We provide our customers with future solutions already built-in to their Ceragon-installed base. We invest a significant amount of effort in designing and providing solutions, which are not only backward compatible with our earlier product generations, but allow our customers to reuse the radio units and antennas of their Ceragon links installed based,base, thereby replacing only the low labor-consuming indoor (sheltered) units - thus benefiting from the latest wireless backhaul performance of our latest technology across their Ceragon-installed base. Moreover, our solutions support multiple technologies within the same wireless backhaul equipment, providing our customers with high flexibility in network transition from legacy circuit-based connectivity to 4G and other IP/Ethernet-based connectivity, at their desired pace of transition - while achieving long-term operational efficiency, high service quality and availability.
We offer our products in three configurations: All-indoor, All-outdoor and Split-mount.
An antenna, an RFU and an indoor unit comprise a terminal. Two terminals are required to form a radio link, which typically extends across a distance of several miles and can extend across a distance of over 100 miles. The specific distance depends upon the customer'scustomer’s requirements and chosen modulation scheme, the frequency utilized, the available line of sight, local rain patterns and antenna size. Each link can be controlled by our network management system or can be interfaced to the network management system of the service provider. The systems are available in both split-mount, including an indoor and outdoor unit, all-indoor and all-outdoor installations.
| Short-Haul | Long-Haul | |
Product | FibeAir IP-20G & IP-20GXFrequency range | FibeAir Form Factor | Application | Transport technology |
IP-20N / IP-20A*IP-20A | FibeAir IP-20C | FibeAir IP-20S | FibeAir IP-20E | FibeAir IP-20C HP | FibeAir IP-20LH | Evolution IP-20 LH | PointLink |
Description | Multi-Radio Technology Edge Node
| Multi-Radio Technology Aggregation Node | Compact All-Outdoor Multi-Core Node
| Compact All-Outdoor Node
| Compact All-Outdoor Node for E-band (70-80GHz) | Compact, high power, multi-carrier trunk | Ultra-high power multi-carrier trunk with HP-radio ODUs | Ultra-high power multi-carrier trunk with Evolution ODUs | High capacity offshore communication |
Interfaces | 1GE, FE, and
E1/T1
| 10GE, 1GE, FE, E1/T1 | 1GE | 1GE | 1GE | 10GE, 1GE, STM-1/OC-3, E1/T1
Note: support for some interfaces requires use of IP-20N/IP-20A IDU
| 10GE, 1GE, FE, STM-1/OC-3, E1/T1
| 10GE, 1GE, , FE, STM-1/OC-3, E1/T1 | |
Site Configuration | Split-mount | All-outdoor
| All-outdoor / Split Mount (with IP-20N or IP-20A IDU) | All-indoor /
Split-mount 4-86GHz | Split mount / All indoor | Shorthaul, Longhaul | Packet, TDM |
Transport
Technology IP-20GX | Hybrid and/or all-packet4-86GHz | All-packetSplit mount / All indoor | All-packet and/or HybridShorthaul | Hybrid and/or all-packet | Packet, TDM |
Typical ApplicationsIP-20F | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)4-86GHz | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)Split mount / All indoor | Cellular
operators,
Wireless ISPs,
Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies) Shorthaul | Cellular
operators,
Wireless ISPs,
Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Cellular
operators,
Wireless ISPs,
Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Cellular operators,
Wireless ISPs,
Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Cellular operators, Wireless service providers,
Incumbent local exchange
carriers, Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Cellular operators, Wireless service providers,
Incumbent local exchange
carriers Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Offshore oil/gas rigs in high vibration environmentPacket, TDM |
Type of CustomersIP-20G | Cellular operators, Wireless ISPs, Private Network providers, Government institutions6-42GHz | Cellular operators, Wireless ISPs, Private Network providers, Government institutionsSplit mount / All indoor | Cellular operators, Wireless ISPs, Private Network providers, Government institutions Shorthaul | Cellular operators, Wireless ISPs, Private Network providers, Government institutions
| Cellular operators, Wireless ISPs, Private Network providers, Government institutions
| Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Network providers | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Network providers | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Network providers | Oil and gas drilling companies, shipping industryPacket, TDM |
Operating systemIP-20C | Unified operating system (CeraOS), uniformly supporting End-to-End networking, services and radio capabilities across the entire IP-20 platform series of products6-42GHz | All outdoor | Shorthaul, small cells, enterprise | Packet |
IP-20C-HP | 4-11GHz | All outdoor | Longhaul | Packet |
IP-20S | 6-42GHz | All outdoor | Shorthaul, enterprise | Packet |
IP-20E | 71-86GHz | All outdoor | Shorthaul, small cells, enterprise | Packet |
IP-20V | 57-66GHz | All outdoor | Shorthaul, small cells, enterprise | Packet |
* ANSI versionAll products serve multiple applications in mobile networks across 3G, 4G and 5G networks, as well as for wireless ISPs, public safety, utility and other vertical applications.
32As wireless backhaul capacity needs grow, the wireless backhaul network blueprint evolves to supporting more radio carriers in one box (2 carriers, instead of 1) as a basic configuration, Ceragon is extending its multicore technology to all network scenarios and site configurations be it All-outdoor, Split-mount, or All-indoor. Various multicore radio units can be used with IP-20N and IP-20F products listed above, such as RFU-D and the RFU-D-HP. Other radio units can be used with this equipment or other legacy equipment of the Company. Ceragon also provides E-band radio heads for split mount solutions of IP-20N and IP-20F.
On top of the IP-20 Platform, Ceragon offers the PointLink portfolio that offers a tailored solution for oil and gas and other maritime offshore applications.
Our network management system (NMS) can be used to monitor network element status, provide statistical and inventory reports, download software and configuration to elements in the network, and provide end-to-end service management across the network. Our NMS solutions support all IP-20 platform products, as well as our legacy FibeAir IP-10microwave and Evolutionmillimeter-wave products through a single user interface.
Our IP-based network products use native IP technology. Our hybrid products use our hybrid concept, which allows them to transmit both native IP and native circuit-switched TDM traffic simultaneously over a single radio link. Native IP refers to systems that are designed to transport IP-based network traffic directly rather than adapting IP-based network traffic to existing circuit-switched systems. This approach increases efficiency and decreases latency. Our products provide effectively seamless migration to gradually evolve the network from an all circuit-switched and hybrid concept to an all IP-based packet.
As telecommunication networks and services become more demanding, there is an increasing need to match the indoor units'units’ advanced networking capabilities with powerful and efficient radio units. Our outdoor RFUs are designed with sturdiness, power, simplicity, and compatibility in mind. As such, they provide high-power transmission for both short and long distances and can be assembled and installed quickly and easily. The RFUs can operate with different Ceragon indoor units, according to the desired configuration, addressing any network need be it cellular, backbone, rural or private backhaul networks.
Since 2012, weWe are responsible for installing part of the links we ship. We offer complete solutions and services for the design and implementation of telecommunication networks, as well as the expansion or integration of existing ones. We have a global projects and services group that operates alongside our products groups. Under this group we offer our customers a comprehensive set of turn-key services including: advanced network and radio planning, site survey, solutions development, installation, maintenance, training and more. Our services include utilization of powerful project management tools in order to streamline deployments of complex wireless networks, thereby reducing time and costs associated with network set-up, and allowing faster time to revenue. Our experienced teams can deploy hundreds of "wireless“wireless backhaul links"links” every week, and our rollout project track-record includes hundreds of thousands of links already installed and in operation with a variety of Tier 1 operators.
We are committed to providing high levels of service and implementation support to our customers. Our sales and network field engineering services personnel work closely with customers, system integrators and others to coordinate network design and ensure successful deployment of our solutions.
We support our products with documentation and training courses tailored to our customers'customers’ varied needs. We have the capability to remotely monitor the in-network performance of our products and to diagnose and address problems that may arise. We help our customers to integrate our network management system into their existing internal network operations control centers.
We have sold our products through a variety of channels to over 460 service providers as well as to hundreds of private networks in more than 130 countries. Our principal customers are wireless service providers that use our products to expand backhaul network capacity, reduce backhaul costs and support the provision of advanced telecommunications services. In 2016,2017, we continued to maintain our position as the number one wireless backhaul specialist, in terms of unit shipments and global distribution of our business. While most of our sales are direct, we do reach a number of these customers through OEM or distributor relationships. We also sell systems to large enterprises and public institutions that operate their own private communications networks through system integrators, resellers and distributors. Our customer base is diverse in terms of both size and geographic location.
In 2016,2017, customers from the Europe region contributed 15%14% of total yearly revenue. Our sales in Latin America and Africa were 27%18% and 7%4% of yearly revenue in 2016,2017, respectively. Our sales in Asia Pacific (excluding India), North America and India in 20162017 were 10%13%, 14%12% and 27%39%, respectively.
The following table summarizes the distribution of our revenues by region, stated as a percentage of total revenues for the years ended December 31, 2014, 2015, 2016 and 2016:2017:
| | Year Ended December 31, | | |
| | 2014 | | | 2015 | | | 2016 | | | Year Ended December 31, | |
Region | | | | | | | | | | | 2015 | | | 2016 | | | 2017 | |
North America | | | 11 | % | | | 13 | % | | | 14 | % | | | 13 | % | | | 14 | % | | | 12 | % |
Europe | | | 16 | % | | | 14 | % | | | 15 | % | | | 14 | % | | | 15 | % | | | 14 | % |
Africa | | | 15 | % | | | 10 | % | | | 7 | % | | | 10 | % | | | 7 | % | | | 4 | % |
India | | | 25 | % | | | 30 | % | | | 27 | % | | | 30 | % | | | 27 | % | | | 39 | % |
APAC (excluding India) | | | 11 | % | | | 9 | % | | | 10 | % | | | 9 | % | | | 10 | % | | | 13 | % |
Latin America | | | 22 | % | | | 24 | % | | | 27 | % | | | 24 | % | | | 27 | % | | | 18 | % |
We sell our products through a variety of channels, including direct sales, OEMs, resellers, distributors and system integrators. Our sales and marketing staff, including supporting functions, includes approximately 513465 employees in many countries worldwide, who work together with local agents, distributors and OEMs to expand our business.
We are a supplier to fourvarious key OEMs which together accounted for approximately 6%7% of our revenues in 2016.2017. System integrators, distributors and resellers accounted for approximately 19% of our revenues for 2016.2017. We are focusing our efforts on direct sales, which accounted for approximately 75%74% of our revenues for 2016.2017. We also plan to develop additional strategic relationships with equipment vendors, system integrators, distributors, resellers, networking companies and other industry suppliers with the goal of gaining greater access to our target markets.
Our marketing efforts include digital marketing campaigns, advertising, public relations and participation in industry trade shows and conferences.
Manufacturing and Assembly
Our manufacturing process consists of materials planning and procurement, assembly of indoor units and outdoor units, final product assurance testing, quality control and packaging and shipping. With the goal of streamlining all manufacturing and assembly processes, we have implemented an outsourced, just-in-time manufacturing strategy that relies on contract manufacturers to manufacture and assemble circuit boards and other components used in our products and to assemble and test indoor units and outdoor units for us. The use of advanced supply chain techniques has enabled us to increase our manufacturing capacity, reduce our manufacturing costs and improve our efficiency.
We outsource most of our manufacturing operations to major contract manufacturers in Israel, Malaysia, Singapore the Philippines, Hungary and Ukraine. On March 18, 2015, we signed a contract with a certain contract manufacturer to outsource our production facility in Slovakia and the production transfer to that manufacturer in Ukraine was carried out during 2015. Additionally, in December 2017 we closed our manufacturing activities in the Philippines. Most of our warehouse operations are outsourced to subcontractors in Israel, the Netherlands, USA and Singapore. The raw materials (components) for our products come primarily from the United States, Europe and Asia Pacific.
We comply with standards promulgated by the International Organization for Standardization and have received certification under the ISO 9001, ISO 14001, ISO 27001 and OHSAS 18001 standards. These standards define the procedures required for the manufacture of products with predictable and stable performance and quality, as well as environmental guidelines for our operations and safety assurance.
Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards including the "RoHS"“RoHS” (Restrictions of Hazardous Substances) Directive.
We place considerable emphasis on research and development to improve and expand the capabilities of our existing products, to develop new products, with particular emphasis on equipment for transitioning to IP-based networks,increasing the transmitted capacity and effective bandwidth utilization, and to lower the cost of producing both existing and future products. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we maintain close relationships with our customers to identify market needs and to define appropriate product specifications. In addition, we intend to continue to comply with industry standards and we are full members of the European Telecommunications Standards Institute in order to participate in the formulation of European standards.
Our research and development activities are conducted mainly at our facilities in Tel Aviv, Israel, but also at our subsidiaries in Greece and Romania. As part of the restructuring activities in 2013, we closed our research and development activities in Bergen, Norway. As of December 31, 2016,2017, our research, development and engineering staff consisted of 204218 employees. Our research and development team includes highly specialized engineers and technicians with expertise in the fields of millimeter-wave design, modem and signal processing, data communications, system management and networking solutions.
Our research and development department provides us with the ability to design and develop most of the aspects of our proprietary solutions, from the chip-level, including both application specific integrated circuits, or ASICs and RFICs, to full system integration. Our research and development projects currently in process include extensions to our leading IP-based networking product lines and development of new technologies to support future product concepts. In addition, our engineers continually work to redesign our products with the goal of improving their manufacturability and testability while reducing costs.
To safeguard our proprietary technology, we rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality agreements and other contractual arrangements with our customers, third-party distributors, consultants and employees, each of which affords only limited protection. We have a policy which requires all of our employees to execute employment agreements which contain confidentiality provisions.
To date, we have 1617 patents granted in the United States and other foreign jurisdictions including the EPO (European Patent Office) and 45 patent applications pending in the United States and other foreign jurisdictions including the EPO.
We have registered trademarks as follows:
| · | for the standard character mark Ceragon Networks and our logo in the United States, Israel, and the European Union; |
| · | for the standard character mark Ceragon Networks in Canada; |
| · | for the standard character mark CERAGON in Morocco, Malaysia, Indonesia, Japan, Russia, Morocco, Israel, Mexico, Malaysia, United States, South Africa, the Philippines, Argentina, Venezuela and Colombia and International Registration (protection granted in Australia, Iceland, Bosnia & Herzegovina, Switzerland, Croatia, Norway, Russia, South Korea,China, Ukraine, CTM (European Union), Turkey, Singapore, Egypt, Kenya and Macedonia); |
| · | for our design mark for FibeAir in the United States, Israel and the European Union; |
| · | for the standard character mark FibeAir in the United States; |
| · | for the standard character mark CeraView in Israel and the European Union. |
We have pending trademark applications as follows:
| · | for the standard character mark CERAGON in Japan, Brazil, Indonesia, India, Peru, Canada, Nigeria, and International Registration (protection pending in ChinaEgypt, Kenya and Vietnam). |
The market for wireless equipment is rapidly evolving, fragmented, highly competitive and subject to rapid technological change. We expect competition, which may differ from region to region, to persist, intensify and increase in the future - especially if rapid technological developments occur in the broadband wireless equipment industry or in other competing high-speed access technologies.
We compete with a number of wireless equipment providers worldwide that vary in size and in the types of products and solutions they offer. Our primary competitors include large wireless equipment manufacturers referred to as generalists, such as Huawei Technologies Co., Ltd., L.M. Ericsson Telephone Company, NEC Corporation, Nokia and ZTE Corporation. In addition to these primary competitors, a number of other smaller wireless backhaul equipment suppliers, including Aviat Networks, DragonWave Inc., and SIAE Microelectronica S.p.A offer or develop products that compete with our products.
We also expect consolidation to continue as the wireless equipment market continues to be highly competitive and, as a result, faceswe face strong price pressures. We expect to continue to be a leader in the best-of-breed segment of the wireless backhaul market in terms of market share, technology and innovation, providing significant value to our customers.
We expect that continued market pressures will drive further consolidation within equipment manufacturers competing with us and which focus solely on the best-of-breed segment of the wireless backhaul market. Examples of such previous consolidations are our acquisition of Nera Network AS in 2011 (the “Nera Acquisition”), the acquisition by Dragonwave of the wireless division of Nokia (formerly NSN), and the merger of the wireless divisions of Harris and Stratex Networks.
We expect further consolidations will take place within the generalists; the most recent is the merger between Nokia and Alcatel-Lucent, while Nokia itself is the result of a previous joint venture between Nokia and Siemens, and Alcatel-Lucent is the result of a previous merger between Alcatel and Lucent.
Further market consolidations among industry generalists may drive some operators, which seek best-of-breed solutions, to seek "bundled"“bundled” network solutions from these generalists, which today, in part, resell our products.generalists. This trend may put an additional strain on our competitiveness.
We believe we compete favorably on the basis of:
| · | our focus on the mobile market and active involvement in shaping next generation standards and technologies, which deliver best customer value; |
| · | our ability to expand to other vertical markets such as oil and gas and public safety, by drawing upon the capabilities of our technologies and solutions; |
| · | product performance, reliability and functionality, which assist our customers to achieve the highest value; |
| · | range and maturity of product portfolio, including the ability to provide solutions in every widely available microwave and millimeter-wave licensed and license-exempt frequency, as well as our ability to provide both circuit switch and IP solutions and therefore to facilitate a migration path for circuit-switched to IP-based networks; |
| · | focus on high-capacity, point-to-point microwave technology, which allows us to quickly adapt to our customers'customers’ evolving needs; |
| · | range of rollout services offering for faster deployment of an entire network and reduced total cost of ownership; and |
| · | support and technical service, experience and commitment to high quality customer service.service, and |
| · | our ability to expand to other vertical markets such as oil and gas and public safety, by drawing upon the capabilities of our technologies and solutions. |
Our products also indirectly compete with other high-speed communications solutions, including fiber optic lines and other wireless technologies.
The Israel Innovation Authority (formerly – the Israeli Office of Chief Scientist).Authority.
The Governmentgovernment of Israel encourages research and development projects in Israel through the IIA - Israel Innovation Authority, formerly and more commonly known as the Israeli Office of Chief Scientist, (the "OCS"), pursuant to and subject to the provisions of the R&D Law. We received grants from the OCSIIA for several projects, and may receive additional grants in the future.
Under the terms of the certain grants, a company may be required to pay royalties ranging between 3% to 5%6% of the revenues generated from its products or services incorporating know howknow-how developed with, or are a derivative of, funds received from the OCS,IIA (“IIA Products”), until 100% of the dollar value of the grant is repaid (along with interest)(plus LIBOR interest applicable to grants received on or after January 1, 1999).
The R&D Law requires that a product developed under a grant programthe manufacturing of IIA Products will be manufacturedcarried out in Israel, in accordance with such manufacturing volume as was detailed inunless the original grant application. However, uponIIA provides its approval to the approval of the OCS, some of the manufacturing volume may be performed outside of Israel.contrary. Such approval may only be granted under various conditions, and entails repayment of increased royalties equal to up to 300% of the total grant amount, plus applicable interest, depending on the extent of the manufacturing that is to be conducted outside of Israel, andIsrael. In any case, IIA Products manufactured abroad carry an increase of 1% in the royalty rate.
The R&D Law also provides that know-how (and its derivatives) developed with, or is a derivative of, funds received from the OCSIIA and any right derived therefrom may not be transferred to third parties, unless such transfer was approved in accordance with the R&D Law. The research committee operating under the OCSIIA may approve the transfer of know-how between Israeli entities, provided that the transferee undertakes all the obligations in connection with the R&D grant as prescribed under the R&D Law. In certain cases, such research committee may also approve a transfer of know-how outside of Israel, in both cases subject to the receipt of certain payments, calculated according to a formula set forth in the R&D Law, in amounts of up to six (6) times the total amount of the OCSIIA grants, plus applicable interest (in case of transfer outside of Israel), and three (3) times of such total amount, plus applicable interest, (in case sufficient R&D activity related to the know how remains in Israel). Such approvals are not required for the sale or export of any products resulting from such R&D activity.
Further, the R&D Law imposes reporting requirements on certain companies with respect to certain changes in the ownership of a grant recipient. The grant recipient, its controlling shareholders, and foreign interested parties of such companies must notify the OCSIIA of any change in control of the grantgrant’s recipient or the holdings of the "means“means of control"control” of the recipient that result in an Israeli or a non-Israeli becoming an interested party directly in the recipient. The R&D Law also requires the new interested party to undertake to comply with the R&D Law. For this purpose, "control"“control” means the ability to direct the activities of a company (other than any ability arising solely from serving as an officer or director of the company), including the holding of 25% or more of the "means“means of control"control”, if no other shareholder holds 50% or more of such "means“means of control." "Means” “Means of control"control” refer to voting rights or the right to appoint directors or the chief executive officer. An "interested party"“interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, in certain cases, any non-Israeli who acquires 5% or more of our ordinary shares willmay be required to notify the OCSIIA that it has become an interested party and to sign an undertaking to comply with the R&D Law. In addition, the rules of the OCSIIA may require additional information or representations with respect to such events.
The R&D Law has been amended effective as of January 1, 2016. Under the amendment, the new Israel Innovation Authority has been established and is in charge of implementing the governmental policy regarding the R&D Law (and has been given discretion in the implementation of the R&D Law for such purpose). However, and until prescribed otherwise, the existing provisions relating to the transfer of knowhow and manufacturing outside of Israel, as detailed above, shall remain in full force and effect with respect to benefits and funding approved or received prior to such date.
In December 2006, we entered into an agreement with the OCSIIA to conclude our R&D grants sponsored by the OCS,IIA, and by 2008 completed paying all debts remaining therefrom. In 2013 and 2014 we received approval for new R&D grants from the Government of Israel through the OCSIIA in amounts of approximately $0.7 million and $0.9 million respectively. In 2015, 2016 and 20162017 we received approval for additional R&D grants in a total amount for the twothree years, of approximately $1.2$2.1 million part of which have already been received (together the "Generic Plan"). In 2018, we received approval for an additional Generic Plan, in the frame of which we expect to receive $0.46 million. The Generic Plan requires us to comply with the requirements of the R&D Law in the same manner applicable to previous grants, provided, however, that the obligation to pay royalties on sales of products based on technology or know how developed with the Generic Plan does not apply to us, but may apply, under certain conditions, to a recipient of the technology or knowhow developed with the Generic Plan, to the extent such is sold and/or transferred. In addition, we may manufacture part of the products developed under the program outside of Israel, up to the percentages declared in our applications for such grants.
In addition to the grants described above, in March 2014, we agreed to participate in two "Magnet"“Magnet” Consortium Programs (the "Magnet Programs"“Magnet Programs”) sponsored by the OCS,IIA, which grants do not bear any royalty payment obligations. In the framework of the Magnet Programs, intended to support innovative generic industry-oriented technologies, we are to cooperate with additional companies and research institutes. With respect to each of the years 2015, 2016 and 20162017 we received an approval from the OCSIIA for a sum of $2.5$3.8 million in the aggregate under the Magnet Programs, most of which was already received.Programs. In 20172018 we expect to receive additional sum of approximately $0.8$0.88 million, subject to our compliance with the terms of the Magnet Programs. The R&D Law applies to the Magnet Programs, including the restrictions on transfer of know how or manufacturing outside of Israel, as described above. In addition, certain restrictions resulting from Magnet Programs' internal agreements between the consortium members may apply.
C. Organizational Structure
We are an Israeli company that commenced operations in 1996. The following is a list of our significant subsidiaries:
Company | | Place of Incorporation | | Ownership Interest | |
| | | | | |
Ceragon Networks, Inc. | | New Jersey | | | 100 | % |
Ceragon Networks AS | | Norway | | | 100 | % | | |
Ceragon Networks (India) Private Limited | | India | | | 100 | % |
Ceragon Networks S.A. de CV | | Mexico | | | 100 | % |
D. Property, Plants and Equipment
Our corporate headquarters and principal administrative, finance and operations departments are located at a leased facility of approximately 65,00067,500 square feet of office space and approximately 75009,300 square feet of warehouse space, in Tel Aviv, Israel. The leases of this space will expire December 31, 2017.2019.
We also lease the following space at the following properties:
| · | in the United States, we lease approximately 5,3505,300 square feet of new premises in Overlook at Great Notch, New Jersey, expiring September, 2021 and approximately 12,4618,200 square feet of office and warehouse space in Richardson, Texas, expiring May 2018. |
| · | in Norway we lease approximately 12,000 square feet of office space in Bergen, expiring in May 2019;March 2024. |
| · | in India, we lease approximately 11,73711,700 square feet of office space in New Delhi, expiring in October 2019. |
| · | In Mexicoin Romania, we lease approximately 4,30620,000 square feet of office and space in Mexico City, Mexico,Bucharest, Romania, expiring in March 2019.November 2020. |
We also lease space for other local subsidiaries to conduct pre-sales and marketing activities in their respective regions.
ITEM 4A.UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial statements, and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in "Risk Factors"“Risk Factors” and elsewhere in this annual report. Our consolidated financial statements are prepared in conformity with U.S. GAAP.
Overview
We are the number one wireless backhaul specialist in terms of unit shipments and global distribution of our business. We provide wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice and data services, enabling smart-phone applications such as Internet browsing, social networking applications, image sharing, music and video applications.mobile broadband services. Our wireless backhaul solutions use microwave and millimeter wave technology to transfer large amounts of telecommunication traffic between base stations and small-cells and the core of the service provider'sprovider’s network.
We also provide our solutions to other non-carrier vertical markets such as oil and gas companies, public safety network operators, businesses and public institutions, broadcasters, energy utilities and others that operate their own private communications networks. Our solutions are deployed by more than 460 service providers, of all sizes, as well as in hundreds of private networks,network owners, in nearlymore than 130 countries.
In March 2013, we received $113.7 million of credit facilities which replaced all of the Company's previous credit facilities. In October 2013 and again in April 2014, we obtained the bank syndicate's consent for temporary less restrictive financial covenants. On March 31, 2015 we reached an agreement with the bank syndicate under which our existing credit facility agreement was amended to reflect a reduction in our credit facility and to include, among other changes, certain relief under our covenants as well as an extension of the agreement until June 30, 2016. On March 10, 2016 we signed an additional amendment to the credit facility agreement, which extended the credit facility repayment date until March 31, 2017 under the same terms of the previous amendment. On March 30, 2017 we signed another amendment to the credit facility agreement, which extended the credit facility repayment date until March 31, 2018. Following this last amendment, the credit facility stands at a total sum of $100.2 million. For a more detailed discussion see below under B. Liquidity and Capital Resources.
In December 2014, we announced a significant new restructuring of our operations to reduce our operational costs. The restructuring plan is intended to realign operations, reduce head count and undertake other cost reduction measures in order to lower our breakeven point and improve profitability. Once the restructuring and other cost reduction measures are completed, they were expected to result in annual savings of approximately $18 to $22 million. The restructuring plan includes relocating certain offices and reducing staff functions and some operations positions, as well as other measures. In 2014 and the first quarter of 2015, we incurred restructuring charges of $6.8 million and $1.2 million, respectively, both related primarily to the 2014 restructuring plan. In addition, in the fourth quarter of 2014 we incurred a $4.4 million write-off of discontinued product inventory related to the restructuring plan.
In August 2014, the Company completed a public offering of its shares on Nasdaq. Total net proceeds from the issuance amounted to approximately $45.1 million, net of issuance expenses in the amount of $400 thousand.
In April 2014, we signed an agreement with Eltek ASA to settle all claims, counter claims, legal proceedings, and any other contingent or potential claims regarding alleged breaches of representations and warranties contained in the purchase agreement governing the Nera Acquisition in January 2011. Pursuant to the settlement agreement, we received $17 million in cash.
