In addition, the Share Incentive Plan provides that, unless otherwise determined otherwise by our Board of Directors (or a committee thereof), in the event of a “Hostile Takeover”, which is defined to include, among others, an unsolicited acquisition of more than 20% of our outstanding shares (other than a purchase by Mr. Yehuda Zisapel), the vesting of all or a portion of our outstanding equity awards, will accelerate. As a result, an acquisition of our Company that triggers the said acceleration will be more costly to a potential acquirer.
Options granted pursuant to the Share Incentive Plan are typically granted for a term of sixty-two months from the date of the grant of the option. As of December 31, 2016, 28,445,7142017, 30,272,967 ordinary shares have been reserved for equity grants under the plan, of which we have granted (i) options to purchase 25,884,55927,334,574 ordinary shares at a weighted average exercise price of $7.59$7.5 per ordinary share and (ii) 1,536,0891,810,381 RSUs have been issued under the plan.
The Share Incentive Plan allows the allocation of short term options to grantees who are not residents of Israel or the United States, with a grant price of 90% of the closing sales price for the shares on the NASDAQNasdaq on the date of grant of a respective option award. As of December 31, 2016,2017, 1,000,000 ordinary shares have been reserved for option grants under this arrangement, of which we have granted options to purchase 236,694 ordinary shares at a weighted average exercise price of $7.09 per ordinary share. This arrangement does not affect the possibility of issuing options under the Share Incentive Plan as detailed above. However, any person who participates in the ESPP (as defined below) shall not be an eligible grantee for purposes of such arrangement.
In February 2000, we adopted a Directors and Consultants Option Plan, which is administered by our Compensation Committee. Options granted pursuant to our Directors and Consultants Options Plan are for a term of sixty-two months from the date of the grant of the option. The terms of the Directors and Consultants Option Plan are similar to the terms of the Share Incentive Plan. The Directors and Consultants Option Plan relies on the 26,301,74830,272,967 ordinary shares reserved for option grants shares under the Share Incentive Plan which can be rolled over between such plans. The Compensation Committee may not grant options to members of the Committee or to a shareholder of over 10% of our issued and outstanding shares.
In February 2010, our Board of Directors adopted the 2010 Employee Share Purchase Plan (“ESPP”), which provides for the issuance of a maximum of 2,000,000 ordinary shares. Pursuant to the ESPP, eligible employees (including only Israeli and United States residents) could have up to 10% of their net income withheld, up to certain maximums, to be used to purchase our ordinary shares. The ESPP is implemented with overlapping one year offering periods, each one consisting of two purchases, once in every six-month period. The price of each ordinary share purchased under the ESPP is equal to 90% of the closing price for the shares on the respective offering date. As of December 31, 2016,2017, a total of 255,560 shares have been purchased under the ESPP. During 2016,2017, no shares have been purchased under the ESPP.
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of April 21, 2017,March 25, 2018, by each person or entity known to own beneficially 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. The voting rights of all major shareholders are the same as for all other shareholders.
(1) Shares are beneficially owned by Senvest Management, LLC and Mr. Richard Mashaal (collectively, “Senvest”). This information is based on information provided in the Amendment No. 1213 to Statement on Schedule 13G filed with the SEC by Senvest on February 13, 2017.12, 2018.
(2) This information is based on information provided in the Amendment No. 12 to Statement on Schedule 13G filed with the SEC by Cadian Capital Management, LP , Cadian Capital Management GP, LLC and Mr. Eric Bannasch (collectively, “Cadian”) on February 13, 2017.2018.
(3) Of the ordinary shares beneficially owned by Ms. Nava Zisapel, (i) 2,592,943 are held directly; and (ii) 522,466267,833 are held of record by Carm-AD Ltd., an Israeli company owned 50% by Nava Zisapel; As noted in note 1 in “Item 6E – Share Ownership,”Ownership”, Yehuda and Nava Zisapel have an agreement which provides for certain coordination in respect of sales of shares of Radware as well as for tag along rights with respect to off-market sales of shares of Radware. The information regarding Mr. Yehuda Zisapel’s share holdings is based on information provided in the Amendment No. 3 to Statement on Schedule 13D filed with the SEC by Mr. Yehuda Zisapel and Ms. Nava Zisapel on February 26, 2018.
To the best of our knowledge, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly. There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company.
During the past three years, the significant changes in the percentage ownership of our major shareholders were as follows:
- 103 -
| · | Based on Amendment No.1 to Statement on Schedule 13G filed with the SEC by Cadian on February 13, 2017, Cadian beneficially owned 9.71% of our outstanding ordinary shares. Based on previous Schedule 13G filed with the SEC by Cadian, Cadian beneficially owned, as of February12, 2016, 9.22% of our outstanding ordinary shares. |
Major Shareholders Voting Rights
Our major shareholders do not have different voting rights from those of other shareholders.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of April 21, 2017,March 25, 2018, there were 2827 holders of record of our ordinary shares, of which 17 record holders, holding approximately 11.19%10.35% of our ordinary shares, had registered addresses in Israel, and of which 87 record holders, holding approximately 88.80%89.64% of our ordinary shares, had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our ordinary shares nor is it representative of where such beneficial holders reside, since 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 88.80%89.64% of our outstanding ordinary shares as of said date).
B. Related Party Transactions
General
We have entered into a number of agreements with certain companies, of which Yehuda, Nava and Zohar Zisapel are co-founders, directors and/or principal stockholders, collectively known as the RAD-Bynet Group and, in one of which, SecurityDam, Roy Zisapel, our President and Chief Executive Officer and a director, also holds a minority stake of 10%. In addition, we purchase different services and fixed assets from third parties at special rates offered to the RAD-Bynet Group, such as car leases, maintenance, insurance communication and Managed Security Service Providers (MSSP) scrubbing centers services.
The RAD-Bynet Group consists of high-tech manufacturers of hardware and software solutions and data communication providers, distributors and integrators as well as service providers. The RAD-Bynet Group includes approximately 15 different companies dealing in advanced communication technology, Managed Security Service Providers (MSSP) scrubbing centers services, networks, and integration. Companies within the RAD-Bynet Group provide a variety of solutions and services to their customers, including: engineering, purchasing and sub-contracting, production and final testing, planning and control, and support for end users. The RAD-Bynet Group also includes a few companies which provide services which support the activities of the other RAD-Bynet Group members, such as real estate leasing and administrative services. Some of the products of members of the RAD-Bynet Group are complementary to, and may be used in connection with, our products. Each company in the RAD-Bynet Group is independent from the others. The ownership and Board of Directors structure of each RAD-Bynet Group member is different and certain of the RAD-Bynet Group members are publicly traded companies. See Item 4C – Organizational Structure.” for additional details about the group.
We believe that all of these transactions and arrangements with affiliated parties, including members of the RAD-Bynet Group, are in the ordinary course of our business and are not unusual in their nature or conditions. However, in accordance with the Companies Law, they generally require the approval of our Audit Committee and our Board of Directors and may, in certain circumstances, require approval by our shareholders. In this respect, as permitted by the Companies Law, our Audit Committee established an internal policy with certain criteria and procedures designed to ensure that the terms of the transactions to which we enter into with companies within the RAD-Bynet Group are made on market terms and, at the same time, where such transactions are immaterial or negligible, both from a qualitative and quantitative perspective (and/or are otherwise believed to be routine) would not require the pre-approval of our Audit Committee and Board of Directors. Our management is required to examine whether transactions with the RAD-Bynet Group comply with such criteria and transactions which do not meet the criteria require pre-approval of our Audit Committee and such other corporate approvals prescribed by the Companies Law.
We believe that the terms of the transactions to which we have entered with members of the RAD-Bynet Group are not different in any material respect from terms we could obtain from unaffiliated third parties. The pricing of the transactions was based on negotiations between the parties and members of our management reviewed the pricing of these agreements, as well as, in some cases, used a third-party consulting firm, and confirmed that they were not different in any material respect than that which could have been obtained from unaffiliated third parties.
In the event that we cease to be a member of the RAD-Bynet Group, we may not be able to obtain the current rates for such services. We believe, however, that due to the affiliation between us and the RAD-Bynet Group, we have greater flexibility in obtaining certain terms and conditions that may not be available from unaffiliated third parties on similar products and services.
Lease of Property
We lease the office space for our headquarters and principal R&D, administrative, finance and marketing and sales operations from private companies within the RAD-Bynet Group that are owned by Zohar Zisapel, Nava Zisapel and Yehuda Zisapel:
One lease or the “Headquarters Lease” is a five-story building in Tel Aviv, Israel, consisting of approximately 38,00040,000 square feet, plus storage and parking space. The lease expires in June 2020. The annual rent amounts to approximately $678,000.$695,000.
Another lease consists of four floors in the Or Tower in Tel Aviv, Israel with approximately 60,000 square feet, plus parking spaces. The lease expires in June 2020. The annual rent amounts to approximately $1,590,000.$1,725,000.
We also lease approximately 3,500 square feet of space in Jerusalem, Israel, for development facilities from an affiliated company owned by Messrs. Yehuda and Zohar Zisapel. This lease expires in August 2020. The annual rent amounts to approximately $88,000.$89,000.
In addition, we lease approximately 15,000 square feet of space in Jerusalem, Israel, for manufacturing facilities from an affiliated company owned by Yehuda Nava and Zohar Zisapel. This lease expires in August 2019. The annual rent amounts to approximately $231,000$276,000
We entered into an agreement with RAD Data Communications, Inc., a company controlled by Yehuda, Nava and Zohar Zisapel, pursuant to which we lease approximately 16,900 square feet in Mahwah, New Jersey, consisting of approximately 12,700 square feet of office space and 4,200 square feet of warehouse space, in consideration for annual rent of approximately $260,000$262,000 (including taxes, electricity and management fees). The lease expires in December 2017.2018.
Distribution Agreement
Bynet Data Communications Ltd. (“Bynet”), a member of the RAD-Bynet Group, distributes our products in Israel on a non-exclusive basis. We have a written distributor agreement with Bynet under which we provide Bynet Data Communications with discounts on our products and services similar to the discounts provided to third-party distributors in the region in the ordinary course of business. The total sales to Bynet (and other companies in the RAD-Bynet Group) under such distributor agreement amounted to approximately $2.6 million in 2017, compared to $1.7 million in 2016, compared to $2.3 million in 2015.2016.
Managed Security Service Provider (“MSSP”) Agreement
SecurityDAM Ltd., or SecurityDam, a member of the RAD-Bynet Group, provides some of our DefensePipe’s pipe saturation defense services andDDoS cloud protection service against high-volume network floods. SecurityDam offers these MSSP services through a global network of scrubbing centers. Total cost of services received from SecurityDam amounted to approximately $4.3 million in 2017, compared to $3.1 million in 2016, compared to $1.7 million in 2015.2016.
Additional RAD-Bynet Group Services
We receive the following additional services from members of the RAD-Bynet Group: network management; IT and communication services; equipment testing and repair; electricity charges; parking and building maintenance; reception services; vehicles and human resource administration; distribution services; and marketing services. Each of these additional services is not material, individually or in the aggregate, to Radware or the RAD-Bynet Group.
A portion of the above services, such as electricity charges, are “pass through” services for which we are charged on a “back-to-back” basis according to our actual usage (i.e., we are charged pro ratably based on the actual charge of the third party electricity company) due to the fact that we lease part of our facilities from a number of other RAD-Bynet Group members. Other services mentioned above, such as vehicles and human resource administration, are performed by one of the RAD-Bynet Group companies and are provided to all members of the RAD-Bynet Group, in order to achieve lower prices for these services based on economies of scale. In addition, since the RAD-Bynet Group is comprised of a number of companies which are engaged in our industry, the RAD-Bynet Group initiates marketing events from time to time, which we participate in, to promote the RAD-Bynet Group members’ products. The charges for these services are based on actual costs incurred and are allocated to the Company according to its relative part in such services (e.g., vehicles administration – according to the number of the Company’s vehicles out of the total vehicles of the RAD-Bynet Group; marketing events – according to the number of participants of the Company’s customers out of the total participants in the events).
All other services, such as communication and distribution services are provided to us on the same basis and terms as provided to unrelated companies outside the RAD-Bynet Group, and were compared to prices the Company could have obtained from unaffiliated third parties and were found to be equal or less expensive. All services are charged on a monthly basis and on terms which are generally typical for other third party providers of the Company.
Compensation of Chief Executive Officer
See discussion in Item 6A “Directors, Senior Management and Employees – Directors and Senior Management”.
C. Interests of Experts and Counsel
Not applicable.
A. Consolidated Statements and other Financial Information
Financial Statements
See “Item 18 - Financial Statements”.
Export Sales
For the year ended December 31, 2016,2017, the amount of our export sales (i.e., sales outside Israel) was approximately $189$202 million, which represents 96% of our total sales.revenues.
Legal Proceedings
We are, or may be, from time to time named as a defendant in certain routine litigation incidental to our business. However, except for the matters described below, we are currently not, and have not been in the recent past, a party to any legal proceedings which may have or have had in the recent past significant effects on our financial position or profitability.
F5 Intellectual Property ClaimDispute with F5
OnIn April 4, 2016, F5 Networks, Inc. (“F5”) filed a lawsuit against us in the United States District Court for the Western District of Washington, alleging infringement of three U.S. patents of F5 relating to our ADC and WAF products. In December 2016, we filed an amended counterclaim in this action for patent infringement of a recently issued Radware patent directed to outbound link load balancing. In June 2017, the case was transferred to the United States District Court for the Northern District of California. In November 2017, the Court for the Northern District entered a partial stay of the case pending resolution of an Inter Partes Review of Radware’s patent through the end of April 2018. We deny that any of our products infringe any valid claims of the asserted F5 patents and we intend to continue to vigorously oppose F5’s claims. On December 16, 2016, we filed an amended counterclaim in this action for patent infringement of a recently issued Radware patent directed to outbound link load balancing However, since discovery and litigation is still in a preliminary stage, we cannot estimate what impact, if any, the litigation may have on our results of operations, financial condition or cash flows.
Inter Partes Reviews
Inter Partes review is a U.S. Patent and Trademark Office post-grant procedure to challenge the validity of a patent claim based on patents and printed publications.
On October 18, 2016, F5 filed a petition for Inter Partes review of our U.S. Patent No. 9,231,853. We submitted our preliminary response on February 1, 2017 and, if an Inter Partes review is instituted, we intend to vigorously defend the patentability of our patent before the U.S. Patent Trial and Appeal Board.
On January 11, 2017, we filed two petitions for Inter Partes review of U.S. Patent No. 7,472,413, which is one of the three patents F5 asserts in the Western District of Washington litigation.
On March 29, 2017, we filed a petition for Inter Partes review of U.S. Patent No. 8,676,955, which is one of the three patents F5 asserts in the Western District of Washington litigation.
On April 6, 2017, we filed a petition for Inter Partes review of U.S. Patent No. 6,311,278, which is one of the three patents F5 asserts in the Western District of Washington litigation.
