As filed with the United States Securities and Exchange Commission on May 17, 2006
UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
FORM 20-F |
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act Ofof 1934
FOR THE FISCAL YEAR ENDED DECEMBER
For the fiscal year ended December 31, 2002
2005
Commission file number 0-27466
NICE-SYSTEMS LTD.
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(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
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ISRAEL
(Jurisdiction of incorporation or organization)
8 Hapnina Street, P.O. Box 690, Ra'anana 43107, Israel
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(Address of principal executive offices)
NICE-SYSTEMS LTD. |
(Exact name of Registrant as specified in its charter and translation of Registrant’s name into English) |
Israel |
(Jurisdiction of incorporation or organization) |
8 Hapnina Street, P.O. Box 690, Ra’anana 43107, Israel |
(Address of principal executive offices) |
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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NONE NONE
-------------------------------- ---------------------------------
Title of Each | Name of Each Exchange | |
None | None | |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
AMERICAN DEPOSITARY SHARES, EACH REPRESENTING
ONE ORDINARY SHARE, PAR VALUE ONE
NEW ISRAELI SHEKEL PER SHARE
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
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(Title of Class)
American Depositary Shares, each representing |
one Ordinary Share, par value one |
New Israeli Shekel per share |
(Title of Class) |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: |
None |
(Title of Class) |
Indicate the number of outstanding shares of each of the issuer'sissuer’s classes of capital or common stock as of the close of the period covered by the annual report:
15,704,425 ORDINARY SHARES, PAR VALUE
24,137,643 Ordinary Shares, par value NIS 1.00 PER SHARE
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Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes oNo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes X xNo
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o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerx | Accelerated filero | Non-accelerated filero |
Indicate by check mark which financial statements the registrant has elected to follow:
Item 17o Item 18 X
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x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
PRELIMINARY NOTE
THIS ANNUAL REPORT CONTAINS HISTORICAL INFORMATION AND FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
This annual report contains historical information and forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 WITH RESPECT TO NICE'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND,"
"MAY," "PLAN," "PROJECT" AND "SHOULD" AND SIMILAR EXPRESSIONS, AS THEY RELATE TOwith respect to NICE’s business, financial condition and results of operations. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “strategy,” “continue,” “goal” and “target” and similar expressions, as they relate to NICE OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS REFLECT THE CURRENT VIEWS AND ASSUMPTIONS OFor its management, are intended to identify forward-looking statements. Such statements reflect the current views and assumptions of NICE WITH RESPECT
TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES. MANY FACTORS COULD
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OFwith respect to future events and are subject to risks and uncertainties. The forward-looking statements relate to, among other things: operating results; anticipated cash flows; gross margins; adequacy of resources to fund operations; our ability to maintain our average selling prices despite the aggressive marketing and pricing strategies of our competitors; our ability to maintain and develop profitable relationships with our key distribution partners, one of which constitutes 21% of our revenues; the financial strength of our key distribution partners; and the market’s acceptance of our technologies, products and solutions.
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. Many factors could cause the actual results, performance or achievements of NICE TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT MAY BE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING, AMONG
OTHERS, CHANGES IN GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN CURRENCY
EXCHANGE RATES AND INTEREST RATES, DIFFICULTIES OR DELAYS IN ABSORBING AND
INTEGRATING ACQUIRED OPERATIONS, PRODUCTS, TECHNOLOGIES AND PERSONNEL, CHANGES
IN BUSINESS STRATEGY AND VARIOUS OTHER FACTORS, BOTH REFERENCED AND NOT
REFERENCED IN THIS ANNUAL REPORT. THESE RISKS ARE MORE FULLY DESCRIBED UNDER
ITEMto be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, difficulties or delays in absorbing and integrating acquired operations, products, technologies and personnel, changes in business strategy and various other factors, both referenced and not referenced in this annual report. These risks are more fully described under Item 3, "KEY INFORMATION - RISK FACTORS" OF THIS ANNUAL REPORT. SHOULD ONE OR
MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING
ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED,
PLANNED OR PROJECTED.“Key Information – Risk Factors” of this annual report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. NICE DOES NOT INTEND OR ASSUME ANY OBLIGATION TO UPDATE
THESE FORWARD-LOOKING STATEMENTS.does not intend or assume any obligation to update these forward-looking statements. Investors should bear this in mind as they consider forward-looking statements and whether to invest or remain invested in NICE-Systems Ltd.’s securities.
In this annual report, all references to "NICE," "we," "us"“NICE,” “we,” “us” or "our"“our” are to NICE Systems Ltd,NICE-Systems Ltd., a company organized under the laws of the State of Israel, and its wholly owned subsidiaries, NICENice Systems Inc., NICE Systems GmbH, NICE Systems Canada Ltd., NICE CTI Systems UK Ltd., STS Software Systems (1993) Ltd., NiceEye BV, NICE Systems S.A.R.L,S.A.R.L., NICE APAC Ltd., NiceEye Ltd. and, Racal Recorders Systems Ltd., NICE Interactive Solutions India Private Ltd., Nice Systems Latin America, Inc., Nice Japan Ltd., Nice Systems (Singapore) Pte. Ltd., Nice Systems Australia PTY Ltd., Nice Switzerland AG, Fast Video Security GmbH and Fast Video Security (UK) Ltd.
In this annual report, unless otherwise specified or unless the context otherwise requires, all references to "$"“$” or "dollars"“dollars” are to U.S. dollars and all references to "NIS"“NIS” are to New Israeli Shekels. Except as otherwise indicated, the financial statements of and information regarding NICE are presented in U.S. dollars.
ii
TABLE OF CONTENTS
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42 | ||
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63 | ||
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85 | ||
88 | ||
111 | ||
111 | ||
111 | ||
112 | ||
112 | ||
112 | ||
112 | ||
113 | ||
113 | ||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 113 | |
114 | ||
114 | ||
115 | ||
F-1 | ||
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not Applicable.
ITEM 3. KEY INFORMATION.
SELECTED FINANCIAL DATA
Identity of Directors, Senior Management and Advisers. | |
Not Applicable. | |
Offer Statistics and Expected Timetable. | |
Not Applicable. | |
Key Information. |
Selected Financial Data
The following selected consolidated financial data as of December 31, 20012004 and 20022005 and for the years ended December 31, 2000, 20012003, 2004 and 20022005 have been derived from our audited consolidated financial statements. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and audited by Kost, Forer, Gabbay & Gabbay,Kasierer, a member of Ernst & Young Global. The consolidated selected financial data as of December 31, 1998, 19992001, 2002 and 20002003 and for the years ended December 31, 19982001 and 1999 have2002 has been derived from other consolidated financial statements not included in this annual report and have also been prepared in accordance with U.S. GAAP and audited by Kost, Forer, Gabbay & Gabbay,Kasierer, a member of Ernst & Young Global. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to "ItemItem 5, Operating“Operating and Financial Review and Prospects"Prospects” and the consolidated financial statements and notes thereto and other financial information included elsewhere in this annual report.
