Stock-based compensation
. We have granted options to purchase our
ordinary shares to our employees and consultants at prices below the fair
market value of the underlying ordinary shares on the grant date. These options
were considered compensatory because the deemed fair market value of the
underlying ordinary shares was greater than the exercise prices determined by
our board of directors on the option grant date. The determination of the fair
market value of the underlying ordinary shares prior to our initial public
offering involved subjective judgment, third party valuations and the
consideration by our board of directors of a variety of factors. Because there
was no public market for our ordinary shares prior to our initial public
offering, the amount of the compensatory charge was not based on an objective
measure, such as the trading price of our ordinary shares. As of January 1,
2006, we adopted Statement of Financial Accounting Standards No. 123(R) Share
Based Payment, or SFAS No. 123(R), which requires us to expense the fair value
of employee stock options. We adopted the fair value recognition provisions of
SFAS No. 123(R), using the modified prospective method for grants that were
measured using the fair value method and adopted SFAS No. 123(R) using the
prospective-transition method for grants that were measured using the Minimum
Value method in Statement of Financial Accounting Standards No. 123 Accounting
for Stock-Based Compensation, or SFAS No. 123, for either recognition or pro
forma disclosures. The fair value of stock-based awards granted after January
1, 2006, was estimated using the binominal model.
In
connection with the grant of options, we recorded total stock-based compensation
expense of $305,000 in 2005, $1.4 million in 2006 and $1.4 million in 2007. In
2007, $48,000, $230,000, $340,000 and $743,000 of our stock-based compensation
expense resulted from cost of revenue, research and development expenses, sales
and marketing expenses and general and administrative expenses, respectively,
based on the division in which the recipient of the option grant was employed.
As of December 31, 2007, we had an aggregate of $4.9 million of deferred
unrecognized stock-based compensation remaining to be recognized. We estimate
that this deferred unrecognized stock-based compensation balance will be
amortized as follows: $1.9 million in 2008, $1.8 million in 2009 and $1.2
million in 2010 and thereafter.
Financial
income (expenses), net
Financial
income (expenses), net consists primarily of interest earned on our cash
balances and other financial investments, foreign currency exchange gains or
losses, devaluation of marketable securities and bank fees.
As of
December 31, 2007, we had $40.3 million of principal invested in Auction-Rate
Securities, or ARS, which were rated AAA and AA at the time of purchase. Due to
the continued deterioration of, and uncertainties in, the credit and capital
markets that began in the second half of 2007, our ARS have experienced
multiple failed auctions due to a lack of liquidity in the market. A few of our
ARS have had their credit rating downgraded. To date, our ARS have paid
interest in accordance with their stated terms. Based on valuation reports
received from investment banks, we have recorded an impairment charge of $4.9
million to financial and other expenses, net, in our statement of operations
with respect to devaluation, which is considered other than temporary. In
addition, all of our ARS have been classified as long term assets. If
uncertainties in the credit and capital markets continue, these markets
deteriorate further or we experience any ratings downgrades on any ongoing
investments in our portfolio, including of ARS, we may incur additional
impairments to our investment portfolio and record further impairment charges
to our financial and other expenses, net, in our statement of operations.
34
In
addition, the financial and other income (expenses), net, may fluctuate due to
foreign currency exchange gains or losses. See also paragraph ITEM 11:
Quantitative and Qualitative Disclosures About Market Risk Foreign Currency
Exchange Risk.
Tax Reform
On January
1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the
reform, resident companies are subject to Israeli tax on income accrued or
derived in Israel or abroad. In addition, the concept of controlled foreign
corporation, or CFC, was introduced according to which an Israeli company may
become subject to Israeli taxes on certain income of a non-Israeli subsidiary
if, among other things, the subsidiarys primary source of income is passive
income (such as interest, dividends, royalties, rental income or capital
gains).
Our
facilities in Hod-Hasharon, Israel have been granted Approved Enterprise status
under the Investment Law and enjoy certain tax benefits. We expect to utilize
these tax benefits after we utilize our net operating loss carry forwards. As
of December 31, 2007, our net operating loss carry forwards for Israeli tax
purposes amounted to approximately $38 million. Income derived from other
sources, other than the Approved Enterprise, during the benefit period will
be subject to tax at the regular corporate tax rate. For more information about
the tax benefits available to us as an Approved Enterprise see ITEM 10:
Additional InformationTaxation and Government ProgramsLaw for the
Encouragement of Capital Investments, 1959.
Government Grants
Our
research and development efforts have been financed, in part, through grants
from the Office of the Chief Scientist under our approved plans in accordance
with the Israeli Law for Encouragement of Research and Development in the
Industry, 1984, or the Research and Development Law. Through December 31, 2007,
we had applied and received approval for grants totaling $13.6 million from the
Office of the Chief Scientist, of which $4.1 million is attributed to
NetReality products. Under Israeli law and the approved plans, royalties on the
revenues derived from sales of all of our products are payable to the Israeli
government, generally at the rate of 3.0% during the first three years and 3.5%
beginning with the fourth year, up to the amount of the received grants as
adjusted for fluctuation in the U.S. dollar/shekel exchange rate. The amounts
received after January 1, 1999 bear interest at twelve month LIBOR as at the
beginning of the year in which a grant is approved. Our obligation to pay these
royalties is contingent upon actual consolidated sales of our products and no
payment is required if no sales are made. As of December 31, 2007, we had an
outstanding contingent obligation to pay royalties in the amount of $5.9
million.
The
government of Israel does not own proprietary rights in knowledge developed
using its funding and there is no restriction related to such funding on the
export of products manufactured using the know-how. The know-how is, however,
subject to other legal restrictions, including the obligation to manufacture
the product based on the know-how in Israel and to obtain the Office of the
Chief Scientists consent to transfer the know-how to a third party, whether in
or outside Israel. These restrictions may impair our ability to outsource
manufacturing or enter into similar arrangements for those products or
technologies and they continue to apply even after we have paid the full amount
of royalties payable for the grants.
35
If the
Office of the Chief Scientist consents to the manufacture of the products
outside Israel, the regulations allow the Office of the Chief Scientist to
require the payment of increased royalties, ranging from 120% to 300% of the
amount of the grant plus interest, depending on the percentage of foreign
manufacture. If the manufacturing is performed outside of Israel by us, the
rate of royalties payable by us on revenues from the sale of products
manufactured outside of Israel will increase by 1% over the regular rates. If
the manufacturing, marketing and distribution is carried outside of Israel, the
rate of royalties payable by us on those revenues will be calculated in
accordance with the proportion between the grant received and the grant plus
the amount of our own investments in research and development for such
technology. The Research and Development Law further permits the Office of the
Chief Scientist, among other things, to approve the transfer of manufacturing
or manufacturing rights outside Israel in exchange for an import of certain
manufacturing or manufacturing rights into Israel as a substitute, in lieu of
the increased royalties.
The
Research and Development Law provides that the consent of the Office of the
Chief Scientist for the transfer outside of Israel of know-how derived out of
an approved plan may only be granted under special circumstances and subject to
fulfillment of certain conditions specified in the Research and Development Law
as follows: (a) the grant recipient pays to the Office of the Chief Scientist an
amount based on the scope of the support received, the royalties that were paid
by the company, the amount of time that elapsed since the date on which the
grants were received, and the sale price (according to certain formulas),
except if the grantee receives from the transferee of the know-how an
exclusive, irrevocable, perpetual unlimited license to fully utilize the
know-how and all related rights; (b) the grant recipient receives know-how from
a third party in exchange for its Office of the Chief Scientist funded
know-how; or (c) such transfer of Office of the Chief Scientist funded know-how
arises in connection with certain types of cooperation in research and
development activities.
In
September 2002, we acquired the assets of NetReality, an Israeli manufacturer,
from a receiver pursuant to a court ruling. In connection with the NetReality
acquisition, we assumed a commitment to pay royalties to the Office of the
Chief Scientist up to the amount of the contingent liabilities derived from the
grants that had been received by NetReality prior to the acquisition. Following
the acquisition of NetReality, the Office of the Chief Scientist merged the
NetReality approved plans with our other approved plans under a unified file.
In April 2007, the Office of the Chief Scientist notified us of its decision,
per our request, to separate the NetReality related approved plans from other
approved plans. The Office of the Chief Scientist also approved the
discontinuation of the NetReality related approved plans and as a result the
balance of our outstanding contingent obligation to pay royalties was reduced
by $4.7 million.
Factors Affecting Our Performance
Our
business, financial position and results of operations, as well as the
period-to-period comparability of our financial results, are significantly
affected by a number of factors, some of which are beyond our control,
including:
Size of end-customers and sales cycles
. We have a global, diversified end-customer
base consisting primarily of service providers and enterprises. We are making
efforts to increase our sales to large service providers. The deployment of our
products by small and midsize enterprises and service providers can be
completed relatively quickly with a limited number of NetEnforcer and/or
Service Gateway Omega systems compared to the number required by large
service providers. Large service providers take longer to plan the integration
of DPI solutions into their existing networks and to set goals for the implementation
of the technology. Sales to large service providers are therefore more
complicated as they involve a relatively larger number of network elements and
solutions, as well as NetEnforcer and/or Service Gateway Omega systems. We
are seeking to achieve significant customer wins in the large service provider
market that will positively impact future performance. However, our performance
is also influenced by sales cycles for our products, which typically fluctuate
based upon the size and needs of end-customers that purchase our products. We
expect that increased sales to large service providers of Service Gateway
systems will result in longer sales cycles that will increase unpredictability
regarding the timing of our sales and may cause our quarterly and annual
operating results to fluctuate if a significant customer delays its purchasing
decision and/or defers an order. Furthermore, longer sales cycles may result in
delays from the time we increase our operating expenses and make investments in
inventory, until the time that we generate revenue from related product sales.
36
Average
selling prices
.
Our performance is affected by the selling price of our products. We
price our products based on several factors, including manufacturing costs, the
stage of the products life cycle, competition, technical complexity of the
product, discounts given to channel partners in certain territories,
customization and other special considerations in connection with larger
projects. We typically are able to charge the highest price for a product when
it is first introduced to the market. We expect that the average selling prices
for our products will decrease over the products life cycle as our competitors
introduce new products and DPI technology becomes more standardized. In order
to maintain or increase our current price, we expect that we will need to
enhance the functionality of our existing products by offering higher system
speeds, and additional features, such as additional security functions, supporting
additional applications and enhanced reporting tools. We also from time to time
introduce enhanced products, typically higher end models that include new
architecture and design and new capabilities, primarily to higher end models.
Such enhanced products typically increase our average selling price. To further
offset such declines, we sell maintenance and support programs on our products,
and as our customer base and number of field installations grows our related
service revenues are expected to increase.
Cost of revenues and cost reductions
. Our cost of revenues as a percentage of
total revenues was 23.6% for 2005, 22.2% for 2006 and 24.7% for 2007. Our
products use off-the-shelf components and typically the prices of such
components decline over time. However, the introduction and sale of new or
enhanced products and services may result in an increase in our costs of
revenues. We make a continuous effort to identify cheaper components of
comparable performance and quality. We also seek improvements in engineering
and manufacturing efficiency that will reduce costs. Since our cost of revenues
also include royalties paid to the Office of the Chief Scientist, our cost of
sales may be impacted positively or negatively by actions of the Israeli government
changing the royalty rate. Our products incorporate features that require
payment of royalties to third parties. In addition, new products, such as the
Service Gateway platform, usually have higher costs during the initial
introduction period. We generally expect such costs to decline as the product
matures and sales volume increases. The growth of our customer base is usually
coupled with increased service revenues and demand for extended service suites
by our large services providers and Tier 1 carriers may require us to hire
additional personnel and incur other expenditures. However, these additional
expenses, handled efficiently, may be utilized to further support the growth of
our customer base and increase service revenues.
37
Currency
exposure.
A majority of our revenues and a substantial
portion of our expenses are denominated in U.S. dollars. However, a significant
portion of the expenses associated with our global operations, including
personnel and facilities related expenses, are incurred in currencies other
than U.S. dollar. This is the case in primarily in Israel and to a lesser
extent in certain countries in Europe and Asia. Consequently, a decrease in the
value of the U.S. dollar relative to local currencies will increase the dollar
cost of our operations in these countries. A relative decrease in the value of
the U.S. dollar would be partially offset to the extent that we generate
revenues in such currencies.
Over the
past two years, the U.S. dollar has devaluated relative to the Israeli
currency, the New Israeli Shekel, or the NIS. In 2007, the U.S. dollar
depreciated against the NIS by 9.0%. During the first half of 2008, this
devaluation trend was accelerated. This trend occurred as well in respect to
the exchange rate of the U.S. dollar and other currencies. If this trend
continues, our U.S. dollar-measured results of operations might be adversely
affected.
In
addition, since certain assets and liabilities on our balance sheet are
denominated in currencies other than U.S. dollar, our financial and other
income (expenses), net, may fluctuate due to revaluation and/or realization of
these assets and liabilities in exchange rates other than those prevailing at
the time in which these assets and/or liabilities were incurred.
Critical Accounting Policies and Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates and judgments are subject to an inherent
degree of uncertainty and actual results may differ. Our significant accounting
policies are more fully described in Note 2 to our consolidated financial
statements included elsewhere in this annual report. Certain of our accounting
policies are particularly important to the portrayal of our financial position
and results of operations. In applying these critical accounting policies, our
management uses its judgment to determine the appropriate assumptions to be
used in making certain estimates. Those estimates are based on our historical
experience, the terms of existing contracts, our observance of trends in our
industry, information provided by our customers and information available from
other outside sources, as appropriate. With respect to our policies on revenue
recognition and warranty costs, our historical experience is based principally
on our operations since we commenced selling our products in 1998. Our
estimates are guided by observing the following critical accounting policies:
Revenue recognition
. We recognize revenues from sales of our
products in accordance with the American Institute of Certified Public
Accountants Statement of Position, or SOP, 97-2, Software Revenue
Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. When an arrangement does not require
significant production, modification or customization of software or does not
contain services considered to be essential to the functionality of the
software, revenue is recognized when the following four criteria are met: (i)
persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii)
the fee is fixed and determinable; and (iv) collection is probable.
38
We exercise
judgment and use estimates in connection with the determination of the amount
of product software license and services revenues to be recognized in each
accounting period. If collection is not considered probable, revenue is
recognized when the fee is collected. We record provisions against revenue for
estimated sales returns and sales incentives on product and service-related
sales in the same period as the related revenue is recorded. We estimate the
costs that may be incurred under the warranty arrangements and record a
liability to cost of sales in the amount of such costs at the time product
revenue is recognized. We also record a provision to operating expenses for bad
debts resulting from customers inability to pay for the products or services
they have received. These estimates are based on historical sales returns, sale
incentives, warranty related expenses, and bad debt expense, analyses of credit
memo data, and other known factors, such as bankruptcy. If the historical data
we use to calculate these estimates do not accurately reflect actual or future
returns, sales incentives, warranty related expenses or bad debts, adjustments
to these reserves may be required that would increase or decrease revenue or
net income.
Many of our
product sales include multiple elements. Such elements typically include
several or all of the following: hardware appliance, software licenses,
hardware and software maintenance, technical support and training services. For
multiple-element arrangements that do not involve significant modification or
customization of the software and do not involve services that are considered
essential to the functionality of the software, we use the residual method to
allocate value to each element when sufficient specific objective evidence
exists for all undelivered elements, but does not exist for the delivered
element, typically the hardware appliance and software license. Under the
residual method, each undelivered element is allocated value based on customer
specific objective evidence of fair value for that element, as described above,
and the remainder of the total arrangement fee is allocated to the delivered
element(s). If sufficient customer specific objective evidence does not exist for
all undelivered elements, revenue is deferred for the entire arrangement until
all revenue recognition criteria are met for such undelivered elements.
Accounting
for Stock-Based Compensation
. Effective January 1,
2006, we adopted SFAS No. 123(R), which supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Generally, the
approach in SFAS No. 123(R) is similar to the approach described in SFAS No.
123. However, SFAS No. 123(R) requires all equity-based payments to employees,
including grants of employee stock options, to be recognized in the statement
of income based on their fair values. We elected the modified-prospective
method and therefore prior periods were not restated. Under the
modified-prospective method, compensation costs recognized in 2007 include also
compensation costs for all share-based payments granted prior to, but not yet
vested, as of December 31, 2007. In
2007, we recognized equity-based compensation expense under SFAS No. 123(R) in the
amount of $1.4 million. When calculating this equity-based compensation expense
we took into consideration awards that are ultimately expected to vest.
Therefore, this expense has been reduced for estimated forfeitures. In our pro
forma information required under SFAS No. 123 for the periods prior to fiscal
2006, we accounted for forfeitures as they occurred. We elected to apply the
intrinsic value-based method prescribed in APB Opinion No. 25 for our
equity-based compensation to employees and directors and provide the pro forma
disclosure provisions of SFAS No. 123, as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of SFAS No. 123. As such, we computed and recorded
compensation expense for grants whose terms were fixed with respect to the
number of shares and option price only if the market price on the date of grant
exceeded the exercise price of the stock option. The compensation cost for the
fixed plans was recorded over the period the employee performs the service to
which the stock compensation relates.
39
Inventories
. We value our inventories at the lower of cost or estimated market
value. Cost being determined on the basis of First In, First Out (FIFO) cost
method for raw materials and out-of-pocket manufacturing costs. Indirect costs
are allocated on average basis. We estimate market value based on our current
pricing, market conditions and specific customer information. We write off
inventory for slow-moving items or technological obsolescence. We also assess
our inventories for obsolescence based upon assumptions about future demand and
market conditions. Once inventory is written off, a new cost basis for these
assets is established for future periods. Inventory write offs totaled $0.2
million in 2005, $0.3 million in 2006 and $0.2 million in 2007.
Marketable
securities
. We account for our investments in
marketable securities using Statement of Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity Securities, or SFAS No.
115. Our management determines the appropriate classification of marketable
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been classified as
available-for-sale and are carried at fair market value. Fair value is
determined based on observable market value quotes or, if market values are not
available, using valuation models including assessments of counterparty credit
worthiness, credit default risk, underlying security type of collaterals risk
premium and overall capital market liquidity conditions. Declines in fair value
that are considered other-than-temporary are charged to earnings and those that
are considered temporary are reported, net of tax, as a component of
accumulated other comprehensive income in stockholders equity. The cost of
securities sold is based on the specific identification method. As of December
31, 2007, we held marketable securities in U.S. dollars in the United States,
which were classified as available for sale. The balance was composed of ARS
and corporate bonds. The ARS and corporate bonds bear interest at rates ranging
from 4.59% to 7.55% per annum.
Following
SEC Staff Accounting Bulletin No. 59, EITF 03-1 and FAS 115-1, management
evaluated in each period whether declines in the market value of its securities
are other than temporary. Where such declines are determined to be other than
temporary, the related unrealized loss is recorded as a write-down included in
financial expenses.
We recorded
a pre-tax impairment charge relating to our investments in ARS of $4.9 million
in the fourth quarter of 2007 and an additional pre-tax impairment charge of
$2.2 million in the first quarter of 2008. See ITEM 3: Key InformationRisk
FactorsWe have invested a portion of our cash in auction-rate securities,
which subjects us to liquidity and investment risk. Due to recent uncertainties
in the capital markets regarding auction-rate securities, we recorded
impairment charges in the fourth quarter of 2007 and the first quarter of 2008,
and, if the fair value of these investments were to decline further, we could
be required to record further impairment charges related to these investments.
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board, or the FASB, issued
the Statement of Financial Accounting Standards No. 157, Fair Value
Measurements, or SFAS No. 157. This statement provides a single definition of
fair value, a framework for measuring fair value, and expanded disclosures
concerning fair value. Previously, different definitions of fair value were
contained in various accounting pronouncements creating inconsistencies in
measurement and disclosures. SFAS No. 157 applies under those previously issued
pronouncements that prescribe fair value as the relevant measure of value,
except SFAS No. 123(R) and related interpretations. The statements does not
apply to accounting standards that require or permit measurement similar to
fair value but are not intended to measure fair value. This pronouncement is
effective for fiscal years beginning after November 15, 2007. On February 12,
2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of
FASB Statement No. 157, or FSP No. 157-2. FSP 157-2 amends SFAS No. 157 to
delay the effective date of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (that is, at least
annually). For items within its scope, FSP No. 157-2 defers the effective date
of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. We are currently evaluating the impact on
our consolidated financial statements of adopting SFAS No. 157.
40
In February
2007, the FASB issued the Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS
No. 159. This statement provides companies with an option to report selected
financial assets and liabilities at fair value. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The SFAS No.
159 objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS No. 159 is effective as of the beginning of
an entitys first fiscal year beginning after November 15, 2007. The adoption
of SFAS No. 159 will not have effect on our consolidated financial statements.
In December
2007, the FASB issued the Statement of Financial Accounting Standards
No. 141R, Business Combinations, or SFAS No. 141R. SFAS No.
141R establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree. The statement also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statement to evaluate
the nature and financial effects of the business combination. SFAS No.
141R is effective for financial statements issued for fiscal years beginning after
December 15, 2008. Accordingly, any business combinations the Company
executes will be recorded and disclosed following existing GAAP until
January 1, 2009. We expect that SFAS No. 141R will have an
impact on our consolidated financial statements when effective, but the nature
and magnitude of the specific effects will depend upon the nature, terms and
size of the acquisitions we consummate after the effective date. We are still
assessing the impact of this standard on our future consolidated financial statements.
In December
2007, the SEC staff issued Staff Accounting Bulletin No. 110, or SAB 110,
which, effective January 1, 2008, amends and replaces SAB 107, Share-Based
Payment. SAB 110 expresses the views of
the SEC staff regarding the use of a simplified method in developing an
estimate of expected term of plain vanilla share options in accordance with
SFAS No. 123(R). Under the simplified method, the expected term is calculated
as the midpoint between the vesting date and the end of the contractual term of
the option. The use of the simplified method, which was first described in
SAB 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use
of the simplified method for plain vanilla awards in certain situations. The SEC staff does not expect the
simplified method to be used when sufficient information regarding exercise
behavior, such as historical exercise data or exercise information from
external sources, becomes available. We are currently assessing the potential
impact that the adoption of SAB 110 could have on our consolidated financial
statements.
41
Results of Operations
The
following table sets forth our statements of operations as a percentage of
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
80.5
|
%
|
|
84.2
|
%
|
|
77.1
|
%
|
Services
|
|
|
19.5
|
|
|
15.8
|
|
|
22.9
|
|
Total
revenues
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
Cost of
revenues:
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
19.5
|
|
|
18.8
|
|
|
20.3
|
|
Services
|
|
|
4.1
|
|
|
3.4
|
|
|
4.4
|
|
Total
cost of revenues
|
|
|
23.6
|
|
|
22.2
|
|
|
24.7
|
|
Gross profit
|
|
|
76.4
|
|
|
77.8
|
|
|
75.3
|
|
Operating expenses
:
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
25.8
|
|
|
22.1
|
|
|
28.9
|
|
Sales and marketing
|
|
|
51.7
|
|
|
45.3
|
|
|
55.6
|
|
General and administrative
|
|
|
10.4
|
|
|
10.2
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
87.9
|
|
|
77.5
|
|
|
101.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(11.5
|
)
|
|
0.3
|
|
|
(26.4
|
)
|
Financing and other income (expenses), net
|
|
|
0.2
|
|
|
1.9
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit (expense)
|
|
|
(11.3
|
)
|
|
2.2
|
|
|
(29.0
|
)
|
Income tax benefit (expense)
|
|
|
1.0
|
|
|
0.3
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(10.3
|
)
|
|
1.8
|
|
|
(30.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2007 Compared to Year Ended December 31, 2006
Revenues
Products
. Product
revenues decreased by $3.7 million, or 13%, to $25.1 million in 2007
from $28.8 million in 2006. The
majority of our product revenue in 2007 was derived from sales of our NetEnforcer
AC-1000 and AC-2500, and to a lesser extent, from the Service Gateway Omega,
which are targeted primarily at large and medium service providers. The
decrease is primarily attributable to the completion in 2006 of a project that
generated revenues of $6.9 million from a single system integrator.
Services
. Service revenues increased by $2.0 million,
or 37%, to $7.4 million in 2007 from $5.4 million in 2006. The increase in
service revenues resulted primarily from a larger customer base and increased
field installations covered by maintenance and support contracts.
42
Revenues
from products, which comprised 77.1% of our total revenues in 2007, decreased
by 7.1% compared to 2006, while the service revenues increased by a comparable
amount.
Cost of revenues and gross margin
Products
. Cost of product revenues increased by $0.2
million, or 3%, to $6.6 million in 2007 from $6.4 million in 2006. This increase resulted primarily from growth
in salaries and overhead expenses. Product gross margin was 73.7% in 2007
compared to 77.6% in 2006. This decrease is primarily attributable to increased
expenses attributable to salaries, third-party royalties and overhead expenses
combined with higher sales volume of our high-end products, which require
higher material and labor costs than other products.
Services
. Service cost of revenues increased by $0.2
million, or 17%, to $1.4 million in 2007 from $1.2 million in 2006. This
increase resulted primarily from an increase in post-sales support
expenses caused by employing additional post-sale support engineers and salary
increases. Services gross margin was
80.9% in 2007 compared to 78.4% in 2006.
Total gross
margin was 75.3% in 2007 compared to 77.8% in 2006.
Operating
expenses
Research
and development
.
Gross research
and development expenses increased by $2.5 million, or 26.9%, to $11.8 million
in 2007 from $9.3 million in 2006.
This increase was primarily attributed to an increase of salaries
of approximately $1.4 million, which resulted principally from salary raises
and the devaluation of the U.S. dollar relative to the NIS; an increase in
depreciation of $0.3 million; and an increase in other expenses, principally
consisted of rent and overhead, of approximately $0.8 million. The increase in gross
research and development expenses is primarily driven by the development
of our NetXplorer management application suite and the Service Gateway platform.
Research
and development expenses, net of received and accrued grants from the Office of
the Chief Scientist, increased by $1.9 million, or 24.6%, to $9.4 million in
2007 from $7.5 million in 2006. Grants
totaled $2.4 million in 2007 compared to $1.8 million in 2006. The increase in grants received was due to a
larger grant approved by the Office of the Chief Scientist and the devaluation
of U.S. dollar relative to the NIS. Research and development expenses as a
percentage of revenues increased to 28.9% in 2007 from 22.1% in 2006.
Sales
and marketing
.
Sales and
marketing expenses increased by $2.6 million in 2007, or 16.9%, to $18.1
million in 2007 from $15.5 million in 2006.
This increase resulted from growth in salaries and related
expenses of $1.9 million, primarily related to hiring of additional sales,
marketing and presale support personnel to provide broader geographical
coverage and increased focus on the service provider market, an increase of
$0.4 million in facilities-related and overhead expenses and an increase of
$0.6 million in consulting, travel and other expenses, partially offset by a
decrease of $0.3 million in amortization of stock-based compensation. Sales and marketing
expenses as a percentage of revenues increased to 55.6% in 2007 from 45.3% in
2006.
43
General
and administrative
.
General and
administrative expenses increased by $2.1 million, or 61.2%, to $5.6 million in
2007 from $3.5 million in 2006. This
increase is primarily attributable to: an increase of $1.1 million in
professional services expenses primarily associated with corporate governance
compliance under the Sarbanes-Oxley Act of 2002 and rules of the U.S.
Securities and Exchange Commission and Nasdaq; director and officer liability
insurance premiums and defending the class action law suits filed in the United
States District Court for the Southern District of New York against us and
certain of our directors and officers; an increase of $0.5 million in personnel
expenses due to the hiring of additional personnel as well as salary increases;
an increase of $0.3 million in other expenses mainly depreciation and travel;
and an increase of $0.2 million in amortization of stock-based compensation.
General
and administrative expenses as a percentage of revenues increased to 17.2% in
2007 from 10.2% in 2006.
Financial and other income (expenses), net.
Financial
and other expenses, net were $845,000 in 2007 compared to a net income of
$630,000 in 2006. The decrease in
financial and other income (expenses), net is primarily due to the $4.9 million
impairment charge against our investment in auction-rate securities, and was
partially offset by an increase in interest received on cash balances and
marketable securities of $3.3 million that is primarily attributable to the
increase in cash, cash equivalents and marketable securities as a result of our
initial public offering and decrease in interest and other expenses of $0.1
million.
Income tax expense
. Income tax expense was
$0.5 million in 2007 compared to income tax expense of $0.1 million in 2006.
The increase in income tax expense is primarily attributable to a write-down of
a withholding tax asset, which resulted from our assessment as to our ability
to utilize them in the foreseeable future.
Year Ended December
31, 2006 Compared to Year Ended December 31, 2005
Revenues
Products
.
Product revenues
increased by $10.3 million, or 56%, to $28.8 million in 2006 from $18.5 million
in 2005. The majority of our product
revenue in 2006 was derived from sales of the NetEnforcer AC-1000 and AC-2500,
which are targeted primarily at large and medium service providers. Product
revenues for 2006 also include $6.9 million of sales to a single system
integrator
compared to $3.7 million of sales to the same system integrator in 2005.
Services
. Service revenues increased by $0.9 million,
or 20%, to $5.4 million in 2006 from $4.5 million in 2005. The increase in
service revenues resulted primarily from a larger product base covered by
maintenance and support contracts. The increase in service revenues was partially offset by a
decrease of sales of maintenance and support programs related to NetRealitys
legacy products in 2006 compared to 2005. Service revenues as a
percentage of sales decreased in part due to sales to NTL, which, as of
December 31, 2006, had not included maintenance and support contracts typically
associated with our product sales.