F5 Intellectual Property Counterclaim
On August 29, 2013, F5 filed an amended answer and counterclaim in an action brought by Radware against F5 on May 1, 2013 for infringement of three Radware patents regarding link load balancing technology. Radware prevailed in its affirmative case at trial, resulting in a damages award of $6,870,978.95$6.8 million plus costs. The Court also permanently enjoined F5 from infringing Radware’s patents-in-suit. In its counterclaim, F5 alleged infringement of four F5 patents related to cookie persistence technology. In particular, while F5 acknowledged that Radware is licensed to each of the F5 patents-in-suit, F5 contends that Radware’s AppDirector and Alteon product lines perform unlicensed modes of the patents-in-suit. F5’s counterclaim further alleged trade libel and unfair competition resulting from statements allegedly made by Radware asserting that F5 is responsible for certain internet service problems at major banks, including the Bank of America. On December 6, 2013, Radware filed an answer denying the allegations in F5’s counterclaims. On June 26, 2014, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s patent infringement counterclaim with respect to Radware’s AppDirector product line. In June 2015, in response to Radware’s Summary Judgment Motion, F5 conceded that the current version of Alteon does not infringe any of the F5 patents-in-suit and that its allegations are limited to a previous version of Alteon. On January 7, 2016, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s trade libel and unfair competition counterclaims. On May 9, 2016, F5 accepted our offer for judgment of $40,000 for all of F5’s remaining claims and on September 7, 2016 the Court entered judgment in the same amount. This portion of the judgment is not appealable. After judgment, both Radware and F5 appealed other portions of the judgment to the Federal Circuit. F5 appealed the judgment for Radware, while Radware appealed orders that limited the amount of damages and the scope of the permanent injunction. Oral hearing on the appeal has not yet been scheduled. F5 has posted a bond with the Court for the entire judgment amount in favor of Radware.
The Federal Circuit affirmed the entire judgment on September 18, 2017 and remanded the case to the District Court on October 25, 2017, upon expiration of the time allowed for either party to request reconsideration of the affirmance. Upon remand, the case was re-assigned to Judge Chabria on November 21, 2017. On November 28, 2017, Radware moved to release the bond posted by F5. On December 6, 2017, the Court granted Radware’s motion. On January 16, 2018 Radware filed the necessary tax documents for Radware Inc. to collect the funds, which, together with interest amounted to $6.9 million and which were in turn released by the Court on January 29, 2018.
Dividend Distribution Policy
We have never paid and do not intend to pay cash dividends on our ordinary shares in the foreseeable future. While we may engage from time to time in “buy-back” programs of our shares, our policy is to retain earnings and other cash resources to continue the development and expansion of our business. Any future dividend policy will be determined by our Board of Directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions. See also Item 10B “- Dividend and Liquidation Rights.”
B. Significant Changes
Except as otherwise disclosed in this annual report, we are not aware of any significant changes that have occurred since December 31, 2016.2017.
A. Offer and Listing Details
Our ordinary shares have been listed for quotation on the NASDAQNasdaq Global Select Market since September 30, 1999 under the symbol “RDWR”. From May 12, 2004 to March 8, 2009, our ordinary shares were also listed on the Tel Aviv Stock Exchange, or TASE. We voluntarily delisted our ordinary shares from the TASE primarily due to low trading volume.
The following table sets forth the high and low sale price for our ordinary shares as reported by the NASDAQNasdaq Global Select Market for the periods indicated:
| | NASDAQ Global Select Market | | | Nasdaq Global Select Market | |
| | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | |
2012 | | $ | 19.87 | | | $ | 14.48 | | |
2013 | | $ | 19.28 | | | $ | 13.70 | | | $ | 19.28 | | | $ | 13.70 | |
2014 | | $ | 22.67 | | | $ | 15.91 | | | $ | 22.67 | | | $ | 15.91 | |
2015 | | | | | | | | | | $ | 24.91 | | | $ | 12.60 | |
2016 | | | $ | 15.20 | | | $ | 9.98 | |
2017 | | | $ | 20.48 | | | $ | 14.38 | |
2016 | | | | | | | | | |
First Quarter | | $ | 23.49 | | | $ | 19.24 | | | $ | 14.76 | | | $ | 10.18 | |
Second Quarter | | $ | 24.48 | | | $ | 20.69 | | | $ | 12.48 | | | $ | 10.50 | |
Third Quarter | | $ | 21.95 | | | $ | 15.85 | | | $ | 13.87 | | | $ | 10.97 | |
Fourth Quarter | | $ | 17.32 | | | $ | 13.97 | | | $ | 14.85 | | | $ | 11.85 | |
ANNUAL | | $ | 24.91 | | | $ | 12.60 | | |
| | | | | | | | | |
2016 | | | | | | | | | |
2017 | | | | | | | | | |
First Quarter | | $ | 14.76 | | | $ | 10.18 | | | $ | 16.37 | | | $ | 14.38 | |
Second Quarter | | $ | 12.48 | | | $ | 10.50 | | | $ | 18.26 | | | $ | 15.17 | |
Third Quarter | | $ | 13.87 | | | $ | 10.97 | | | $ | 18.18 | | | $ | 16.32 | |
October 2016 | | $ | 13.80 | | | $ | 12.11 | | |
November 2016 | | $ | 13.79 | | | $ | 11.46 | | |
December 2016 | | $ | 15.10 | | | $ | 13.18 | | |
Fourth Quarter | | $ | 14.85 | | | $ | 11.85 | | | $ | 20.48 | | | $ | 16.93 | |
ANNUAL | | $ | 15.20 | | | $ | 9.98 | | |
| | | | | | | | | |
2017 | | | | | | | | | |
January 2017 | | $ | 14.76 | | | $ | 14.38 | | |
February 2017 | | $ | 16.37 | | | $ | 14.55 | | |
March 2017 | | $ | 16.16 | | | $ | 15.46 | | |
April 2017* | | $ | 15.94 | | | $ | 15.17 | | |
Six months prior to filing | | | | | | | | | |
October 2017 | | | $ | 17.54 | | | $ | 16.93 | |
November 2017 | | | $ | 20.44 | | | $ | 19.14 | |
December 2017 | | | $ | 20.48 | | | $ | 19.40 | |
January 2018 | | | $ | 20.43 | | | $ | 19.45 | |
February 2018 | | | $ | 21.34 | | | $ | 19.55 | |
March 2018* | | | $ | 21.76 | | | $ | 20.47 | |
*Through April 21, 2017March 25, 2018
On April 21, 2017,March 25, 2018, the last reported sale price of our ordinary shares on the NASDAQNasdaq was $15.17$21.19 per share.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are listed for quotation on the NASDAQNasdaq Global Select Market under the symbol “RDWR”.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Set out below is a description of certain provisions of our Memorandum of Association and Articles of Association, and of the Companies Law related to such provisions. This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Memorandum and Articles which are incorporated by reference to exhibits to this annual report and by Israeli law.
We were first registered under Israeli law on May 16, 1996 as a private company, and on November 18, 1999 became a public company. Our registration number with the Israeli registrar of companies is 52-004437-1.
Objects and Purposes
Pursuant to our Articles of Association, our objective is to engage, directly or indirectly, in any lawful undertaking or business whatsoever, including, without limitation, as stipulated in our Memorandum of Association, which was filed with the Israeli Registrar of Companies.
Shares; Transfer of Shares
Our registered capital is divided into 60,000,000 ordinary shares of nominal (par) value NIS 0.05 each. There are no other classes of shares. All of our outstanding shares are fully paid and non-assessable. The shares do not entitle their holders to preemptive rights and fully paid ordinary shares may be freely transferred pursuant to our Articles of Association unless such transfer is restricted or prohibited by another instrument.
Dividend and Liquidation Rights
According to the Israeli Companies Law, a company may distribute dividends only out of its “profits,” as such term is defined in the Israeli Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher. Our Board of Directors is authorized to declare dividends, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due, and provided further that our shareholders approve the final dividend declared by the Board of Directors, in an amount not to exceed the Board of Directors’ recommendation. Notwithstanding the foregoing, even where there are no sufficient profits, dividends may be paid with the approval of a court, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after deduction of previous distributions that were not already deducted from the surplus, as evidenced by financial statements prepared no more than six months prior to the date of distribution.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. This liquidation right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Voting, Shareholders’ Meetings and Resolutions
We have two types of general shareholder meetings: the annual general meeting and the extraordinary general meeting. An annual general meeting must be held once in every calendar year, but not more than 15 months after the last annual general meeting. The Board of Directors may convene an extraordinary general meeting whenever it deems fit, and is obliged to do so upon the request of any of: (i) two directors or one fourth of the then serving directors; (ii) one or more shareholders who hold at least 5% of the issued share capital and at least 1% of the voting rights; or (iii) one or more shareholders who hold at least 5% of the voting rights.
In accordance with our Articles of Association, unless a longer period for notice is prescribed by the Israeli Companies Law, at least seven days and not more than forty-five days’ notice of any general meeting of shareholders must be given. Under the Companies Law, shareholder meetings generally require prior notice of not less than 21 days or, with respect to certain matters, such as election of directors and affiliated party transactions, not less than 35 days.
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. A shareholder may only vote the shares for which all calls have been paid, except in separate general meetings of a particular class.
The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 35% of the outstanding voting shares unless otherwise required by applicable rules. A meeting adjourned for lack of a quorum, if convened upon requisition under the provisions of the Companies Law, shall be dissolved, but in any other case is adjourned to the same day in the following week at the same time and place or any time and place as the chairman may designate with the consent of a majority of the voting power represented at the meeting and voting on the matter adjourned. At such reconvened meeting, the required quorum consists of any two members present in person or by proxy.
Under the Companies Law, unless otherwise provided in the Articles of Association or applicable law, all resolutions of the shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter. However, our articles of association require approval of at least 75% of the shares present and voting to increase our share capital or to change its structure, grant any special rights to the holders of a class of shares with preferential rights or change such rights previously granted or remove directors from office.
Subject to the Companies Law, a resolution in writing signed by the holders of all of our ordinary shares entitled to vote at a meeting of shareholders or to which all such shareholders have given their written consent is required to adopt the resolution in lieu of a meeting.
General Duties of Shareholders
Under the Companies Law, each and every shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations towards the company and other shareholders and refrain from abusing his power in the company, such as in voting in the general meeting of shareholders on the following matters:
· | any amendment to the articles of association; |
· | an increase of the company’s authorized share capital; |
an increase of the company’s authorized share capital;a merger; or
approval of certain related party transactions and actions, which require shareholder approval pursuant to the Companies Law.
· | approval of certain related party transactions and actions, which require shareholder approval pursuant to the Companies Law. |
In addition, each and every shareholder has the general duty to refrain from depriving rights of other shareholders.
Furthermore, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder in the company or any other power toward the company is under a duty to act in fairness towards the company. These various shareholder duties may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests.
Restrictions on Non-Israeli Residents
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 of Association or Articles of Association or by the laws of the State of Israel.
Mergers and Acquisitions under Israeli Law
There are no specific provisions of our Memorandum or Articles of Association that would have an effect of delaying, deferring or preventing a change in control of us or that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or any of our subsidiaries), except those relating to the staggered board as described in Item 6 above and certain provisions of the Companies Law described below, which may have such effect.
The Israeli Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares, voting on the proposed merger at a shareholders meeting. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power of the right to appoint 25% or more of the directors of the other party), vote against the merger. 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 a proposal of the merger has been filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed since the merger was approved by the shareholders of each merging company.
In addition, provisions of the Companies Law that deal with “arrangements” between a company and its shareholders may be used to effect squeeze-out transactions in which the target company becomes a wholly-owned subsidiary of the acquirer. These provisions generally require that the merger be approved by a majority of the participating shareholders holding at least 75% of the shares voted on the matter. In addition to shareholder approval, court approval of the transaction is required, which entails further delay. The Companies Law also provides for a merger between Israeli companies, after completion of the above procedure for an “arrangement” transaction and court approval of the merger.
The Companies Law also provides that an acquisition of shares of a public company must be made by means of a “special” tender offer if as a result of the acquisition (1) the purchaser would become a 25% or greater shareholder of the company and there is no 25% or greater shareholder in the company, or (2) the purchaser would become a 45% or greater shareholder of the company and there is no 45% or greater shareholder in the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholder approval, (2) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. A “special” 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. In general, the tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered 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’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. In general, if less than 5% of the outstanding shares are not tendered in the tender offer and more than half of the offerees who have no personal interest in the offer tendered their shares, all the shares that the acquirer offered to purchase will be transferred to it. Shareholders may request appraisal rights in connection with a full tender offer for a period of six months following the consummation of the tender offer, but the acquirer is entitled to stipulate that tendering shareholders will forfeit such appraisal rights.
In addition, our Board of Directors may decide to adopt a shareholder rights plan without further shareholder approval.
Finally, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law subjects a shareholder who exchanges his ordinary shares for shares in another corporation to taxation on half the shareholder’s shares two years following the exchange and on the balance four years thereafter even if the shareholder has not yet sold the new shares.
Modification of Class Rights
Our Articles of Association provide that the rights attached to any class (unless otherwise provided by the terms of such class), such as voting, rights to dividends and the like, may be varied by written consent of holders of seventy-five percent of the issued shares of that class, or by adoption by the holders of seventy-five percent (75%) of the shares of that class at a separate class meeting. Subject thereto, the conditions imposed by our Articles of Association governing changes in the rights of any class of shares, are no more stringent than is required by Israeli law.
Board of Directors
According to the Companies Law and our Articles of Association, the management of our business is vested in our Board of Directors. Our Articles of Association provide that the Board of Directors shall consist of not less than five and not more than nine directors as shall be determined by our shareholders (in October 2006 our shareholders fixed the maximum size of our Board of Directors at nine members). In accordance with our Articles of Association, our Board of Directors (other than our external directors) is divided into three classes with each class serving until the third annual meeting following their election, as more fully described in “Item 6– Directors, Senior Management and Employees – Board Practices – Staggered Board.” There is no requirement under our Articles of Association or under Israeli law for directors to retire on attaining a specific age. Our Articles of Association do not require directors to hold our ordinary shares to qualify for election.
The Board of Directors may exercise all such powers and may take all such actions that are not specifically granted to our shareholders. As part of its powers, our Board of Directors may cause the Company to borrow or secure payment of any sum or sums of money for the purposes of the Company, at such times and upon such terms and conditions as it thinks fit, including the grants of security interests on all or any part of the property of the Company. In addition, the Companies Law requires that transactions between a company and its office holders (which term includes directors) or that benefit its office holders, including arrangements as to the compensation of office holders, be approved as provided for in the Companies Law and the company’s Articles of Association, as more fully described in Item 6C under “Approval of Specified Related Party Transactions Under Israeli Law”.
A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the directors present and voting on the matter.
Exculpation, Insurance and Indemnification
Exculpation of Office Holders
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 duty of care (except in connection with distributions), provided that the articles of association of the company allow it to do so. Our Articles of Association allow us to exempt our office holders to the maximum extent permitted by law.
Insurance of Office Holders
As permitted by the Companies Law, our Articles of Association provide that we may enter into a contract for the insurance of the liability of any of our office holders, with respect to an act performed in the capacity of an office holder for:
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;
expenses he or she incurs as a result of administrative proceedings that may be instituted against him or her under Israeli securities laws, if applicable, and payments made to injured persons under specific circumstances thereunder; and
any other matter in respect of which it is permitted or will be permitted under applicable law to insure the liability of an office holder in the Company.
Indemnification of Office Holders
As permitted by the Companies Law, our Articles of Association provide that we may indemnify any of our office holders against the following obligations and expenses imposed on the office holder with respect to an act performed in the capacity of an office holder:
a financial liability incurred by, or imposed on him or her in favor of another person by a court judgment, including a settlement or an arbitration award approved by the court. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that our undertaking to indemnify is limited to events that our Board of Directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or criterion that our Board of Directors determines to be reasonable under the circumstances;
reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding either (A) concluded without the filing of an indictment against him or her or (B) concluded with the imposition of financial liability in lieu of criminal proceedings other than with respect to a criminal offense that does not require proof of criminal intent or in connection with a financial sanction;
reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him or her by a court in connection with proceedings we institute against him or her or instituted on our behalf or by another person, a criminal indictment from which he or she was acquitted, or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of criminal intent;
expenses he or she incurs as a result of administrative proceedings that may be instituted against him or her under Israeli securities laws, if applicable, and payments made to injured persons under specific circumstances thereunder; and
any other matter in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder in the Company.
