMENT
IN COMPANIES
|
|
|
a.
|
In
July 2005, the Company signed a share purchase agreement with an unrelated
privately-held company and certain of its shareholders to acquire 19.5% of
its ordinary shares for a total purchase price in the amount of
$ 707. Until December 31, 2008, the Company extended convertible
loans in the aggregate amount of $303 to this company. The loans bear
interest at the rate of 9% per annum and are convertible into shares. The
loans are payable during 2009. As of December 31, 2008, the Company
owned 20.2% of the company's outstanding share
capital.
|
|
December
31,
|
|||||||||
|
2007
|
2008
|
||||||||
|
Net
equity as of purchase date
|
$ | (106 | ) | $ | (106 | ) | |||
|
Unamortized
goodwill
|
1,085 | 1,400 | |||||||
|
Accumulated
net loss
|
(71 | ) | (49 | ) | |||||
|
Total
investment
|
$ | 908 | $ | 1,245 | |||||
|
|
b.
|
In
December 2006, the Company extended a convertible loan in the amount of
$ 1,000 to another unrelated privately-held company. The loan bears
interest at LIBOR+2% per annum and was due and payable in December 2007.
In December, 2007, the Company requested repayment of loan. During 2008,
the Company received $ 870 in cash and shares of another unrelated
privately-held company. The remaining balance of the loan in the amount of
$ 130 was written off.
|
|
NOTE
6:-
|
PROPERTY
AND EQUIPMENT
|
|
December
31,
|
|||||||||
|
2007
|
2008
|
||||||||
|
Cost:
|
|||||||||
|
Computers
and peripheral equipment
|
$ | 16,073 | $ | 18,645 | |||||
|
Office
furniture and equipment
|
8,515 | 9,466 | |||||||
|
Leasehold
improvements
|
1,731 | 2,437 | |||||||
| 26,319 | 30,548 | ||||||||
|
Accumulated
depreciation:
|
|||||||||
|
Computers
and peripheral equipment
|
12,848 | 15,507 | |||||||
|
Office
furniture and equipment
|
5,733 | 7,154 | |||||||
|
Leasehold
improvements
|
644 | 1,043 | |||||||
| 19,225 | 23,704 | ||||||||
|
Depreciated
cost
|
$ | 7,094 | $ | 6,844 | |||||
Depreciation
expenses amounted to $ 2,920, $ 3,392 and $ 3,602 for the years
ended December 31, 2006, 2007 and 2008, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
7:-
|
INTANGIBLE
ASSETS, DEFERRED CHARGES AND OTHER
|
|
Useful life
|
December
31,
|
||||||||||||||
|
(years)
|
2007
|
2008
|
|||||||||||||
| a. |
Cost:
|
||||||||||||||
|
Acquired
technology
|
5 -
10
|
$ | 17,512 | $ | 17,512 | ||||||||||
|
Customer
relationship
|
9
|
8,001 | 8,001 | ||||||||||||
|
Trade
name
|
3
|
466 | 466 | ||||||||||||
|
Existing
contracts for maintenance
|
3
|
204 | 204 | ||||||||||||
|
Backlog
|
1 -
2
|
878 | 878 | ||||||||||||
|
Deferred
charges
|
20
|
478 | 478 | ||||||||||||
|
Other
|
200 | 200 | |||||||||||||
| 27,739 | 27,739 | ||||||||||||||
|
Accumulated
amortization:
|
|||||||||||||||
|
Acquired
technology
|
6,146 | 8,847 | |||||||||||||
|
Customer
relationship
|
1,333 | 2,222 | |||||||||||||
|
Trade
name
|
234 | 389 | |||||||||||||
|
Existing
contracts for maintenance
|
102 | 170 | |||||||||||||
|
Backlog
|
852 | 878 | |||||||||||||
|
Deferred
charges
|
65 | 251 | |||||||||||||
| 8,732 | 12,757 | ||||||||||||||
|
Impairment:
|
|||||||||||||||
|
Acquired
technology
|
- | 1,995 | |||||||||||||
|
Customer
relationship
|
- | 3,829 | |||||||||||||
|
Trade
name
|
- | 51 | |||||||||||||
|
Existing
contracts for maintenance
|
- | 23 | |||||||||||||
| - | 5,898 | ||||||||||||||
|
Amortized
cost
|
$ | 19,007 | $ | 9,084 | |||||||||||
|
NOTE
7:-
|
INTANGIBLE
ASSETS, DEFERRED CHARGES AND OTHER
(Cont.)