Industry Trends
Market trends have placed, and will continue to place, pressure on the selling prices for our products. Our objective is to continue to meet the demand for our solutions while at the same time increasing our profitability. We seek to achieve this objective by constantly reviewing and improving our execution in, among others, development, manufacturing and sales and marketing. Set forth below is a more detailed discussion of the trends affecting our business:
| · | Growing NumberDeployments of Global Wireless Subscribers.Gigabit-LTE as an interim phase ahead of 5G deployment. This enables enhanced mobile broadband (eMBB) services. |
| · | A growing number of global wireless subscribers. Growth in the number of global wireless subscribers is being driven by the availability of inexpensive cellular phones and more affordable wireless service, particularly in developing countries and emerging markets, and is being addressed by expanding wireless networks and by building new networks. Additionally, in developed countries, subscriber growth is expected over the next several years as 4G gigabit LTE deployments intensify and 5G deployments initiate, and machines and IoT devices are expected to drive the introduction of new services and bring for proliferation of 1,000 fold of service connections from these subscribed devices. |
| · | Increasing Demanddemand for Mobile Data Services.mobile broadband services. Cellular operators and other wireless service providers are facing increasing demand from subscribers to deliver voice and data services, including Internet browsing, music and video applications. |
| · | The emergence of small cells in particular markets (North America, Asia Pacific) present wireless backhaul challenges that differ from those of traditional macro-cells. Small cells architectures can be used to provide a second layer of coverage in 4G and, in the future, 5G networks, resulting in higher throughput and data rates for the end-user. While adoption by some service providers in North America and Asia Pacific, other service providers around the globe and which have previously considered the deployment of 4G small cells have come to the conclusion that the benefit of additional coverage and capacity versus the required investment, does not provide significant value and hence have deferred the consideration of small cells radio access network to a time in which 5G radio access networks shall be considered. |
| · | Transition to IP-based Networks.networks. Cellular operators and other wireless service providers are deploying all-IP networks and upgrading their infrastructure to interface with an IP-based core network in order to increase network efficiency, lower operating costs and more effectively deliver high-bandwidth data services. |
| · | Software Defined Networking (SDN) deliver network architectures that transition networks from a world of task-specific dedicated equipment elements, to a world of service creation and optimization of network performance through network intelligence. |
| · | Network sharing business models are being adopted by mobile network operators (MNOs) who are faced with increasing competition from over-the-top players and an ever-growing capacity crunch. Network sharing can be particularly effective in the backhaul portion of mobile networks, especially as conventional macro cells evolve into super-sized macro sites that require exponentially more bandwidth for backhaul. |
We are also experiencing pressure on our sale prices as a result of several factors:
| · | Increased Competition.competition. Our target market is characterized by vigorous, worldwide competition for market share and rapid technological development. These factors have resulted in aggressive pricing practices and downward pricing pressures, and growing competition from both start-up companies and well-capitalized telecommunication systems providers. |
| · | Regional Pricing Pressures.pricing pressures. A significant portion of our sales derives from India, in response to the rapid build-out of cellular networks in this country. For the years ended December 31, 2014, 2015, 2016 and 2016, 24.8%2017, 30.3%, 30.3%27.3% and 27.3%39.2%, respectively, of our revenues were earned in India. Sales of our products in these markets are generally at lower gross margins in comparison to other regions. Recently, network operators have started to share parts of their network infrastructure through cooperation agreements, which may adversely affect demand for network equipment. |
| · | Transaction Size.size. Competition for larger equipment orders is increasingly intensifying due to the fact that the number of large equipment orders in any year is limited. Consequently, we generally experience greater pricing pressure when we compete for larger orders as a result of this increased competition and demand from purchasers for greater volume discounts. As an increasing portion of our revenues is derived from large orders, we believe that our business will be more susceptible to these pressures. |
As we continue to focus on operational improvements, these price pressures may have a negative impact on our gross margins.
As we continue to adjust our geographic footprint, we are increasingly engaged in supplying installation and other services for our customers, often in emerging markets. In this context, we may act as the prime contractor and equipment supplier for network build-out projects, providing installation, supervision and commissioning services required for these projects, or we may provide such services and equipment for projects handled by system integrators. In such cases, we typically bear the risks of loss and damage to our products until the customer has issued an acceptance certificate upon successful completion of acceptance tests. If our products are damaged or stolen, or if the network we install does not pass the acceptance tests, the end user or the system integrator, as the case may be, could delay payment to us and we would incur substantial costs, including fees owed to our installation subcontractors, increased insurance premiums, transportation costs and expenses related to repairing or manufacturing the products. Moreover, in such a case, we may not be able to repossess the equipment, thus suffering additional losses. Also, these projects are rollout projects, which involve fixed-price contracts. We assume greater financial risks on fixed-price projects, which routinely involve the provision of installation and other services, versus short-term projects, which do not similarly require us to provide services or require customer acceptance certificates in order for us to recognize revenue.
After a significant decrease in our revenues in 2013 compared to 2012, there were no material differences in 2014 and 2015, however, in2015. In 2016, our revenues experienced an additional decrease. This decrease is mainly attributeddecreased due to the strategy we implemented in order to accelerate our return to profitability, which includedincluded: managing the revenue mix more carefully, seeking revised pricing, payment and other terms in certain new orders and our business focus on service providers that seek to resolve their wireless backhaul challenges through solutions, which create higher business value and are willing to pay a premium in order to create this value. In 2017, revenues increased mainly due to an increase in the business from our customers in India and to a lesser extent an expansion of our business in the rest of APAC.
Results of Operations
Revenues. We generate revenues primarily from the sale of our products, and, to a lesser extent, services. The final price to the customer may largely vary based on various factors, including but not limited to the size of a given transaction, the geographic location of the customer, the specific application for which products are sold, the channel through which products are sold, the competitive environment and the results of negotiation.
Cost of Revenues. Our cost of revenues consists primarily of the prices we pay contract manufacturers for the products they manufacture for us, the costs of off the shelf parts, accessories and antennas, the costs of our manufacturing facility, estimated warranty costs, costs related to management of our manufacturing facility, supply chain and shipping, as well as inventory write-off costs and amortization of intangible assets. In addition, we pay salaries and related costs to our employees and fees to subcontractors relating to installation services with respect to our products.
Significant Expenses
Research and Development Expenses. Our research and development expenses consist primarily of salaries and related costs for research and development personnel, subcontractors'subcontractors’ costs, costs of materials and depreciation of equipment. All of our research and development costs are expensed as incurred.incurred, except for development expenses, which were capitalized in accordance with ASC 985-20 “Software – Costs of Software to be Sold, Leased, or Marketed”. We believe that continued investment in research and development is essential to attaining our strategic objectives.
Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of compensation and related costs for sales marketing and marketingsales support functions personnel, amortization of intangible assets, trade show and exhibit expenses, travel expenses, commissions and promotional materials.
General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation and related costs for executive, finance, information system and human resources personnel, professional fees (including legal and accounting fees), insurance, provisions for doubtful accounts and other general corporate expenses.
Restructuring costs. Our restructuring expenses consisted primarily of severance and related benefit charges, and to a lesser extent, facilities costs related to obligations under non-cancelable leases for facilities that we ceased to use and other associated costs.
Financial Income (expenses), net. Our financial income (expenses), net, consists primarily of interest paid on bank debts, gains and losses arising from the re-measurement of transactions and balances denominated in non-dollar currencies into dollars, gains and losses from our currency hedging activity, amortization of marketable securities premium, net, and other fees and commissions paid to banks, offset by interest earned on bank deposits and marketable securities.
Taxes. Our tax expenses consist of current corporate tax expenses in various locations and changes in tax deferred assets and liabilities, as well as reserves for uncertain tax positions.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S (“U.S. GAAP.GAAP”). These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the time they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented.
Our management believes the accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements and which are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
| · | Inventory valuation; and |
| · | Provision for doubtful accounts. |
Revenue recognition. We generate revenues from selling products and services to end users, distributors, system integrators and original equipment manufacturers ("OEM"(“OEM”).
Revenues from product sales are recognized in accordance with ASC topic 605-10, "Revenue Recognition"“Revenue Recognition” and with ASC 605-25 "Multiple-Element Arrangements" ("“Multiple-Element Arrangements” (“ASC 605"605”), when delivery has occurred, persuasive evidence of an arrangement exists, the vendor's fee is fixed or determinable, no future obligation exists and collectability is probable.
In case the sale is subject to a right of return, we record a provision for estimated sale returns and stock rotation granted to customers on products in the same period the related revenues are recorded in accordance with ASC 605. These estimates are based on historical sale returns, stock rotations and other known factors.
Pursuant to the guidance of ASU 605-25, "Multiple“Multiple Deliverable Revenue Arrangements,"” when a sales arrangement contains multiple elements, such as equipment and services, we allocate revenues to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (''VSOE''(‘‘VSOE’’) if available, third party evidence (''TPE''(‘‘TPE’’) if VSOE is not available, or estimated selling price (''ESP''(‘‘ESP’’) if neither VSOE nor TPE is available. In multiple element arrangements, revenues are allocated to each separate unit of accounting for each of the deliverables using the relative estimated selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.
In certain arrangements, we consider the sale of equipment and its installation to be two separate units of accounting in the arrangement in which the installation is not essential to the functionality of the equipment, the equipment has value to the customer on a standalone basis and whenever the arrangement does not include a general right of return relative to the delivered item or delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. In such an arrangement, revenues from the sale of equipment are recognized upon delivery if all other revenue recognition criteria are met, and the installation revenues are deferred to the period in which such installation occurs (but not less than the amount contingent upon completion of installation, if any) using relative selling prices of each of the deliverables based on the aforementioned selling price hierarchy.
We determine the selling price in our multiple-element arrangements by reviewing historical transactions, and considering internal factors including, but not limited to, pricing practices (including discounting), margin objectives and competition. The determination of ESP is made through consultation with management, taking into consideration the pricing model and strategy.
When sale arrangements include a customer acceptance provision, revenue is recognized when we demonstrate that the criteria specified in the acceptance provision has been satisfied or as the acceptance provision has lapsed and deemed to be attained.
To assess the probability of collection for revenue recognition purposes, we analyze historical collection experience, current economic trends and the financial position of our customers. On the basis of these criteria, we conclude whether revenue recognition should be deferred and recognized on a cash basis.
When applicable, the Company records a provision for estimated sale returns, stock rotation and credits granted to customers on products in the same period the related revenues are recorded in accordance with ASC 605. These estimates are based on historical sales returns, stock rotations and other known factors.
Deferred revenue includes unearned amounts received in our arrangements, and amounts received from customers but not recognized as revenues due to the fact that these transactions did not meet the revenue recognition criteria.
Inventory valuation. Our inventories are stated at the lower of cost or marketrealizable net value. Cost is determined by using the moving average cost method. At each balance sheet date, we evaluate our inventory balance for excess quantities and obsolescence. This evaluation includes an analysis of slow-moving items and sales levels by product and projections of future demand. If needed, we write off inventories that are considered obsolete or excessive. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the revision is made.
Provision for doubtful accounts. We perform ongoing credit evaluations of our trade receivables and maintain an allowance for doubtful accounts, based upon our judgment as to our ability to collect outstanding receivables. Allowance for doubtful accounts is made based upon a specific review of all the overdue outstanding invoices. In determining the provisions, we analyze our historical collection experience, current economic trends, the financial position of our customers and the payment guarantees (such as letters of credit) that we receive from our customers. We also insure certain trade receivables under credit insurance policies. If the financial condition of our customers deteriorates, resulting in their inability to make payments, additional allowances might be required. Historically, our provision for doubtful accounts has been sufficient to account for our bad debts.
Impairment of Long-Lived Assets. Our long-lived assets include property and equipment, goodwill and other identifiable other intangible assets that are subject to amortization. In assessing the recoverability of our goodwill, property and equipment and other identifiable intangible assets that are held and used, we make judgments regarding whether impairment indicators exist based on legal factors, market conditions and operating performances. Future events could cause us to conclude that impairment indicators exist and that the carrying values of the goodwill, property and equipment and other intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.
ASC 350 "Intangible – Goodwill and Other," requires that goodwill be testedOur long-lived assets are reviewed for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of the company. We have concluded that we have one reporting unit. The goodwill impairment test is a two-step test. Under the first step, the fair value of the company is comparedaccordance with its carrying value (including goodwill). If the fair value of the company is less than its carrying value, an indication of goodwill impairment exists and we must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the company's goodwill over the implied fair value of that goodwill. If the fair value of the company exceeds its carrying value, step two does not need to be performed. The fair value of the Company is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of our long-term rate of growth, the period over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value or goodwill impairment for the Company. During 2014, we recognized impairment of goodwill in the amount of $14.8 million primarily from Nera Acquisition.
We are required to assess the impairment of long-lived assets, tangible and intangible, other than goodwill, under ASC topic 360, "Property,"Property Plant and Equipment," whenEquipment", ("ASC 360"), whenever events or changes in circumstances indicate that the carrying valueamount of an asset may not be recoverable. Impairment indicators include any significant changes in the mannerRecoverability of our use of the assets or the strategy of our overall business, significant negative industry or economic trendsto be held and significant decline in our share price for a sustained period. Our 2014 restructuring plan has created the need for such an impairment in 2014.
Upon determination that the carrying value of a long-lived asset may not be recoverable based uponused is measured by a comparison of aggregatethe carrying amount of an asset to the future undiscounted projected future cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. During 2015, 2016 and 2017, no impairment losses have been recognized.
Impact of recently issued Accounting Standards.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, “Revenue Recognition”, and requires entities to recognize revenue when they transfer control of promised goods or services to customers in an impairment charge is recordedamount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company will adopt the excessnew standard effective of fair value overJanuary 1, 2018, using the carrying amount. We measure fair value using discounted projected future cash flows. During 2014, we recognized impairmentmodified retrospective approach, applied only to contracts that were not completed as of fixed assets in the date of adoption.
Under the Company's current accounting policy, it defers certain revenues when it had a contingent revenue. Under Topic 606, the Company assesses the revenue amount of $2.4 million relatedit entitled to specific assets that will not be used asupon completing its performance obligation, taking into consideration variable considerations. As a result of our restructuring plan. In 2015the cumulative impact of adopting the new guidance in the first quarter of 2018, the Company expects to record a net increase to opening retained earnings of approximately $91 thousand as of January 1, 2018, an increase in trade receivables of approximately $131 thousand and 2016 no impairment was recognized.an increase in trade payables of approximately $40 thousand.
Impact of recently issued Accounting Standards:
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company has adopted early this standard in the fourth quarter of 2016 on a retrospective basis. Prior periods have been retrospectively adjusted. As a result of the adoption of ASU 2015-17, the Company made the following adjustments to the December 31, 2015 balance sheet: a $1.6 million decrease to current deferred tax assets and a corresponding increase to noncurrent deferred tax asset.
In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842)2016-02, “Leases”, which sets out the principles foron the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors.lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-linestraight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve12 months regardless of their classification. Leases with a term of twelve12 months or less will be accounted for in a manner similar to the accounting under existing guidance for operating leases.leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This ASUASC 842 supersedes the previous leases standard, FASB Accounting Standards Codification Topic 840.ASC 840, "Leases". The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05,"Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"), which clarifies that a change in the counter party to a derivative instrument designated as a hedging instrument does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria are met. The new guidance is effective for fiscal yearsthe interim and annual periods beginning on or after December 15, 2016, including interim periods within this fiscal year. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.
In March 2016, FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which affects all entities that issue share-based payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits2018, and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method. Earlyearly adoption is permitted. The Company does not expect that this new guidance will have a material impact on the Company's consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU2016-13"). ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 also applies to employee benefit plan accounting, with an effective date of the first quarter of fiscal 2022. The amendments in this update are effective for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and footnote disclosures and employee benefit plans' accounting.disclosures.
45Effective as of December 15, 2016, the Company adopted Accounting Standards Update 2016-09, “Compensation—Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation cost for stock-based compensation: to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures as they occur. Upon adoption of ASU 2016-09, the Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period, thus no change was made in connection with ASU 2016-09 adoption.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15").Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization.
ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The standard is effective for the interim and annual periods beginning on January 1, 2019.or after December 15, 2017. This new guidance does not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for the interim and annual periods beginning on or after December 15, 2017. The Company is currently assessinghas decided to adopt this standard effective December 31, 2017 using the impact ofretrospective transition method, as required by the new standard. The adoption of this standard has an immaterial impact on itsthe Company’s consolidated financial statements and footnote disclosures.of cash flows.
In October 2016,August 2017, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory ("ASU-2016-16"),2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which requires entities to recognizeexpands the income tax consequences of an intra-entity transfer of an asset other than inventory whenactivities that qualify for hedge accounting and simplifies the transfer occurs.rules for reporting hedging transactions. The standard is effective for fiscal yearsthe interim and annual periods beginning on or after December 15, 2017, including interim periods within those fiscal years.2018. Early adoption is permitted as of the beginning of a fiscal year. The new standard should be adopted on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.permitted. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated financial statements and related disclosures.
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU-2016-18"). This standard requires the presentation of the statement of cash flows to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the timing of adoption and the effects of the adoption of this ASU on the consolidated financial statements.
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on identifying performance obligations.
The guidance permits two methods of modification: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company currently anticipates adopting the standard using the modified retrospective method rather than full retrospective method. However, the Company is continuing to evaluate the impact of the standard, and the adoption method is subject to change.
The new standard will be effective for the Company beginning January 1, 2018, and adoption as of the original effective date of January 1, 2017 is permitted. The Company will adopt the new standard as of January 1, 2018.
The Company has made progress toward completing its evaluation of the potential changes from adopting this new standard on its financial reporting and disclosures. The Company has evaluated the impact of the standard on majority of its revenue streams and associated contracts. The Company formed an implementation work group and expects to complete the evaluation of the impact of the accounting and disclosure changes on its business processes, controls and systems throughout 2017, design any changes to such business processes, controls and systems, and implement the changes before the end of 2017.
Currently, the Company is analyzing the impact that the adoption of the standard will have on specific performance obligations and variable consideration transactions. In addition incremental costs that are related to sales from contracts signed during the period would require capitalization. The company also will consider if there is a significant financing component if the time between payment and delivery is more than one year.
The Company continues to assess all potential impacts under the new revenue standard.
Comparison of Period to Period Results of Operations
The following table presents consolidated statement of operations data for the periods indicated as a percentage of total revenues.
| | Year Ended December 31 | | | Year Ended December 31 | |
| | 2014 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2017 | |
Revenues | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of revenues | | | 77.2 | | | | 70.5 | | | | 66.2 | | | | 70.5 | | | | 66.2 | | | | 67.7 | |
Gross profit | | | 22.8 | | | | 29.5 | | | | 33.8 | | | | 29.5 | | | | 33.8 | | | | 32.3 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development, net | | | 9.4 | | | | 6.6 | | | | 7.4 | | | | 6.6 | | | | 7.4 | | | | 7.7 | |
Selling and marketing | | | 15.1 | | | | 11.7 | | | | 13.5 | | | | 11.7 | | | | 13.5 | | | | 12.5 | |
General and administrative | | | 6.4 | | | | 6.1 | | | | 6.9 | | | | 6.1 | | | | 6.9 | | | | 5.6 | |
Restructuring costs | | | 1.8 | | | | 0.4 | | | | - | | | | 0.4 | | | | - | | | | - | |
Goodwill impairment | | | 4.0 | | | | - | | | | - | | |
Other income | | | (5.3 | ) | | | (1.5 | ) | | | (0.7 | ) | | | (1.5 | ) | | | (0.7 | ) | | | (0.5 | ) |
Total operating expenses | | | 31.4 | | | | 23.3 | | | | 27.1 | | | | 23.3 | | | | 27.1 | | | | 25.3 | |
Operating income (loss) | | | (8.6 | ) | | | 6.2 | | | | 6.7 | | |
Operating income | | | | 6.2 | | | | 6.7 | | | | 7.0 | |
Financial expenses, net | | | 10.2 | | | | 4.2 | | | | 2.1 | | | | 4.2 | | | | 2.1 | | | | 1.8 | |
Taxes on income | | | 1.8 | | | | 1.7 | | | | 0.6 | | | | 1.7 | | | | 0.6 | | | | 0.5 | |
Net income (loss) | | | (20.6 | ) | | | 0.3 | | | | 4.0 | | |
Net income | | | | 0.3 | | | | 4.0 | | | | 4.7 | |
Year ended December 31, 2016 compared to year ended December 31, 2017
Revenues. Revenues totaled $332.0 million in 2017 as compared with $293.6 million in 2016, an increase of $38.4 million, or 13.1%. Revenues in India increased to $130.0 million in 2017 from $80.2 million in 2016, mainly due to large orders received from two major customers. Revenues in the Africa region decreased to $12.1 million in 2017, from $19.9 million in 2016 primarily due to the decline in the economic condition in the continent, mainly attributed to the global decline in commodity and oil prices which has caused a reduced demand for telecommunications infrastructure. Revenues in the APAC region increased to $45.0 million in 2017 from $29.7 million in 2016, mainly as a result of expending business with existing customers and new customers. Revenues in Europe increased to $45.4 million in 2017 from $43.5 million in 2016. Revenues in North America decreased to $39.5 million in 2017 from $40.2 million in 2016. Revenues in Latin America decreased to $60.0 million in 2017 from $80.1 million in 2016, mainly due to a slow-down in microwave roll out activities of one of our customers.
Cost of Revenues. Cost of revenues totaled $224.7 million in 2017 as compared with $194.5 million in 2016, an increase of $30.2 million, or 15.5%, attributed mainly to:
| · | higher direct material and services costs primarily resulting from the higher volume of revenues; and |
| · | higher other direct and supply chain costs primarily resulting from the higher volume of revenues. |
Gross Profit. Gross profit as a percentage of revenues decreased to 32.3% in 2017 from 33.8% in 2016. This decrease is mainly attributed to higher portion of revenue coming from India.
Research and Development Expenses, Net. Our net research and development expenses totaled $25.7 million in 2017 as compared with $21.7 million in 2016, an increase of $4.0 million, or 18.5% primarily as a result of an increase of $1.8 million in salary and salary related expenses, a decrease of $1.0 million in IIA (Israel Innovation Authority) grants, an increase of $0.8 million in material purchasing for R&D purposes, and an increase of $0.4 million in depreciation, office expenses and other expenses.
Our research and development efforts are a key element of our strategy and are essential to our success. We intend to maintain or slightly increase our commitment to research and development, and an increase or a decrease in our total revenue would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures. As a percentage of revenues, research and development expenses increased to 7.7% in 2017 compared to 7.4% in 2016.
Selling and Marketing Expenses. Selling and marketing expenses totaled $41.7 million in 2017 as compared with $39.5 million 2016, an increase of $2.2 million, or 5.3%, resulting mainly from an increase of $2.4 million in agent commission expenses, an increase of $0.7 million in salary and salary related expenses, an increase $0.6 million in sales commission expenses, partially offset by decrease of $0.9 million in consultancy expenses and a decrease of $0.6 million in office and other expenses. As a percentage of revenues, selling and marketing expenses were decreased to 12.5% in 2017 from 13.5% in 2016.
General and Administrative Expenses. General and administrative expenses totaled $18.6 million in 2017 as compared with $20.4 million in 2016, a decrease of $1.8 million, or 8.9%. This decrease is attributable primarily to a decrease of $3.2 million in doubtful debt expenses, partially offset by an increase in of $1.1 million in salary and salary-related expenses and an increase of $0.4 million in office and other expenses. As a percentage of revenues, general and administrative expenses decreased to 5.6% in 2017 from 6.9% in 2016.
Other income. Other income for 2016 and 2017 included $1.9 million and $1.7 million, respectively, related to the expiration of certain pre-acquisition indirect tax exposures primarily in connection with the Nera Acquisition.
Financial expenses, Net. Financial expenses, net totaled $5.9 million in 2017 as compared with $6.3 million in 2016, a decrease of $0.4 million, or 6.6%. This decrease is primarily attributable to a decrease of $1.6 million in financial expenses incurred from exchange rate differences related to significant devaluation of the local currencies in Argentina, Venezuela and Nigeria during 2016, partially offset by an increase of $0.9 million in bank commissions and interest expenses related to letter of credit charges and an increase in discounting activities. As a percentage of revenues, financial expenses, net decreased to 1.8% in 2017 compared to 2.1% in 2016.
Taxes on income. Taxes on income totaled $1.7 million in 2017 as compared with $1.8 million in 2016, a decrease of $0.1 million, mainly attributed to an increase in tax benefits of $1.0 million related to changes in our tax exposures reserves, partially offset by an increase of $0.7 million in taxes from previous years mainly related to a withholding tax asset which was expensed in 2017, and an increase of $0.2 million in our current taxes on income, primarily due to our sales and distribution subsidiaries.
Net profit. In 2017 the Company had $15.6 million in net profit as compared with net profit of $11.4 million in 2016. As a percentage of revenues, net profit increased to 4.7% compared to 3.9% in 2016. The increase in net profit was mainly attributable to the increase in our revenues that drove the increase in gross profit and the decrease in our financial and tax expenses.
Year ended December 31, 2015 compared to year ended December 31, 2016
Revenues. Revenues totaled $293.6 million in 2016 as compared with $349.4 million in 2015, a decrease of $55.8 million, or 16.0%. Revenues in India decreased to $80.2 million in 2016 from $106.0 million in 2015 mainly due to a completion of a significant rollout phase in the network of one of our customers. Revenues in the Africa region decreased to $19.9 million in 2016, from $35.0 million in 2015 primarily due to a slowdown in microwave solutions procurement of a customer group in this region. The global decline in commodity and oil prices have led to a decline in economic growth in the African continent, reducing demand for telecommunications infrastructure. Revenues in the APAC region decreased to $29.7 million in 2016 from $31.9 million in 2015. Revenues in Europe decreased to $43.5 million in 2016 from $48.6 million in 2015. Revenues in North America decreased to $40.2 million in 2016 from $45.9 million in 2015. Revenues in Latin America decreased to $80.1 million in 2016 from $82.3 million in 2015.
Cost of Revenues. Cost of revenues totaled $194.5 million in 2016 as compared with $246.5 million in 2015, a decrease of $52.0 million, or 21%, attributed mainly to:
| · | lower direct material and services costs primarily resulting from lower volume of revenues; |
| · | lower other direct and supply chain costs primarily resulting from lower volume of revenues; and |
| · | the Company'sCompany’s continued product-cost improvement. |
Gross Profit. Gross profit as a percentage of revenues increased to 33.8% in 2016 from 29.5% in 2015. This increase is mainly attributed to product cost improvement as well as pursuing a more selective deal approach.
Research and Development Expenses, Net. Our net research and development expenses totaled $21.7 million in 2016 as compared with $22.9 million in 2015, a decrease of $1.2 million, or 5.4% primarily as a result of decrease of $0.8 million in depreciation expenses, an increase of $0.8 million in OCS (Office of the Chief Scientist) IIA (Israel Innovation Authority)grants, a decrease of $0.6 million in stock based compensation expenses, partially offset by an increase of $1.0 million in salary and salary related expenses.
Our research and development efforts are a key element of our strategy and are essential to our success. We intend to maintain or slightly increase our commitment to research and development, and an increase or a decrease in our total revenue would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures. As a percentage of revenues, research and development expenses increased to 7.4% in 2016 compared to 6.6% in 2015.
Selling and Marketing Expenses. Selling and marketing expenses totaled $39.5 million in 2016 as compared with $40.8 million 2015, a decrease of $1.3 million, or 3.2%, resulting mainly from a decrease of $0.9 million in office expenses, a decrease of $0.6 million in depreciation expenses, a decrease of $0.3 million in travel expenses, partially offset by an increase of $0.5 million in salary and salary related expenses. As a percentage of revenues, selling and marketing expenses were increased to 13.5% in 2016 from 11.7% in 2015.
General and Administrative Expenses. General and administrative expenses totaled $20.4 million in 2016 as compared with $21.2 million in 2015, a decrease of $0.8 million, or 4.0%. This decrease is attributable primarily to a decrease of $1.5 million in doubtful debt expenses, a decrease of $0.4 million in IT expenses and a decrease of $0.4 million in depreciation expenses, partially offset by an increase in of $1.3 million in salary and salary related expenses and an increase of $0.2 million in stock based compensation expenses. As a percentage of revenues, general and administrative expenses increased to 6.9% in 2016 from 6.1% in 2015.
Restructuring costs. There were no restructuring costs in 2016 as compared with $1.2 million in 2015. Restructuring costs in 2015 were related to completion of the 2014 restructuring plan.
Other income. Other income for 2015 and 2016 included $4.8 million and $1.9 million, respectively, related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition.
Financial expenses, Net. Financial expenses, net totaled $6.3 million in 2016 as compared with $14.7 million in 2015, a decrease of $8.4 million. This decrease is primarily attributable to a decrease in financial expenses incurred from the re-measurement of assets denominated in or linked to the U.S. dollar in the amount of $6.3 million, mainly related to the change of $3.9 million in the devaluation of assets and liabilities in local currency in Venezuela from $3.0 million in 2015, to appreciation of $0.9 million in 2016, related to currency fluctuations in Venezuela and Venezuelan government limitations on payments for imported goods on foreign currency, in addition to a $1.9 million decrease in bank charges and interest on loans, mainly related to the significant repayment of loans during the year. As a percentage of revenues, financial expenses, net decreased to 2.1% in 2016 compared to 4.2% in 2015.
Taxes on income. Taxes on income, totaled $1.8 million in 2016 as compared with $5.8 million in 2015, a decrease of $4.0 million, mainly attributed to the decrease in our deferred tax expenses of $1.6 million, due to a significant deferred tax assets utilization in 2015, and decrease in FIN 48exposures reserves of $2.8 million, related to a relative change in our tax exposures, partially offset by an increase of $0.3 million in our current taxes on income, primarily due to our sales and distribution subsidiaries, where the local activities were more profitable.