2
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| Year Ended December 31, |
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| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
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| (in thousands of U.S. dollars, except per share data) |
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OPERATING DATA: |
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Revenues |
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Products |
| $ | 99,395 |
| $ | 127,896 |
| $ | 168,055 |
| $ | 182,616 |
| $ | 206,355 |
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Services |
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| 14,474 |
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| 27,445 |
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| 56,203 |
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| 70,027 |
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| 104,755 |
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Total revenues |
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| 113,869 |
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| 155,341 |
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| 224,258 |
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| 252,643 |
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| 311,110 |
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Cost of revenues |
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Products |
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| 47,781 |
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| 55,453 |
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| 64,231 |
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| 64,432 |
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| 67,543 |
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Services |
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| 19,446 |
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| 26,054 |
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| 42,084 |
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| 49,876 |
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| 68,683 |
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Total cost of revenues |
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| 67,227 |
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| 81,507 |
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| 106,315 |
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| 114,308 |
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| 136,226 |
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Gross profit |
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| 46,642 |
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| 73,834 |
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| 117,943 |
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| 138,335 |
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| 174,884 |
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Operating expenses: |
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Research and development, net |
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| 18,843 |
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| 17,122 |
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| 22,833 |
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| 24,866 |
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| 30,896 |
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Selling and marketing |
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| 33,683 |
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| 38,685 |
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| 53,351 |
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| 61,855 |
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| 72,829 |
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General and administrative |
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| 23,410 |
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| 23,806 |
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| 29,840 |
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| 31,269 |
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| 37,742 |
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Amortization of acquired intangible assets |
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| 3,414 |
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| 58 |
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| 350 |
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| 317 |
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| 1,331 |
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Other special charges |
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| 17,862 |
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| 29,092 |
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| 7,082 |
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| - |
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| - |
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Total operating expenses |
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| 97,212 |
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| 108,763 |
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| 113,456 |
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| 118,307 |
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| 142,798 |
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Operating income (loss) |
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| (50,570 | ) |
| (34,929 | ) |
| 4,487 |
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| 20,028 |
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| 32,086 |
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Financial income, net |
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| 4,254 |
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| 3,992 |
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| 2,034 |
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| 3,556 |
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| 5,398 |
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Other income (expenses), net |
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| (4,846 | ) |
| (4,065 | ) |
| 292 |
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| 54 |
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| (13 | ) |
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Income (loss) before taxes on income |
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| (51,162 | ) |
| (35,002 | ) |
| 6,813 |
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| 23,638 |
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| 37,471 |
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Taxes on income |
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| 198 |
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| 350 |
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| 1,205 |
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| 2,319 |
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| 902 |
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Net income (loss) from continuing operations |
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| (51,360 | ) |
| (35,352 | ) |
| 5,608 |
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| 21,319 |
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| 36,569 |
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Net income (loss) from discontinuing operations |
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| 4,565 |
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| 1,370 |
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| 1,483 |
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| 3,236 |
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| - |
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Net income (loss) |
| $ | (46,795 | ) | $ | (33,982 | ) | $ | 7,091 |
| $ | 24,555 |
| $ | 36,569 |
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Basic earnings (loss) per share: |
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Continuing operations |
| $ | (3.94 | ) | $ | (2.56 | ) | $ | 0.35 |
| $ | 1.22 |
| $ | 1.91 |
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Discontinued operations |
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| 0.35 |
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| 0.10 |
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| 0.09 |
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| 0.18 |
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| - |
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Net earnings (loss) |
| $ | (3.59 | ) | $ | (2.46 | ) | $ | 0.44 |
| $ | 1.40 |
| $ | 1.91 |
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Weighted average number of shares used in computing basic earnings (loss) per share (in thousands) |
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| 13,047 |
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| 13,795 |
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| 16,038 |
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| 17,497 |
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| 19,121 |
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Diluted earnings (loss) per share: |
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Continuing operations |
| $ | (3.94 | ) | $ | (2.56 | ) | $ | 0.33 |
| $ | 1.14 |
| $ | 1.77 |
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Discontinued operations |
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| 0.35 |
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| 0.10 |
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| 0.09 |
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| 0.17 |
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| - |
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Net earnings (loss) |
| $ | (3.59 | ) | $ | (2.46 | ) | $ | 0.42 |
| $ | 1.31 |
| $ | 1.77 |
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Weighted average number of shares used in computing diluted earnings (loss) per share (in thousands) |
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| 13,047 |
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| 13,795 |
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| 16,781 |
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| 18,703 |
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| 20,646 |
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| At December 31, |
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| 2002 |
| 2003 |
| 2004 |
| 2005 |
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BALANCE SHEET DATA: |
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Working capital |
| $ | 70,572 |
| $ | 79,583 |
| $ | 56,174 |
| $ | 51,428 |
| $ | 274,708 |
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Total assets |
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| 210,012 |
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| 236,288 |
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| 249,415 |
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| 298,311 |
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| 617,250 |
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Total debt |
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| - |
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| 24 |
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| - |
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| - |
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| - |
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Shareholders’ equity |
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| 167,018 |
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| 154,536 |
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| 176,831 |
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| 222,871 |
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| 487,041 |
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Risk Factors
General Business Risks Relating to Our Business Portfolio and Structure
The following table shows, for each of the months indicated, the highmarkets in which we operate are characterized by rapid technological changes and low exchange rates between New Israeli Shekelsfrequent new products and U.S. dollars, expressed as
shekels per U.S. dollarservice introductions. We may not be able to keep up with these rapid technological and based upon the daily representative rate of exchange
as reported by the Bank of Israel:
MONTH HIGH LOW
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December 2002......................... NIS 4.791 NIS 4.632
January 2003.......................... 4.898 4.769
February 2003......................... 4.924 4.810
March 2003............................ 4.858 4.687
April 2003............................ 4.671 4.521
May 2003.............................. 4.577 4.373
The following table shows, for periods indicated, the average exchange rate
between New Israeli Shekels and U.S. dollars, expressed as shekels per U.S.
dollar, calculated based on the average of the exchange rates on the last day of
each month during the relevant period as reported by the Bank of Israel:
YEAR AVERAGE
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1998..................................... 3.810
1999..................................... 4.153
2000..................................... 4.068
2001..................................... 4.203
2002..................................... 4.738
On June 17, 2003, the exchange rate was NIS 4.353 per U.S. dollar as
reported by the Bank of Israel.
The effect of exchange rate fluctuations on our business and operations is
discussed in "Item 5. Operating and Financial Review and Prospects."
DIVIDENDS
We have never declared or paid dividends on our ordinary shares. We intend
to retain our earnings for future growth and therefore do not anticipate paying
any cash dividends in the foreseeable future.
4
RISK FACTORS
GENERAL BUSINESS RISKS TO NICE BUSINESS PORTFOLIO AND STRUCTURE
INTEGRATION OF THALES CONTACT SOLUTIONS FOLLOWING THE ACQUISITION IN NOVEMBER
2002 MAY PLACE SIGNIFICANT DEMANDS ON OUR OPERATIONS AND FINANCIAL RESOURCES.
We completed the acquisition of Thales Contact Solutions (or TCS) in
November 2002. We cannot guarantee the successful integration of top management,
people, product platforms, partners and distribution channels. The integration
of TCS also requires a high level of management attention, which further puts
risk on day-to-day business management. The integration of acquired companies
may place significant demands on our operations and financial resources.
Acquisitions of companies involve financial, operational and legal risks,
including the difficulty of assimilating operations and personnel of the
acquired companies and of maintaining uniform standards, controls, procedures
and policies. Any failure to effectively integrate any acquired company could
have a material adverse effect on our business, financial condition and results
of operations.
THE MARKETS IN WHICH WE OPERATE ARE CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES
AND FREQUENT NEW PRODUCTS AND SERVICE INTRODUCTIONS. WE MAY NOT BE ABLE TO KEEP
UP WITH THESE RAPID TECHNOLOGICAL AND OTHER CHANGES.other changes.
We are operating in several markets, each characterized by rapidly changing technology, new product introductions and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable and can exert price pressures on existing products. We anticipate that a number of existing and potential competitors will be introducing new and enhanced products that could adversely affect the competitive position of our products. Our most significant market is the market for voice recording platforms and related enhanced applications (or Voice Platforms and Applications). Voice Platforms and Applications are utilized by entities operating in the contact center, trading floor, public safety and air traffic control segments to capture, store, retrieve and analyze recorded data. The market for our Voice Platforms and Applications is, in particular, characterized by a group of highly competitive vendors that are introducing rapidly changing competitive offerings around evolving industry standards.
Our ability to anticipate changes in technology and industry standards and to successfully develop and introduce new, enhanced and competitive products, on a timely basis, in all the markets where we operate, will be a critical factor in our ability to grow and be competitive. As a result, we expect to continue to make significant expenditures on research and development, particularly with respect to new software applications, which are continuously required in all our business areas. The convergence of voice and data networks and wired and wireless communications could require substantial modification and customization of our current products and business models, as well as the introduction of new products. Further, customer acceptance of these new technologies may be slower than we anticipate. We cannot assure you that the market or demand for our products will grow as rapidly as we expect, or if at all, that we will successfully develop new products or introduce new applications for existing products, that such new products and applications will achieve market acceptance or that the introduction of new products or technological developments by others will not render our products obsolete. In addition, our products must readily integrate with major third party security, telephone, front-office and back-office systems. Any changes to these third party systems could require us to redesign our products, and any such redesign might not be possible on a timely basis or achieve market acceptance. Our inability to develop products that are competitive in technology and price and responsive to customer needs could have a material adverse effect on our business, financial condition and results of operations. WE MAY NOT SUCCEED IN MAKING ADDITIONAL ACQUISITIONS OR BE EFFECTIVE IN
INTEGRATING SUCH ACQUISITIONS.
OneAdditional factors that could have a material adverse effect on our business, financial condition and results of operations include industry specific factors; our ability to continuously develop, introduce and deliver commercially viable products, solutions and technologies, the market’s rate of acceptance of the product solutions and technologies we offer; and our ability to keep pace with market and technology changes and to compete successfully.
4
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments. In particular, we may not succeed in making additional acquisitions or be effective in integrating such acquisitions.
As part of our business strategies is to pursue acquisitions of businesses,
products and technologies that are complementary to those of our businesses. In
the past,growth strategy, we have entered intomade a number of acquisitions and wehave made minority investments in complementary businesses, products or technologies. We frequently evaluate the tactical or strategic opportunity available related to complementary businesses, products or technologies. The process of integrating an acquired company’s business into our operations and/or of investing in new technologies, may make
additionalresult in unforeseen operating difficulties and large expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business. Other risks commonly encountered with acquisitions include the effect of the acquisition on our financial and strategic position and reputation, the failure of the acquired business to further our strategies, the inability to successfully integrate or commercialize acquired technologies or otherwise realize anticipated synergies or economies of scale on a timely basis and the potential impairment of acquired assets. Moreover, there can be no assurance that the anticipated benefits of any acquisition or investment will be realized. Future acquisitions or investments contemplated and/or consummated could result in potentially dilutive issuances of equity securities, the future.incurrence of debt and contingent liabilities, and amortization expenses related to intangible assets, any of which could have a material adverse effect on our operating results and financial condition. There can be no
5
acquisitions.acquisitions into our existing business. In addition, if we consummate one or more significant acquisitions in which the consideration consists, in whole or in part, of ordinary shares or ADSs,American Depositary Shares (ADSs), representing our ordinary shares, shareholders would suffer dilution of their interests in us. WE MAY BE UNABLE TO MANAGE OUR EXPANSION AND ANTICIPATED GROWTH EFFECTIVELY.