|
|
|
b.
|
Amortization
expenses amounted to $ 2,623, $ 4,397 and $ 3,839 for the
years ended December 31, 2006, 2007 and 2008,
respectively.
|
|
|
c.
|
Amortization
expenses related to deferred charges amounted to $ 20, $ 20 and
$ 19 for the years ended December 31, 2006, 2007 and 2008,
respectively.
|
|
|
d.
|
Expected
amortization expenses for the years ended
December 31:
|
|
2009
|
$ | 3,281 | |||
|
2010
|
$ | 1,642 | |||
|
2011
|
$ | 846 | |||
|
2012
|
$ | 846 | |||
|
2013
|
$ | 655 | |||
|
2014
and thereafter
|
$ | 1,814 |
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
8:-
|
FAIR
VALUE MEASUREMENTS
|
In
accordance with SFAS No. 157, the Company measures its foreign currency
derivative contracts at fair value. Foreign currency derivative contracts are
classified within Level 2 value hierarchy, as the valuation inputs are based on
quoted prices and market observable data of similar instruments.
As of
December 31, 2008, the fair value of foreign currency derivative liability,
measured on a recurring, basis, was $ 854.
|
NOTE
9:-
|
OTHER
PAYABLES AND ACCRUED EXPENSES
|
|
December
31,
|
|||||||||
|
2007
|
2008
|
||||||||
|
Employees
and payroll accruals
|
$ | 8,047 | $ | 7,537 | |||||
|
Royalties
provision
|
1,786 | 1,066 | |||||||
|
Government
authorities
|
420 | 184 | |||||||
|
Accrued
expenses
|
15,506 | 11,570 | |||||||
|
Deferred
revenues
|
1,594 | 3,695 | |||||||
|
Others
|
1,427 | 137 | |||||||
| $ | 28,780 | $ | 24,189 | ||||||
|
NOTE
10:-
|
SENIOR
CONVERTIBLE NOTES
|
In
November 2004, the Company issued an aggregate of $ 125,000 (including the
exercise of the option as described below) principal amount of its 2% Senior
Convertible Notes due November 9, 2024 ("the Notes"). The Company is
obligated to pay interest on the Notes semi-annually on May 9 and November 9 of
each year.
The Notes
are convertible, at the option of the holders at any time before the maturity
date, into ordinary shares of the Company at a conversion rate of 53.4474
ordinary shares per $ 1 principal amount of Notes, representing a
conversion price of approximately $ 18.71 per share. The Notes are subject
to redemption at any time on or after November 9, 2009, in whole or in part, at
the option of the Company, at a redemption price of 100% of the principal amount
plus accrued and unpaid interest. The Notes are subject to repurchase, at the
holders' option, on November 9, 2009, November 9, 2014 or November 9, 2019,
at a repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest, if any, on such repurchase date. As of December 31, 2008, the
Notes are presented as a short-term liability since the Company believes that
the holders will choose to redeem the Notes on November 9, 2009.
The Notes
also contain a provision for a "make-whole" premium to be paid by the Company to
holders of the Notes in the event of certain changes in control that could occur
prior to November 9, 2009. The premium is payable in the form of cash, the
Company's Ordinary shares, or the same form of consideration used to pay for the
shares of the Company's Ordinary shares in connection with the transaction
constituting the change in control. The premium declines over time and is based
upon the price of the Company's ordinary shares as of the effective date of the
change in control. As of December 31, 2007 and 2008 the Company did not record a
separate derivative in the financial statements since the value of that
derivative was 0.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
10:-
|
SENIOR
CONVERTIBLE NOTES (Cont.)
|
During
2008, the Company repurchased $ 51,500 in principal amount of its 2% Senior
Convertible Notes for a total cost, including accrued interest, of
$ 50,200. As a result of the repurchase, the Company recorded a gain in the
amount of $ 50 in its statements of operations.