Net profit. In 2016 the company had $11.4 million in net profit as compared with net profit of $1.0 million in 2015. As a percentage of revenues, net profit increased to 4% in 2016 from a loss of 0.3% in 2015. The increase in net profit was mainly attributable to the decrease in our operating expenses and to the decrease in our financial and tax expenses.
Year ended December 31, 2014 compared to year ended December 31, 2015
Revenues. Revenues totaled $349.4 million in 2015 as compared with $371.1 million in 2014, a decrease of $21.7 million, or 5.8%. Revenues in India increased to $106.0 million in 2015 from $92.1 million in 2014 primarily due to an increase in microwave solutions investment by several customers, the majority driven by a single customer, offset by a decrease in revenue from our 2014 primary customer due to completion of a major deployment cycle. Revenues in the Africa region decreased to $34.6 million in 2015, from $56.0 million in 2014 primarily due to a slowdown in microwave solutions procurement of a customer group in this region. Revenues in the APAC region decreased to $32.0 million in 2015 from $42.1 million in 2014 primarily due to a completion of deployment cycles several customers. Revenues in Europe decreased to $48.6 million in 2015 from $58.5 million in 2014 partially due to the erosion of the Euro against the U.S. Dollar. Revenues in North America increased to $45.9 million in 2015 from $40.4 million in 2014. Revenues in Latin America increased slightly to $82.3 million in 2015 from $82.1 million in 2014.
Cost of Revenues. Cost of revenues totaled $246.5 million in 2015 as compared with $286.7 million in 2014, a decrease of $40.2 million, or 14%, mainly attributed to:
| · | Lower direct material costs primarily resulting from lower volume of revenues; |
| · | The Company's continued product-cost improvement; and |
| · | Lower employee costs primarily as a result of the 2014 restructuring plan. |
Gross Profit. Gross profit as a percentage of revenues increased to 29.5% in 2015 from 22.8% in 2014. This increase is mainly attributed to product cost improvement as well as pursuing a more selective deal approach.
Research and Development Expenses, Net. Our net research and development expenses totaled $22.9 million in 2015 as compared with $35.0 million in 2014, a decrease of $12.1 million, or 34.5%, which is primarily attributed to a decrease of approximately $7.8 million in salary and salary related expenses, primarily as a result of the 2014 restructuring plan, a decrease of $0.9 million in subcontractors expenses, a decrease of $0.9 million in stock based compensation expenses, a decrease of $0.6 million in depreciation and an increase of $0.7 million in grants. As a percentage of revenues, research and development expenses decreased to 6.6% in 2015 compared to 9.4% in 2014.
Selling and Marketing Expenses. Selling and marketing expenses totaled $40.8 million in 2015 as compared with $56.1 million 2014, a decrease of $15.3 million, or 27.2%, resulting mainly from a decrease of approximately $10.5 million in salary and related expenses, primarily due to the 2014 restructuring plan, a decrease of $3.0 million in sales and agent commission expenses primarily attributed to a decrease in revenue and a decrease of $1.2 million in travel expenses. As a percentage of revenues, selling and marketing expenses were decreased to 11.7% in 2015 from 15.1% in 2014.
General and Administrative Expenses. General and administrative expenses totaled $21.2 million in 2015 as compared with $23.7 million in 2014; a decrease of $2.5 million, or 10.2%. This decrease is primarily attributable to a decrease of $1.9 million in salary, and salary related expenses, primarily due to the 2014 restructuring plan, a decrease of $0.7 million in IT subcontractor expenses, $0.6 million decrease in legal and consulting expenses, $0.4 million related to liquidation of one of the Company's subsidiaries in 2014 and a decrease of $0.5 million in stock based compensation expenses, partially offset by an increase in doubtful debt expenses of $2.2 million. As a percentage of revenues, general and administrative expenses decreased to 6.0% in 2015 from 6.1% in 2014.
Restructuring costs. Restructuring costs totaled $1.2 million in 2015 as compared with $6.8 million in 2014, a decrease of $5.6 million, or 82%. These costs are related to completion of the 2013 and 2014 restructuring plan.
Other income. Other income for 2015 included $4.8 million related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition. Other income for 2014 included $16.8 million related to a settlement agreement with Eltek ASA related to the Nera Acquisition and $3.0 million related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition.
Financial expenses, Net. Financial expenses, net totaled $14.7 million in 2015 as compared with $37.9 million in 2014, a decrease of $23.2 million. This decrease is primarily attributable to a decrease in financial expenses incurred from the re-measurement of assets denominated in or linked to the U.S. dollar and devaluation of assets and liabilities in local currency in Venezuela from $26.6 million in 2014, to $3 million in 2015, due to currency devaluation in Venezuela and Venezuelan government limitations on payments for imported goods in foreign currency. As a percentage of revenues, financial expenses, net decreased to 4.2% in 2015 compared to 10.2% in 2014.
Taxes on income. Taxes on income, totaled $5.8 million in 2015 as compared with $6.5 million in 2014, a decrease of $0.7 million, mainly attributed to the decrease in deferred tax expenses of $7.7 million. This amount was offset by an increase in tax expenses, net related to direct tax exposures of approximately $5.9 million, primarily due to a tax income of $4.8 million, related to expiration of pre-acquisition tax provisions, which was recorded in 2014, and an increase of $1.0 million in our current taxes on income, primarily due to sales and distribution subsidiaries, where the local activities are profitable.
Net profit (loss). In 2015 the Company had a $1.0 million net profit as compared with a net loss of $76.5 million in 2014. As a percentage of revenues, net profit increased to 0.3% in 2015 from loss of 20.6 % in 2014. The increase in net profit was mainly attributable to the improvement in our gross profit and the decrease in our operating expenses, which were mainly attributable to the 2014 restructuring plan and to the decrease in our financial expenses, mainly due to the reduction of the re-measurement and devaluation effect in Venezuela.
Impact of Currency Fluctuations
The majority of our revenues are denominated in U.S. dollars, and to a lesser extent, in Euro, INR (Indian Rupee), Euro, and in other currencies. Our cost of revenues are primarily denominated in U.S. dollars as well, while a major part of our operating expenses are in New Israeli Shekel (NIS), and to a lesser extent, in Indian INR (Indian Rupee), Euro, NOK (Norwegian Kroner), BRL (Brazilian Real) and other currencies. We anticipate that a material portion of our operating expenses will continue to be in NIS.
Fluctuation in the exchange rates between any of these currencies (other than U.S. dollars) and the U.S. dollar could significantly impact our results of operations as well as the comparability of these results in different periods. Even in cases where our revenues or our expenses in a certain currency are relatively modest, high volatility of the exchange rates with the U.S. dollar can still have a significant impact on our results of operations. For example, in recent years we have suffered a significant adverse impact on our financial results due to fluctuation in the exchange rates of the U.S. dollar compared to the NGN (Nigerian Naira), the ARS (Argentine Peso) and the VEB (Venezuelan bolivar.Bolivar). We partially reduce this currency exposure by entering into hedging transactions. The effects of foreign currency re-measurements are reported in our consolidated statements of operations. For a discussion of our hedging transactions, please see Item 11."”QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK."”
Transactions and balances in currencies other than U.S. dollars are re-measured into U.S. dollars according to the principles in ASC topic 830, "Foreign“Foreign Currency Matters."” Gains and losses arising from re-measurement are recorded as financial income or expense, as applicable.
Effects of Government Regulations and Location on the Company'sCompany’s Business
For a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see "Information“Information on the Company – Business Overview – Conditions in Israel"Israel” in Item 4 and the "Risks“Risks Relating to Israel"Israel” as well as the Risk Factor "“Our international operations expose us to the risk of fluctuation in currency exchange rates and restrictions related to cash repatriation"” in Item 3, above.
B. Liquidity and Capital Resources
Since our initial public offering in August 2000, we have financed our operations primarily through the proceeds of that initial public offering, follow-on offerings and royalty-bearing grants from the OCS. In the initial public offering, we raised $97.8 million. In follow-on public offerings completed in December 2007, November 2013 and August 2014, we raised net amounts of $88.3 million $35.0 million and $45.1 million, respectively. Through December 31, 2006, we received a total of $21.0 million in grants from the OCS.IIA.
In March 2013, the Company entered intowas provided with a revolving credit facilityCredit Facility (as defined in 4.4 of ITEM 19) by four financial institutions. The Credit Facility was renewed and amended several times during the past years according to Company’s needs and financial position.
In December 2016, the Company signed an amendment to its agreement with the four financial institutions (the "Lenders"),to increase the allowed discounting activities of receivables received under whichletters of credit from one of its customers to $94 million in addition to the existing $20 million receivables factoring limit.
In March 2017, the Company signed a sumfurther amendment to its agreement with three of upthe four financial institutions to extend the Credit Facility repayment date to March 31, 2018. One of the four bank had to terminate its participation in the agreement because of regulatory constraints and its share in the Credit Facility was re-distributed by the other three on a pro-rata basis. In addition, the Credit Facility for bank guarantees was increased to $ 40.250.2 million. Other change adjusted the fees and interest spread to the same levels of the original agreement from March 2013.
As of December 31, 2017, the Company has not utilized any of the $50 million wascredit line available for short term loans. During 2017, the credit lines carry interest rates in the formrange of Libor+3.0% and Libor+3.4%.
In February 2018, the Company signed a further amendment to its agreement with the three financial institutions to increase the bank guarantees and $73.5credit lines by $15 million to a total of $65.2 million.
In March 2018, the Company signed an amendment to the agreement in the formframe of loans.which, the fourth bank returned to the consortium after resolving some regulatory matters that caused it to terminate its participation in the consortium in March 2017, and the Credit Facility was redistributed between the consortium members. The amendment extends the Credit Facility by 2 years and 3 months, till June 30, 2020. This extension is subject to the Company achieving a positive operating profit in 2018, otherwise the agreement replaced allwill only be extended by 1 year and 3 months. Furthermore, the amendment includes an additional increase in bank guarantees credit lines of $20 million, to $85.2 million, a decrease in the Company's previousCredit Facility for Loans of $10 million to $40 million, a decrease in allowed letter of credit facilities. Each Lender operated its own portiondiscounting activities with one customer from $94 million to $50 million, and additional $10 million of allowed factoring of invoices with another specific customer. The existing $20 million receivables factoring permitted under the credit facility.agreement, has remained unchanged. The amendment also includes reduced fees and interest spread as compared with the March 2017 amendment.
The credit facilityCredit Facility is secured by a floating charge over all Company assets as well as several customary fixed charges on specific assets, and was subject to certainassets.
Repayment could be accelerated by the financial covenants.
The Lenders are able to accelerate repaymentsinstitutions in certain events of default including in insolvency events, failure to comply with financial covenants or an event in which a change ofcurrent or future shareholder acquires control (as defined under the Israel Securities Law) of the Company.
During 2014The credit agreement contains financial and 2015other covenants requiring that the Company amended its credit facility arrangements. The loan facility was reduced graduallymaintains, among other things, minimum shareholders' equity value and financial assets, a certain ratio between our shareholders' equity and the total value of our assets on our balance sheet, a certain ratio between our net financial debt to $50 millioneach of our working capital and adjustments were made to several financial covenants, interest rates and fees in lightaccounts receivable. As of the Company's performance during that period of time. In addition the Company was allowed to discount a letter of credit from one of its customers up to $54 million which was in addition to an existing $20 million receivables factoring limit.
In March 2016 the agreement with the Lenders was extended until MarchDecember 31, 2017 and in December 2016, the Company signed another amendment tomet all of its agreement with the Lenders to increase the allowed discounting activities of letter of credit to $94 million.covenants.
In March 2017 the Company signed an additional amendment to its agreement with the Lenders to extend the credit facility repayment date to March 31, 2018. Under this amendment, one of the four banks had to terminate its participation in the agreement because of regulatory constraints and its share in the credit facility was re-distributed by the other three on a pro-rata basis. In addition, the credit facility for bank guarantees was increased to $50.2 million. Other change adjusted the fees and interest spread to the same levels of the original agreement from March 2013, reflecting the Company's return to profitability.
In the past few years we have initiated several restructuring plans - during the fourth quarter of 2012 we initiated a restructuring plan to improve our operating efficiency and during the fourth quarter of 2013 we initiated a restructuring plan to reduce operational costs. The restructuring costs in 2013 amounted to $9.3 million. In December 2014, we announced a significant new restructuring of our operations to reduce our operational costs. The restructuring costs in 2014 amounted to $6.8 million. In the first quarter of 2015 we incurred additional restructuring costs in a sum of $1.2 million, related to the 2014 restructuring plan. All three restructuring plans referred to above contributed significantly to the reduction in our operating expenses for the years ended 2014, 2015 and 2016. In the year ended December 31, 20162017 our capital expenditures were $8.2$10.9 million, primarily for the development of our new IP-20 product family and its production lines.
As of December 31, 2016, our debt from financial institutions amounted to $17.0 million.
As of December 31, 2016,2017, we had approximately $36.3$25.9 million in cash and cash equivalents, out of which $0.4$0.7 million is located in Venezuela. It may be difficult to transfer foreign currency outside of Venezuela due to foreign currency restrictions. In addition, due to the major devaluation of the Venezuelan Bolivar relative to the U.S. dollar during the first quarter of 2018, we expect to record approximately $0.7 million of forex expenses in the first quarter of 2018, related to the erosion of our cash balances in Venezuela.
As of December 31, 2016,In 2017, our $17.2 million in cash investments were comprised entirely of short-term, highly liquid investments with original maturities of up to three months. Most of these investments are in U.S. dollars.provided by operating activities was affected by the following principal factors:
| · | our net income of $15.6 million; |
| · | $9.2 million of depreciation and amortization expenses; |
| · | $3.4 million increase in trade payables and accrued expenses, net; |
| · | $2.6 million increase in deferred revenues paid in advance; and |
| · | $1.2 million stock-based compensation expenses |
These factors were offset by:
| · | a $8.6 million increase in inventories; and |
| · | a $6.7 million increase in trade and other receivables. |
In 2016, our $25.8 million in cash provided by operating activities was affected by the following principal factors:
| · | our net income of $11.4 million; |
| · | a $15.7$15.8 million decrease in trade and other receivables, net; |
| · | $10.0 million of depreciation and amortization expenses; and |
| · | a $4.7 million decrease in inventories. |
These factors were offset by:
| · | a $11.4$11.6 million decrease in trade payables and accrued expenses, net; and |
| · | a $6.2 million decrease in deferred revenues paid in advance. |
In 2015, our $16.1 million in cash provided by operating activities was affected by the following principal factors:
| · | our net income of 1.0 million; |
| · | a $40.2$38.2 million decrease in trade and other receivables, net; |
| · | $12.2 million of depreciation and amortization expenses; and |
| · | a $10.2 million decrease in inventories. |
These factors were offset by:
| · | a $41.5$39.6 million decrease in trade payables and accrued expenses, net; and |
| · | a $8.8 million decrease in deferred revenues paid in advance. |
In 2014, our $32.3 million in cash used in operating activities was affected by the following principal factors:
| · | our net loss of $76.5 million; and |
| · | a $22.6 million increase in trade and other receivables, net. |
These factors were offset by:
| · | a $14.8 million impairment of goodwill; |
| · | $13.5 million of depreciation and amortization expenses; |
| · | a $9.7 million increase in deferred revenues paid in advance; |
| · | a $8.9 million increase in trade payables and accrued expenses, net; and |
| · | a $9.8 million decrease in deferred tax asset. |
Net cash used in investing activities was approximately $10.9 million for the year ended December 31, 2017, as compared to net cash used in investing activities of approximately $8.2 million for the year ended December 31, 2016, as compared toand net cash used in investing activities of approximately $4.7 million for the year ended December 31, 2015, and net cash used in investing activities of approximately $7.5 million for2015. In the year ended December 31, 2014.2017, our purchase of property and equipment amounted to $8.5 million in addition to purchase of intangible assets of $1.4 million and our investment in long term bank deposits of $1.0 million. In the year ended December 31, 2016, our purchase of property and equipment of $8.2 million and our investment in marketable securitiesshort term bank deposits of $0.2 million, were partially offset by proceeds from maturities of short-term bank deposits of $0.2 million. In the year ended December 31, 2015 our purchase of property and equipment of $5.3 million, were partially offset by proceeds from maturities of short-term bank deposits of $0.4 million. In the year ended December 31, 2014 our purchase of property and equipment of $12.7 million were partially offset by proceeds from sales of marketable securities of $5.2 million.
Net cash used in financing activities was approximately $17.8$16.7 million for the year ended December 31, 20162017, as compared to approximately $15.8$17.8 million net cash used in financing activities for the year ended December 31, 20152016 and net cash provided byused in financing activities of $38.8$15.8 million for the year ended December 31, 2014.2015. In the year ended December 31, 2017, our net cash used in financing activities was primarily due to our repayment of a bank loan of $17.0 million. In the year ended December 31, 2016, our net cash used in financing activities was primarily due to our repayment of a bank loan of $17.9 million. In the year ended December 31, 2015, our net cash used in financing activities was primarily due to our repayment of a bank loan of $16.0 million. In the year ended December 31, 2014, our proceeds from issuance of shares, net of $45.1 million and proceeds from financial institutions of $22.7 million were partially offset by repayment of a bank loan of $29.0 million.
For more details concerning the Company'sCompany’s commitments, please see below ITEM 5. "OPERATING“OPERATING AND FINANCIAL REVIEW AND PROSPECTS - F. Tabular Disclosure of Contractual Obligations."”
Our capital requirements are dependent on many factors, including working capital requirements to finance the business activity of the Company, and the allocation of resources to research and development, marketing and sales activities. We plan on continuing to raise capital as we may require, subject to changes in our business activities.
We believe that current cash and cash equivalent balances together with the credit facilityCredit Facility available with the Lendersfour financial institutions, will be sufficient for our requirements through at least the next 12 months.
C. Research and Development
We place considerable emphasis on research and development to improve and expand the capabilities of our existing products, to develop new products (with particular emphasis on equipment for emerging IP-based networks) and to lower the cost of producing both existing and future products. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we maintain close relationships with our customers to identify market needs and to define appropriate product specifications. In addition, we intend to continue to comply with industry standards and, in order to participate in the formulation of European standards, we are full members of the European Telecommunications Standards Institute.
Our research and development activities are conducted mainly at our facilities in Tel Aviv, Israel, and also at our subsidiaries in Greece and Romania. As of December 31, 2016,2017, our research, development and engineering staff consisted of 204218 employees. Our research and development team includes highly specialized engineers and technicians with expertise in the fields of millimeter-wave design, modem and signal processing, data communications, system management and networking solutions.
Our research and development department provides us with the ability to design and develop most of the aspects of our proprietary solutions, from the chip-level, including both ASICs and RFICs, to full system integration. Our research and development projects currently in process include extensions to our leading IP-based networking product lines and development of new technologies to support future product concepts. In addition, our engineers continually work to redesign our products with the goal of improving their manufacturability and testability while reducing costs.
Our research and development expenses were approximately $25.7 million or 7.7% of revenues in 2017, $21.7 million or 7.4% of revenues in 2016, and $22.9 million or 6.6% of revenues in 2015, and $35.0 million or 9.4% of revenues in 2014.2015.
Intellectual Property
For a description of our intellectual property see Item 4. "INFORMATION“INFORMATION ON THE COMPANY – B. Business Overview - Intellectual Property."”
D. Trend Information
For a description of the trend information relevant to us see discussions in Parts A and B of Item 5."”OPERATING AND FINANCIAL REVIEW AND PROSPECTS."”
E. Off Balance Sheet Arrangements
We are not 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 liabilities.
F. Tabular Disclosure of Contractual Obligations
| | Payments due by period (in thousands of dollars) | | | Payments due by period (in thousands of dollars) | |
Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Operating lease obligations1 | | | 8,326 | | | | 4, 612 | | | | 3,557 | | | | 157 | | | | | | | 10,007 | | | | 4,918 | | | | 4,873 | | | | 216 | | | | |
Purchase obligations2 | | | 23,126 | | | | 23,126 | | | | | | | | | | | | | | | 36,600 | | | | 36,600 | | | | | | | | | | | | |
Other long-term commitment3 | | | 4,622 | | | | | | | | | | | | | | | | 4,622 | | | | 4,626 | | | | 177 | | | | 1,946 | | | | | | | | 2,503 | |
Uncertain income tax positions4 | | | 3,939 | | | | | | | | | | | | | | | | 3,939 | | | | 2,160 | | | | | | | | | | | | | | | | 2,160 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 40,013 | | | | 27,738 | | | | 3,557 | | | | 157 | | | | 8,561 | | | | 53,393 | | | | 41,695 | | | | 6,819 | | | | 216 | | | | 4,663 | |
(1) | Consists of operating leases for our facilities and for vehicles. |
(2) | Consists of all outstanding purchase orders for our products from our suppliers. |
(3) | Our obligation for accrued severance pay under Israel'sIsrael’s Severance Pay Law as of December 31, 20162017 was approximately $6.8$7.9 million, of which approximately $4.6$5.5 million was funded through deposits in severance pay funds, leaving a net commitment of approximately $2.2$2.4 million. In addition, the commitment includes a net amount of approximately $2.4$2.2 million in pension accruals in other subsidiaries, mainly in Norway. |
(4) | Uncertain income tax position under ASC 740-10, "Income“Income Taxes,"” are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 13g of our Consolidated Financial Statements for further information regarding the Company'sCompany’s liability under ASC 740-10. |
Effect of Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, in Notes to the Consolidated Financial Statements in Item 8 of Part II of this Report, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, which is incorporated herein by reference.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. | A. | Directors and Senior Management |
The following table lists the name, age and position of each of our current directors and executive officers:
Name | Age | Position |
Zohar Zisapel | 6869
| Chairman of the Board of Directors |
Ira Palti | 5960
| President and Chief Executive Officer |
Doron Arazi | 5354
| Deputy Chief Executive Officer & Chief Financial Officer |
Nurit Kruk-Zilca | 4344
| Executive Vice President, Human Resources |
Yuval Reina | 5051
| Executive Vice President, Global Products |
Oz Zimerman | 5354
| Executive Vice President, Global Corporate Development |
Flavio Perrucchetti | 4950
| Regional President, Europe |
Ram Prakash Tripathi | 5051
| Regional President, India |
Amit Ancikovsky | 4647
| Regional President, Latin America & Africa |
Charles Meyo | 5354
| Regional President, North America |
Shlomo Liran(2) | 6667
| Director |
Yael Langer | 5253
| Director |
Yair E. Orgler(1)(2) | 77
| Director |
Avi Patir | 6878
| Director |
(1) External director
(2) Independent director
Set forth below is a biographical summary of each of the above-named directors and executive officers.
Zohar Zisapel has served as the Chairman of our Board of Directors since we were incorporated in 1996. Mr. Zisapel is also a founder and a director of RAD Data Communications Ltd., of which he served as CEO from January 1982 until January 1998 and as chairman from 1998 until 2012. Mr. Zisapel also serves as a director of RADCOM Ltd. and Amdocs Limited, both public companies traded on NASDAQ. Mr. Zisapel founded or invested in many companies in the fields of Communications, Cyber Security and Automotive and serves as chairman or director of severalmany private companies. Mr. Zisapel received a B.Sc. and a M.Sc. in electrical engineering from the Technion, Haifa Institute of Technology ("Technion"(“Technion”) and an M.B.A. from the Tel Aviv University.
Ira Palti has served as our President and Chief Executive Officer since August 2005. From January 2003 to August 2005, Mr. Palti was Chief Executive Officer of Seabridge Ltd., a Siemens company that is a global leader in the area of broadband services and networks. Prior to joining Seabridge, he was the Chief Operating Officer of VocalTec Communications Ltd., responsible for sales, marketing, customer support and product development. Among the positions he held before joining VocalTec was founder of Rosh Intelligent Systems, a company providing software maintenance and AI diagnostic solutions and one of the first startups in Israel. Mr. Palti received a B.Sc. in mathematics and computer science (magna cum laude) from the Tel Aviv University.
Doron Arazi has served as our Executive Vice President and Chief Financial Officer since 2014. During 2016 Mr. Arazi was appointed as Deputy CEO while continuing to carry the role of Chief Financial Officer. Mr. Arazi joined Ceragon as CFO after a long, successful career with Amdocs where he managed the business relationship with a U.S. Tier 1 mobile operator and was responsible for hundreds of employees. Prior to Amdocs, Mr. Arazi looked after the financial and growth activities of other high-tech companies in the telecommunications sector, including serving as CFO of Allot Communications and VP of Finance at Verint. Mr. Arazi is a CPA and holds a B.A. degree in Economics and Accounting as well as an MBA degree focusing on Finance and Insurance, both from the Tel Aviv University.
Nurit Kruk-Zilca has served as our Executive Vice President, Human Resources since April 2014. From July 2005 until March 2014, Ms. Kruk-Zilca served in various positions in our human resources department, the last one as VP Global HR, responsible for all human resources. From 2000 until July 2005 she was a talent acquisition and sourcing specialist for Intel Israel. Ms. Kruk-Zilca received a B.A. in Leadership & Education and an M.A. in Organizational Sociology from the Tel Aviv University.
Yuval Reina has served as our Executive Vice President Global Products and Services since joining Ceragon in 2015. He is responsible for the conception, creation and delivery of leading-edge wireless backhaul solutions. With more than 25 years in management of large-scale, multidisciplinary projects and sizeable R&D organizations, Mr. Reina brings a wide breadth of experience along with a sharp focus on innovation and product delivery. Mr. Reina holds a B.Sc. (cum laude) in Electrical Engineering and a M.Sc. (summa cum laude) in Management from the Ben-Gurion University.
Oz Zimerman has served as our Executive Vice President Global Corporate Development since 2014. He joined the company in March 2013. Oz brings with him over 20 years of global executive business experience in sales, marketing and business development. From 2008 to 2012, Mr. Zimerman was Corporate VP Marketing and Business Development at DSP Group (DSPG), where he was responsible for leading the company's overall marketing activities, M&A and supporting its worldwide expansion. Prior to joining DSP Group, Oz was VP Marketing at Comverse, where he led global positioning and developed partnerships. Before joining Comverse, he was VP Channels Sales, Business Development and Strategic Marketing at ECI Telecom, and prior to his work at ECI, he was Engagement Manager at Shaldor, a leading management consulting firm. Mr. Zimerman holds a B.Sc. in Industrial Engineering & Management from NYU University (summa cum laude) and a Master'sMaster’s degree in Business Administration & Industrial Engineering from Columbia University.
Flavio Perrucchetti has served as our Regional President, Europe since 2015. Mr. Perrucchetti joined Ceragon in August 2011 from SIAE Microelettronica, where he was the Head of Sales & Marketing for Europe from 2007. Prior to that, he was engaged for more than 20 years in sales, marketing and management activities in the telecommunications market, including as the Head of Sales for Europe & Key Accounts Manager for Italy for a major telecom service provider, and as Head of International Sales & Marketing for a major microwave manufacturer where was responsible for Latin America, the Far East and Northern Europe. Mr. Perrucchetti holds a M.Sc. in Biology and also participated in graduate studies in Environmental Chemistry at the Università degli Studi di Milano.
Ram Prakash Tripathi has served as our Regional President, India since 2002. Prior to joining Ceragon, Mr. Tripathi held senior managerial positions at several companies including Stratex and Reliance, and has over 20 years of experience in the telecommunications industry. Mr. Tripathi holds a B.Sc. in Electronics & Communication Engineering from the Dr. Babasaheb Ambedkar University, in Aurangabad, Maharashtra, India.
Amit Ancikovsky has served as our Regional President, Latin America since 2013 and has also assumed the position of Regional President Africa in 2015. Prior to joining Ceragon, Mr. Ancikovsky held a number of management positions at Airspan Networks Inc., including President of Sales & Products. Before that, Mr. Ancikovsky served as the Chief Financial Officer and Head of Business Development for Gilat Networks Latin America, a world leader in VSAT technologies. Mr. Ancikovsky holds a B.A. in Accounting and Economics and an LL.B. from the Hebrew University in Jerusalem.
Charles (Chuck) Meyo has served as our Regional President, North America since 2012. Prior to joining Ceragon, Mr. Meyo served as Vice President of Global Channels and Americas Sales at Narus, Inc. and thereafter worked within the Boeing Defense, Space and Security division (following the acquisition of Narus, Inc. by the Boeing Company in 2011). Prior to that, Mr. Meyo was the Sales Vice President of the IBM Global Accounts and Alliances organization at Avaya and held a variety of successful sales and management roles at Lucent Technologies and AT&T. Mr. Meyo holds a B.A. and B.Sc. from the Ohio State University in Columbus, Ohio.