InWe have also invested in companies which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire initial investment in these companies.
5
We have expanded into new markets and may not be able to manage our expansion and anticipated growth effectively.
We have established a sales and service infrastructure in India by recruiting sales and service personnel in order to bring about further growth in revenue in the Asia Pacific market and have expanded our professional services group to include business consultants. Also, since 2002 we have expandedbeen expanding our presence in Europe (mainly in the UK)United Kingdom) and in the Middle East and Africa (or EMEA)(the EMEA region) through organic growth and through theour acquisition of TCS.Thales Contact Solutions (or TCS). The growth in our business in the EMEA region is still in its early stage, and particularly,in particular, we are just beginning to develop our digital video business in EMEA.the EMEA region. We expect continued growth, particularly in connection with the enhancement and expansion of our operations in the EMEA region, as well as in the Asia Pacific (or APAC) region. We may establish additional operations within these regions or in other regions where growth opportunities are projected to warrant the investment. However, we cannot assure you that our revenues will increase as a result of this expansion or that we will be able to recover the expenses we incurred in effecting the expansion. FailureOur failure to effectively manage our expansion of our sales, marketing, service and support organizations could have a negative impact on our business. WE HAVE RECENTLY MIGRATED TOWARDS THE OUTSOURCING OF THE MANUFACTURING OF OUR
KEY PRODUCTS. THE FAILURE OF OUR SUPPLIERS TO MEET OUR QUALITY OR DELIVERY
REQUIREMENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
DuringTo accommodate our global expansion, we are continuously implementing new or expanded business systems, procedures and controls. There can be no assurance that the implementation of such systems, procedures, controls and other internal systems can be completed successfully.
Our evolving business strategy could adversely affect our business.
Historically we have supplied the hardware and some software for implementing multimedia recording solutions. Our shift towards providing professional support services and an enterprise software business model has required and will continue to require substantial change, potentially resulting in some disruption to our business. These changes may include changes in management and technical personnel; expanded or differing competition resulting from entering the enterprise software market; increased need to expand our distribution network to include system integrators which could impact revenues and gross margins, and, as our applications are sold either to our installed base or to new customers together with our recording platforms, the rate of adoption of our software applications by the market.
The changes in our business may place a significant strain on our operational and financial resources. We may experience substantial disruption from changes and could incur significant expenses and write-offs. Failing to carefully manage expense and inventory levels consistent with product demand and to carefully manage accounts receivable to limit credit risk, could materially adversely affect our results of operations.
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We depend upon outsourcers for the manufacture of our key products. The failure of our product manufacturers to meet our quality or delivery requirements would likely have a material adverse effect on our business, results of operations and financial condition.
In 2002, we implementedentered into a manufacturing agreement with Flextronics Israel Ltd., a subsidiary of Flextronics, a global electronics manufacturing services company.company, or Flextronics. Under this agreement, Flextronics is providingprovides us with a turnkeycomprehensive manufacturing solution that covers all aspects of the manufacture of our products from order receipt to product shipment, including purchasing, manufacturing, testing, configuration, and delivery services. This agreement currently coverscovered all our products. WithIn addition, in connection with the acquisition of TCS,Dictaphone Corporation’s (or Dictaphone) Communications Recordings Systems division (or CRS), we assumed a contract manufacturing agreement with INSTEM (of the UK) forDictaphone’s EMS (EMS) division pursuant to which EMS manufactures all ex-TCSex-CRS products. Consequently,As a result of these arrangements, we are now fully dependent on Flextronics and INSTEMEMS to process orders and manufacture our products. Consequently, the manufacturing process of our products is not in our control.
We may from time to time experience delivery delays due to the inability of the outsourcersFlextronics and EMS to consistently meet our quality or delivery requirements.requirements and we may experience production interruptions if any of Flextronics or EMS is for any reason unable to continue the production of our products. Should we have on-going performance issues with our contract manufacturers, the process to move from one contractor to another is a lengthy and costly process that could affect our ability to execute customer shipment requirements and/or might negatively affect revenue and/or costs. If these suppliersmanufacturers or any other suppliermanufacturer were to cancel contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition.
IF WE LOSE OUR KEY SUPPLIERS, OUR BUSINESS MAY SUFFER.
Undetected problems in our products could directly impair our financial results.
If flaws in design, production, assembly or testing of our products (by us or our suppliers) were to occur, we could experience a rate of failure in our products that would result in substantial repair, replacement or service costs and potential liability and damage to our reputation. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations and financial condition.
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If we lose our key suppliers, our business may suffer.
Certain components and subassemblies that we useare used in the manufacture of our existing products are purchased from a single or a limited number of suppliers. In the event that any of these suppliers are unable to meet our requirements in a timely manner, we may experience an interruption in production until an alternative source of supply can be obtained. Any disruption, or any other interruption of a suppliers'supplier’s ability to provide components to us, could result in delays in making product shipments, which could have a material adverse effect on our business, financial condition and results of operations. In addition, some of our major suppliers use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. Further, as suppliers discontinue their products, or modify them in manners incompatible with our current use, or use manufacturing processes and tools that could not be easily migrated to other vendors, we could have significant delays in product availability, which would have a significant adverse impact on our results of operations and financial condition. Although we generally maintain an inventory for some of our components and subassemblies to limit the potential for an interruption and we believe that we can obtain alternative sources of supply in the event our suppliers are unable to meet our requirements in a 6
production.
IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR
BUSINESS MAY SUFFER.production and in availability of spare parts.
The European Union has issued directives relating to the sale in member countries of electrical and electronic equipment, including products sold by us. If our products fail to comply with these directives, we could be subject to penalties and sanctions that could materially adversely affect our business.
A directive issued by the European Union on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or “RoHS”, comes into effect on July 1, 2006. The RoHS directive lists a number of substances including, among others, lead, mercury, cadmium and hexavalent chromium, which must either be removed or reduced to within maximum permitted concentrations in any products containing electrical or electronic components that are sold within the European Union. Our products fall within the scope of the RoHS directive and we are making every effort in order to ensure that all of our products sold in the European Union after July 1, 2006, will comply with the RoHS directive, without otherwise adversely affecting the quality and functionalities of such products. We, alongside other manufacturers, will be dependent on our suppliers for certain components and sub-system modules to comply with these requirements.
Compliance with the RoHS directive, especially with respect to the requirement that products be lead free, will require us to undertake significant expenses with respect to the redesign of our products. In addition, we may be required to pay higher prices for components that comply with this directive. We may not be able to pass these higher component costs or redesign costs on to our customers. We cannot at this point estimate the expense that will be required to redesign our products in order to include “environmentally friendly” components. We cannot be sure that we will be able to comply with these regulations in a timely manner, that we will be able to comply on a cost effective basis or that a sufficient supply of compliant components will be available to us. Our inability or failure to comply with these regulations may restrict us for a period of time from conducting certain business in the European Union and could have a material adverse effect on our results of operations. In addition, manufacturers of components that we use in our products that do not comply with these regulations may decide to stop manufacturing these components prior to the July 2006 compliance date. These actions by manufacturers of components could result in a shortage of components that could adversely affect our business and results of operations.
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A further directive on Waste Electrical and Electronic Equipment, or “WEEE”, approved by the European Union in 2003, promotes waste recovery with a view to reducing the quantity of waste for disposal and saving natural resources, in particular by reuse, recycling and recovery of waste electrical and electronic equipment. The WEEE directive covers all electrical and electronic equipment used by consumers and electronic equipment intended for professional use. The directive, which partly came into effect in August 2005, requires that all new electrical and electronic equipment placed for sale in the European Union be appropriately labeled regarding waste disposal and contains other obligations regarding the collection and recycling of waste electrical and electronic equipment. Our products fall within the scope of the WEEE directive, and we are taking and will continue to take all requisite steps to ensure compliance. The WEEE directive is required to be implemented by each member country of the European Union through its own national legislation. Accordingly, we cannot at this time be certain that we will be able to comply with the specific regulations which will be enacted to implement the WEEE directive in each of the individual countries in the European Union.
The countries of the European Union, as a single market for our products, accounted in 2005 for approximately 23% of our revenues. If our products fail to comply with WEEE or RoHS directives or any other directive issued from time to time by the European Union, we could be subject to penalties and other sanctions that could have a material adverse affect on our results of operations and financial condition.