|
NOTE
11:-
|
LONG-TERM
BANK LOANS
|
In April
and July 2008, the Company entered into loan agreements with banks in Israel
that provided for loans in the amount of $ 30,000. The loans bear interest
at LIBOR plus 1.5% with respect to $ 23,000 of the loans and LIBOR plus
0.65% with respect to the remaining principal amount of $ 7,000 of the
loans. The principal amount borrowed is repayable in 20 equal quarterly payments
through July 2013. The banks have a lien of the Company's assets and the Company
is required to maintain $ 7,000 of compensating balances with the banks and
is disclosed as part of short term bank deposits. The agreement requires the
Company, among other things, to maintain shareholders' equity at specified
levels and to achieve certain levels of operating income. The agreement also
restricts the Company from paying dividends. As of December 31, 2008, the
Company was in compliance with its covenants to the banks.
|
NOTE
12:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
a.
|
Lease
commitments:
|
The
Group's facilities are rented under several lease agreements in Israel and the
U.S. for periods ending in 2021.
Future
minimum rental commitments under non-cancelable operating leases for the years
ended December 31, are as follows:
|
2009
|
$ | 5,085 | |||
|
2010
|
4,521 | ||||
|
2011
|
2,607 | ||||
|
2012
|
2,459 | ||||
|
2013
|
2,479 | ||||
|
2014
and thereafter
|
15,181 | ||||
| $ | 32,332 |
Rent
expenses for the years ended December 31, 2006, 2007 and 2008, were
approximately $ 3,087, $ 4,471 and $ 6,432,
respectively.
|
|
b.
|
Other
commitments:
|
The
Company is obligated under certain agreements with its suppliers to purchase
goods and under an agreement with its manufacturing subcontractor to purchase
excess inventory. Non- cancelable obligations as of December 31, 2008, were
approximately $ 2,300,
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
12:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|
|
|
c.
|
Royalty
commitment to the Office of the Chief Scientist of Israel
("OCS"):
|
Under the
research and development agreements of the Company with the OCS and pursuant to
applicable laws, the Company is required to pay royalties at the rate of 3%-4.5%
of sales of products developed with funds provided by the OCS, up to an amount
equal to 100% of the OCS research and development grants received, linked to the
U.S. dollar plus interest on the unpaid amount received based on the 12-month
LIBOR rate applicable to dollar deposits. The Company is obligated to repay the
Israeli Government for the grants received only to the extent that there are
sales of the funded products.
As of
December 31, 2008, the Company has a contingent obligation to pay royalties in
the amount of approximately $ 4,865.
|
|
d.
|
Royalty
commitments to third parties:
|
In
previous years, the Group has entered into technology licensing fee agreements
with third parties. Under the agreements, the Group agreed to pay the third
parties royalties until 2008, based on 0.75%-0.9% of the Group's total
consolidated revenues.
|
|
e.
|
Legal
proceedings:
|
As of
December 31, 2008, there are no material pending legal proceedings in which any
member of the Group is a party.
|
NOTE
13:-
|
SHAREHOLDERS'
EQUITY
|
|
|
a.
|
Treasury
stock:
|
Through
January 2001, the Company had a share repurchase program pursuant to which the
Company was authorized to purchase up to an aggregate amount of 4,000,000 of its
outstanding ordinary shares. The Company purchased 3,942,139 of its outstanding
ordinary shares, at a weighted average price per share of $ 2.87, under
that program.
In
January 2008, the Company's Board of Directors approved a new share repurchase
program pursuant to which the Company was authorized to purchase up to an
aggregate amount of 4,000,000 of its outstanding ordinary shares. During 2008,
the Company purchased an additional 3,450,217 of its outstanding ordinary shares
under the new share repurchase plan, at a weighted average price per share of
$ 3.98.
|
|
b.
|
Warrants
issued to consultants:
|
During
2001, the Company issued warrants to consultants to purchase 50,000 if its
Ordinary shares at an exercise price of $ 18.82 per share, expiring seven
years from the date of grant.