Shlomo Liran joined Ceragon'sCeragon’s Board of Directors in August 2015, after gaining experience in senior management positions, including in the telecommunication industry. In October 2016 Mr. Liran was appointed as the CEO of Spuntech Industries Ltd. From July 2014 until January 2015, Mr. Liran served as the Chief Executive Officer of Hadera Paper Ltd. From 2010 to 2013, Mr. Liran served as the Chief Executive Officer of Avgol Nonwovens Ltd. During the years 2008 and 2009 Mr. Liran served as the Chief Executive Officer of Ericsson Israel Ltd., and from 2004 to 2007 he served as Chief Executive Officer of TRE (Scandinavian cellular network) in Sweden and in Denmark. From 2000 to 2003, he served as Chief Executive Officer of YES Satellite Multi-Channel TV. Prior to that, Mr. Liran spent thirteen years in Strauss as CEO (1995-2000), General Manager of the Dairy Division (1991-1995) and VP Operations (1987-1991). Mr. Liran holds a B.Sc. in Industrial Engineering from the Technion, an M. Eng. System Analysis from University of Toronto, Canada and an AMP-ISMP advanced management program from the Harvard Business School. Mr. Liran is one of our independent directors and is considered a "financial expert" for the purposes of the Nasdaq Rules.
Yael Langer has served as our director since December 2000. Ms. Langer served as our general counsel from July 1998 until December 2000. Ms. Langer is General Counsel and Secretary of RAD Data Communications Ltd. and other companies in the RAD-BYNET group. Since July 2009, Ms. Langer serves as a director in Radware Ltd. From December 1995 to July 1998, Ms. Langer served as Assistant General Counsel to companies in the RAD-BYNET group. From September 1993 until July 1995, Ms. Langer was a member of the legal department of Poalim Capital Markets and Investments Ltd. Ms. Langer received an LL.B. from the Hebrew University in Jerusalem.
Yair E. Orgler has served as our external director since March 2007. Prof. Orgler is Professor Emeritus at the Leon Recanati Graduate School of Business Administration, Tel Aviv University (the "Recanati School"“Recanati School”). From 1996 to June 2006, Prof. Orgler was Chairman of the Board of the Tel-Aviv Stock Exchange. From 2001 to 2004, he was President of the International Options Markets Association (IOMA). Prof. Orgler serves as a director at Atidim-High Tech Industrial Park Ltd. and Gazit-Globe Ltd. OtherPrevious public positions held by Prof. Orgler in recent years include: director at Israel Chemicals Ltd. (until September 2015), director at Bank Hapoalim, B.M.; director at Discount Investment Corporation Ltd., Founder and Chairman of "Maalot"“Maalot”, Israel'sIsrael’s first securities rating company; Chairman of the Wage Committee of the Association of University Heads in Israel; Chairman of the Executive Council of the Academic College of Tel-Aviv-Yafo; and member of the Board of the United States-Israel Educational Foundation (USIEF). Previous academic positions held by Prof. Orgler include: Vice Rector of the Tel-Aviv University and before that Dean of the Recanati School. For over 20 years he was the incumbent of the Goldreich Chair in International Banking at the Tel-Aviv University and served frequently as a Visiting Professor of Finance at the Kellogg Graduate School of Management, Northwestern University. Prof. Orgler holds a Ph.D. and M.A. in industrial administration from Carnegie Mellon University, a M.Sc. in industrial engineering from University of Southern California and a B.Sc. in industrial engineering from the Technion. Prof. Orgler is one of our independent directors for the purposes of the Nasdaq Rules and one of our external directors for purposes of the Companies Law.
Avi Patir has served as our external director since March 2007. Mr. Patir is the CEO of a privately owned consulting company (Patir Consultants). From 2007 to 2013 he served as Senior Vice President and CTO at Hot Mobile Ltd. (previously MIRS Communications Ltd.), a wholly-owned subsidiary of HOT Telecommunication. From 2004 to 2006, Mr. Patir served as the Group COO and Head of the Wireline Division of "Bezeq" – The Israel Telecommunication Corp. Limited ("Bezeq"), Israel's national telecommunications provider. From 2003 to 2004, Mr. Patir was President and CEO of American Israel Paper Mills Ltd., a manufacturer and marketer of paper and paper products. From 1996 to 2003, he was the President and CEO of Barak International Telecommunication Corporation Ltd., a leading provider of international telecommunications services in Israel, and from 1992 to 1996, he was Executive Vice President Engineering and Operations at Bezeq. Mr. Patir has been a board member of, among others, Bezeq International, Pelephone Communications Ltd. and Satlink Communications Ltd. Mr. Patir holds a M.Sc. in electrical and electronic engineering from Columbia University and a B.Sc. in electrical and electronic engineering from the Technion. He is also a graduate of the Kellogg-Recanati executive management program of the Tel Aviv University. Mr. Patir is one of our independent directors for the purposes of the Nasdaq Rules and one of our external directors for purposes of the Companies Law.
Arrangements Involving Directors and Senior Management
There are no arrangements or understandings of which we are aware relating to the election of our directors or the appointment of executive officers in our Company. In addition, there are no family relationships among any of the individuals listed in this Section A (Directors and Senior Management).
| a) | Aggregate Executive Compensation |
During 2016,2017, the aggregate compensation paid by us or accrued on behalf of all persons listed in Section A above (Directors and Senior Management), and other directors and executive officers who served as such during the year 20162017 and have terminated their service with us, consisted of approximately $3.5$3.7 million in salary, fees, bonuses, commissions and directors' fees and approximately $0.4$0.35 million in amounts set aside or accrued to provide pension, retirement or similar benefits, but excluding amounts expended for automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to our officers and other fringe benefits commonly reimbursed under local practices or paid by companies in Israel.
During 2016,2017, we granted to our directors and executive officers, in the aggregate, options to purchase 676,668779,164 ordinary shares and 62,500 restricted share units (“RSU’s”) under our Amended and Restated Share Option and RSU Plan. No restricted share units (RSUs) were granted during 2016. The exercise price of the options ranges from $1.14$2.08 to $2.41$3.62 per share. Share options will expire 6 years after their date of grant.
We have a performance-based bonus plan, which includes our executive officers. The plan is based on our overall performance, the particular unit performance, and individual performance. A non-material portion of the performance objectives of our executive officers are qualitative. The measurable performance objectives can change year over year, and are a combination of financial parameters, such as revenues, booking, gross profit, regional operating profit, operating income, net income and collection. The plan of our executive officers is reviewed and approved by our Compensation Committee and Board of Directors annually (and with respect to our CEO, also by our shareholders), as are any bonus payments to our executive officers made under such plan.
Our threetwo independent directors are compensated in accordance with regulations promulgated under the Companies Law concerning the remuneration of external directors (the "Remuneration Regulations"“Remuneration Regulations”). Our independent directors are also reimbursed for expenses and are awarded share options, as further described below. We pay each of our independent directors, for their service as directors and their participation in each meeting of the Board or Board's committees, the "Minimum"Minimum Amount" of the annual and participation fees as set forth in the Remuneration Regulations, based on the classification of the Company according to the size of its capital; currentlyAs of February 1, 2018 – the sum of NIS 52,05961,068 (approximately $13,588)$17,614) as annual fee and the sum of NIS 1,8392,156 (approximately $480)$622) as an in-person participation fee, NIS 1,1041,294 (approximately $288)$373) for conference call participation and NIS 9201,078 (approximately $240)$311) for participating in a written resolution. These cash amounts are subject to an annual adjustment for changes in the Israeli consumer price index and to an annual adjustment in accordance with the classification of the Company according to the size of its capital. For more information, please see "“Remuneration of Directors"” and "“The Share Option Plan"” below and Note 14 to our consolidated financial statements included as Item 18 in this annual report.
As consideration for their contributions and efforts as independent directors of the Company, in August 2015 our shareholders approved, in addition to the above-mentioned cash remuneration, annual equity grants to Mr. Shlomo Liran, Mr. Yair E. Orgler and Mr. Avi Patir (who served as our external and independent director until his death in addition to the above-mentioned cash remuneration,January 2018), with respect to their three-year terms of service, as follows:service. Such equity grants included options to purchase 50,000 Ordinary Shares, one-third of which were granted, on the date of the original appointment, or re-appointment, as applicable for each such director, with an additional one third, which were granted upon the first anniversary thereof and the remaining options which shall bewere granted upon the second anniversary thereof; i.e., for Mr. Liran, 16, 66716,667 options were granted on August 11 of each of, 2015, 16,667 additionaland 2016 and the remaining 16,666 options were granted on August 11, 2016 and the remaining 16,666 options shall be granted on August 11, 2017, provided that he is still a director of the Company at the time of such last grant.2017. For each of Mr. Patir and Mr. Orgler, 16,667 options were granted on March 25 of each of 2016 (the commencement date of their fourth term of service) - and 2017 and the remaining 16,666 options shall be granted to Mr. Orgler on March 25, 2018, as Mr. Patir’s service -as director was terminated in January 2018; see below under C. Board Practices - "External Directors"), 16,667 additional options have been granted on March 25, 2017 and the remaining 16,666 options shall be granted on March 25, 2018; Provided that each of them is still a director of the Company at the time of such respective grant..
AsFurther, as remuneration for their contribution and efforts as directors of the Company, in August 2015 our shareholders approved annual equity grants to Mr. Zohar Zisapel and Ms. Yael Langer, with respect to their three-year terms of service, as follows:
· to Zohar Zisapel, Chairman of the Board of Directors, options to purchase 150,000 Ordinary Shares, one-third of which were granted on August 11, 2015, the date of his re-appointment, an additional one third of which were granted upon the first anniversary thereof, with the remaining options to be granted on the second anniversary thereof (i.e., 50,000 options are to be granted on August 11 2017), provided he is still a director of the Company at the time such last grant. | · | to Zohar Zisapel, Chairman of the Board of Directors, options to purchase 150,000 Ordinary Shares, one-third of which were granted on August 11 of each of 2015, 2016 and 2017. The Compensation Committee and Board of Directors believed it would be appropriate to compensate Mr. Zisapel with the grant of an increased number of options in comparison to the number of options granted to the other members of the Board considering, among others, the considerable amount of time required from him to fulfill his Board activities as a Chairman and his long-term contribution to the Company's success. |
· to Yael Langer, a director of the Company, options to purchase 50,000 Ordinary Shares, one-third of which (16,667 options) were granted on August 11, 2015, the date of her re-appointment, an additional one third of which were granted on the first anniversary thereof, and the remaining options to be granted on the second anniversary thereof (i.e., 16,667 options to be granted on August 11, 2017), provided she is still a director of the Company at the time of such last grant. | · | to Yael Langer, a director of the Company, options to purchase 50,000 Ordinary Shares, one-third of which were granted on August 11 of each of 2015, 2016 (16,667 options) and 2017 (16,666 options). |
All options granted each year, as detailed above, vest on their date of grant. The exercise price of such options equals to the average closing price of the Company'sCompany’s Shares on the Nasdaq Global Select Market for the period of thirty (30) consecutive trading days immediately preceding the date of grant. These grants were made and will be made under the Company's Amended and Restated Share Option and RSU Plan and under the Capital Gains Route of Section 102(b)(2) of the Israeli Income Tax Ordinance (the "Ordinance"“Ordinance”), except for the options granted to Zohar Zisapel, Chairman of the Board of Directors, which are granted under Section 3(i) of the Ordinance.
| b) | Individual Compensation of Office Holders |
The following information describes the compensation of our five most highly compensated "officer“officer holders" (as such term is defined in the Companies Law); with respect to the year ended December 31, 2016.2017. The five individuals for whom disclosure is provided are referred to herein as "Covered“Covered Office Holders."” All amounts specified below are in terms of cost to the Company, as recorded in our financial statements, and are based on the following components:
| · | Salary Costs. Salary Costs include gross salary, benefits and perquisites, including those mandated by applicable law which may include, to the extent applicable to each Covered Office Holder's,Holder’s, payments, contributions and/or allocations for pension, severance, car or car allowance, medical insurance and risk insurance (e.g., life, disability, accidents), phone, convalescence pay, relocation, payments for social security, and other benefits consistent with the Company's guidelines. |
| · | Performance Bonus Costs. Performance Bonus Costs represent bonuses granted to the Covered Office Holder'sHolder’s with respect to the year ended December 31, 2016,2017, paid in accordance with the Covered Office Holder'sHolder’s performance of targets as set forth in his bonus plan, as well as a proportionate amount of a retention bonus that is related to the reported year, and approved by the Company's Compensation Committee and Board of Directors. |
| · | Equity Costs represent the expense recorded in our financial statements for the year ended December 31, 2016,2017, with respect to equity-based compensation granted in 20162017 and in previous years. For assumptions and key variables used in the calculation of such amounts see note 14c of our audited consolidated financial statements. |
| (1)· | Ira Palti – CEO. Salary Costs - $334,138;$ 392,200; Performance Bonus Costs - $266,194;$288,255; Equity Costs - $287,002.$216,982. |
| (2)· | Doron Arazi – Deputy CEO & CFO. Salary Cost - $324,058; Performance Bonus Cost - $146,539; Equity Cost - $113,255. |
| · | Amit Ancikovsky – Regional President Latin America & Africa. Salary Costs - $293,931;$293,639; Performance Bonus Costs - $223,092;$265,093; Equity Costs - $15,435.$71,140. |
| (3) | Doron Arazi – Deputy CEO & CFO. Salary Cost - $ 257,679; Bonus Cost - $ 231,375; Equity Cost - $68,909.
|
| (4)· | Charles (Chuck) Meyo – Regional President North America. Salary Costs - $ 317,461;$319,259; Performance Bonus Costs - $173,855;$179,153; Equity Costs -$ 28,658.53,355. |
| (5)· | Flavio Perrucchetti – Regional President Europe. Salary Cost - $219,591;$385,525; Performance Bonus Cost - $80,322;$116,397; Equity Cost - $21,109.$52,128. |
C. Board Practices
Corporate Governance Practices
We are incorporated in Israel and therefore are generally subject to various corporate governance practices under the Companies Law, relating to matters such as external directors, audit committee (hereinafter referred to as "Corporate“Corporate Audit Committee"Committee”), compensation committee, internal auditor and approvals of interested partiesparties’ transactions. These matters are in addition to the ongoing listing conditions of the Nasdaq and other relevant provisions of U.S. securities laws. Under applicable Nasdaq Rules, a foreign private issuer (such as the Company) may generally follow its home country rules of corporate governance in lieu of the comparable Nasdaq Rules, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. See Item 3. "“KEY INFORMATION – Risk Factors – Risks Related to Our Ordinary Shares - As a foreign private issuer we are permitted to follow certain home country corporate governance practices, instead of applicable SEC and Nasdaq Rules, which may result in less protection than is afforded to investors under rules applicable to domestic issuers."” For information regarding home country rules followed by us see Item 16G. "CORPORATE“CORPORATE GOVERNANCE."”
General Board Practices
OurAs a result of the death of Mr. Avi Patir, on January 28, 2018, our Board of Directors presently consists of fivefour members, while the minimum number authorized byrequired under our Articles of Association. Association is five directors. We expect to regain compliance with this requirement shortly, with the appointment of new directors in our next general meeting of shareholders.
The Board of Directors retains all the powers in managing our Company that are not specifically granted to the shareholders. For example, for whatever purposes it deems fit, the board may decide to borrow money or may set aside reserves out of our profits.
The Board of Directors may pass a resolution when a quorum is present, and by a vote of at least a majority of the directors present when the resolution is put to vote. A quorum is defined as at least a majority of the directors then in office who are lawfully entitled to participate in the meeting but not less than two directors. The Chairman of the board is elected and removed by the board members. Minutes of the board meetings are recorded and kept at our offices.
The Board of Directors may, subject to the provisions of the Companies Law, appoint a committee of the Board and delegate to such committee all or any of the powers of the Board, as it deems appropriate. Notwithstanding the foregoing and subject to the provisions of the Companies Law, the Board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. Our Board of Directors has appointed a Corporate Audit Committee under the Companies Law, a Financial Audit Committee a Compensation Audit Committee (each of which has three members), a Compensation Committee and a Nomination Committee (which(each of which has two members).
Our Articles of Association provide that any director may appoint as an alternate director, by written notice to us, any individual who is qualified to serve as director and who is not then serving as a director or alternate director for any other director. An alternate director has all of the rights and obligations of a director, excluding the right to appoint an alternate for himself. Currently no alternate directors serve on our board.
Terms and Skills of Directors
Our directors, other than external directors, are elected at the annual general meeting of shareholders for a term ending on the date of the third annual general meeting following the general meeting at which they were elected, unless earlier terminated in the event of such director'sdirector’s death, resignation, bankruptcy, incapacity or removal. Accordingly, in the annualour next general meeting of shareholders held on August 11, 2015,(the “2018 Meeting”), our three serving directors (other than the(which are not external directors), were electedwill be proposed for re-election to serve until the date of the 20182021 annual general meeting of shareholders.
According to the Companies Law, a person who does not possess the skills required and the ability to devote the appropriate time to the performance of the office of director in a company, taking into consideration, among other things, the special requirements and size of that company, shall neither be appointed as a director nor serve as a director in a public company. A public company shall not summon a general meeting the agenda of which includes the appointment of a director, and a director shall not be appointed, unless the candidate has submitted a declaration that he or she possesses the skills required and the ability to devote the appropriate time to the performance of the office of director in the company, that sets forth the aforementioned skills and further states that the limitations set forth in the Companies Law regarding the appointment of a director do not apply in respect of such candidate.
A director who ceases to possess any qualification required under the Companies Law for holding the office of director or who becomes subject to any ground for termination of his/her office must inform the company immediately and his/her office shall terminate upon such notice.
Independent Directors
Under the Nasdaq Rules, the majority of our directors are required to be independent. The independence standard under the Nasdaq Rules excludes, among others, any person who is: (i) a current or former (at any time during the past three years) employee of the company or its affiliates; or (ii) an immediate family member of an executive officer (at any time during the past three years) of the company or its affiliates. Messrs. Yair Orgler Avi Patir and Shlomo Liran currently serve as our independent directors. Due to the recent death of Mr. Avi Patir, as of January 28, 2018, we temporarily do not comply with this particular requirement of the Nasdaq Rules. However, consistent with Listing Rules 6505(b)(1)(A), Nasdaq provided the Company with a cure period in order to regain compliance, until the earlier of the next annual shareholders’ meeting or January 28, 2019; or if the next annual shareholders’ meeting is held before July 27, 2018, then the Company must evidence compliance no later than this date. The Company intends to fill the vacancy and regain compliance immediately following its 2018 Meeting.
External Directors
Under the Companies Law, we are required to appoint at least two external directors. Each committee of a company'scompany’s board of directors, which is authorized to exercise the board of directors'directors’ authorities, is required to include at least one external director, and the corporate audit and compensation committees must include all of the external directors. A recent amendment to regulationsRegulations promulgated under the Companies Law allowsallow us, as a company whose shares are traded on Nasdaq, and does not have a controlling shareholder (within the meaning of the Companies Law) to exempt ourselves from the requirement to have external directors on our Board of Directors and from related obligations concerning such external directors imposed by the Companies Law concerning such external directors, provided that we continue to comply with applicable U.S. securities laws and Nasdaq listing rules. Implementation of such exemption will probably require shareholder approval and is not currently planned.
Qualification. To qualify as an external director, an individual or his or her relative, partner, employer, any person to whom such person is directly or indirectly subject to, or any entity under his or her control may not have, as of the date of appointment, or may not have had, during the previous two years, any affiliation with the company, any entity controlling the company on the date of the appointment or with any entity controlled, at the date of the appointment or during the previous two years, by the company or by its controlling shareholder and in a company that does not have a shareholder or an affiliated group of shareholders holding 25% or more of the company'scompany’s voting rights, such person may not have any affiliation with any person who, at the time of appointment or thereafter, is the chairman, the CEO, chief financial officer or a 5% shareholder of the company. In general, the term "affiliation"“affiliation” includes:
| · | an employment relationship; |
| · | a business or professional relationship maintained on a regular basis; |
| · | service as an "Office Holder"“Office Holder”; the term "Office Holder"“Office Holder” as defined in the Companies Law includes a director, the CEO, an executive vice president, a vice president, any other person fulfilling or assuming any of the foregoing positions without regard to such person'sperson’s title, and any manager who is directly subordinated to the CEO. |
"Control"“Control” is defined in the Israeli Securities Law as the ability to direct the actions of a company, excluding power that is solely derived from a position as a director of the company or any other position with the company; a person who holds 50% or more of the "controlling power"“controlling power” in the company (i.e., voting rights or the right to appoint a director or a general manager) is automatically considered to possess control.
In addition, no person can serve as an external director if the person'sperson’s position or other activities creates, or may create, a conflict of interest with the person'sperson’s responsibilities as an external director or may otherwise interfere with the person'sperson’s ability to serve as an external director. Until the lapse of two years from termination of office, a company or its controlling shareholder may not give any direct or indirect benefit to the former external director.
Election and Term of External Directors. External directors are elected by a majority vote at a shareholders'shareholders’ meeting, provided that either:
| · | the majority of the shares voted at the meeting, which are not held by controlling shareholders or shareholders with personal interest in approving the appointment (excluding personal interest not resulting from contacts with the controlling shareholder) ("Non-Related Votes"), not taking into account any abstentions, vote in favor of the election; or |
| · | the total number of Non-Related Votes, voting against the election of the external director, does not exceed two percent of the aggregate voting rights in the company. |
In a company in which, at the date of appointment of an external director, all the directors are of the same gender, the external director to be appointed shall be of the other gender.
An external director can be removed from office only by: (i) a special meeting of the shareholders, by the same majority of shareholders that is required to elect an external director; or (ii) a court, and provided that either: (a) the external director ceases to meet the statutory qualifications with respect to his or her appointment; or (b) the external director violates his or her duty of loyalty to the company. The court may also remove an external director from office if he or she is unable to perform his or her duties on a regular basis.
An external director who ceases to possess any qualification required under the Companies Law for holding the office of an external director must inform the company immediately and his/her office shall terminate upon such notice.
Each of ourAn external directorsdirector serves a three-year term, and may be re-elected to serve in this capacity for two additional terms of three years each. Thereafter, he or she may be re-elected by ourthe shareholders for additional periods of up to three years each, only if the Corporate Audit Committee, followed by the board, have approved the reelection, taking into consideration the expertise and special contribution of the external director to the work of the board and its committees, and determining that the appointment for a further term of service is beneficial to the Company.company.
Re-election of an external director may be effected through one of the following mechanisms:
| 1. | a shareholder holding one percent or more of a company's voting rights proposed the re-election of the nominee; |
| 2. | the board of directors proposed the re-election of the nominee and the election was approved by the shareholders by the majority required to appoint external directors for their initial term; or |
| 3. | the external director who is up for renewal has proposed himself or herself for re-election. |
With respect to mechanisms 1 and 3 above: (i) the re-election must be approved by a majority of the votes cast by the shareholders of the Company, excluding the votes of (a) controlling shareholders; and (b) shareholders who have a personal interest in approving such nomination resulting from their relations with the controlling shareholders; (ii) the re-election must include votes cast in favor of the re-election by such non-excluded shareholders constituting more than two percent of the voting rights in the Company; and (iii) the external director cannot be a related or competing shareholder or a relative of such a related or competing shareholder at the time of the appointment, and cannot have any affiliation with a related or competing shareholder, at the time of the appointment or within the two years preceding the appointment. A 'related‘related or competing shareholder'shareholder’ exists where: (a) a shareholder proposing the re-appointment or a shareholder holding 5% or more of the outstanding shares or voting rights of the company; and (b) at the time of the re-appointment, such shareholder, a controlling shareholder thereof or a company controlled by such shareholder or by a controlling shareholder thereof, either has business relationships with the Company or is a competitor of the Company.
Financial and Accounting Expertise. Pursuant to the Companies Law and regulations promulgated thereunder, (1) each external director must have either "accounting“accounting and financial expertise"expertise” or "professional“professional qualifications and (2) at least one of the external directors must have "accounting“accounting and financial expertise."” A director with "accounting“accounting and financial expertise"expertise” is a director whose education, experience and skills qualifies him or her to be highly proficient in understanding business and accounting matters and to thoroughly understand the Company'sCompany’s financial statements and to stimulate discussion regarding the manner in which financial data is presented. A director with "professional qualifications"“professional qualifications” is a person that meets any of the following criteria: (i) has an academic degree in economics, business management, accounting, law, public administration; (ii) has a different academic degree or has completed higher education in an area relevant to the Company'sCompany’s business or which is relevant to his or her position; or (iii) has at least five years'years’ experience in any of the following, or has a total of five years'years’ experience in at least two of the following: (A) a senior position in the business management of a corporation with substantial business activities; (B) a senior public position or a senior position in the public service; or (C) a senior position in the Company'sCompany’s main fields of business.
Compensation. An external director is entitled to compensation as provided in the Remuneration Regulations and is otherwise prohibited from receiving any other compensation, directly or indirectly, from the Company. For more information, please see "“Remuneration of Directors"” below.
Our External Directors. Yair Orgler and the late Avi Patir were initially appointed in 2006 as our external directors. Their terms began in March 2007 and in December 2009, and December 2012, at the respective annual general meeting of shareholders, Messrs. Orgler and Patir were re-appointed for second and third terms as external directors. In theour 2015 annual general meeting, held on August 11, 2016, the shareholders approved the extension of terms of service offor Messrs. Orgler and Patir for an additional period of three years each. These terms commencedeach, which began on March 25, 2016, following approvals by our Corporate Audit Committee and Board that such re-appointment was beneficial to the Company considering the expertise and special contribution each of Messrs. Orgler and Patir to the work of the Board and its committees. Our Board of Directors has determined that Prof. Orgler has the "accounting“accounting and financial expertise"expertise” and that Mr. Patir has the "professional qualifications"“professional qualifications” required by the Companies Law. As a result of the death of Mr. Patir, as of January 28, 2018, we only have one external director. We expect to regain compliance with these requirements, immediately following our 2018 Meeting.
Remuneration of Directors
Directors'Directors’ remuneration should be consistent with our compensation policy for office holders (see below) and generally requires the approval of the Compensation Committee, the Board of Directors and the shareholders (in that order).
Notwithstanding the above, under special circumstances, the Compensation Committee and the Board of Directors may approve an arrangement that deviates from our compensation policy, provided that such arrangement is approved by a special majority of the company'scompany’s shareholders, including (i) at least a majority of the shareholders, present and voting (abstentions are disregarded), who are not controlling shareholders and who do not have a personal interest in the matter, or (ii) the non-controlling shareholders and shareholders who do not have a personal interest in the matter who were present and voted against the matter hold two percent or less of the voting power of the Company.
According to the Remuneration Regulations, external directors are generally entitled to an annual fee, a participation fee for board or committee meetings and reimbursement of travel expenses for participation in a meeting which is held outside of the external director'sdirector’s place of residence. The minimum, fixed and maximum amounts of the annual and participation fees are set forth in the Remuneration Regulations, and are based on the classification of the Company according to the size of its capital. Remuneration of an external director in an amount which is less than the fixed annual fee or the fixed participation fee requires the approval of the Compensation Committee, the Board of Directors and the shareholders (in that order). A candidate for external directors must be informed about the terms of remuneration prior to his/her appointment and, subject to certain exceptions, these terms cannot be amended throughout the three-year period during which he or she is in office. A company may compensate an external director in shares or rights to purchase shares, other than convertible debentures which may be converted into shares, in addition to the annual and the participation fees, and the reimbursement of expenses, subject to certain limitations set forth in the Remuneration Regulations.
Additionally, according to other regulations promulgated under the Companies Law with respect to relief in approval of certain related party transactions (the "Relief Regulations"“Relief Regulations”), shareholders'shareholders’ approval for directors'directors’ compensation and employment arrangements is not required if both the compensation committee and the board of directors resolve that either (i) the directors'directors’ compensation and employment arrangements are solely for the benefit of the Company or (ii) the remuneration to be paid to any such director does not exceed the maximum amounts set forth in the regulations applicable to companies whose shares are traded outside of Israel. Further, according to the Relief Regulations, shareholders' approval for directors' compensation and employment arrangements is not required if (i) both the compensation committee and the board of directors resolve that such terms are not more beneficial than the former terms, or are essentially the same in their effect, and are in line with the company's compensation policy; and (ii) such terms are brought for shareholder approval at the next general meeting of shareholders.
Neither we nor any of our subsidiaries has entered into a service contract with any of our current directors that provides for benefits upon termination of their service as directors.
For a full discussion of the remuneration paid to our directors, including our external directors, see above in "B.“B. Compensation a) Aggregate Executive Compensation."”