If we lose a major customer or support contract, our business may suffer.
We derive a significant portion of our revenues from services, which include maintenance, project management, support and training. As a result, if we lose a major customer or if a support contract is delayed or cancelled, our revenues would be adversely affected. In addition, customers who have accounted for significant services revenues in the past may not generate revenues in future periods. Our failure to obtain new customers or additional orders from existing customers could also materially affect our results of operations.
Risks associated with our distribution channels and key strategic partners may materially adversely affect our financial results.
We have agreements in place with many distributors, dealers and resellers to market and sell our products and services in addition to our direct sales force. We derive a significant percentage of our revenues from one of our distributor channels and new channels may, in the future, account for a significant percentage of our revenues. Our top channel partner accounted for approximately 21%, 19% and 20% of our revenues in 2005, 2004 and 2003, respectively. Our financial results could be materially adversely affected if our contracts with channel partners were terminated, if our relationship with channel partners were to deteriorate or if the financial condition of our channel partners were to weaken. Additionally, our competitors’ ability to penetrate our strategic relationships, particularly our relationship with Avaya Inc., our largest global distribution partner and one of the leading global providers of enterprise business communication platforms in voice, e-business and data, may result in a significant reduction of sales through that partner.
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As our market opportunities change, our reliance on particular channel partners may increase, which may negatively impact gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels. If we are not successful, we may lose sales opportunities, customers and market share. In addition, some of our channel partners are suppliers of telecommunication infrastructure equipment. There can be no assurance that our channel partners will not develop or market VoIP, software applications and storage products and services in competition with us in the future.
Our uneven sales patterns could significantly impact our quarterly revenues and earnings.
The sales cycle for our products and services is variable, typically ranging between a few weeks to several months from initial contact with the potential client to the signing of a contract. Frequently, sales orders accumulate towards the latter part of a given quarter. Looking forward, given the lead-time required by our contract manufacturer, if a large portion of sales orders are received late in the quarter, we may not be able to deliver products within the quarter and thus such sales will be deferred to a future quarter. There can be no assurance that such deferrals will result in sales in the near term, or at all. Thus, delays in executing client orders may affect our revenue and cause our operating results to vary widely. Additionally, as a high percentage of our expenses, particularly employee compensation, is relatively fixed, a variation in the level of sales, especially at or near the end of any quarter, may have a material adverse impact on our quarterly operating results.
It is also difficult to predict the exact mix of products for any period between hardware, software and services as well as within the product category between audio platforms and related applications and digital video. As each of our product types and services have different gross margins, changes in the mix of products in a period will have an impact, and perhaps a material impact, on our gross profit and net income in that period.
If we lose our key personnel or cannot recruit additional personnel, our business may suffer.
If our growth continues, we will be required to hire and integrate new employees. Recruiting and retaining qualified engineers and computer programmers to perform research and development and to commercialize our products, as well as qualified personnel to market and sell those products, are critical to our success. As of December 31, 2002,2005, approximately 25%26% of our employees were devoted to research and product development and 27%23% were devoted to marketing and sales. There can be no assurance that we will be able to successfully recruit and integrate new employees. There is often intense competition to recruit highly skilled employees in the technology industry. We may also experience personnel changes as a result of our move from multimedia recording equipment towards business performance solutions. An inability to attract and retain highly qualified employees may have an adverse effect on our ability to develop new products and enhancements for existing products and to successfully market such products.products, all of which would likely have a material adverse effect on our results of operations and financial position. Our success also depends, to a significant extent, upon the continued service of a number of key management, sales, marketing and technicaldevelopment employees, the loss of any of whom could materially adversely affect our business, financial condition and results of operations.
OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE RISKS.
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Operating internationally exposes us to additional and unpredictable risks.
We sell our products throughout the world and intend to continue to increase our penetration of international markets. In 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2002,2005, approximately 98%, 98%, 99%, 97%, 96%99% and 98%99%, respectively, of our total sales were derived from sales to customers outside of Israel, and approximately 42%48%, 52%, 50%, 44%, and 53%, 48% and 50% respectively, of our total sales were made to customers in North America. A number of risks are inherent in international transactions. Our future results could be materially adversely affected by a variety of factors including changes in exchange rates, general economic conditions, regulatory requirements, tax structures or changes in tax laws, and longer payment cycles in the countries in our geographic areas of operations. International sales and operations may be limited or disrupted by the imposition of governmental controls and regulations, export license requirements, political instability, trade restrictions, changes in tariffs and difficulties in managing international operations. We cannot assure you that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business, financial condition and results of operations.
INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS COULD PREVENT US FROM ENFORCING OR
DEFENDING OUR INTELLECTUAL PROPERTY AND WE MAY BE SUBJECT TO LIABILITY IN THE
EVENT OUR PRODUCTS INFRINGE ON THE PROPRIETARY RIGHTS OF THIRD PARTIES AND WE
ARE NOT SUCCESSFUL IN DEFENDING SUCH CLAIMS.
Inadequate intellectual property protections could prevent us from enforcing or defending our intellectual property and we may be subject to liability in the event our products infringe on the proprietary rights of third parties and we are not successful in defending such claims.
Our success is dependent, to a certainsignificant extent, upon our proprietary technology. We currently own tenhold 29 U.S. patents (including sevenand 20 patents issued in additional countries covering the United States)
to protect oursame technology and weas the U.S. patents. We have 46over 128 patent applications pending in the United States and other countries. We currently rely on a combination of patent, trade secret, copyright and trademark law, together with non-disclosure and non-competenon-competition agreements, as well as third party licenses to establish and protect the technology used in our systems. However, we cannot assure you that such measures will be adequate to protect our proprietary technology, that competitors will not develop products with features based upon, or otherwise similar to our systems, or that third party licenses will be available to us or that we will prevail in any proceeding instituted by us in order to enjoin competitors from selling similar products.
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In June 2000, Dictaphone Corporation, one of our competitors, filed a
patent infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.
In April 2002, we received a letter from Dictaphone stating that several of
our products were using technology protected by additional Dictaphone patents
and offering us a licensing arrangement for these patents. We believe that none
of our products infringe upon those patents.
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From time to time, we receive "cease“cease and desist"desist” letters alleging patent infringements. No formal claims or other actions (aside from Dictaphone) have been filed with respect to such letters.alleged infringements, except for claims filed by Dictaphone (which have since been settled and dismissed) and Witness Systems, Inc. (described under Item 8, “Financial Information–Legal Proceedings” in this annual report). We believe that none of these allegations has merit. We cannot assure you, however, that we will be successful in defending Dictaphone's infringement claimagainst the claims that have been asserted or any other claims.claims that may be asserted. We also cannot assure you that Dictaphone'ssuch claims or others' claims if asserted, will not have a material adverse effect on our business, financial condition, or operations. Defending the infringement claimclaims or other claims could involve substantial costs and diversion of management resources. In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms.
WE FACE POTENTIAL PRODUCT LIABILITY CLAIMS AGAINST US.
We face potential product liability claims against us.
Our products focus specifically on organizations’ business-critical operations. We may be subject to claims that our products are defective or that some function or malfunction of our products caused or contributed to property, bodily or consequential damages. We minimize this risk by incorporating provisions into our distribution and standard sales agreements that are designed to limit our exposure to potential claims of liability. We carry product liability insurance in the amount of $10,000,000$20,000,000 per occurrence and $10,000,000
overall.$20,000,000 overall per annum. No assurance can be given that all claims will be covered either by the contractual provisions limiting liability or by the insurance, or that the amount of any individual claim or all claims will be covered by the insurance or that the amount of any individual claim or all claims in the aggregate will not exceed policy coverage limits. 8
WE MAY FACE RISKS RELATING TO GOVERNMENT CONTRACTS.A significant liability claim against us could have a material adverse effect on our results of operations and financial position.
If our advanced compliance recording solutions fail to record our customers’ interactions, we may be subject to liability and our reputation may be harmed.
Many of our customers use our solutions to record and to store recordings of commercial interactions. These recordings are used to provide back-up and verification of transactions and to guard against risks posed by lost or misinterpreted voice communications. These customers rely on our solutions to record, store and retrieve voice data in a timely, reliable and efficient manner. If our solutions fail to record our customer’s interactions or our customers are unable to retrieve stored recordings when necessary, we may be subject to liability and our reputation may be harmed. Although we attempt to limit any potential exposure through quality assurance programs, insurance and contractual terms, we cannot assure you that we will eliminate or successfully limit our liability for any failure of our recording and storage solutions.
We face risks relating to government contracts.
We sell our products to, among other customers, governments and governmental entities. These sales are subject to special risks, such as delays in funding, termination of contracts or sub-contracts at the convenience of the government, termination, reduction or modification of contracts or sub-contracts in the event of changes in the government'sgovernment’s policies or as a result of budgetary constraints, and increased or unexpected costs resulting in losses or reduced profits under fixed price contracts. Although to date we have not experienced any material problems in our performance of government contracts, or in the receipt of payments in full under such contracts, we cannot assure you that we will not experience problems in the future.