Limitations on Insurance and Indemnification
The Companies Law provides that a company may not indemnify an office holder, or 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 unless, with respect to indemnification or insurance coverage, 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 the breach was done intentionally or recklessly unless the breach was done negligently;
Any act or omission done with the intent to derive an illegal personal benefit; or
Any fine levied against the office holder.
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our Audit Committee and our Board of Directors and, if the beneficiary is a director, by our shareholders.
We currently hold directors and officers liability insurance for the benefit of our office holders with an aggregate coverage limit of $25 million.million, including side A coverage. In addition, we provide our directors and officers indemnification pursuant to the terms of a Letter of Indemnification substantially in the form approved by our shareholders.
C. Material Contracts
See the summary of the terms of the Headquarters Lease in “Item 7B – Major Shareholders and Related Party Transactions – Related Party Transactions – Lease of Property.
D. 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.
E. Taxation
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Considerations
The following is a summary of the material current tax structure applicable to companies incorporated in Israel and some Israeli Government programs benefiting us, with special reference to its effect on us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting us. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the Israel tax authorities or courts. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation which has not been subject to judicial or administrative interpretation. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
General Corporate Tax Structure
Generally, Israeli companies are subject to “Corporate Tax” on their taxable income. As of 2016,2017, the corporate tax rate is 25%24% (in 20142015 and 2015,2016, the corporate tax rate was 26.5%) and 25%, respectively). InUnder an amendment to the Israeli Tax Ordinance enacted in December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 anddecreased to 23% effective from January 1, 2018.for 2018 and thereafter. However, the effective tax rate payable by a company that qualifies as an Industrial Company that derives income from an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise (as discussed below), like us, may be considerably less. Capital gains derived by an Israeli company are subject to the prevailing corporate tax rate.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959
The 2005 Amendment to the Investments Law
An amendment to the Investments Law, which was published on April 1, 2005 (the “Amendment”), changed certain provisions of the Investments Law. As a result of the Amendment, a company is no longer obliged to obtain Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Benefits provisions, and therefore generally there is no need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking grants). Rather, the Company may claim the tax benefits offered by the Investments Law directly in its tax returns by notifying the ITA within 12 months of the end of that year, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment.
The Amendment applies to new investment programs and investment programs with an election year commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The Amendment provides that terms and benefits included in any certificate of approval that was granted before the Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval.
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 export to specific markets with a population of at least 12 million (following an amendment which became effective as of July 2013, the export criteria was increased to markets with population of at least 14 million; such export criteria will further increase in the future by 1.4% per annum) and meet additional criteria stipulate in the amendment (referred to as a “Privileged Enterprise”). In order to receive the tax benefits, the Amendment states that the company must make an investment in the Privileged Enterprise, which meets all of the conditions, including 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 Privileged Enterprise (the “Year of Election”). Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company’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 Privileged Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion.
The extent of the tax benefits available under the Amendment to qualifying income of a Privileged Enterprise depend on, among other things, the geographic location in Israel of the Beneficiary Enterprise. The geographic location of the company at the year of election will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Privileged Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year if it is a qualified FIC. A company qualifying for tax benefits under the Amendment which pays a dividend out of income derived by its Privileged Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%. Dividends paid out of income attributed to a Privileged Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
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 benefits available to a Privileged Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest, or other monetary penalties.
We elected 2009 and 2012 as “Years of Election” according to the law prior to the 2011 Amendment mentioned below.
Tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record a deferred tax liability with respect to such tax-exempt income.
Preferred Enterprise – The 2011 Amendment
On December 29, 2010, the Israeli parliament approved an amendment to the Investments Law, effective as of January 1, 2011, which constitutes a reform of the incentives regime under such law.
The amendment generally abolishes the previous tax benefit routes that were afforded under the Investment Law, specifically the tax-exemption periods previously allowed, and introduces new tax benefits for industrial enterprises meeting the criteria of the law, which include the following:
A reduced corporate tax rate for industrial enterprises, provided that more than 25% of their annual income is derived from export, which will apply to the enterprise'senterprise’s entire preferred income so that in the tax years 2011 and 2012 the reduced tax rate was 10% for preferred income derived from industrial facilities located in development area A and 15% for those located elsewhere in Israel, in the tax year 2013 the reduced tax rate was 7% for development area A and 12.5% for the rest of Israel, and as offor the tax yearyears of 2014, 2015 and onwards2016, the reduced tax rate is 9% for development area A and 16% for the rest of Israel, and as of the tax year 2017 and onwards, the reduced tax rate is 7.5% for development area A and 16% for the rest of Israel.
The reduced tax rates will no longer be contingent upon making a minimum qualifying investment in productive assets.
A definition of “preferred income” was introduced into the Investments Law to include certain types of income that are generated by the Israeli production activity of a preferred enterprise.
A reduced dividend withholding tax rate of 15% will apply to dividends paid from preferred income to both Israeli and non-Israeli investors, which tax rate was increased to 20% for dividends paid from preferred income which was accumulated from 2014 and onwards, and with an exemption from such withholding tax applying to dividends paid to an Israeli company.
A “Preferred Company” (as defined in the Investments Law) may generally elect to apply the provisions of the amendment to preferred income produced or generated by it commencing on January 1, 2011. The amendment provides various transition provisions which allow, under certain circumstances, to apply the new regime to investment programs previously approved or elected under the Investments Law in its previous form.
Under the transition provisions of the new legislation, we decided to irrevocably implement the new law, effective January 1, 2014.
A substantial portion of our taxable operating income is derived from our Preferred Enterprise programs and we expect that a substantial portion of any taxable operating income that we may realize in the future will be also derived from such programs.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law ("Amendment 73") was published. According to Amendment 73, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The new tax tracksBenefits under the Amendment 73 are as follows: Technological preferred enterprise - an enterprise for which total consolidated revenuesnew regime of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel“Preferred Technology Enterprise” will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%). Special technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise's geographical location.include:
The Amendment 73 also prescribes special tax tracks for technological enterprises, which are subject to rules that are to be issued by the Minister of Finance by March 31, 2017. Since as of December 31, 2016 definitive criteria to determine the tax benefits had not yet been established, it cannot be concluded that the legislation in respect of technological enterprises had been enacted or substantively enacted as of that date. · | A reduced flat corporate tax rate of 12% (or 7.5% for entities located in Development Area A) on qualifying income deriving from eligible Intellectual Property (“Preferred Technology Income”), subject to satisfaction of a number of conditions, including compliance with a minimal amount or ratio of annual R&D expenditure and R&D employees, as well as having at least 25% of annual income derived from export. |
· | A 12% capital gains tax rate on the sale of a preferred intangible asset to a foreign affiliated enterprise, provided that the asset was initially purchased from a foreign resident at an amount of NIS 200 million or more. |
· | A withholding tax rate of 20% for dividends paid from Preferred Technology Income (with an exemption on dividends paid to an Israeli company). Such rate may be reduced to 4% on dividends paid to a foreign resident company, subject to certain conditions regarding percentage of foreign ownership of the distributing entity. |
· | Special technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise's geographical location. |
Accordingly, the above changes in the tax rates relating to technological enterprises were not considered in the computation of deferred taxes as of December 31, 2016.2016.
From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities.
Tax Benefits under the 2017 Amendment
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development Zone A. In addition, a Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation, or NATI.
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law. Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such divided are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%.
We have examined the impact of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise and have elected to adopt it as of 2017 onwards.
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), Industrial Companies are entitled to the following preferred corporate tax benefits, among others:
Deduction of purchases of know-how and patents over an eight-year period for tax purposes;
Right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli Industrial Companies;
Accelerated depreciation rates on equipment and buildings; and
Deductions over a three-year period of expenses involved with the issuance and listing of shares on a recognized stock market.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise, located in Israel, owned by an Industrial Company, whose major activity in a given tax year is industrial production activity.
We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’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 which is equivalent to the increase of the relevant asset’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, as of January 1, 2012, 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, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 30%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement). Israeli companies are subject to the Corporate Tax rate on capital gains derived from the sale of listed shares.
As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the Israeli CPI each year, which equated to NIS 803,520807,143 in the 20162017 tax year)year), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their taxable income for such tax year which is in excess of such threshold. For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions. For this purpose, taxable income includes taxable capital gains from the sale of our shares and taxable income from dividend distributions. Under an amendment to the Israeli Tax Ordinance enacted in December 2016, the rate of High Income Tax for 2017 and thereafter will increase to 3% and will be applicable to annual income exceeding NIS 640,000 (linked to the Israeli CPI each year, which equated to NIS 614,880 in 2018).
The tax basis of our ordinary shares acquired prior to January 1, 2003 will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided however that such capital gains are not derived from a permanent establishment in Israel and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.
Pursuant to the Convention Between the government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended (the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such 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 such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Taxation of Dividends paid to Non-Resident Holders of Shares
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends. On distributions of dividends other than bonus shares, or stock dividends, income tax is applicable at the rate of 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’s country of residence. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.
However, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to an Approved Enterprise, a Preferred Enterprise or a Privileged Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. Pursuant to the Tax Amendment, effective January 1, 2014, if the dividend is being paid out of certain income attributable to a Preferred Enterprise, the dividend will be subject to tax at the rate of 20% (and not 15%). A different rate may be provided in a treaty between Israel and the shareholder’s country of residence, as mentioned below.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty U.S. Resident is 25%. However, if the income out of which the dividend is paid is not generated by an Approved Enterprise, Privileged Enterprise or Preferred Enterprise, and not more than 25% of our gross income consists of interest or dividends, dividends paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year, are generally taxed at a rate of 12.5%. Dividends generated by an Approved Enterprise, Privileged Enterprise or Preferred Enterprise, are taxed at the rate of 15% under the U.S.-Israel Tax Treaty.
United States Federal Income Tax Considerations
Subject to the limitations described herein, the following discussion summarizes certain United States federal income tax consequences to a U.S. Holder of our ordinary shares. A “U.S. Holder” means a holder of our ordinary shares who is:
An individual citizen or resident of the United States for U.S. federal income tax purposes;
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 or 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, in general 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.
This discussion considers only U.S. Holders that will own their ordinary shares as capital assets (generally, for investment) and does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase our ordinary shares. Certain aspects of U.S. federal income taxation relevant to a holder of our ordinary shares that is not a U.S. Holder and not a partnership or other pass-through entity (a “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”), current and proposed Treasury Regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, 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’s individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or 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;
Dealers or traders in securities, commodities or currencies;
Have elected mark-to-market accounting;accounting method;
Are tax-exempt organizations or retirement plans;
Are grantor trusts;
Partnerships or other pass-through entities;
Partners or other equity owners in partnerships or other pass-through entities;
U.S. Holders selling our ordinary shares short,
U.S. Holders deemed to have sold our ordinary shares in a “constructive sale,”
Are S corporations;
Are financial institutions or “financial services entities” ;
Hold their ordinary shares as part of a straddle, “hedge”, “integrated” or “conversion transaction” with other investments;
Are certain former citizens or long-term residents of the United States;
Acquired their ordinary shares upon the exercise of employee stock options or otherwise as compensation;
Are real estate investment trusts or regulated investment companies;
Pension funds;
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.
If an 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.
In addition, this discussion does not address any aspect of state, local or non-United States tax laws or the possible application of United States federal gift or estate taxes.
Each holder of our ordinary shares is advised to consult such holder’s own tax advisor with respect to the specific tax consequences to such holder of purchasing, holding or disposing of our ordinary shares, including the applicability and effect of federal, state, local and foreign laws and possible changes in the tax laws in such holder’s particular circumstances.
Taxation of Ordinary Shares
Taxation of Dividends Paid On Ordinary Shares. Subject to the discussion below under “Passive Foreign Investment Company Status”, 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 such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in our ordinary shares and, to the extent in excess of such basis, will be treated as gain from the deemed sale or exchange of our ordinary shares. The dividend portion of such distributions generally will not qualify for the dividends received deduction available to corporations.corporations and thus will be subject to tax at the rate applicable to their taxable income.
Dividends that are received by non-corporate U.S. Holders will generally 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 dividend income.” Such income may also be subject to a 3.8% Net Investment Income Tax (NIIT) on individuals.individuals, estates or trusts. 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 (1) if 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) to the extent that 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 PFIC (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 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 therefrom) will generally be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received regardless of whether the foreign currency is converted into U.S. dollars. A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars after the date of receipt may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
U.S. Holders may have the option of claiming the amount of any non-U.S. income taxes withheld on a dividend distribution either as a deduction from gross income provided a deduction is claimed for all of the foreign income taxes the U.S. Holder pays or accrues in the particular year 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 such amount may be claimed as a credit against the individual’s U.S. federal income tax liability. A deduction does not reduce U.S. tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits, but may be subject to other limitations and each US Holder is urged to consult its own tax advisor. The amount of non-U.S. income taxes which 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 U.S. Holder. These limitations include, among others, rules which limit foreign tax credits allowable with respect to specific classes of income to the U.S. federal income taxes otherwise payable with respect to 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 attributed to non-U.S. source taxable income. A U.S. Holder will be denied a foreign tax credit with respect to non-U.S. income tax withheld from a dividend received on the ordinary shares if such 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 to the extent such 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. Distributions of current or accumulated earnings and profits generally will be foreign source passive income for U.S. foreign tax credit purposes.
Taxation of the Disposition of Ordinary Shares. Subject to the discussion below under “Passive Foreign Investment Company Status,” upon the sale, exchange or other disposition of our ordinary shares (other than with respect to certain non-recognition transactions), a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in such ordinary shares, which is usually the cost of such shares, and the amount realized on the disposition. A U.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles, while 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,” unless such U.S. Holder has elected to use the settlement date to determine its proceeds of sale. Capital gain from the sale, exchange or other disposition of our ordinary shares held more than one year is long-term capital gain, and may be eligible for a reduced rate of taxation for individuals, estates or trusts (currently taxable at a maximum of 20%). U.S. Holders should consult their own tax advisors regarding the availability of the reduced rate of U.S. federal income tax on dividends in light of their own particular circumstances. Gains or losses recognized by a U.S. Holder on a sale, exchange or other disposition of our ordinary shares generally will 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 our ordinary shares may be subject to limitations. A U.S. Holder that receives foreign currency upon disposition of our ordinary shares and subsequently converts the foreign currency into U.S. dollars or disposes of such foreign currency, may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
Net Investment Income. Certain non-corporate U.S. holders may be subject to an additional 3.8% surtax on all or a portion of their “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 additional net investment income on their investment in our ordinary shares.