Revenues
from products, which comprised 84.2% of our total revenues in 2006, increased
by 3.7% compared to 2005, while the balance of our revenues were attributable
to service revenues.
44
Cost
of revenues and gross margin
Products
. Cost of product revenues increased by $1.9
million, or 44%, to $6.4 million in 2006 from $4.5 million in 2005. This increase resulted primarily from
increased expenditure of $1.1 million on materials due to an increased number
of units sold, and an increase of $0.4 million in royalty expense accrued or
paid to the Office of the Chief Scientist.
Product gross margin was 77.6% in 2006 compared to 75.8% in 2005. This increase resulted from higher priced
modules accounting for a greater proportion of total sales.
Services
.
Service cost of revenues increased by $0.3 million, or 24%, to $1.2 million
in 2006 from $0.9 million in 2005. This increase resulted from
an increase of $0.2 million in post-sales support expenses as a result
of employing additional post-sale support engineers and salary increases. Services gross margin was 78.4% in 2006
compared to 79.0% in 2005.
Total gross
margin was 77.8% in 2006 compared to 76.4% in 2005.
Operating
expenses
Research and development
. Gross research and development
expenses increased by $2.6 million, or 38.8%, to $9.3 million in 2006 from
$6.7 million in 2005. This
increase was primarily due to the hiring of additional research and
development staff as well as increased salaries. These increases were driven by the development of
new products, such as our NetXplorer management application suite and the
initial development of our Service Gateway platform.
Research
and development expenses, net of received and accrued grants from the Office of
the Chief Scientist, increased by $1.6 million, or 27.1%, to $7.5 million in
2006 from $5.9 million in 2005. Grants
totaled $1.8 million in 2006 compared to $0.7 million in 2005. The increase in grants received was due to a
larger grant approved by the Office of the Chief Scientist. Research and
development expenses as a percentage of revenues decreased to 22.1% in 2006
from 25.8% in 2005.
Sales and marketing
. Sales and marketing expenses increased by $3.6 million in
2006, or 30.0%, to $15.5 million in 2006 from $11.9 million in 2005. This increase resulted from an increase
of $0.9 million due primarily to the hiring of additional sales, marketing and
engineering personnel to provide broader geographical coverage and increased
focus on the service provider market, an increase of $0.6 million in
amortization of stock-based compensation and an increase of $0.3 million in
expenses relating to cooperative advertising expenses, public relations and
advertising. Sales and marketing expenses as a percentage of
revenues decreased to 45.3% in 2006 from 52% in 2005.
General and
administrative
. General and administrative
expenses increased by $1.1 million, or 45.6%, to $3.5 million in 2006 from $2.4
million in 2005. This increase resulted
from an increase of $0.2 million due primarily to the hiring of
additional personnel as well as salary increases, an increase of $0.2 million
in expenses related to professional services and increase of $0.5 million in
amortization of stock-based compensation. General and administrative expenses as a percentage of
revenues were approximately 10%
in 2006 maintaining similar level as in 2005.
45
Financial and other income (expenses), net.
Financial
and other income, net was $0.6 million in 2006 compared to $45,000 in
2005. The increase in financial and
other income resulted from an increase of $0.6 million related to interest
received on cash balances.
Income tax benefit (expense)
. Income tax
expense was $111,000 in 2006 compared to income tax benefit of $218,000 in
2005. The income tax expense in 2006 was attributable to a reversal of deferred
income tax asset and taxable income in the U.S. subsidiary.
|
|
B.
|
Liquidity and Capital Resources
|
From
inception until consummation of our initial public offering we financed our
operations primarily through private placements of our equity securities and,
to a lesser extent, through borrowings from financial institutions. Sales of
our equity securities including the consummation of our initial public offering
resulted in net proceeds to us of approximately $112.7 million, net of issuance
expenses.
As of
December 31, 2007, we had $28.1 million in cash and cash equivalents and $42.6
million in marketable securities, of which $35.4 million were ARS. As of
December 31, 2007, our working capital, which we calculate by subtracting our
current liabilities from our current assets, was $37.2 million.
Based on
our current business plan, we believe that our existing cash balances, will be
sufficient to meet our anticipated cash needs for payments of our recent
acquisition of Esphions business and for working capital and capital
expenditures for at least the next twelve months. In addition, we believe that
the current lack of liquidity of the ARS will not have a material impact on our
liquidity, cash flow or our ability to fund our operations for at least the
next twelve months. If our estimates of revenues, expenses or capital or
liquidity requirements change or are inaccurate and are insufficient to satisfy
our liquidity requirements, we may seek to sell additional equity or arrange
additional debt financing. In addition, we may seek to sell additional equity
or arrange debt financing to give us financial flexibility to pursue attractive
acquisition or investment opportunities that may arise in the future, although
we currently do not have any specific acquisitions or investments planned.
Operating activities
. Net cash used in
operating activities in 2007 was $6.1 million. Net cash used in operating
activities was primarily attributable to our net loss of $9.9 million and was
partially offset by non-cash expenses that primarily consisted of a $4.9
million impairment charge against ARS, $1.5 million in depreciation and
amortization and $1.4 million in stock-based compensation expenses. In
addition, an increase of $1.9 million in trade receivables, an increase of $1.8
million in other receivables and prepaid expenses, which is primarily
attributable to the increase of a receivable from the Office of Chief
Scientist, an increase of $1.6 million in inventories balances, a decrease of
$1.0 million in trade payables and changes in other balance sheet items, net of
$0.4 million, partially offset by the increase of $1.0 million in employees and
payroll accruals and an increase of $1.7 million in deferred revenues, caused a
further increase of the net cash used in operating activities.
Net cash
provided by the operating activities in 2006 was $1.3 million. This net cash
was generated primarily from our net income of $0.6 million adjusted for
non-cash expenses of $2.3 million and by an increase in trade and other
accounts payable of $2.8 million, an increase of $1.1 million in deferred
revenues, partially offset by an increase of $2.3 million in trade receivables,
an increase of $2.1 million in inventories, and by an increase of $1.1 million
in other receivables and prepaid expenses and other assets due to prepaid
payments for the lease on our new offices in Hod-Hasharon, Israel. Net cash
provided by operating activities in 2005 was $0.2 million and was generated
primarily by an increase of $1.3 million in deferred revenues and an increase
in trade and other accounts payable of $1.1 million, partially offset by our
net loss of $2.4 million adjusted for non-cash expenses of $0.9 million.
46
Investing activities
. Net cash provided by
investing activities in 2007 was $25.6 million, primarily due to redemption and sale of
available-for-sale marketable securities in the amount of $115.7 million,
partially offset by investment in available-for-sale marketable securities in
the amount of $87.1 million, and $3.0 million of capital investment
primarily in research
and development equipment. Net cash used in investing activities in 2006
was $73.9 million and consisted primarily of $104.1 million investments in
available-for-sale marketable securities, partially offset by $32.5 million of redemption
and sales of available-for-sale marketable securities, $2.1 million of capital
investments primarily in research
and development equipment and $0.3 million of investment in severance pay funds.
Net cash used in investing activities in 2005 was $0.4 million and consisted
primarily of $0.7 million of capital investments primarily in research and
development equipment, $4.3 million investments in available-for-sale
marketable securities, partially offset by $4.6 million of redemption and sales
of available-for-sale marketable securities.
We expect
that our capital expenditures will total approximately $2.0 million in 2008. We
anticipate that these capital expenditures will be primarily related to further
investments in research and development equipment of our next generation
products and in leasehold improvements.
Financing activities
. Net cash provided by financing activities in
2007 was $1.5 million and was generated primarily by the issuance of share
capital through stock options and warrant exercise. Net cash provided by
financing activities in 2006 was $76.1 million and was primarily attributable
to the net funds raised in our initial public offering of $70.5 million,
issuance of share capital prior to our initial public offering of $5.4 million
and other issuances of share capital due to options and warrants exercise
including related stock based compensation tax benefits of $0.2 million. Net
cash used in financing activities in 2005 was $0.1 million resulting primarily from
the repayment of $0.2 million of indebtedness partially offset by funds
received from option exercises.
|
|
C.
|
Research and Development, Patents and Licenses
|
Our
research and development activities take place in Israel and New Zealand. As of
December 31, 2007, 89 of our employees were engaged primarily in research and
development. We devote a significant amount of our resources towards research
and development to introduce and continuously enhance products to support our
growth strategy.
Our
research and development efforts have benefited from royalty-bearing grants
from the Office of the Chief Scientist. The State of Israel does not own any
proprietary rights in technology developed with the Office of the Chief
Scientist funding and there is no restriction related to the Office of the
Chief Scientist on the export of products manufactured using technology
developed with Office of the Chief Scientist funding. For a description of
restrictions on the transfer of the technology and with respect to
manufacturing rights, please see ITEM 3: Key InformationRisk FactorsThe
government grants we have received for research and development expenditures
restrict our ability to manufacture products and transfer technologies outside
of Israel and require us to satisfy specified conditions. If we fail to comply
with such restrictions or these conditions, we may be required to refund grants
previously received together with interest and penalties, and may be subject to
criminal charges.
47
Total
research and development expenses, before royalty bearing grants, were
approximately $6.7 million, $9.3 million and $11.8 million in the years ended
December 31, 2005, 2006 and 2007, respectively. Royalty bearing grants amounted
to $0.7 million, $1.8 million and $2.4 million in 2005, 2006 and 2007,
respectively.
See ITEM
5: Operating and Financial Review and Prospects above.
|
|
E.
|
Off Balance Sheet Arrangements
|
We
are not a party to any material off-balance sheet arrangements. In addition, we
have no unconsolidated special purpose financing or partnership entities that
are likely to create material contingent obligations.
|
|
F.
|
Contractual and Other Commitments
|
The
following table of our material contractual and other obligations known to us
as of December 31, 2007, summarizes the aggregate effect that these obligations
are expected to have on our cash flows in the periods indicated. We currently
estimate that we may be required to pay an aggregate of $0.5 to $0.8 million in
earnout payments to be accrued in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
due by period
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1 3 years
|
|
3-5 years
|
|
Over 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
offices(1)
|
|
$
|
2,737
|
|
$
|
645
|
|
$
|
1,424
|
|
$
|
668
|
|
$
|
|
|
Operating leases
vehicles
|
|
|
1,471
|
|
|
857
|
|
|
614
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
1,900
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
Accrued severance pay(2)
|
|
|
3,175
|
|
|
|
|
|
|
|
|
|
|
|
3,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,283
|
|
$
|
3,402
|
|
$
|
2,038
|
|
$
|
668
|
|
$
|
3,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consists primarily of an
operating lease for our facilities in Hod-Hasharon, Israel, as well as
operating leases for facilities leased by our subsidiaries.
|
(2)
|
Accrued severance pay
relates to obligations to our Israeli employees as required under Israeli
labor laws. These obligations are payable, among others, upon termination,
retirement or death of the respective employee.
|
48
ITEM 6: Directors, Senior Management and
Employees
|
|
A.
|
Directors and Senior Management
|
Our
directors and executive officers, their ages and positions as of June 15, 2008,
are as follows:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
Yigal Jacoby
|
|
47
|
|
Chairman of the Board
|
Rami Hadar
|
|
44
|
|
Director, Chief Executive
Officer and President
|
Yossi Sela(1)
|
|
56
|
|
Director
|
Dr. Eyal Kishon(1)(2)
|
|
48
|
|
Director
|
Shai Saul(1)
|
|
45
|
|
Director
|
Nurit Benjamini(1)(2)
|
|
41
|
|
Director
|
Steven D. Levy(2)
|
|
52
|
|
Director
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
Amir Weinstein(3)
|
|
47
|
|
Executive Vice President
Products and Technology
|
Anat Shenig
|
|
39
|
|
Vice President Human
Resources
|
Andrei Elefant
|
|
34
|
|
Vice President Product
Management and Marketing
|
Doron Arazi
|
|
44
|
|
Chief Financial Officer
|
Elazar (Azi) Ronen
|
|
46
|
|
Executive Vice President
Corporate Development
|
Eli Cohen
|
|
40
|
|
Vice President
International Sales
|
Jay Klein
|
|
43
|
|
Vice President Chief
Technology Officer
|
Pini Gvili
|
|
42
|
|
Vice President
Operations
|
Ramy Moriah
|
|
52
|
|
Vice President Customer
Care and Information Technology
|
Vin Costello
|
|
51
|
|
Vice President and General
Manager The Americas
|
|
|
(1)
|
Member of our compensation
and nomination committee.
|
(2)
|
Member of our audit
committee.
|
(3)
|
Mr. Weinstein has resigned
his position to be effective as of September 1, 2008.
|
Directors
Yigal Jacoby
co-founded our company in 1996
and serves as Chairman of our board of directors. Prior to co-founding Allot,
Mr. Jacoby served as General Manager of Bay Networks Network Management
Division in Santa Clara from 1996 to 1997. In 1992, he founded Armon
Networking, a manufacturer of RMON-based network management solutions, which
was sold to Bay Networks in 1996. He also held various engineering and
marketing management positions at Tekelec, a manufacturer of Telecommunication
monitoring and diagnostic equipment, including Director, OSI & LAN Products
from 1989 to 1992 and Engineering Manager from 1987 to 1989. Mr. Jacoby has
founded several startups in the communications field and served on their
boards. Mr. Jacoby has a B.A., cum laude, in Computer Science from Technion
Israel Institute of Technology and an M.Sc. in Computer Science from University
of Southern California.
Rami
Hadar
has served as our Chief Executive Officer and
President since 2006 and is a member of our board of directors. Prior to
joining us, Mr. Hadar founded CTP Systems, a developer of cordless telephony
systems in 1989 and served as Chief Executive Officer until its acquisition by
DSP Communications in 1995. Mr. Hadar continued with DSP Communications
executive management team for two years, and thereafter, in 1999, the company
was acquired by Intel. In 1997, Mr. Hadar co-founded Ensemble Communications, a
pioneer in the broadband wireless space and the WiMax standard, where he served
as Executive Vice President of Sales and Marketing until 2002. Mr. Hadar also
served as Chief Executive Officer of Native Networks from 2002 to 2005, which
was successfully sold and integrated to Alcatel. Mr. Hadar holds a B.Sc. in
Electrical Engineering from Technion Israel Institute of Technology.
49
Yossi
Sela
has served as a director since 1998. Mr. Sela is
the Managing Partner of Gemini Israel Funds, a leading Venture Capital fund,
which invests primarily in seed and early stage Israeli technology companies.
In this capacity, Mr. Sela sits on the board of a number of Gemini portfolio
companies, including Adimos Inc., Saifun Semiconductors Ltd., and IXI Mobile,
Ltd. Mr. Selas past board positions include CommTouch Software Ltd., Precise
Software Solutions Ltd. and Envara Inc. In 1995, he served as the Chief
Executive Officer of Ornet Data Communication Technologies Ltd., which was a
Gemini portfolio company. Mr. Sela led that company until its acquisition by
Siemens AG in September 1995. From 1990 to 1992, Mr. Sela served as Vice
President of Marketing at DSP Group, an American-Israeli company specializing
in proprietary Digital Signal Processing for consumer and telecommunication
applications. He later served as VP Marketing at DSP Communications, Inc., a
spin-off of DSP Group. From 1985 to 1989, Mr. Sela worked at Daisy Systems Inc.
where he was Director for CAD Development and PCB Marketing Manager for Europe.
From 1974 to 1984, he served in the Israel Defense Forces and was responsible
for the definition and development of systems for communication applications.
Mr. Sela holds a B.Sc. in Electrical Engineering from the Technion Israel
Institute of Technology and an M.B.A. from Tel Aviv University.
Dr.
Eyal Kishon
has served as a director since 1998. In
1996, Dr. Kishon co-founded Genesis Partners, an Israeli technology-driven
venture capital fund, and currently serves as Founder and Managing Partner.
From 1993 to 1996, Dr. Kishon served as the Associate Director of the Polaris
Fund, now Pitango. Prior to that, Dr. Kishon served as Chief Technology Officer
at Yozma Venture Capital from 1992 to 1993. From 1991 to 1992, he worked at the
IBM Research Center, and from 1989 to 1991 he worked at the AT&T Bell
Laboratories Robotics Research Department. Dr. Kishon also serves as a
director of AudioCodes Ltd. (NASDAQ: AUDC) and Celtro Inc. He holds a Ph.D. in
Computer Science and Robotics from the Courant Institute of Mathematical
Sciences at New York University and a B.A. in Computer Science from the
Technion Israel Institute of Technology. Dr. Kishon has written a number of
scientific publications and holds a patent for signature verification for
interactive security systems.
Shai Saul
has served as a director since
2000. Mr. Saul is currently Managing General Partner of Tamir Fishman Ventures.
During 2001, he acted as interim-CEO for CopperGate Communications. From 1994
to 1999, Mr. Saul acted as Executive Vice President for Aladdin Knowledge
Systems Ltd. (NASDAQ: ALDN), a leading provider of digital security solutions.
From 1993 to 1994, he served as Chief Executive Officer of Ganot Ltd. Mr. Saul
also serves as Chairman of the Board of CopperGate Communications and as member
of the board of Lanoptics Ltd. (NASDAQ: LNOP). Mr. Saul holds an LL.B. from Tel
Aviv University.
Nurit Benjamini
has served as an outside
director since 2007. Ms. Benjamini has served as the Chief Financial Officer of
CopperGate Communications, a system-on-chip company that develops markets and
sells chipsets for the home networking and MDU/MTU Broadband Access markets,
since 2007. Previously, Ms. Benjamini served as the Chief Financial Officer of
Compugen Ltd. (NASDAQ: CGEN) from 2000 to 2007. Prior to her position with
Compugen Ltd., from 1998 to 2000, Ms. Benjamini served as the Chief Financial
Officer of Phone-Or Ltd. Between 1993 and 1998, Ms. Benjamini served as the
Chief Financial Officer of Aladdin Knowledge Systems Ltd. (NASDAQ: ALDN). Ms.
Benjamini holds a B.A. in Economics and Business and an M.B.A. in Finance, both
from Bar Ilan University, Israel.
50
Steven D. Levy
has served as an outside director since
2007. Mr. Levy served as a Managing Director and Global Head of Communications
Technology Research at Lehman Brothers from 1998 to 2005. Before joining Lehman Brothers, Mr. Levy was
a Director of Telecommunications Research at Salomon Brothers from 1997 to
1998, Managing Director and Head of the Communications Research Team at Oppenheimer
& Co. from 1994 to 1997 and a senior communications analyst at Hambrecht
& Quist from 1986 to 1994. Mr. Levy
has served as a director of PCTEL, a broadband wireless technology company
since January 2006 and of Zhone Technologies, Inc., a U.S. provider of
telecommunications equipment, since April 2006. Mr. Levy holds a B.Sc. in Materials Engineering and an M.B.A.,
both from the Rensselaer Polytechnic Institute.
Executive Officers
Amir Weinstein
joined our company in 2005
and has served as our Executive Vice President Products and Technology since
then. Prior to that, in 1999, Mr. Weinstein co-founded Business Layers, now
Netegrity, a provisioning company, providing workflow and IT provisioning
solutions to enterprises, and held the position of General Manager until 2004.
Mr. Weinstein has held several other senior management positions, including
Vice President of Engineering at Nortel Networks, a phone and data
communication company from 1996 to 1999. Amir holds a B.Sc. in Computer Science
and Mathematics from Bar Ilan University and M.Sc. in Computer Science from
UCLA.
Anat Shenig
joined our company in 2000 and
has served as Vice President Human Resources since 2007. Ms. Shenig is
responsible for human resources recruiting, welfare policy and employees
training. Prior to joining us, Ms. Shenig served as Human Resource Manager for
Davidoff insurance company and as an organizational consultant for Aman
Consulting. Ms. Shenig holds bachelor degrees in Psychology and Economics from
Tel Aviv University and an M.B.A. in organizational behavior from Tel Aviv
University.
Andrei Elefant
joined our company in 2000
and has served as VP Product Management since 2007. Mr. Elefant assumed
responsibility to our marketing activities in 2008. Mr. Elefant is responsible
for product management, product marketing and strategic project management.
Prior to joining us, Mr. Elefant served as officer in the Israeli air force.
Mr. Elefant holds a B.Sc. in Mechanical Engineering from the Technion Israel
Institute of Technology and an M.B.A. from Tel-Aviv University.
Doron
Arazi
has served as our Chief Financial Officer since
2007. Prior to joining us, Mr. Arazi held various financial positions at Verint
Systems Ltd., one of the largest subsidiaries of Verint System Inc., an
analytic software-based solutions provider. For the last three years, Mr. Arazi
has served as Vice President Finance of Verint Systems Ltd. Mr. Arazi is a certified public accountant
and he holds a B.A. in Accounting and Economics and an M.B.A. from Tel Aviv
University.
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Eli
Cohen
has served as our Vice President International
Sales since 2008. Prior to joining us, from 2006 through 2008, Mr. Cohen was
general manager of the Access Line business and before that the Vice President
of Sales and Sales Operations for the Broadband Access Division at ECI Telecom,
a supplier of networking infrastructure for carriers and service provider
networks. Previously, Mr. Cohen held various senior positions in sales and
marketing from 2002 to 2006 at ECI. Before that, between 1999 and 2002, Mr.
Cohen was CEO and Director of Sales & Marketing of GigaSpaces Technologies,
an e-commerce start-up company in the field of infrastructure for business and
residential applications. Mr. Cohen has a B.Sc. in Electronic Engineering from
Coventry University and an M.B.A. from Manchester University.
Elazar
(Azi) Ronen
has served as our Executive Vice President
Corporate Development since 2005 and served as Executive Vice President
Technology and Marketing from 1999 to 2005. Prior to joining us, from 1998
through 1999, Mr. Ronen was the Vice President of Marketing at VocalTec
Communications, a vendor of VoIP networking equipment. Previously, Mr. Ronen
was the Vice President of Research and Development at RADLINX, a member of the
RAD group, a vendor of remote access servers and fax over IP networking
equipment from 1990 to 1998. Mr. Ronen has a B.Sc., cum laude, in Computer
Sciences from the Technion Israel Institute of Technology.
Jay Klein
joined our company in 2006 and
has served as VP and CTO since 2007. Mr. Klein is responsible for driving our technology strategy,
expanding our core algorithmic competence and driving intellectual property
development, industry standards involvement and academic cooperation.
Prior to joining us, between 2004 and 2006, Mr. Klein served as VP at DSPG
(VoIP and multimedia silicon solutions) where he was responsible for strategic
technology acquisitions. Between 1997 and 2003, Mr. Klein was Co-Founder and
CTO of Ensemble Communications, a wireless access systems manufacturer and was one of the founders and
creators of WiMAX and IEEE 802.16. Prior to that, between 1993 and 1997,
he served as CTO and VP of R&D at CPT Systems, a cellular systems
manufacturer, which was acquired by DSP Communications and later by Intel. Mr.
Klein holds a B.Sc. in
Electrical and Electronic Engineering from Tel-Aviv University.
Pini
Gvili
has served as our Vice President Operations
since 2006. Prior to joining us, from 2004 to 2006, he served as Vice President
Operations for Celerica, a start-up company specializing in solutions for
cellular network optimization. From 2001 to 2004, Mr. Gvili was the Vice
President Operations and IT at Terayon Communication Systems, and from 1998
to 2000, held the position of Manager of Integration and Final Testing at
Telegate. Mr. Gvili was also a hardware/software engineer at Comverse/Efrat, a
world leader of voice mail and digital recording systems, from 1994 to 1997.
Mr. Gvili has a B.Sc. in Computer Science from Champlain University and was
awarded a practical electronics degree from ORT Technical College.
Ramy Moriah
has served as our Vice
President Customer Care & IT since 2005. Prior to joining us, Mr. Moriah
was a founding member of Daisy Systems Design Center in Israel, in 1984. From
1991 to 1994, Mr. Moriah held the position of Manager of Software Development
at Orbot Instruments, a world leader of Automatic Optical Inspection
manufacturer for the VLSI Chip Industry. Mr. Moriah was also the acting General
Manager at ACA, 3D CAD/solid modeling software for architecture from 1995 to
1997, and served there as Vice President Research and Development from 1995
to 1997. Mr. Moriah holds a B.Sc., cum laude, in Computer Engineering from the
Technion Israel Institute of Technology and an M.Sc. in Management and
Information Systems from the Tel Aviv University School of Business
Administration.
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Vin
Costello
has served as VP and & General Manager
Americas since 2006. Mr. Costello began his career with NYNEX and rapidly rose
through the ranks achieving the title of Vice President, Business Network
Solutions and Vice President Global Sales. Mr. Costello founded and headed
NYNEX Network Integration and upon the merger with Bell Atlantic, was named
President and CEO of Bell Atlantic Network Integration. Mr. Costello departed Verizon for an optical
networking start-up where he served as VP of Sales and assisted Corvis Corporation,
in their successful initial public offering.
Mr. Costello was subsequently named VP and General Manager of the
Managed Storage Division after Corvis purchased Broadwing and reinvented itself
as a service provider. Mr. Costello holds a B.Sc. in Computer Applications and
Information Systems as well as Business Management (double major) from New York
University and earned an M.Sc. in Telecommunications and Computing Management
from Polytechnic University.
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Compensation of Officers and Directors
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The
aggregate compensation paid to or accrued on behalf of our directors and
executive officers as a group during 2007 consisted of approximately $2.3
million in salary, fees, bonus, commissions and directors fees and
approximately $377,000 in amounts set aside or accrued to provide pension,
retirement or similar benefits, but excluding amounts we expended for
automobiles made available to our officers, expenses, including dues for
professional and business associations, business travel and other expenses, and
other benefits commonly reimbursed or paid by companies in Israel.
We pay each
of our outside directors an annual fee of $10,000, paid in four equal
installments of $2,500, at the beginning of each calendar quarter with respect
to the preceding quarter (with a pro-rata payment for the first and last
calendar quarters of service, to the extent the outside director did not serve
as such during the entire calendar quarter). Each outside director also was
granted upon his or her election options to purchase 15,000 of our ordinary
shares, which vest on a quarterly basis over a period of three years.
During
2007, our officers and directors received, in the aggregate, options to
purchase 440,000 ordinary shares under our equity based compensation plans.
These options have a weighted average exercise price of approximately $8.76 and
the options will expire ten years after the date the options were granted.
Corporate Governance Practices
As a foreign
private issuer, we are permitted under Nasdaq Marketplace Rule 4350 to follow
Israeli corporate governance practices instead of the Nasdaq Global Market
requirements, provided we disclose which requirements we are not following and
the equivalent Israeli requirement. We must also provide Nasdaq with a letter
from outside counsel in our home country, Israel, certifying that our corporate
governance practices are not prohibited by Israeli law.
53
We rely on
this foreign private issuer exemption with respect to the following items:
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We follow
the requirements of Israeli law with respect to the quorum requirement for
meetings of our shareholders, which are different from the requirements of
Rule 4350(f). Under our articles of association, the quorum required for an
ordinary meeting of shareholders consists of at least two shareholders
present in person, by proxy or by written ballot, who hold or represent
between them at least 25% of the voting power of our shares, instead of 33
1/3% of the issued share capital provided by under the Nasdaq Global Market
requirements. This quorum requirement is based on the default requirement set
forth in the Israeli Companies Law, 1999, or the Companies Law. We submitted a letter from our outside
counsel in connection with this item prior to our initial public offering in
November 2006.
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We do not
seek shareholder approval for equity compensation plans in accordance with
the requirements of the Companies Law, which does not fully reflect the requirements
of Rule 4350(i)(1)(A). Under Israeli
law, we may amend our 2006 Incentive Compensation Plan by the approval of our
board of directors, and without shareholder approval as is generally required
under rule 4350(i)(1)(A). Under Israeli law, the adoption and amendment of
equity compensation plans, including changes to the reserved shares, do not
require shareholder approval. We submitted a letter from our outside counsel
in connection with this item in June 2008.
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We
otherwise comply with the Nasdaq Global Market rules requiring that listed
companies have a majority of independent directors and maintain a compensation
and nominating committee composed entirely of independent directors. We are
also subject to Israeli corporate governance requirements applicable to
companies incorporated in Israel whose securities are listed for trading on a
stock exchange outside of Israel.
We may in
the future provide Nasdaq with an additional letter or letters notifying Nasdaq
that we are following our home country practices, consistent with the Israeli
Companies Law and practices, in lieu of other requirements of Marketplace Rule
4350.
Board of Directors
Terms
of Directors
Our
current board of directors consists of seven directors, each of whom was
appointed by a certain group of shareholders pursuant to rights of appointment
granted in our previous articles of association, except for Mr. Hadar, who
serves on our board of directors by virtue of his position as Chief Executive
Officer and the outside directors, Ms. Benjamini and Mr. Levy, who were elected
by our shareholders in 2007. Our articles of association provide that we may
have not less than five directors and up to nine directors. The members of our
board of directors do not receive any additional remuneration upon termination
of their services as directors.
Under our
articles of association our directors (other than the outside directors, whose
appointment is required under the Companies Law; see Outside Directors) are
divided into three classes. Each class of directors consists, as nearly as
possible, of one-third of the total number of directors constituting the entire
board of directors (other than the outside directors). At each annual general
meeting of our shareholders, the election or re-election of directors following
the expiration of the term of office of the directors of that class of
directors, will be for a term of office that expires on the third annual
general meeting following such election or re-election, such that each year the
term of office of only one class of directors will expire. Yossi Sela who is a
Class I director, will hold office until our annual meeting of shareholders to
be held in 2010. Class II directors, consisting of Dr. Eyal Kishon and Shai
Saul, will hold office until our annual meeting of shareholders to be held in
2008. Class III directors, consisting of Yigal Jacoby and Rami Hadar, will hold
office until our annual meeting of shareholders to be held in 2009. The
directors shall be elected by a vote of the holders of a majority of the voting
power present and voting at that meeting. Each director, will hold office until
the annual general meeting of our shareholders for the year in which his term
expires and until his successor is elected and qualified, unless the tenure of
such director expires earlier pursuant to the Companies Law or unless he is
removed from office as described below.