RISKS RELATING TO ISRAEL
OUR BUSINESS MAY BE IMPACTED BY INFLATION AND NIS EXCHANGE RATE FLUCTUATIONS.
Exchange rate fluctuations between the dollar
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The markets in which we operate are highly competitive and the NISwe may negatively
affectbe unable to compete successfully.
The market for our earnings. A substantial majorityproducts and related services, in general, is highly competitive. Additionally, some of our revenuesprincipal competitors such as Witness Systems, Inc. and a substantial
portionVerint Systems, Inc. may have significantly greater resources and larger customer bases than do we. We have seen evidence of deep price reductions by our expenses are denominated in dollars. However, a significant
portion of the expenses associated with our Israeli operations, including
personnel and facilities related expenses, are incurred in NIS. Consequently,
inflation in Israel will have the effect of increasing the dollar cost of our
operations in Israel, unless it is offset on a timely basis by a devaluation of
the NIS relative to the dollar. We cannot predict any future trends in the rate
of inflation in Israel or the rate of devaluation of the NIS against the dollar.
If the dollar cost of our operations in Israel increases, our dollar-measured
results of operations will be adversely affected.
WE ARE SUBJECT TO THE POLITICAL, ECONOMIC AND MILITARY CONDITIONS IN ISRAEL.
Our headquarters, research and development and main manufacturing
facilities are located in the State of Israel, and we are directly affected by
the political, economic and military conditions to which Israel is subject.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors. A state of
hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Since October 2000, there has been a high level of violence
between Israel and the Palestinians, which has led to a crisis in the entire
peace process and affected Israel's relationship with several Arab countries.
Any armed conflicts or political instability in the region could negatively
affect local business conditions and harm our results of operations. We cannot
predict the effect on the region of the increase in the degree of violence
between Israel and the Palestinians. Furthermore, several countries restrict
doing business with Israel and Israeli companies, and additional companies may
restrict doing business with Israel and Israeli companies as a result of the
recent increase in hostilities. Our products are heavily dependent upon
components imported from, and most of our sales are made to, countries outside
of Israel. Accordingly, our operations could be materially adversely affected if
trade between Israel and its present trading partners were interrupted or
curtailed.
Some of our directors, officers and employees are currently obligated to
perform annual military reserve duty. Additionally, in the event of a military
conflict, including the ongoing conflict with the Palestinians, these persons
could be required to serve in the military for extended periods of time. We
cannot assess the full impact of these requirements on our workforce or business
and we cannot predict the effect on us of any expansion or reduction of these
obligations.
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SERVICE AND ENFORCEMENT OF LEGAL PROCESS ON US AND OUR DIRECTORS AND OFFICERS
MAY BE DIFFICULT TO OBTAIN.
Service of process upon our directors and officers most of whom reside
outside the United States, may be difficult to obtain within the United States.
Furthermore, since the majority of our assets and most of our directors and
officers are located outside the United States, any judgment obtained in the
United States against us or these individuals or entities may not be collectible
within the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of United States courts for
liquidated amounts in civil matters, including judgments based upon the civil
liability provisions of those Acts.
WE DEPEND ON THE AVAILABILITY OF GOVERNMENT GRANTS AND TAX BENEFITS.
We derivecompetitors and expect to continue to derive significant benefits from
various programssee such behavior in the future, which, if we are required to match such discounting, will adversely affect our gross margins and laws in Israel including tax benefits relatingresults of operations. To date, we have been able to manage our "Approved Enterprise" programsproduct design and certain grants from the Office of the Chief
Scientist, or OCS, for research and development. To be eligible for these
grants, programs and tax benefits, we must continue to meet certain conditions,
including making certain specified investments in fixed assets and conducting
the research, development and manufacturing of products developed with such OCS
grants in Israel (unless a special approval has been granted). From time to
time, the Israeli Government has discussed reducing or eliminating the
availability of these grants, programs and benefits, andcomponent costs. However, there can be no assurance that the Government's support of grants, programs and benefits will
continue.
Pursuant to an amendment to Israeli regulations, income from two of our
"Approved Enterprises" is exempt from income tax for only two years. Following
this two-year period, the "Approved Enterprise"we will be subject to corporate tax
at a reduced rate of 10-25% (based on the percentage of foreign ownership in
each taxable year) for the following eight years. Income from the other two
"Approved Enterprises" is tax exempt for four years. Following this four-year
period, the "Approved Enterprises" are subject to corporate tax at a reduced
rate of 10-25% (based on the percentage of foreign ownership in each taxable
year) for the following six years.
If grants, programs and benefits available to us or the laws under which
they were granted are eliminated or their scope is further reduced, or if we
fail to meet the conditions of existing grants, programs or benefits and are
required to refund grants or tax benefits already received (together with
interest and certain inflation adjustments), our business, financial condition
and results of operations could be materially adversely affected.
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RISKS RELATING TO NICE BUSINESS
THE INDUSTRY FOR OUR VOICE PLATFORMS AND APPLICATIONS BUSINESS IS CHARACTERIZED
BY RAPID TECHNOLOGICAL CHANGES AND FREQUENT NEW PRODUCTS AND SERVICE
INTRODUCTIONS. WE MAY NOT BE ABLE TO KEEP UP WITH THESE RAPID TECHNOLOGICAL AND
OTHER CHANGES THAT REFLECT A HIGHLY COMPETITIVE MARKET.
Our most significant market is the market for voice recording platforms and
related enhanced applications ( or Voice Platforms and Applications). Voice
Platforms and Applications are utilized by entities operating in the contact
center, trading floor, public safety and air traffic control segments to
capture, store, retrieve and analyze recorded data. The market for our Voice
Platforms and Applications is characterized by a group of highly competitive
vendors that are introducing rapidly changing competitive offerings around
evolving industry standards. The introduction of products embodying new
technology and the emergence of new industry standards can render existing
products obsolete and unmarketable and can exert price pressures on existing
products. We anticipate that a number of existing and potential competitors will
be introducing new and enhanced products. Our ability to anticipate changes in
technology and industry standards and to successfully develop and introduce new,
enhanced and competitive products, on a timely basis, will be a critical factor
in our ability to grow and be competitive. As a result, we expectable to continue to make significant expenditures on researchachieve reductions in component and development, particularly with
respect to new software applications, which are continuously requiredproduct design costs. Further, the relative and varying rates of increases or decreases in all our
business areas. We cannot assure you that the market or demand for our products
will grow as rapidly as we expect, or if at all, that we will successfully
develop new products or introduce new applications for existing products, that
such new products and applications will achieve market acceptance or that the
introduction of new products or technological developments by others will not
render our products obsolete. Our inability to develop products that are
competitive in technology andproduct price and responsive to customer needscost could have a material adverse effectimpact on our business, financial condition or results of
operations.
CONTINUING ADVERSE CONDITIONS IN INFORMATION TECHNOLOGY SECTORS MAY LEAD TO A
DECREASED DEMAND FOR OUR VOICE PLATFORMS AND APPLICATIONS AND MAY HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our operating results may be materially adversely affected as a result of
recent unfavorable economic conditions and reduced information technology
spending, particularly in the product segments in which we compete. During 2002,
there was a decrease in demand for our Voice Platforms and Applications as
customers delayed or reduced information technology expenditures. In particular,
many enterprises, telecommunications carriers and service providers have reduced
spending in connection with contact centers, and many financial institutions
have reduced spending related to trading floors. These trends may adversely
affect the growth of sales of new Applications. If these industry-wide
conditions persist, they will likely have an adverse impact, which may be
material, on our business, financial condition and results of operations.
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VOIP EXPANSION
The expansion of the new Voice over Internet Protocol (or VOIP) in contact
centers and trading floors may lead to other companies taking leadership.
Strategic partners may change their vendor preferences. New developments of VOIP
may lead to embedded VOIP recording as part of the VOIP switch or networking
infrastructure. We cannot assure you that our products or existing partnerships
will ensure sustainable leadership.
WE DEPEND ON A NUMBER OF KEY STRATEGIC DISTRIBUTION PARTNERS FOR OUR VOICE
PLATFORM AND APPLICATION SALES
In 2002 more than 57% of our indirect sales for Voice Platforms and
Applications came from strategic partners, which accounted for a total of 39% of
our entire Voice Platforms and Applications sales, or 32% of our entire sales.
Our competitors' ability to penetrate these strategic relationships,
particularly our relationship with AVAYA, our largest global distribution
partner, may result in a significant reduction of sales through that partner.
WE DEPEND ON THE SUCCESS OF THE NICELOG SYSTEM AND RELATED PRODUCTS.
We are dependent on the success of the NiceLog system and related products
to maintain profitability. In 1998, 1999, 2000, 2001 and 2002, approximately and
respectively, 94%, 88%, 84%, 79%, and 78% of our revenues were generated from
sales of NiceLog systems and related products and we anticipate that such
products will continue to account for a significant portion of our sales in the
next several years. A significant decline in sales of NiceLog systems and
related products, or a significant decrease in the profit margin on such
products, could have a material adverse effect on our business, financial
condition or results of operations.