Passive Foreign Investment Company Status. We will be a PFIC if (taking into account certain “look-through” rules with respect to the income and assets of our corporate subsidiaries) either (i) 75 percent or more of our gross income in a taxable year is passive income or (ii) the average percentage of our total assets (by value, determined on a quarterly basis) thatwhich produce, or are held for the production of, passive assets during the taxable year is at least 50 percent. Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions. If we were a PFIC, each U.S. Holder would (unless it made one of the elections discussed below on a timely basis) be taxed on gain recognized from the disposition of our ordinary shares (including gain deemed recognized if the ordinary shares are used as security for a loan) and upon receipt of certain excess distributions with respect to our ordinary shares as if such income had been recognized ratably over the U.S. Holder’s holding period for the ordinary shares. The U.S. Holder’s income for the current taxable year would include (as ordinary income) amounts allocated to the current year and to any period prior to the first day of the first taxable year for which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other period to which income is allocated, and an interest charge on the tax as so computed would also apply. The tax liability with respect to the amount allocated to the taxable year prior to the taxable year of the distribution or disposition cannot be offset by any net operating losses. Additionally, if we were a PFIC, U.S. Holders who acquire our ordinary shares from decedents (other than certain nonresident aliens) would be denied the normally-available step-up in basis for such shares to fair market value on the date of death and, instead, would generally have a tax basis in such shares equal to the lower of the decedent’s basis or the fair market value of such shares on the date of the decedent’s death. Further, if we are a PFIC, each U.S. Holder generally will be required to file an annual report with the IRS. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we will continue to be treated as a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary shares, regardless of whether we continue to meet the tests described above unless such U.S. Holder elects to apply the QEF or the mark-to-market election (described below) and certain conditions are met.
As an alternative to the tax treatment described above, a U.S. Holder could elect to treat us as a “qualified electing 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 gain as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. 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 includable 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. We will supply U.S. Holders with the information needed to report income and gain under a QEF election if we are a PFIC. A U.S. Holder’s basis in its ordinary shares will increase by any amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long as a U.S. Holder’s QEF election is in effect beginning with the first taxable year in which we were a PFIC during the U.S. Holder’s holding period for its ordinary shares, any gain or loss realized by such holder on the disposition of its ordinary shares held as a capital asset ordinarily would be a 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.disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. 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” (e.g., “regularly traded” on the NASDAQNasdaq 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’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 would generally 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’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 taxable 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 taxable 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’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 our ordinary shares for the ordinary shares to be considered “regularly traded” or that our ordinary shares will continue to trade on the NASDAQNasdaq 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”).
As indicated above, we will be a PFIC for any taxable year if the average percentage (by fair market value determined on a quarterly basis) of our assets held for the production of, or that produce, passive income is at least 50 percent. The Code does not specify how a corporation must determine the fair market value of its assets for this purpose and the issue has not been definitively determined by the IRS or the courts. The market capitalization approach has generally been used to determine the fair market value of the assets of a publicly traded corporation. The IRS and the courts, however, have accepted other valuation methods besides the market capitalization approach in certain other valuation contexts. For our 20162017 taxable year, we believe that we should not be classified as a PFIC. However, there can be no assurance that the IRS will not challenge this treatment and it is possible that the IRS could attempt to treat us as a PFIC for 20162017 and possibly prior taxable years. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets and market capitalization, including the future price of our ordinary shares, which are all relevant to this determination of whether we are classified as a PFIC. Accordingly, there can be no assurance that we will not become a PFIC in future taxable years.
U.S. Holders are urged to consult their tax advisors about the PFIC rules, including eligibility for and the manner and advisability of making, the QEF election or the mark-to market election.
Tax Consequences for Non-U.S. Holders of Ordinary Shares
Except as described in “Information Reporting and Backup Withholding” below, a Non-U.S. Holder of 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, ordinary shares, unless, in the case of U.S. federal income taxes:
such 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, such item is attributable to a permanent establishment or, in the case of an individual, 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 requirements are met.
Information Reporting and Backup Withholding
U.S. Holders (other than certain exempt recipients, such as corporations) generally are subject to information reporting requirements with respect to dividends paid in the United States on ordinary shares and proceeds received from the sale, exchange, redemption or other disposition of ordinary shares. Under the Code, a U.S. Holder may be subject, under certain circumstances, to backup withholding (currently at a rate of up to 28%) with respect to dividends paid on our ordinary shares and proceeds received from the sale, exchange, redemption or other disposition of ordinary shares unless such holder provides proof of an applicable exemption or correct taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules.
Any US Holders required to establish their exempt status generally must provide a properly executed IRS Form W-9 (Request for Taxpayer Identification Number and Certification).
A U.S. Holder of 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. Holders 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 backup withholding with respect to dividends paid on, or the proceeds from the disposition of, ordinary shares, provided that such Non-U.S. Holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
Certain U.S. holders (and to the extent provided in IRS guidance, certain non-U.S. holders) who hold interests in “specified foreign financial 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.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the Exchange Act, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports and other information with the SEC. You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Such materials are also available free of charge at the website of the SEC at www.sec.gov and on our website www.radware.com. The content of our website is not incorporated by reference into this annual report.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
Notwithstanding the foregoing, we furnish reports with the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and we solicit proxies and furnish proxy statements for all meetings of shareholders, a copy of which proxy statement is furnished promptly thereafter with the SEC under the cover of a Current Report on Form 6-K. We also post our Annual Report on Form 20-F on our web site (www.radware.com) as soon as practicable following the filing of the Annual Report on Form 20-F with the SEC.
The documents concerning our Company which are referred to in this annual report may also be inspected at our offices located at 22 Raoul Wallenberg Street, Tel Aviv 6971917, Israel.
I. Subsidiary Information
Not applicable.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk, including fluctuations in interest rates and foreign currency exchange rates. Our primary market risk exposure occurs because we generate a portion of our revenues in foreign currencies, mainly in Chinese Yuan, but also in Australian Dollar and Euro and incur a portion of our expenses in foreign currencies, mainly in NIS, but also in Euro and other foreign currencies. We generally do not engage in hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations.
In addition, as of December 31, 2016,2017, we had cash and cash equivalents, including short-term and long-term bank deposits and short-term and long-term marketable securities, of $320.1$344.3 million. As of that date, approximately 98%95% of our cash, cash equivalents and marketable securities are held by Radware Ltd. in Israeli or U.S. financial institutions.
The majority of our cash and cash equivalents, and short-term and long-term bank deposits are invested in banks in Israel and, to a smaller extent, in banks in the United States. The Israeli bank deposits are not insured, while the deposits made in the United States are in excess of insured limits and are not otherwise insured. If one or more of these financial institutions were to become insolvent, the loss of these investments would have a material adverse effect on our financial condition.
Exposure to Interest Rate Fluctuations
We do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk, with the exception of the following:
Approximately half of our cash throughout the world is invested in fixed-income securities and is affected by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These securities are readily available for sale and are treated as such in our financial statements.
A decline in market interest rates, such as the significant global decline in 2008 and 2009, that continued through 2016, has had an adverse effect on our investment income. This is because, in a declining interest rate environment, borrowers may seek to refinance their borrowings at lower rates and, accordingly, prepay or redeem securities held earlier than initially expected. This action may cause us to reinvest the redeemed proceeds in lower yielding investments. An increase in market interest rates could also have an adverse effect on the value of our investment portfolio, for example, by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio.
Our investments consist primarily of government and corporate debentures and bank deposits. As of December 31, 2016,2017, approximately 17%14% of our portfolio was invested in foreign banks and government debentures, 13% in other corporate debentures and the rest of the funds were invested in bank deposits and money market funds. Although we believe that we generally adhere to conservative investment guidelines, the continuing turmoil in the financial markets may result in impairments of the carrying value of our investment assets. Realized losses in our investments portfolio may adversely affect our financial position and results.
Any significant decline in our investment income or the value of our investments as a result of falling interest rates, deterioration in the credit of the securities in which we have invested, or general market conditions, could have an adverse effect on our results of operations and financial condition.
We currently have no debt.
Exposure to Currency Fluctuations
Approximately 85%86% of our sales arein 2017 were denominated in dollars or are dollar-linked and we incur most of our expenses in dollars, NIS, and Euros. We believe that the dollar is the primary currency of the economic environment in which we operate. Thus, our functional and reporting currency is the dollar and monetary accounts maintained in currencies other than the dollar are re-measured into U.S. dollars in accordance with ASC No. 830 “Foreign Currency Matters”. Changes in currency exchange rates between our functional currency and the currency in which a transaction is denominated are included in our results of operations as financial income (expense) in the period in which the currency exchange rates change.
Our revenues and expenses may be affected by fluctuations in the value of the dollar as it relates to foreign currencies, mainly the NIS, Euro, Chinese Yuan and Australia Dollar. For example, if there were no changes in the average exchange rates of the dollar relative to the NIS, Euro, Chinese Yuan and Australia Dollar during the year in 20162017 compared to the average exchange rates in 2015,2016, our revenues would have been higherlower in an amount of $0.7$0.6 million and our expenses would have been higherlower in an amount of $0.2$4.3 million. Assuming our revenues and expenses in 20172018 remain at the same level and with the same currency mix as in 2016,2017, a 10% weakening in the value of the dollar relative to all currencies in which we operate would result in an increase in revenues of $2.9 million and an increase in our expenses of $10.6$10.7 million.
The following table presents information about the changes in the exchange rates of the U.S. dollar relative to the NIS, Euro, Chinese Yuan and Australian Dollar:
Year ended December 31, | | U.S. dollar against: | | | U.S. dollar against: | |
| | NIS | | | Euro | | | | | | | | | NIS | | | Euro | | | Chinese Yuan | | | Australian Dollar | |
2012 | | | (2.3 | )% | | | (2.0 | )% | | | (1.2 | )% | | | (2.1 | )% | |
2013 | | | (7.0 | )% | | | (4.3 | )% | | | (2.7 | )% | | | 16.0 | % | | | (7.0 | )% | | | (4.3 | )% | | | (2.7 | )% | | | 16.0 | % |
2014 | | | 12 | % | | | 13.4 | % | | | 3.0 | % | | | 9.1 | % | | | 12 | % | | | 13.4 | % | | | 3.0 | % | | | 9.1 | % |
2015 | | | 0.3 | % | | | 11.6 | % | | | 5.2 | % | | | 12.2 | % | | | 0.3 | % | | | 11.6 | % | | | 5.2 | % | | | 12.2 | % |
2016 | | | (1.5 | )% | | | 3.5 | % | | | 6.2 | % | | | 1.2 | % | | | (1.5 | )% | | | 3.5 | % | | | 6.2 | % | | | 1.2 | % |
2017 (1) | | | (4.3 | )% | | | (1.9 | )% | | | (1.1 | )% | | | (4.1 | )% | |
2017 | | | | (9.8 | )% | | | (12.2 | )% | | | 6.7 | % | | | (7.5 | )% |
2018 (1) | | | | 0.7 | % | | | (2.8 | )% | | | (3.0 | )% | | | (1.1 | )% |
(1) January 1, 20172018 through April 21, 2017March 25, 2018
| DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
ITEMS 12A, 12B AND 12C
Not applicable.
ITEM 12D
The Company does not have any outstanding American Depositary Shares or American Depositary Receipts.
ITEM 13. | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable.
ITEM 14. | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
ITEMS 14A, 14B, 14C, 14D AND 14E
Not applicable.
ITEM 14E
The effective date of the registration statement (Commission File Number 333-10752) for our initial public offering of our ordinary shares was September 29, 1999. The offering commenced on October 5, 1999, and terminated after the sale of all the securities registered. The managing underwriter of the offering was Salomon Smith Barney. We registered 8,050,000 ordinary shares in the offering, including shares issued pursuant to the exercise of the underwriters’ over-allotment option. Of such shares, we sold 7,000,000 ordinary shares at an aggregate offering price of $63.0 million ($9.00 per share) and certain selling shareholders sold an aggregate of 1,050,000 ordinary shares at an aggregate offering price of $9.45 million ($9.00 per share). Under the terms of the offering, we incurred underwriting discounts of $4.41 million. We also incurred estimated expenses of $1.82 million in connection with the offering. None of the expenses consisted of amounts paid directly or indirectly to any of our directors, officers, general partners or their associates, any persons owning ten percent or more of any class of our equity securities, or any of our affiliates. The net proceeds that we received as a result of the offering were approximately $56.8 million. None of the use of proceeds consisted of amounts paid directly or indirectly to any of our directors, officers, general partners or their associates, any persons owning ten percent or more of any class of our equity securities, or any of our affiliates.
In January 2000, we raised net proceeds of approximately $60.0 million in a public offering of our ordinary shares.
The net proceeds of the two offerings are kept in short-term and long-term bank deposits and in marketable securities.
ITEM 15. | ITEM 15. CONTROLS AND PROCEDURES |
· Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2016.2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2016,2017, our disclosure controls and procedures were effective to ensure that: (1) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (2) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
· Management’s Annual Report on Internal Control Over Financial Reporting and Attestation Report of Registered Public Accounting Firm
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting for us. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets,
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection 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.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.2017. In conducting its assessment of internal control over financial reporting, our management based its evaluation on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has concluded based on its assessment, that our internal control over financial reporting was effective as of December 31, 20162017 based on these criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2016,2017, has been audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst & Young Global), an independent registered public accounting firm who audited and reported on the consolidated financial statements of the company for the year ended December 31, 2016.2017.
· Attestation Report of the Registered Public Accounting Firm
This annual report includes an attestation report of our independent registered public accounting firm regarding internal control over financial reporting on page F-3 of our audited consolidated financial statements set forth in “Item 18 – Financial Statements”, and incorporated herein by reference.
· Changes Inin Internal Control Over Financial Reporting
During the year ended December 31, 2016,2017, no changes in our internal control over financial reporting have occurred that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Avraham Asheri, a member of our Audit Committee, is a financial expert as defined in the applicable regulations, and has determined that such member is “independent” as such term is defined in the NASDAQNasdaq listing standards. The education and experience of the Audit Committee financial expert is presented in “Item 6 – Directors, Senior Management and Employees – Directors and Senior Management” and is incorporated herein by reference.
We have adopted a Code of Conduct and Ethics which applies to all directors, officers and employees of the Company, including our President and Chief Executive Officer, Chief Financial Officer, Director of Finance and Corporate Controller. Our Code of Conduct and Ethics has been posted on our Internet website, http://www.radware.com/corporategovernance/ .
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Public Accountants
In the annual meeting held in October 2016,September 2017, our shareholders approved the reappointment of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global (“Ernst & Young”), to serve as our independent auditors until the next annual meeting.
The following table sets forth, for each of the years indicated, the aggregate fees billed by Ernst & Young and the percentage of each of the fees out of the total amount paid to them classified by category:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2016 | | | 2016 | | | 2017 | |
| | (US$ in thousands) | | | (US$ in thousands) | |
Audit Fees (1) | | | 275 | | | | 84 | % | | | 315 | | | | 70 | % | |
Audit and Audit Related Fees (1) | | | | 315 | | | | 70 | % | | | 341 | | | | 54 | % |
Tax Fees (2) | | | 31 | | | | 9 | % | | | 92 | | | | 21 | % | | | 92 | | | | 21 | % | | | 165 | | | | 26 | % |
All Other Fees (3) | | | 21 | | | | 7 | % | | | 41 | | | | 9 | % | | | 41 | | | | 9 | % | | | 124 | | | | 20 | % |
Total | | | 327 | | | | 100 | % | | | 449 | | | | 100 | % | | | 449 | | | | 100 | % | | | 630 | | | | 100 | % |
(1) Audit Fees include fees associated with the annual audit, including the audit of internal control over financial reporting, the reviews of the Company’s quarterly financial statements, statutory audits required internationally, special implementation project of new revenue standard 606, consents and assistance with and review of documents filed with the SEC.
(2) Tax Fees included tax compliance, including the preparation of tax returns, tax planning and tax advice, including assistance with tax audits and appeals, advice related to acquisitions, transfer pricing and assistance with respect to requests for rulings from tax authorities.