54
Under
our articles of association the approval of a special majority of the holders
of at least 75.0% of the voting rights present and voting at a general meeting
is generally required to remove any of our directors from office. The holders
of a majority of the voting power present and voting at a meeting may elect
directors in their stead or fill any vacancy, however created, in our board of
directors. In addition, vacancies on our board of directors, other than
vacancies created by an outside director, may be filled by a vote of a simple
majority of the directors then in office. A director so chosen or appointed
will hold office until the next annual general meeting of our shareholders,
unless earlier removed by the vote of a majority of the directors then in
office prior to such annual meeting. See Outside Directors for a description
of the procedure for election of outside directors.
Outside Directors
Qualifications
of Outside Directors
Under the
Israeli Companies Law, companies incorporated under the laws of the State of
Israel that are public companies, which also includes companies with shares
listed on the Nasdaq Global Market, are required to appoint at least two
outside directors.
A person
may not serve as an outside director if at the date of the persons appointment
or within the prior two years, the person, the persons relatives, entities
under the persons control, or the persons partners or employer, have or had
any affiliation with us or any entity controlled by or under common control
with us during the prior two years, or which controls us at the time of such
persons appointment.
The
term affiliation includes:
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an
employment relationship;
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a business
or professional relationship maintained on a regular basis;
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control;
and
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service as
an office holder, excluding service as a director in a private company prior
to the first offering of its shares to the public if such director was
appointed as a director of the private company in order to serve as an
outside director following the public offering.
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The
term relative is defined as spouses, siblings, parents, grandparents,
descendants, spouses descendants and the spouses of each of these persons.
55
The
term office holder is defined as a director, general manager, chief business
manager, deputy general manager, vice general manager, executive vice
president, vice president, other manager directly subordinate to the general
manager or any other person assuming the responsibilities of any of the
foregoing positions, without regard to such persons title. Each person listed
under Directors and Senior Management is an office holder.
No
person can serve as an outside director if the persons position or other
business create, or may create, a conflict of interests with the persons
responsibilities as a director or may otherwise interfere with the persons
ability to serve as a director. If at the time an outside director is appointed
all current members of the board of directors are of the same gender, then that
outside director must be of the other gender.
The
Companies Law provides that each outside director must meet certain
professional qualifications or have financial and accounting expertise, and
that at least one outside director must have financial and accounting
expertise. However, if at least one of our directors meets the independence
requirements of the Securities Exchange Act of 1934, as amended, and the
standards of the Nasdaq Global Market rules for membership on the audit
committee and also has financial and accounting expertise as defined in the
Companies Law and applicable regulations, then our outside directors are
required to meet the professional qualifications only. Under applicable
regulations, a director with financial and accounting expertise is a director
who, by reason of his or her education, professional experience and skill, has
a high level of proficiency in and understanding of business accounting matters
and financial statements. He or she must be able to thoroughly comprehend the
financial statements of the company and initiate debate regarding the manner in
which financial information is presented. The regulations define a director
with the requisite professional qualifications as a director who satisfies one
of the following requirements: (1) the director holds an academic degree in
either economics, business administration, accounting, law or public
administration, (2) the director either holds an academic degree in any other
field or has completed another form of higher education in the companys
primary field of business or in an area which is relevant to the office of an
outside director, or (3) the director has at least five years of cumulative
experience serving in one or more of the following capacities: (a) a senior business
management position in a corporation with a substantial scope of business, (b)
a senior position in the companys primary field of business or (c) a senior
position in public administration.
Until
the lapse of two years from termination of office, a company may not engage an
outside director to serve as an office holder and cannot employ or receive
professional services for payment from that person, either directly or
indirectly, including through a corporation controlled by that person.
Election
of Outside Directors
Outside
directors are elected by a majority vote at a shareholders meeting, provided
that either:
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the majority
of shares voted at the meeting, including at least one-third of the shares of
non-controlling shareholders voted at the meeting, excluding abstentions,
vote in favor of the election of the outside director; or
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the total
number of shares of non-controlling shareholders voted against
the election of the outside director does not exceed one percent of the
aggregate voting rights in the company.
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For a
company such as ours, the initial term of an outside director is three years
and may be extended for additional three-year terms by the shareholders, if
certain conditions are met. An outside director can be removed from office only
by the same majority of shareholders that is required to elect an outside
director, or by a court (if the outside director ceases to meet the statutory
qualifications with respect to his or her appointment, or if he or she violates
his or her duty of loyalty to the company). Each committee of a companys board
of directors which is authorized to exercise the board of directors
authorities is required to include at least one outside director, except for
the audit committee, which is required to include all outside director.
An
outside director is entitled to compensation as provided in regulations
promulgated under the Companies Law and is otherwise prohibited from receiving
any other compensation, directly or indirectly, in connection with services
provided as an outside director.
Nasdaq
Requirements
Under
the rules of the Nasdaq Global Market, a majority of directors must meet the
definition of independence contained in those rules. Our board of directors has
determined that all of our directors, other than Yigal Jacoby and Rami Hadar,
meet the independence standards contained in the rules of the Nasdaq Global
Market. We do not believe that any of these directors have a relationship that
would preclude a finding of independence under these rules and, in reaching its
determination, our board of directors determined that the other relationships
that these directors have with us do not impair their independence.
Audit Committee
Companies
Law Requirements
Under
the Companies Law, the board of directors of any public company must also
appoint an audit committee comprised of at least three directors including all
of the outside directors, but excluding the:
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chairman of
the board of directors;
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controlling
shareholder or a relative of a controlling shareholder; and
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any director
employed by the company or who provides services to the company on a regular
basis.
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Nasdaq
Requirements
Under
the Nasdaq Global Market rules, we are required to maintain an audit committee
consisting of at least three independent directors, all of whom are financially
literate and one of whom has accounting or related financial management expertise.
Our audit committee members are required to meet additional independence
standards, including minimum standards set forth in rules of the Securities and
Exchange Commission and adopted by the Nasdaq Global Market.
57
Approval
of Transactions with Office Holders and Controlling Shareholders
The
approval of the audit committee is required to effect specified actions and
transactions with office holders and controlling shareholders. The term
controlling shareholder means a shareholder with the ability to direct the
activities of the company, other than by virtue of being an office holder. A
shareholder is presumed to be a controlling shareholder if the shareholder
holds 50.0% or more of the voting rights in a company or has the right to
appoint the majority of the directors of the company or its general manager.
For the purpose of approving transactions with controlling shareholders, the
term also includes any shareholder that holds 25.0% or more of the voting
rights of the company if the company has no shareholder that owns more than
50.0% of its voting rights. For purposes of determining the holding percentage
stated above, two or more shareholders who have a personal interest in a
transaction that is brought for the companys approval are deemed as joint
holders. The audit committee may not approve an action or a transaction with a
controlling shareholder or with an office holder unless at the time of approval
two outside directors are serving as members of the audit committee and at
least one of them was present at the meeting at which the approval was granted.
Audit
Committee Role
Our
board of directors has adopted an audit committee charter setting forth the
responsibilities of the audit committee consistent with the rules of the
Securities and Exchange Commission and The Nasdaq Global Market rules, which
include:
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retaining
and terminating the companys independent auditors, subject to shareholder
ratification;
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pre-approval
of audit and non-audit services provided by the independent auditors;
and
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approval of
transactions with office holders and controlling shareholders, as described
above, and other related-party transactions.
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Additionally,
under the Companies Law, the role of the audit committee is to identify
irregularities in the business management of the company in consultation with
the internal auditor or the companys independent auditors and suggest an
appropriate course of action to the board of directors and to approve the
yearly or periodic work plan proposed by the internal auditor to the extent
required. The audit committee charter states that in fulfilling this role the
committee is entitled to rely on interviews and consultations with our
management, our internal auditor and our independent auditor, and is not
obligated to conduct any independent investigation or verification.
Our
audit committee consists of our directors, Ms. Nurit Benjamini, Mr. Steven Levy
and Dr. Eyal Kishon. The financial expert on the audit committee pursuant to
the definition of the Securities and Exchange Commission is Ms. Benjamini.
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Compensation and Nominating Committee
We
have established a compensation and nominating committee consisting of our directors,
Mr. Yossi Sela, Dr. Eyal Kishon, Ms. Nurit Benjamini and Mr. Shai Saul. This
committee also oversees matters related to our corporate governance practices.
Our board of directors has adopted a compensation and nominating committee
charter setting forth the responsibilities of the committee consistent with the
Nasdaq Global Market rules, which include:
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determining
the compensation of our Chief Executive Officer and other executive officers;
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granting
options to our employees and the employees of our subsidiaries;
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recommending
candidates for nomination as members of our board of directors; and
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developing
and recommending to the board corporate governance guidelines and a code of
business ethics and conduct in accordance with applicable laws.
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Internal Auditor
Under
the Companies Law, the board of directors of a public company must appoint an
internal auditor nominated by the audit committee. The role of the internal
auditor is, among other things, to examine whether a companys actions comply
with applicable law and orderly business procedure. Under the Companies Law,
the internal auditor may be an employee of the company but not an interested
party or an office holder or a relative of an interested party or an office
holder, nor may the internal auditor be the companys independent auditor or
the representative of the same. An interested party is defined in the Companies
Law as a holder of 5.0% or more of the issued share capital or voting power in
a company, any person or entity who has the right to designate one director or
more or the chief executive officer of the company or any person who serves as
a director or as a chief executive officer. In February 2007, our board of
directors approved the appointment of the firm of Haikin, Rubin, Cohen &
Gilboa as the internal auditor of the Company.
Exculpation, Insurance and Indemnification of
Office Holders
Under
the Companies Law, a company may not exculpate an office holder from liability
for a breach of the duty of loyalty. However, a company may approve an act
performed in breach of the duty of loyalty of an office holder provided that
the office holder acted in good faith, the act or its approval does not harm
the company, and the office holder discloses the nature of his or her personal
interest in the act and all material facts and documents a reasonable time
before discussion of the approval. An Israeli company may exculpate an office
holder in advance from liability to the company, in whole or in part, for
damages caused to the company as a result of a breach of duty of care but only
if a provision authorizing such exculpation is inserted in its articles of
association. Our articles of association include such a provision. An Israeli
company may not exculpate a director for liability arising out of a prohibited
dividend or distribution to shareholders.
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An
Israeli company may indemnify an office holder in respect of certain
liabilities either in advance of an event or following an event provided a
provision authorizing such indemnification is inserted in its articles of
association. Our articles of association contain such an authorization. An
undertaking provided in advance by an Israeli company to indemnify an office
holder with respect to a financial liability imposed on him or her in favor of
another person pursuant to a judgment, settlement or arbitrators award
approved by a court must be limited to events which in the opinion of the board
of directors can be foreseen based on the companys activities when the
undertaking to indemnify is given, and to an amount or according to criteria
determined by the board of directors as reasonable under the circumstances, and
such undertaking shall detail the above mentioned events and amount or
criteria. In addition, a company may undertake in advance to indemnify an
office holder against the following liabilities incurred for acts performed as
an office holder:
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reasonable
litigation expenses, including attorneys fees, incurred by the office holder
as a result of an investigation or proceeding instituted against him or her
by an authority authorized to conduct such investigation or proceeding,
provided that (i) no indictment was filed against such office holder as a
result of such investigation or proceeding; and (ii) no financial liability,
such as a criminal penalty, was imposed upon him or her as a substitute for
the criminal proceeding as a result of such investigation or proceeding or,
if such financial liability was imposed, it was imposed with respect to an
offense that does not require proof of criminal intent; and
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reasonable
litigation expenses, including attorneys fees, incurred by the office holder
or imposed by a court in proceedings instituted against him or her by the
company, on its behalf or by a third party or in connection with criminal
proceedings in which the office holder was acquitted or as a result of a
conviction for an offense that does not require proof of criminal
intent.
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An
Israeli company may insure an office holder against the following liabilities
incurred for acts performed as an office holder if and to the extent provided
in the companys articles of association:
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a breach of
duty of loyalty to the company, to the extent that the office holder acted in
good faith and had a reasonable basis to believe that the act would not
prejudice the company;
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a breach of
duty of care to the company or to a third party, including a breach arising
out of the negligent conduct of the office holder; and
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a financial
liability imposed on the office holder in favor of a third party.
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An
Israeli company may not indemnify or insure an office holder against any of the
following:
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a breach of
duty of loyalty, except to the extent that the office holder acted in good
faith and had a reasonable basis to believe that the act would not prejudice
the company;
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a breach of
duty of care committed intentionally or recklessly, excluding a breach
arising out of the negligent conduct of the office holder;
|
|
|
|
|
·
|
an act or
omission committed with intent to derive illegal personal benefit; or
|
|
|
|
|
·
|
a fine or
forfeit levied against the office holder.
|
60
Under
the Companies Law, exculpation, indemnification and insurance of office holders
must be approved by our audit committee and our board of directors and, in
respect of our directors, by our shareholders.
Our
articles of association allow us to indemnify and insure our office holders to
the fullest extent permitted by the Companies Law. Our office holders are
currently covered by a directors and officers liability insurance policy. In
May 2007, we and certain of our officers and directors were named as defendants
in a number of purported securities class action lawsuits filed in the United
States District Court for the Southern District of New York and that were
consolidated to
In re Allot Communications
Ltd. Securities Litigation.
under Master File No. 07-cv-03455
(RJH). See ITEM 8: Financial InformationConsolidated Statements and Other
Financial InformationLegal Proceedings.
As of the date of this annual report, no other claims for directors and
officers liability insurance have been filed under our policies and we are not
aware of any pending or threatened litigation or proceeding involving any of
our directors or officers in which indemnification is sought.
We
have entered into agreements with each of our directors and office holders
exculpating them, to the fullest extent permitted by law, from liability to us
for damages caused to us as a result of a breach of duty of care, and
undertaking to indemnify them to the fullest extent permitted by law. This
indemnification is limited to events determined as foreseeable by the board of
directors based on our activities, and to an amount or according to criteria
determined by the board of directors as reasonable under the circumstances, and
the insurance is subject to our discretion depending on its availability,
effectiveness and cost. The current maximum amount set forth in such agreements
is the greater of (1) with respect to indemnification in connection with a
public offering of our securities, the gross proceeds raised by us and/or any
selling shareholder in such public offering, and (2) with respect to all
permitted indemnification, including a public offering of our securities, an
amount equal to 50% of the our shareholders equity on a consolidated basis,
based on our most recent financial statements made publicly available before
the date on which the indemnity payment is made.
In
the opinion of the U.S. Securities and Exchange Commission, however,
indemnification of directors and office holders for liabilities arising under
the Securities Act is against public policy and therefore unenforceable.
As of
December 31, 2007, we had 242 employees of whom 174 were based in Israel, 29 in
the United States and the remainder in Asia and Europe. The breakdown of our
employees by department is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
Department
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing and
operations
|
|
|
14
|
|
|
19
|
|
|
19
|
|
Research and development
|
|
|
75
|
|
|
95
|
|
|
89
|
|
Sales, marketing, service
and support
|
|
|
80
|
|
|
95
|
|
|
102
|
|
Management and
administration
|
|
|
15
|
|
|
27
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
184
|
|
|
236
|
|
|
242
|
|
61
Under
applicable Israeli law, we and our employees are subject to protective labor
provisions such as restrictions on working hours, minimum wages, minimum
vacation, sick pay, severance pay and advance notice of termination of
employment as well as equal opportunity and anti-discrimination laws. Orders
issued by the Israeli Ministry of Industry, Trade and Labor make certain
industry-wide collective bargaining agreements applicable to us. These
agreements affect matters such as cost of living adjustments to salaries,
length of working hours and week, recuperation, travel expenses, and pension rights.
Our employees are not represented by a labor union. We provide our employees
with benefits and working conditions which we believe are competitive with
benefits and working conditions provided by similar companies in Israel. We
have never experienced labor-related work stoppages and believe that our
relations with our employees are good.
Beneficial Ownership of Executive Officers
and Directors
The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of June 15, 2008, of each of our directors
and executive officers.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of
Beneficial Owner
|
|
Number of
Shares
Beneficially Held(1)
|
|
|
Percent of
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
Shai Saul(2)
|
|
2,337,843
|
|
|
10.6
|
%
|
|
Dr. Eyal Kishon(3)
|
|
2,034,760
|
|
|
9.2
|
%
|
|
Yigal Jacoby(4)
|
|
1,817,674
|
|
|
7.9
|
%
|
|
Yossi Sela(5)
|
|
1,708,929
|
|
|
7.7
|
%
|
|
Rami Hadar
|
|
272,963
|
|
|
1.2
|
%
|
|
Nurit Benjamini
|
|
*
|
|
|
*
|
|
|
Steven D. Levy
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
Amir Weinstein
|
|
215,811
|
|
|
1.0
|
%
|
|
Anat Shenig
|
|
*
|
|
|
*
|
|
|
Andrei Elefant
|
|
*
|
|
|
*
|
|
|
Doron Arazi
|
|
*
|
|
|
*
|
|
|
Elazar (Azi) Ronen
|
|
*
|
|
|
*
|
|
|
Eli Cohen
|
|
*
|
|
|
*
|
|
|
Jay Klein
|
|
*
|
|
|
*
|
|
|
Pini Gvili
|
|
*
|
|
|
*
|
|
|
Ramy Moriah
|
|
*
|
|
|
*
|
|
|
Vin Costello
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group
|
|
8,552,483
|
|
|
38.4
|
%
|
|
|
|
*
|
Less than
one percent of the outstanding ordinary shares.
|
|
|
(1)
|
As used in
this table, beneficial ownership means the sole or shared power to vote or
direct the voting or to dispose or direct the disposition of any security.
For purposes of this table, a person is deemed to be the beneficial owner of
securities that can be acquired within 60 days from June 15, 2008 through the
exercise of any option or warrant. Ordinary shares subject to options or
warrants that are currently exercisable or exercisable within 60 days are
deemed outstanding for computing the ownership percentage of the person
holding such options or warrants, but are not deemed outstanding for
computing the ownership percentage of any other person. The amounts and percentages
are based upon 22,061,347 ordinary shares outstanding as of June 15, 2008.
|
62
|
|
(2)
|
Consists of
2,331,593 shares held by the Tamir Fishman Ventures and an option to purchase
6,250 shares held by Shai Saul. Mr. Saul is a managing partner of Tamir Fishman
and, by virtue of his position, may be deemed to have voting and investment
power, and thus beneficial ownership, with respect to the shares held by the
Tamir Fishman Ventures. Mr. Saul disclaims such beneficial ownership except
to the extent of his pecuniary interest therein.
|
(3)
|
Consists of
2,028,510 shares held by the Genesis Group and an option to purchase 6,250
shares held by Dr. Eyal Kishon. Dr. Kishon is a managing partner of Genesis
Partners and, by virtue of his position, may be deemed to have voting and
investment power, and thus beneficial ownership, with respect to the shares
held by the Genesis Group. Dr. Kishon disclaims such beneficial ownership
except to the extent of his pecuniary interest therein.
|
(4)
|
Consists of
835,410 shares held by Odem Rotem Holdings Ltd., a company wholly-owned and
controlled by Yigal Jacoby, 1,500 shares held by Anat Jacoby, who is Yigal
Jacobys spouse, and an option to purchase 481,794 shares held by Odem Rotem
Holdings. Also consists of options held directly by Mr. Jacoby to purchase
222,491 shares and a right held by Mr. Jacoby to purchase 246,479 shares
currently held by a trustee. See ITEM 7: Major Shareholders and Related
Party TransactionsRelated Party TransactionsEscrow Agreement with Yigal Jacoby.
|
(5)
|
Consists of
1,702,679 shares held by the Gemini Group and an option to purchase 6,250
shares held by Yossi Sela. Mr. Sela is a managing partner of Gemini Israel
Funds and, by virtue of his position, may be deemed to have voting and
investment power, and thus beneficial ownership, with respect to the shares
held by the Gemini Group. Mr. Sela disclaims such beneficial ownership except
to the extent of his pecuniary interest therein.
|
Our
directors and executive officers hold, in the aggregate, options exercisable
into 2,495,541 ordinary shares. The 2,495,541 options have a weighted average
exercise price of approximately $3.43 per share and have expiration dates until
2018.
Share Option Plans
We
have adopted four share option plans and, as of June 1, 2008, we had 3,961,817
ordinary shares reserved for issuance under these plans, with respect to which
(i) options to purchase 3,724,603 ordinary shares at a weighted average
exercise price of $4.08 per share were outstanding, and (ii) options to
purchase 1,748,128 ordinary shares were already exercised by certain of the
grantees and such shares were issued by us. As of June 1, 2008, options to
purchase 1,785,021 ordinary shares were vested and exercisable.
We will only grant options or other equity incentive awards under the
2006 Incentive Compensation Plan, although previously-granted options will
continue to be governed by our other plans.
2006 Incentive Compensation Plan
The
2006 plan is intended to further our success by increasing the ownership
interest of certain of our and our subsidiaries employees, directors and
consultants and to enhance our and our subsidiaries ability to attract and
retain employees, directors and consultants.
The
number of ordinary shares that we may issue under the 2006 plan will increase
on the first day of each fiscal year during the term of the 2006 plan, in each
case in an amount equal to the lesser of (i) 1,000,000 shares,
(ii) 3.5% of our outstanding ordinary shares on the last day of the
immediately preceding year, or (iii) an amount determined by our board of
directors. The number of shares subject to the 2006 plan is also subject to
adjustment if particular capital changes affect our share capital. Ordinary shares
subject to outstanding awards under the 2006 plan or our 2003 plan or 1997
plans that are subsequently forfeited or terminated for any other reason before
being exercised will again be available for grant under the 2006 plan. As of
June 1, 2008, options or other awards to purchase 1,656,399 ordinary shares had
been granted under the 2006 plan and 237,214 remained available for future
options or other awards.
63
Israeli
participants in the 2006 plan may be granted options subject to Section 102
of the Israeli Income Tax Ordinance. Section 102 of the Israeli Income Tax
Ordinance, allows employees, directors and officers, who are not controlling
shareholders and are considered Israeli residents to receive favorable tax
treatment for compensation in the form of shares or options. Our non-employees
service providers and controlling shareholders may only be granted options
under another section of the Tax Ordinance, which does not provide for similar
tax benefits. Section 102 includes two alternatives for tax treatment
involving the issuance of options or shares to a trustee for the benefit of the
grantees and also includes an additional alternative for the issuance of
options or shares directly to the grantee. The most favorable tax treatment for
the grantees is under Section 102(b)(2) of the Tax Ordinance, the issuance
to a trustee under the capital gain track. However, under this track we are
not allowed to deduct an expense with respect to the issuance of the options or
shares. Any stock options granted under the 2006 plan to participants in the
United States will be either incentive stock options, which may be eligible
for special tax treatment under the Internal Revenue Code of 1986, or options
other than incentive stock options (referred to as nonqualified stock
options), as determined by our compensation and nominating committee and
stated in the option agreement.
Our
compensation and nominating committee administers the 2006 plan and it will
select which of our and our subsidiaries and affiliates eligible employees,
directors and/or consultants shall receive options or other awards under the
2006 plan and will determine the terms of the grant, including, exercise
prices, method of payment, vesting schedules, acceleration of vesting and the
other matters necessary in the administration of the plan.
If we
undergo a change of control, as defined in the 2006 plan, subject to any
contrary law or rule, or the terms of any award agreement in effect before the
change of control, (a) the compensation and nominating committee may, in
its discretion, accelerate the vesting, exercisability and payment, as
applicable, of outstanding options and other awards; and (b) the
compensation and nominating committee, in its discretion, may adjust
outstanding awards by substituting ordinary shares or other securities of any
successor or another party to the change of control transaction, or cash out
outstanding options and other awards, in any such case, generally based on the
consideration received by our shareholders in the transaction.
Allot
Communications Ltd. Key Employee Share Incentive Plan (2003)
Our
2003 share option plan provides for the grant of options to our and our
affiliates employees, directors, officers, consultants, advisers and service
providers. As of June 1, 2008, there were outstanding options to purchase
2,169,664 ordinary shares under the plan, of which options to purchase
1,572,337 ordinary shares were vested and exercisable and options to purchase
991,794 ordinary shares were already exercised for ordinary shares. We no
longer grant options under this plan, and ordinary shares underlying any option
granted under this plan that terminates without exercise become available for
future issuance under our 2006 plan.
64
The
terms of the 2003 plan are in compliance with Section 102 of the Israeli
Income Tax Ordinance, which allows employees, directors and officers, who are
not controlling shareholders and are considered Israeli residents to receive
favorable tax treatment for compensation in the form of shares or options. Our
non-employees service providers and controlling shareholders may only be
granted options under another section of the Tax Ordinance, which does not
provide for similar tax benefits.
We
have elected to issue our options under the capital gain track and,
accordingly, all options granted under this plan to Israeli residents have been
granted under the capital gain track. Section 102 also provides for an
income tax track, under which, among other things, the benefits to the
employees would be taxed as ordinary income, we would be allowed to recognize
expenses for tax purposes and the minimum holding period for the trustee will
be twelve months from the end of the calendar year in which such options
are granted, and if granted after January 1, 2006, twelve months
after the date of grant. In order to comply with the terms of the capital gain
track, all options, as well as the ordinary shares issued upon exercise of these
options and other shares received subsequently following any realization of
rights with respect to such options, such as stock dividends and stock splits
are granted to a trustee and should be held by the trustee for the lesser of
thirty months from the date of grant, or two years following the end of
the tax year in which the options were granted and if granted after
January 1, 2006 only two years after the date of grant. Under this plan,
all options, whether or not granted pursuant to said Section 102, the
ordinary shares issued upon their exercise and other shares received
subsequently following any realization of rights are issued to a trustee.
The
plan is administered by our board of directors which has delegated certain
responsibilities to our compensation and nomination committee.
In
the event of our being acquired by means of merger with or into another entity,
in which our outstanding shares are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring company or its
subsidiary, or in the event of the sale of all or substantially all of our
assets, to the extent it has not been previously exercised, each vested or
unvested option will terminate immediately prior to the consummation of such
transaction. The plan further provides that, in the event of our consolidation
or merger with or into another corporation, the compensation committee may, in
its absolute discretion and without obligation, agree that instead of
termination: (i) each unexercised option, if possible, will be assumed or
an equivalent option will be substituted by our successor corporation or a
parent or subsidiary of our successor corporation; or (ii) we will pay to
the grantee an amount equivalent to the valuation of the grantees unexercised
options on an as converted basis at that time.
Allot Communications Ltd. Key Employees Share Incentive Plan
and Key Employees of Subsidiaries and Consultants Share Incentive Plan (1997)
Our
Key Employees Share Incentive Plan, adopted in 1997, provides for the grant of
options to any of our directors, officers and employees, and our Key Employees
of Subsidiaries and Consultants Share Incentive Plan, also adopted in 1997,
provides for the grant of options to any of our or our subsidiaries directors,
officers, employees, or consultants. The terms of both plans are identical,
except that the grant of options under the first plan was made in compliance
with the provisions of Section 102 of the Tax Ordinance, as was in effect
in 1997 and prior to its amendments in 2003, which allows employees who are
considered Israeli residents to receive favorable tax treatment.
65
As of
June 1, 2008, there were outstanding options to purchase 9,737 ordinary shares
under the two plans, all of which were vested and options to purchase 9,737
ordinary shares that were already exercised for ordinary shares. We no longer
grant options under these plans, and ordinary shares underlying any option
granted under these plans that terminate without exercise become available for
future issuance under our 2006 plan.
The
plans are administered by our compensation and nominating committee.
ITEM 7: Major Shareholders and Related Party
Transactions
The
following table sets forth certain information regarding the beneficial
ownership of our outstanding ordinary shares as of June 15, 2008, by each
person who we know beneficially owns 5.0% or more of the outstanding ordinary
shares. Each of our shareholders has identical voting rights with respect to
its shares. All of the information with respect to beneficial ownership of the
ordinary shares is given to the best of our knowledge.
|
|
|
|
|
|
|
Ordinary
Shares
Beneficially Owned(1)
|
|
Percentage
of Ordinary Shares
Beneficially Owned
|
|
|
|
|
|
|
|
|
|
|
Brookside Capital Fund(2)
|
|
3,426,638
|
|
15.5%
|
Tamir Fishman Ventures(3)
|
|
2,337,843
|
|
10.6%
|
Genesis Partners(4)
|
|
2,034,760
|
|
9.2%
|
Yigal
Jacoby(5)
|
|
1,817,674
|
|
7.9%
|
Gemini Group(6)
|
|
1,708,929
|
|
7.8%
|
Partech
International Group(7)
|
|
1,280,562
|
|
5.8%
|
|
|
(1)
|
As used in this table,
beneficial ownership means the sole or shared power to vote or direct the
voting or to dispose or direct the disposition of any security. For purposes
of this table, a person is deemed to be the beneficial owner of securities
that can be acquired within 60 days from June 15, 2008 through the exercise
of any option or warrant. Ordinary shares subject to options or warrants that
are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the ownership percentage of the person holding such
options or warrants, but are not deemed outstanding for computing the
ownership percentage of any other person. The amounts and percentages are
based upon 22,061,347 ordinary shares outstanding as of June 15, 2008.
|
(2)
|
Based on a Schedule 13G/A
filed on January 9, 2008. Consists of 3,426,638 shares held by Brookside
Capital Partners Fund, L.P., a Delaware limited partnership. Brookside
Capital Investors, L.P., a Delaware limited partnership is the sole general
partner of the Brookside Capital Partners Fund, L.P. Brookside Capital
Management, LLC, a Delaware limited liability company, is the sole general
partner of Brookside Capital Investors, L.P. Domenic J. Ferrante is the sole
managing member of Brookside Capital Management, LLC. The address of the
Brookside entities and the foregoing individual is 111 Huntington Avenue,
Boston, Massachusetts 02199.
|
66
|
|
(3)
|
Based on a Schedule 13G/A
filed on February 14, 2008. Consists of 1,165,014 shares held by Tamir
Fishman Ventures II L.P., 804,842 shares held by Tamir Fishman Venture
Capital II Ltd., 155,904 shares held by Tamir Fishman Ventures II (Israel)
L.P., 138,310 shares held by Tamir Fishman Ventures II (Cayman Islands) L.P.,
54,543 shares held by Tamir Fishman Ventures II CEO Funds (U.S.) L.P., 12,980
shares held by Tamir Fishman Ventures II CEO Funds L.P. and an option to
purchase 6,250 shares held by Shai Saul. Tamir Fishman Ventures II, LLC is
the sole general partner of each of the foregoing limited partnerships and
has management rights over the shares held by Tamir Fishman Venture Capital
II Ltd. by virtue of a management agreement with Tamir Fishman Ventures II,
LLC. The managing members of Tamir Fishman Ventures II, LLC are Shai Saul,
Michael Elias and Tamir Fishman & Co. Ltd. Eldad Tamir and Danny Fishman
are Co-Presidents and Co-Chief Executive Officers of Tamir Fishman & Co.