During
2008, 10,000 warrants were granted to consultants at an exercise price of
$ 4.82 per share. The Company recorded compensation expenses in accordance
with EITF No. 96-18. The amount recorded is immaterial. As of December 31, 2008,
10,000 warrants to consultants are outstanding and exercisable at an exercise
price of $ 4.82 per share.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
13:-
|
SHAREHOLDERS'
EQUITY (Cont.)
|
|
|
c.
|
Employee
Stock Purchase Plan:
|
In May
2001, the Company's Board of Directors adopted the Employee Stock Purchase Plan
("the Purchase Plan"), and, in July 2007, amended the Purchase Plan. As amended,
the Purchase Plan provides for the issuance of a maximum of 6,500,000 ordinary
shares. As of December 31, 2008, 4,004,683 shares are still available for future
issuance under the Purchase Plan. Eligible employees can have up to 15% of their
wages, up to certain maximums, used to purchase ordinary shares. The Purchase
Plan is implemented with purchases every six months occurring on January 31 and
July 31 of each year. The price of the ordinary shares purchased under the
Purchase Plan is equal to 85% of the lower of the fair market value of the
ordinary shares on the commencement date of each offering period or on the
semi-annual purchase date. The Purchase Plan is considered a compensatory plan.
Therefore the Company recorded compensation expense in accordance with SFAS 123R
with respect to purchases under the Purchase Plan.
During
the years ended December 31, 2006, 2007 and 2008, 323,303, 649,853 and 319,453
shares, respectively, were issued under the Purchase Plan for aggregate
consideration of $ 2,665, $ 3,619 and $ 1,214,
respectively.
|
|
d.
|
Employee
Stock Option Plans:
|
Under the
Company's 1997 and 1999 Stock Option Plans, options to purchase ordinary shares
may be granted to officers, directors, employees and consultants of the Group.
As of December 31, 2008, both plans had expired and no options are
available for future grants under these plans.
During
2008, the board of directors approved the 2008 Equity Incentive Plan that is
effective starting January 2009. The total number of shares authorized for grant
under this Plan is 2,009,122.
Stock
options granted under the abovementioned plans are exercisable at the fair
market value of the ordinary shares at the date of grant and usually expire
seven or ten years from the date of grant. The options generally vest over four
years from the date of grant. Any options that are forfeited or cancelled before
expiration become available for future grants.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
13:-
|
SHAREHOLDERS'
EQUITY (Cont.)
|
The
following is a summary of the Group's stock option activity and related
information for the year ended December 31, 2008:
|
Year
ended December 31, 2008
|
|||||||||||||||||
|
Amount
of options
|
Weighted
average
exercise
price
|
Weighted
average remaining contractual
term
(in
years)
|
Aggregate
intrinsic
value
|
||||||||||||||
|
Outstanding
at beginning of year
|
7,387,260 | $ | 7.85 | ||||||||||||||
|
Changes
during the year:
|
|||||||||||||||||
|
Granted
|
269,750 | $ | 3.97 | ||||||||||||||
|
Exercised
|
223,550 | $ | 1.54 | ||||||||||||||
|
Forfeited
|
845,823 | $ | 9.28 | ||||||||||||||
|
Expired
|
241,100 | $ | 4.39 | ||||||||||||||
|
Options
outstanding at end of year
|
6,346,537 | $ | 7.81 | 3.1 | $ | 67 | |||||||||||
|
Vested
and expected to vest
|
5,648,418 | $ | 7.81 | 3.1 | $ | 60 | |||||||||||
|
Options
exercisable at end of year
|
4,621,027 | $ | 7.88 | 2.4 | $ | 67 | |||||||||||
The total
intrinsic value of stock options exercised during 2008 was
$ 124.
The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2006, 2007 and 2008 was $ 5.81, $ 3.23 and
$ 1.80, respectively. The aggregate intrinsic value in the table above
represents the total intrinsic value (the difference between the Company's
closing stock price on the last trading day of the fiscal year and the exercise
price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on
the last trading day of the fiscal year. This amount changes based on the fair
market value of the Company's shares.
Total
intrinsic value of options exercised for the twelve months ended December 31,
2006, 2007 and 2008 was $ 4,790, $ 613 and $ 124, respectively.