(3) Other Fees include fees for consultation with Company management about accounting or disclosure treatment of transactions or events and consulting services such as obtaining grants from the Government of Israel for approved research and development projects.
Audit Committee’s pre-approval policies and procedures
Our Audit Committee oversees our independent auditors. See also the description in “Item 6C- Directors, Senior Management and Employee - Board Practices.”
Our Audit Committee has adopted a policy requiring management to obtain the Committee’s approval before engaging our independent auditors to provide any other audit or permitted non-audit services to us or our subsidiaries. Pursuant to this policy, which is designed to assure you that such engagements do not impair the independence of our auditors, and which is discussed and approved at the end of each calendar year, the Audit Committee pre-approves annually a catalog of specific audit and non-audit services in the categories Audit Service, Audit-Related Service and Tax Consulting Services that may be performed by our auditors. In addition, the Audit Committee limited the aggregate amount in fees our auditors may receive during fiscal year for non-audit services in certain categories, unless pre-approved. Our Director of Finance reviews all individual management requests to engage our independent auditors as a service provider in accordance with this catalog and, if the requested services are permitted pursuant to the catalog, approve the request accordingly. We inform the Audit Committee about these approvals on a quarterly basis. Services that are not included in the catalog require pre-approval by the Audit Committee on a case-by-case basis. Our Audit Committee is not permitted to approve any engagement of our auditors if the services to be performed either fall into a category of services that are not permitted by applicable law or the services would be inconsistent with maintaining the auditors’ independence.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
During 2016,2017, we repurchased our ordinary shares under a share repurchase plan, in an aggregate amount of $22.0$0.4 million, as follows:
Period | | (a) Total Number of Shares (or Units) Purchased | | | (b) Average Price Paid per Share (or Units) (in US$) | | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1) | | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) | | | (a) Total Number of Shares (or Units) Purchased | | | (b) Average Price Paid per Share (or Units) (in US$) | | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)(2) | | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)(2) | |
| | | | | | | | | | | | | | | | |
January 1 through 31 | | | 0 | | | | N/A | | | | 0 | | | $ | 6,894,942 | (1) | | | 0 | | | | N/A | | | | 0 | | | $ | 24,840,431(1 | ) |
February 1 through 28 | | | 626,800 | | | | 10.97 | | | | 626,800 | | | $ | 131,047 | (1) | | | 0 | | | | N/A | | | | 0 | | | $ | 24,840,431(1 | ) |
March 1 through 31 | | | 0 | | | | N/A | | | | 0 | | | $ | 131,047 | (1) | | | 0 | | | | N/A | | | | 0 | | | $ | 24,840,431(1 | ) |
April 1 through 30 | | | 0 | | | | N/A | | | | 0 | | | $ | 131,047 | (1) | | | 0 | | | | N/A | | | | 0 | | | $ | 24,840,431(1 | ) |
May 1 through 31 | | | 456,952 | | | | 10.77 | | | | 456,952 | | | $ | 35,079,762 | (2) | | | 0 | | | | N/A | | | | 0 | | | $ | 40,000,000(2 | ) |
June 1 through 30 | | | 0 | | | | N/A | | | | 0 | | | $ | 35,079,762 | (2) | | | 0 | | | | N/A | | | | 0 | | | $ | 40,000,000(2 | ) |
July 1 through 31 | | | 0 | | | | N/A | | | | 0 | | | $ | 35,079,762 | (2) | | | 0 | | | | N/A | | | | 0 | | | $ | 40,000,000(2 | ) |
August 1 through 31 | | | 0 | | | | N/A | | | | 0 | | | $ | 35,079,762 | (2) | | | 0 | | | | N/A | | | | 0 | | | $ | 40,000,000(2 | ) |
September 1 through 30 | | | 0 | | | | N/A | | | | 0 | | | $ | 35,079,762 | (2) | | | 25,782 | | | | 15.99 | | | | 25,782 | | | $ | 39,587,815(2 | ) |
October 1 through 31 | | | 625,748 | | | | 12.94 | | | | 625,748 | | | $ | 26,980,883 | (2) | | | 0 | | | | N/A | | | | 0 | | | $ | 39,587,815(2 | ) |
November 1 through 30 | | | 174,528 | | | | 12.38 | | | | 174,528 | | | $ | 24,840,431 | (2) | | | 0 | | | | N/A | | | | 0 | | | $ | 39,587,815(2 | ) |
December 1 through 31 | | | 0 | | | | N/A | | | | 0 | | | $ | 24,840,431 | (2) | | | 0 | | | | N/A | | | | 0 | | | $ | 39,587,815(2 | ) |
(1) In February 2016, the Company’s Board of Directors authorized a plan for the repurchase of up to an aggregate of $40.0 million of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan was announced in a press release dated February 3, 2016 and expired on February 2, 2017.
(2) In April 2015,2017, the Company’s Board of Directors authorized a new plan for the repurchase of up to an aggregate of $40.0 million of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan was announced in a press release dated April 30, 201524, 2017 and will expire on April 30, 2016.
(2) In February 2016 the Company’s Board of Directors authorized a new plan for the repurchase of up to an aggregate of $40.0 million of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan was announced in a press release dated February 3, 2016 and will expire on February 2, 2017.24, 2018.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
We are a foreign private issuer whose ordinary shares are listed on the NASDAQNasdaq Global Select Market. As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the NASDAQNasdaq rules, including the NASDAQNasdaq corporate governance requirements. The NASDAQNasdaq rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQNasdaq applicable to domestic U.S. listed companies:
The NASDAQNasdaq rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer’s common voting stock. We have chosen to follow home country practice with respect to the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Israeli Companies Law and Israeli practice, provide that the quorum requirements for an adjourned meeting are the presence of a minimum of two shareholders present in person.
The NASDAQNasdaq rules require shareholder approval of stock option plans and other equity compensation arrangements available to officers, directors or employees.employees and any material amendments thereto. We have decided to follow home country practice in lieu of obtaining shareholder approval for our stock optioncurrent or future equity incentive plans. However, subject to exceptions permitted under the Companies Law, we are required to seek shareholder approval of any grants of options to directors and controlling shareholders or plans that require shareholder approval for other reasons.
Additionally, we have chosen to follow our home country practice in lieu of the requirements of NASDAQNasdaq Rule 5250(d)(1), relating to an issuer’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 post a copy on our website.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17. | ITEM 17. FINANCIAL STATEMENTS |
We have responded to Item 18 in lieu of this item.
ITEM 18. | ITEM 18. FINANCIAL STATEMENTS |
The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1.
The exhibits filed with or incorporated into this annual report are listed on the index of exhibits below.
Exhibit No. | Exhibit |
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101 | The following financial information from the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2016,2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Comprehensive Income (Loss); (iv) Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail* |
¶ Translated from Hebrew
* Filed herewith.
** Furnished herewith.
(A) Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8, filed with the SEC on December 30, 2013.
(B) Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-8, filed with the SEC on December 30, 2013.
(C) Incorporated by reference to Annex B to the Proxy Statement filed as Exhibit 1.2 to Report of Foreign Private Issuer on Form 6-K submitted to the SEC on July 28, 2011.
(D) Incorporated by reference to Exhibit 4.3 to the Annual Report on Form 20-F for the year ended December 31, 2001, filed with the SEC on April 5, 2002.
(E) Incorporated by reference to Exhibit 4.7 to the Annual Report on Form 20-F for the year ended December 31, 2008, filed with the SEC on March 25, 2009.
(F) Incorporated by reference to Exhibit 4.6 to the Annual Report on Form 20-F for the year ended December 31, 2012, filed with the SEC on March 28, 2013.
(G) Incorporated by reference to Exhibit 4.8 to the Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on April 29, 2010.
(H) Incorporated by reference to Exhibit 4.9 to the Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on April 29, 2010.
(I) Incorporated by reference to Appendix A to the Proxy Statement filed as Exhibit 1.2 to Report of Foreign Private Issuer on Form 6-K submitted to the SEC on September 30, 2015.
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.
| RADWARE LTD. | |
| | | |
| By: | /s/ Roy Zisapel | |
| | Roy Zisapel | |
| | Chief Executive Officer | |
| | | |
Date: April 27, 2017March 28, 2018
- 144 -
RADWARE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20162017
U.S. DOLLARS IN THOUSANDS
INDEX
| Page |
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| F2 - F3F-2 – F-3 |
| |
| F4 - F5F-4 – F-5 |
| |
| F6F-6 |
| |
| F7F-7 |
| |
| F8F-8 |
| |
| F9 - F10F-9 – F-10 |
| |
| F11F-11 - F50F-48 |
| Kost Forer Gabbay & Kasierer 144 Menachem Begin Road Tel-Aviv 6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors and Shareholders of
RADWARE LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Radware Ltd. and subsidiaries ("the Company") and subsidiaries as of December 31, 20162017 and 2015, and2016, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. 2017 and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 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, 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 March 28, 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 thesethe 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 Public Company Accounting Oversight Board (United States).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. An audit includesmisstatement, 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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position/s/ KOST FORER GABBAY & KASIERER
A Member of the Company and subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.Ernst & Young Global
We also have audited, in accordance withserved as the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, 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 27, 2017 expressed an unqualified opinion thereon.Company's auditor since 2002.
Tel-Aviv, Israel
March 28, 2018
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
April 27, 2017 | A Member of Ernst & Young Global |
| Kost Forer Gabbay & Kasierer 144 Menachem Begin Road Tel-Aviv 6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors and Shareholders of
RADWARE LTD.
Opinion on the Internal Control over Financial Reporting
We have audited Radware Ltd. and subsidiariessubsidiaries' 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("the COSO criteria)criteria"). In our opinion, Radware Ltd. and subsidiaries ("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, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and our report dated March 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company'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 Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We 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.
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;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 Companycompany are being made only in accordance with authorizations of management and directors of the Company;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.
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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income (loss), comprehensive income (loss), change in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated April 27, 2017 expressed an unqualified opinion thereon.
Tel-Aviv, Israel | /s/ KOST FORER GABBAY & KASIERER |
April 27, 2017March 28, 2018 | A Member of Ernst & Young Global |
CONSOLIDATED
BALANCE SHEETS
U.S. dollars in thousands
| | December 31, | | | December 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | |
| | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash and cash equivalents | | $ | 79,639 | | | $ | 33,744 | | | $ | 65,237 | | | $ | 79,639 | |
Available-for-sale marketable securities | | | 20,452 | | | | 16,003 | | | | 42,573 | | | | 20,452 | |
Short-term bank deposits | | | 125,995 | | | | 80,922 | | | | 93,151 | | | | 125,995 | |
Trade receivables (net of allowance for doubtful accounts and sales reserves in a total amount of $ 1,236 and $ 1,686 in 2016 and 2015, respectively) | | | 19,407 | | | | 26,410 | | |
Trade receivables (net of allowance for doubtful accounts and sales reserves in a total amount of $ 1,993 and $ 1,236 in 2017 and 2016, respectively) | | | | 16,150 | | | | 19,407 | |
Other current assets and prepaid expenses | | | 4,159 | | | | 5,042 | | | | 12,252 | | | | 4,159 | |
Inventories | | | 17,114 | | | | 16,322 | | | | 18,772 | | | | 17,114 | |
| | | | | | | | | | | | | | | | |
Total current assets | | | 266,766 | | | | 178,443 | | | | 248,135 | | | | 266,766 | |
| | | | | | | | | | | | | | | | |
LONG-TERM INVESTMENTS: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Available-for-sale marketable securities | | | 74,967 | | | | 87,814 | | | | 54,427 | | | | 74,967 | |
Long-term bank deposits | | | 19,092 | | | | 96,643 | | | | 88,911 | | | | 19,092 | |
Severance pay fund | | | 2,597 | | | | 2,724 | | | | 3,251 | | | | 2,597 | |
| | | | | | | | | | | | | | | | |
Total long-term investments | | | 96,656 | | | | 187,181 | | | | 146,589 | | | | 96,656 | |
| | | | | | | | | | | | | | | | |
Property and equipment, net | | | 26,354 | | | | 26,203 | | | | 23,642 | | | | 26,354 | |
Intangible assets, net | | | 2,399 | | | | 3,518 | | | | 10,415 | | | | 2,399 | |
Goodwill | | | 30,069 | | | | 30,069 | | | | 32,174 | | | | 30,069 | |
Other long-term assets | | | 8,092 | | | | 5,473 | | | | 8,133 | | | | 8,092 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 430,336 | | | $ | 430,887 | | | $ | 469,088 | | | $ | 430,336 | |
The accompanying notes are an integral part of the consolidated financial statements.
RADWARE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
| | December 31, | | | December 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | |
| | | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Trade payables | | $ | 5,971 | | | $ | 9,255 | | | $ | 5,367 | | | $ | 5,971 | |
Deferred revenues | | | 53,061 | | | | 46,061 | | | | 69,829 | | | | 53,061 | |
Employees and payroll accruals | | | 11,713 | | | | 10,791 | | | | 16,470 | | | | 11,713 | |
Other payables and accrued expenses | | | 14,519 | | | | 11,307 | | | | 15,704 | | | | 14,519 | |
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Total current liabilities | | | 85,264 | | | | 77,414 | | | | 107,370 | | | | 85,264 | |
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LONG-TERM LIABILITIES: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Deferred revenues | | | 31,100 | | | | 25,136 | | | | 43,482 | | | | 31,100 | |
Other long-term liabilities | | | 14,209 | | | | 9,214 | | | | 2,880 | | | | 14,209 | |
| | | | | | | | | | | | | | | | |
Total long-term liabilities | | | 45,309 | | | | 34,350 | | | | 46,362 | | | | 45,309 | |
| | | | | | | | | | | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
SHAREHOLDERS' EQUITY: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Share capital - | | | | | | | | | | | | | | | | |
Ordinary shares of NIS 0.05 par value - Authorized: 60,000,000 at December 31, 2016 and 2015; Issued: 52,913,976 and 52,619,945 shares at December 31, 2016 and 2015, respectively; Outstanding: 43,188,850 and 44,778,847 shares at December 31, 2016 and 2015, respectively | | | 663 | | | | 661 | | |
Ordinary shares of NIS 0.05 par value - Authorized: 60,000,000 at December 31, 2017 and 2016; Issued: 53,884,864 and 52,913,976 shares at December 31, 2017 and 2016, respectively; Outstanding: 44,133,954 and 43,188,850 shares at December 31, 2017 and 2016, respectively | | | | 673 | | | | 663 | |
Additional paid-in capital | | | 325,338 | | | | 312,784 | | | | 349,250 | | | | 325,338 | |
Treasury stock (9,725,128) and (7,841,098) of ordinary shares at December 31, 2016 and 2015, respectively | | | (116,029 | ) | | | (94,049 | ) | |
Accumulated other comprehensive income (loss) | | | (20 | ) | | | 1,257 | | |
Treasury stock (9,750,910) and (9,725,128) of Ordinary shares at December 31, 2017 and 2016, respectively | | | | (116,442 | ) | | | (116,029 | ) |
Accumulated other comprehensive loss | | | | (443 | ) | | | (20 | ) |
Retained earnings | | | 89,811 | | | | 98,470 | | | | 82,318 | | | | 89,811 | |
| | | | | | | | | | | | | | | | |
Total shareholders' equity | | | 299,763 | | | | 319,123 | | | | 315,356 | | | | 299,763 | |
| | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 430,336 | | | $ | 430,887 | | | $ | 469,088 | | | $ | 430,336 | |
The accompanying notes are an integral part of the consolidated financial statements.