Committees of the Board of Directors
Financial Audit Committee
In accordance with the Securities Exchange Act of 1934, rules of the SEC under the Exchange Act and under Nasdaq Rules, we are required to have an audit committee consisting of at least three directors, each of whom (i) is independent; (ii) does not receive any compensation from the Company (other than directors' fees); (iii) is not an affiliated person of the Company or any of its subsidiaries; (iv) has not participated in the preparation of the Company's (or subsidiary's) financial statements during the past three years; and (v) is financially literate and one of whom has been determined by the board to be the Corporate Audit Committeea financial expert. Currently, Messrs. Yair Orgler, Avi Patir and Shlomo Liran serve on our Financial Audit Committee, each of whom has been determined by the board to meet the Nasdaq standards described above. Mr. Liran is the chairman of our Financial Audit Committee and its financial expert (see Item 16A. "AUDIT“AUDIT COMMITTEE FINANCIAL EXPERT,"EXPERT” below).
As of January 28, 2018, the date of Mr. Patir’s death, we no longer comply with the requirement to have an audit committee consisting of at least three members. However, consistent with Nasdaq Rule 6505(c)(4), Nasdaq provided the Company a cure period in order to regain compliance until the earlier of the next annual shareholders’ meeting or January 28, 2019; or if the next annual shareholders’ meeting is held before July 27, 2018, then the Company must evidence compliance no later than this date. We plan to fill the vacancy and regain compliance with this requirement shortly, after the appointment of new independent directors in our 2018 Meeting.
We have adopted a Financial Audit Committee charter as required byunder the Nasdaq Rules. The duties and responsibilities of the Financial Audit Committee include: (i) recommending the appointment of the Company's independent auditor to the Board of Directors, determining its compensation and overseeing the work performed by it;(ii) pre-approving all services of the independent auditor; (iii) overseeing our accounting and financial reporting processes and the audits of our financial statements; and (iv) handling complaints relating to accounting, internal controls and auditing matters.
Corporate Audit Committee
Under the Companies Law, the board of directors of any Israeli public company whose shares are publicly traded must appoint an audit committee comprised of at least three directors and all the external directors. In addition, the majority of the members must meet certain independence criteria and may not include: (i) the chairman of the board; (ii) any controlling shareholder or any relative thereof; (iii) any director employed by or providing services on a regular basis to, the Company, a controlling shareholder or a company owned by a controlling shareholder; or (iv) any director whose main income is provided by a controlling shareholder ("Non-Permitted Members"Members"). The chairman of such audit committee must be an external director. OurAs a result of Mr. Patir’s death, our Corporate Audit Committee followsdoes not currently follow such composition requirements, although as a company whose shares are traded on Nasdaq, and does not have a controlling shareholder (within the meaning of the Companies Law), we are allowedexpect to exempt ourselves from suchregain compliance with these requirements, and only follow the composition requirements under the Nasdaq Listing Rules (see above). Messrs.immediately following our 2018 Meeting. Mr. Yair Orgler, our external director, and Avi PatirMr. Shlomo Liran, who serve as members of our two external directors. Both of them, as well as Mr. Shlomo Liran,Corporate Audit Committee, meet the independence criteria defined in the Companies Law. Mr. Orgler is the chairman of our Corporate Audit Committee.
The duties and responsibilities of our Corporate Audit Committee include: (i) identifying of irregularities and deficiencies in the management of our business, in consultation with the internal auditor and our independent auditor, and suggesting appropriate courses of action to amend such irregularities; (ii) reviewing and approving certain transactions and actions of the Company, including the approval of related party transactions that require approval by the audit committee under the Companies Law; defining whether certain acts and transactions that involve conflicts of interest are material or not and whether transactions that involve interested parties are extraordinary or not, and to approve such transactions; (iii) recommending the appointment of the internal auditor and its compensation to the Board of Directors; (iv) examining the performance of our internal auditor and whether it is provided with the required resources and tools necessary for him to fulfill its role, considering, inter alia, the Company's size and special needs; (v) setting procedures for handling complaints made by the Company's employees in connection with management deficiencies and the protection to be provided to such employees; and (vi) performing such other duties that are or will be designated solely to the audit committee in accordance with the Companies Law and the Company's Articles of Association.
Non-Permitted Members shall not attend Corporate Audit Committee meetings or take part in its decisions, unless the chairman of the Corporate Audit Committee has determined that such person is required for the presentation of a certain matter. Nevertheless, an employee who is not a controlling shareholder or a relative thereof, may be present at discussion of the committee, pursuant to the committee's request, and the company'scompany’s legal counsel and secretary, who are not controlling shareholders or relatives thereof, may be present during both the discussion and vote of the committee, pursuant to the committee's request.
The quorum for discussions and decisions shall be the majority of the members of the Corporate Audit Committee, provided that the majority of the members present meet the independence criteria set forth in the Companies Law, and at least one of them is an external director.
Compensation Committee
General. According to the Companies Law, the board of directors of any Israeli public company whose shares are publicly traded, must appoint a compensation committee, comprised of at least three directors, including all of the external directors. The majority of the compensation committee must be comprised of external directors and an external director who must serve as the chairman of the committee. The remaining members of the committee must satisfy the criteria for remuneration applicable to the external directors and qualified to serve as members of the audit committee pursuant to Companies Law requirements (Corporate Audit Committee), as described above (the "Compensation Committee Qualifications"). Our “Compensation Committee isQualifications”). Until January 28, 2018, our Compensation Committee was comprised of our (then) two external directors, Messrs. Yair Orgler and Avi Patir, as well as our independent director, Mr. Shlomo Liran, whose remuneration is similaridentical to the remuneration paid to our external directors. Mr. Patir isserved as the Chairman of our Compensation Committee. As a result of Mr. Patir’s death, our Compensation Committee does not currently comply with the Compensation Committee Qualifications, and we expect to regain compliance with such qualifications shortly, immediately following our 2018 Meeting.
The Compensation Committee is responsible for: (i) making recommendations to the Board of Directors with respect to the approval of the compensation policy (see below) and any extensions thereto; (ii) periodically reviewing the implementation of the compensation policy and providing the Board of Directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with respect to the terms of office and employment of office holders; and (iv) determining whether or not to exempt under certain circumstances a transaction with a candidate for CEO, who is not affiliated with the Company or its controlling shareholders, from shareholder approval, and provided that the terms approved are consistent with the compensation policy.
In addition, our Compensation Committee administers our Amended and Restated Share Option and RSU Plan. The Board has delegated to the Compensation Committee the authority to grant options and RSUs under this plan and to act as the share incentive committee pursuant to this plan, provided that such grants are within the framework determined by the Board, and that the grant of equity compensation to our office holders is also approved by our board.
The attendance and participation in the meetings of the Compensation Committee is subject to the same limitations that apply to the Corporate Audit Committee.
The quorum for discussions and decisions is the majority of the Compensation Committee members, provided that the majority of the members present are independent directors and at least one of them is an external director.
Under Nasdaq Rules, the compensation payable to our executive officers must be determined or recommended to the board for determination either by a majority of the independent directors on the board, in a vote in which only independent directors participate, or by a compensation committee comprised solely of independent directors, subject to certain exceptions. We generally follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our Compensation Committee, office holder compensation, and any required approval by the shareholders of such compensation. (see also under Item 16G. "CORPORATE GOVERNANCE"“CORPORATE GOVERNANCE”).
Under recent amendments to the Companies Law and regulations promulgated there under: (a) an Israeli public company whose shares are traded on Nasdaq, and does not have a controlling shareholder (within the meaning of the Companies Law), is permitted to exempt itself from the above-mentioned composition requirements set forth under the Companies Law with respect to audit committee and compensation committee set forth under the Companies Law, and to follow only the composition requirements under the Nasdaq Listing Rules. As of the date of this report, we have not elected to apply such exemption;Rules; and (b) an Israeli public company may elect to have its audit committee carry out all the duties and responsibilities conferred by the Companies Law upon the compensation committee, provided that such audit committee meets the Compensation Committee Qualifications. Although our Audit Committee meetsAs we currently do not comply with the Compensation Committee Qualifications, asin February 2018 our Board of the date of this report, we have notDirectors has elected to adopttake a temporary exemption from the Companies Law composition requirements with respect to compensation committee, and to follow the composition requirements set forth under the Nasdaq Listing Rules, until such change, and did not combine these two committees.time when the Company regains compliance with the Compensation Committee Qualifications.
Nomination Committee
The Nasdaq Rules require that director nominees be selected or recommended for the board'sboard’s selection either by a nomination committee composed solely of independent directors, or by a majority of independent directors, in a vote in which only independent directors participate, subject to certain exceptions. Our two external (and independent)independent directors, Mr. PatirOrgler and Mr. Orgler,Liran, are the members of our Nomination Committee, which recommends director nominees for our board's approval.
Approval of Office Holders Terms of Employment
The terms of office and employment of office holders (other than directors and the CEO) require the approval of the Compensation Committeecompensation committee and then of the board of directors, provided such terms are in accordance with the Company'scompany's compensation policy. If terms of employment of such officer are not in accordance with the compensation policy, then shareholder approval is also required. However, in special circumstances the compensation committee and then the board of directors may nonetheless approve such terms of office and employment even if they were not approved by the shareholders, following a further discussion and for detailed reasoning.
The terms of office and employment of thea CEO, regardless of whether such terms conform to the Company's compensation policy, must be approved by the Compensation Committee,compensation committee, the board of directors and then by a special majority of the shareholders, including: (i) a majority of the shareholders, present and voting (abstentions are disregarded), who are not controlling shareholders and who do not have a personal interest in the matter; or (ii) the non-controlling shareholders and shareholders who do not have a personal interest in the matter who were present and voted against the matter hold two percent or less of the voting power of the Company.
Notwithstanding the above, in special circumstances the Compensation Committeecompensation committee and then the Boardboard of Directorsdirectors may nonetheless approve compensation for the CEO, even if such compensation was not approved by the shareholders, following a further discussion and for detailed reasoning. In addition, under certain circumstances, a company may be exempt from receiving shareholder approval with respect to the terms of office and employment of a candidate for the position of CEO.
Amendment of existing terms of office and employment of office holders, including chief executive officers, who are not directors, requiresrequire the approval of the Compensation Committeecompensation committee only, if the Compensation Committeecompensation committee determines that the amendment is not material.
The terms of office and employment of our directors, regardless of whether such terms conform to the Company'scompany's compensation policy, must be approved by the Compensation Committee,compensation committee, the Boardboard of Directorsdirectors and then by the shareholders, but, in case that such terms are inconsistent with the company's compensation policy, such shareholders' approval must be obtained by the special majority detailed above with respect to the CEO.
However, and as referred to above with respect to remuneration of directors, according to the Relief Regulations, a company's Compensation Committeecompensation committee and Boardboard of Directorsdirectors are permitted to approve terms of office and employment of a CEO or of a director, without convening a general meeting of shareholders, provided however, that such terms: (i) are not more beneficial than the former terms, or are essentially the same in their effect; (ii) are in line with the Compensation Policy;company’s compensation policy; and (iii) are brought for shareholder approval at the next general meeting of shareholders.
Compensation Policy
As required by the Companies Law, our shareholders, following the approval of the Boardboard of Directorsdirectors and the recommendations of the Compensation Committee,compensation committee, approved and adopted a compensation policy which was last revised in August 2015.2012. The compensation policy was revised in 2015 and a further revision is going to be brought for shareholder approval in the 2018 Meeting (the “Compensation Policy”). The Compensation Policy sets forth the Company'sCompany’s policy regarding the terms of office and employment of office holders, including compensation, equity awards, severance and other benefits, exemption from liability and indemnification, and which takes into account, among other things, providing proper incentives to directors and officers, management of risk by the Company, the officer'sofficer’s contribution to achieving corporate objectives and increasing profits, and the function of the officer or director. The policyCompensation Policy provides our Compensation Committee and our Board of Directors with adequate measures and flexibility to tailor each of our office holder'sholder’s compensation package based, among other matters, on geography, tasks, role, seniority and capability. Moreover, the policyit is intended to motivate our office holders to achieve ongoing targeted results in addition to a high level of business performance in the long term, all without encouraging excessive risk taking.
TheUntil 2016, the Companies Law originally required that all variable compensation of office holders be based on measurable criteria, except for a non-material portion thereof. Accordingly, ourthe Compensation Policy allows for a non-substantial portion of up to 20% of the bonus objectives for each year to be based on non-measurable criteria, and if and to the extent permissible pursuant to the Companies Law - our Compensation Committee and Board of Directors (and with respect to our CEO and directors with the approval of our shareholders as well) - may increase the portion of targets that are based on non-measurable criteria above the rate of 20%, up to the maximum portion permissible pursuant to the Companies Law, but not to more than 50%. An amendment to the Companies Law fromSince 2016, allows 100% of the variable compensation of office holders, who are not directors or the CEO, tomay be based on non-measurable criteria. The amendment further clarified thatcriteria, and the variable compensation of directors and chief executive officers should still be based on measurable criteria, but with the CEO and directors that does not exceed threeexception of a non-substantial portion of up to 3 monthly base salaries, is considered to be non-material for the purpose thereof.salaries. Accordingly, as of 2016, our Compensation Committee and Board of Directors now have the authority to increase the portion of the targets of our office holders (who are not directors and CEO), that are based on non-measurable criteria, - to 50%.
Approval of Certain Transactions with Related Parties
The Companies Law requires the approval of the corporate audit committee or the compensation committee, thereafter, the approval of the board of directors and in certain cases the approval of the shareholders, in order to effect specified actions and extraordinary transactions such as the following:
| · | transactions with office holders and third parties, where an office holder has a personal interest in the transaction; |
| · | employment terms of office holders; and |
| · | extraordinary transactions with controlling parties, and extraordinary transactions with a third party where a controlling party has a personal interest in the transaction, or any transaction with the controlling shareholder or his relative regarding terms of service provided directly or indirectly (including through a company controlled by the controlling shareholder) and terms of employment (for a controlling shareholder who is not an office holder). A "relative"“relative” is defined in the Companies Law as spouse, sibling, parent, grandparent, descendant, spouse'sspouse’s descendant, sibling or parent and the spouse of any of the foregoing. |
Further, such extraordinary transactions with controlling shareholders require the approval of the corporate audit committee or the compensation committee, the board of directors and the majority of the voting power of the shareholders present and voting at the general meeting of the company (not including abstentions), provided that either:
| · | the majority of the shares of shareholders who have no personal interest in the transaction and who are present and voting, not taking into account any abstentions, vote in favor; or |
| · | shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than two percent of the aggregate voting rights in the company. |
Any shareholder participating in the vote on approval of an extraordinary transaction with a controlling shareholder must inform the company prior to the voting whether or not he or she has a personal interest in the approval of the transaction, and if he or she fails to do so, his or her vote will be disregarded.
Further, such extraordinary transactions as well as any transactions with a controlling shareholder or his relative concerning terms of service or employment need to be re-approved once every three years, provided however that with respect to certain such extraordinary transactions the corporate audit committee may determine that a longer duration is reasonable given the circumstances related thereto and such extended period has been approved by the shareholders.
In accordance with regulations promulgated under the Companies Law, certain defined types of extraordinary transactions between a public company and its controlling shareholder(s) are exempt from the shareholder approval requirements.
The approval of the corporate audit committee, followed by the approval of the board of directors and the shareholders, is required to effect a private placement of securities, in which either: (i) 20% or more of the company'scompany’s outstanding share capital prior to the placement is offered, and the payment for which (in whole or in part) is not in cash, in tradable securities registered in a stock exchange or not under market terms, and which will result in: (a) an increase of the holdings of a shareholder that holds 5% or more of the company'scompany’s outstanding share capital or voting rights; or (b) will cause any person to become, as a result of the issuance, a holder of more than 5% of the company'scompany’s outstanding share capital or voting rights; or (ii) a person will become a controlling shareholder of the company.
A "controlling party"“controlling party” is defined in the Israeli Securities Law and in the Companies Law, for purposes of the provisions governing related party transactions, as a person with the ability to direct the actions of a company but excluding a person whose power derives solely from his or her position as a director of the company or any other position with the company, and with respect to approval of transactions with related parties also a person who holds 25% or more of the voting power in a public company if no other shareholder owns more than 50% of the voting power in the company, and provided that two or more persons holding voting rights in the company, who each have a personal interest in the approval of the same transaction, shall be deemed to be one holder for the purpose of evaluating their holdings with respect to approvals of transactions with related parties.
Compensation committee approval is also required (and thereafter, the approval of the board of directors and in certain cases – the approval of the shareholders) to approve the grant of an exemption from the responsibility for a breach of the duty of care towards the company, for the provision of insurance and for an undertaking to indemnify any office holder of the company; see below under "“Exemption, Insurance and Indemnification of Directors and Officers."”
Duties of Office Holders and Shareholders
Duties of Office Holders
Fiduciary Duties. The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and officers. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty includes avoiding any conflict of interest between the office holder's position in the company and his personal affairs, avoiding any competition with the company, avoiding the exploitation of any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company's affairs which the office holder has received due to his position as an office holder.
The company may approve an action by an office holder from which the office holder would otherwise have to refrain due to its violation of the office holder'sholder’s duty of loyalty if: (i) the office holder acts in good faith and the act or its approval does not cause harm to the company, and (ii) the office holder discloses the nature of his or her interest in the transaction to the company a reasonable time before the company'scompany’s approval.
Each person listed in the table under "Directors“Directors and Senior Management"Management” above is considered an office holder under the Companies Law.
Disclosure of Personal Interests of an Office Holder. The Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may have and all related material information and documents known to him or her relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse'sspouse’s siblings, parents and descendants and the spouses of any of these people, or any corporation in which the office holder: (i) holds at least 5% of the company'scompany’s outstanding share capital of voting rights; (ii) is a director or general manager; or (iii) has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction that is either: (i) not in the ordinary course of business; (ii) not on market terms; or (iii) likely to have a material impact on the company'scompany’s profitability, assets or liabilities.
In the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure requirements, only board approval is required unless the articles of association of the company provide otherwise. The transaction must be for the benefit of the company. If a transaction is an extraordinary transaction, or a with respect to terms of office and employment, then, in addition to any approval stipulated by the articles of association, it also must be approved by the company's audit committee (or with respect to terms of office and employment, the compensation committee) and then by the board of directors, and, under certain circumstances, by a meeting of the shareholders of the company. A director who has a personal interest in a transaction, may be present if a majority of the members of the board of directors or the audit committee (or with respect to terms of office and employment, the compensation committee), as the case may be, has a personal interest. If a majority of the board of directors has a personal interest, then shareholders'shareholders’ approval is also required.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty toto: (i) act in good faith toward the company and other shareholdersshareholders; and to(ii) refrain from abusing his or her power in the company, including, among other things, voting in a general meeting of shareholders onwith respect to the following matters: (a) any amendment to the articles of association,association; (b) an increase of the company's authorized share capital,capital; (c) a mergermerger; or (d) approval of interested party transactions which require shareholders' approval.
In addition, any controlling shareholder, or any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty but states that the remedies generally available upon a breach of contract, will also apply in the event of a breach of the duty of fairness, taking into account such shareholder's position.
Exemption, Insurance and Indemnification of Directors and Officers
Pursuant to the Companies Law and the Israeli Securities Law, the Israeli Securities Authority ("ISA"(“ISA”) is authorized to impose administrative sanctions, including monetary fines, against companies like ours and their officers and directors for certain violations of the Israeli Securities Law or the Companies Law (for further details see in "“Administrative Enforcement"” below); and the Companies Law provides that companies like ours may indemnify their officers and directors and purchase an insurance policy to cover certain liabilities, if provisions for that purpose are included in their articles of association.
Our Articles of Association allow us to indemnify and insure our office holders to the fullest extent permitted by law.
Office Holders' Exemption
Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, for a breach of his or her duty of care (except in connection with distributions), provided that the articles of association allow it to do so. Our Articles of Association allow us to exempt our office holders to the fullest extent permitted by law.
Office Holders'Holders’ Insurance
Our Articles of Association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of all or part of the liability of any of our office holders imposed on the office holder in respect of an act or omission performed by him or her in his or her capacity as an office holder, for, in respect ofregarding each of the following:
| · | a breach of his or her duty of care to us or to another person; |
| · | a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice our interests; |
| · | a financial liability imposed upon him or her in favor of another person; andand/or |
| · | any other event, occurrence or circumstance in respect of which we may lawfully insure an office holder. |
Without derogating from the aforementioned, subject to the provisions of the Companies Law and the Israeli Securities Law, we may also enter into a contract to insure an office holder, in respect of expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder or payment required to be made to an injured party, pursuant to certain provisions of the Israeli Securities Law.
Office Holder's Indemnification
Our Articles of Association provide that, subject to the provisions of the Companies Law and the Israeli Securities Law, we may indemnify any of our office holders in respect offor an obligation or expense specified below, imposed on or incurred by the office holder in respect of an act or omission performed in his or her capacity as an office holder, as follows:
| · | a financial liability imposed on him or her in favor of another person by any judgment, including a settlement or an arbitration award approved by a court. |
| · | reasonable litigation expenses, including attorney'sattorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against him by a competent authority which concluded without the filing of an indictment against him and without the imposition of any financial liability in lieu of criminal proceedings, or which concluded without the filing of an indictment against him but with the imposition of a financial liability in lieu of criminal proceedings concerning a criminal offense that does not require proof of criminal intent or in connection with a financial sanction (the phrases "proceeding“proceeding concluded without the filing of an indictment"indictment” and "financial“financial liability in lieu of criminal proceeding"proceeding” shall have the meaning ascribed to such phrases in section 260(a)(1a) of the Companies Law); |
| · | reasonable litigation expenses, including attorneys'attorneys’ fees, expended by an office holder or charged to the office holder by a court, in a proceeding instituted against the office holder by the Company or on its behalf or by another person, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of an offense that does not require proof of criminal intent; |
| · | expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder, or payment required to be made to an injured party, pursuant to certain provisions of the Securities Law; andand/or |
| · | any other event, occurrence or circumstance in respect of which we may lawfully indemnify an office holder. |
The Company may undertake to indemnify an office holder as aforesaid: (a) prospectively, provided that, in respect of the first act (financial liability) the undertaking is limited to events which in the opinion of the Board of Directors are foreseeable in light of the Company'sCompany’s actual operations when the undertaking to indemnify is given, and to an amount or criteria set by the Board of Directors as reasonable under the circumstances, and further provided that such events and amount or criteria are set forth in the indemnification undertaking; and (b) retroactively.
Limitations on Insurance and Indemnification
The Companies Law provides that a company may not exculpateexempt or indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:
| · | a breach by the office holder of his or her duty of loyalty, except that the company may enter into an insurance contract or indemnify an office holder if the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
| · | a breach by the office holder of his or her duty of care, if such breach was intentional or reckless, but unless such breach was solely negligent; |
| · | any act or omission intended to derive an illegal personal benefit; or |
| · | any fine levied against the office holder. |
In addition, under the Companies Law, exculpationexemption and indemnification of, and procurement of insurance coverage for, our office holders must be approved by our Compensation Committee and our Board of Directors and, with respect to an office holder who is CEO or a director, also by our shareholders. However, according to the Relief Regulations, shareholders' approvalshareholders’ and Board approvals for the procurement of directors'such insurance iscoverage are not required if the insurance policy is approved by our Compensation Committee and: (i) the terms of such policy are within the framework for insurance coverage as approved by our shareholders and set forth in our compensation policy;Compensation Policy; (ii) the premium paid under the insurance policy is at fair market value; and (iii) the insurance policy does not and may not have a substantial effect on the Company'sCompany’s profitability, assets or obligations.
Our Insurance and Indemnification
Indemnification letters, covering indemnification and insurance of those liabilities imposed under the Companies Law and the Israeli Securities Law, as discussed above, were granted to each of our present office holders and were approved for any future office holders. Hence, we indemnify our office holders to the fullest extent permitted under the Companies Law.
We currently hold directors'directors’ and officers'officers’ liability insurance policy for the benefit of our office holders, which includeincluding our directors. This policy was approved by our Compensation Committee, after confirming that its terms are within the framework set forth for insurance coverage under our compensation policy.
Compensation Policy and adhere to the other requirements set forth in the Relief Regulations, as mentioned above.
Insofar as indemnification for liabilities arising under the United States Securities Act of 1933, as amended, may be permitted to our directors, officers and controlling persons, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Administrative Enforcement
The Israeli Securities Law includes an administrative enforcement procedure to be used by the Israeli Securities Authority,ISA, to enhance the efficacy of enforcement in the securities market in Israel. This administrative enforcement procedure may be applied to any company or person (including director, officer or shareholder of a company) performing any of the actions specifically designated as breaches of law under the Israeli Securities Law. Furthermore, the Israeli Securities Law requires that the CEO of a company supervise and take all reasonable measures to prevent the company or any of its employees from breaching the Israeli Securities Law.such law. The CEO is presumed to have fulfilled such supervisory duty if the company adopts internal enforcement procedures designed to prevent such breaches, appoints a representative to supervise the implementation of such procedures and takes measures to correct the breach and prevent its reoccurrence.
As detailed above, under the Israeli Securities Law, a company cannot obtain insurance against or indemnify a third party (including its officers and/or employees) for any administrative procedure and/or monetary fine (other than for payment of damages to an injured party). The Israeli Securities Law permits insurance and/or indemnification for expenses related to an administrative procedure, such as reasonable legal fees, provided that it is permitted under the company's articles of association.
We have adopted and implemented an internal enforcement plan to reduce our exposure to potential breaches of sections in the Companies Law and in the Israeli Securities Law.Law applicable to us. Our Articles of Association and letters of indemnification permit, among others, insurance and/or indemnification as contemplated under the Israeli Securities Law (see "“Exculpation, Insurance and Indemnification of Directors and Officers" above).
Internal Auditor
Under the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor proposed by the corporate audit committee (see under "“Committees of the Board of Directors"” – "“Corporate Audit Committee"”, above). The internal auditor may be an employee of the company but may not be an interested party, an office holder or a relative of the foregoing, nor may the internal auditor be the company'scompany’s independent accountant or its representative. The role of the internal auditor is to examine, among other things, whether the company'scompany’s conduct complies with applicable law, integrity and orderly business procedure. The internal auditor has the right to request that the chairman of the corporate audit committee convene a corporate audit committee meeting, and the internal auditor may participate in all corporate audit committee meetings.
We have appointed the firm of Chaikin, Cohen, Rubin & Co., Certified Public Accountants (Isr.) as our internal auditor. Our internal auditor meets the independence requirements of the Companies Law, as detailed above.
As of December 31, 2016,2017, we had 903905 employees worldwide, of whom 204218 were employed in research, development and engineering, 513465 in sales and marketing including supporting functions, 81116 in management and administration and 105106 in operations. Of these employees, 329353 were based in Israel, 4946 were based in the United States, 216207 were based in EMEA (not including Israel), 196204 were based in Latin America and 11395 were based in Asia Pacific.
In addition, during 2017 we have employed on average 215 temporary employees, primarily in India, supporting the projects we have won in this country. The majority of the costs of these temporary employees were included in the cost of revenues in our financial statements.
We and our Israeli employees are not parties to any collective bargaining agreements. However, with respect to such employees, we are subject to Israeli labor laws, regulations and collective bargaining agreements applicable to us by extension orders of the Israeli Ministry of Social Affairs and Social Services, as are in effect from time to time. Generally, we provide our employees with benefits and working conditions above the legally required minimums.
Israeli law generally and applicable extension orders require severance pay upon the retirement or death of an employee or termination without due cause, payment to pension funds or similar funds in lieu thereof and require us and our employees to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Such amounts also include payments by the employee for mandatory health insurance.
Substantially all of our employment agreements include employees'employees’ undertakings with respect to non-competition, assignment to us of intellectual property rights developed in the course of employment and confidentiality. However, it should be noted that the enforceability of non-competition undertakings is rather limited under the local laws in certain jurisdictions, including Israel.
To date, we have not experienced labor-related work stoppages and believe that our relations with our employees are good.
The employees of our other subsidiaries are subject to local labor laws and regulations that vary from country to country. In certain locations such as Brazil and Norway we are a party to collective bargaining agreements.
Share Ownership
The following table sets forth certain information regarding the ordinary shares owned, and stock options held, by our directors and senior management as of March 28, 2017.27, 2018. The percentage of outstanding ordinary shares is based on 77,837,60778,130,978 ordinary shares outstanding as of March 28, 2017.27, 2018.