WE ARE EXPANDING THE SCOPE OF OUR VOICE PLATFORMS AND APPLICATIONS TO INCLUDE
ENTERPRISE BUSINESS PERFORMANCE MANAGEMENT SOLUTIONS. WE MAY NOT HAVE THE
SUFFICIENT RESOURCES TO SUCCESSFULLY LEAD SUCH A PROCESS.earnings.
We are expanding the scope of our Voice Platforms and Applications to Enterprise Performance Management solutions, with a focus on analytic software solutions that are based on voice and data content analysis. The market for such content analysis applications is still in its early phases. Successful positioning of our products is a critical factor in our ability to maintain growth. Furthermore, new potential entrants from the traditional enterprise business intelligence and business analytics sector may decide to develop recording and content analysis capabilities and compete with us in this emerging opportunity. As a result, we expect to continue to make significant expenditures on marketing. We cannot assure youensure that the market awareness or demand for our new products will grow as rapidly as we expect, or if at all, that we will successfully develop new products or introduce new applications for existing products, that such new products and applications will achieve market acceptance or that the introduction of new products or technological developments by others will not adversely impact the demand for our products.
OUR SUCCESS IN THE PUBLIC SAFETY SEGMENT DEPENDS ON SEVERAL MARKETING FACTORS.
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Our ability
The recent expansion of Voice over Internet Protocol (or VoIP) into contact centers and trading floors may allow one or more of our competitors to succeed in the public safety segment depends on our abilitytake a leadership position with respect to this new technology. Strategic partners may change their vendor preference as a result or may develop an effective network of distributors to the mid-low segmentembedded VoIP recording as part of the public safety market, while facing pricing pressures and a low-end entry
barrier.VoIP switch or networking infrastructure. We face fierce competition from players like Dictaphone, CVDS,
VoicePrint and others that results in price erosion. We believe that our ability
to sell and distribute our Voice Platforms and Applications to the public safety
market depends on a number of successful marketing and product development
initiatives, but cannot assure you of their success.
THE VIDEO PLATFORM AND APPLICATIONS MARKET IN WHICH WE OPERATE IS HIGHLY
COMPETITIVE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY.
Another market which we service isthat our products or existing partnerships will ensure sustainable leadership.
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With respect to the market for digital video products and applications (or Video PlatformPlatforms and Applications). Our, our Video PlatformPlatforms and Applications are utilized by entities in the closed circuit television, (or CCTV)or CCTV, security, gaming and retail industries to capture, store and analyze digital video and related data. The market for our Video PlatformPlatforms and Applications is highly competitive and includes products offering a broad range of features and capacities. We compete with a number of large, established manufacturers of video recording systems and distributors of similar products, as well as new emerging players in the field.competitors. The price per channel of digital recording systems has decreased throughout the market in recent years, primarily due to competitive pressures. We cannot assure you that the price per channel of digital recording systems will not continue to decrease or that our gross profit will not decrease as a result thereof.result.
With respect to the public safety part of our business, our ability to succeed depends on our ability to develop an effective network of distributors to the mid-low segment of the public safety market, while facing pricing pressures and low barriers to entry. We face significant competition from other well-established competitors, including CVDS Inc., VoicePrint Inc. and others. Prices have decreased throughout the market in recent years, primarily due to competitive pressures. We cannot assure you that prices will not continue to decrease or that our gross profit will not decrease as a result. We believe that our ability to sell and distribute our Voice Platforms and Applications in the public safety market depends on the success of our marketing, distribution and product development initiatives. We cannot assure you that we will be ablesuccessful in these initiatives.
Continuing adverse conditions in the information technology sector may lead to compete successfullya decreased demand for our voice platforms and applications and may harm our business, financial condition and results of operations.
We are subject to the effects of general global, economic and market conditions. Our operating results may be materially adversely affected as a result of recent unfavorable economic conditions and reduced information technology spending, particularly in the product segments in which we compete. In particular, many enterprises, telecommunications carriers and service providers have reduced spending in connection with contact centers, and many financial institutions have reduced spending related to trading floors. Customer purchase decisions may be significantly affected by a variety of factors including trends in spending for information technology and enterprise software, market competition, and the viability or announcement of alternative technologies. If these industry-wide conditions persist, they may have a material adverse impact on our business, financial condition and results of operations.
We depend on the success of the NiceLog system and related products.
We are dependent on the success of the NiceLog system and related products to maintain profitability. In 2003, 2004 and 2005, approximately 75%, 78% and 78%, respectively, of our revenues were generated from sales of NiceLog systems and related products and we anticipate that competitionsuch products will notcontinue to account for a significant portion of our sales in the next several years. A significant decline in sales of NiceLog systems and related products, or a significant decrease in the profit margin on such products, could have a material adverse effect on our business, financial condition andor results of operations.
WE MAY BE UNABLE TO DEVELOP STRATEGIC ALLIANCES AND MARKETING PARTNERSHIPS FOR
THE GLOBAL DISTRIBUTION OF OUR VIDEO PLATFORM AND APPLICATIONS, WHICH MAY LIMIT
OUR ABILITY TO SUCCESSFULLY MARKET AND SELL THESE PRODUCTS.
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We may be unable to develop strategic alliances and marketing partnerships for the global distribution of our Video Platforms and Applications, which may limit our ability to successfully market and sell these products.
We believe that developing marketing partnerships and strategic alliances is an important factor in our success in marketing our Video PlatformPlatforms and Applications and in penetrating new markets for such products. WeHowever, unlike our Voice Platforms and Applications, we have only recently started to develop a number of strategic alliances for the marketing and distribution of our Video PlatformPlatforms and Applications. We cannot assure you that we will be able to successfully develop such partnerships or strategic alliances.alliances on terms that are favorable to us, if at all. Failure to develop such arrangements that are satisfactory to us may limit our ability to successfully market and sell our Video PlatformPlatforms and Applications and may have a negative impact on our business.
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WE ARE DEVELOPING NEW VIDEO CONTENT ANALYSIS APPLICATIONS. WE MAY NOT HAVE
SUFFICIENT RESOURCES TO SUCCESSFULLY COMMERCIALIZE SUCH APPLICATIONS.business and results of operations.
We may be unable to commercialize new video content analysis applications.
We are currently in the process of developing and commercializing new video content analysis applications that will enable real-time detection of security threats. The market for such video content analysis applications is still in an early phase. AsIn addition, because this is a new opportunity for changing security procedures and represents a transition to proactive security management, we cannot anticipateare not able to predict the pace inat which security organizations will adopt this technology.technology, if at all. Successful positioning of our products is a critical factor in our ability to maintain growth. New potential entrants to the market may decide to develop video content analysis capabilities and compete with us in this emerging opportunity. As a result, we expect to continue to make significant expenditures on marketing. We cannot assure you that thea market awareness or demand for such newthese products will growdevelop as rapidly as we expect or if at all, that we will successfully develop new products or introduce new applications for existing products, that such new products andor applications will achievemeet market acceptanceexpectations and needs, that we will be successful in penetrating these markets and in marketing our products or that the introduction of new products or technological developments by others will not adversely impact the demand for our video content analysis applications.
OUR COMINT/DF BUSINESS IS SMALL.
Another market we serve
If the pace of spending by the U.S. Department of Homeland Security is the market for communication intelligence and
direction finding (or COMINT/DF) applications utilized by military intelligence
operations. Our COMINT/DFslower than anticipated, our security business is small in size, we are considered a niche
player, and are depending on system integrators for the growth of the business.
We cannot assure you the sustainability of this business in the longer term.
OUR LAWFUL INTERCEPTION PRODUCT OFFERINGS BUSINESS IS IN ITS EARLY STAGES.
Our NiceTrack system for the Lawful Interception marketplace is
particularly designed for the new European Telecommunications Standardization
Institute (or ETSI) standard. The implementation of this standard maywill likely be very
slow and the potential of sales may be limited.
THE PACE OF THE HOMELAND SECURITY SPENDING MAY BE SLOWER THAN ANTICIPATED.adversely affected, perhaps materially.
The market for our security solutions in closed circuit television (or
CCTV)CCTV continuous recording, public safety and law enforcement is highly dependent on the spending cycle and spending scope of the USUnited States Department of Homeland Security,
department as well as local, state and municipal governments and security organizations in international markets. We cannot be sure that the spending cycle will materialize and that we will be positioned to benefit from the potential opportunities.
RISKS RELATED TO OUR ORDINARY SHARES AND ADSS
OUR SHARE PRICE MAY BE VOLATILE AND MAY DECLINE.
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If we are unable to maintain the security of our systems, our business, financial condition and operating results could be harmed.