RADWARE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF
INCOME (LOSS)
U.S. dollars in thousands, except per share data
| | Year ended December 31, | | | Year ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | |
Products | | $ | 110,186 | | | $ | 136,793 | | | $ | | | | $ | 117,968 | | | $ | 110,186 | | | $ | 136,793 | |
Services | | | 86,399 | | | | 79,773 | | | | | | | | 93,401 | | | | 86,399 | | | | 79,773 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 196,585 | | | | 216,566 | | | | 221,892 | | | | 211,369 | | | | 196,585 | | | | 216,566 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Products | | | 27,320 | | | | 29,159 | | | | 29,448 | | | | 30,862 | | | | 27,320 | | | | 29,159 | |
Services | | | 8,375 | | | | 9,041 | | | | 10,284 | | | | 8,754 | | | | 8,375 | | | | 9,041 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total cost of revenues | | | 35,695 | | | | 38,200 | | | | 39,732 | | | | 39,616 | | | | 35,695 | | | | 38,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 160,890 | | | | 178,366 | | | | 182,160 | | | | 171,753 | | | | 160,890 | | | | 178,366 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Operating expenses, net: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Research and development, net | | | 51,732 | | | | 49,987 | | | | 44,081 | | | | 59,003 | | | | 51,732 | | | | 49,987 | |
Sales and marketing | | | 103,774 | | | | 93,347 | | | | 93,203 | | | | 108,744 | | | | 103,774 | | | | 93,347 | |
General and administrative | | | 18,133 | | | | 17,033 | | | | 19,797 | | | | 17,577 | | | | 18,133 | | | | 17,033 | |
Other income | | | | (6,900 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 173,639 | | | | 160,367 | | | | 157,081 | | |
Total operating expenses, net | | | | 178,424 | | | | 173,639 | | | | 160,367 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | (12,749 | ) | | | 17,999 | | | | 25,079 | | | | (6,671 | ) | | | (12,749 | ) | | | 17,999 | |
Financial income, net | | | 5,741 | | | | 5,867 | | | | 5,802 | | | | 4,830 | | | | 5,741 | | | | 5,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before taxes on income | | | (7,008 | ) | | | 23,866 | | | | 30,881 | | | | (1,841 | ) | | | (7,008 | ) | | | 23,866 | |
Taxes on income | | | 1,651 | | | | 5,297 | | | | 5,931 | | | | 5,652 | | | | 1,651 | | | | 5,297 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (8,659 | ) | | $ | 18,569 | | | $ | 24,950 | | | $ | (7,493 | ) | | $ | (8,659 | ) | | $ | 18,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic net earnings (loss) per share | | $ | (0.20 | ) | | $ | 0.40 | | | $ | 0.55 | | | $ | (0.17 | ) | | $ | (0.20 | ) | | $ | 0.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted net earnings (loss) per share | | $ | (0.20 | ) | | $ | 0.40 | | | $ | 0.53 | | | $ | (0.17 | ) | | $ | (0.20 | ) | | $ | 0.40 | |
The accompanying notes are an integral part of the consolidated financial statements.
RADWARE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
U.S. dollars in thousands, except per share data
| | Year ended December 31, | | | Year ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (8,659 | ) | | $ | 18,569 | | | $ | 24,950 | | | $ | (7,493 | ) | | $ | (8,659 | ) | | $ | 18,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) before tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Changes in unrealized gains | | | 68 | | | | 3,903 | | | | (1,098 | ) | |
Less: reclassification adjustments for gains included in net income (loss) | | | (1,771 | ) | | | (2,438 | ) | | | (424 | ) | |
Changes in unrealized gains (losses) | | | | (530 | ) | | | 68 | | | | 3,903 | |
Less: reclassification adjustments for losses (gains) included in net income (loss) | | | | (18 | ) | | | (1,771 | ) | | | (2,438 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) before tax | | | (1,703 | ) | | | 1,465 | | | | (1,522 | ) | | | (548 | ) | | | (1,703 | ) | | | 1,465 | |
Income tax benefits (expense) related to components of other comprehensive income (loss) | | | 426 | | | | (419 | ) | | | - | | | | 125 | | | | 426 | | | | (419 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | (1,277 | ) | | | 1,046 | | | | (1,522 | ) | | | (423 | ) | | | (1,277 | ) | | | 1,046 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (9,936 | ) | | $ | 19,615 | | | $ | 23,428 | | | $ | (7,916 | ) | | $ | (9,936 | ) | | $ | 19,615 | |
The accompanying notes are an integral part of the consolidated financial statements.
STATEMENTS OF CHANGES IN
SHAREHOLDERS'
EQUITY
U.S. dollars in thousands, except share data
| | Number of outstanding Ordinary shares | | | Share capital | | | Additional paid-in capital | | | Treasury stock, at cost | | | Accumulated other comprehensive income (loss) | | | Retained earnings | | | Total | | | Number of outstanding Ordinary shares | | | Share capital | | | Additional paid-in capital | | | Treasury stock, at cost | | | Accumulated other comprehensive income (loss) | | | Retained earnings | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2013 | | | 44,733,589 | | | $ | 611 | | | $ | 262,809 | | | $ | (25,984 | ) | | $ | 1,733 | | | $ | 54,951 | | | $ | 294,120 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of ordinary shares | | | (887,855 | ) | | | - | | | | - | | | | (15,169 | ) | | | - | | | | - | | | | (15,169 | ) | |
Issuance of shares upon exercise of stock options | | | 3,080,763 | | | | 43 | | | | 22,450 | | | | - | | | | - | | | | - | | | | 22,493 | | |
Stock based compensation | | | - | | | | - | | | | 7,382 | | | | - | | | | - | | | | - | | | | 7,382 | | |
Tax benefit related to exercise of stock options | | | - | | | | - | | | | 1,443 | | | | - | | | | - | | | | - | | | | 1,443 | | |
Other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | - | | | | (1,522 | ) | | | - | | | | (1,522 | ) | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 24,950 | | | | 24,950 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2014 | | | 46,926,497 | | | | 654 | | | | 294,084 | | | | (41,153 | ) | | | 211 | | | | 79,901 | | | | 333,697 | | |
Balance as of January 1, 2015 | | | | 46,926,497 | | | $ | 654 | | | $ | 294,084 | | | $ | (41,153 | ) | | $ | 211 | | | $ | 79,901 | | | $ | 333,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of ordinary shares | | | (2,824,772 | ) | | | - | | | | - | | | | (52,896 | ) | | | - | | | | - | | | | (52,896 | ) | | | (2,824,772 | ) | | | - | | | | - | | | | (52,896 | ) | | | - | | | | - | | | | (52,896 | ) |
Issuance of shares upon exercise of stock options | | | 677,122 | | | | 7 | | | | 8,739 | | | | - | | | | - | | | | - | | | | 8,746 | | | | 677,122 | | | | 7 | | | | 8,739 | | | | - | | | | - | | | | - | | | | 8,746 | |
Stock based compensation | | | - | | | | - | | | | 9,329 | | | | - | | | | - | | | | - | | | | 9,329 | | | | - | | | | - | | | | 9,329 | | | | - | | | | - | | | | - | | | | 9,329 | |
Tax benefit related to exercise of stock options | | | - | | | | - | | | | 632 | | | | - | | | | - | | | | - | | | | 632 | | | | - | | | | - | | | | 632 | | | | - | | | | - | | | | - | | | | 632 | |
Other comprehensive income, net of tax | | | - | | | | - | | | | - | | | | - | | | | 1,046 | | | | - | | | | 1,046 | | | | - | | | | - | | | | - | | | | - | | | | 1,046 | | | | - | | | | 1,046 | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 18,569 | | | | 18,569 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 18,569 | | | | 18,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2015 | | | 44,778,847 | | | | 661 | | | | 312,784 | | | | (94,049 | ) | | | 1,257 | | | | 98,470 | | | | 319,123 | | | | 44,778,847 | | | | 661 | | | | 312,784 | | | | (94,049 | ) | | | 1,257 | | | | 98,470 | | | | 319,123 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of ordinary shares | | | (1,884,030 | ) | | | - | | | | - | | | | (21,980 | ) | | | - | | | | - | | | | (21,980 | ) | | | (1,884,030 | ) | | | - | | | | - | | | | (21,980 | ) | | | - | | | | - | | | | (21,980 | ) |
Issuance of shares upon exercise of stock options | | | 294,033 | | | | 2 | | | | 1,581 | | | | - | | | | - | | | | - | | | | 1,583 | | | | 294,033 | | | | 2 | | | | 1,581 | | | | - | | | | - | | | | - | | | | 1,583 | |
Stock based compensation | | | - | | | | - | | | | 11,520 | | | | - | | | | - | | | | - | | | | 11,520 | | | | - | | | | - | | | | 11,520 | | | | - | | | | - | | | | - | | | | 11,520 | |
Tax deficiency related to exercise of stock options | | | - | | | | - | | | | (547 | ) | | | - | | | | - | | | | - | | | | (547 | ) | | | - | | | | - | | | | (547 | ) | | | - | | | | - | | | | - | | | | (547 | ) |
Other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | - | | | | (1,277 | ) | | | - | | | | (1,277 | ) | | | - | | | | - | | | | - | | | | - | | | | (1,277 | ) | | | - | | | | (1,277 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,659 | ) | | | (8,659 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,659 | ) | | | (8,659 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2016 | | | 43,188,850 | | | $ | 663 | | | $ | 325,338 | | | $ | (116,029 | ) | | $ | (20 | ) | | $ | 89,811 | | | $ | 299,763 | | | | 43,188,850 | | | | 663 | | | | 325,338 | | | | (116,029 | ) | | | (20 | ) | | | 89,811 | | | | 299,763 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of ordinary shares | | | | (25,782 | ) | | | - | | | | - | | | | (413 | ) | | | - | | | | - | | | | (413 | ) |
Issuance of shares upon exercise of stock options | | | | 970,886 | | | | 10 | | | | 10,881 | | | | - | | | | - | | | | - | | | | 10,891 | |
Stock based compensation | | | | - | | | | - | | | | 13,031 | | | | - | | | | - | | | | - | | | | 13,031 | |
Other comprehensive loss, net of tax | | | | - | | | | - | | | | - | | | | - | | | | (423 | ) | | | - | | | | (423 | ) |
Net loss | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7,493 | ) | | | (7,493 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2017 | | | | 44,133,954 | | | $ | 673 | | | $ | 349,250 | | | $ | (116,442 | ) | | $ | (443 | ) | | $ | 82,318 | | | $ | 315,356 | |
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
U.S. dollars in thousands
| | Year ended December 31, | | | Year ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (8,659 | ) | | $ | 18,569 | | | $ | 24,950 | | | $ | (7,493 | ) | | $ | (8,659 | ) | | $ | 18,569 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 10,372 | | | | 9,401 | | | | 8,102 | | | | 11,232 | | | | 10,372 | | | | 9,401 | |
Stock based compensation | | | 11,520 | | | | 9,329 | | | | 7,382 | | | | 13,031 | | | | 11,520 | | | | 9,329 | |
Gain from sale of available-for-sale marketable securities | | | (1,771 | ) | | | (2,438 | ) | | | (424 | ) | | | (18 | ) | | | (1,771 | ) | | | (2,438 | ) |
Amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities, net | | | 1,949 | | | | 3,208 | | | | 2,964 | | | | 1,546 | | | | 1,949 | | | | 3,208 | |
Accrued interest on bank deposits | | | 1,179 | | | | (1,998 | ) | | | 1,069 | | | | 226 | | | | 1,179 | | | | (1,998 | ) |
Increase (decrease) in accrued severance pay, net | | | 401 | | | | 125 | | | | (158 | ) | | | (210 | ) | | | 401 | | | | 125 | |
Decrease (increase) in trade receivables, net | | | | 3,390 | | | | 7,003 | | | | (773 | ) |
Changes in deferred income taxes, net | | | (2,687 | ) | | | 215 | | | | (1,775 | ) | | | 91 | | | | (2,687 | ) | | | 215 | |
Decrease (increase) in trade receivables, net | | | 7,003 | | | | (773 | ) | | | (726 | ) | |
Decrease (increase) in other current assets and prepaid expenses | | | 883 | | | | (103 | ) | | | (1,913 | ) | | | (7,969 | ) | | | 883 | | | | (103 | ) |
Decrease (increase) in inventories | | | (792 | ) | | | 522 | | | | (2,654 | ) | | | (1,658 | ) | | | (792 | ) | | | 522 | |
Increase (decrease) in trade payables | | | (3,284 | ) | | | (562 | ) | | | 1,019 | | |
Decrease in trade payables | | | | (734 | ) | | | (3,284 | ) | | | (562 | ) |
Increase in deferred revenues (short-term and long-term) | | | 12,964 | | | | 3,849 | | | | 8,638 | | | | 28,781 | | | | 12,964 | | | | 3,849 | |
Increase in other payables and accrued expenses and other long-term liabilities | | | 8,855 | | | | 424 | | | | 7,146 | | |
Increase (decrease) in other payables and accrued expenses and other long-term liabilities | | | | (8,753 | ) | | | 8,855 | | | | 424 | |
Excess tax deficiency (benefit) from stock-based compensation stock options | | | 547 | | | | (632 | ) | | | (1,443 | ) | | | - | | | | 547 | | | | (632 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 38,480 | | | | 39,136 | | | | 52,177 | | | | 31,462 | | | | 38,480 | | | | 39,136 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (9,404 | ) | | | (13,774 | ) | | | (9,482 | ) | | | (7,210 | ) | | | (9,404 | ) | | | (13,774 | ) |
Proceeds from (investment in) other long-term assets | | | (53 | ) | | | (100 | ) | | | 34 | | |
Investment in other long-term assets | | | | (6 | ) | | | (53 | ) | | | (100 | ) |
Proceeds from (investment in) bank deposits, net | | | 31,295 | | | | (33,824 | ) | | | (20,929 | ) | | | (37,200 | ) | | | 31,295 | | | | (33,824 | ) |
Purchase of available-for-sale marketable securities | | | (16,219 | ) | | | (13,442 | ) | | | (44,063 | ) | | | (24,595 | ) | | | (16,219 | ) | | | (13,442 | ) |
Proceeds from maturity of available-for-sale marketable securities | | | 17,205 | | | | 26,530 | | | | 29,390 | | | | 20,075 | | | | 17,205 | | | | 26,530 | |
Proceeds from redemption of available-for-sale marketable securities | | | 5,535 | | | | 27,757 | | | | 10,393 | | | | 863 | | | | 5,535 | | | | 27,757 | |
Purchase of an intangible asset | | | - | | | | - | | | | (1,375 | ) | |
Payment for the acquisition of subsidiary, net of cash acquired | | | | (8,269 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 28,359 | | | | (6,853 | ) | | | (36,032 | ) | | | (56,342 | ) | | | 28,359 | | | | (6,853 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
RADWARE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
| | Year ended December 31, | | | Year ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Proceeds from exercise of stock options | | | 1,583 | | | | 8,746 | | | | 22,493 | | | | 10,891 | | | | 1,583 | | | | 8,746 | |
Excess tax (deficiency) benefit from stock-based compensation | | | (547 | ) | | | 632 | | | | 1,443 | | | | - | | | | (547 | ) | | | 632 | |
Repurchase of Ordinary shares | | | (21,980 | ) | | | (52,896 | ) | | | (15,169 | ) | |
Repurchase of ordinary shares | | | | (413 | ) | | | (21,980 | ) | | | (52,896 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (20,944 | ) | | | (43,518 | ) | | | 8,767 | | | | 10,478 | | | | (20,944 | ) | | | (43,518 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 45,895 | | | | (11,235 | ) | | | 24,912 | | | | (14,402 | ) | | | 45,895 | | | | (11,235 | ) |
Cash and cash equivalents at the beginning of the year | | | 33,744 | | | | 44,979 | | | | 20,067 | | | | 79,639 | | | | 33,744 | | | | 44,979 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at the end of the year | | $ | 79,639 | | | $ | 33,744 | | | $ | 44,979 | | | $ | 65,237 | | | $ | 79,639 | | | $ | 33,744 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid during the year for income taxes | | $ | 1,730 | | | $ | 1,853 | | | $ | 2,285 | | | $ | 14,352 | | | $ | 1,730 | | | $ | 1,853 | |
The accompanying notes are an integral part of the consolidated financial statements.