Name | | Number of Ordinary Shares(1) | | | Percentage of Outstanding Ordinary Shares | | | Number of Stock Options Held (2) | | | Range of exercise prices per share of stock options | | | Number of RSUs Held (2) | | | Number of Ordinary Shares(1) | | | Percentage of Outstanding Ordinary Shares | | | Number of Stock Options Held(2) | | | Range of exercise prices per share of stock options | | | Number of RSUs Held(2) | |
Zohar Zisapel(3) | | | 10,838,341 | | | | 13.9 | | | | 300,000 | | | $ | 1.08 - $11.75 | | | | - | | | | 10,888,341 | | | | 13.9 | | | | 350,000 | | | $ | 2.02 - $11.75 | | | | - | |
Ira Palti | | | 1,003,253 | | | | 1.3 | | | | 1,470,000 | | | $ | 1.16 - $13.04 | | | | 20,622 | | | | 1,183,374 | | | | 1.5 | | | | 1,575,000 | | | $ | 1.16 - $13.04 | | | | 4,120 | |
| | | | | | | | | | | | | | | | | | | | | |
All directors and senior management as a group consisting of 14 people(4) | | | 13,121,430 | | | | 16.3 | | | | 3,716,336 | | | $ | 1.08-$13.04 | | | | 22,622 | | | | 13,477,382 | | | | 17.2 | | | | 4,127,167 | | | $ | 1.14-$13.04 | | | | 67,620 | |
(1) | Consists of ordinary shares and options to purchase ordinary shares which are vested or shall become vested within 60 days as of March 28, 2017.27, 2018. |
(2) | Each stock option is exercisable into one ordinary share, and expires between 6 and 10 years from the date of its grant. Of the number of stock options listed, 300,000, 1,003,253350,000, 1,181,374 and 2,583,0892,939,041 options, are vested or shall become vested within 60 days of March 28, 201727, 2018 for Mr. Zisapel, Mr. Palti and all directors and senior management as a group, respectively. No RSU'sRSU’s listed are vested or expected to vest within 60 days as of March 28, 2017, for Mr. Zisapel, Mr. Palti and all directors and senior management as a group, respectively.27, 2018. |
(3) | The number of ordinary shares held by Zohar Zisapel includes 10,717 shares held by RAD Data Communications Ltd., of which Mr. Zisapel is a principal shareholder and chairman of the board. |
(4) | Each of the directors and senior managers other than Messrs. Zohar Zisapel and Ira Palti, beneficially owns less than 1%2% of the outstanding ordinary shares as of March 28, 201727, 2018 (including options held by each such person and which are vested or shall become vested within 60 days as of March 28, 2017)27, 2018) and have therefore not been separately disclosed.listed. |
Stock Option Plan
The Amended and Restated Share Option and RSU Plan
In September 2003, our shareholders approved and adopted our 2003 share option plan. This plan, complies with changes in Israeli tax law that was introduced in 2003 with respect to share options. The plan is designed to grant options pursuant to Section 102 or 3(i) of the Ordinance. It is also intendedOrdinance, and to be a "qualified plan"“qualified plan” as defined by U.S. tax law. Our worldwide employees, directors, consultants and contractors are eligible to participate in this plan. TheOur Compensation Committee of our Board of Directors administers the plan. Generally, the options granted under this plan expire between six to ten years from the date of grant. In addition, our Board of Directors has sole discretion to determine, in the event of a transaction with another corporation, as defined in the plan, that each option shall either: (i) be substituted for an option to purchase securities of the other corporation; (ii) be assumed by the other corporation; or (iii) automatically vest in full. In the event that all or substantially all of the issued and outstanding share capital of the company shall be sold, each option holder shall be obligated to participate in the sale and to sell his/her options at the price equal to that of any other share sold.
In September, 2010, our Board of Directors amended the share option plan so as to enable the grant of RSUs pursuant to such plan (the "Amended“Amended and Restated Share Option and RSU Plan"Plan”, or "the Plan"“the Plan”).
In December 2012, our Board of Directors extended the Plan for an additional ten-year period through December 31, 2022. The Plan has been approved by the Israeli Tax Authority as required by applicable law. The following tables present information regarding option and RSU grants under the Plan as of December 31, 2016.2017.
Cumulative Ordinary Shares Reserved for Option Grants | | | Remaining Reserved Shares Available for Option Grants | | | Options Outstanding | | | Weighted Average Exercise Price | |
20,051,126 | | | 779,327 | | | 7,490,173 | | | $3.86 | |
Cumulative Ordinary Shares Reserved for Option Grants | | | Remaining Reserved Shares Available for Option Grants | | | Options Outstanding | | | Weighted Average Exercise Price | |
| 20,374,299 | | | | 413,701 | | | | 7,939,978 | | | $ | 3.61 | |
Cumulative Ordinary Shares Reserved for RSU Grants | | | Remaining Reserved Shares Available for RSU Grants | | | RSUs Outstanding | | | Weighted Average Exercise Price | |
1,544,562 | | | --- | | | 47,535 | | | $0.00 | |
Cumulative Ordinary Shares Reserved for RSU Grants | | | Remaining Reserved Shares Available for RSU Grants | | | RSUs Outstanding | | | Weighted Average Exercise Price | |
| 1,861,389 | | | | --- | | | | 327,093 | | | $ | 0.00 | |
The following table presents certain option and RSU grant information concerning the distribution of options and RSUs (granted under the Plan) among directors and employees of the Company as of December 31, 2016:2017:
| | Options and RSUs Outstanding | | | Unvested Options and RSUs | | |
| | | | | | | | Options and RSUs Outstanding | | | Unvested Options and RSUs | |
Directors and senior management | | | 3,857,687 | | | | 1,449,190 | | | | 4,316,850 | | | | 1,523,015 | |
| | | | | | | | | | | | | | | | |
All other grantees | | | 3,680,021 | | | | 2,066,877 | | | | 3,950,221 | | | | 1,841,241 | |
Amendment of the Plan
Subject to applicable law, our Board of Directors may amend the Plan, provided that any action by our Board of Directors which will alter or impair the rights or obligations of an option holder requires the prior consent of that option holder. Our board last amended the Plan in August 2014, extending the authority originally granted to our Compensation Committee to provide grantees, in their notice of grant, with a "Double“Double Trigger" acceleration mechanism upon the occurrence of certain events.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The following table sets forth stock ownership information as of March 28, 201727, 2018 (unless otherwise noted below) with respect to each person who is known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares, based on information provided to us by the holders or disclosed in public filings with the SEC.
Except where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares. The shareholders listed below do not have any different voting rights from any of our other shareholders. We know of no arrangements which would, at a subsequent date, result in a change of control of our company.
Total shares beneficially owned in the table below include shares that may be acquired upon the exercise of options that are exercisable within 60 days. The shares that may be issued under these options are treated as outstanding only for purposes of determining the percent owned by the person or group holding the options but not for the purpose of determining the percentage ownership of any other person or group. Each of our directors and officers who is also a director or officer of an entity listed in the table below disclaims ownership of our ordinary shares owned by such entity.
Name | | Number of Ordinary Shares(2) | | | Percentage of Outstanding Ordinary Shares(1) | |
Zohar Zisapel (3) | | | 10,838,341 | | | | 13.9 | % |
Joseph D. Samberg (4) | | | 4,600,000 | | | | 5.9 | % |
Name | | Number of Ordinary Shares(2) | | | Percentage of Outstanding Ordinary Shares(1) | |
Zohar Zisapel (3) | | | 10,888,341 | | | | 13.94 | % |
Joseph D. Samberg (4) | | | 6,784,842 | | | | 8.68 | % |
| (1) | Based on 77,768,92978,130,978 ordinary shares issued and outstanding as of March 28, 2017.27, 2018. |
| (2) | Consists of ordinary shares and options to purchase ordinary shares, which are vested or shall become vested within 60 days as of March 28, 2017.27, 2018. |
| (3) | Zohar Zisapel'sZisapel’s address is 24 Raoul Wallenberg St., Tel Aviv 69719, Israel. The ordinary shares held by Zohar Zisapel include 10,717 shares held by RAD Data Communications Ltd., of which Mr. Zisapel is a principal shareholders and the chairman of the board. |
| (4) | Joseph D. Samberg's address is 1091 Boston Post Road, Rye, NY 10580. |
As of March 28, 2017,19, 2018, approximately 96.9%97% of our ordinary shares were registered for trade and held in the United States and there were 3027 record holders with addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where such beneficial holders reside due to the fact that many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 96.8% of our outstanding ordinary shares as of said date).
Related Party Transactions
Zohar Zisapel, the Chairman of our boardBoard of directorsDirectors and a principal shareholder of our company, beneficially owns 13.9%13.94% of our ordinary shares as of March 28, 2017.27, 2018. Yehuda Zisapel, the brother of Zohar Zisapel, is also a shareholder, who together with Nava Zisapel beneficially owns 4.61%4.57% of our ordinary shares as of March 28, 2017.27, 2018. Zohar and Yehuda Zisapel do not vote as a group and do not have a voting agreement.
Zohar Zisapel is the Chairman of the board of, and holds shares in, RADWIN Ltd., RADIFLOW Ltd., ARGUS Cyber SecurityHailo Technologies Ltd.; and Innoviz Ltd. He also serves as a director in the following companies, in a few of which he holds shares: RADCOM Ltd., Amdocs Ltd., RADHEARNUANCE HEARING Ltd., RAD Data Communications Ltd., RAD-Bynet Properties and Assets (1981) Ltd., Packetlight Networks Ltd., CyberInt Technologies Ltd., TopSpin Security Ltd., Armis Security Ltd., SatixfyCylus Ltd., Nucleix Ltd.; and several other private holdings and real estate and medical devices companies.estate. Zohar Zisapel also holds shares in the following companies: Satixfy Ltd., Nucleix Ltd., Allot Communications Ltd., Silicom Ltd., Ellomay Capital Ltd., Vascular Grafts Solutions Ltd., Perflow Ltd., Vectorious Ltd., ExpanDB Ltd., Siraj Ltd.and Galil Software Ltd. The above list does not constitute a complete list of Zohar Zisapel'sZisapel’s holdings.
Yehuda Zisapel holds shares and serves as a director in a few of the above-mentioned companies, as well as in additional companies, including: RADWARE Ltd., Bynet Data Communications Ltd., Bynet Electronics Ltd., Bynet Semech (Outsourcing) Ltd., Bynet Systems Applications Ltd., Ab-Net Communications Ltd., BYNET Software Systems Ltd., Internet Binat Ltd., SecurityDam Ltd., Binat Business Ltd, ACE – Assured Customer Experience Ltd. and several other private holdings, real estate and medical devices companies. The above list does not constitute a complete list of Yehuda Zisapel'sZisapel’s holdings.
Some of the companies referred to above are known as the "RAD-BYNET“RAD-BYNET Group". Members of the RAD-BYNET Group sometimes share expenses with us, on an as-needed basis, for information systems infrastructure, administrative services, medical insurance, as well as in connection with logistics services, such as transportation and cafeteria facilities - all by arm'sarm’s length transactions. In addition, the Company purchases certain equipment, other services, software and licenses from members of the RAD-BYNET.RAD-BYNET Group. The aggregate amount of such purchases and shared expenses in 2017 was approximately $2.7 million in 2016.$2.1 million.
We, as well as other companies of the RAD-BYNET Group, may market through the same distribution channels. In addition, the Company markets and sells some products of other members of the RAD-BYNET Group, which are complementary to our products, while some members of the RAD-BYNET Group market and sell part of our products, which are complimentary to their products. Certain products of members of the RAD-BYNET Group may be used in place of (and thus may be deemed to be competitive with) our products.
Ms. Yael Langer, one of our directors, acts as general counsel for several RAD-BYNET Group companies and serves as a director in RADWARE Ltd.
We generally ascertain the market prices for goods and services that can be obtained at arms'arms’ length from unaffiliated third parties before entering into any transaction with a related party. In addition, all of our related-party transactions with members of the RAD-BYNET Group are approved by our Audit Committee and then by our Board of Directors. As a result, we believe that the terms of the transactions in which we have engaged, and are currently engaged with other members of the RAD-BYNET Group are beneficial to us and no less favorable to us than terms, which might be available to us from unaffiliated third parties. Any future transaction and arrangement with entities in which our office holders may have a personal interest will require approval by our Audit Committee, our Board of Directors and, if applicable, our shareholders.
Lease Arrangements
We lease most of our office space for our current headquarters and principal administrative, finance, marketing and sales operations from real estate holding companies controlled by Yehuda and Zohar Zisapel. The leased facility, located in Tel Aviv, Israel is approximately 65,000 square59,300square feet of office space and approximately 75004,000 square feet of warehouse space. The leases for this facility will expire in the end of December 2017.2019. The aggregate amount of rent and maintenance expenses related to these properties was approximately $1.9$1.8 million in 2016.2017.
Supply Arrangement
We purchase products from certain RAD-BYNET Group companies, which we integrate into our products or product offerings. The aggregate purchase price of these components in 2017 was approximately $2.9 million for the year ended December 31, 2016.$1.3 million.
Sales Arrangement
We sell products through RAD-BYNET Group companies, which they integrate into their products or product offerings. The aggregate selling price of these components in 2017 was approximately $0.2 million.
Registration Rights
In connection with the private placement of preferred shares before our initial public offering in August 2000, several of our shareholders were granted registration rights with respect to ordinary shares that were converted from preferred shares immediately prior to the completion of our initial public offering. The registration rights were granted to each of:
| · | ·the holders of the ordinary shares resulting from the conversion of such preferred shares; and |
| · | Yehuda Zisapel and Zohar Zisapel. |
Under the registration rights agreement, each of these shareholders has the right to have its ordinary shares included in certain of our registration statements.
ITEM 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
The annual financial statements required by this item are found at the end of this annual report, beginning on Page F-1.
Export Sales
In 2016,2017, our sales to end users located outside of Israel amounted to $291.9$330.1 million, or 99.4% of our $293.6$332.0 million revenues for this year.
Legal Proceedings
On January 5, 2015, a motion to approve a purported class action, naming the Company, its CEO and its directors as defendants, was filed with the District Court of Tel-Aviv (Economic Department), on behalf of holders of ordinary shares, including those who purchased shares during the period following the Company'sCompany’s follow on public offering in July 2014 (the "Motion"“Motion").
The purported class action is based on Israeli law and alleges breaches of duties by the Company and its management on account of false and misleading statements in the Company'sCompany’s SEC filings and public statements, during the period between July and October 2014. The plaintiff's principal claim is that immediately prior to the follow on public offering, the defendants presented misleading guidance concerning the expected financial results for the third quarter of 2014, indicating an anticipated improvement in the rate of gross profit based on orders which were already received by the Company at the time of such presentation. Although the plaintiff admits that, in accordance with the actual results for the third quarter, the Company did meet the guidance as far as revenues were concerned, the actual rate of gross profit turned out to be much lower than the one anticipated. Plaintiff argues that at the time such guidance was presented by the defendants, they already knew, or should have known, that it was incorrect. The plaintiff seeks specified compensatory damages in a sum of up to $75,000,000, as well as attorneys'attorneys’ fees and costs.
The Motion was served to the Company on January 6, 2015 and the Company filed its response on June 21, 2015. On October 22, 2015, the plaintiff filed a request for discovery of specific documents. The Company filed its response to the plaintiffs' request for discovery on January 25, 2016, and the plaintiffs submitted their response on February 24, 2016. On June 8, 2016, the District Court partially accepted the plaintiff's request for discovery, and ordered the Company to disclose some of the requested documents. The Company's request to appeal this decision was denied by the Supreme Court on October 25, 2016, and the Company disclosed the required documents to the plaintiffs. The plaintiffs filed their reply to the Company'sCompany’s response to the motionMotion on April 2, 2017.
In May 2017 the Company filed two requests: the first, requesting to dismiss the Plaintiff’s response to the Company’s defense, or, alternatively, to allow the Company to respond to it; the second, to first hear the Company’s claims with regards to the legal question of the governing law. A preliminary hearing has beenwas held on May 22, 2017, where the court set dates for Mayresponse to the Company’s above-mentioned requests and for evidence hearings. On July 17, 2017, the court allowed the Company to respond to the plaintiff’s response and on July 29, 2017 the Court denied the Company’s second request. The Company filed its response to the plaintiff’s response on September 18, 2017.
On October 2, 2017, the plaintiff filed a request to summon our Chairman of the Board, Mr. Zisapel, and our CEO, Mr. Palti, to the upcoming evidence hearing. The Company filed its response to this request on October 26, 2017; and the plaintiff filed its reply to Company's response.
The first evidence hearing took place on November 2, 2017. During this hearing the Company agreed to consider summoning to the second evidence hearing one of the above-mentioned Company's officers, and on November 8, 2017. Since2017, the initial procedure, (i.e.Company advised the District Courtcourt that it agrees that Mr. Palti will be summoned to the next evidence hearing. The second and final evidence hearing took place on January 8, 2018.
After submission of summaries by both parties to the court, currently scheduled for the beginning of July 2018, the court is expected to issue its decision whether to approve the Motion or to deny it), has been in process for over two years now, it is difficult to estimate how long this litigation will last. it.
The Company believes that it has a strong defense against the above-mentioned allegations referred to in the Motion and that the District Court should deny the Motion.it.
We are not a party to any other material legal proceedings.
Dividends
We have never declared or paid any dividend on our ordinary shares except for the share dividend that was paid as a result of a 250-for-1 share recapitalization that took place immediately prior to our initial public offering. We do not anticipate paying any 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. In connection with the 2013 credit facility, we undertook not to distribute dividends (unless certain terms are met) without the Lender'sLender’s prior written consent.
Significant Changes
See Item 5. "OPERATING“OPERATING AND FINANCIAL REVIEW AND PROSPECTS -Liquidity and Capital Resources"Resources” for a description of the April 2014 amendmentFebruary 2018 and March 2018 amendments to the credit facility.
In April 2014, we signed an agreement with Eltek ASA, to settle all claims, counter claims, legal proceedings, and any other contingent or potential claims regarding alleged breaches of representations and warranties contained in the purchase agreement governing the Nera Acquisition in January 2011. Pursuant to the settlement agreement, we received $17 million in cash.
ITEM 9. THE OFFER AND LISTING
Offer and Listing Details
OurSince January 3, 2011, our ordinary shares arehave been listed on the Nasdaq Global Select Market since January 3, 2011 andunder the TASE, sincesymbol “CRNT”. Prior to that, we were listed on the Nasdaq Global Market, from August 4, 2000. Between September 12, 2004 in both exchangesand December 11, 2017 our shares were also listed on the Tel Aviv Stock Exchange (“TASE”), under the symbol "CRNT."same symbol. On July 26, 2017, our Board of Directors resolved to voluntarily delist the Company’s shares from trading on the TASE. Consequently, we applied to the TASE and requested that TASE initiate the delisting process. On September 12, 2017, we announced to the TASE members that the last trading day in the Company's shares on the TASE shall be December 7, 2017 and that on December 11, 2017, the Company's shares were to be delisted from trading on the TASE. Following our delisting from trading on the TASE, the only trading market for our ordinary shares is the Nasdaq Global Select Market.
The table below sets forth for the periods indicated the high and low market (sale) prices of our ordinary shares, for the periods indicated, as reported on Nasdaq:
| | Ordinary Shares | |
Annual | | High | | | Low | |
2012 | | $ | 9.76 | | | $ | 3.91 | |
2013 | | | 5.15 | | | | 2.35 | |
2014 | | | 3.84 | | | | 0.93 | |
2015 | | | 2.00 | | | | 0.88 | |
2016 | | | 2.94 | | | | 0.89 | |
| | | | | | | | |
Quarterly 2014 | | | | | | | | |
First Quarter | | $ | 3.84 | | | $ | 2.8 | |
Second Quarter | | | 2.95 | | | | 2.13 | |
Third Quarter | | | 2.69 | | | | 2.0 | |
Fourth Quarter | | | 2.39 | | | | 0.93 | |
| | Ordinary Shares | |
Annual | | High | | | Low | |
2015 | | $ | 2.00 | | | $ | 0.88 | |
2016 | | | 2.94 | | | | 0.89 | |
2017 | | | 4.23 | | | | 1.64 | |
| | | | | | | | |
Quarterly 2015 | | | | | | | | |
First Quarter | | $ | 1.35 | | | $ | 0.88 | |
Second Quarter | | | 1.47 | | | | 1.02 | |
Third Quarter | | | 1.74 | | | | 0.93 | |
Fourth Quarter | | | 2.00 | | | | 1.09 | |
| | | | | | | | |
Quarterly 2016 | | | | | | | | |
First Quarter | | $ | 1.30 | | | $ | 0.89 | |
Second Quarter | | | 1.84 | | | | 1.11 | |
Third Quarter | | | 2.94 | | | | 1.58 | |
Fourth Quarter | | | 2.89 | | | | 1.95 | |
Quarterly 2015 | | | | | | |
First Quarter | | $ | 1.35 | | | $ | 0.88 | |
Second Quarter | | | 1.47 | | | | 1.02 | |
Third Quarter | | | 1.74 | | | | 0.93 | |
Fourth Quarter | | | 2.00 | | | | 1.09 | |
| | | | | | | | |
Quarterly 2016 | | | | | | | | |
First Quarter | | $ | 1.30 | | | $ | 0.89 | |
Second Quarter | | | 1.84 | | | | 1.11 | |
Third Quarter | | | 2.94 | | | | 1.58 | |
Fourth Quarter | | | 2.89 | | | | 1.95 | |
Monthly | | High | | | Low | |
October 2016 | | $ | 2.89 | | | $ | 1.95 | |
November 2016 | | | 2.61 | | | | 2.21 | |
December 2016 | | | 2.84 | | | | 2.21 | |
January 2017 . | | | 3.88 | | | | 2.70 | |
February 2017 | | | 4.23 | | | | 3.43 | |
March 2017 | | | 3.77 | | | | 3.20 | |
Quarterly 2017 | | | | | | |
First Quarter | | $ | 4.23 | | | $ | 2.70 | |
Second Quarter | | | 3.65 | | | | 2.45 | |
Third Quarter | | | 2.93 | | | | 1.88 | |
Fourth Quarter | | | 2.38 | | | | 1.64 | |
78
Monthly | | High | | | Low | |
October 2017 | | $ | 2.22 | | | $ | 1.98 | |
November 2017 | | | 2.24 | | | | 1.64 | |
December 2017 | | | 2.38 | | | | 1.83 | |
January 2018 . | | | 2.30 | | | | 1.96 | |
February 2018 | | | 2.97 | | | | 1.95 | |
March 2018 | | | 3.00 | | | | 2.63 | |
ITEM 10.ADDITIONAL INFORMATION
Memorandum and Articles of Association - General
A description of our Memorandum and Articles of Association was previously provided in our registration statement on Form F-1 (Registration Statement 333-12312) filed with the SEC on August 3, 2000, and is incorporated herein by reference. The Memorandum and Articles of Association - as amended in October 2007, September 2011, December 2012, and July 2014 and September 2016 - were previously provided in our annual reports on Form 20-F for the years 2007, 2011, 2012, 2014 and 2014,2016, respectively, and are incorporated herein by reference. Our Articles of Association as amended on September 20, 2016 are included as Exhibit 1.2 to this annual report.
In July 2014, we revoked our Memorandum pursuant to procedures provided by Israeli law; a detailed description of such procedure was previously provided in our annual report on Form 20-F for the year 2014 and is incorporated herein by reference.
Articles of Association
Objects and purposes
Our registration number with the Israeli Registrar of Companies is 51-235244-4. Our purpose as set forth in article 1 to our Articles of Association is to engage, directly or indirectly, in any lawful undertaking or business whatsoever.
Meetings of Shareholders, Quorum and Voting Rights
According to the Companies Law and our Articles of Association, an annual general meeting of our shareholders shall be held once every calendar year, provided it is within a period of not more than fifteen (15) months after the preceding annual general meeting. Our Board of Directors may, whenever it deems fit, convene a special general meeting at such time and place as may be determined by the board, and, pursuant to the Companies Law, must convene a meeting upon the demand of: (a) two directors or one quarter of the directors in office; or (b) the holder or holders of: (i) 5% or more of the Company'sCompany’s issued share capital and one percent 1% or more of its voting rights; or (ii) 5% or more of the Company'sCompany’s voting rights.
As of September 20, 2016, pursuant to an amendment toUnder our Articles of Association, the quorum required for a meeting of shareholders consists the presence, in person or by proxy, of at least two shareholders holding shares conferring in the aggregate twenty five percent (25%) or more of the voting power of the Company. If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened by the Board of Directors upon the demand of shareholders or upon the demand of less than 50% of the directors then in office or directly by such shareholders or directors, shall be cancelled. If a meeting is otherwise called and no quorum is present within half an hour from the time appointed for such meeting it shall stand adjourned to the same day in the following week at the same time and place or to such other day, time and place as the BoardChairman of Directorsthe meeting may determine.determine with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment. At the adjourned meeting, the required quorum consists of any two shareholders.
Subject to the provisions of the Articles of Association, holders of fully paid ordinary shares have one vote for each ordinary share held by such shareholder of record, on all matters submitted to a vote of shareholders. Shareholders may vote in person, by proxy or by proxy card. Alternatively, shareholders who hold shares through members of the Tel Aviv Stock Exchange may vote electronically via the electronic voting system of the Israel Securities Authority ("Electronic Vote"). These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. As our ordinary shares do not have cumulative voting rights in the election of directors, the holders of the majority of the shares present and voting at a shareholders meeting generally have the power to elect all of our directors, except the external directors whose election requires a special majority.
Unless otherwise prescribed in our Articles of Association and/or under the Companies Law, shareholders resolutions are deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person, by proxy or by proxy card, or by Electronic Vote, and voting on the matter.
Share Ownership Restrictions
The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by the Articles of Association or the laws of the State of Israel, except that citizens of countries that are in a state of war with Israel may not be recognized as owners of ordinary shares.
Transfer of Shares
Our ordinary shares which have been fully paid-up are transferable by submission of a proper instrument of transfer together with the certificate of the shares to be transferred and such other evidence of title, as the Board of Directors may require, unless such transfer is prohibited by another instrument or by applicable securities laws.
Modification of Class Rights
Pursuant to our Articles of Association, if at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by our Articles of Association, may be modified or abrogated by the Company, by shareholders resolution, subject to the requirement that such resolution is also approved by a majority of the holders of the shares of such applicable class, who are present and voting at a separate general meeting of the holders of the shares of such class.
Dividends
Under the Companies law, dividends may be distributed only out of profits available for dividends as determined by the Companies Law, provided that there is no reasonable concern that the distribution will prevent the Company from being able to meet its existing and anticipated obligations when they become due. If the company does not meet the profit requirement, a court may nevertheless allow the company to distribute a dividend, as long as the court is convinced that there is no reasonable concern that such distribution will prevent the company from being able to meet its existing and anticipated obligations when they become due. Pursuant to our Articles of Association, no dividend shall be paid otherwise than out of the profits of the Company. Generally, under the Companies Law, the decision to distribute dividends and the amount to be distributed is made by a company'scompany’s board of directors.
Our Articles of Association provide that our Board of Directors, may, subject to the Companies Law, from time to time, declare and cause the Company to pay such dividends as may appear to the Board of Directors to be justified by the profits of our Company. Subject to the rights of the holders of shares with preferential, special or deferred rights that may be authorized in the future, our profits which shall be declared as dividends shall be distributed according to the proportion of the nominal (par) value paid up or credited as paid up on account of the shares held at the date so appointed by the Company and in respect of which such dividend is being paid, without regard to the premium paid in excess of the nominal (par) value, if any. The declaration of dividends does not require Shareholders'Shareholders’ approval.
To date, we have not declared or distributed any dividend and we currently do not intend to pay cash dividends on our ordinary shares in the foreseeable future; see above under Item 8. "Financial“Financial Information – Dividends."”
Liquidation Rights
In the event of our winding up or liquidation or dissolution, subject to applicable law, our assets available for distribution among the shareholders shall be distributed to the holders of ordinary shares in proportion to the amount paid up or credited as paid up on account of the nominal value of the shares held by them respectively and in respect of which such distribution is being made, without regard to any premium paid in excess of the nominal value, if any. This liquidation right may be affected by the grant of limited or preferential rights as to liquidation to the holders of a class of shares that may be authorized in the future.