Ltd. and, by virtue of their positions, may be deemed to be beneficial owners
of the securities held thereby. Each of the foregoing entities and
individuals disclaims beneficial ownership of these securities except to the
extent of its or his pecuniary interest therein. The address of the Tamir
Fishman entities and the foregoing individuals is 21 Haarbaa, Tel Aviv 64739
Israel.
|
(4)
|
Based on a Schedule 13G
filed on February 14, 2007. Consists of 1,312,770 shares held by Genesis
Partners I L.P., 715,740 shares held by Genesis Partners (Cayman) L.P.
and an option to purchase 6,250 shares held by Dr. Eyal Kishon. Eddy Shalev
and Dr. Kishon are the directors of E. Shalev Management Ltd., a general
partner of these funds. These individuals each have voting, investment and
dispositive power with respect to the shares held by the Genesis entities and
may be deemed to be beneficial owners of the securities held thereby. Each
individual disclaims beneficial ownership of these securities except to the
extent of his pecuniary interest therein. The address of the Genesis entities
and the foregoing individuals is 11 HaMenofim Street, Herzliya Pituach 46725,
Israel.
|
(5)
|
Based on a Schedule 13G/A filed on February 20, 2008. Consists of 30,000 ordinary shares personally held
by Yigal Jacoby, 1,500 ordinary shares held jointly by Yigal Jacoby and his wife, Anat Jacoby. Also
consists of options held directly by Mr. Jacoby to purchase 222,491 shares and a right held by Mr.
Jacoby to purchase 246,479 shares currently held by a trustee. Also consists of 835,410 shares held by
Odem Rotem Holdings Ltd., a company wholly-owned and controlled by Mr. Jacoby, and an option to purchase
481,794 shares held by Odem Rotem Holdings. The address of Mr. Jacoby is 22 Hanagar Street, Neve Ne'eman
Industrial Zone B, Hod-Hasharon 45240, Israel. The address of Odem Rotem Holdings Ltd. and Anat
Jacoby is 9 Nordau Street, Rannana, Israel.
|
(6)
|
Based on a Schedule 13G/A
filed on February 14, 2008. Consists of 880,295 shares held by Gemini Israel
II L.P., 690,669 shares held by Gemini Israel II Parallel Fund L.P., 112,216
shares held by Advent PGGM Gemini L.P., 19,499 shares held by Gemini Partner
Investors L.P. and an option to purchase 6,250 shares held by Yossi Sela. Mr.
Sela is a managing partner and a shareholder of Gemini Israel Funds Ltd., the
sole general partner or the sole general partner of the general partner of
Gemini Israel II L.P., Gemini Israel II Parallel Fund L.P., Advent PGGM
Gemini L.P., Gemini Partner Investors L.P., Gemini Israel III L.P. and Gemini
Israel III Parallel Fund L.P. The board of directors of Gemini Israel Funds
Ltd. has sole investment control with respect to these entities and is
comprised of Steve Kahn, Amram Rasiel, Dr. A.I. (Ed) Mlavsky, Yossi Sela and
David Cohen. These individuals share voting power over the shares and held by
the Gemini entities and may be deemed to be the beneficial owners of the
securities held thereby. Each individual disclaims beneficial ownership of
these securities except to the extent of his pecuniary interest therein. The
address of the Gemini entities and the foregoing individuals is 9 HaMenofim
Street, Herzliya Pituach 46725, Israel.
|
(7)
|
Based on a Schedule 13G/A
filed on February 14, 2008. Consists of 469,537 shares held by Partech
International Growth Capital I LLC, 533,565 shares held by Partech
International Growth Capital III LLC, 224,098 shares held by AXA Growth
Capital II L.P., 32,016 shares held by Double Black Diamond II LLC and 21,346
shares held by Multinvest LLC. 46th Parallel, LLC is the managing member of
each of Partech International Growth Capital I, LLC and Partech International
Growth Capital III, LLC. 48th Parallel, LLC is the general partner of AXA
Growth Capital II L.P. ParVenture Japan Managers, LLC is the managing member
of Multinvest, LLC. Thomas G. McKinley and Vincent Worms are the managing
members of Double Black Diamond II, LLC. PAR SF, LLC is the managing member of
each of 46th Parallel, LLC and 48th Parallel, LLC. Vincent Worms and Vendome
Capital, LLC are the managing members of each of PAR SF, LLC and ParVenture
Japan Managers, LLC. Thomas G. McKinley is the managing member of Vendome
Capital, LLC. Thomas G. McKinley and Vincent Worms share voting power over
the shares held by the Partech International Group and may be deemed to be
the beneficial owners of the securities held thereby. Each individual
disclaims beneficial ownership of these securities except to the extent of
his pecuniary interest therein. The address of the Partech International
entities and the foregoing individuals is 50 California Street, Suite 3200,
San Francisco, California.
|
Significant Changes in the Ownership of Major
Shareholders
As of June
15, 2008, Brookside Capital Partners Fund, L.P. was the beneficial owner of
3,426,638, or 15.5%, of our ordinary shares. As of December 31, 2007, Brookside
Capital Partners was the beneficial owner of 2,204,921. 10.5%. As of December
31, 2006, Brookside Capital Partners was not a major shareholder.
67
Record Holders
Based on a
review of the information provided to us by our transfer agent, as of June 15,
2008, there were 46
*
record holders of ordinary shares, of which 13
represented United States
*
record holders holding approximately 67%
of our outstanding ordinary shares.
|
|
*
|
Including
the Depository Trust Company.
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|
|
B.
|
Related Party Transactions
|
Our
policy is to enter into transactions with related parties on terms that, on the
whole, are no more favorable, or no less favorable, than those available from
unaffiliated third parties. Based on our experience in the business sectors in
which we operate and the terms of our transactions with unaffiliated third
parties, we believe that all of the transactions described below met this
policy standard at the time they occurred.
Registration Rights
We
have entered into an amended and restated investors rights agreement with
certain of our shareholders, pursuant to which holders of 13,275,813 ordinary
shares are entitled to certain registration rights as described below. This
amount does not include shares issuable upon the exercise of options and
warrants, which are also entitled to registration rights as described under
Registration RightsCertain Options and Warrants. In accordance with
such agreement, the following entities which beneficially own more than 5.0% of
our ordinary shares, are entitled to registration rights: the Tamir Fishman
Ventures; the Gemini Group; the Genesis Group; the Partech International Group;
and our Chairman, Yigal Jacoby and Odem Rotem Holdings, a company wholly-owned
and controlled by Mr. Jacoby.
Demand registration rights.
We are
required to file a registration statement in respect of ordinary shares held by
our former preferred shareholders as follows:
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·
|
two
registrations at the request of one or more of our shareholders holding
ordinary shares representing in the aggregate a majority of ordinary shares
resulting from conversion of our Series A preferred shares,
Series B preferred shares, collectively, referred to as the
B Registrable Securities, and Series C preferred shares and all
ordinary shares issued in respect of such shares;
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·
|
one
registration at the request of one of more of our shareholders holding
ordinary shares representing in the aggregate a majority of ordinary shares
resulting from conversion of our Series D preferred shares and all
ordinary shares issued in respect of such shares;
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·
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one registration
at the request of one of more of our shareholders holding ordinary shares
representing in the aggregate a majority of ordinary shares resulting from
conversion of our Series E preferred shares and all ordinary shares
issued in respect of such shares; and
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·
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provided
that (1) the aggregate proceeds from any such registration are estimated
in good faith to be in excess of $5.0 million and (2) we are not
required to effect a registration within 180 days after the effective
date of our initial public offering or a registration statement for any
subsequent offering.
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68
Following
a request to effect a registration by our shareholders as described above, we
are required to offer the other shareholders that are entitled to registration
rights an opportunity to include their shares in the registration statement. In
the event that the managing underwriter advises the registering shareholders in
writing that marketing factors require a limitation on the number of shares
that can be included in the registration statement, certain preferences will
apply with respect to the inclusion of the registrable securities.
Registration
on Form F-3.
Shareholders holding registrable
securities may request that we register such registrable securities on
Form F-3, provided that each such registration generates proceeds of at
least $2.0 million. This right may be exercised up to twice in any
twelve-month period. We are required to give notice of any such request to the
other holders of registrable securities and offer them an opportunity to
include their shares in the registration statement. In the event that the
managing underwriter advises in writing that marketing factors require a
limitation on the number of shares that can be included in the registration statement,
the shares will be included in the registration statement in an agreed order of
preference between the shareholders holding registrable securities.
Piggyback registration rights.
Shareholders
holding registrable securities also have the right to request that we include
their registrable securities in any registration statements filed by us in the
future for the purposes of a public offering, subject to specified exceptions.
In the event that the managing underwriter advises in writing that marketing
factors require a limitation on the number of shares that can be included in
the registration statement, the shares will be included in the registration
statement in an agreed order of preference between the shareholders holding
registrable securities.
Termination.
All registration rights
granted to holders of registrable securities will terminate on the fifth
anniversary of the closing of our initial public offering and, with respect to
any of our holders of registrable securities, when the shares held by such
shareholder can be sold within a ninety-day period under Rule 144.
Expenses.
We will pay all expenses in
carrying out the above registrations.
Certain options and warrants.
We have also
granted the following registration rights to holders of certain warrants and
options to purchase our preferred shares:
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·
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68,713
ordinary shares issuable upon the non-cashless exercise of warrants granted
to an Israeli bank and 73,069 ordinary shares that were issued to that
Israeli bank pursuant to a cashless exercise of warrants are entitled to the
same registration rights as the B Registrable Securities, subject to
first cutback as to the B Registrable Securities.
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·
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163,665
ordinary shares that were issued to an affiliate of another Israeli bank are
entitled to notice of and inclusion in any registration statement that we
file following our initial public offering. This right terminates with
respect to 102,291 of such shares if they can be sold within a 180-day period
under Rule 144.
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·
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246,479
ordinary shares that have been issued, but are held in trust for the benefit
of our Chairman, Yigal Jacoby, pending his payment of the purchase price of
such shares, will be entitled, upon the payment of the purchase price, to the
same registration rights as the Series A preferred shares.
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69
Agreements with Directors and Officers
Employment of Yigal Jacoby.
In October
2006, we entered into an agreement with Yigal Jacoby governing the terms of his
employment with us for the provision of management and guidance services with
regard to our strategy, long term vision and key objectives. Under the terms of
the agreement, Mr. Jacoby is required to devote 75% of his time to
his position with us. The agreement contains standard employment provisions,
including provisions relating to confidentiality and assignment of inventions.
We may terminate Mr. Jacobys employment on thirty days prior
notice, or we may terminate Mr. Jacobys employment without notice if we
give him thirty days pay in lieu of notice. As of February 2008, Mr.
Jacoby waives approximately 65% of his salary under the agreement.
Prior
to his transition to a direct employment relationship, Mr. Jacoby provided
substantially identical services to us pursuant to a consulting agreement,
dated December 2001. The agreement was terminated in October 2006. The
agreement contained standard confidentiality provisions that survived the
agreements termination.
In
August 2004, we entered into a non-competition agreement with Mr. Jacoby
and Odem Rotem Holdings. Under this agreement, Mr. Jacoby and Odem Rotem
Holdings are prohibited during the term of Mr. Jacobys engagement with us
and for a period of twelve months thereafter from directly or indirectly competing
with our products or services or directly or indirectly soliciting our
employees or consultants to engage in business which competes with our products
or services. The non-competition agreement does, however, permit
Mr. Jacoby, if he becomes an executive of a venture capital fund in the
future to serve as a director of the venture capital funds portfolio
companies. Further, any employment or solicitation of our employees or
consultants or solicitation of business opportunities by a company in which
Odem Rotem Holdings or Mr. Jacoby are a director or shareholders are not
be deemed, by itself, to violate the non-competition agreement so long as
neither Odem Rotem Holdings nor Mr. Jacoby were actively involved in such
employment or solicitation.
Escrow Agreement with Yigal Jacoby.
A
right to purchase 246,479 ordinary shares was granted to Mr. Jacoby in
connection with our Series A financing. The shares are issued, but are
held in trust for the benefit of the Mr. Jacoby pursuant to an escrow
agreement entered into on January 28, 1998, amended on October 26,
2006, by and among the Company, Mr. Jacoby and an escrow agent. Pursuant
to the terms of this agreement, the escrow agent is holding such shares for
which Mr. Jacoby has paid nominal value. While these shares are held in
trust, neither Mr. Jacoby nor the trustee has voting or economic rights
with respect to such shares. Mr. Jacoby may exercise his right to purchase
the shares in trust, in whole or in part, by paying any portion of the full
$600,000 purchase price (less $475 previously paid in respect of the nominal
value of the shares) for the respective portion of the shares. Mr. Jacoby
has the right to pay any portion of the purchase price for the respective
portion of shares by net payment of his right to purchase. Mr. Jacobys
right to purchase expires upon November 15, 2008. See Note 8b(3) to our
consolidated financial statements for additional information.
70
Consulting Agreement with Hess MarkITing Ltd.
In
June 2005, we entered into a consulting agreement with Hess MarkITing Ltd., as
consultant, for consulting services to be determined. This agreement was
terminated in May 2008. All of the consulting service under that agreement were
to be provided through Sharon Hess, our former Vice President Marketing
and the founder and owner of Hess MarkITing Ltd. The agreement contained a
non-compete provision prohibiting the consultant from directly or indirectly
having any connection with a business or venture that competes with us. Under
the agreement, we paid Hess MarkITing a monthly consulting fee, provided use of
one of our company cars and granted stock options to purchase our ordinary
shares to Ms. Hess. Such monthly consulting fee was recorded as a sales
and marketing expense.
Technical Training Services Agreement with Experteam.
We have received technical writing services from Experteam Ltd., a
company owned and controlled by the wife of our Chairman, Yigal Jacoby. We
began using Experteam in 2004 and our expenses incurred in connection with the
engagement of Experteam were approximately $14,000 in 2005, $78,000 in 2006 and
$36,000 in 2007.
Employment Agreements.
We have entered
into employment agreements with each of our officers who work for us as
employees. These agreements all contain provisions standard for a company in
our industry regarding noncompetition, confidentiality of information and
assignment of inventions. The enforceability of covenants not to compete in
Israel is limited.
Exculpation, Indemnification and Insurance.
Our
articles of association permit us to exculpate, indemnify and insure our office
holders to the fullest extent permitted by the Companies Law. We have entered
into agreements with each of our office holders, exculpating them from a breach
of their duty of care to us to the fullest extent permitted by law and
undertaking to indemnify them to the fullest extent permitted by law, to the
extent that these liabilities are not covered by insurance. See ITEM 6:
Directors, Senior Management and EmployeesBoard PracticesExculpation,
Insurance and Indemnification of Office Holders.
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C.
|
Interests of experts and counsel
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Not
applicable.
ITEM 8: Financial Information
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|
A.
|
Consolidated
Financial Statements and Other Financial Information.
|
Consolidated Financial Statements
For our audited consolidated financial statements for the year ended
December 31, 2007, please see pages F-2 to F-36 of this report.
Export Sales
See ITEM 5: Operating and Financial Review and Prospects under the
caption Geographic Breakdown of Revenues for certain details of export sales
for the last three fiscal years.
71
Legal Proceedings
On
May 1, 2007, a securities class action complaint,
Brickman Investment Inc. v. Allot Communications Ltd. et al.
,
was filed in the United States District Court for the Southern District of New
York. A number of substantially similar
complaints were filed in the same court after the original action was filed. We
and certain of our directors and officers are named as defendants. The
securities class action complaints allege that the defendants violated Sections
11 and 15 of the Securities Act of 1933 by making false and misleading
statements and omissions in our registration statement for our initial public offering
in November 2006. The claims are purportedly brought on behalf of persons who
purchased our stock pursuant to and/or traceable to the initial public offering
on or about November 15, 2006 through April 2, 2007. The plaintiffs seek
unspecified compensatory damages against the defendants, as well as attorneys
fees and costs. Motions for consolidation and for appointment of lead plaintiff
were filed on July 2, 2007 and were decided on March 27, 2008, with an order
granting consolidation and appointing co-lead plaintiffs. The Consolidated
Amended Compliant was served on June 9, 2008. We have not responded to the
complaints, and expect to respond on or about August 10, 2008. We believe that we have meritorious defenses
to the pleaded claims. We intend to vigorously defend against those
claims.
We may,
from time to time in the future be involved in legal proceedings in the
ordinary course of business.
Dividends
We have
never declared or paid any cash dividends on our ordinary shares and we do not
anticipate paying any cash dividends on our ordinary shares in the future. We
currently intend to retain all future earnings to finance our operations and to
expand our business. Any future determination relating to our dividend policy
will be made at the discretion of our board of directors and will depend on a
number of factors, including future earnings, capital requirements, financial
condition and future prospects and other factors our board of directors may
deem relevant.
Since
the date of our audited financial statements included elsewhere in this annual
report, there have not been any significant changes in our financial position.
ITEM 9: The Offer and Listing
Not applicable, except for Items 9.A.4 and 9.C, which are detailed
below.
Stock Price History
Our
ordinary shares began trading publicly on November 16, 2006. Prior to that
date, there was no public market for our ordinary shares. The following table
lists the high and low closing sale prices for our ordinary shares for the
periods indicated as reported by The Nasdaq Global Market.
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Year
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High
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Low
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|
|
|
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|
|
|
|
|
|
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2006
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$
|
13.81
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$
|
10.10
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|
2007
|
|
|
11.50
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|
|
4.35
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|
72
|
|
|
|
|
|
|
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|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
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|
$
|
13.81
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|
$
|
10.10
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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First
Quarter
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$
|
11.50
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|
$
|
8.42
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Second
Quarter
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8.31
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6.45
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Third
Quarter
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8.06
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|
5.63
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Fourth
Quarter
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|
|
6.96
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|
|
4.35
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|
|
|
|
|
|
|
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2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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First
Quarter
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|
$
|
4.85
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|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
Most Recent Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
May 2008
|
|
$
|
3.46
|
|
$
|
3.10
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|
April 2008
|
|
|
3.54
|
|
|
2.50
|
|
March 2008
|
|
|
2.90
|
|
|
2.24
|
|
February
2008
|
|
|
4.00
|
|
|
2.80
|
|
January 2008
|
|
|
4.85
|
|
|
3.97
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|
December
2007
|
|
|
4.85
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|
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4.35
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Markets
Our
ordinary shares have been quoted on The Nasdaq Global Market under the symbol
ALLT since November 16, 2006.
ITEM 10: Additional Information
Not
applicable.
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B.
|
Memorandum of Association and Articles of Association
|
Memorandum and Articles of Association
We are
registered with the Israeli Registrar of Companies in Jerusalem. Our
registration number is 51-239477-6.
A description of our memorandum and articles of association was
previously provided in our registration statement on Form F-1 (Registration
Statement 333-138313) filed with the Securities and Exchange Commission on
October 31, 2006, and is incorporated herein by reference.
73
Acquisitions under Israeli Law
Full Tender Offer.
A person wishing to
acquire shares of a public Israeli company and who would as a result hold over
90.0% of the target companys issued and outstanding share capital is required
by the Companies Law to make a tender offer to all of the companys
shareholders for the purchase of all of the issued and outstanding shares of
the company. A person wishing to acquire shares of a public Israeli company and
who would as a result hold over 90.0% of the issued and outstanding share
capital of a certain class of shares is required to make a tender offer to all
of the shareholders who hold shares of the same class for the purchase of all
of the issued and outstanding shares of the same class. If the shareholders who
do not accept the offer hold less than 5.0% of the issued and outstanding share
capital of the company or of the applicable class, all of the shares that the
acquirer offered to purchase will be transferred to the acquirer by operation
of law. However, a shareholder that had its shares so transferred may, within
three months from the date of acceptance of the tender offer, petition the
court to determine that tender offer was for less than fair value and that the
fair value should be paid as determined by the court. If the shareholders who
did not accept the tender offer hold at least 5.0% of the issued and
outstanding share capital of the company or of the applicable class, the
acquirer may not acquire shares of the company that will increase its holdings
to more than 90.0% of the companys issued and outstanding share capital or of
the applicable class from shareholders who accepted the tender offer.
Special Tender Offer.
The Companies Law
provides that an acquisition of shares of a public Israeli company must be made
by means of a special tender offer if as a result of the acquisition the
purchaser would become a holder of at least 25.0% of the voting rights in the
company. This rule does not apply if there is already another holder of at
least 25.0% of the voting rights in the company. Similarly, the Companies Law
provides that an acquisition of shares in a public company must be made by
means of a tender offer if as a result of the acquisition the purchaser would
become a holder of more than 45.0% of the voting rights in the company, if
there is no other shareholder of the company who holds more than 45.0% of the
voting rights in the company. These requirements do not apply if the
acquisition (i) occurs in the context of a private placement by the company
that received shareholder approval, (ii) was from a shareholder holding at
least 25.0% of the voting rights in the company and resulted in the acquirer
becoming a holder of at least 25.0% of the voting rights in the company or
(iii) was from a holder of more then 45.0% of the voting rights in the company
and resulted in the acquirer becoming a holder of more than 45.0% of the voting
rights in the company. The special
tender offer may be consummated only if (a) at least 5.0% of the voting rights
attached to the companys outstanding shares will be acquired by the offeror
and (b) the number of shares tendered in the offer exceeds the number of shares
whose holders objected to the offer.
In the
event that a special tender offer is made, a companys board of directors is
required to express its opinion on the advisability of the offer, or shall
abstain from expressing any opinion if it is unable to do so, provided that it
gives the reasons for its abstention. An office holder in a target company who,
in his or her capacity as an office holder, performs an action the purpose of
which is to cause the failure of an existing or foreseeable special tender
offer or is to impair the chances of its acceptance, is liable to the potential
purchaser and shareholders for damages, unless such office holder acted in good
faith and had reasonable grounds to believe he or she was acting for the
benefit of the company. However, office holders of the target company may
negotiate with the potential purchaser in order to improve the terms of the
special tender offer, and may further negotiate with third parties in order to
obtain a competing offer.
74
If a
special tender offer was accepted by a majority of the shareholders who
announced their stand on such offer, then shareholders who did not announce
their stand or who had objected to the offer may accept the offer within four
days of the last day set for the acceptance of the offer.
In
the event that a special tender offer is accepted, then the purchaser or any
person or entity controlling it or under common control with the purchaser or
such controlling person or entity shall refrain of making a subsequent tender
offer for the purchase of shares of the target company and cannot execute a
merger with the target company for a period of one year from the date of the
offer, unless the purchaser or such person or entity undertook to effect such
an offer or merger in the initial special tender offer.
Merger.
The Companies Law permits merger
transactions if approved by each partys board of directors and, unless certain
requirements described under the Companies Law are met, a certain percentage of
each partys shareholders. The board of directors of a merging company is
required pursuant to the Companies Law to discuss and determine whether in its
opinion there exists a reasonable concern that as a result of a proposed
merger, the surviving company will not be able to satisfy its obligations
towards its creditors, such determination taking into account the financial
status of the merging companies. If the board has determined that such a
concern exists, it may not approve a proposed merger. Following the approval of
the board of directors of each of the merging companies, the boards must
jointly prepare a merger proposal for submission to the Israeli Registrar of
Companies.
Under
the Companies Law, if the approval of a general meeting of the shareholders is
required, merger transactions may be approved by holders of a simple majority
of our shares (including the separate vote of each class of shares of the party
to the merger which is not the surviving entity) present, in person, by proxy
or by written ballot, at a general meeting and voting on the transaction. In
determining whether the required majority has approved the merger, if shares of
the company are held by the other party to the merger, or by any person holding
at least 25.0% of the voting rights or 25.0% of the means of appointing
directors or the general manager of the other party to the merger, then a vote
against the merger by holders of the majority of the shares present and voting,
excluding shares held by the other party or by such person, or any person or
entity acting on behalf of, related to or controlled by either of them, is
sufficient to reject the merger transaction. If the transaction would have been
approved but for the separate approval of each class or the exclusion of the
votes of certain shareholders as provided above, a court may still approve the
merger upon the request of holders of at least 25.0% of the voting rights of a
company, if the court holds that the merger is fair and reasonable, taking into
account the value of the parties to the merger and the consideration offered to
the shareholders.
Under
the Companies Law, each merging company must inform its secured creditors of
the proposed merger plans. Creditors are entitled to notice of the merger
pursuant to the regulations adopted under the Companies Law. Upon the request
of a creditor of either party to the proposed merger, the court may delay or
prevent the merger if it concludes that there exists a reasonable concern that,
as a result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger, and may further give
instructions to secure the rights of creditors.
75
In
addition, a merger may not be completed unless at least fifty days have passed
from the date that a proposal for approval of the merger was filed with the
Israeli Registrar of Companies and thirty days from the date that shareholder
approval of both merging companies was obtained.
Anti-Takeover Measures
Undesignated preferred stock.
The
Companies Law allows us to create and issue shares having rights different to
those attached to our ordinary shares, including shares providing certain preferred
or additional rights to voting, distributions or other matters and shares
having preemptive rights. We do not have any authorized or issued shares other
than ordinary shares. In the future, if we do create and issue a class of
shares other than ordinary shares, such class of shares, depending on the
specific rights that may be attached to them, may delay or prevent a takeover
or otherwise prevent our shareholders from realizing a potential premium over
the market value of their ordinary shares. The authorization of a new class of
shares will require an amendment to our articles of association which requires
the prior approval of a simple majority of our shares represented and voted at
a general meeting.
Supermajority voting.
Our articles of
association require the approval of the holders of at least two thirds of our
combined voting power to effect certain amendments to our articles of
association.
Classified board of directors.
Our
articles of association provide for a classified board of directors. See ITEM
6: Directors, Senior Management and EmployeesBoard PracticesTerm of
Directors.
Transfer Agent and Registrar
The
transfer agent and registrar for our ordinary shares is American Stock
Transfer& Trust Company. Its address is 59 Maiden Lane, New York, New York
10038 and its telephone number is (718)921-8200.
Summaries
of the following material contracts and amendments to these contracts are
included in this annual report in the places indicated:
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|
Material
Contract
|
|
Location
|
|
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|
|
|
|
Agreement
with R.H. Electronics Ltd.
|
|
ITEM 4.B:
Information on the CompanyBusiness OverviewManufacturing.
|
|
|
|
Agreement
with Flextronics (Israel) Ltd.
|
|
ITEM 4.B:
Information on the CompanyBusiness OverviewManufacturing.
|
|
|
|
Esphion
Limited
|
|
ITEM 5:
Operating and Financial Review and ProspectsOperating ResultsOverview.
|
|
|
|
Second
Amended and Restated Investor Rights Agreement
|
|
ITEM 7.
Major Shareholders and Related Party TransactionsRelated Party
TransactionsRegistration Rights.
|
76
In
1998, Israeli currency control regulations were liberalized significantly, so
that Israeli residents generally may freely deal in foreign currency and
foreign assets, and non-residents may freely deal in Israeli currency and
Israeli assets. There are currently no Israeli currency control restrictions on
remittances of dividends on the ordinary shares or the proceeds from the sale
of the shares provided that all taxes were paid or withheld; however,
legislation remains in effect pursuant to which currency controls can be
imposed by administrative action at any time.
Non-residents
of Israel may freely hold and trade our securities. Neither our memorandum of association
nor our articles of association nor the laws of the State of Israel restrict in
any way the ownership or voting of ordinary shares by non-residents, except
that such restrictions may exist with respect to citizens of countries which
are in a state of war with Israel. Israeli residents are allowed to purchase
our ordinary shares.
Israeli Tax Considerations and Government
Programs
The
following is a general discussion only and is not exhaustive of all possible
tax considerations. It is not intended, and should not be construed, as legal
or professional tax advice and should not be relied upon for tax planning
purposes. In addition, this discussion does not address all of the tax
consequences that may be relevant to purchasers of our ordinary shares in light
of their particular circumstances, or certain types of purchasers of our
ordinary shares subject to special tax treatment. Examples of this kind of
investor include residents of Israel and traders in securities who are subject
to special tax regimes not covered in this discussion. Each individual/entity
should consult its own tax or legal advisor as to the Israeli tax consequences
of the purchase, ownership and disposition of our ordinary shares.