| a. | Radware Ltd. (the “Company”"Company"), an Israeli corporation commenced operations in April 1997. The Company and its subsidiaries (the “Group""Group") are engaged in the development, manufacture and sale of Cyber Security and Application Delivery solutions designedthat help to ensure optimal service levelsecure the digital experience for users of business-critical applications in virtual, cloud and software defined data centers. The Company's products are marketed worldwide. |
| b. | The Company has established wholly-owned subsidiaries in the United States, France, Germany, Singapore, the United Kingdom, Japan, Korea, Canada, India, Australia, Italy, Hong Kong, China and China.Spain. In addition, the Company has established representative officesoffice in Taiwan and Spain.Taiwan. The Company holds 91% of one of its Israeli subsidiary.subsidiaries ("the Israeli Subsidiary"). The Company's subsidiaries are engaged primarily in sales, marketing and support activities of its core products, except for the Israeli subsidiary which is engaged primarily in real-time consumer applications across the web. The Israeli subsidiary operations were immaterial for the years ended December 31, 2014, 20152017, 2016 and 2016.2015. The net income (loss)loss attributable to non-controlling interests represents 0.29%0.77%, (0.69%)1.92% and (1.92%)0.69% out of the consolidated net income (loss) in 2014,2017, 2016 and 2015, and 2016, respectively. |
| c. | On January 30, 2017 ("the Closing Date"), the Company acquired 100% outstanding shares of Seculert Ltd. ("Seculert"), a company based in Israel and engaged in cyber-attack detection and HTTP analytics solutions and developing user and entity behavioral analysis ("UEBA") solutions. The consideration to acquire Seculert was $10,000 in cash and additional contingent consideration of up to $10,000, based on certain milestones to be achieved. The milestone-based contingent consideration was measured at fair value at the Closing Date and recorded as a liability on the balance sheet in the amount of $1,981 ($1,550 as of December 31, 2017). The derived goodwill from this acquisition is attributable to additional capabilities of the Group to expand its products portfolio. Goodwill generated from this business combination is primarily attributable to synergies between the Company's and Seculert's respective products and services. The acquisition was accounted for as a business combination. The Company recorded IPR&D, technology and goodwill in amount of $ 7,088, $2,183 and $ 2,105 respectively. The estimated useful life of the IPR&D and technology is approximately 9 years. |
Pro forma results of operations for this acquisition have not been presented because they are not material to the consolidated results of operations.
| c.d. | The Company depends on a few vendors to supply certain hardware platforms and components for the production of its products. If one of these suppliers fails to deliver or delays the delivery of the necessary components, the Company will be required to seek alternative sources of supply. A change in suppliers could result in manufacturing delays, which could cause a possible loss of sales and, consequently, could adversely affect the Company's results of operations and financial position. |
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP").
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time these estimates are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
On an ongoing basis, the Company's management evaluates estimates, including those related to fair values and useful lives of intangible assets, tax assets and liabilities, fair values of stock-based awards, as well as in estimates used in applying the revenue recognition policy related to separation of multiple elements. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
| b. | Financial statements in United States dollars: |
A majority of the Group's revenues of the Group are denominated in United States dollars ("dollar" or "U.S. dollars"). In addition, a substantial portion of the Company's and certain of its subsidiaries' costs are denominated in dollars. The Company's management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with Accounting Standards Codification ("ASC") No. 830 "Foreign Currency Matters". Changes in currency exchange rates between the Company's functional currency and the currency in which a transaction is denominated are included in the Company's results of operations as financial income, net in the period in which the currency exchange rates change.
| c. | Principles of consolidation: |
The consolidated financial statements include the accounts of the Group. Intercompany balances and transactions including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less, at acquisition.
Bank deposits with maturities of more than three months but less than one year are included in short-term deposits. Such short-term deposits are stated at cost which approximates market values.
Bank deposits with maturities of more than one year are included in long-term deposits. Deposits as of December 31, 20162017 do not have contractual maturities that exceed 2.52.25 years. Such long-term deposits are stated at cost which approximates market values.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| f. | Investment in marketable securities: |
The Company accounts for investments in marketable securities in accordance with ASC No. 320, "Investments- Debt and equity Securities". Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each balance sheet date.
The Company classified all of its debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in "accumulated other comprehensive income (loss)" in shareholders' equity. Realized gains and losses on sales of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in financial income, net.
The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. The factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment recognized in the statement of income (loss) is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss).
During the years 2014,2017, 2016 and 2015, and 2016, the Company did not record any other-than-temporary impairment loss with respect to its available-for-sale marketable securities.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company’sCompany's unrealized loss on debt securities in corporate bonds relates to several bonds. Because the Company has the ability to hold these debt securities until a recovery of fair value, which may be the maturity date of such bonds, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2016.2017.
Inventories are stated at the lower of cost or marketnet realizable value. Inventory write-off is provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories and discontinued products. Inventory write-offs totaled $ 1,288,2,324, $ 1,071 and $ 750 in 2017, 2016 and $ 1,071 in 2014, 2015, and 2016, respectively, and have been included in cost of revenues of product.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Cost is determined as follows:
Raw materials and components - using the "first-in, first-out" method.
Work-in-progress and finished products - raw materials as above with the addition of subcontracting costs - calculated on the basis of direct subcontractors costs and with direct overhead costs.
The Company assesses the carrying value of its inventory for each reporting period to ensure inventory is reported at the lower of cost or marketnet realizable value in accordance with ASC 330-10-35. Charges for obsolete and slow moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. These assessments consider various factors, including historical usage rate, technological obsolescence, estimated current and future market values and new product introduction. In cases when there is evidence that the anticipated utility of goods, in their disposal in the ordinary course of business, will be less than the historical cost of the inventory, the Company recognizes the difference as a current period charge to earnings and carries the inventory at the reduced cost basis until it is sold or disposed of.
| h. | Property and equipment, net: |
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following annual rates:
| % |
| |
Computers, peripheral equipment and software | 15 - 33 (mainly 33) |
Office furniture and equipment | 6 - 20 (mainly 15) |
Leasehold improvements | Over the shorter of the term of the lease or the useful life of the asset |
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| i. | Impairment of long lived assets and intangible assets subject to amortization: |
Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which range from 5 to 79 years. Some of the acquired customer arrangements are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer arrangements as compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line basis. During 2014,2017, 2016 and 2015, and 2016, no impairment losses were recorded.
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350 "Intangibles – Goodwill and Other" ("ASC 350"), goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.
The Company operates in one operating segment, and this segment comprises its onlysingle reporting unit. The Company performs assessment of qualitative factors during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. This analysis determined that no indicators of impairment existed for 2014, 20152017, 2016 and 2016.2015.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company is currently involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss.
The Group deriveGroup's revenues mainlyare derived from sales of our products post-contract customer support ("PCS") and subscriptions. The Company's products are sold primarily through distributors and resellers, all of which are considered end-users.services:
Revenues from product sales are recognized in accordance with ASC No. 605, "Revenue Recognition" ("ASC 605"), when delivery has occurred, persuasive evidence of an agreement exists, the vendor's fee is fixed or determinable, and collectability is reasonably assured.
| · | Revenues from product are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, no further obligation exists and collectability is probable. Revenues from product subscriptions are recognized ratably over the subscription period. |
Revenues from PCS, which represents mainly software updates, help desk support, unit replacement or repair, and security update services, and revenues from subscriptions are recognized ratably over the term of the agreement, which is typically between one year and three years. | · | Revenues from post-contract customer support ("PCS") and service subscriptions, which represents mainly software update subscriptions, help-desk support and unit repairs or replacements, are recognized ratably over the contract or subscription period, which is typically between one year and three years. |
The timing for revenue recognition of the various products and customers is dependent upon satisfaction of such criteria and generally varies from shipment to delivery to the customer depending on the specific shipping terms of a given transaction, as stipulated in the agreement with each customer.
The Company's products and services generally qualify as separate units of accounting. As such, revenues from multiple element arrangements that include products, PCS and subscriptions are separated into their various elements using the relative selling price method. The estimated selling price for each 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.
The Company determines ESP in multiple-element arrangements as follows:establishes VSOE for post-contract customer support is determined based on the price charged when such element is sold separately (renewals). The price may vary in the territories and vertical markets in which the Company conducts business. Price is determined by using a consistent percentage of the Company's product price lists, in the same territories and markets.
For the product and subscriptions, the Company determines the ESP based on management’smanagement's estimated selling price by considering several external and internal factors including, but not limited to, pricing practices including discounting, margin objectives and competition. The determination of ESP is made through consultation with and approval of management, taking into consideration the pricing model and go-to-market strategy.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company records 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 No. 605. These estimates are based on historical sales returns, stock rotations and other known factors. Such provisions amounted to $ 1,434$1,657 and $ 984 as of December 31, 20152017 and 2016, respectively.
Deferred revenues include unearned amounts collected under post-contract customer support and subscription agreements, and are classified in short and long-term based on their contractual term.
| m. | m. Shipping and handling fees and costs: |
Shipping and handling fees charged to the Company's customers are recognized as product revenue in the period shipped and the related costs for providing these services are recorded as a cost of revenues.
Cost of products is comprised of cost of software and hardware production, manuals, packaging, license fees paid to third parties, inventory write-offs and amortization of acquired technology.
Cost of services is comprised of cost of post-sale customer support.support and hosting services.
The Company generally provides a one year warranty for all of its products. A provision is recorded for estimated warranty costs at the time revenues are recognized based on the Company's experience. Warranty expenses for the years ended December 31, 2014,2017, 2016 and 2015 and 2016 were immaterial.
| p. | Research and development expenses: |
Research and development costs are charged to the statements of income (loss) as incurred. ASC No. 985-20, “Software"Software - Costs of Software to Be Sold, Leased, or Marketed”Marketed", requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.
Based on the Company’sCompany's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general release, have been insignificant. Therefore, all research and development costs are expensed as incurred.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
During 2012-2014 and 20162016-2017, the Company received non-royalty-bearing grants from the Government of Israel for approved research and development projects. These grants are recognized at the time the Company is entitled to such grants on the basis of the costs incurred as provided by the relevant agreement and included as a deduction from research and development expenses.
Research and development grants deducted from research and development expenses amounted to $ 297, nil and545, $ 880 and 0 in 2014,2017, 2016 and 2015, and 2016, respectively.
| r. | Accounting for stock-based compensation: |
The Company accounts for stock-based compensation in accordance with ASC No. 718, "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statement of income.income (loss).
The Company recognizes compensation expenses for the value of its awards based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
ASC 718 requires The Company adopted ASU 2016-09 (see below) in the cash flows resulting from the tax deductions in excessfirst quarter of the compensation costs recognized for those stock optionsfiscal year 2017. The Company elected to be classified as financing cash flows.retain its existing accounting policy and estimate expected forfeitures.
The Company selected the Black-Scholes-Merton option pricing model to account for the fair value of its stock-options awards with only service conditions and whereas the fair value of the restricted stocks awards is based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over an historical period equivalent to the option's expected term. The expected option term represents the period of time that options are expected to be outstanding. Expected term of options is based on historical experience. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances.
The Company measures the fair value of restricted stock units ("RSUs") based on the market value of the underlying shares at the date of grant.
The fair value of the Company's stock options granted to employees and directors for the years ended December 31, 2014,2017, 2016 and 2015 and 2016 was estimated using the following weighted average assumptions:
Employees' stock option plan:
| | Year ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | |
Risk free interest rate | | | 1.12 | % | | | 1.21 | % | | | 1.10 | % |
Dividend yields | | | 0 | % | | | 0 | % | | | 0 | % |
Expected volatility | | | 34 | % | | | 34 | % | | | 40 | % |
Weighted average expected term from grant date (in years) | | | 3.88 | | | | 3.86 | | | | 3.72 | |
| | Year ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | |
Risk free interest rate | | | 1.66 | % | | | 1.12 | % | | | 1.21 | % |
Dividend yields | | | 0 | % | | | 0 | % | | | 0 | % |
Expected volatility | | | 32 | % | | | 34 | % | | | 34 | % |
Weighted average expected term from grant date (in years) | | | 3.80 | | | | 3.88 | | | | 3.86 | |
On January 1, 2017, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-09 (Topic 718) Compensation—Stock Compensation: Improvements to Employee Stock-Based Payment Accounting, which simplifies several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture, statutory tax withholding requirements, and classification on the statement of cash flows.
The impact of the adoption on the Company's consolidated Financial Statements was as follows:
| · | Income tax accounting: The Company is required to record excess tax benefits and tax deficiencies related to stock-based compensation as income tax benefit or expense in the statement of income (loss) prospectively when share-based awards vest or are settled. Since the Company utilized the entire previously unrecognized excess tax benefits before the adoption, no a cumulative-effect was recorded in the opening retained earnings. |
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| · | Cash flow presentation of excess tax benefits: The Company is required to classify excess tax benefits along with other income tax cash flows as an operating activity either prospectively or retrospectively. The Company elected to apply the change in presentation to the statements of cash flows prospectively from January 1, 2017. |
The Company accounts for income taxes in accordance with ASC No. 740, "Income Taxes" ("ASC 740"). This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Group provideprovides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all of the deferred tax assets will not be realized.
Deferred tax liabilities and assets are classified as non-current in accordance with ASU 2015-17 (see also Note 2ab).
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
2015-17.
ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.
The second step is only addressed if the first step has been satisfied (i.e. the position is more likely than not to be sustained) otherwise a full liability in respect of a tax position not meeting the more likely than not criteria is recognized.
The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalty, if any related to unrecognized tax benefits in its taxes on income.
| t. | Concentrations of credit risks: |
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, available-for-sale marketable securities and trade receivables.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The majority of the Group’sGroup's cash, and cash equivalents and bank deposits are invested in major banks in Israel and the U.S. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these cash equivalents may be redeemed upon demand and, therefore management believes that it bears a lower risk. The short-term and long-term bank deposits are held in financial institutions which management believes are institutions with high credit standing, and accordingly, minimal credit risk from geographic or credit concentration exists with respect to these bank deposits. As of December 31, 2016, 81%2017, 85% of the Group’sGroup's short-term and long-term bank deposits were deposited in major Israeli banks in Israel which are rated AA+ and AAA, as determined by the Israeli affiliate of Standard & Poor’s (“Poor's ("S&P”&P"), and 19%15% were deposited in the U.S. branch of another major Israeli bank which is also rated AAA, as determined by the Israeli affiliate of S&P.
As of December 31, 2016,2017, the maximal contractual duration of any of the Group’sGroup's bank deposits was 2.512.25 years, the weighted average duration of the Group’sGroup's deposits was 1.321.59 years, and the weighted average time to maturity was 0.370.87 years.