Mergers and Acquisitions under Israeli Law
In general, a merger of a company, that was incorporated before the enactment of the Companies Law, requires the approval of the holders of a majority of 75% of the voting power represented at the annual or special general meeting in person or by proxy or by a written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Companies Law. However, in accordance with our Articles of Association, a shareholder resolution approving a merger (as defined in the Companies law) of the Company shall be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon. Upon the request of a creditor of either party of 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. In addition, a merger may not be completed unless at least: (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies; and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
The Companies Law also provides that, an acquisition of shares in a public company must be made by means of a tender offer: (a) if there is no existing shareholder, or a group of shareholders holding shares together, in the company holding shares conferring 25% or more of the voting rights at the general meeting (a "control block"), and as a result of the acquisition the purchaser would become a holder of a control block; or (b) if there is no existing shareholder, or a group of shareholders holding shares together, in the company holding shares conferring 45% or more of the voting rights at the general meeting and as a result of the acquisition the purchaser would become a holder of 45% or more of the voting rights at the general meeting. Notwithstanding, the abovementioned requirements do not apply if the acquisition was: (1) made by way of a private placement that received shareholders'shareholders’ approval (which includes an explicit approval that the purchaser will become, as a result of such acquisition, a holder of a "control“control block,"” or of 45% or more of the voting power in the company, and unless there is already a holder of a "control block"“control block” or of 45% or more of the voting power in the company, respectively); (2) was from a holder of a "control block"“control block” in the company and resulted in the acquirer becoming a holder of a "control block"“control block”; or (3) was from a holder of 45% or more of the voting power in the company and resulted in the acquirer becoming a holder of 45% or more of the voting power in the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company's outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if: (i) at least 5% of the company'scompany’s outstanding shares will be acquired by the offeror; and (ii) the number of shares acquired in the offer exceeds the number of shares whose holders objected to the offer.
If as a result of an acquisition of shares, the acquirer will hold more than 90% of a company'scompany’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If as a result of such full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase (i.e. all of the shares not owned by the acquirer) will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer, but the acquirer will be entitled to stipulate that tendering shareholders forfeit their appraisal rights. If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares.
Furthermore, certain provisions of other Israeli laws may have the effect of delaying, preventing or making more difficult an acquisition of or merger with us; see Item 3. "KEY“KEY INFORMATION - Risk Factors – Risks Related to Operations in Israel - Provisions of our Articles of Association, Israeli law and financing documents could delay, prevent or make difficult a change of control and therefore depress the price of our shares."”
Material Contracts
None.
Exchange Controls
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our Memorandum or Articles of Association or by the laws of the State of Israel.
Taxation
The following is a short summary of the tax environment to which shareholders may be subject. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal advisor.
This summary is based on the current provisions of tax law and, except for the foregoing, does not anticipate any possible changes in law, whether by legislative, regulatory, administrative or judicial action. Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares.
General Corporate Tax Structure in Israel
The corporate tax rate in 2015 was 26.5%. The corporate tax rate as from January 1, 2016 is 25%. In December 2016 the Israeli Parliament approved a reduction in the corporate income tax rate to 24% effective from January 1, 2017 and 23% for 2018 and thereafter.
However, the effective tax rate payable by a company that derives income from an approved enterprise, beneficiary enterprise, or preferred enterprise discussed further below, may be considerably lower. See "The“The Law for the Encouragement of Capital Investments, 1959"1959” (the “Investment Law”) below.
The Law for the Encouragement of Capital Investments, 1959
In general, the Investment Law is intended to provide tax benefits to Industrial Enterprises who undertake significant export activities leading to the economic competitiveness of the country. The Investment Law underwent several amendments in recent years as will be detailed below, however, benefits which were granted under prior versions of the law remain intact and may be applied to the extent the company who obtained such benefits continues to comply with the respective requirements and has not waived such benefits.
Tax Benefits before the 2005 amendment
The Investment Law for the Encouragement of Capital Investments, 1959, commonly referredas legislated prior to as the Investments Law,2005 provides that a proposed capital investment in eligible facilities may be designated as an approved enterprise. See "Tax“Tax Benefits under the 2005 Amendment"Amendment” below regarding an amendment to the Investments Law that came into effect in 2005 and the amendments to the Investments Law that came into effect in 2011.
Each certificate of approval for an approved enterprise, received upon application to the Investment Center of the Ministry of Economy and Industry, Trade and Labor of the State of Israel, or the Investment Center, relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, for example, the equipment to be purchased and utilized under the program. The tax benefits derived from any certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted average of the applicable rates.
The benefit period starts with the first year the enterprise earns taxable income, provided that 14 years have not passed since the approval was granted and 12 years have not passed since the enterprise began operating (“limitation period”). The respective benefit period has not yet begun.
Taxable income of a company derived from an approved enterprise is subject to reduced corporate tax at the rate of 10% to 25% for the benefit period.period and subject to the limitation period as was described above. This period is ordinarily seven or ten years depending upon the geographic location of the approved enterprise within Israel, and whether the company qualifies as a foreign investors'investors’ company as described below, commencing with the year in which the approved enterprise first generates taxable income after the commencement of production. Tax benefits under the Investments Law may 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, provided that such income is generated within the approved enterprise'senterprise’s ordinary course of business.
A company owning an approved enterprise may elect to forego certain government grants extended to an approved enterprise in return for an alternative package of benefits. Under the alternative package of benefits, a company'scompany’s undistributed income derived from an approved enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income after the commencement of production, depending on the geographic location of the approved enterprise within Israel, and the company will be eligible for a reduced tax rate for the remainder of the benefits period. However, this period is limited to twelve years from commencement of production or fourteen years from the date of approval, whichever is earlier. This limitation does not apply to the exemption period.
A company that has an approved enterprise program is eligible for further tax benefits if it qualifies as a foreign investors'investors’ company. A foreign investors'investors’ company is a company in which 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'investors’ company and has an approved enterprise program is eligible for tax benefits for a ten-year benefit period (instead of seven). Depending on the geographic location of the approved enterprise within Israel, income derived from the approved enterprise program may be exempt from tax on its undistributed income for a period of between two and ten years and will be subject to a reduced tax rate for rest of the benefits period (up to eight years). The tax rate for the additional benefits period is 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate is 20% if the foreign investment is 49% or more and less than 74%; 15% if 74% or more and less than 90%; and 10% if 90% or more. A company that has elected the alternative package of benefits and that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to tax on the gross amount distributed. The tax rate will be the rate which would have been applicable had the company not elected the alternative package of benefits. This rate is generally 10% to 25%, depending on the percentage of the company'scompany’s shares held by foreign shareholders.shareholders and subject to the limitation period as was described above. The dividend recipient is subject to withholdings of tax at the source by the company at the reduced rate applicable to dividends from approved enterprises, which is 20% if the dividend is distributed during the tax exemption period or within 12 years after the period. This limitation does not apply to a foreign investors'investors’ company.
The benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investments Law and its regulations and the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, in whole or in part, it would be required to refund the amount of tax benefits, with the addition of the consumer price index linkage adjustment and interest.
The Investment Center has granted approved enterprise status to three investment programs at our former facility in Tel Aviv and we have derived and expect to continue to derive a substantial portion of our income from these programs. We have elected the alternative package of benefits under these approved enterprise programs. The portion of our income derived from these approved enterprise programs will be exempt from tax for a period of two years commencing in the first year in which there is taxable income after the commencement of production and will be subject to a reduced company tax of between 10% and 25% subject to the limitation period defined above, for the subsequent period of five years, or up to eight years if the percentage of non-Israeli investors who hold our ordinary shares exceeds 25%. The period of tax benefits for our approved enterprise programs has not yet commenced, because we have yet to realize taxable income.
Tax Benefits under the 2005 Amendment
On April 1, 2005, an amendment to the Investments Law (the "Amendment"“Amendment”) came into force. The Amendment includes revisions to the criteria for investments qualified to receive tax benefits as an approved enterprise. The 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, whose benefits will remain 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 to the amendment) would not be allowed to choose a new tax year as a year of election (as described below) under the new amendment for a period of 2 years from the company'scompany’s previous year of commencement under the old Investments Law.
The Company will continue to enjoy its current tax benefits in accordance with the provisions of the Investment Law prior to its revision. However, if the Company is granted any new benefits in the future, they will be subject to the provisions of the amended Investments Law. Therefore, the2005 Amendment. The above discussion is a summary of the Investment Law prior to its amendment and the following is a discussion of the relevant changes contained in the 2005 Amendment.
The 2005 Amendment simplifies the approval process: according to the Amendment, only approved enterprises receiving cash grants require the approval of the Investment Center.
Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from exportexports (referred to as a "Beneficiary Enterprise"“Beneficiary Enterprise”). In order to receive the tax benefits, the 2005 Amendment states that the company must make an investment in the BenefitedBeneficiary 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 Beneficiary Enterprise (the "Year“Year of Election"Election”). A company wishing to receive the tax benefits afforded to a Beneficiary Enterprise is required to select the tax year from which the period of benefits under the Investments Law are to commence by notifying the Israeli Tax Authority within 12 months of the end of that year. Companies are also granted the right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment. Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Beneficiary Enterprise and the company'scompany’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Beneficiary Enterprise is required to exceed a certain percentage or a minimum amount of the company'scompany’s production assets before the expansion.
The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, or 12 years from the first day of the Year of Election. The tax benefits granted to a BenefitedBeneficiary Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following tax routes,tracks, which may be applicable to us:
| · | Similar to the available alternative route,track, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the BenefitedBeneficiary 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 BenefitedBeneficiary 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 weit may distribute. The company is required to withhold tax at the source at a rate of 20% from any dividends distributed from income derived from the BenefitedBeneficiary Enterprise; and |
| · | 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 BenefitedBeneficiary Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 20% for Israeli residents and at a rate of 4% for foreign residents. |
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) 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 changed the definition of "foreign investment"“foreign investment” in the Investments Law so that the amended definition requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition also includes the purchase of shares of a company from another shareholder, provided that the company'scompany’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the definition of "foreign investment"“foreign investment” took effect retroactively from 2003.
Among the results of the 2005 Amendment are that (a) tax-exempt income generated under the provisions of the 2005 Amendment will subject us to taxes upon distribution or liquidation and (b) we may be required to record a deferred tax liability with respect to such tax-exempt income. As of December 31, 2016,2017, we did not generate income under the provisions of the new law.
The benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investments Law and its regulations as described above and criteria in rulings issued by the Israeli Tax Authorities. If a company does not meet these conditions, in whole or in part, it would be required to refund the amount of tax benefits, with the addition of the consumer price index linkage adjustment and interest.
Tax Benefits under the 2011 Amendment
On January 1, 2011, legislation amending the Investment Law came into effect. The new legislation introduced a new status of "Preferred Company"“Preferred Company” and "Preferred“Preferred Enterprise,"” replacing the existing status of "Beneficiary Company"“Beneficiary Company” and "Beneficiary“Beneficiary Enterprise."” Similarly to "Beneficiary“Beneficiary Company,"” a Preferred Company is an industrial company owning a Preferred Enterprise which meets certain conditions (including a minimum threshold of 25% export). However, under the 2011 Amendment the requirement for a minimum investment in productive assets was cancelled.
Under the 2011 Amendment, a uniform corporate tax rate will applyapplies to all qualifying income of the Preferred Company, as opposed to the former law, which was limited to income from the Approved or Beneficiary Enterprises during the benefits period. The uniform corporate tax rate is 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. Certain "Special“Special Industrial Companies"Companies” that meet certain criteria can enjoy further reduced tax rates of 5% in Development Zone A and 8% elsewhere.
Dividend distributed from income which is attributed to "Preferred Enterprise"“Preferred Enterprise”/ "Special“Special Preferred Enterprise"Enterprise” earned after January 1, 2014 will be subject to withholding tax at source at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual –20% (iii) non-Israeli resident at 20%, subject to a reduced tax rate under the provisions of an applicable double tax treaty.
The provisions of the 2011 Amendment shall not apply to a company already owning "Beneficiary Enterprise"“Beneficiary Enterprise” or "Approved“Approved Enterprise" which will continue to benefit from the tax benefits under the Investment Law in effect prior to the new legislation, unless such company has otherwise elected to implement the 2011 Amendment.
We examined the possible effect of the 2011 amendment on our financial statements, if at all,the Company, and at this time do not believe we will opt to apply the amendment.
Tax Benefits under the 2016 Amendment
In December 2016, an additional amendment to the Law was passed (the “2016 Amendment”), which provides for:
| (1) | A reduction in the tax rate for Preferred Enterprises in Development Zone A from 9% to 7.5%; and |
| (2) | Additional benefits to Preferred Technological Enterprises by reducing the tax rate on preferred Technological Enterprise income (as such is defined in Amendment 73)the 2016 Amendment) to 12% (the "Amendment"). |
However, theThe 2016 Amendment has not yet comecame into effect in March 2017 as regulations for its implementation with regards to the Preferred Technological Enterprise have not yet beenwere promulgated by the Minister of Finance and thereforeFinance. The Company examined the Company cannot yet evaluate thepossible effect of the 2016 Amendment on its financial statements.and at this time does not believe it will elect to apply the 2016 Amendment.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to scientific research and development projects, for the year in which they are incurred if:
| · | the expenditures are approved by the relevant Israeli government ministry, determined by the field of research; |
| · | the research and development is for the promotion or development of the company; and |
| · | the research and development is carried out by or on behalf of the company seeking the deduction. |
However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible over a three-year period if the R&D is for the promotion or development of the company.
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
According to the Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, an industrial company is a company incorporated and resident in Israel, at least 90% of the income of which, in a given tax year, determined in Israeli currency 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 the Industry Encouragement Law, industrial companies are entitled to the following preferred corporate tax benefits, among others:
| · | deduction of purchases of know-how, patents and the right to use a patent over an eight-year period for tax purposes; |
| · | deduction over a three-year period of specified expenses incurred with the issuance and listing of shares on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel (including Nasdaq); |
| · | the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies; and |
| · | accelerated depreciation rates on equipment and buildings. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that we currently qualify as an industrial company within the definition of the Industry Encouragement Law. We cannot assure you that we will continue to qualify as an industrial company or that the benefits described above will be available to us in the future.
Special Provisions Relating to Taxation under Inflationary Conditions
Under the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes were measured in real terms in accordance with the changes in the Israeli Consumer Price Index ("(“Israeli CPI"CPI”). Accordingly, until 2002, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Commencing in fiscal year 2003, we have elected to measure our taxable income and file our tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Such an election obligated us for three years. Accordingly, commencing with fiscal year 2003, results for tax purposes are measured in terms of earnings in US dollars. Since 2006, we file for extensions on an annual basis. Beginning January 1, 2008, the Inflationary Adjustments Law was repealed.
Israeli Capital Gains Tax on Sales of Shares
Israeli law 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 non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder'sshareholder’s 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 that is equivalent to the increase of the relevant asset'sasset’s 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, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals. Additionally, if such individual shareholder is considered a "significant shareholder"“significant shareholder” at any time during the 12-month period preceding such sale (i.e. such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company) the tax rate is 30%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of publicly-traded shares.
Capital gains accrued on the sale of an asset purchased prior to January 1, 2003 will be subject to tax at a blended rate. The marginal tax rate for individuals (48%(47% in 2016)2017) will be applied to the portion of the gain amount which bears the same ratio to the total gain realized as the ratio which the holding period commencing at the acquisition date and terminating on January 1, 2003 bears to the total holding period. The remainder of the gain realized will be subject to capital gains tax at the rates applicable to an asset purchased after January 1, 2003 (see the above).
Furthermore, beginning on January 1, 2013, an additional tax liability at the rate of 2% was added to the applicable tax rate on the annual taxable income of the individuals (whether any such individual is an Israeli resident or non-Israeli resident) exceeding NIS 803,520 (in 2016) (hereinafter: "Added Tax"“Added Tax”). Effective January 1, 2017 the Added Tax rate has increased to 3% and the threshold taxable income was reduced to NIS 640,000.
Generally, non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE, provided such gains did not derive from a permanent establishment of such shareholders in Israel, and 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 market outside of Israel (including Nasdaq). 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 of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
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.
Under the convention between the United States and Israel concerning taxes on income, as amended (the "U.S.-Israel“U.S.-Israel Tax Treaty"Treaty”), generally, Israeli capital gains tax will not apply to the sale, exchange or disposition of ordinary shares by a person who:
| · | holds the ordinary shares as a capital asset; |
| · | qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty; and |
| · | is entitled to claim the benefits available to the person by the U.S.-Israel tax treaty. |
However, this exemption will not apply if (i) the treaty U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition, subject to specified conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In this case, the sale, exchange or disposition would be subject to Israeli tax, to the extent applicable. However, under the U.S.-Israel tax treaty, the treaty U.S. resident would be permitted to claim a credit for the taxes against the U.S. federal income tax imposed on the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.
Israeli Taxation of Dividends Distributed to Non-Resident Holders of Our Shares
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income, including dividends, royalties and interest, as well as non-passive income from services provided in Israel. On distributions of dividends other than bonus shares or stock dividends, income tax is withheld at source at the following rates: 25% or 30% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution; unless a different rate is provided in a treaty between Israel and the shareholder'sshareholder’s country of residence. According to the U.S.-Israel Tax Treaty, the tax withholding rate on dividends distributed by an Israeli corporation to a U.S. individual and a U.S. corporation is 25%. If the U.S. company holds 10% or more of the voting power of the Israeli company during the part of the tax year which precedes the date of payment of the dividend and during the whole of the preceding tax year, the tax withholding rate is reduced to 12.5%. Dividends received by the U.S. company or the U.S. individual distributed from income generated by an approved enterprise and beneficiary enterprise are subject to withholding tax at a rate of 15%.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into effect (the "TP Regs"“TP Regs”). Section 85A of the Tax Ordinance and the TP RegsRegulations generally requires that all cross-border transactions carried out between related parties be conducted on an arm'sarm’s length principle basis and will be taxed accordingly. The TP RegsRegulations have not had a material effect on the Company.
U.S. Federal Income Tax Considerations
Subject to the limitations described below, the following discussion summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition of our ordinary shares to a U.S. holder that owns our ordinary shares as a capital asset (generally, for investment). A U.S. holder is a holder of our ordinary shares that is for U.S. federal income tax purposes:
| · | an individual citizen or resident of the United States; |
| · | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any political subdivision thereof or the District of Columbia; |
| · | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
| · | a trust (i) if (i) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person. |
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of the entity and an equity owner in such entity will generally depend on the status of the equity owner and the activities of the entity. Such an equity owner or entity should consult its own tax advisor as to its tax consequences.
Certain aspects of U.S. federal income taxes relevant to a holder of our ordinary shares (other than a partnership) that is not a U.S. holder (a "Non-U.S. holder"“Non-U.S. holder”) are also discussed below.
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"“Code”), current and proposed Treasury Regulations, and administrative and judicial decisions as of the date of this annual report, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder in light of such holder'sholder’s individual circumstances. In particular, this discussion does not address the potential application of the U.S. federal income tax consequences to U.S. holders that are subject to special treatment, including U.S. holders that:
| · | are broker-dealers or insurance companies; |
| · | have elected mark-to-market accounting; |
| · | are tax-exempt organizations or retirement plans; |
| · | are certain former citizens or long-term residents of the United States; |
| · | are financial institutions; |
| · | hold ordinary shares as part of a straddle, hedge or conversion transaction with other investments; |
| · | acquired their ordinary shares upon the exercise of employee stock options or otherwise as compensation; |
| · | are real estate investment trusts or regulated investment companies; |
| · | own directly, indirectly or by attribution at least 10% of our voting power;shares (by vote or value); or |
| · | have a functional currency that is not the U.S. dollar. |
This discussion is not a comprehensive description of all of the tax considerations that may be relevant to each person'sperson’s decision to purchase our ordinary shares. For example, this discussion does not address any aspect of state, local or non-U.S. tax laws, the possible application of the alternative minimum tax or United States federal gift or estate taxes.
Each holder of our ordinary shares is advised to consult his or her own tax advisor with respect to the specific tax consequences to him or her of purchasing, owning or disposing of our ordinary shares, including the applicability and effect of federal, state, local and foreign income and other tax laws to his or her particular circumstances.
Taxation of Distributions Paid on Ordinary Shares
Subject to the discussion below under "Tax“Tax Consequences if We Are a Passive Foreign Investment Company,"” a U.S. holder will be required to include in gross income as dividend income the amount of any distribution paid on our ordinary shares, including any non-U.S. taxes withheld from the amount paid, to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of earnings and profits will be applied against and will reduce the U.S. holder'sholder’s tax basis in its ordinary shares and, to the extent in excess of that basis, will be treated as gain from the sale or exchange of ordinary shares. The dividend portion of such distribution generally will not qualify for the dividends received deduction otherwise available to corporations.
Dividends that are received by U.S. holders that are individuals, estates or trusts will be taxed at the rate applicable to long-term capital gains (currently a maximum rate of 20%), provided that such dividends meet the requirements of "qualified“qualified dividend income."” Subject to the holding period and risk-of-loss requirements discussed below generally, dividends paid by a non-U.S. corporation that is not a passive foreign investment company (as discussed below) will generally be qualified dividend income if either the stock with respect to which the dividend is paid is readily tradable on an established securities market in the United States (such as the Nasdaq Global Select Market) or such corporation is eligible for the benefits of an income tax treaty with the IRS determines is satisfactory and which includes an exchange of information program. The IRS has determined that the U.S.-Israel income tax treaty is satisfactory for this purpose and includes an exchange of information program. Dividends that fail to meet such requirements, and dividends received by corporate U.S. holders, are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend if (1) the U.S. holder held the ordinary share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical securities) or (2) the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinary share with respect to which the dividend is paid. If we were to be a passive foreign investment company (as such term is defined in the Code) for any year, dividends paid on our ordinary shares in such year or in the following year would not be qualified dividends. In addition, a non-corporate U.S. holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income tax rates.
Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. holder (including any non-U.S. taxes withheld from the distributions) will generally be includible in the income of a U.S. holder in a dollar amount calculated by reference to the exchange rate on the date of the distribution. A U.S. holder that receives a foreign currency distribution and converts the foreign currency into dollars after the date of distribution may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss.
U.S. holders generally will have the option of claiming the amount of any non-U.S. income taxes withheld at source either as a deduction from gross income or as a dollar-for-dollar credit against their U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the non-U.S. income taxes withheld, but the amount may be claimed as a credit against the individual'sindividual’s U.S. federal income tax liability. The amount of non-U.S. income taxes that may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each holder. These limitations include rules which limit foreign tax credits allowable for specific classes of income to the U.S. federal income taxes otherwise payable on each such class of income. The total amount of allowable foreign tax credits in any year generally cannot exceed the pre-credit U.S. tax liability for the year attributable to non-U.S. source taxable income. Distributions of current or accumulated earnings and profits generally will be non-U.S. source passive income for U.S. foreign tax credit purposes.
A U.S. holder will be denied a foreign tax credit for non-U.S. income taxes withheld from a dividend received on the ordinary shares (1) if the U.S. holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend or (2) to the extent the U.S. holder is under an obligation to make related payments with respect to positions in substantially similar or related property. Any days during which a U.S. holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the required 16-day holding period.
Taxation of the Disposition of Ordinary Shares
Subject to the discussion below under "Tax“Tax Consequences if We Are a Passive Foreign Investment Company,"” upon the sale, exchange or other disposition of our ordinary shares (other than in certain non-recognition transactions), a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the U.S. holder'sholder’s basis in the ordinary shares, which is usually the cost to the U.S. holder of the ordinary shares, and the amount realized on the disposition. Capital gain from the sale, exchange or other disposition of ordinary shares held more than one year will be long-term capital gain and may, in the case of non-corporate U.S. holders, be subject to a reduced rate of taxation (long-term capital gains are currently taxable at a maximum rate of 20% for U.S. holders that are individuals, estates or trusts). Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares will generally be treated as U.S. source income for U.S. foreign tax credit purposes. The deductibility of a capital loss recognized on the sale, exchange or other disposition of ordinary shares may be subject to limitations.
A U.S. holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles. However, a U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss. An accrual method U.S. holder may avoid realizing such foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition of ordinary shares and converts the foreign currency into dollars after the settlement date or trade date (whichever date the U.S. holder is required to use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss.
Net Investment Income Tax
Certain non-corporate U.S. holders may also be subject to an additional 3.8% tax on all or a portion of their "net“net investment income,"” which may include dividends on, or capital gains recognized from the disposition of, our ordinary shares, subject to certain limitations and exceptions. U.S. holders are urged to consult their own tax advisors regarding the implications of the Net Investment income tax on their investment in our ordinary shares.
Tax Consequences if We Are a Passive Foreign Investment Company
For U.S. federal income tax purposes, we will be classified as a passive foreign investment company, or PFIC, for any taxable year in which, after applying certain look-through rules, either (i) 75% or more of our gross income is passive income or (ii) at least 50% of the average value of our total assets (determined on a quarterly basis) for the taxable year produce, or are held for the production of, passive income. For this purpose, cash is considered to be an asset which produces passive income. Passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of certain assets which produce passive income.
Based on our income, assets, activities and market capitalization, we do not believe that we were a PFIC for the taxable year ended December 31, 2016.2017. However, there can be no assurances that the IRS will not challenge this conclusion. If we were not a PFIC for 2016,2017, U.S. holders who acquired our ordinary shares in 20162017 will not be subject to the PFIC rules described below (regardless of whether we were a PFIC in any prior year) unless we are classified as a PFIC in future years. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets, activities and market capitalization, including fluctuations in the price of our ordinary shares, which are relevant to this determination.
If we are a PFIC, a U.S. holder of our ordinary shares could be subject to increased tax liability upon the sale or other disposition (including gain deemed recognized if the ordinary shares are used as security for a loan) of its ordinary shares or upon the receipt of distributions that are treated as "excess distributions"“excess distributions”, which could result in a reduction in the after-tax return to such U.S. holder. In general, an excess distribution is the amount of distributions received during a taxable year that exceed 125% of the average amount of distributions received by a U.S. holder in respect of the ordinary shares during the preceding three taxable years, or if shorter, during the U.S. holder'sholder’s holding period prior to the taxable year of the distribution. Under these rules, the distributions that are excess distributions and any gain on the disposition of ordinary shares would be allocated ratably over the U.S. holder'sholder’s holding period for the ordinary shares. The amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that taxable year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to taxable years prior to the year of the disposition or distribution cannot be offset by net operating losses. In addition, holders of stock in a PFIC may not receive a "step-up"“step-up” in basis on shares acquired from a decedent. Furthermore, if we are a PFIC, each U.S. holder generally will be required to file an annual report with the IRS.
As an alternative to the tax treatment described above, a U.S. holder could elect to treat us as a "qualified“qualified electing fund" ("QEF"fund” (“QEF”), in which case the U.S. holder would be required to include in income, for each taxable year that we are a PFIC, its pro rata share of our ordinary earnings as ordinary income and its pro rata share of our net capital gains as capital gain, subject to a separate election to defer payment of taxes where such deferral is subject to an interest charge. We may supply U.S. holders that make a request in writing with the information needed to report income and gain under a QEF election, if we are a PFIC. Any income inclusion will be required whether or not such U.S. holder owns our ordinary shares for an entire taxable year or at the end of our taxable year. The amount so includible will be determined without regard to our prior year losses or the amount of cash distributions, if any, received from us. Special rules apply if a U.S. holder makes a QEF election after the first year in its holding period in which we are a PFIC. A U.S. holder'sholder’s basis in its ordinary shares will increase by any amount included in income and decrease by any amounts distributed to the extent such amounts were previously taxed under the QEF rules. So long as a U.S. holder'sholder’s QEF election is in effect beginning with the first taxable year in its holding period in which we were a PFIC, any gain or loss realized by such holder on the disposition of its ordinary shares held as a capital asset ordinarily would be capital gain or loss. Such capital gain or loss ordinarily would be long-term if such U.S. holder had held such ordinary shares for more than one year at the time of the disposition. The QEF election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. holder and can be revoked only with the consent of the IRS.
As an alternative to making a QEF election, a U.S. holder of PFIC stock which is "marketable stock"“marketable stock” (e.g., "regularly traded"“regularly traded” on the Nasdaq Global Select Market) may in certain circumstances avoid certain of the tax consequences generally applicable to holders of stock in a PFIC by electing to mark the stock to market as of the beginning of such U.S. holder'sholder’s holding period for the ordinary shares. As a result of such election, in any taxable year that we are a PFIC, a U.S. holder generally would be required to report gain or loss to the extent of the difference between the fair market value of the ordinary shares at the end of the taxable year and such U.S. holder'sholder’s tax basis in its ordinary shares at that time. Any gain under this computation, and any gain on an actual disposition of the ordinary shares in a year in which we are a PFIC, would be treated as ordinary income. Any loss under this computation, and any loss on an actual disposition of the ordinary shares in a year in which we are a PFIC, generally would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining loss from marking ordinary shares to market will not be allowed, and any remaining loss from an actual disposition of ordinary shares generally would be capital loss. A U.S. holder'sholder’s tax basis in its ordinary shares is adjusted annually for any gain or loss recognized under the mark-to-market election. There can be no assurances that there will be sufficient trading volume with respect to the ordinary shares in order for the ordinary shares to be considered "regularly traded"“regularly traded” or that our ordinary shares will continue to trade on the Nasdaq Global Select Market. Accordingly, there are no assurances that the ordinary shares will be marketable stock for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. holder and can only be revoked with consent of the IRS (except to the extent the ordinary shares no longer constitute "marketable stock"“marketable stock”).