To the
extent that part of the discussion is based on new tax legislation, which has
not been subject to judicial or administrative interpretation, we cannot assure
that the tax authorities or the courts will accept the views expressed in this
section.
The following
summary describes the current tax structure applicable to companies in Israel,
with special reference to its effect on us. The following also contains a
discussion of the material Israeli tax consequences to holders of our ordinary
shares.
General Corporate Tax Structure in Israel
Israeli
companies were generally subject to corporate tax at the rate of 29% of their
taxable income in 2007. The corporate tax rate is scheduled to decline to 27%
in 2008, 26% in 2009 and 25% in 2010 and thereafter. However, the effective tax
rate payable by a company that derives income from an approved enterprise (as
discussed below) may be considerably less.
77
Tax Benefits and Grants for Research and Development
Israeli tax
law allows, under certain conditions, a tax deduction for expenditures,
including capital expenditures, for the year in which they are incurred.
Expenditures are deemed related to scientific research and development
projects, if:
|
|
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|
·
|
The
expenditures are approved by the relevant Israeli government ministry,
determined by the field of research;
|
|
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|
|
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The research
and development must be for the promotion of the company; and
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The research
and development is carried out by or on behalf of the company seeking such
tax deduction.
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The amount
of such deductible expenses is reduced by the sum of any funds received through
government grants for the finance of such scientific research and development
projects. No deduction under these research and development deduction rules is
allowed if such deduction is related to an expense invested in an asset
depreciable under the general depreciation rules of the income Tax Ordinance,
1961. Expenditures not so approved are deductible in equal amounts over three
years.
We intend
to apply the Office of the Chief Scientist for approval to allow a tax
deduction for all research and development expenses during the year incurred.
There can be no assurance that our application will be accepted.
Law for the Encouragement of Industry (Taxes), 1969
The Law for
the Encouragement of Industry (Taxes), 1969, generally referred to as the
Industry Encouragement Law, provides several tax benefits for industrial
companies. We believe that we currently qualify as an Industrial Company
within the meaning of the Industry Encouragement Law. The Industry
Encouragement Law defines Industrial Company as a company resident in Israel,
of which 90% or more of its income in any tax year, other than of income from
defense loans, capital gains, interest and dividend, 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.
The
following corporate tax benefits, among others, are available to Industrial
Companies:
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Amortization
of the cost of purchased know-how and patents and of rights to use a patent
and know-how which are used for the development or advancement of the
company, over an eight-year period;
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Accelerated
depreciation rates on equipment and buildings;
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Under
specified conditions, an election to file consolidated tax returns with
additional related Israeli Industrial Companies; and
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Expenses
related to a public offering on the Tel Aviv Stock Exchange and, as of
January 1, 2003, also on recognized stock markets outside Israel, are
deductible in equal amounts over three years.
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78
Under
certain tax laws and regulations, an Industrial Enterprise may be eligible
for special depreciation rates for machinery, equipment and buildings. These
rates differ based on various factors, including the date the operations begin
and the number of work shifts. An Industrial Company owning an approved enterprise
may choose between these special depreciation rates and the depreciation rates
available to the approved enterprise.
Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any governmental authority. We
can give no assurance that we qualify or will continue to qualify as an
Industrial Company or that the benefits described above will be available in
the future.
Special Provisions Relating to Taxation Under Inflationary
Conditions
The Income
Tax Law (Inflationary Adjustments), 1985, generally referred to as the
Inflationary Adjustments Law, represents an attempt to overcome the problems
presented to a traditional tax system by an economy undergoing rapid inflation.
The Inflationary Adjustments Law is highly complex. Its features, which are
material to us, can be generally described as follows:
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Where a
companys equity, as calculated under the Inflationary Adjustments Law,
exceeds the depreciated cost of its fixed assets (as defined in the
Inflationary Adjustments Law), a deduction from taxable income is permitted
equal to the excess multiplied by the applicable annual rate of inflation.
The maximum deduction permitted in any single tax year is 70% of taxable
income, with the unused portion permitted to be carried forward, linked to
the Israeli consumer price index. The unused portion that is carried forward
may be deducted in full in the following year.
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Where a
companys depreciated cost of fixed assets exceeds its equity, then the
excess multiplied by the applicable annual rate of inflation is added to the
companys ordinary income, provided that the inflation supplement will only
be added to the corporate income and not to other sources of income such as
capital gains.
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Subject to
certain limitations, depreciation deductions on fixed assets and losses
carried forward are adjusted for inflation based on the change in the
consumer price index.
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The
Minister of Finance may, with the approval of the Knesset Finance Committee,
determine by decree, during a certain fiscal year (or until February 28th of the
following year) in which the rate of increase of the Israeli consumer price
index would not exceed or did not exceed, as applicable, 3%, that some or all
of the provisions of the Inflationary Adjustments Law shall not apply with
respect to such fiscal year, or, that the rate of increase of the Israeli
consumer price index relating to such fiscal year shall be deemed to be 0%, and
to make the adjustments required to be made as a result of such determination.
Tax Benefits Under the
Law for Encouragement of Capital
Investments, 1959
Tax benefits prior the 2005
amendment
The Law for the Encouragement of Capital
Investments, 1959, as amended (effective as of April 1, 2005), generally
referred to as the Investments Law, provides that a proposed capital investment
in eligible facilities may, upon application to the Investment Center of the
Ministry of Industry and Commerce of the State of Israel, be designated as an
Approved Enterprise. The Investment Center bases its decision as to whether
or not to approve an application, among other things, on the criteria set forth
in the Investments Law and regulations, the policy of the Investment Center,
and the specific objectives and financial criteria of the applicant. 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.
79
The
Investments Law provides that an approved enterprise is eligible for tax benefits
on taxable income derived from its approved enterprise programs. The
tax benefits under the Investments Law also apply to income generated by a
company from the grant of a usage right with respect to know-how developed by
the Approved Enterprise, income generated from royalties, and income derived
from a service which is auxiliary to such usage right or royalties, provided
that such income is generated within the Approved Enterprises ordinary course
of business. 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 average of the applicable rates.
The tax benefits under the Investments Law are not, generally, available with
respect to income derived from products manufactured outside of Israel. In
addition, the tax benefits available to an Approved Enterprise are contingent
upon the fulfillment of conditions stipulated in the Investments Law and
regulations and the criteria set forth in the specific certificate of approval,
as described above. In the event that a company does not meet these conditions,
it would be required to refund the amount of tax benefits, plus a consumer
price index linkage adjustment and interest.
The
Investments Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
Approved Enterprise program in the first five years of using the equipment.
Taxable
income of a company derived from an Approved Enterprise is subject to corporate
tax at the maximum rate of 25%, rather than the regular corporate tax rate, for
the benefit period. This period is ordinarily seven years commencing with the
year in which the approved enterprise first generates taxable income after the
commencement of production, and is limited to twelve years from commencement of
production or fourteen years from the date of approval, whichever is earlier.
This time limitation does not apply to the exemption period described below.
Should
we derive income from sources other than the Approved Enterprise during the
relevant period of benefits, such income will be taxable at the regular
corporate tax rates.
Under
certain circumstances (as further detailed below), the benefit period may
extend to a maximum of ten years from the commencement of the benefit period.
A
company may elect to receive an alternative package of benefits. Under the
alternative package of benefits, a companys undistributed income derived from
the Approved Enterprise will be exempt from corporate tax for a period of
between two and ten years from the first year the company derives taxable
income under the program, after the commencement of production, depending on
the geographic location of the Approved Enterprise within Israel, and such
company will be eligible for a reduced tax rate for the remainder of the
benefits period. The years
limitation does not apply to the exemption period.
80
A
company that has elected the alternative package of benefits, such as us, that
subsequently pays a dividend out of income derived from the approved
enterprise(s) during the tax exemption period will be subject to corporate tax
in the year the dividend is distributed in respect of the gross amount
distributed, at the rate which would
have been applicable had the company not elected the alternative package of
benefits, (generally 10%-25%, depending on the percentage of the companys
ordinary shares held by foreign shareholders). The dividend recipient is
subject to withholding tax at the reduced rate of 15% applicable to dividends
from approved enterprises, if the dividend is distributed during the tax
exemption period or within twelve years thereafter. In the event,
however, that the company is qualifies as a foreign investors company, there
is no such time limitation. This tax must be withheld by the company at source,
regardless of whether the dividend is converted into foreign currency.
Foreign Investors Company
(FIC)
A company
that has an Approved Enterprise program is eligible for further tax benefits if
it qualifies as a foreign investors company. A foreign investors company is a
company of which, among other criteria, more than 25% of its share capital and
combined share and loan capital is owned by non-Israeli residents. A company
that qualifies as a foreign investors company and has an approved enterprise
program is eligible for tax benefits for a ten-year benefit period. As
specified above, depending on the geographic location of the approved
enterprise within Israel, income derived from the approved enterprise program
may be entitled to the following:
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Extension of
the benefit period to up to ten years.
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An
additional period of reduced corporate tax liability at rates ranging between
10% and 25%, depending on the level of foreign (that is, non-Israeli)
ownership of our shares. Those tax rates and the related levels of foreign
investment are as set forth in the following table:
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Rate of
Reduced Tax
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Reduced Tax
Period
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Tax Exemption
Period
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Percent of
Foreign Ownership
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25
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0 years
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10 years
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0-25%
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25
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0 years
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10 years
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25-48.99%
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20
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0 years
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10 years
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49-73.99%
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15
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0 years
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10 years
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74-89.99%
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10
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0 years
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10 years
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90-100%
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Rate of
Reduced Tax
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Reduced Tax
Period
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Tax Exemption
Period
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Percent of
Foreign Ownership
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25
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1 years
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6 years
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0-25%
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25
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4 years
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6 years
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25-48.99%
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20
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4 years
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6 years
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49-73.99%
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15
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4 years
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6 years
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74-89.99%
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10
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4 years
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6 years
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90-100%
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Rate of
Reduced Tax
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Reduced Tax
Period
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Tax Exemption
Period
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Percent of
Foreign Ownership
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25
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5 years
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2 years
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0-25%
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25
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8 years
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2 years
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25-48.99%
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20
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8 years
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2 years
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49-73.99%
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15
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8 years
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2 years
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74-89.99%
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10
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8 years
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2 years
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90-100%
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The twelve
years limitation period for reduced tax rate of 15% on dividend from the
approved enterprise will not apply.
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Subject
to applicable provisions concerning income under the alternative package of
benefits, dividends paid by a company are considered to be attributable to
income received from the entire company and the companys effective tax rate is
the result of a weighted average of the various applicable tax rates, excluding
any tax-exempt income. Under the Investments Law, a company that has elected
the alternative package of benefits is not obliged to distribute retained
profits, and may generally decide from which years profits to declare
dividends.
We
currently intend to reinvest any income derived from our Approved Enterprise
program and not to distribute such income as a dividend. As of December 31,
2007, we did not generate income under the provision of the new law.
Tax Benefits under the 2005 Amendment
A
recent amendment to the Investment Law, generally referred as the 2005
Amendment, effective as of April 1, 2005 has significantly changed the
provisions of the Investments Law. The amendment includes revisions to the
criteria for investments qualified to receive tax benefits as an Approved
Enterprise. The 2005 Amendment applies to new investment programs and
investment programs commencing after 2004, and does not apply to investment
programs approved prior to December 31, 2004, and therefore to benefits
included in any certificate of approval that was granted before the 2005
Amendment came into effect, which will remain subject to the provisions of the
Investments Law as they were on the date of such approval.
However, a
company that was granted benefits according to Section 51 of the Investments
Law (prior the 2005 Amendment) will not be allowed to choose new tax year as a
Year of Election, referred to below, under the 2005 Amendment, for a period
of three years from the companys previous Commencement Year (referred to
below) under the old Investments Law.
The 2005
Amendment simplifies the approval process for the approved enterprise.
According to the 2005 Amendment, only approved enterprises receiving cash
grants require the approval of the Investment Center. The Investment Center will
be entitled to approve such programs only until December 31, 2007.
82
As a result
of the 2005 Amendment, it is no longer necessary for a company to acquire
Approved Enterprise status in order to receive the tax benefits previously
available under the Alternative Route, and therefore such companies need not
apply to the Investment Center for this purpose. Rather, a company may claim
the tax benefits offered by the Investment Law directly in its tax returns or
by notifying the Israeli Tax Authority within twelve months of the end of that
year, provided that its facilities meet the criteria for tax benefits set out
by the 2005 Amendment. Such enterprise is referred to as the Benefited
Enterprise. Companies are also granted a right to approach the Israeli Tax
Authority for a pre-ruling regarding their eligibility for benefits under the
2005 Amendment. The 2005 Amendment includes provisions attempting to ensure
that a company will not enjoy both Government grants and tax benefits for the
same investment program.
Tax
benefits are available under the 2005 Amendment to production facilities (or
other eligible facilities), which are generally required to derive more than
25% of their business income from export. In order to receive the tax benefits,
the 2005 Amendment states that a company must make an investment in the
Benefited Enterprise exceeding a certain percentage or a minimum amount
specified in the Investments Law. Such investment may be made over a period of
no more than three years ending at the end of the year in which the company
requested to have the tax benefits apply to the Benefited Enterprise, or the
Year of Election. Where the company requests to have the tax benefits apply to
an expansion of existing facilities, then only the expansion will be considered
a Benefited Enterprise and the companys effective tax rate will be the result
of a weighted average of the applicable rates. In this case, the minimum
investment required in order to qualify as a Benefited Enterprise is required
to exceed a certain percentage or a minimum amount of the companys production
assets at the end of the year before the expansion.
The
duration of tax benefits is subject to a limitation of the earlier of seven to
ten years from the Commencement Year, or twelve years from the first day of the
Year of Election. The Commencement Year is defined as the later of (a) the
first tax year in which a company had derived income for tax purposes from the
Beneficiary Enterprise or (b) the year in which a company requested to have the
tax benefits apply to the Beneficiary Enterprise Year of Election. The tax
benefits granted to a Benefited Enterprise are determined, as applicable to its
geographic location within Israel, according to one of the following new tax
routes, which may be applicable to us:
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Similar to
the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the
geographic location of the Benefited Enterprise within Israel, and a reduced
corporate tax rate of 10% to 25% for the remainder of the benefits period,
depending on the level of foreign investment in each year. Benefits may be granted for a term of
seven to ten years, depending on the level of foreign investment in the
company. If the company pays a dividend out of income derived from the
Benefited Enterprise during the tax exemption period, such income will be
subject to corporate tax at the applicable rate (10%-25%) in respect of the
gross amount of the dividend that we may be distributed. The company is
required to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Benefited Enterprise; and
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A special
tax route, which enables companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of
the Benefited Enterprise. The benefits period is ten years. Upon payment of
dividends, the company is required to withhold tax at source at a rate of 15%
for Israeli residents and at a rate of 4% for foreign residents.
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83
Generally,
a company that is Abundant in Foreign Investment (owned by at least 74% foreign
shareholders and has undertaken to invest a minimum sum of $20 million in the
Beneficiary Enterprise as defined in the Investments Law) is entitled to an
extension of the benefits period by an additional five years, depending on the
rate of its income that is derived in foreign currency.
The 2005
Amendment changes the definition of foreign investment in the Investments Law
so that the definition now requires a minimal investment of NIS5 million by
foreign investors. Furthermore, such definition now also includes the purchase
of shares of a company from another shareholder, provided that the companys
outstanding and paid-up share capital exceeds NIS5 million. Such changes to the
aforementioned definition will take effect retroactively from 2003.
The 2005
Amendment will apply to approved enterprise programs in which the year of
election under the Investments Law is 2004 or later, unless such programs
received approval from the Investment Center on or prior to December 31, 2004,
in which case the 2005 Amendment provides that terms and benefits included in
any certificate of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval.
As a result
of the 2005 Amendment, tax-exempt income generated under the provisions of the
Investments Law, as amended, will subject us to taxes upon distribution or
liquidation and we may be required to record deferred tax liability with
respect to such tax-exempt income.
A
substantial portion of our taxable operating income is derived from our
approved enterprise program and we expect that a substantial portion of any
taxable operating income that we may realize in the future will be also derived
from such program.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli
law generally imposes a capital gains tax on the sale of any capital assets by
residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares in Israeli companies, by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholders country of
residence provides otherwise. The law distinguishes between real gain and
inflationary surplus. The inflationary surplus is a portion of the total
capital gain which is equivalent to the increase of the relevant assets
purchase price which is attributable to the increase in the Israeli consumer
price index or, in certain circumstances, a foreign currency exchange rate,
between the date of purchase and the date of sale. The real gain is the excess
of the total capital gain over the inflationary surplus.
Generally,
until the 2006 tax year, capital gains tax was imposed on Israeli resident
individuals at a rate of 15% on real gains derived on or after January 1, 2003,
from the sale of shares in, among others, Israeli companies publicly traded on
NASDAQ or on a recognized stock exchange or regulated market in a country that
has a treaty for the prevention of double taxation with Israel. This tax rate
was contingent upon the shareholder not claiming a deduction for financing
expenses in connection with such shares (in which case the gain was generally
be taxed at a rate of 25%), and did not apply to: (i) the sale of shares to a
relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares
by dealers in securities; (iii) the sale of shares by shareholders that report
in accordance with the Inflationary Adjustments Law (that were taxed at
corporate tax rates for corporations and at marginal tax rates for
individuals); or (iv)the sale of shares by shareholders who acquired their
shares prior to an initial public offering (that may be subject to a different
tax arrangement).
84
As
of January 1, 2006, the tax rate applicable to capital gains derived from the
sale of shares, whether or not listed on a stock market, is 20% for Israeli
individuals, unless such shareholder claims a deduction for financing expenses
in connection with such shares, in which case the gain will generally be taxed
at a rate of 25%. Additionally, if such shareholder is considered a material
shareholder at any time during the twelve-month period preceding such sale,
that is, such shareholder holds directly or indirectly, including with others,
at least 10% of any means of control in the company, the tax rate shall be 25%.
Israeli companies are subject to the corporate tax rate on capital gains
derived from the sale of shares, unless such companies were not subject to the
Inflationary Adjustments Law (or certain regulations) at the time of
publication of the aforementioned amendment to the Tax Ordinance that came into
effect on January 1, 2006, in which case the applicable tax rate is 25%.
However, the foregoing tax rates do not apply to: (i) dealers in securities;
and (ii) shareholders who acquired their shares prior to an initial public
offering (that may be subject to a different tax arrangement).
The
tax basis of shares acquired prior to January 1, 2003 will be determined in
accordance with the average closing share price in the three trading days
preceding January 1, 2003. However, a request may be made to the tax
authorities to consider the actual adjusted cost of the shares as the tax basis
if it is higher than such average price.
Non-Israeli
residents are 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, however, that such
capital gains are not derived from a permanent establishment in Israel, such
shareholders are not subject to the Inflationary Adjustments Law, and such
shareholders did not acquire their shares prior to an initial public offering.
However, non-Israeli corporations will not be entitled to such exemption 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 liable 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.
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, generally
referred to as the U.S.-Israel Tax Treaty, the sale, exchange or disposition of
ordinary shares by a person who (i) holds the ordinary shares as a capital
asset, (ii) qualifies as a resident of the United States within the meaning of
the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded
to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to
the Israeli capital gains tax. Such exemption will not apply if (a) such Treaty
U.S. Resident holds, directly or indirectly, shares representing 10% or more of
our voting power during any part of the twelve-month period preceding such
sale, exchange or disposition, subject to certain conditions, or (b) the
capital gains from such sale, exchange or disposition can be allocated to a
permanent establishment in Israel. In such case, the sale, exchange or
disposition of ordinary shares would be subject to Israeli tax, to the extent
applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S.
Resident would be permitted to claim a credit for such taxes against the U.S.
federal income tax imposed with respect to such sale, exchange or disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits. The
U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
85
Taxation of Non-Resident Holders of Shares
Non-residents
of Israel are subject to income tax on income accrued or derived from sources
in Israel. Such sources of income include passive income such as dividends,
royalties and interest, as well as non-passive income from services rendered in
Israel. As of 2006, distributions of dividends other than bonus shares, or
stock dividends, income tax is withheld at the source at the rate of 20%, 15% for dividends generated by an approved
enterprise (if the dividend is distributed during the tax exemption period or
within 12 years thereafter. In the event, however, that the company is
qualifies as a Foreign Investors Company, there is no such time limitation, unless a different rate is provided in a treaty
between Israel and the shareholders 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 U.S. Resident is 20%. However, under the
Investments Law, dividends generated by an Approved Enterprise (or Benefited
Enterprise) are taxed at the rate of 15%. Furthermore, dividends not generated
by an Approved Enterprise (or Benefited Enterprise) paid to a U.S. corporation
holding at least 10% of our issued voting power during the part of the tax year
which precedes the date of payment of the dividend and during the whole of its
prior tax year, are generally taxed at a rate of 12.5%.
United States Federal Income Taxation
The
following is a description of the material United States federal income tax
consequences of the ownership and disposition of our ordinary shares. This
description addresses only the United States federal income tax considerations
of holders that are initial purchasers of our ordinary shares pursuant to the
offering and that will hold such ordinary shares as capital assets. This
description does not address tax considerations applicable to holders that may
be subject to special tax rules, including:
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financial
institutions or insurance companies;
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real estate
investment trusts, regulated investment companies or grantor trusts;
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dealers or
traders in securities or currencies;
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tax-exempt
entities;
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certain
former citizens or long-term residents of the United States;
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persons that
will hold our shares through a partnership or other pass-through entity;
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persons that
received our shares as compensation for the performance of services;
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persons that
will hold our shares as part of a hedging or conversion transaction or as
a position in a straddle for United States federal income tax purposes;
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persons
whose functional currency is not the United States dollar;or
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holders that
own directly, indirectly or through attribution 10.0% or more of the voting
power or value of our shares.
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86
Moreover,
this description does not address the United States federal estate and gift or
alternative minimum tax consequences of the acquisition, ownership and
disposition of our ordinary shares.
This
description is based on the Code, existing, proposed and temporary United
States Treasury Regulations and judicial and administrative interpretations
thereof, in each case as in effect and available on the date hereof. All of the
foregoing are subject to change, which change could apply retroactively and
could affect the tax consequences described below.
For
purposes of this description, a U.S.Holder is a beneficial owner of our
ordinary shares that, for United States federal income tax purposes, is:
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a citizen or
resident of the United States;
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corporation,
or other entity treated as a corporation for U.S.federal income tax purposes,
created or organized in or under the laws of the United States or any state
thereof, including the District of Columbia;
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an estate
the income of which is subject to United States federal income taxation
regardless of its source; or
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·
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a trust if
such trust has validly elected to be treated as a United States person for
United States federal income tax purposes or if (1)a court within the United
States is able to exercise primary supervision over its administration and
(2)one or more United States persons have the authority to control all of the
substantial decisions of such trust.
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A
Non-U.S.Holder is a beneficial owner of our ordinary shares that is neither a
U.S.Holder nor a partnership (or other entity treated as a partnership for
United States federal income tax purposes).
If a
partnership (or any other entity treated as a partnership for United States
federal income tax purposes) holds our ordinary shares, the tax treatment of a
partner in such partnership will generally depend on the status of the partner
and the activities of the partnership. Such a partner or partnership should
consult its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to
the United States federal, state, local and foreign tax consequences of
acquiring, owning and disposing of our ordinary shares.
Distributions
Subject
to the discussion below under Passive Foreign Investment Company
Considerations, if you are a U.S.Holder, for United States federal income tax
purposes, the gross amount of any distribution made to you, with respect to
your ordinary shares before reduction for any Israeli taxes withheld therefrom,
other than certain distributions, if any, of our ordinary shares distribute pro
rata to all our shareholders, will be includible in your income as dividend
income to the extent such distribution is paid out of our current or
accumulated earnings and profits as determined under United States federal
income tax principles. Subject to the discussion below under Passive Foreign
Investment Company Considerations, non-corporate U.S.Holders may qualify for
the lower rates of taxation with respect to dividends on ordinary shares
applicable to long-term capital gains (that is, gains from the sale of capital
assets held for more than one year) with respect to taxable years beginning on
or before December31, 2010, provided that certain conditions are met, including
certain holding period requirements and the absence of certain risk reduction
transactions. However, such dividends will not be eligible for the dividends
received deduction generally allowed to corporate U.S.Holders. Subject to the
discussion below under Passive Foreign Investment Company Considerations, to
the extent, if any, that the amount of any distribution by us exceeds our
current and accumulated earnings and profits as determined under United States
federal income tax principles, it will be treated first as a tax-free return of
your adjusted tax basis in your ordinary shares and thereafter as capital gain.
We do not expect to maintain calculations of our earnings and profits under
United States federal income tax principles and, therefore, if you are a U.S. Holder
you should expect that the entire amount of any distribution generally will be
reported as dividend income to you.
87
If you are
a U.S.Holder, dividends paid to you with respect to your ordinary shares will
be treated as foreign source income, which may be relevant in calculating your
foreign tax credit limitation. Subject to certain conditions and limitations,
Israeli tax withheld on dividends may be deducted from your taxable income or
credited against your United States federal income tax liability. The
limitation on foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. For this purpose, dividends that we
distribute generally should constitute passive category income, or, in the
case of certain U.S. Holders, general category income. A foreign tax credit for foreign taxes
imposed on distributions may be denied when you do not satisfy certain minimum
holding period requirements. The rules relating to the determination of the
foreign tax credit are complex, and you should consult your personal tax
advisors to determine whether and to what extent you would be entitled to this
credit.
Subject to
the discussion below under Backup Withholding Tax and Information Reporting
Requirements, if you are a Non-U.S.Holder, you generally will not be subject
to United States federal income or withholding tax on dividends received by you
on your ordinary shares, unless you conduct a trade or business in the United
States and such income is effectively connected with that trade or business.
Sales Exchange or other Disposition of Ordinary Shares
Subject
to the discussion below under Passive Foreign Investment Company
Considerations, if you are a U.S.Holder, you generally will recognize gain or
loss on the sale, exchange or other disposition of your ordinary shares equal
to the difference between the amount realized on such sale, exchange or other
disposition and your adjusted tax basis in your ordinary shares. Such gain or
loss will be capital gain or loss. If you are a non corporate U.S.Holder,
capital gain from the sale, exchange or other disposition of ordinary shares is
eligible for the preferential rate of taxation applicable to long-term capital
gains, with respect to taxable years beginning on or before December31, 2010,
if your holding period for such ordinary shares exceeds one year (that is, such gain is long-term capital gain).
Gain or loss, if any, recognized by you generally will be treated as United
States source income or loss for United States foreign tax credit purposes. The
deductibility of capital losses for U.S.federal income tax purposes is subject
to limitations.
88
Subject to
the discussion below under Backup Withholding Tax and Information Reporting
Requirements, if you are a Non-U.S.Holder, you generally will not be subject
to United States federal income or withholding tax on any gain realized on the
sale or exchange of such ordinary shares unless:
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·
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such gain is
effectively connected with your conduct of a trade or business in the United
States; or
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·
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you are
an individual and have been present in the United States for 183days or more
in the taxable year of such sale or exchange and certain other conditions are
met.
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Passive
Foreign Investment Company Considerations
A
non-U.S. corporation will be classified as a passive foreign investment
company, or a PFIC, for United States federal income tax purposes in any
taxable year in which, after applying certain look-through rules, either:
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·
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at least 75
percent of its gross income is passive income; or
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·
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at least 50
percent of the average value of its gross assets (based on the quarterly
value of such gross assets) is attributable to assets that produce passive
income or are held for the production of passive income.
|
Passive
income for this purpose generally includes dividends, interest, royalties,
rents, gains from commodities and securities transactions, the excess of gains
over losses from the disposition of assets which produce passive income, and
includes amounts derived by reason of the temporary investment of funds raised
in offerings of our ordinary shares.
Based on
our estimated gross income, the average value of our gross assets (the latter
determined by reference to the market value of our shares and valuing our
intangible assets using the methods prescribed for publicly traded
corporations) and the nature of our business, we believe that we would not be
classified as a PFIC for the taxable year ended December 31, 2007. However,
based on the value of our gross assets determined by reference to the market
value of our shares at the end of the first quarter of the 2008 taxable year,
there is a substantial risk that we will be classified as a PFIC for the 2008
taxable year. However, because PFIC status is based on our income, assets and
activities for the entire taxable year, it is not possible to determine whether
we will have become a PFIC for the 2008 taxable year until after the close of
the year. Moreover, no rulings have been or will be sought from the U.S.
Internal Revenue Service (the IRS) with respect to our PFIC status, and no
assurance can be given that the IRS or the courts would not reach a contrary
conclusion. Our PFIC status should be determined annually based on tests which
are factual in nature and our status in future years will depend on our income,
assets and activities in those years, although you will be treated as
continuing to own an interest in a PFIC if we are a PFIC in any year while you
own your shares unless you make certain elections as described further below.
While we intend to manage our business so as to avoid PFIC status, to the
extent consistent with our other business goals, we cannot predict whether our
business plans will allow us to avoid PFIC status determination. Because the
market price of our ordinary shares is likely to fluctuate and the market price
of the shares of technology companies has been especially volatile, and because
that market price may affect the determination of whether we will be considered
a PFIC, we cannot assure you that we will not be considered a PFIC for any
taxable year. If we were a PFIC, you generally would be subject to imputed
interest charges and other disadvantageous tax treatment (including the denial
of the taxation of such dividends at the lower rates applicable to long-term
capital gains, as discussed above under Distributions) with respect to any
gain from the sale or exchange of, and excess distributions with respect to,
the ordinary shares.