The occurrence of or perception of occurrence of security breaches in the operation of our business or by third parties using our products could harm our business, financial condition and operating results. Some of our customers use our products to compile and analyze highly sensitive or confidential information. We may come into contact with such information or data when we perform service or maintenance functions for our customers. While we have internal policies and procedures for employees in connection with performing these functions, the perception or fact that any of our employees has improperly handled sensitive information of a customer or a customer’s customer could negatively impact our business. If, in handling this information we fail to comply with our privacy policies or privacy and security laws, we could incur civil liability to government agencies, customers and individuals whose privacy was compromised. If personal information is received or used from sources outside the U.S., we could be subject to civil, administrative or criminal liability under the laws of other countries. In addition, third parties may attempt to breach our security or inappropriately use our products through computer viruses, electronic break-ins and other disruptions. If successful, confidential information, including passwords, financial information, or other personal information may be improperly obtained and we may be subject to lawsuits and other liability. Any internal or external security breaches could harm our reputation and even the perception of security risks, whether or not valid, could inhibit market acceptance of our products.
Our business could be materially adversely affected by changes in the legal and regulatory environment.
Our business, results of operations and financial condition could be materially adversely affected if laws, regulations or standards relating to our products or us are newly implemented or changed.
Additional tax liabilities could materially adversely affect our results of operations and financial condition.
As a global corporation, we are subject to income taxes both in Israel and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to our interpretation of applicable laws in the jurisdictions in which we file. From time to time, we are subject to income tax audits. While we believe we comply with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed additional taxes, there could be a material adverse affect on our results of operations and financial condition.
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Risks Relating to Israel
Our business may be impacted by inflation and NIS exchange rate fluctuations.
Exchange rate fluctuations between the United States dollar and the NIS may negatively affect our earnings. A substantial majority of our revenues and a substantial portion of our expenses are denominated in U.S. dollars. However, a significant portion of the expenses associated with our Israeli operations, including personnel and facilities related expenses, are incurred in NIS. Consequently, inflation in Israel will have the effect of increasing the dollar cost of our operations in Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the U.S. dollar. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation of the NIS against the U.S. dollar. If the U.S. dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. In addition, exchange rate fluctuations in currency exchange rates in countries other than Israel where we operate and do business may also negatively affect our earnings.
We are subject to the political, economic and military conditions in Israel.
Our headquarters, research and development and main manufacturing facilities are located in the State of Israel, and we are directly affected by the political, economic and military conditions to which Israel is subject. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a high level of violence between Israel and the Palestinians, and in January 2006, Hamas, an Islamic movement responsible for many attacks against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported candidates is expected to be a major obstacle to relations between Israel and the Palestinian Authority, as well as to the stability in the Middle East as a whole. Acts of terrorism, armed conflicts or political instability in the region could negatively affect local business conditions and harm our results of operations. We cannot predict the effect on the region of any diplomatic initiatives or political developments involving Israel or the Palestinians or other countries in the Middle East. Furthermore, several countries restrict doing business with Israel and Israeli companies, and additional companies may restrict doing business with Israel and Israeli companies as a result of an increase in hostilities. Our products are heavily dependent upon components imported from, and most of our sales are made to, countries outside of Israel. Accordingly, our operations could be materially adversely affected if trade between Israel and its present trading partners were interrupted or curtailed.
Some of our officers and employees are currently obligated to perform annual military reserve duty. Additionally, in the event of a military conflict, including the ongoing conflict with the Palestinians, these persons could be required to serve in the military for extended periods of time. We cannot assess the full impact of these requirements on our workforce or business and we cannot predict the effect on us of any expansion or reduction of these obligations.
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Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Service of process upon our directors and officers, most of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, since the majority of our assets and most of our directors and officers are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, in original actions instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those Acts.
We depend on the availability of government grants and tax benefits.
We derive and expect to continue to derive significant benefits from various programs and laws in Israel including tax benefits relating to our “Approved Enterprise” programs and certain grants from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, or OCS, for research and development. To be eligible for these grants, programs and tax benefits, we must continue to meet certain conditions, including making certain specified investments in fixed assets and conducting the research, development and manufacturing of products developed with such OCS grants in Israel (unless a special approval has been granted for performing manufacturing activities outside Israel). From time to time, the Israeli Government has discussed reducing or eliminating the availability of these grants, programs and benefits and there can be no assurance that the Israeli Government’s support of grants, programs and benefits will continue. If grants, programs and benefits available to us or the laws, rules and regulations under which they were granted are eliminated or their scope is further reduced, or if we fail to meet the conditions of existing grants, programs or benefits and are required to refund grants or tax benefits already received (together with interest and certain inflation adjustments) or fail to meet the criteria for future “Approved Enterprises”, our business, financial condition and results of operations could be materially adversely affected.
On April 1, 2005, an amendment to the Israeli law which deals with Approved Enterprises came into force. Pursuant to the amendment, a company’s facility will be granted the status of “Approved Enterprise” only if it is proven to be an industrial facility (as defined in such law) that contributes to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. The amendment incorporates certain changes to both the criteria and procedure for obtaining “Approved Enterprise” status for an investment program, and changes to the tax benefits afforded in certain circumstances to “Approved Enterprises” under such law (which in some cases is referred to as a Benefiting Enterprise following such amendment). The amendment will apply to Approved Enterprise programs in which the year of commencement of benefits under the law is 2004 or later, unless such programs received approval from the applicable government authority prior to December 31, 2004, in which case the provisions of the amendment will not apply.
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As a result of the amendment, where we benefit from tax-exempt income pursuant to the new Benefiting Enterprise regime, we will be subject to taxes upon the distribution of such tax-exempt income or upon our liquidation. Accordingly, we may be required to record a deferred tax liability with respect to such tax-exempt income. We are currently evaluating the impact of the amendment on us. Based on our preliminary analysis, it may materially increase our provision for income taxes in future years.
We may be required to pay stamp duty on agreements executed by us between June 1, 2003 and December 31, 2005. This would increase our taxes.
The Israeli Stamp Duty on Documents Law, 1961 (the “Stamp Duty Law”), provided that most documents signed by Israeli companies were subject to a stamp duty, generally at a rate of between 0.4% and 1% of the value of the subject matter of such document. De facto, it was common practice in Israel not to pay such stamp duty unless a document was filed with a governmental authority or with the courts. As a result of an amendment to the Stamp Duty Law that came into effect on June 1, 2003, the Israeli tax authorities have approached many companies in Israel (including us) and requested the disclosure of all agreements signed by such companies after June 1, 2003 with the aim of collecting stamp duty on such agreements. Based on advice from our Israeli counsel, we believe that we may only be required to pay stamp duty on documents signed on or after August 2004. However, we cannot give any assurance that the tax authorities or the courts will accept such view. At this stage it is not yet possible to evaluate the effect, if any, on us of the 2003 amendment to the Stamp Duty Law.
Under an order published in December 2005, the said requirement to pay stamp duty was cancelled with respect to documents signed on or after January 1, 2006.
Risks Related to our Ordinary Shares and ADSs
Our share price is volatile and may decline.
Numerous factors, some of which are beyond our control, may cause the market price of our ordinary shares or our American Depositary Shares, or ADSs, each of which represents one ordinary share, to fluctuate significantly. These factors include, among other things, announcements of technological innovations, development of or disputes concerning our intellectual property rights, customer orders or new products by us or our competitors, earningcurrency exchange rate fluctuations, earnings releases by us or our competitors, market conditions in the industry and the general state of the securities markets, with particular emphasis on the technology and Israeli sectors of the securities markets.
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Our operating results in one or more future periods may fluctuate significantly and may cause our share price to be volatile.
The sales cycle for our products and services is variable, typically ranging between a few weeks to several months from initial contact with the potential client to the signing of a contract. Frequently, sales orders accumulate towards the latter part of a given quarter. Looking forward, given the lead time required by our contract manufacturer, if a large portion of sales orders are received late in the quarter, we may not be able to deliver products within the quarter and thus such sales will be deferred to a future quarter. There can be no assurance that such deferrals will result in sales in the near term, or at all. Thus, delays in executing client orders may affect our revenue and cause our operating results to vary widely. Additionally, as a high percentage of our expenses, particularly employee compensation, is relatively fixed, a variation in the level of sales, especially at or near the end of any quarter, may have a material adverse impact on our quarterly operating results.
In addition, our quarterly operating results may be subject to significant fluctuations due to variousother factors, including the length of the sale cycles, the timing and size of orders and shipments to customers, variations in distribution channels, mix of products, new product introductions, competitive pressures and general economic conditions. In particular,It is difficult to predict the COMINT/DFexact mix of products are long-term
projects that may also affect quarterly results.for any period between hardware, software and services as well as within the product category between audio platforms and related applications, digital video and communications intelligence. Because a significant portion of our overhead consists of fixed costs, our quarterly results may be adversely impacted if sales fall below management'smanagement’s expectations. In addition, the period of time from order to delivery of our Audio and Video Platforms and Applications is short, and therefore our backlog for such products is currently, and is expected to continue to be, small and substantially unrelated to the level of sales in subsequent periods. As a result, our results of operations for any quarter may not necessarily be indicative of results for any future period. Due to all of the foregoing factors, in some future quarters our sales or operating results may be below our forecasts and the expectations of public market analysts or investors. In such event, the market price of our ordinary shares and ADSs would likelymay be materially adversely affected.