The Group’sGroup's available-for-sale marketable securities include investments in foreign banks, government debentures and in corporate shares and debentures. The financial institutions that hold the Group’sGroup's marketable securities are major U.S. financial institutions, located in the United States. The Company's management believes that the Group’sGroup's marketable securities portfolio is a diverse portfolio of highly-rated securities and the Group’sGroup's investment policy limits the amount the Group’sGroup's may invest in each issuer, and accordingly, management believes that minimal credit risk exists from geographic or credit concentration with respect to these securities.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
As of December 31, 2016, 49%2017, 44% of the Group’sGroup's marketable securities portfolio was invested in debt securities of financial institutions, 10%2% in debt securities of governmental institutions, and 41%54% in debt securities of corporations. No more than 2% of the Group’s total investments portfolio was invested in debt securities of a single issuer.
From geographic prospective, 49%50% of the Group’sGroup's marketable securities portfolio was invested in debt securities of U.S. issuers, 29%22% was invested in debt securities of European issuers and 22%28% was invested in debt securities of other geographic-located issuers. As of December 31, 2016, 86%2017, 92% of the Group’sGroup's marketable securities portfolio was rated A- or higher, as determined by S&P, 10%4% was rated BBB or BBB+ and 4% was rated BB-.
The trade receivables of the Group are mainly derived from sales to customers located primarily in the United States, Europe, the Middle East, Africa and Asia Pacific. The Company performs ongoing credit evaluations of its customers. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. In certain circumstances, the Company may require from its customers letters of credit, other collateral or additional guarantees. Bad debt expenses for the years ended December 31, 2014,2017, 2016 and 2015 and 2016 were $ 150,109, nil and $ 80, and nil, respectively. Total write offs during 2014,2017, 2016 and 2015 and 2016 amounted to $ 214, nilnil.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and nil, respectively.per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| u. | Employee related benefits: |
Severance pay:
The Group’sGroup's liability for severance pay with respect to its Israeli employees for periods prior to April 1, 2007 (the “Transition"Transition Date") is calculated pursuant to the Israeli Severance Pay Law – 1963 ("ISP Law"), based on the most recent salary of the employees multiplied by the number of years of employment as of the Transition Date. The Company recorded as expenses the increase in the severance liability, net of earnings (losses) from the related investment fund. Israeli employees were entitled to one month's salary for each year of employment, or a portion thereof. Until the Transition Date, the Group’sGroup's liability was partially funded by monthly payments deposited with insurers; any unfunded amounts would be paid from operating funds and are covered by a provision established by the Company.
The carrying value of the deposited funds for the Group’sGroup's Israeli employees severance pay for employment periods prior to the Transition Date include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the ISP Law or employment agreements.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Effective as of the Transition Date, the Group’sGroup's agreements with employees in Israel are in accordance with Section 14 of the ISP Law which provide that the employer's contributions to severance pay fund shall cover its entire severance obligation with respect to period of employment subsequent to the Transition Date. Upon termination, the release of the contributed amounts from the fund to the employee shall relieve the employer from any further severance obligation and no additional payments are required to be made by the employertoemployer to the employee. As a result, the related obligation and amounts deposited in respect of such obligation are not stated on the balance sheets, as the employerisemployer is legally released from severance obligation to employees once the amounts have been fully deposited, and the Company has no legal ownership in the amounts deposited. Consequently, effective from the Transition Date, the Company increased its contribution to the deposited funds to cover the full amount of the employees' salaries.
Severance pay expenses for the years ended December 31, 2017, 2016 2015 and 20142015 amounted to approximately $ 3,296, $ 3,603 and $ 2,886, and $ 2,432, respectively. Accrued severance pay is included in other long-term liabilities in the balance sheets.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| v. | Fair value of financial instruments: |
The Company measures its cash equivalents, deposits, andavailable-for-sale marketable securities and contingent consideration at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
| Level 1 | - | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2 | - | Include other inputs that are directly or indirectly observable in the marketplace. |
| Level 3 | - | Unobservable inputs which are supported by little or no market activity. |
The carrying amounts of cash equivalents, trade receivables, trade payables, short-term bank deposits and other payables and accrued expenses, approximate at fair value because of their generally short maturities.
| w. | w. Comprehensive income (loss): |
The Company accounts for comprehensive income (loss) in accordance with ASC No. 220, "Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in shareholders’shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its only item of other comprehensive income (loss) relate to available-for-sale marketable securities adjustment.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company repurchases its ordinary shares from time to time on the open market and holds such shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity. The voting rights attached to treasury stock are revoked.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| y. | Basic and diluted net income (loss) per share: |
Basic net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus potential dilutive ordinary shares considered outstanding during the period, if any, in accordance with ASC No. 260, "Earnings Per Share". The total number of ordinary shares related to outstanding stock options excluded from the calculation of diluted income (loss) per share as they would have been anti-dilutive was 474,000,981,750, 4,665,638 and 4,174,953 and 4,665,638 for the years ended December 31, 2014,2017, 2016 and 2015, and 2016, respectively.
The Company accounted for business combination in accordance with ASC No. 805, "Business Combinations" ("ASC 805"). ASC No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.
| aa. | Reclassifications:New accounting pronouncements not yet effective: |
Certain amountsIn 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 flow arising from contracts with customers. The guidance permits two methods of modification: retrospectively to each prior years' financial statements have been reclassifiedreporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method.). The Company will adopt the new standard, effective January 1, 2018, using the modified retrospective method applied to conformthose contracts, which were not substantially completed as of January 1, 2018. The cumulative adjustment related to the current year's presentation. revenue recognition will decrease the Company's retained earnings by $142.
The reclassificationmost significant impact of the new standard related to the way the Group accounts for commission expense. The Group has also considered the impact of the guidance in ASC 340-40 "Other Assets and Deferred Costs" under the new standard. Under ASC 340-40, it may be required to capitalize and amortize certain incremental costs of obtaining a contract such as the maintenance portion of sales commission costs. The cumulative impact to the Group's retained earnings as of January 1, 2018 will increase by approximately $10,200. Adoption of the standard related to revenue recognition had no effectimpact to cash from or used in operating, investing or financing activities on previously reported net income or shareholders' equity. The reclassification was adjusted the revenues from services to revenues from products in order to align the 2016 presentation.Group's consolidated statement of cash flows.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| ab. | Impact of recently issued accounting pronouncements: |
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 "Revenue from Contracts with Customers" (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method. 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 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. Based on its current analysis, one of the potential effects, if any, relates to incremental sales costs with respect to contracts signed during a period, which may require capitalization. The FASB has issued, and may issue in the future, interpretive guidance, which may cause the Company's evaluation to change. The Company continues to assess all the potential impacts under the new revenues standard. Management believes that the Company is following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the beginning of fiscal year 2018.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17) "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". 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 early adopted this standard in the fourth quarter of 2015 on a retrospective basis.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
In February 2016, the FASB issued ASU No.2016-02. ASU 2016-02 Leases (Topic 842) to increase transparency and comparability among organizationschanges the current lease accounting standard by recognizingrequiring the recognition of lease assets and lease liabilities for all leases, including those currently classified as operating leases. This new guidance is to be applied under a modified retrospective application to the earliest reporting period presented for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the potential impact of this new guidance on its financial statements.
In June 2016, the balance sheet and disclosing key information about leasing arrangements. ThisFASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company in the first quarter of 2019.beginning January 1, 2020, with early application permitted. The Company is evaluating the impact of the adoption ofadopting this updatenew accounting guidance on its consolidated financial statements and related disclosures..
In March 2016, theJanuary 2017, FASB issued ASU No. 2016-09, Improvements2017-01, Business Combinations (Topic 805) Clarifying the Definition of Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to Employee Share-Based Payment Accounting.assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU simplifies several aspects ofupdate to the accounting for employee share-based payments including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU will bestandard is effective for theinterim and annual periods beginning after December 15, 2017, and applied prospectively. The Company indoes not expect the first quarter of 2017. The Company’s adoption of ASU 2016-09this standard will not have a material impact on itsthe consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which intends to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance will be effective for The Company in the first quarter of 2018. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
In January 2017, the FASB issued ASU "Intangibles - Goodwill and Other (Topic 350): Simplifying2017-04, simplifying the Test for Goodwill Impairment" ("ASU 2017-04")Impairment (Topic 350). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating the second stepThis standard eliminates Step 2 from the goodwill impairment test. ASU 2017-04 would require applyingtest, instead requiring an entity to recognize a one-step quantitative test and recordinggoodwill impairment charge for the amount ofby which the goodwill impairment as the excess ofcarrying amount exceeds the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 arevalue. This guidance is effective for interim and annual or any interim goodwill impairment tests forin fiscal years beginning after December 15, 2019. Early2019 with early adoption is permitted for interim or annual goodwill impairment tests performedpermitted. This guidance must be applied on testing dates after January 1, 2017.a prospective basis. The Company is currently evaluatingdoes not expect the impactadoption of thethis standard on its future financial statements and disclosures but it is not expected towill have a material impact.impact on the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, changing the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classifications of the award changes. The guidance also clarifies that a modification to an award could be significant and therefore require disclosure, even if modification accounting is not required. Therefore, an entity will have to make all of the disclosures about modifications that are required today, in addition to disclosing that the compensation expense has not change. This guidance is effective for interim and fiscal years beginning after December 15, 2017 with early adoption permitted. This guidance must be applied on a prospective basis. The Company does not expect the adoption of this standard will have a material impact on the consolidated financial statements.
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- | MARKETABLE SECURITIES |
Marketable securities with contractual maturities of less than one year are as follows:
| | December 31, | | | December 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
| | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | |
| | cost | | | losses | | | gains | | | Value | | | cost | | | losses | | | gains | | | Value | | | cost | | | losses | | | gains | | | value | | | cost | | | losses | | | gains | | | value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign banks and government debentures | | $ | 15,361 | | | $ | (10 | ) | | $ | 51 | | | $ | 15,402 | | | $ | 5,895 | | | $ | (15 | ) | | $ | 16 | | | $ | 5,896 | | | $ | 22,294 | | | $ | (63 | ) | | $ | 3 | | | $ | 22,234 | | | $ | 15,361 | | | $ | (10 | ) | | $ | 51 | | | $ | 15,402 | |
Corporate debentures | | | 5,046 | | | | - | | | | 4 | | | | 5,050 | | | | 4,393 | | | | (1 | ) | | | 17 | | | | 4,409 | | | | 20,354 | | | | (20 | ) | | | 5 | | | | 20,339 | | | | 5,046 | | | | - | | | | 4 | | | | 5,050 | |
Corporate shares | | | - | | | | - | | | | - | | | | - | | | | 3,762 | | | | - | | | | 1,936 | | | | 5,698 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale marketable securities | | $ | 20,407 | | | $ | (10 | ) | | $ | 55 | | | $ | 20,452 | | | $ | 14,050 | | | $ | (16 | ) | | $ | 1,969 | | | $ | 16,003 | | | $ | 42,648 | | | $ | (83 | ) | | $ | 8 | | | $ | 42,573 | | | $ | 20,407 | | | $ | (10 | ) | | $ | 55 | | | $ | 20,452 | |
Marketable securities with contractual maturities from one to three years are as follows:
| | December 31, | | | December 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
| | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | |
| | cost | | | losses | | | gains | | | Value | | | cost | | | losses | | | gains | | | Value | | | cost | | | losses | | | gains | | | value | | | cost | | | losses | | | gains | | | value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign banks and government debentures | | $ | 31,040 | | | $ | (45 | ) | | $ | 76 | | | $ | 31,071 | | | $ | 38,383 | | | $ | (117 | ) | | $ | 149 | | | $ | 38,415 | | | $ | 14,463 | | | $ | (61 | ) | | $ | 2 | | | $ | 14,404 | | | $ | 31,040 | | | $ | (45 | ) | | $ | 76 | | | $ | 31,071 | |
Corporate debentures | | | 28,980 | | | | (26 | ) | | | 65 | | | | 29,019 | | | | 32,008 | | | | (143 | ) | | | 43 | | | | 31,908 | | | | 9,554 | | | | (19 | ) | | | 32 | | | | 9,567 | | | | 28,980 | | | | (26 | ) | | | 65 | | | | 29,019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale marketable securities | | $ | 60,020 | | | $ | (71 | ) | | $ | 141 | | | $ | 60,090 | | | $ | 70,391 | | | $ | (260 | ) | | $ | 192 | | | $ | 70,323 | | | $ | 24,017 | | | $ | (80 | ) | | $ | 34 | | | $ | 23,971 | | | $ | 60,020 | | | $ | (71 | ) | | $ | 141 | | | $ | 60,090 | |
Marketable securities with contractual maturities of more than three years are as follows:
| | December 31, | | | December 31, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | |
| | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | | | Adjusted | | | Gross unrealized | | | Gross unrealized | | | Market | |
| | cost | | | Losses | | | gains | | | Value | | | cost | | | Losses | | | gains | | | Value | | | cost | | | losses | | | gains | | | value | | | cost | | | losses | | | gains | | | value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign banks and government debentures | | $ | 7,738 | | | $ | (111 | ) | | $ | - | | | $ | 7,627 | | | $ | 6,356 | | | $ | (71 | ) | | $ | - | | | $ | 6,285 | | | $ | 13,603 | | | $ | (198 | ) | | $ | - | | | $ | 13,405 | | | $ | 7,738 | | | $ | (111 | ) | | $ | - | | | $ | 7,627 | |
Corporate debentures | | | 7,281 | | | | (60 | ) | | | 29 | | | | 7,250 | | | | 11,342 | | | | (136 | ) | | | - | | | | 11,206 | | | | 17,308 | | | | (257 | ) | | | - | | | | 17,051 | | | | 7,281 | | | | (60 | ) | | | 29 | | | | 7,250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale marketable securities | | $ | 15,019 | | | $ | (171 | ) | | $ | 29 | | | $ | 14,877 | | | $ | 17,698 | | | $ | (207 | ) | | $ | - | | | $ | 17,491 | | | $ | 30,911 | | | $ | (455 | ) | | $ | - | | | $ | 30,456 | | | $ | 15,019 | | | $ | (171 | ) | | $ | 29 | | | $ | 14,877 | |
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- | MARKETABLE SECURITIES (Cont.) |
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values as of December 31, 20162017 and 20152016 were as follows:
| | December 31, 2016 | | | December 31, 2017 | |
| | Investments with continuous unrealized losses for less than 12 months | | | Investments with continuous unrealized losses for 12 months or greater | | | Total investments with continuous unrealized losses | | | Investments with continuous unrealized losses for less than 12 months | | | Investments with continuous unrealized losses for 12 months or greater | | | Total investments with continuous unrealized losses | |
| | Fair Value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair Value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign banks and government debentures | | $ | 20,118 | | | $ | (139 | ) | | $ | 2,325 | | | $ | (28 | ) | | $ | 22,443 | | | $ | (167 | ) | | $ | 40,104 | | | $ | (275 | ) | | $ | 6,486 | | | $ | (48 | ) | | $ | 46,590 | | | $ | (323 | ) |
Corporate debentures | | | 13,444 | | | | (79 | ) | | | 1,013 | | | | (6 | ) | | | 14,457 | | | | (85 | ) | | | 29,280 | | | | (226 | ) | | | 8,173 | | | | (69 | ) | | | 37,453 | | | | (295 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale marketable securities | | $ | 33,562 | | | $ | (218 | ) | | $ | 3,338 | | | $ | (34 | ) | | $ | 36,900 | | | $ | (252 | ) | | $ | 69,384 | | | $ | (501 | ) | | $ | 14,659 | | | $ | (117 | ) | | $ | 84,043 | | | $ | (618 | ) |