As of December 31, 2008, there was $ 2,908 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the Company's stock option plans. That cost is expected to be
recognized over a weighted-average period of 0.9 years.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
13:-
|
SHAREHOLDERS'
EQUITY (Cont.)
|
The
options outstanding as of December 31, 2008, have been separated into ranges of
exercise prices, as follows:
|
Range
of
exercise
price
|
Options
outstanding
as
of
December
31,
2008
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Options
exercisable
as
of
December
31,
2008
|
Weighted
average
exercise
price
of
exercisable
options
|
|||||||||||||||||
|
(Years)
|
||||||||||||||||||||||
| $ |
1.1
|
103,800 |
1.51
|
$ | 1.10 | 103,800 | $ | 1.10 | ||||||||||||||
| $ |
1.73-2.51
|
453,318 |
1.61
|
$ | 2.24 | 400,318 | $ | 2.29 | ||||||||||||||
| $ |
2.67-4
|
398,084 |
1.96
|
$ | 3.25 | 343,334 | $ | 3.18 | ||||||||||||||
| $ |
4.1-6.49
|
1,601,525 |
4.20
|
$ | 5.19 | 808,240 | $ | 4.85 | ||||||||||||||
| $ |
6.51-9.24
|
810,410 |
2.29
|
$ | 7.55 | 709,910 | $ | 7.66 | ||||||||||||||
| $ |
9.32-14.76
|
2,949,400 |
3.28
|
$ | 10.93 | 2,225,425 | $ | 10.99 | ||||||||||||||
| $ |
15.94
|
30,000 |
2.99
|
$ | 15.94 | 30,000 | $ | 15.94 | ||||||||||||||
| 6,346,537 | $ | 7.81 | 4,621,027 | $ | 7.88 | |||||||||||||||||
|
|
e.
|
During
2008, the Company decided on an exceptional and ex-gratia basis to extend
the validity of certain options granted to employees by a period of 2
years and re-priced the exercise price to certain
employees.
|
The
Company accounted for these changes as modifications in accordance with SFAS
123R. The Company calculated the incremental value of these modifications and
recorded compensation cost in a total amount of $ 402.
|
|
f.
|
Dividends:
|
In the
event that cash dividends are declared in the future, such dividends will be
paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future. (See also Note 14a.)
|
NOTE
14:-
|
TAXES
ON INCOME
|
|
|
a.
|
Israeli
taxation:
|
|
|
1.
|
Measurement
of taxable income:
|
The
Company has elected to measure its taxable income and file its tax return under
the Israeli Income Tax Regulations (Principles Regarding the Management of Books
of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income), 1986. Accordingly, results for tax
purposes are measured in terms of earnings in dollars.
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
|
2.
|
Tax
benefits under the Law for the Encouragement of Capital Investments, 1959
("the Investment Law"):
|
The
Company's production facilities have been granted the status of an "Approved
Enterprise" in accordance with the Investment Law under four separate investment
programs. According to the provisions of such Israeli Investment Law, the
Company has been granted the "Alternative Benefit Plan", under which the main
benefits are tax exemptions and reduced tax rates.
Therefore,
the Company's income derived from the Approved Enterprise will be entitled to a
tax exemption for a period of two to four years and to an additional period of
five to eight years of reduced tax rates of 10% - 25% (based on the percentage
of foreign ownership). The duration of tax benefits of reduced tax rates is
subject to a limitation of the earlier of 12 years from commencement of
production, or 14 years from the approval date. The Company utilized tax
benefits from the first program in 1998 and is no longer eligible for benefits
in 2007. Tax benefits from the remaining programs are scheduled to gradually
expire through 2013.
As of
December 31, 2008, retained earnings included approximately $ 540 in
tax-exempt income earned by the Company's "Approved Enterprise". The Company's
Board of Directors has decided not to declare dividends out of such tax-exempt
income. Accordingly, no deferred income taxes have been provided on income
attributable to the Company's "Approved Enterprise".
Tax-exempt
income attributable to the "Approved Enterprise" cannot be distributed to
shareholders without subjecting the Company to taxes except upon complete
liquidation of the Company. If such retained tax-exempt income is distributed in
a manner other than upon the complete liquidation of the Company, it would be
taxed at the corporate tax rate applicable to such profits as if the Company had
not elected the alternative tax benefits (currently between 10% - 25%) and an
income tax liability of approximately up to $135 would be incurred by the
Company.
The
entitlement to the above benefits is conditional upon the Company fulfilling the
conditions stipulated by the above Investment Law, regulations published
thereunder and the certificate of approval for the specific investments in
"Approved Enterprises". In the event of failure to comply with these conditions,
the benefits may be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, including interest. As of December
31, 2008, management believes that the Company is in compliance with all of the
aforementioned conditions.