The U.S. federal income tax consequences to a U.S. holder if we were to be classified as a PFIC in 20162017 or any previous taxable year are complex. A U.S. holder should consult with his or her own advisor with regard to those consequences, as well as with regard to whether he or she should make either of the elections described above.
Tax Consequences for Non-U.S. Holders of Ordinary Shares
Except as described in "Information“Information Reporting and Back-up Withholding"Withholding” below, a non-U.S. holder of our ordinary shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our ordinary shares, unless, in the case of U.S. federal income taxes:
| · | the item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and in the case of a resident of a country which has a treaty with the United States, the item is attributable to a permanent establishment, or in the case of an individual, the item is attributable to a fixed place of business in the United States; or |
| · | the non-U.S. holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition, and certain other conditions are met. |
Information Reporting and Back-up Withholding
U.S. holders generally are subject to information reporting requirements with respect to dividends on, or proceeds from the disposition of, our ordinary shares. In addition, a U.S. holder may be subject, under certain circumstances, to backup withholding at a current rate of up to 28% with respect to dividends paid on, or proceeds from the disposition of, our ordinary shares unless the U.S. holder provides proof of an applicable exemption or correct taxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding rules. A U.S. holder of our ordinary shares who provides an incorrect taxpayer identification number may be subject to penalties imposed by the IRS. Amounts withheld under the backup withholding rules are not an additional tax and may be refunded or credited against the U.S. holder'sholder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Non-U.S. holders generally are not subject to information reporting or back-up withholding with respect to dividends paid in the United States on, or proceeds from the disposition of, our ordinary shares, provided that the non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or establishes another exemption from the information reporting or back-up withholding requirements.
Certain U.S. holders (and to the extent provided in IRS guidance, certain non-U.S. holders) who hold interests in "specified“specified foreign financial assets"assets” (as defined in Section 6038D of the Code) are generally required to file an IRS Form 8938 as part of their U.S. federal income tax returns to report their ownership of such specified foreign financial assets, which may include our ordinary shares, if the total value of those assets exceed certain thresholds. Substantial penalties may apply to any failure to timely file IRS Form 8938. In addition, in the event a holder that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close until three years after the date that the required information is filed. Holders should consult their own tax advisors regarding their tax reporting obligations.
Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill these requirements by filing reports with the SEC. These reports include certain financial and statistical information about us, and may be accompanied by exhibits. You may read and copy any document we file with the SEC at the SEC'sSEC’s Public Reference Room at100 F Street, N.E., Room 1580, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy statements, information statements and other material that are filed through the SEC'sSEC’s Electronic Data Gathering, Analysis and Retrieval ("EDGAR"(“EDGAR”) system.
You may also visit us on the Internet at www.ceragon.com. However, information contained on our website does not constitute a part of this annual report.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We do not use derivative financial instruments for trading purposes. Accordingly, we have concluded that there is no material market risk exposure of the type contemplated by Item 11, and that no quantitative tabular disclosures are required. We are exposed to certain other types of market risks, as described below.
Foreign Currency Risk
As the majority of our revenues and cost of revenues, as well as a significant portion of our operating expenses, are in U.S. dollars, we have determined that our functional currency is the U.S. dollar. However, a significant portion of our revenues, costs of revenue as well as major portion of our operating expenses are denominated in other currencies, mainly in NIS, INR, EUR, BRL and NOK. As our financial results are reported in U.S. dollars, fluctuations in the exchange rates between the U.S. dollar and applicable non-dollar currencies may have an effect on our results of operations. In order to reduce such effect, we hedge a portion of certain cash flow transactions denominated in non-dollar currencies as well as a portion of certain monetary items in the balance sheet, such as trade receivables and trade payables, denominated in non-dollar currencies. The following sensitivity analysis illustrates the impact on our non-dollar net monetary assets assuming an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At December 31, 2016,2017, a 10% strengthening of the U.S. dollar versus other currencies would have resulted in an increase of approximately $2.2$2.8 million in our net monetary assets position, while a 10% weakening of the dollar versus all other currencies would have resulted in a decrease of approximately $2.2$3.4 million in our net monetary assets position.
The counter-parties to our hedging transactions are major financial institutions with high credit ratings. As of December 31, 2016,2017, we had outstanding forward contracts in the amount of $18.9$10.7 million for a period of up to twelve months.
We do not invest in interest rate derivative financial instruments.
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. |
Use of Proceeds
None
ITEM 15.CONTROLS AND PROCEDURES
(a)Disclosure Controls and Procedures
The Company performed an evaluation of the effectiveness of its disclosure controls and procedures that are designed to provide reasonable assurance that the material financial and non-financial information required to be disclosed to the SEC is recorded, processed, summarized and reported timely. Based on the Company’s evaluation, the Company’s management, including the CEO and CFO, has concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report are effective in reaching such reasonable assurance.assurance. Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within Ceragon to disclose material information otherwise required to be set forth in the Company’s reports.
(b) Management'sManagement’s Annual Report on Internal Control Over Financial Reporting
The Company'sCompany’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
The Company performed an evaluation of the effectiveness of its internal control over financial reporting that is designed by, or under the supervision of, the Company'sCompany’s principal executive and principal financial officers, and effected by the Company'sCompany’s Board of Directors, management and other personnel, 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 and includes those policies and procedures that:
(i) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; | (i) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
(ii) 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 | (ii) | 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 |
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. | (iii) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20162017 based on the framework for Internal Control - Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on our assessment under that framework and the criteria established therein, our management concluded that the Company'sCompany’s internal control over financial reporting was effective as of December 31, 20162017 in providing reasonable assurance regarding the reliability of the Company'sCompany’s financial reporting. Notwithstanding the foregoing, there can be no assurance that the Company'sCompany’s financial reporting controls and procedures will detect or uncover all failures of persons within the Company to do all the required activities properly, which may impact the fair presentation of the financial statements of the Company otherwise required to be set forth in the financial reports.
(c) Attestation Report of Independent Registered Public Accounting Firm
Kost, Forer, Gabbay & Kasierer, a Member of Ernst & Young Global, our independent registered public accounting firm, has issued an attestation report on the effectiveness of our internal control over financial reporting, appearing under Item 18: "Financial Statements"“Financial Statements” on pages F-3 – F-4, and such report is incorporated herein by reference.
(d)Changes in Internal Controls Over Financial Reporting
There were no changes in the Company'sCompany’s internal control over financial reporting that occurred during the year ended December 31, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Company'sCompany’s Board of Directors has determined that Mr. Shlomo Liran is the Audit Committee financial expert. Mr. Liran is one of our independent directors for the purposes of the Nasdaq Rules.
In November 2003, the Company'sCompany’s Board of Directors adopted a Code of Ethics that applies to the CEO, chief financial officer and controller. In October 2008, we amended our Code of Ethics in order to update it and expand its applicability to additional senior officers. In December 2009, we combined the Code of Ethics together with certain Standards of Business Conduct to strengthen the Company'sCompany’s Ethics Compliance Program. In October 2014, and again in December 2016, we amended and expanded the Company'sCompany’s Ethics Compliance Program, in order to strengthen certain provisions thereunder. A copy of the Company'sCompany’s updated Code of Ethics may be obtained, without charge, upon a written request addressed to the Company'sCompany’s investor relations department, 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel (Telephone no. +972-3-645-5733) (e-mail: ir@ceragon.com). In addition, it is also available on the Internet at www.ceragon.com. However, information contained on our website does not constitute a part of this annual report.
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Auditors
The following table sets forth, for each of the years indicated, the fees billed by Kost, Forer, Gabbay & Kasierer, a member firm of Ernst & Young Global, our auditors, and the percentage of each of the fees out of the total amount billed by them.
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2016 | | | 2016 | | | 2017 | |
Services Rendered | | Fees | | | Percentages | | | Fees | | | Percentages | | | Fees | | | Percentages | | | Fees | | | Percentages | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Audit Fees (1) | | $ | 605,518 | | | | 71 | | | $ | 735,556 | | | | 73 | % | | $ | 735,556 | | | | 73 | % | | $ | 795,615 | | | | 73 | % |
Tax Fees (2) | | $ | 176,341 | | | | 21 | | | $ | 190,646 | | | | 19 | % | | $ | 190,646 | | | | 19 | % | | $ | 187,303 | | | | 17 | % |
Other Services(3) | | $ | 63,607 | | | | 8 | | | $ | 83,726 | | | | 8 | % | | $ | 83,726 | | | | 8 | % | | $ | 112,000 | | | | 10 | % |
Total | | $ | 845,466 | | | | 100 | | | $ | 1,009,928 | | | | 100 | % | | $ | 1,009,928 | | | | 100 | % | | $ | 1,094,918 | | | | 100 | % |
(1) | Audit fees consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide. |
(2) | Tax fees relate to tax compliance, planning and advice |
(3) | Other consulting services |
Policies and Procedures
Our Financial Audit Committee is in charge of a policy and procedures for approval of audit and non-audit services rendered by our independent auditors. The policy requires the Financial Audit Committee'sCommittee’s approval of the scope of the engagement of our independent auditor. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors.
All of the fees listed in the table above were approved by our Financial Audit Committee.
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
None.
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
There were no purchases of our ordinary shares by affiliates during the year ended December 31, 2016.2017.
ITEM 16F.CHANGE IN REGISTRANT'SREGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. | CORPORATE GOVERNANCE |
The Nasdaq Rules provide that foreign private issuers may follow home country practice in lieu of certain Nasdaq rules, subject to certain exceptions and except to the extent that such exemptions would not be contrary to U.S. federal securities laws, so long as the foreign issuerissuer: (i) provides a written statement from an independent counsel in its home country certifying that the company's practices are not prohibited by the home country law; and (ii) discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. The practices we follow in lieu of Nasdaq Rules are described below:
- | Compensation Committee Charter: We have opted out of the requirement to adopt and file a compensation committee charter as set forth in Nasdaq Rule 5605(d)(1). Instead, our Compensation Committee conducts itself in accordance with provisions governing the establishment and the responsibilities of a compensation committee as set forth in the Companies Law. |
- | Shareholder Approval: We have opted out of the requirement for shareholder approval of stock option plans and other equity based compensation arrangements as set forth in Nasdaq Rule 5635 and Nasdaq Rule 5605(d), respectively.5635. Nevertheless, as required under the Companies Law, shareholder voting procedures are followed for the approval of equity-based compensation of certain office holders or employees, such as our CEO and members of our Board of Directors. Equity based compensation arrangements with other office holders are approved by our Compensation Committee and our Board of Directors, provided they are consistent with our Compensation Policy, and in special circumstances in deviation therefrom, taking into account certain considerations as set forth in the Companies Law. |
- | Annual General Meetings of Shareholders: We have opted out of the requirement for conducting annual meetings as set forth in Nasdaq Rule 5620(a), which requires Ceragon to hold its annual meetings of shareholders within twelve months of the end of its fiscal year end. Instead, Ceragon is following home country practice and law in this respect. The Companies Law requires that an annual meeting of shareholders be held every year, and not later than 15 months following the last annual meeting (see in Item 10.B above –"Additional Information –Voting, Shareholders' Meetings and Resolutions"). Further, we |
- | Quorum at General Meetings of Shareholders: We have opted out of the requirement set under Rule 5620(c) of the Nasdaq Rules, which requires the presence of two or more shareholders holding at least 33 1/3%, and in lieu follow our home country practice and Israeli law, according to which the quorum for any shareholders meeting will be the presence of two or more shareholders holding at least 25% of the voting rights in the aggregate - within half an hour from the time set for opening the meeting. |
- | Distribution of Annual Reports: We have chosen to follow our home country practice in lieu of the requirements of Nasdaq Rule 5250(d)(1), relating to an issuer'sissuer’s furnishing of its annual report to shareholders. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC, and also post a copy on our website. |
ITEM 16H. | MINE SAFETY DISCLOSURE |
Not Applicable.
ITEM 17.FINANCIAL STATEMENTS
Not applicable.
ITEM 18.FINANCIAL STATEMENTS
The Consolidated Financial Statements and related notes thereto required by this item are contained on pages F-1F-2 through F-51F-52 hereof.
| Page |
| |
Index to Consolidated Financial Statements | Page |
| |
| F-2 - F-4 |
| |
| F-5 - F-6 |
| |
| F-7 |
| |
| F-8 |
| |
| F-9 |
| |
| F-10 - F-11 |
| |
| F-12 - F-51F-52 |
101 | The following financial information from Ceragon Networks Ltd.'s’s Annual Report on Form 20-F for the year ended December 31, 2016,2017, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the years ended December 31, 2016,2017, 2015 and 2014; (ii) Consolidated Statements of Comprehensive Income (Loss) at December 31, 2016,2017, 2015 and 2014; (iii) Consolidated Statements of Changes in Shareholders'Shareholders’ Equity for the years ended December 31, 2016,2017, 2015 and 2014; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2016,2017, 2015 and 2014; and (v) Notes to Consolidated Financial Statements. Users of this data are advised, in accordance with Rule 406T of Regulation S-T promulgated by the SEC, that this Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections. |
(1) Previously filed as exhibit 1.2 to the Company’s Annual Report on Form 20-F for the year 2016 and incorporated herein by reference.
(2) Previously filed as exhibit 4.4 to the Company'sCompany’s Annual Report on Form 20-F for the year 2012 and incorporated herein by reference.
(2)(3) Previously furnished as exhibit 99.3 in a Report on Form 6-K which exhibit was incorporated by reference into the Company'sCompany’s Registration Statement on Form F-3 (No. 333-183316), and incorporated herein by reference.
(3)(4) Previously filed as exhibits 4.6, 4.7 and 4.8 to the Company'sCompany’s Annual Report on Form 20-F for the year 2014 and incorporated herein by reference.
(4)(5) Previously filed as exhibits 4.9 to the Company'sCompany’s Annual Report on Form 20-F for the year 2015 and incorporated herein by reference.
(6) Previously filed as exhibit 4.10 to the Company’s Annual Report on Form 20-F for the year 2016 and incorporated herein by reference.
(7) Previously filed as exhibit 4.11 to the Company’s Annual Report on Form 20-F for the year 2016 and incorporated herein by reference.
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
CERAGON NETWORKS LTD.
By: /s/ Ira Palti
Title: Title: | President and Chief Executive Officer |
Date: April 7, 2017
March 27, 2018
CERAGON NETWORKS LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20162017
IN U.S. DOLLARS
INDEX
| Page |
| |
| F-2 - F-4 |
| |
| F-5 - F-6 |
| |
| F-7 |
| |
| F-8 |
| |
| F-9 |
| |
| F-10 - F-11 |
| |
| F-12 - F-51F-52 |
| Kost Forer Gabbay & Kasierer 3 Aminadav St.144 Menachem Begin Road
Tel-Aviv 6706703,6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Ceragon Networks Ltd.
CERAGON NETWORKS LTDOpinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ceragon Networks Ltd. and its subsidiaries (the "Company") and subsidiaries as of December 31, 20152017 and 2016, and the related consolidated statements of operations, statements of comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. These consolidated2017, and the related notes (collectively referred to as the "consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements"). 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 and subsidiaries as ofat December 31, 20152017 and 2016, and the consolidated results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2016,2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2016,2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 7, 2017March 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
April 7, 2017 | A Member of Ernst & Young Global |
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young GlobalWe have served as the Company's auditor since 2002
Tel-Aviv, Israel
| Kost Forer Gabbay & Kasierer 3 Aminadav St.144 Menachem Begin Road
Tel-Aviv 6706703,6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors and Shareholders of Ceragon Networks Ltd.
CERAGON NETWORKS LTDOpinion on Internal Control over Financial Reporting
We have audited Ceragon Networks Ltd.'s and its subsidiaries (the "Company") internal control over financial reporting as of December 31, 2016,2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the "COSO criteria")COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of operations, statements of comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 of the Company and our report dated March 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management's reportManagement's Annual Report on internal controlInternal Control over financial reporting.Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
| Kost Forer Gabbay & Kasierer 144 Menachem Begin Road Tel-Aviv 6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
Definition and Limitations of Internal Control Over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 27, 2018
CERAGON NETWORKS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
In our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria. | | | | | December 31, | |
| | Note | | | 2016 | | | 2017 | |
| | | | | | | | | |
ASSETS | | | | | | | | | |
| | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents | | | | | $ | 36,338 | | | $ | 25,877 | |
Trade receivables (net of allowance for doubtful accounts of $ 12,162 and $7,883 at December 31, 2016 and 2017, respectively) | | | | | | 107,395 | | | | 113,719 | |
Other accounts receivable and prepaid expenses | | | 3 | | | | 17,076 | | | | 17,052 | |
Inventories | | | 4 | | | | 45,647 | | | | 54,164 | |
| | | | | | | | | | | | |
Total current assets | | | | | | | 206,456 | | | | 210,812 | |
| | | | | | | | | | | | |
NON-CURRENT ASSETS: | | | | | | | | | | | | |
Long-term bank deposits | | | | | | | - | | | | 996 | |
Deferred tax assets | | | 13c | | | | 1,344 | | | | 988 | |
Severance pay and pension fund | | | | | | | 4,575 | | | | 5,459 | |
Other accounts receivable | | | | | | | 2,746 | | | | 3,269 | |
| | | | | | | | | | | | |
PROPERTY AND EQUIPMENT, NET | | | 5 | | | | 27,560 | | | | 29,870 | |
| | | | | | | | | | | | |
INTANGIBLE ASSETS, NET | | | 6 | | | | 1,544 | | | | 2,199 | |
| | | | | | | | | | | | |
Total long-term assets | | | | | | | 37,769 | | | | 42,781 | |
| | | | | | | | | | | | |
Total assets | | | | | | $ | 244,225 | | | $ | 253,593 | |
We also have audited, in accordance with the standardsThe accompanying notes are an integral part of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2015 and 2016, and the related consolidated statements of operations, statements of comprehensive income (loss) changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated April 7, 2017 expressed an unqualified opinion thereon.financial statements.
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
April 7, 2017 | A Member of Ernst & Young Global |
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
| | | | | December 31, | |
| | Note | | | 2015 | | | 2016 | |
| | | | | | | | | |
ASSETS | | | | | | | | | |
| | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents | | | | | $ | 36,318 | | | $ | 36,338 | |
Trade receivables (net of allowance for doubtful accounts of $12,229 and $12,162 at December 31, 2015 and 2016, respectively) | | | | | | 116,683 | | | | 107,395 | |
Other accounts receivable and prepaid expenses | | 3 | | | | | | | | 17,076 | |
Inventories | | 4 | | | | 49,690 | | | | 45,647 | |
| | | | | | | | | | | |
Total current assets | | | | | | | | | | 206,456 | |
| | | | | | | | | | | |
NON-CURRENT ASSETS: | | | | | | | | | | | |
Deferred tax assets, net | | 13c | | | | 1,822 | | | | 1,344 | |
Severance pay and pension fund | | | | | | 4,681 | | | | 4,575 | |
Other accounts receivable | | | | | | | | | | 2,746 | |
| | | | | | | | | | | |
PROPERTY AND EQUIPMENT, NET | | 5 | | | | 28,906 | | | | 27,560 | |
| | | | | | | | | | | |
INTANGIBLE ASSETS, NET | | 6 | | | | 3,192 | | | | 1,544 | |
| | | | | | | | | | | |
Total long-term assets | | | | | | | | | | 37,769 | |
| | | | | | | | | | | |
Total assets | | | | | $ | | | | $ | 244,225 | |
The accompanying notes are an integral part of the consolidated financial statements
CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
| | | | | December 31, | | | | | | December 31, | |
| | Note | | | 2015 | | | 2016 | | | Note | | | 2016 | | | 2017 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | |
Short-term loans | | 8 | | | $ | 34,922 | | | $ | 17,000 | | | | 8 | | | $ | 17,000 | | | $ | - | |
Trade payables | | | | | | | | | | 68,408 | | | | | | | | 68,408 | | | | 75,476 | |
Deferred revenues | | | | | | 8,901 | | | | 2,673 | | | | | | | | 2,673 | | | | 5,193 | |
Other accounts payable and accrued expenses | | 7 | | | | 27,052 | | | | 22,425 | | | | 7 | | | | 22,425 | | | | 24,781 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | | | | | | | | 110,506 | | | | | | | | 110,506 | | | | 105,450 | |
| | | | | | | | | | | | | | | | | | | | | | | |
LONG-TERM LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax liability | | | | 13C | | | | - | | | | 141 | |
Accrued severance pay and pensions | | | | | | 9,276 | | | | 9,198 | | | | | | | | 9,198 | | | | 10,085 | |
Other long-term liabilities | | | | | | 10,639 | | | | 8,357 | | | | | | | | 8,357 | | | | 4,019 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total long-term liabilities | | | | | | 19,915 | | | | 17,555 | | | | | | | | 17,555 | | | | 14,245 | |
| | | | | | | | | | | | | | | | | | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES | | 11 | | | | | | | | | | | | 11 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
SHAREHOLDERS' EQUITY: | | 12 | | | | | | | | | | | | 12 | | | | | | | | | |
Share capital - | | | | | | | | | | | | | | | | | | | | | | | |
Ordinary shares of NIS 0.01 par value - | | | | | | | | | | | | | | | | | | | | | | | |
Authorized: 120,000,000 shares at December 31, 2015 and 2016; Issued: 81,118,387 and 81,250,452 shares at December 31, 2015 and 2016, respectively; Outstanding: 77,636,864 and 77,768,929 shares at December 31, 2015 and 2016, respectively | | | | | | 214 | | | | 214 | | |
Authorized: 120,000,000 shares at December 31, 2016 and 2017; Issued: 81,250,452 and 81,526,715 shares at December 31, 2016 and 2017, respectively; Outstanding: 77,768,929 and 78,045,192 shares at December 31, 2016 and 2017, respectively | | | | | | | | 214 | | | | 214 | |
Additional paid-in capital | | | | | | 408,174 | | | | 409,320 | | | | | | | | 409,320 | | | | 410,817 | |
Treasury shares at cost – 3,481,523 ordinary shares as of December 31, 2015 and 2016 | | | | | | (20,091 | ) | | | (20,091 | ) | |
Treasury shares at cost – 3,481,523 ordinary shares as of December 31, 2016 and 2017 | | | | | | | | (20,091 | ) | | | (20,091 | ) |
Accumulated other comprehensive loss | | | | | | (8,616 | ) | | | (7,848 | ) | | | | | | | (7,848 | ) | | | (7,171 | ) |
Accumulated deficit | | | | | | (276,860 | ) | | | (265,431 | ) | | | | | | | (265,431 | ) | | | (249,871 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Total shareholders' equity | | | | | | 102,821 | | | | 116,164 | | |
Total shareholders' equity | | | | | | | | 116,164 | | | | 133,898 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | | | | $ | | | | $ | 244,225 | | | | | | | $ | 244,225 | | | $ | 253,593 | |
The accompanying notes are an integral part of the consolidated financial statements.
CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands (except share and per share data)
| | | | | Year ended December 31, | | | | | | Year ended December 31, | |
| | Note | | | 2014 | | | 2015 | | | 2016 | | | Note | | | 2015 | | | 2016 | | | 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | 14b | | | $ | 371,112 | | | $ | 349,435 | | | $ | 293,641 | | | | 14b | | | $ | 349,435 | | | $ | 293,641 | | | $ | 332,033 | |
Cost of revenues | | | | | | 286,670 | | | | 246,487 | | | | 194,479 | | | | | | | | 246,487 | | | | 194,479 | | | | 224,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | | | | 84,442 | | | | 102,948 | | | | 99,162 | | | | | | | | 102,948 | | | | 99,162 | | | | 107,335 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development, net | | | | | | 35,004 | | | | 22,930 | | | | 21,695 | | | | | | | | 22,930 | | | | 21,695 | | | | 25,703 | |
Selling and marketing | | | | | | 56,059 | | | | 40,816 | | | | 39,515 | | | | | | | | 40,816 | | | | 39,515 | | | | 41,656 | |
General and administrative | | | | | | 23,657 | | | | 21,235 | | | | 20,380 | | | | | | | | 21,235 | | | | 20,380 | | | | 18,576 | |
Restructuring costs | | | | | | 6,816 | | | | 1,225 | | | | - | | | | | | | | 1,225 | | | | - | | | | - | |
Goodwill impairment | | | | | | 14,765 | | | | - | | | | - | | |
Other income | | | | | | (19,827 | ) | | | (4,849 | ) | | | (1,921 | ) | | | | | | | (4,849 | ) | | | (1,921 | ) | | | (1,746 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | | | | 116,474 | | | | 81,357 | | | | 79,669 | | | | | | | | 81,357 | | | | 79,669 | | | | 84,189 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | | | | (32,032 | ) | | | 21,591 | | | | 19,493 | | |
Operating income | | | | | | | | 21,591 | | | | 19,493 | | | | 23,146 | |
Financial expenses, net | | 15 | | | | 37,946 | | | | 14,738 | | | | 6,303 | | | | 15 | | | | 14,738 | | | | 6,303 | | | | 5,889 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss)before taxes on income | | | | | | (69,978 | ) | | | 6,853 | | | | 13,190 | | |
Income before taxes on income | | | | | | | | 6,853 | | | | 13,190 | | | | 17,257 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxes on income | | 13b | | | | 6,501 | | | | 5,842 | | | | 1,761 | | | | 13b | | | | 5,842 | | | | 1,761 | | | | 1,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | | | $ | (76,479 | ) | | $ | 1,011 | | | $ | 11,429 | | |
Net income | | | | | | | $ | 1,011 | | | $ | 11,429 | | | $ | 15,560 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income (loss) per share: | | | | | | | | | | | | | | | | |
Net Income per share: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | $ | (1.22 | ) | | $ | 0.01 | | | $ | 0.15 | | |
| | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | $ | (1.22 | ) | | $ | 0.01 | | | $ | 0.15 | | |
Weighted average number of ordinary shares used in computing basic net income (loss) per share | | | | | | 62,518,602 | | | | 77,239,409 | | | | 77,702,788 | | |
Weighted average number of ordinary shares used in computing diluted net income (loss) per share | | | | | | 62,518,602 | | | | 77,296,681 | | | | 78,613,528 | | |
Basic net income per share | | | | | | | $ | 0.01 | | | $ | 0.15 | | | $ | 0.20 | |
Diluted net income per share | | | | | | | $ | 0.01 | | | $ | 0.15 | | | $ | 0.19 | |
Weighted average number of ordinary shares used in computing basic net income per share | | | | | | | | 77,239,409 | | | | 77,702,788 | | | | 77,916,912 | |
Weighted average number of ordinary shares used in computing diluted net income per share | | | | | | | | 77,296,681 | | | | 78,613,528 | | | | 79,942,353 | |
CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S. dollars in thousands
| | Year ended December 31, | | | Year ended December 31, | |
| | 2014 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2017 | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (76,479 | ) | | $ | 1,011 | | | $ | 11,429 | | |
Net income | | | $ | 1,011 | | | $ | 11,429 | | | $ | 15,560 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in foreign currency translation adjustment | | | (1,853 | ) | | | (4,149 | ) | | | 861 | | | | (4,149 | ) | | | 861 | | | | 118 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale investments: | | | | | | | | | | | | | | | | | | | | | | | | |
Change in net unrealized gain (losses) | | | 260 | | | | (423 | ) | | | - | | | | (423 | ) | | | - | | | | - | |
Amounts reclassified from AOCI | | | (735 | ) | | | 330 | | | | - | | | | 330 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net change | | | (475 | ) | | | (93 | ) | | | - | | | | (93 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | |
Change in net unrealized gains (losses) | | | (709 | ) | | | (153 | ) | | | | | | | (153 | ) | | | 168 | | | | 2,331 | |
Amounts reclassified from AOCI | | | 495 | | | | (110 | ) | | | (261 | ) | | | (110 | ) | | | (261 | ) | | | (1,772 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net change | | | (214 | ) | | | (263 | ) | | | (93 | ) | | | (263 | ) | | | (93 | ) | | | 559 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net | | | (2,542 | ) | | | (4,505 | ) | | | 768 | | | | (4,505 | ) | | | 768 | | | | 677 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total of comprehensive income (loss) | | $ | (79,021 | ) | | $ | (3,494 | ) | | $ | 12,197 | | | $ | (3,494 | ) | | $ | 12,197 | | | $ | 16,237 | |
U.S. dollars in thousands (except share and per share data)