89
Under the
PFIC rules, unless a U.S. Holder makes one of the elections described in the
next paragraphs, a special tax regime will apply to both (a) any excess
distribution by us (generally, the U.S. Holders ratable portion of distributions
in any year which are greater than 125% of the average annual distribution
received by such U.S. Holder in the shorter of the three preceding years or the
U.S. Holders holding period) and (b) any gain realized on the sale or other
disposition of the ordinary shares. Under this regime, any excess distribution
and realized gain will be treated as ordinary income and will be subject to tax
as if (a) the excess distribution or gain had been realized ratably over the
U.S. Holders holding period, (b) the amount deemed realized had been subject
to tax in each year of that holding period, and (c) the interest charge
generally applicable to underpayments of tax had been imposed on the taxes
deemed to have been payable in those years. In addition, dividend distributions
made to you will not qualify for the lower rates of taxation applicable to long
term capital gains discussed above under Distributions.
Certain
elections are available to U.S. Holders of shares that may serve to alleviate
some of the adverse tax consequences of PFIC status. If we agreed to provide
the necessary information, you could avoid the interest charge imposed by the
PFIC rules by making a qualified electing fund, or a QEF election, which
election may be made retroactively under certain circumstances, in which case
you generally would be required to include in income on a current basis your
pro rata share of our ordinary earnings as ordinary income and your pro rata
share of our net capital gains as long-term capital gain. We do not expect to
provide to U.S. Holders the information needed to report income and gain
pursuant to a QEF election, and we make no undertaking to provide such
information in the event that we are a PFIC.
Under an
alternative tax regime, you may also avoid certain adverse tax consequences
relating to PFIC status discussed above by making a mark-to-market election
with respect to your ordinary shares annually, provided that the shares are
marketable. Shares will be marketable if they are regularly traded on certain
U.S. stock exchanges (including NASDAQ) or on certain non-U.S. stock exchanges.
For these purposes, the shares will generally be considered regularly traded
during any calendar year during which they are traded, other than in negligible
quantities, on at least fifteen days during each calendar quarter.
If you
choose to make a mark-to-market election, you would recognize as ordinary
income or loss each year an amount equal to the difference as of the close of
the taxable year between the fair market value of the PFIC shares and your
adjusted tax basis in the PFIC shares. Losses would be allowed only to the
extent of net mark-to-market gain previously included by you under the election
for prior taxable years. If the mark-to-market election were made, then the
PFIC rules set forth above relating to excess distributions and realized gains
would not apply for periods covered by the election. If you make a
mark-to-market election after the beginning of your holding period of our
ordinary shares, you would be subject to interest charges with respect to the
inclusion of ordinary income attributable to the period before the effective
date of such election.
90
Under
certain circumstances, ordinary shares owned by a Non-U.S. Holder may be
attributed to a U.S. person owning an interest, directly or indirectly, in the
Non-U.S. Holder. In this event, distributions and other transactions in respect
of such ordinary shares may be treated as excess distributions with respect to such
U.S. person, and a QEF election may be made by such U.S. person with respect to
its indirect interest in us, subject to the discussion in the preceding
paragraphs.
We may
invest in stock of non-U.S. corporations that are PFICs. In such a case,
provided that we are classified as a PFIC, a U.S. Holder would be treated as
owning its pro rata share of the stock of the PFIC owned by us. Such a U.S.
Holder would be subject to the rules generally applicable to shareholders of
PFICs discussed above with respect to distributions received by us from such a
PFIC and dispositions by us of the stock of such a PFIC (even though the U.S.
Holder may not have received the proceeds of such distribution or disposition).
Assuming we receive the necessary information from the PFIC in which we own
stock, certain U.S. Holders may make the QEF election discussed above with
respect to the stock of the PFIC owned by us, with the consequences discussed
above. However, no assurance can be given that we will be able to provide U.S.
Holders with such information.
If we were
a PFIC, a holder of ordinary shares that is a U.S. Holder must file United
States Internal Revenue Service Form 8621 for each tax year in which the U.S.
Holder owns the ordinary shares.
You should
consult your own tax advisor regarding our potential status as a PFIC and the
tax consequences that would arise if we were treated as a PFIC.
Backup Withholding Tax and Information Reporting
Requirements
United
States backup withholding tax and information reporting requirements generally
apply to certain payments to certain non-corporate holders of stock.
Information reporting generally will apply to payments of dividends on, and to
proceeds from the sale or redemption of, ordinary shares made within the United
States, or by a United States payor or United States middleman, to a holder of
ordinary shares, other than an exempt recipient (including a corporation, a
payee that is not a United States person that provides an appropriate
certification and certain other persons). A payor will be required to withhold
backup withholding tax from any payments of dividends on, or the proceeds from
the sale or redemption of, ordinary shares within the United States, or by a
United States payor or United States middleman, to a holder, other than an
exempt recipient, if such holder fails to furnish its correct taxpayer
identification number or otherwise fails to comply with, or establish an
exemption from, such backup withholding tax requirements. The backup
withholding tax rate is 28.0% for years through 2010.
Any amounts
withheld under the backup withholding rules will be allowed as a refund or
credit against the beneficial owners United States federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
The above description is not intended to constitute a
complete analysis of all tax consequences relating to acquisition, ownership
and disposition of our ordinary shares. You should consult your tax advisor
concerning the tax consequences of your particular situation.
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F.
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Dividends and Paying Agents
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Not
applicable.
91
Not
applicable.
We are
currently subject to the information and periodic reporting requirements of the
U.S. Securities Exchange Act of 1934, as amended, generally referred to as the
Exchange Act, and file periodic reports and other information with the
Securities and Exchange Commission through its electronic data gathering,
analysis and retrieval (EDGAR) system. Our securities filings, including this
annual report and the exhibits thereto, are available for inspection and
copying at the public reference facilities of the Securities and Exchange Commission
located at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. You may also
obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the Securities and Exchange Commission at 100 F Street,
N.E., Washington, DC 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the public reference room. The
Commission also maintains a website at http://www.sec.gov from which certain
filings may be accessed.
As a
foreign private issuer, we are exempt from the rules under the Exchange Act
relating to the furnishing and content of proxy statements, and our officers,
directors and principal shareholders will be 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 Securities and Exchange Commission as
frequently or as promptly as United States companies whose securities are
registered under the Exchange Act.
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I.
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Subsidiary Information
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Not
applicable.
ITEM 11: Quantitative and Qualitative
Disclosures About Market Risk
Market risk
is the risk of loss related to changes in market prices, including interest
rates and foreign exchange rates, of financial instruments that may adversely
impact our consolidated financial position, results of operations or cash
flows.
Risk of Interest Rate Fluctuation
We do not
have any long-term borrowings. Our investments consist primarily of cash and
cash equivalents and interest bearing, investment-grade investments in
marketable securities. These marketable securities currently consist of
corporate debt securities, money market funds and auction-rate securities. See
ITEM 3: Key InformationRisk FactorsWe have invested a portion of our cash in
auction-rate securities, which subjects us to liquidity and investment risk.
Due to recent uncertainties in the capital markets regarding auction-rate
securities, we recorded impairment charges in the fourth quarter of 2007 and
the first quarter of 2008, and, if the fair value of these investments were to
decline further, we could be required to record further impairment charges
related to these investments and ITEM 5: Operating and Financial Review and
ProspectsOperating ResultsOverviewFinancial income (expenses), net for
further information regarding our investments in auction rate securities. The
primary objective of our investment activities is to preserve principal while
maximizing the income that we receive from our investments without
significantly increasing risk and loss. Our investments are exposed to market
risk due to fluctuation in interest rates, which may affect our interest income
and the fair market value of our investments. We manage this exposure by
performing ongoing evaluations of our investments. Due to the short and
medium-term maturities of our investments to date, their carrying value
approximates the fair value. We generally hold investments to maturity in order
to limit our exposure to interest rate fluctuations.
92
Foreign Currency Exchange Risk
Our foreign
currency exposures give rise to market risk associated with exchange rate
movements of the U.S.dollar, our functional and reporting currency, mainly
against the NIS. In 2007, we derived our revenues principally in U.S.dollars.
Although a substantial part of our expenses were denominated in U.S.dollars, a
significant portion of our expenses were denominated in shekels and to a lesser
extent in euros and other Asian currencies. Our shekel-denominated expenses
consist principally of salaries and related personnel expenses.
We
anticipate that a material portion of our expenses will continue to be denominated
in shekels. If the U.S.dollar continues to weaken against the shekel or other
currencies we are exposed to, there will be a negative impact on our profit
margins.
Impact of Inflation
We believe
that the rate of inflation in Israel has had a minor effect on our business to
date. However, our U.S. dollar costs in Israel will increase if inflation in
Israel exceeds the devaluation of the shekel against the U.S. dollar or if the
timing of such devaluation lags behind inflation in Israel.
The following table presents information about the rate of inflation in
Israel, the rate of devaluation of the shekel against the U.S. dollar and the
rate of inflation in Israel adjusted for such devaluation:
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Year ended
December 31,
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Israeli
inflation
rate %
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Israeli
devaluation
(appreciation)
rate %
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Israeli
inflation
adjusted for
devaluation %
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2005
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2.4
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6.7
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(4.3)
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2006
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(0.1)
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(8.2)
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8.1
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2007
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3.4
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(9.0)
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12.4
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We cannot
assure you that we will not be materially and adversely affected in the future
if inflation in Israel exceeds the devaluation of the shekel against the dollar
or if the timing of the devaluation lags behind inflation in Israel.
ITEM 12: Description of Securities Other Than
Equity Securities
Not
applicable.
93
PART
II
ITEM 13: Defaults, Dividend Arrearages and
Delinquencies
None.
ITEM 14: Material Modifications to the Rights
of Security Holders and Use of Proceed
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A.
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Material Modifications to the Rights of Security Holders
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None.
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E.
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Use of Proceeds
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The
effective date of the registration statement (file no. 333-138313) for our
initial public offering of ordinary shares, par value NIS 0.10, was November
15, 2006. The offering commenced on November 15, 2006 and terminated after the
sale of all the securities registered. Lehman Brothers Inc. acted as the sole
book-running manager for the offering, Deutsche Bank Securities Inc. acted as
co-lead manager and, CIBC World Markets Corp. and RBC Capital Markets
Corporation acted as co-managers. We registered 6,500,000 ordinary shares in
the offering. We sold 6,500,000 ordinary shares at an aggregate offering price
of $78 million at a price per share of $12.00. Under the terms of the offering,
we incurred aggregate underwriting discounts of $5.5 million. We also incurred
expenses of $2 million in connection with the offering. The net proceeds that
we received as a result of the offering were $70.5 million.
From the
effective date of the registration statement and until December 31, 2007, the
net proceeds had been invested in cash equivalents, marketable securities,
capital expenditure and other corporate purposes.
None of the
net proceeds of the offering was paid directly or indirectly to any director,
officer, general partner of ours or to their associates, persons owning ten
percent or more of any class of our equity securities, or to any of our
affiliates.
ITEM 15: Controls and Procedures
(a)
Disclosure
Controls and Procedures
. Our management, including our Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of December 31, 2007. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2007, we have in place effective controls
and procedures designed to ensure that information disclosed by us in the
reports we file or submit under the Exchange Act and the rules thereunder, is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.
94
(b)
Managements
Annual Report on Internal Control Over Financial Reporting
. Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. Our internal control over financial reporting is a process 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. Our internal control over financial
reporting includes those policies and procedures that:
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pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
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·
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provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors;
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·
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provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
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Our
management recognizes that there are inherent limitations in the effectiveness
of any system of internal control over financial reporting, including the
possibility of human error and the circumvention or override of internal
control. Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement
preparation, and may not prevent or detect all misstatements. Further, because
of changes in conditions, the effectiveness of internal control over financial
reporting may vary over time.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. Our management has concluded, based on its
assessment, that our internal control over financial reporting was effective as
of December 31, 2007.
Our financial
statements have been audited by Kost, Forer, Gabbay & Kasierer (a Member of
Ernst & Young Global), an independent registered public accounting firm.
(c)
Attestation
Report of Registered Public Accounting Firm
: See the report of Kost Forer
Gabbay & Kasierer (a Member of Ernst & Young Global), an independent
registered public accounting firm, included under ITEM 18: Financial
Statements on page F-3.
(d)
Changes
in Internal Control Over Financial Reporting
. During the period covered by
this report, no material changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) have occurred that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 16: Reserved
ITEM 16A: Audit Committee Financial Expert
The
board of directors has determined that Nurit Benjamini is the financial expert
serving on its audit committee and that Ms. Benjamini is independent under the
rules of The Nasdaq Stock Market.
95
ITEM 16B: Code of Ethics
We
have adopted a code of ethics applicable to our Chief Executive Officer, Chief
Financial Officer, controller and persons performing similar functions. This
code has been posted on our website, www.allot.com.
ITEM 16C: Principal Accountant Fees and
Services
Fees paid to the Auditors
The
following table sets forth, for each of the years indicated, the fees billed by
our independent registered public accounting firm.
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Year ended December, 31,
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2006
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2007
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(in thousands of U.S. dollars)
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Audit Fees(1)
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$
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426
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$
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265
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Audit-Related Fees(2)
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15
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Tax Fees(3)
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11
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29
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All Other Fees(4)
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5
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|
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25
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|
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|
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Total
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$
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442
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$
|
334
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(1)
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Audit fees include fees
for services performed by our independent public accounting firm in
connection with our annual audit for 2007 (including the audit required by
Section 404 of the Sarbanes-Oxley Act), certain procedures regarding our
quarterly financial results submitted on Form 6-K and consultation concerning
financial accounting and reporting standards.
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(2)
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Audit-Related fees
include fees for the performance of due diligence investigations.
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(3)
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Tax fees include fees
for professional services rendered by our independent registered public
accounting firm for tax compliance and tax advice on actual or contemplated
transactions.
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(4)
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Other fees include fees
for services rendered by our independent registered public accounting firm
with respect to government incentives.
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Audit Committees Pre-Approval Policies and Procedures
Our
audit committee pre-approved all audit and non-audit services provided to us
and to our subsidiaries during the periods listed above.
ITEM 16D: Exemptions from the Listing
Standards for Audit Committees
Not
applicable.
ITEM 16E: Purchase of Equity Securities by
the Company and Affiliated Purchasers
Not applicable.
96
PART III
ITEM 17: Financial Statements
Not
applicable.
ITEM 18: Financial Statements
See
Financial Statements included at the end of this report.
ITEM 19: Exhibits
See
exhibit index incorporated herein by reference.
97
SIGNATURES
The registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
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Allot Communications Ltd.
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By:
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/s/ Rami
Hadar
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Rami Hadar
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Chief
Executive Officer and President
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Dated: June 27, 2008
98
ANNUAL REPORT ON FORM
20-F
INDEX OF EXHIBITS
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Number
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Description
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1.1
|
|
Articles of Association of
the Registrant (1)
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1.2
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Certificate of Name Change
(1)
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2.1
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|
Specimen share certificate
(1)
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2.2
|
|
Second Amended and
Restated Investors Rights Agreement, dated October 26, 2006, by and among the
parties thereto and the Registrant (1)
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3.1
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|
Escrow Agreement, dated
January 28, 1998 by and among Yigal Jacoby, Ravillan Benzur & Co., Law
Offices and the Registrant; Escrow Letter of Resignation and Appointment,
dated January 31, 2004 by and among Yigal Jacoby, Yolovelsky, Dinstein, Sneh &
Co. and the Registrant; and Assignment of Escrow Agreement, dated May 21,
2006 by and among Yodan Trust Company Ltd., Oro Trust Company Ltd., Yigal
Jacoby and the Registrant (1)
|
|
|
|
3.2
|
|
Addendum, dated October
26, 2006, to Escrow Agreement, dated January 28, 1998, by and between Yigal
Jacoby and the Registrant (1)
|
|
|
|
4.1
|
|
Share Purchase Agreement,
dated May 18, 2006, by and among the parties thereto and the Registrant (1)
|
|
|
|
4.2
|
|
Non-Competition Agreement,
dated August 24, 2004, by and among Odem Rotem Holdings Ltd., Yigal Jacoby
and the Registrant (1)
|
|
|
|
4.3
|
|
Experteam Training
Services Proposal, dated as of March 2006, by Experteam to the Registrant (1)
|
|
|
|
4.4
|
|
Warrant to Purchase Series
C-1 Shares, dated November 27, 2001, by and between the Company and Yigal
Jacoby (1)
|
|
|
|
4.5
|
|
Manufacturing Agreement,
dated September 4, 2002, by and between R.H. Electronics Ltd. and the
Registrant* (1)
|
|
|
|
4.6
|
|
Non-Stabilized Lease
Agreement, dated February 13, 2006, by and among, Aderet Hod Hasharon Ltd.,
Miritz, Inc., Leah and Israel Ruben Assets Ltd., Tamar and Moshe Cohen Assets
Ltd., Drish Assets Ltd., S. L. A. A. Assets and Consulting Ltd., Iris Katz
Ltd., Y. A. Groder Investments Ltd., Ginotel Hod Hasharon 2000 Ltd. and Allot
Communications Ltd. (1)
|
|
|
|
4.7
|
|
Key Employees of
Subsidiaries and Consultants Share Incentive Plan (1997) (1)
|
|
|
|
4.8
|
|
Key Employees Share
Incentive Plan (1997) (1)
|
99
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
4.9
|
|
Key Employees Share
Incentive Plan (2003) (1)
|
|
|
|
4.10
|
|
2006 Incentive
Compensation Plan (1)
|
|
|
|
4.11
|
|
Manufacturing Agreement,
dated July 19, 2007, by and between Flextronics (Israel) Ltd. and the
Registrant*
|
|
|
|
4.12
|
|
Agreement relating to the
sale and purchase of the Business and Assets dated January 1, 2008 by and between
Esphion Limited and the Registrant
|
|
|
|
8.1
|
|
List of Subsidiaries of
the Registrant
|
|
|
|
11.1
|
|
Code of Ethics (2)
|
|
|
|
12.1
|
|
Certification of Principal
Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302
Certifications)
|
|
|
|
12.2
|
|
Certification of Principal
Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302
Certifications)
|
|
|
|
13.1
|
|
Certification of Principal
Executive Officer and Principal Financial Officer required by Rule 13a-14(b)
and Rule 15d-14(b) (Section 906 Certifications) (3)
|
|
|
|
14.1
|
|
Consent
of Kost Forer Gabbay & Kasierer
|
|
|
(1)
|
Previously filed with the
Securities and Exchange Commission on October 31, 2006 pursuant to a
registration statement on Form F-1 (File No. 333-138313) and incorporated by
reference herein.
|
|
|
(2)
|
Previously filled with the Securities
and Exchange Commission on June 28, 2007 on Form 20-F for the year ended December 31, 2006
and incorporated by reference herein.
|
|
|
(3)
|
This document is being
furnished in accordance with SEC Release Nos. 33-8212 and 34-47551.
|
|
|
*
|
Portions of this exhibit
were omitted and have been filed separately with the Secretary of the
Securities and Exchange Commission pursuant to the Registrants application
requesting confidential treatment under Rule 24b-2 of the Exchange Act.
|
100
ALLOT COMMUNICATIONS
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS OF DECEMBER 31,
2007
U.S. DOLLARS IN
THOUSANDS
INDEX
|
|
|
Kost Forer
Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Shareholders of
ALLOT
COMMUNICATIONS LTD. AND ITS SUBSIDIARIES
We
have audited the accompanying consolidated balance sheets of Allot
Communications Ltd. (the Company) and its subsidiaries as of December 31,
2007 and 2006, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three years in the period
ended December 31, 2007. These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
explained in Note 2 to the consolidated financial statements, on January 1,
2006 the Company adopted Statement of Financial Accounting Standards No.
123(revised 2004), Share Based Payment.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Companys internal control over
financial reporting as of December 31, 2007, 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 26, 2008
expressed an unqualified opinion thereon.
|
|
|
/s/ KOST FORER GABBAY & KASIERER
|
Tel-Aviv,
Israel
|
KOST FORER
GABBAY & KASIERER
|
June 26,
2008
|
A Member of
Ernst & Young Global
|
F 2
|
|
|
Kost Forer
Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Shareholders of
ALLOT
COMMUNICATIONS LTD. AND ITS SUBSIDIARIES
We
have audited Allot Communications Ltd and its subsidiaries (the Companys)
internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on the Companys 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 provide a reasonable basis for our opinion.
A
companys 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 companys 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 companys 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.
F 3
|
|
|
Kost Forer
Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
|
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, 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
the Company and its subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in stockholders equity
and cash flows for each of the three years in the period ended
December 31, 2007 and our report dated June 26, 2008 expressed an
unqualified opinion thereon.
|
|
|
/s/ KOST
FORER GABBAY & KASIERER
|
Tel-Aviv,
Israel
|
KOST FORER
GABBAY & KASIERER
|
June 26,
2008
|
A Member of
Ernst & Young Global
|
F 4
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,117
|
|
$
|
28,101
|
|
Marketable securities
|
|
|
70,364
|
|
|
7,243
|
|
Short-term bank deposit
|
|
|
59
|
|
|
62
|
|
Trade receivables (net of allowance for
doubtful accounts of $ 0 and $ 49
at December 31, 2006 and 2007, respectively)
|
|
|
4,178
|
|
|
6,122
|
|
Other receivables and prepaid expenses
|
|
|
1,961
|
|
|
3,799
|
|
Inventories
|
|
|
3,337
|
|
|
4,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
87,016
|
|
|
50,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
5,750
|
|
|
35,371
|
|
Severance pay fund
|
|
|
2,648
|
|
|
3,302
|
|
Deferred taxes
|
|
|
291
|
|
|
264
|
|
Other assets
|
|
|
763
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term
assets
|
|
|
9,452
|
|
|
39,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
2,939
|
|
|
4,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL AND INTANGIBLE ASSETS, NET
|
|
|
99
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
99,506
|
|
$
|
94,655
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F 5
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Short-term bank credit
|
|
$
|
6
|
|
$
|
-
|
|
Trade payables
|
|
|
4,415
|
|
|
3,409
|
|
Employees and payroll accruals
|
|
|
2,610
|
|
|
3,590
|
|
Deferred revenues
|
|
|
2,580
|
|
|
3,968
|
|
Other payables and accrued expenses
|
|
|
2,223
|
|
|
1,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
11,834
|
|
|
12,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
1,108
|
|
|
1,404
|
|
Accrued severance pay
|
|
|
2,377
|
|
|
3,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term
liabilities
|
|
|
3,485
|
|
|
4,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
Share capital -
|
|
|
|
|
|
|
|
Ordinary shares of NIS 0.1 par value -
Authorized: 200,000,000 shares
at December 31, 2007 and 2006; Issued: 22,254,728 and 21,232,290
shares at December 31, 2007 and 2006, respectively; Outstanding:
22,008,249 and 20,985,811 shares at December 31, 2007 and 2006,
respectively
|
|
|
456
|
|
|
480
|
|
Additional paid-in capital
|
|
|
121,069
|
|
|
123,913
|
|
Deferred stock compensation
|
|
|
(34
|
)
|
|
-
|
|
Accumulated other comprehensive loss
|
|
|
(36
|
)
|
|
-
|
|
Accumulated deficit
|
|
|
(37,268
|
)
|
|
(47,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders equity
|
|
|
84,187
|
|
|
77,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
and shareholders equity
|
|
$
|
99,506
|
|
$
|
94,655
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F 6
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
18,498
|
|
$
|
28,756
|
|
$
|
25,073
|
|
Services
|
|
|
4,474
|
|
|
5,388
|
|
|
7,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
22,972
|
|
|
34,144
|
|
|
32,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues:
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,481
|
|
|
6,435
|
|
|
6,603
|
|
Services
|
|
|
938
|
|
|
1,162
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenues
|
|
|
5,419
|
|
|
7,597
|
|
|
8,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
17,553
|
|
|
26,547
|
|
|
24,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
5,925
|
|
|
7,529
|
|
|
9,384
|
|
Sales and marketing
|
|
|
11,887
|
|
|
15,457
|
|
|
18,081
|
|
General and administrative
|
|
|
2,380
|
|
|
3,464
|
|
|
5,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
20,192
|
|
|
26,450
|
|
|
33,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(2,639
|
)
|
|
97
|
|
|
(8,565
|
)
|
Financial
and other income (expenses), net
|
|
|
45
|
|
|
630
|
|
|
(845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax expenses (benefit)
|
|
|
(2,594
|
)
|
|
727
|
|
|
(9,410
|
)
|
Income tax
expenses (benefit)
|
|
|
(218
|
)
|
|
111
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(2,376
|
)
|
$
|
616
|
|
$
|
(9,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net
earnings (loss) per share
|
|
$
|
(0.81
|
)
|
$
|
0.04
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net
earnings (loss) per share
|
|
$
|
(0.81
|
)
|
$
|
0.04
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
computing basic net earnings (loss) per share
|
|
|
2,943,500
|
|
|
14,402,338
|
|
|
21,525,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
computing diluted net earnings (loss) per share
|
|
|
2,943,500
|
|
|
16,423,227
|
|
|
21,525,822
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F 7
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
U.S. dollars in thousands, except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
Convertible
Preferred shares
|
|
Additional
paid-in
capital
|
|
Deferred
stock
compensation
|
|
Accumulated
other
comprehensive
loss
|
|
Accumulated
deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005
|
|
2,447,568
|
|
$
|
29
|
|
4,357,769
|
|
$
|
103
|
|
$
|
43,692
|
|
$
|
(119
|
)
|
$
|
(4
|
)
|
$
|
(35,508
|
)
|
$
|
8,193
|
|
Exercise of warrants and employee stock
options
|
|
276,519
|
|
|
3
|
|
-
|
|
|
-
|
|
|
19
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
22
|
|
Compensation related to warrants and options granted
to consultants
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
54
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
54
|
|
Deferred stock compensation
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
2
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization of stock-based compensation
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
205
|
|
|
46
|
|
|
-
|
|
|
-
|
|
|
251
|
|
Net unrealized loss on available-for-sale
securities
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(18
|
)
|
|
-
|
|
|
(18
|
)
|
Net loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,376
|
)
|
|
(2,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
2,724,087
|
|
|
32
|
|
4,357,769
|
|
|
103
|
|
|
43,972
|
|
|
(75
|
)
|
|
(22
|
)
|
|
(37,884
|
)
|
|
6,126
|
|
Issuance of share capital (net of expenses of
$ 68)
|
|
-
|
|
|
-
|
|
452,157
|
|
|
10
|
|
|
5,422
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,432
|
|
Exercise of warrants and employee stock
options
|
|
488,027
|
|
|
9
|
|
-
|
|
|
-
|
|
|
85
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
94
|
|
Compensation related to warrants and options granted
to consultants
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
635
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
635
|
|
Amortization of stock-based compensation
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
685
|
|
|
41
|
|
|
-
|
|
|
-
|
|
|
726
|
|
Net unrealized loss on available-for-sale
securities
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(14
|
)
|
|
-
|
|
|
(14
|
)
|
Tax benefit related to exercise of stock
options
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
99
|
|
Share dividend
|
|
342,588
|
|
|
8
|
|
6,131,170
|
|
|
139
|
|
|
(147
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance of share capital upon Initial Public
Offering, net of
expenses of $ 7,527
|
|
6,500,000
|
|
|
150
|
|
-
|
|
|
|
|
|
70,323
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,473
|
|
Conversion of Convertible Preferred Shares
|
|
11,177,588
|
|
|
257
|
|
(10,941,096
|
)
|
|
(252
|
)
|
|
(5
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net income
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
616
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
21,232,290
|
|
|
456
|
|
-
|
|
|
-
|
|
|
121,069
|
|
|
(34
|
)
|
|
(36
|
)
|
|
(37,268
|
)
|
|
84,187
|
|
Exercise of warrants and employee stock options and
repayment of
non-recourse loan
|
|
1,022,438
|
|
|
24
|
|
-
|
|
|
-
|
|
|
1,448
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,472
|
|
Expenses related to issuance of share capital
upon Initial Public Offering
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(58
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(58
|
)
|
Compensation related to options granted to
consultants
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(172
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(172
|
)
|
Stock-based compensation related to options granted
to employees
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
1,499
|
|
|
34
|
|
|
-
|
|
|
-
|
|
|
1,533
|
|
Realized loss on available-for-sale
securities
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36
|
|
|
-
|
|
|
36
|
|
Tax benefit related to exercise of stock
options
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
127
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
127
|
|
Net loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9,940
|
)
|
|
(9,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
22,254,728
|
|
$
|
480
|
|
-
|
|
$
|
-
|
|
$
|
123,913
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(47,208
|
)
|
$
|
77,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F 8
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,376
|
)
|
$
|
616
|
|
$
|
(9,940
|
)
|
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
559
|
|
|
893
|
|
|
1,486
|
|
Stock-based compensation related to options
granted to employees and non-employees
|
|
|
305
|
|
|
1,361
|
|
|
1,361
|
|
Amortization of intangible assets
|
|
|
23
|
|
|
24
|
|
|
-
|
|
Capital loss
|
|
|
6
|
|
|
-
|
|
|
2
|
|
Decrease (increase) accrued severance pay,
net
|
|
|
(3
|
)
|
|
(75
|
)
|
|
144
|
|
Decrease (increase) in other assets
|
|
|
19
|
|
|
(659
|
)
|
|
19
|
|
Accrued interest on marketable securities
|
|
|
(4
|
)
|
|
(223
|
)
|
|
(82
|
)
|
Decrease in other long-term liabilities
|
|
|
(294
|
)
|
|
-
|
|
|
(228
|
)
|
Increase in trade receivables
|
|
|
(194
|
)
|
|
(648
|
)
|
|
(1,944
|
)
|
Increase in other receivables and prepaid
expenses
|
|
|
(15
|
)
|
|
(1,042
|
)
|
|
(1,795
|
)
|
Increase in inventories
|
|
|
(271
|
)
|
|
(2,053
|
)
|
|
(1,590
|
)
|
Increase (decrease) in deferred taxes
|
|
|
(281
|
)
|
|
(90
|
)
|
|
102
|
|
Increase (decrease) in trade payables
|
|
|
536
|
|
|
2,122
|
|
|
(1,006
|
)
|
Increase in employees and payroll
accruals
|
|
|
219
|
|
|
938
|
|
|
980
|
|
Increase (decrease) in deferred revenues
|
|
|
1,315
|
|
|
(531
|
)
|
|
1,684
|
|
Increase (decrease) in other payables and
accrued expenses
|
|
|
562
|
|
|
560
|
|
|
(211
|
)
|
Amortization of premium on marketable
securities
|
|
|
-
|
|
|
46
|
|
|
38
|
|
Other than temporary loss on marketable
securities
|
|
|
-
|
|
|
-
|
|
|
4,881
|
|
Amortization of discount on bank
credit-line
|
|
|
50
|
|
|
-
|
|
|
-
|
|
Interest on short-term bank deposit
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
|
155
|
|
|
1,238
|
|
|
(6,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
3
|
|
|
62
|
|
|
-
|
|
Purchase of property and equipment
|
|
|
(686
|
)
|
|
(2,072
|
)
|
|
(3,030
|
)
|
Proceeds from sale of property and
equipment
|
|
|
4
|
|
|
4
|
|
|
-
|
|
Investment in marketable securities
|
|
|
(4,300
|
)
|
|
(104,118
|
)
|
|
(87,134
|
)
|
Proceeds from redemption or sale of
marketable securities
|
|
|
4,550
|
|
|
32,525
|
|
|
115,751
|
|
Investment in severance pay fund
|
|
|
-
|
|
|
(271
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
(429
|
)
|
|
(73,870
|
)
|
|
25,587
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F 9
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share capital upon initial
public offering
|
|
|
-
|
|
|
70,473
|
|
|
-
|
|
Bank credit (repayment)
|
|
|
(166
|
)
|
|
6
|
|
|
(6
|
)
|
Exercise of warrants and employee stock
options and repayment of non-recourse loan
|
|
|
22
|
|
|
94
|
|
|
1,436
|
|
Excess tax benefit from stock-based
compensation
|
|
|
-
|
|
|
67
|
|
|
127
|
|
Expenses related to issuance of share
capital upon Initial Public offering
|
|
|
-
|
|
|
-
|
|
|
(58
|
)
|
Issuance of share capital, net
|
|
|
-
|
|
|
5,432
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
|
(144
|
)
|
|
76,072
|
|
|
1,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents
|
|
|
(418
|
)
|
|
3,440
|
|
|
20,984
|
|
Cash and cash equivalents at the beginning
of the year
|
|
|
4,095
|
|
|
3,677
|
|
|
7,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the
year
|
|
$
|
3,677
|
|
$
|
7,117
|
|
$
|
28,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of inventory to property and
equipment
|
|
$
|
155
|
|
$
|
281
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options on account of other
receivables
|
|
$
|
-
|
|
$
|
-
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in goodwill on account of short
term liability
|
|
$
|
-
|
|
$
|
-
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
8
|
|
$
|
3
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
-
|
|
$
|
184
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F 10
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
Allot
Communications Ltd. (the Company) was incorporated in November 1996 under
the laws of the State of Israel. The Company is engaged in developing,
selling and marketing broadband service optimization solutions using advanced
deep packet inspection, or DPI, technology. The solutions provide broadband
service providers and enterprises with real-time, highly granular visibility
into network traffic, and enable them to efficiently and effectively manage
and optimize their networks. The Companys solutions are used to create
policies to monitor network applications, enforce quality of service policies
that guarantee mission-critical application performance, mitigate security
risks and leverage network infrastructure investments. The Companys products
consist of the Service Gateway and NetEnforcer traffic management systems the
NetXplorer and Subscribe Management Platform application management suites
and following the acquisition of Esphion Limited, which was completed on
January 8, 2008, also the Service Protector network protection solution. The
products are also used by service providers to offer subscriber-based and
application-based tiered services that enable them to optimize their service
offerings. On November 16, 2006, trading in the Companys ordinary shares
commenced on the Nasdaq Stock Market.