Income
from sources other than the "Approved Enterprise" during the benefit period will
be subject to tax at the regular tax rate prevailing at that time.
On April
1, 2005, an amendment to the Investment Law came into effect ("the Amendment")
that significantly changed the provisions of the Investment Law. The Amendment
limits the scope of enterprises that may be approved by the Investment Center by
setting criteria for the approval of a facility as a Privileged Enterprise
including a provision generally requiring that at least 25% of the Privileged
Enterprise's income will be derived from export. Additionally, the Amendment
enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies no longer require Investment Center approval in
order to qualify for tax benefits.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
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 they were on the date of such approval. Therefore, the
Company's existing "Approved Enterprises" will generally not be subject to the
provisions of the Amendment. As a result of the Amendment, tax-exempt income
generated under the provisions of the Investment Law, as amended, will subject
the Company to taxes upon distribution or liquidation and the Company may be
required to record a deferred tax liability with respect to such tax-exempt
income. As of December 31, 2007, there was no taxable income attributable to the
Privileged Enterprise.
|
|
3.
|
Net
operating loss carryforward:
|
As of
December 31, 2008, the Company has accumulated losses for tax purposes in the
amount of approximately $ 70,000, which can be carried forward and offset
against taxable income in the future for an indefinite period. As of December
31, 2008, the Company recorded a deferred tax asset of $ 1,447 relating to
the available net carry forward tax losses.
|
|
4.
|
Tax
benefits under the Law for the Encouragement of Industry (Taxation),
1969:
|
The
Company currently qualifies as an "Industrial Company" under the above law and
as such is entitled to certain tax benefits, including accelerated depreciation
and the deduction of public offering expenses in three equal annual
payments.
|
|
5.
|
Tax
rates:
|
Under an
amendment to the Israeli Income Tax Ordinance enacted on July 25, 2005, a
gradual decrease in the corporate tax rate in Israel will be in effect as
follows: in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter -
25%.
|
|
b.
|
Income
(loss) before taxes on income comprised as
follows:
|
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
Domestic
|
$ | 6,683 | $ | 3,131 | $ | 1,639 | |||||||
|
Foreign
|
1,399 | (4,654 | ) | (79,892 | ) | ||||||||
| $ | 8,082 | $ | (1,523 | ) | $ | (78,253 | ) | ||||||
|
|
c.
|
Taxes
on income are comprised as follows:
|
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
Current
taxes
|
$ | 1,290 | $ | (1,125 | ) | $ | 674 | ||||||
|
Deferred
taxes
|
(1,001 | ) | 2,390 | (169 | ) | ||||||||
| $ | 289 | $ | 1,265 | $ | 505 | ||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
Domestic
|
$ | 846 | $ | (1,575 | ) | $ | (1,365 | ) | |||||
|
Foreign
|
(557 | ) | 2,840 | 1,870 | |||||||||
| $ | 289 | $ | 1,265 | $ | 505 | ||||||||
|
|
d.
|
Deferred
income taxes:
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the Group's
deferred tax liabilities and assets are as follows:
|
December
31,
|
|||||||||
|
2007
|
2008
|
||||||||
|
Deferred
tax assets:
|
|||||||||
|
Net
operating loss carry forward
|
$ | 58,513 | $ | 61,093 | |||||
|
Reserves
and allowances
|
5,823 | 2,351 | |||||||
|
Deferred
tax assets before valuation allowance
|
64,336 | 63,444 | |||||||
|
Valuation
allowance
|
(62,278 | ) | (61,217 | ) | |||||
|
Deferred
tax asset
|
$ | 2,058 | $ | 2,227 | |||||
|
Domestic:
|
|||||||||
|
Short
term deferred tax assets
|
$ | - | $ | 652 | |||||
|
Long
term deferred tax asset
|
- | 795 | |||||||
| $ | - | $ | 1,447 | ||||||
|
Foreign:
|
|||||||||
|
Short
term deferred tax assets
|
$ | 1,001 | $ | 320 | |||||
|
Long
term deferred tax asset
|
1,057 | 460 | |||||||
| $ | 2,058 | $ | 780 | ||||||
The
Company's U.S. subsidiaries have estimated total available carry forward tax
losses of approximately $ 84,000 to offset against future taxable income
that expire between 2015 and 2024. As of December 31, 2008, the Company recorded
a deferred tax asset of $ 780 relating to the available net carry forward
tax losses.