|
|
|
|
The Company
holds six wholly-owned subsidiaries (collectively Allot): Allot
Communications, Inc. in Eden Prairie, Minnesota, United-States (the US
subsidiary), which was incorporated in 1997 under the laws of the State of
California, Allot Communication Europe SARL in Sophia, France (the European
subsidiary), which was incorporated in 1998 under the laws of France, Allot
Communications Japan K.K. in Tokyo, Japan (the Japanese subsidiary), which
was incorporated in 2004 under the laws of Japan, Allot Communication (UK)
Limited (the UK subsidiary), which was incorporated in 2006 under the laws
of England and Wales, Allot Communications (Asia Pacific) Pte. Ltd. (the
Singaporean subsidiary), which was incorporated in 2006 under the laws of
Singapore, Allot Communications New Zealand Limited (the NZ subsidiary),
which was incorporated in December 2007 under the laws of New Zealand.
|
|
|
|
The US
subsidiary commenced operations in 1997. It engages in the sale, marketing
and technical support services in America of products manufactured and
imported by the Company. The European, Japanese, UK and Singaporean
subsidiaries are engaged in marketing and technical support services of the
Companys products in Europe, Japan UK and Asia Pacific, respectively. The NZ
subsidiary commenced its operations in 2008 and is engaged in the research
and development of the ServiceProtector Solution, and technical support
services such solutions.
|
|
|
|
During 2006
and 2005, approximately 20% and 16%, respectively, of Allots revenues derived
from a single customer. During 2007, no revenues derived from this customer.
|
|
|
|
Allot
currently depends on two subcontractors to manufacture and provide hardware
warranty support for its traffic management system. If they experiences
delays, disruptions, quality control problem or a loss in capacity, it could
materially adversely affect Allots operating results (see also Note 7e).
Certain components for the Service Gateway and NetEnforcer traffic management
systems come from single or limited sources, and Allot could lose sales if
these sources fail to satisfy its supply requirements.
|
F 11
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
|
The
consolidated financial statements have been prepared in accordance with U.S.
Generally Accepted Accounting Principles (U.S. GAAP).
|
|
|
|
|
a.
|
Use of
estimates:
|
|
|
|
|
|
The
preparation of financial statements, in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from such estimates.
|
|
|
|
|
b.
|
Financial
statements in U.S. dollars:
|
|
|
|
|
|
The majority
of the revenues of the Company and certain of its subsidiaries are generated
in U.S. dollars (dollar) or linked to the dollar. In addition, a majority
portion of the Companys and certain of its subsidiaries costs are incurred
or determined in dollars. A portion of the Company and its subsidiaries
costs is paid in local currencies. The Companys management believes that the
dollar is the currency of the primary economic environment in which the
Company and its subsidiaries operate. Thus, the functional and reporting
currency of the Company and its subsidiaries is the dollar.
|
|
|
|
|
|
Accordingly,
monetary accounts maintained in currencies other than the dollar are
remeasured into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. All transactions
gains and losses from the remeasurement of 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
subsidiaries. Intercompany balances and transactions, including profits from
intercompany sales not yet realized outside Allot, have been eliminated upon
consolidation.
|
|
|
|
|
d.
|
Cash and
cash equivalents:
|
|
|
|
|
|
Allot
considers all highly liquid investments which are readily convertible to cash
with maturity of three months or less, at the date of acquisition, to be cash
equivalents.
|
|
|
|
|
e.
|
Marketable
securities:
|
|
|
|
|
|
Allot
accounts for its investments in marketable securities using Statement of
Financial Accounting Standard No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS No. 115).
|
F 12
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
|
The
Companys management determines the appropriate classification of marketable
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been classified as
available-for-sale and are carried at fair market value. Fair value is
determined based on observable market value quotes or, if market values are
not available, using valuation models including assessments of counterparty
credit worthiness, credit default risk, underlying security type of
collaterals risk premium and overall capital market liquidity conditions.
Declines in fair value that are considered other-than-temporary are charged
to earnings and those that are considered temporary are reported, net of tax,
as a component of accumulated other comprehensive income in stockholders
equity. The cost of securities sold is based on the specific identification
method.
|
|
|
|
|
|
As of
December 31, 2007, the Company held marketable securities in U.S. dollars in
the United States, which were classified as available for sale. The balance
was composed of Auction Rate Securities (ARS) and corporate bonds. The ARS
and corporate bonds bear interest at rates ranging from 4.59% to 7.55% per
annum.
|
|
|
|
|
|
Following
SEC Staff Accounting Bulletin No. 59, EITF 03-1 and FAS 115-1, management
evaluated in each period whether declines in the market value of its
securities are other than temporary. Where such declines are determined to be
other than temporary, the related unrealized loss is recorded as a write-down
included in financial expenses.
|
|
|
|
|
f.
|
Short-term
deposit:
|
|
|
|
|
|
A short-term
bank deposit is a deposit with a maturity of more than three months but less
than one year. The deposit is in dollars and bears interest at annual
weighted average rate of 4.88% at December 31, 2007 and 2006. The short-term
deposit is presented at cost, including accrued interest.
|
|
|
|
|
g.
|
Inventories:
|
|
|
|
|
|
Inventories
are stated at the lower of cost or market value. Cost of inventories is
determined as the cost of raw materials, manufacturing cost and addition of
allocable indirect costs. Cost is determined using the First In First Out
(FIFO) method. Inventory write-offs due to technological obsolescence totaled
$ 175, $ 289 and $ 179 in 2007, 2006 and 2005, respectively.
|
|
|
|
|
h.
|
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:
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Lab equipment
|
|
|
15-33
|
|
Computers
and peripheral equipment
|
|
|
20-33
|
|
Office
furniture
|
|
|
6-33
|
|
Leasehold
improvements
|
|
|
By the shorter of term of the lease
|
|
|
|
|
or the useful life of the asset
|
|
F 13
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
i.
|
Goodwill and
intangible assets:
|
|
|
|
|
|
Goodwill
reflects the excess of the purchase price of business acquired over the fair
value of the net tangible and intangible assets acquired. Intangible assets
consist mainly of acquired technology, trade names and customer relations.
|
|
|
|
|
|
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
Under SFAS No. 142, goodwill is no longer amortized but instead is tested for
impairment at least annually (or more frequently if impairment indicators
arise).
|
|
|
|
|
|
SFAS No. 142
prescribes a two-phase process for impairment testing of goodwill. The first
phase screens for impairment while the second phase (if necessary) measures
impairment. In the first phase of impairment testing, goodwill attributable
to each of the reporting units is tested for impairment by comparing the fair
value of each reporting unit with its carrying value. The Company currently
has one reporting unit. As of December 31, 2007, 2006 and 2005, no instances
of impairment of goodwill were identified.
|
|
|
|
|
|
Intangible
assets are amortized over their useful lives using a method of amortization
that reflects the pattern in which the economic benefits of the intangible
assets are consumed or otherwise used up, in accordance with SFAS No. 142.
The Company amortizes its intangible assets on a straight line basis. As of
December 31, 2007 and 2006, the intangible assets were fully amortized.
|
|
|
|
|
j.
|
Impairment
of long-lived assets:
|
|
|
|
|
|
Long-lived
assets are reviewed for impairment in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144), whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability of assets to be held and used is measured by
a comparison of the carrying amount of the assets to the future undiscounted
cash flows expected to be generated by the assets. 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. As of December 31, 2007, 2006 and 2005, no instances of
impairment were identified.
|
|
|
|
|
k.
|
Revenue
recognition:
|
|
|
|
|
|
Allot
generates revenues mainly from the sale of hardware and software products and
such provision of maintenance and support services. Allot sells its products
mostly through resellers, distributors, OEMs, system integrators and value
added resellers, all of whom are considered end-customers from Allots
perspective.
|
F 14
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
|
The software
components of Allots products are deemed to be more than incidental to the
products as a whole, in accordance with Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2) and EITF 03-5, Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software. Therefore, Allot accounts for its
product sales in accordance with SOP 97-2. Revenues from product sales are
recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, no significant obligations with regard to
implementation remain, the fee is fixed or determinable and collectibility is
probable.
|
|
|
|
|
|
SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative objective fair
value of the elements. Allot has adopted Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions (SOP 98-9). According to SOP 98-9, revenues should be
allocated to the different elements in the arrangement under the residual
method when Vendor Specific Objective Evidence (VSOE) of fair value exists
for all undelivered elements and no VSOE exists for the delivered elements.
Under the residual method, at the outset of the arrangement with a customer,
Allot defers revenue for the fair value of its undelivered elements
(maintenance and support) and recognizes revenue for the remainder of the
arrangement fee attributable to the elements initially delivered in the
arrangement (hardware and software products) when all other criteria in SOP
97-2 have been met. Any discount in the arrangement is allocated to the
delivered element. If sufficient VSOE does not exist for all undelivered
elements, revenue is deferred for the entire arrangement until all revenue
recognition criteria are met for such undelivered elements.
|
|
|
|
|
|
Maintenance
and support revenue included in multiple element arrangements is deferred and
recognized on a straight-line basis over the term of the applicable
maintenance and support agreement. The VSOE of fair value of the maintenance
and support services is determined based on the price charged when sold
separately. Deferred revenues are classified as short and long terms and
recognized as revenues at the time respective elements are provided.
|
|
|
|
|
|
Allot
generally does not grant a right of return to its customers. However, when
other customer incentives, such as returns or rebates, are expected and
estimated, Allot records a provision at the time product revenues is
recognized based on its experience in the last three years. The provision has
been deducted from revenues and amounted to $ 467, $ 427 and $ 346 for the years
ended December 31, 2007, 2006 and 2005, respectively.
|
|
|
|
|
|
Allot grants
a one-year hardware warranty and three-month software warranty on all of its
products. Allot estimates the costs that may be incurred under its warranty
arrangements and records a liability in the amount of such costs at the time
product revenue is recognized. Factors that affect Allots warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims and cost per claim. Allot periodically assesses the adequacy
of its recorded warranty liabilities and adjusts the amounts as necessary.
|
F 15
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
l.
|
Research and
development costs:
|
|
|
|
|
|
Statement of
Financial Accounting Standard No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, requires capitalization
of certain software development costs subsequent to the establishment of
technological feasibility.
|
|
|
|
|
|
Based on
Allots product development process, technological feasibility is established
upon the completion of a working model. Allot does not incur material costs
between the completion of a working model and the point at which the products
are ready for general release. Therefore, research and development costs are
charged to the statement of operations as incurred.
|
|
|
|
|
m.
|
Severance
pay:
|
|
|
|
|
|
The
Companys liability for severance pay for its Israeli employees is calculated
pursuant to Israeli severance pay law, based on the most recent monthly
salary of its employees multiplied by the number of years of employment as of
the balance sheet date for such employees. The Companys liability is partly
provided by monthly deposits with severance pay funds and insurance policies
and the remainder by an accrual.
|
|
|
|
|
|
The
deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israels Severance Pay law, labor agreements and/or applicable
case law. The value of the deposited funds and insurance policies is based on
the cash surrendered value and includes profits accumulated up to the balance
sheet date.
|
|
|
|
|
|
Severance
expenses for the years ended December 31, 2007, 2006 and 2005, amounted to
approximately $ 952, $ 819 and $ 426, respectively.
|
|
|
|
|
n.
|
Accounting for
stock-based compensation:
|
|
|
|
|
|
Prior to
January 1, 2006, the Company accounted for its stock based compensation
awards using the intrinsic value method, under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related Interpretations, as permitted by Statement
of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123).
|
|
|
|
|
|
Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standard No. 123(R), Share-Based Payment
(SFAS No. 123(R)), using the prospective-transition method. 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 Companys Consolidated Statement of
Operations.
|
F 16
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
Under the
prospective-transition method, compensation costs recognized in 2006 includes
compensation costs for all share-based payments granted subsequent to January
1, 2006 based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
|
|
|
|
|
|
Allot applies
SFAS No. 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services (EITF No. 96-18), 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 as defined in EITF No. 96-18.
|
|
|
|
|
|
Effective
January 1, 2006, Allot adopted the fair value recognition provisions of SFAS
No. 123(R). For grants where Allot had previously presented the required SFAS
No. 123 pro forma disclosures using the minimum value method, Allot adopted
the new standard using the prospective transition method. As such, for those
awards only, Allot will continue to apply APB 25 in future periods.
|
|
|
|
|
|
SFAS No.
123(R) requires the cash flows resulting from the tax deductions in excess of
the compensation costs recognized for those stock options to be classified as
financing cash flows. The excess tax benefit classified as financing cash
inflows would have been classified as an operating cash flow if the Company
had not adopted SFAS No. 123(R) at the amount of $ 127 and $ 67 in 2007 and
2006, respectively.
|
|
|
|
|
|
The following
table sets forth the total stock-based compensation expense resulting from
stock options included in the Consolidated Statements of Operations, for the
years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
$
|
15
|
|
$
|
48
|
|
|
Research and
development expenses, net
|
|
|
157
|
|
|
230
|
|
|
Sales and
marketing expenses
|
|
|
650
|
|
|
340
|
|
|
General and
administrative expenses
|
|
|
539
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
$
|
1,361
|
|
$
|
1,361
|
|
|
|
|
|
|
|
|
|
|
F 17
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
|
The fair
value of stock-based awards was estimated using the Binomial model starting
January 1, 2006 with the following weighted-average assumptions for the year
ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suboptimal
exercise multiple
|
|
2-3
|
|
2-3
|
|
Interest
rate
|
|
4.4%-5.33%
|
|
3.18%-5.38%
|
|
Volatility
|
|
80%-85%
|
|
75%
|
|
Dividend
yield
|
|
0%
|
|
0%
|
|
Weighted-average
fair value at grant date
|
|
4.37
|
|
8.57
|
|
|
|
|
|
The
computation of expected volatility is based on realized historical stock
price volatility of certain peer companies that the Company considered to be
comparable based on market capitalization and type of technology platform.
The computation of the suboptimal exercise multiple and the forfeiture rates
are based on the employees expected exercise prior and post vesting
termination behavior. The interest rate for period within the contractual
life of the award is based on the U.S. Treasury yield curve in effect at the
time of grant. The Company currently has no plans to distribute dividends and
intends to retain future earnings to finance the development of its business.
|
|
|
|
|
o.
|
Concentration
of credit risks:
|
|
|
|
|
|
Financial
instruments that potentially subject Allot to concentrations of credit risk
consist primarily of cash and cash equivalents, marketable securities,
short-term deposits and trade receivables.
|
|
|
|
|
|
The majority
of cash and cash equivalents, marketable securities and short-term deposits
of Allot are invested in dollar deposits in major U.S. and Israeli banks.
Such deposits in the United States may be in excess of insured limits and are
not insured in other jurisdictions.
|
|
|
|
|
|
Allots
trade receivables are primarily derived from sales to stable organizations
located mainly in the United States, Europe and Asia.
|
|
|
|
|
|
Allot has no
off-balance-sheet concentration of credit risk, such as foreign exchange
contracts, option contracts or other foreign hedging arrangements.
|
|
|
|
|
p.
|
Royalty
bearing grants:
|
|
|
|
|
|
Participation
grants from the Office of the Chief Scientist of the Ministry of Industry,
Trade and Labor in Israel (OCS) for research and development activity are
recognized at the time Allot is entitled to such grants on the basis of the
costs incurred and included as a deduction of research and development costs.
Research and development grants recognized amounted to $ 2,371, $ 1,811 and
$ 727 in 2007, 2006 and 2005, respectively.
|
F 18
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
q.
|
Income
taxes:
|
|
|
|
|
|
Allot accounts
for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS No. 109) This
Statement prescribes the use of the liability method, whereby deferred tax
asset and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Allot 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
assets will not be realized.
|
|
|
|
|
|
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainties in income taxes by establishing minimum standards for the
recognition and measurement of tax positions taken or expected to be taken in
a tax return. Under the requirements of FIN 48, the Company must review all
of its tax positions and make a determination as to whether its position is
more-likely-than-not to be sustained upon examination by regulatory
authorities. If a tax position meets the more-likelythan-not standard, then
the related tax benefit is measured based on a cumulative probability
analysis of the amount that is more-likely-than-not to be realized upon ultimate
settlement or disposition of the underlying issue. As of January 1, 2007
there was no difference between the provisions of SFAS 5 and FIN 48 therefore
no adjustment was recorded to the accumulated deficit.
|
|
|
|
|
|
Prior to
2007 the Company determined its tax contingencies in accordance with
Statement of Financial Accounting Standard No. 5, Accounting for
Contingencies (SFAS No. 5). The Company recorded estimated tax liabilities
to the extent the contingencies were probable and could be reasonably estimated.
|
|
|
|
|
r.
|
Basic and
diluted net earnings (loss) per share:
|
|
|
|
|
|
The Company
applies the two class method as required by EITF No. 03-6, Participating
Securities and the Two-Class Method under FASB Statement No. 128 (EITF No.
03-6). EITF No. 03-6 requires the earnings (loss) per share for each class
of shares (Ordinary shares and Preferred shares) to be calculated assuming
100% of the Companys earnings are distributed as dividends to each class of
shares based on their contractual rights.
|
|
|
|
|
|
In
compliance with EITF 03-6, the series of Preferred shares are not
participating securities in losses, and therefore are not included in the
computation of net loss per share.
|
|
|
|
|
|
Basic and
diluted net earnings (losses) per share are computed based on the weighted
average number of shares of Ordinary shares outstanding during each year.
Diluted net earnings (losses) per share are computed based on the
weighted-average number of Ordinary shares outstanding during the period,
plus dilutive potential shares of Ordinary shares considered outstanding
during the period, in accordance with Statement of Financial Standard No.
128, Earnings Per Share.
|
F 19
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
|
For the
years ended December 31, 2007 and 2005, all outstanding options, warrants and
Preferred shares (as applicable) have been excluded from the calculation of
the diluted loss per share since their effect was anti-dilutive.
|
|
|
|
|
|
For the year
ended December 31, 2006, the total number of shares related to outstanding
options excluded from the calculation of diluted net earnings per share was
572,790, because their inclusion would have been anti-dilutive.
|
|
|
|
|
s.
|
Fair value
of financial instruments:
|
|
|
|
|
|
The
following methods and assumptions were used by Allot in estimating the fair
value disclosures for financial instruments:
|
|
|
|
|
|
The carrying
value of cash and cash equivalents, short-term deposits, trade receivables,
other accounts receivable and prepaid expenses, trade payables and other
liabilities approximate their fair values due to the short-term maturities of
such instruments.
|
|
|
|
|
|
For
marketable securities not actively traded, fair values are estimated using
values obtained from the Companys cash asset managers. To estimate the value
of these investments the cash asset managers employ various models that take
into consideration such factors, among others, as the credit rating of the
issuer, effective maturity of the security, yields on comparably rated
publicly traded securities, availability of insurance and risk-free yield
curves. The actual value at which such securities could actually be sold or
settled with a willing buyer or seller may differ from such estimated fair
values depending on a number of factors including, but not limited to,
current and future economic conditions, the quantity sold or settled, the
presence of an active market and the availability of a willing buyer or
seller.
|
|
|
|
|
t.
|
Reclassification
|
|
|
|
|
|
Certain
comparative numbers were reclassified in order to conform to the
classification in the current year. Accordingly, an amount of approximately
$ 1,678 was reclassified from deferred revenues to trade receivables as of
December 31, 2006.
|
|
|
|
|
u.
|
Impact of
recently issued accounting standards:
|
|
|
|
|
|
In September
2006, the FASB issued Statement of Financial Accounting Standard No. 157,
Fair Value Measurements (SFAS No. 157). This statement provides a single
definition of fair value, a framework for measuring fair value, and expanded
disclosures concerning fair value. Previously, different definitions of fair
value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures. SFAS No. 157 applies under
those previously issued pronouncements that prescribe fair value as the
relevant measure of value, except SFAS No. 123(R) and related
interpretations. The statements does not apply to accounting standards that
require or permit measurement similar to fair value but are not intended to
measure fair value. This pronouncement is effective for fiscal years
beginning after November 15, 2007.
|
F 20
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
|
On February
12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date
of FASB Statement No. 157 (FSP 157-2). FSP 157-2 amends SFAS No. 157 to
delay the effective date of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (that is, at
least annually). For items within its scope, FSP 157-2 defers the effective
date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company is currently
evaluating the impact of adopting SFAS No. 157.
|
|
|
|
|
|
In February
2007, the FASB issued Statement of Financial Accounting Standard No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
No. 159). This statement provides companies with an option to report
selected financial assets and liabilities at fair value. Generally accepted
accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. The SFAS No. 159 objective is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. This SFAS No. 159 is
effective as of the beginning of an entitys first fiscal year beginning
after November 15, 2007. The adoption of SFAS No. 159 will not have effect on
its consolidated financial statements.
|
|
|
|
|
|
In December
2007, the FASB issued Statement of Financial Accounting Standard No. 141R,
Business Combinations, (SFAS No. 141R). SFAS 141R establishes principles
and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree. SFAS No. 141R also
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable
users of the financial statement to evaluate the nature and financial effects
of the business combination. SFAS 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Accordingly, any
business combinations the Company executes will be recorded and disclosed
following existing GAAP until January 1, 2009.
|
|
|
|
|
|
The Company
expects that SFAS No. 141R will have an impact on its consolidated financial
statements when effective, but the nature and magnitude of the specific effects
will depend upon the nature, terms and size of the acquisitions it
consummates after the effective date. The Company is still assessing the
impact of this standard on its future consolidated financial statements.
|
F 21
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 2:
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
|
In December
2007, the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110),
which, effective January 1, 2008, amends and replaces SAB 107, Share-Based
Payment. SAB 110 expresses the views of the SEC staff regarding the use of a
simplified method in developing an estimate of expected term of plain
vanilla share options in accordance with SFAS No. 123(R). Under the
simplified method, the expected term is calculated as the midpoint between
the vesting date and the end of the contractual term of the option. The use
of the simplified method, which was first described in SAB 107, was
scheduled to expire on December 31, 2007. SAB 110 extends the use of the
simplified method for plain vanilla awards in certain situations. The SEC
staff does not expect the simplified method to be used when sufficient
information regarding exercise behavior, such as historical exercise data or
exercise information from external sources, becomes available. The Company is
currently assessing the potential impact that the adoption of SAB 110 could have
on its financial statements.
|
|
|
|
NOTE 3:
|
MARKETABLE SECURITIES
|
|
|
|
The
following is a summary of available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Carrying
value
|
|
Unrealized
losses
|
|
Market
value
|
|
Carrying
value
|
|
Unrealized
losses
|
|
Market
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
(*)
|
|
$
|
69,370
|
|
$
|
-
|
|
$
|
69,370
|
|
$
|
35,371
|
|
$
|
-
|
|
$
|
35,371
|
|
Corporate bonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,243
|
|
|
-
|
|
|
7,243
|
|
Government agencies
|
|
|
6,780
|
|
|
(36
|
)
|
|
6,744
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
76,150
|
|
$
|
(36
|
)
|
$
|
76,114
|
|
$
|
42,614
|
|
$
|
-
|
|
$
|
42,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Carrying
value
|
|
Market
value
|
|
Carrying
value
|
|
Market
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities with contractual
maturities of less than one year
|
|
$
|
70,370
|
|
$
|
70,364
|
|
$
|
7,243
|
|
$
|
7,243
|
|
Marketable securities with contractual
maturities of more than one year
|
|
|
5,780
|
|
|
5,750
|
|
|
35,371
|
|
|
35,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
76,150
|
|
$
|
76,114
|
|
$
|
42,614
|
|
$
|
42,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Auction Rate
Securities (ARS) held by the Company are private placement securities with
long-term nominal maturities for which the interest rates are reset through a
dutch auction each month. The monthly auctions historically have provided a
liquid market for these securities. The Companys investments in ARS
represent interests in collateralized debt obligations supported by pools of
residential and commercial mortgages or credit cards, insurance
securitizations and other structured credits, including corporate bonds. Some
of the underlying collateral for the ARS held by the Company consists of
sub-prime mortgages
|
F 22
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 3:
|
MARKETABLE SECURITIES (Cont.)
|
|
|
|
ARS
investments had AAA and AA credit ratings at the time of purchase, however,
with the liquidity issues experienced in global credit and capital markets,
the ARS held by the Company at December 31, 2007 have experienced multiple
failed auctions as the amount of securities submitted for sale has exceeded the
amount of purchase orders.
|
|
|
|
Based on
fair value indication received and valuation models applied by the investment
banks and an analysis of other than temporary impairment factors, the Company
has recorded a $ 4,881 impairment charge to reflect a devaluation of certain
ARS that was considered as other-than-temporary. The impairment charge was
included in finance income (expenses), net in the Companys statement of
operations.
|
|
|
|
Historically,
given the liquidity created by the auctions, ARS were presented as current
assets under marketable securities on the Companys balance sheet. As a
result of the failed auctions, in recent periods the Companys ARS are
illiquid until there is a successful auction for them. Since there is
uncertainty about the Companys ability to liquidate these ARS in a short
time, the entire amount of such remaining ARS has been reclassified from
current to non-current assets on the Companys balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
909
|
|
$
|
676
|
|
|
Finished
products
|
|
|
2,428
|
|
|
4,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,337
|
|
$
|
4,789
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5:
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Lab equipment
|
|
$
|
3,100
|
|
$
|
5,879
|
|
|
Computers and peripheral equipment
|
|
|
2,586
|
|
|
2,909
|
|
|
Office furniture and equipment
|
|
|
384
|
|
|
430
|
|
|
Leasehold improvements
|
|
|
253
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,323
|
|
|
9,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
3,384
|
|
|
4,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
2,939
|
|
$
|
4,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expenses for the years ended December 31, 2007, 2006 and 2005, were $ 1,486,
$ 893 and $ 559, respectively.
|
F 23
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 6:
|
INTANGIBLE ASSETS, NET
|
|
|
|
|
a.
|
In September
2002, Allot acquired the tangible and intangible assets of NetReality Ltd.