Utilization
of U.S. net operating losses may be subject to substantial annual limitations
due to the "change in ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
|
e.
|
Reconciliation
of the theoretical tax expenses:
|
A
reconciliation between the theoretical tax expense, assuming all income is taxed
at the statutory tax rate applicable to income of the Company, and the actual
tax expense as reported in the statement of operations is as
follows:
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
Income
(loss) before taxes, as reported in the consolidated statements of
operations
|
$ | 8,082 | $ | (1,523 | ) | $ | (78,253 | ) | |||||
|
Statutory
tax rate
|
31 | % | 29 | % | 27 | % | |||||||
|
Theoretical
tax expenses (benefits) on the above amount at the Israeli statutory tax
rate
|
2,505 | (442 | ) | (21,128 | ) | ||||||||
|
Income
tax at rate other than the Israeli statutory tax rate (1)
|
(4,672 | ) | 655 | 139 | |||||||||
|
Non-deductible
expenses including equity based compensation expenses
|
4,008 | 2,432 | 970 | ||||||||||
|
Non-deductible
expenses which results from Impairment of goodwill, other intangible
assets
and
investment in affiliate
|
- | - | 23,250 | ||||||||||
|
Deferred
taxes on losses for which a valuation allowance was
provided
|
(261 | ) | 3,333 | 75 | |||||||||
|
Utilization
of operation losses carry forward
|
(1,232 | ) | (3,355 | ) | (3,231 | ) | |||||||
|
Taxes
in respect to prior years
|
(66 | ) | (1,588 | ) | 87 | ||||||||
|
State
and Federal taxes
|
425 | 689 | 177 | ||||||||||
|
Inter-company
charges
|
(299 | ) | (430 | ) | 57 | ||||||||
|
Other
individually immaterial income tax item
|
(119 | ) | (29 | ) | 109 | ||||||||
|
Actual
tax expense
|
$ | 289 | $ | 1,265 | $ | 505 | |||||||
|
(1) Per
share amounts (basic) of the tax benefit resulting from the
exemption
|
$ | 0.11 | $ | 0.02 | $ | 0.01 | |||||||
|
Per share amounts (diluted) of the tax benefit resulting from the
exemption
|
$ | 0.11 | $ | 0.02 | $ | 0.01 | |||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
|
f.
|
The
Company adopted the provisions of FIN 48 on January 1, 2007. Prior to
2007, the Company used the provisions of SFAS 5 to determine tax
contingencies. As of January 1, 2007, there was no difference in the
Company's tax contingencies under the provisions of FIN 48. As a result,
there was no effect on the Company's shareholders equity upon the
Company's adoption of FIN 48.
|
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
Gross
unrecognized tax benefits as of January 1, 2008
|
$ | 288 | |||
|
Increase
in tax position for current year
|
23 | ||||
|
Gross
unrecognized tax benefits as of December 31, 2008
|
$ | 311 |
The
Company recognizes interest and penalties related to unrecognized tax benefits
in tax expenses. The liability for unrecognized tax benefits included accrued
interest and penalties of $ 130 and $ 153 at December 31, 2007
and 2008, respectively
|
NOTE
15:-
|
BASIC
AND DILUTED NET INCOME (LOSS) PER
SHARE
|
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
Numerator:
|
|||||||||||||
|
Net
income (loss) available to shareholders of Ordinary shares
|
$ | 6,877 | $ | (3,885 | ) | $ | (81,340 | ) | |||||
|
Denominator:
|
|||||||||||||
|
Denominator
for basic earnings per share - weighted average number of Ordinary shares,
net of treasury stock
|
41,716,626 | 42,699,307 | 41,200,523 | ||||||||||
|
Effect
of dilutive securities:
|
|||||||||||||
|
Employee
stock options and ESPP
|
1,972,767 | * | ) - | * | ) - | ||||||||
|
Senior
convertible notes
|
* | ) - | * | ) - | * | ) - | |||||||
|
Denominator
for diluted net earnings per share - adjusted weighted average number of
shares
|
$ | 43,689,393 | $ | 42,699,307 | $ | 41,200,523 | |||||||
*) Antidilutive.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Year
ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
Financial
expenses:
|
|||||||||||||
|
Interest
|
$ | (2,961 | ) | $ | (2,582 | ) | $ | (2,357 | ) | ||||
|
Amortization
of marketable securities premiums
and
accretion of discounts, net
|
(224 | ) | (40 | ) | (110 | ) | |||||||
|
Others
|
(240 | ) | (617 | ) | (131 | ) | |||||||
| (3,425 | ) | (3,239 | ) | (2,598 | ) | ||||||||
|
Financial
income:
|
|||||||||||||
|
Interest
and others
|
7,242 | 5,909 | 3,780 | ||||||||||
| $ | 3,817 | $ | 2,670 | $ | 1,182 | ||||||||
|
NOTE
17:-
|
GEOGRAPHIC
INFORMATION
|
|
|
a.
|
Summary
information about geographic areas:
|
The Group
manages its business on a basis of one reportable segment (see Note 1 for a
brief description of the Group's business). The data is presented in accordance
with SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information". Revenues in the table below are attributed to geographical areas
based on the location of the end customers.
The
following presents total revenues for the years ended December 31, 2006, 2007
and 2008 and long-lived assets as of December 31, 2006, 2007 and
2008.
|
2006
|
2007
|
2008
|
|||||||||||||||||||||||
|
Total
|
Long-
lived
|
Total
|
Long-
lived
|
Total
|
Long-
lived
|
||||||||||||||||||||
|
revenues
|
assets
|
revenues
|
assets
|
revenues
|
assets
|
||||||||||||||||||||
|
Israel
|
$ | 12,411 | $ | 11,463 | $ | 10,604 | $ | 23,261 | $ | 13,597 | $ | 21,599 | |||||||||||||
|
Americas
|
83,352 | 127,079 | 89,614 | 113,894 | 91,640 | 26,250 | |||||||||||||||||||
|
Europe
|
32,704 | 6 | 40,305 | 105 | 40,854 | 118 | |||||||||||||||||||
|
Far
East
|
18,886 | 5 | 17,712 | 53 | 28,653 | 56 | |||||||||||||||||||
| $ | 147,353 | $ | 138,553 | $ | 158,235 | $ | 137,313 | $ | 174,744 | $ | 48,023 | ||||||||||||||
|
|
b.
|
Product
lines:
|
Total
revenues from external customers divided on the basis of the Company's product
lines are as follows:
- - - - -
- - - - - - - - - - - - - - - -
- - -
EXHIBIT
INDEX
|
Exhibit
No.
|
Exhibit
|
|||
|
4.36
|
Waiver
dated November 24, 2008 to Letter Agreement, dated April 30, 2008, between
First International Bank of Israel, as lender, and AudioCodes Ltd., as
borrower. †
|
|||
|
4.37
|
Amendment
dated February 16, 2009 to Letter Agreements, dated April 30, 2008,
between First International Bank of Israel, as lender, and AudioCodes
Ltd., as borrower. †
|
|||
|
4.38
|
Letter
Agreements, dated July 14, 2008, between Bank Mizrahi Tefahot Ltd., as
lender, and AudioCodes Ltd., as borrower. †
|
|||
|
4.39
|
Amendment
dated November 2, 2008 to Letter Agreement, dated July 14, 2008, between
Bank Mizrahi Tefahot Ltd., as lender, and AudioCodes Ltd., as borrower.
†
|
|||
|
4.40
|
Amendment
dated April 1, 2009 to Letter Agreement, dated July 14, 2008, between Bank
Mizrahi Tefahot Ltd., as lender, and AudioCodes Ltd., as borrower.
†
|
|||
|
4.41
|
AudioCodes
Ltd. 2008 Equity Incentive Plan.
|
|||
|
12.1
|
Certification
of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|||
|
12.2
|
Certification
of Nachum Falek, Vice President and Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|||
|
13.1
|
Certification
by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|||
|
13.2
|
Certification
by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|||
|
15.1
|
Consent
of Kost Forer and Gabbay & Kasierer, a member of Ernst & Young
Global.
|
|||
|
15.2
|
Consent
of Squar, Milner, Peterson, Miranda and Williamson,
LLP.
|
|||
|
†
|
English
summary of Hebrew
original.
|