(NetReality), an Israeli manufacturer of traffic management solutions,
following NetRealitys receivership proceedings filed with an Israeli court.
Allot also recruited NetRealitys employees.
|
|
|
|
|
|
In
consideration for the assets acquired and liability assumed, Allot granted
NetRealitys receiver a fully-vested warrant to purchase 48,267 of series B
Preferred shares (with an exercise price of $ 0.02 per share) (NetReality
Warrant), and undertook to pay royalties at the rate of the higher of (i) 7%
from the sales of the NetReality products; or (ii) 1% of the total sales of
Allot. The royalties were set to be paid over a period of five years from the
date of the acquisition with a minimum of $ 1,000 and maximum of $ 2,500. In
connection with the commitment to pay royalties to the OCS, see Note 7a.
|
|
|
|
|
|
The purchase
price was valued at approximately $ 1,254, based on the fair value of the
warrant granted, and the minimum commitment to pay royalties.
|
|
|
|
|
|
The
acquisition was accounted for in accordance with Statement of Financial
Accounting Standards No. 141, Business Combination, using the purchase
method of accounting. Accordingly, the purchase price has been allocated to
the assets acquired and the liability assumed based on their fair value at
the date of acquisition. The fair values of the identified intangible assets
were established based on an independent valuation study performed by a
third-party specialist. The excess of the purchase price over the fair value
of the net assets acquired has been recorded as goodwill.
|
|
|
|
|
|
NetRealitys
receiver exercised the NetReality Warrant upon the closing of Allots initial
public offering into 109,793 Ordinary shares and paid total exercise price of
$ 1.
|
|
|
|
|
b.
|
Amortization
expenses for the years ended December 31, 2006 and 2005, were, $ 24 and $ 23,
respectively. As of December 31, 2007, the intangible assets were fully
amortized.
|
|
|
NOTE 7:
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
|
|
|
a.
|
Royalties:
|
|
|
|
|
|
1.
|
The Company
received research and development grants from the OCS.
|
|
|
|
|
|
|
|
The Company
is participating in programs sponsored by the Israeli Government for the
support of research and development activities. Currently, the Company is
obligated to pay royalties to the OCS, amounting to 3.5% of the sales of
products of the Company and other related revenues generated, up to 100% of
the grants received, linked to the U.S. dollar and for grants received after
January 1, 1999 also bearing interest at the rate of LIBOR. The obligation to
pay these royalties is contingent on actual sales of products of the Company
and in the absence of such sales no payment is required.
|
F 24
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
NOTE 7:
|
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
|
|
|
|
|
In
connection with the NetReality acquisition, the Company assumed a commitment
to pay royalties to the OCS up to the amount of the contingent liabilities
derived from the grants that had been received by NetReality prior to the
acquisition. In April 2007, the OCS notified the Company of its decision, as
per the Companys request, to separate the NetReality related approved plans
from other approved plans. The OCS also approved the discontinuation of the
NetReality related approved plans and as a result, the balance of outstanding
contingent obligation to pay royalties in the amount of $ 4,722 was waived.
|
|
|
|
|
|
|
|
Through
December 31, 2007, the Company has paid or accrued royalties to the OCS in
the amount of $ 4,826, which was recorded to cost of revenues.
|
|
|
|
|
|
|
|
As of
December 31, 2007, the Company had an outstanding contingent obligation to
pay royalties to the OCS in the amount of approximately $ 5,899.
|
|
|
|
|
|
|
2.
|
The Company
undertook to pay royalties to the receiver of NetReality.
|
|
|
|
|
|
|
|
The
financial statements include a liability at present value of the royalties
amount that will be paid to the receiver in the amount of $ 140. See Note 6a.
|
|
|
|
|
|
b.
|
Lease
commitments:
|
|
|
|
|
|
In February
2006, the Company signed an agreement to rent new offices for a period of
seven years, starting July 2006. The rental expenses are $ 39 per month and a
management fee of costs plus 15% of the expenses incurred by the building
management company as stipulated in the lease agreement.
|
|
|
|
|
|
The US
subsidiary has an operating lease for office facilities in Eden Prairie,
Minnesota. The lease expires on August 31, 2008. The lease provides for a
base monthly rent, adjusted annually for cost of living increases.
|
|
|
|
|
|
The
Companys subsidiaries maintain smaller offices in Boston (U.S.), Tokyo (Japan),
Singapore, Sophia (France), Bedford (UK) and Madrid (Spain).
|
|
|
|
|
|
In addition,
Allot signed motor vehicle operating lease agreements. The terms of the lease
agreements range from 36 to 39 months.
|
|
|
|
|
|
Operating
leases (offices and motor vehicles) expenses for the years ended December 31,
2007, 2006 and 2005, were $ 2,484, $ 1,403 and $ 1,116, respectively.
|
F 25
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
NOTE 7:
|
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
|
|
|
|
|
|
As of
December 31, 2007, the aggregate future minimum lease obligations (offices
and motor vehicles) under non-cancelable operating leases agreements were as
follows:
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,502
|
|
2009
|
|
|
983
|
|
2010
|
|
|
581
|
|
2011
|
|
|
473
|
|
2012 and
thereafter
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,207
|
|
|
|
|
|
|
|
|
|
|
c.
|
Law Suit:
|
|
|
|
|
|
On May 1,
2007, a securities class action complaint, Brickman Investment Inc. v. Allot
Communications Ltd. et al
.
, was
filed in the United States District Court for the Southern District of New
York. A number of substantially similar complaints were filed in the same
court after the original action was filed. The Company and certain of our
directors and officers are named as defendants. The securities class action
complaints allege that the defendants violated Sections 11 and 15 of the
Securities Act of 1933 by making false and misleading statements and omissions
in our registration statement for its initial public offering in November
2006. The claims are purportedly brought on behalf of persons who purchased
the Companys ordinary shares pursuant to and/or traceable to the initial
public offering on or about November 15, 2006 through April 2, 2007. The
plaintiffs seek unspecified compensatory damages against the defendants, as
well as attorneys fees and costs. Motions for consolidation and for
appointment of lead plaintiff were filed on July 2, 2007 and were decided on
March 27, 2008, with an order granting consolidation and appointing co-lead
plaintiffs. The Consolidated Amended Compliant was served on June 9, 2008. No
provision has been provided since the Company believes that the claims have
no merit.
|
|
|
|
|
d.
|
Liens and
charges:
|
|
|
|
|
|
The Company
placed a floating charge in favor of Hapoalim Bank B.M., on all its property,
its assets and insurance rights in their respect, in return for credit lines
which Hapoalim Bank B.M. has granted the Company. On October 11, 2006,
Hapoalim Bank B.M. removed the floating charge.
|
|
|
|
|
e.
|
Other:
|
|
|
|
|
|
The Company
is dependent upon two subcontractors for acquiring components and assembling
its products. The subcontractors maintain net suppliers inventory in
accordance with the Companys selling forecasts. In the event that the
Company terminates its business connection with the subcontractors, it will
have to compensate the subcontractors for certain inventory costs, as
specified in the agreement with the subcontractors.
|
F 26
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 8:
|
SHAREHOLDERS EQUITY
|
|
|
|
|
a.
|
On October
26, 2006, the Companys shareholders approved a 10-for-1 reverse share split
by a way of consolidation of every 10 shares of each class of shares into one
share of the same class and, accordingly, all shares (Ordinary and
Preferred), options, warrants and earnings (losses) per share amounts were adjusted
to reflect this reverse share split. Accordingly, all such amounts have been
retroactively adjusted in these financial statements. Following such reverse
share split, each share has a par value of NIS 0.1 instead of NIS 0.01.
|
|
|
|
|
|
Effective as
of October 29, 2006, following the above shareholders approval, the
Companys Board of Directors approved, in accordance with the Companys
Interim Articles of Association (as approved by the Companys shareholders on
October 26, 2006) (Pre-IPO Articles of Association), the following: (i) all
Ordinary shares, options to purchase Ordinary shares and earnings (losses)
per share amounts were adjusted to reflect a share dividend of approximately
1.275 Ordinary share for each Ordinary share; and (ii) the conversion price
of each series A Ordinary share and Preferred share was adjusted to reflect
such share dividend. Accordingly, all such amounts have been retroactively
adjusted in previous financial statements.
|
|
|
|
|
|
It was
further resolved to increase the Companys registered share capital to NIS
20,000,000.
|
|
|
|
|
b.
|
Composition
of share capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
Shares of NIS 0.01 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (1), (2)
|
|
200,000,000
|
|
200,000,000
|
|
21,232,290
|
|
22,254,728
|
|
20,985,811
|
|
22,008,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000,000
|
|
200,000,000
|
|
21,232,290
|
|
22,254,728
|
|
20,985,811
|
|
22,008,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Ordinary
shares conferred upon their holders the right to receive notice of, and
participate and vote such shares in general meetings of shareholders of the
Company, the right to receive dividends, if and when declared. Until
immediately prior to the Companys initial public offering, the Ordinary
shares had the right to receive the remaining assets of the Company upon
liquidation or deemed liquidation (as was defined in the Pre-IPO Articles of
Association of the Company), subject to the preference in the distribution
thereof to the holders of Preferred shares (as described below).
|
|
|
|
|
(2)
|
Immediately
prior to the closing of the Companys initial public offering, all of the
then outstanding Preferred shares were converted into Ordinary shares.
Ordinary shares confer upon their holders the right to receive notice of, and
participate and vote such shares in general meetings of shareholders of the
Company, the right to receive dividends, if and when declared and the right
to receive the remaining assets of the Company upon liquidation.
|
F 27
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 8:
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
|
|
(3)
|
Shares held
in trust:
|
|
|
|
|
|
|
|
246,479 Ordinary
shares resulting from conversion of series A Preferred shares that were
converted immediately prior to the losing of the Companys initial public
offering, are held in trust for the benefit of the Chairman of the Companys
Board of Directors pursuant to a right to purchase pending his payment of the
full purchase price of approximately $ 600. For the purposes of calculating
shareholders equity, the Company has not considered such shares to be
outstanding because neither the Chairman nor the trustee has voting or
economic rights with respect to such shares.
|
|
|
|
|
|
|
|
In October
2006, the Companys shareholders and the Board of Directors approved an
addendum to the escrow agreement with the Chairman of the Board of Directors
regarding these shares. According to the addendum, if the right is not
exercised prior to the consummation of a Liquidity Event as defined in the
escrow agreement, or November 15, 2008, the right and the underlying shares
will be forfeited. It was further approved that the Chairman has the right to
pay for any portion of the shares by net payment. As a result of the
modification of the right, the Company recorded a total expense of $ 150.
|
|
|
|
|
|
c.
|
Stock option
plans:
|
|
|
|
|
|
|
A summary of
the Companys stock option activity, pertaining to its option plans for
employees and consultants, and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
upon
exercise
|
|
Weighted
average
exercise
price
|
|
Number
of shares
upon
exercise
|
|
Weighted
average
exercise
price
|
|
Number
of shares
upon
exercise
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
2,066,601
|
|
|
$
|
1.17
|
|
|
|
2,467,177
|
|
|
$
|
1.56
|
|
|
|
3,383,930
|
|
|
$
|
2.33
|
|
|
Granted
|
|
|
951,704
|
|
|
$
|
2.24
|
|
|
|
1,138,517
|
|
|
$
|
3.79
|
|
|
|
989,249
|
|
|
$
|
8.57
|
|
|
Forfeited
|
|
|
(274,609
|
)
|
|
$
|
1.88
|
|
|
|
(103,182
|
)
|
|
$
|
2.12
|
|
|
|
(169,381
|
)
|
|
$
|
5.37
|
|
|
Exercised
|
|
|
(276,519
|
)
|
|
$
|
0.99
|
|
|
|
(118,582
|
)
|
|
$
|
0.76
|
|
|
|
(982,304
|
)
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2,467,177
|
|
|
$
|
1.56
|
|
|
|
3,383,930
|
|
|
$
|
2.33
|
|
|
|
3,221,494
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1,183,754
|
|
|
$
|
1.10
|
|
|
|
1,877,544
|
|
|
$
|
1.52
|
|
|
|
1,532,506
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value represents the total intrinsic value (the difference
between the Companys closing stock price on the last trading day of the
fiscal year 2007 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 December 31, 2007. This amount
changes based on the fair market value of the Companys stock. The total
intrinsic value of options outstanding at December 31, 2007, was $ 4,928. The
total intrinsic value of exercisable options at the end of the year was
approximately $ 3,751. The total intrinsic value of options vested and
expected to vest at December 31, 2007 was approximately $ 4,783.
|
F 28
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 8:
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
|
The total
intrinsic value of options exercised during the year ended December 31, 2007
was approximately $ 3,568. The number of options vested during the year ended
December 31, 2007 was 488,996. The weighted-average remaining contractual
life of the outstanding options as of December 31, 2007 was 7.58 years. The
weighted-average remaining contractual life of exercisable options as of
December 31, 2007, was 6.84 years. As of December 31, 2007, $ 4,855 of total
unrecognized compensation cost related to stock options is expected to be
recognized over a weighted-average period of approximately 1.9 years.
|
|
|
|
|
|
The options
outstanding as of December 31, 2007, have been classified by exercise price,
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price
|
|
Shares upon
exercise of options
outstanding
as of
December 31,
2007
|
|
Weighted
average
remaining
contractual life
|
|
Shares upon
exercise of options
exercisable
as of
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$11.34-9.25
|
|
|
550,950
|
|
|
8.46
|
|
|
22,745
|
|
|
$7.62-6.14
|
|
|
317,000
|
|
|
9.15
|
|
|
1,250
|
|
|
$5.93-5.70
|
|
|
110,198
|
|
|
8.67
|
|
|
10,221
|
|
|
$4.616-4.167
|
|
|
251,298
|
|
|
7.42
|
|
|
92,590
|
|
|
$3.517-3.514
|
|
|
629,668
|
|
|
8.09
|
|
|
275,146
|
|
|
$2.242-2.240
|
|
|
996,651
|
|
|
7.11
|
|
|
767,177
|
|
|
$1.363-1.231
|
|
|
356,083
|
|
|
5.13
|
|
|
353,731
|
|
|
$0.009
|
|
|
9,646
|
|
|
3.50
|
|
|
9,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,221,494
|
|
|
|
|
|
1,532,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
has three option plans under which outstanding options as of December 31,
2007, are as follows: (i) under the 1997 option plan the outstanding options
are exercisable for 10,556 Ordinary shares, (ii) under the 2003 option plan,
the outstanding options are exercisable for 2,279,915 Ordinary shares (iii)
under the 2006 option plan, the outstanding options are exercisable for
931,024 Ordinary shares.
|
|
|
|
|
|
Under the
terms of the above option plans, options may be granted to employees,
officers, directors and various service providers of the Company and its
subsidiaries. The options generally become exercisable monthly over a
four-year period, commencing one year after date of the grant, subject to the
continued employment of the employee. The options generally expire no later
than ten years from the date of the grant. The exercise price of the options
granted under the plans may not be less than the nominal value of the shares
into which such options are exercised. Any options, which are forfeited or
cancelled before expiration, become available for future grants.
|
F 29
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 8:
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
The fair
value assigned to the Ordinary shares in order to calculate the compensation
resulting from employee option grants prior to the IPO, was determined
primarily by management. In determining fair value, management has considered
a number of factors, including independent valuations and appraisals.
|
|
|
|
The fair
value of options granted in 2005 was estimated at the date of grant using the
Minimum Value Model option pricing model.
|
|
|
|
The weighted
average exercise prices and fair values of options granted during the years
ended December 31, 2007, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
fair value
|
|
Weighted
average
exercise
price
|
|
Weighted
average
fair value
|
|
Weighted
average
exercise
price
|
|
Weighted
average
fair value
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower than market price at date of grant
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equals market price at date of grant
|
|
$
|
0.35
|
|
$
|
2.24
|
|
$
|
2.58
|
|
$
|
3.79
|
|
$
|
4.53
|
|
$
|
8.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than market price at date of grant
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d.
|
The
Companys outstanding rights, warrants and options to investors and others as
of December 31, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
date
|
|
Number of
shares to be
issued
|
|
Class of shares
|
|
Exercise
price per
share
|
|
Exercisable through
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1998 (1)
|
|
|
246,479
|
|
|
Ordinary
shares
|
|
$
|
2.434
|
|
The earlier between a Liquidity
event and two years after an IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2005 (2)
|
|
|
11,374
|
|
|
Ordinary
shares
|
|
$
|
2.24
|
|
October 2009
|
|
|
|
|
|
(1)
|
Granted to
the Chairman of the Board of Directors who also served as Chief Executive
Officer at the time of the grant. The underlined shares are issued and held
in trust for the benefit of the Chairman, pending his payment of the full
purchase price of approximately $ 600. The Company does not consider these
shares to be outstanding since, while these shares are held in trust, neither
the Chairman nor the trustee have voting or economic rights with respect to
such shares
|
|
|
|
|
(2)
|
56,868
options were granted to contractors in connection with advisory provided to
the Board of Directors out of which 11,374 are outstanding and exercisable.
All the options granted have a contractual life of 10 years and the exercised
price was determined based on the share price at the date of grant.
|
F 30
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 9:
|
TAXES ON INCOME
|
|
|
|
a.
|
Corporate
tax rates.
|
|
|
|
|
|
Generally,
Israeli companies are subject to Corporate Tax on their taxable income. On
July 25, 2005, the Knesset (Israeli Parliament) approved the Law of the
Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes,
among others, a gradual decreased in the corporate tax rate in Israel to the
following tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 -
26% and in 2010 and thereafter - 25%. However, the effective tax rate payable
by a company which derives income from an approved enterprise may be considerably
less, (see Note 9b).
|
|
|
|
|
b.
|
Tax benefits
under Israels Law for the Encouragement of Capital Investments, 1959 (the
Law):
|
|
|
|
|
|
The
Companys productions facilities have been granted a status of an Approved
Enterprise under the Law. According to the provisions of the Law, the
Company has elected the alternative package of benefits and has waived
Government grants in return for tax benefits.
|
|
|
|
|
|
According to
the provisions of the Law, the Companys income is tax-exempt for a period of
two years commencing with the year it first earns taxable income, and subject
to corporate taxes at the reduced rate of 10% to 25%, for an additional
period of five to eight years depending upon the level of foreign ownership
of the Company. The benefit period of tax benefit has not yet commenced,
since the Company has not yet reported taxable income.
|
|
|
|
|
|
The period
of tax benefits, detailed above, is limited to the earlier of 12 years from
the commencement of production (in 2000), or 14 years from the approval date,
(December 8, 1998), (the years limitation does not apply to the exemption
period).
|
|
|
|
|
|
The
entitlement to the above benefits is contingent upon the fulfillment of the
conditions stipulated in the Law, regulations published there under and the
criteria set forth in the specific certificates of approval. 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, 2007, management believes that
the Company is meeting the aforementioned conditions.
|
|
|
|
|
|
The
tax-exempt income attributable to the Approved Enterprises can be
distributed to shareholders, without subjecting the Company to taxes, only
upon the complete liquidation of the Company. If this retained tax-exempt
income is distributed in a manner other than a 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 track
(currently, between 10% to 25%).
|
F 31
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 9:
|
TAXES ON INCOME (Cont.)
|
|
|
|
|
On April 1,
2005, an amendment to the Investment Law came into effect (the Amendment)
and has significantly changed the provisions of the Investment Law. The
Amendment limits the scope of enterprises which may be approved by setting
criteria for the approval of a facility as a Beneficiary Enterprise (rather
than the previous terminology of Approved Enterprise), such as provisions
generally requiring that at least 25% of the Beneficiary Enterprises 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 required for Investment Center approval in
order to qualify for tax benefits. The period of tax benefits for a new
Beneficiary Enterprise commences in the Year of Commencement. This year
is the later of: (1) the year in which taxable income is first generated by
the company, or (2) the Year of Election.
|
|
|
|
|
|
If a company
requested the Alternative Package of benefits for an Approved Enterprise
under the Law prior to the 2005 amendment, it is precluded from filing a Year
of Election notice for a Beneficiary Enterprise for three years after the
year in which the Approved Enterprise was activated.
|
|
|
|
|
|
In addition,
the Investment Law provides that terms and benefits included in any
certificate of approval already granted will remain subject to the provisions
of the Law as they were on the date of such approval. Therefore the Companys
existing Approved Enterprise will generally not be subject to the provisions
of the Amendment.
|
|
|
|
|
|
The Company
currently has no plans to distribute dividends and intends to retain future
earnings to finance the development of its business.
|
|
|
|
|
|
Income from
sources other than the Approved Enterprise during the benefit period will
be subject to tax at the regular corporate tax rate.
|
|
|
|
|
c.
|
Tax benefits
under the Law for the Encouragement of Industry (Taxes), 1969:
|
|
|
|
|
|
The Law for
the Encouragement of Industry (Taxes), 1969, generally referred to as the
Industry Encouragement Law, provides several tax benefits for industrial
companies. An industrial company is defined as a company resident in Israel,
at least 90% of the income of which in a given tax year exclusive of income
from specified 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.
|
|
|
|
|
|
Under some
tax laws and regulations, an industrial enterprise may be eligible for
special depreciation rates for machinery, equipment and buildings. These
rates differ based on various factors, including the date the operations
begin and the number of work shifts. An industrial company owning an approved
enterprise may choose between these special depreciation rates and the
depreciation rates available to the approved enterprise.
|
F 32
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 9:
|
TAXES ON INCOME (Cont.)
|
|
|
|
|
Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. No assurance can be given
that the Israeli tax authorities will agree that the Company qualifies, or,
if the Company qualifies, then the Company will continue to qualify as an
industrial company or that the benefits described above will be available to
the Company in the future.
|
|
|
|
|
d.
|
Pre-tax
income (loss) is comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(2,867
|
)
|
$
|
(1,144
|
)
|
$
|
(9,318
|
)
|
Foreign
|
|
|
273
|
|
|
1,871
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,594
|
)
|
$
|
727
|
|
$
|
(9,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e.
|
A
reconciliation of the theoretical tax expenses, assuming all income is taxed
at the statutory tax rate applicable to the income of the Company and the
actual tax expenses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
$
|
(2,594
|
)
|
$
|
727
|
|
$
|
(9,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expense (benefit) computed
at the statutory tax rate (34%, 31% and 29% for the years 2005, 2006 and
2007, respectively)
|
|
$
|
(882
|
)
|
$
|
225
|
|
$
|
(2,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset for which valuation
allowance was provided
|
|
|
603
|
|
|
(208
|
)
|
|
2,685
|
|
Tax benefit related to exercise of options
|
|
|
-
|
|
|
(67
|
)
|
|
-
|
|
Taxes with respect to prior years
|
|
|
30
|
|
|
85
|
|
|
(1
|
)
|
Impairment of withholding tax asset
|
|
|
-
|
|
|
-
|
|
|
250
|
|
Non-deductible expenses and other
|
|
|
104
|
|
|
99
|
|
|
181
|
|
Other
|
|
|
(73
|
)
|
|
(23
|
)
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expenses (benefit)
|
|
$
|
(218
|
)
|
$
|
111
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
$
|
(531
|
)
|
$
|
111
|
|
$
|
179
|
|
Deferred taxes
|
|
|
283
|
|
|
(85
|
)
|
|
102
|
|
Taxes and deferred taxes in respect of
previous years
|
|
|
30
|
|
|
85
|
|
|
(1
|
)
|
Impairment of withholding tax asset
|
|
|
-
|
|
|
-
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(218
|
)
|
$
|
111
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
F 33
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 9:
|
TAXES ON INCOME (Cont.)
|
|
|
|
f.
|
Net
operating losses carryforward:
|
|
|
|
|
|
The Company
has accumulated losses for tax purposes as of December 31, 2007, in the
amount of approximately $ 38,000, which may be carried forward and offset
against taxable income in the future for an indefinite period. The Company
expects that during the period in which these tax losses are utilized its
income would be substantially tax exempt. Accordingly, there will be no tax
benefit available from such losses and no deferred income taxes have been
included in these financial statements.
|
|
|
|
|
|
The European
subsidiary is subject to French income taxes and has a net operating loss
carryforward amounting to approximately $ 1.6 million as of December 31, 2007.
|
|
|
|
|
g.
|
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
Companys deferred income tax are as follows:
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Operating loss carry forward
|
|
$
|
7,357
|
|
$
|
9,986
|
|
Reserves and allowances
|
|
|
366
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset before valuation
allowance
|
|
|
7,723
|
|
|
10,306
|
|
Valuation allowance
|
|
|
(7,325
|
)
|
|
(10,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
398
|
|
$
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
h.
|
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 material difference between the provision under
FIN 48 therefore there was no effect on the Companys shareholders equity
upon the Companys 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, 2007
|
|
$
|
180
|
|
Increase in tax position for prior years
|
|
|
24
|
|
Increase in tax position for current years
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits as of
December 31, 2007
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
The Company
conducts business globally and, as a result, the Company or one or more of
its subsidiaries file income tax returns in the U.S. federal jurisdiction and
various state and foreign jurisdictions. In the normal course of business,
the Company is subject to examination by taxing authorities throughout the
world, including such major jurisdictions as Israel, France, and the United
States. With few exceptions, the Company is no longer subject to Israeli
final tax assessment through the year 2003 and the European and U.S.
subsidiaries have final tax assessment through 2005 and 2002, respectively.
|
F 34
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 10:
|
NET EARNINGS (LOSSES) PER SHARE
|
|
|
|
The
following table sets forth the computation of the basic and diluted net
earnings (loss) per share:
|
|
|
|
|
a.
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$
|
(2,376
|
)
|
$
|
616
|
|
$
|
(9,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b.
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares
|
|
|
2,943,500
|
|
|
14,402,338
|
|
|
21,525,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net losses per share of
Ordinary shares
|
|
|
2,943,500
|
|
|
14,402,338
|
|
|
21,525,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and warrants
|
|
|
(*)
|
|
|
2,020,889
|
|
|
(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net earnings
(losses) per share of Ordinary shares
|
|
|
2,943,500
|
|
|
16,423,227
|
|
|
21,525,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11:
|
GEOGRAPHIC INFORMATION
|
|
|
|
Allot
operates in a single reportable segment (see Note 1). Revenues are based on
the customers location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
$
|
5,781
|
|
$
|
8,566
|
|
$
|
1,915
|
|
|
Europe
(excluding United Kingdom)
|
|
|
4,916
|
|
|
8,030
|
|
|
8,581
|
|
|
MEA (Middle
East and Africa)
|
|
|
831
|
|
|
1,662
|
|
|
2,061
|
|
|
United
States of America
|
|
|
6,563
|
|
|
7,628
|
|
|
6,435
|
|
|
Americas
(excluding United States of America)
|
|
|
842
|
|
|
1,236
|
|
|
3,636
|
|
|
AO (Asia and
Oceania)
|
|
|
4,039
|
|
|
7,022
|
|
|
9,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,972
|
|
$
|
34,144
|
|
$
|
32,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F 35
ALLOT COMMUNICATIONS LTD. AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 11:
|
GEOGRAPHIC INFORMATION (Cont.)
|
|
|
|
The
following presents total long-lived assets as of December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
3,488
|
|
$
|
5,310
|
|
|
United States of America
|
|
|
218
|
|
|
170
|
|
|
Other
|
|
|
95
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,801
|
|
$
|
5,602
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12:
|
FINANCIAL AND OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Financial and other income:
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
204
|
|
$
|
845
|
|
$
|
4,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial and other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses and other
|
|
|
(77
|
)
|
|
(155
|
)
|
|
(79
|
)
|
|
Amortization of discount on bank
credit-line
|
|
|
(50
|
)
|
|
-
|
|
|
-
|
|
|
Foreign currency transactions differences,
net
|
|
|
(32
|
)
|
|
(60
|
)
|
|
(78
|
)
|
|
Impairment related to Auction Rate
Securities
|
|
|
-
|
|
|
-
|
|
|
(4,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45
|
|
$
|
630
|
|
$
|
(845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13:
|
SUBSEQUENT EVENTS
|
|
|
|
On January
8, 2008, the Company completed an acquisition of the business of Esphion
Limited, a developer of network protection solutions for carriers and
internet service providers. The Company believes that the acquisition
furthers its vision of offering value-added services on its new Service
Gateway platform to help broadband providers build secure and intelligent
networks by purchasing certain assets. Total consideration including direct
transaction costs for the acquisition was approximately $ 3,931, plus
potential earn-outs based on performance milestones amounting to a maximum of
an additional $ 2,000 payable through December 2008.
|
|
|
|
The Company
allocated the purchase price of the acquisition to the tangible and
intangible assets acquired, based on their estimated fair values. The excess
purchase price over those fair values is recorded as goodwill. The fair value
assigned to assets acquired is based on valuations using managements
estimates and assumptions. The Company recorded approximately $ 2,851 of
goodwill and approximately $ 970 of purchased intangibles related to this
acquisition.
|
F 36
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