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Information on the Company. |
History and Development of the Company
Our legal and commercial name is NICE SystemsNICE-Systems Ltd. We are a company limited by shares organized under the laws of the State of Israel. We were originally incorporated as NICE Neptun Intelligent Computer Engineering Ltd. on September 28, 1986 and were renamed NICE-Systems Ltd. on October 14, 1991. Our principal executive offices are located at 8 Hapnina Street, P.O. Box 690, Ra'ananaRa’anana 43107, Israel and the telephone number at that location is +972-9-775-3030. Our agent for service in the United States is our subsidiary, NICE Systems Inc., 301 Route 17 North, 10th Floor, Rutherford, New Jersey 07070.
PRODUCTS/MARKETS OVERVIEW
1) VOICE PLATFORMS AND APPLICATIONS
PRODUCTS
For a summary of our recent acquisitions and dispositions, please see Item 5, “Operating and Financial Review and Prospects–Recent Acquisitions and Dispositions” in this annual report.
Business Overview
We are a leading provider of solutions that capture, manage and analyze unstructured multimedia content enabling companies and public organizations to enhance business and operational performance, address security threats and take proactive actions. Unstructured multimedia content includes phone calls to contact centers and back offices, video captured by closed circuit television cameras, radio communications between emergency services personnel, email and instant messaging. Our Voice Platformssolutions include integrated, scalable, multimedia recording platforms, enhanced software applications and Applicationsrelated professional services. These solutions address critical business processes and risk management, compliance procedures and security needs of corporations or government agencies. Our solutions facilitate faster decision-making and near real-time action, improving business and employee performance, and enhancing security and public safety. Our customers use our systems in a variety of enterprises, such as financial services, health care, outsourcers, retail, service providers, telecommunications, and utilities. Our public safety and security customers include air traffic control, correctional facilities, emergency services, gaming facilities, government intelligence agencies, homeland security and public transportation. Our solutions are deployed at over 23,000 customers, including over 75 of the Fortune 100 companies, across over 40,000 sites around the world.
For a breakdown of total revenues by products and services for each of the last three years, please see Item 5, “Operating and Financial Review and Prospects–Results of Operations.”
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Industry Background and Trends
Increased focus on business productivity, operational performance and customer profitability. Companies are increasingly focused on improving productivity and increasing profitability by creating better-quality customer experiences and through achieving higher efficiencies across the enterprise. These objectives require organizations to better manage their customer, partner and employee relationships, analyze critical customer data, maximize the value of customer interactions and execute customer-focused business processes. Given the high cost of acquiring additional customers and the maturation of many once fast growing industries, it is increasingly important to convert potential customers to new customers and to maximize revenue from the retention and continued satisfaction of current customers. Similarly, due to the high cost of hiring and training new employees, it is important for organizations to address employee concerns in a timely fashion to maximize employee retention and productivity.
In the past, companies have invested in business intelligence solutions and operational systems, which rely on structured transactional data contained in Customer Relationship Management (CRM), Enterprise Resource Planning (ERP) and other related application databases. Traditional business intelligence solutions unlock value contained in these structured data by describing what has happened in any given transaction, and then, by examining patterns in historical data, attempting to predict future customer behavior. Recently, however, companies have recognized the value contained in other types of data, including the vast amounts of unstructured multimedia content that is generated by ongoing interactions with their customers, employees or partners. By employing software-based analytics on unstructured multimedia content, companies are able to detect customer intent, often through near real-time interactions where a customer may express concerns, desires or provide other signals of their intentions. Equipped with such an “early detection” system, companies can take proactive measures to reduce customer churn, focus their marketing efforts and address employee dissatisfaction. By better understanding unstructured data, companies can develop a more comprehensive view across the enterprise, increase revenue and improve service quality, productivity and profitability.
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Increased regulatory and compliance requirements and the high cost of dispute resolution. Regulatory pressures have increased for corporations and public organizations worldwide, especially in the wake of recent well-publicized accounting scandals. For example, regulations such as the Sarbanes-Oxley Act of 2002 and the pending financial guidelines established by the International Financial Reporting Standards Board have heightened the complexity of corporate and governmental compliance. In addition, the hiring of additional finance and accounting employees and increased civil penalties and auditor expenses have raised the financial costs of both noncompliance and ongoing compliance. Moreover, it continues to be important to be able to resolve certain communication disputes, such as between counterparties in a securities trade, in an efficient and definitive manner. Existing business intelligence and other IT solutions have addressed these growing challenges to some degree. However, companies and public organizations require improved solutions that not only provide better compliance but also more current, near real-time information with increased operational visibility. These solutions need to reduce the costs associated with ongoing compliance, while creating the required audit trail for regulatory purposes.
Internet Protocol adoption driving proliferation of multimedia content. Over the last several years, the growth of Internet Protocol (IP) based communications have expanded the types of interactions between companies and their customers, employees and partners. This proliferation, together with businesses’ replacement of legacy communications systems, has created additional growth in the need for IP-based communications solutions. To remain competitive, businesses offer email, Internet and other multimedia, IP-based transmissions, such as Voice-over-Internet-Protocol (VoIP), in addition to traditional means of communications, such as mail and analog voice calls. We believe public safety organizations are also increasingly adopting the flexibility and lower cost of IP-based technologies in their efforts to respond to public safety and security threats. Due to these and other trends, the amount and types of communications within businesses have increased dramatically. As a result, many businesses are faced with the increasing challenge of better understanding the variety of unstructured multimedia content generated by these customer, employee and partner interactions.
Increased focus on physical corporate security. Companies operating throughout the world have recognized that threats to their physical facilities, IT networks, and personnel need to be addressed at all times. For example, many companies have determined that they need to establish measures for personnel screening and observation, invest in enhanced physical security measures and incident response capability, and deploy a variety of systems to address network-based vulnerabilities. As a result of these global trends in security needs, more companies face the growing challenge of storing and analyzing vast amounts of content, such as voice, video and other IP-based communications, captured by an increasing variety of detection devices, such as closed circuit television.
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New challenges for public safety and homeland security. Recent terrorist attacks around the world have significantly changed the geopolitical landscape and created long-term consequences for public safety, security and intelligence agencies. These agencies face new challenges in detecting, protecting and effectively responding to threats to public safety and homeland security. As a result of these global trends, security organizations face the growing challenge of storing and analyzing vast amounts of multimedia content generated by traditional and IP-based communications captured by an increasing variety of detection devices. Emergency services and public organizations require increasingly sophisticated solutions to analyze this content in order to strengthen the measures they take for public safety and security. These solutions need to identify threats as they occur and analyze video footage to identify suspicious objects or behavior more quickly and effectively.
Our Solutions
We have developed fully integrated solutions that include software applications that can be deployed in a modular manner. This flexibility allows our customers to incorporate additional functions and capabilities as their business or operational needs change.
The key features of our solutions are:
Ability to capture and manage vast amounts of complex, unstructured content. Our solutions record and store a wide variety of unstructured content, allowing both our enterprise and public safety and security customers to capture valuable existing and new customer interaction data. They are designed to optimally manage the storage and retrieval of unstructured data within centralized data storage warehouses, which maximizes the efficiency of our customers’ networked environments. Our solutions can be integrated with various enterprise software applications and storage systems. As a result, our solutions enable our customers to capture and manage efficiently and reliably the vast amounts of unstructured data that are generated by their daily operations. This allows our customers to gain insight, improve profitability, enhance operational effectiveness and meet compliance and regulatory requirements.
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Near real-time insights, utilizing proprietary analytic capabilities. We have developed advanced analytics and applications that allow our customers to derive critical insights from the vast amounts of unstructured data that they capture. Our solutions provide valuable insights into important, but previously unscrutinized, interactions and the unstructured content generated by these interactions. For example, our contact center customers are able to immediately review and react to interactions with their callers. Our solutions enable our enterprise customers to detect early signs of customer churn, gain valuable information about competitors, and identify critical market information during these interactions. Our solutions enable our public safety and security customers to identify threats as they occur, and analyze video footage to identify suspicious objects or behavior more quickly and effectively. Based on these insights, our customers are better equipped to adapt and respond to changes in the market or their safety environment. Our business customers are able to increase revenue, maintain a complete view across the enterprise, and improve quality, productivity and profitability. Similarly, by extracting intelligence and insight from captured voice and video content, our solutions enable public safety and security organizations to better respond to threats, prevent intrusions, detect irregular behavior, reduce crime and accelerate investigations.
Our Strategy
The key elements of our strategy include the following:
Drive market adoption of next-generation business intelligence solutions in both the enterprise and public safety and security markets. We believe there is a growing unmet need to capture, manage and analyze unstructured data in a wide variety of business and operational environments. Accordingly, we plan to continue to target this market through focused sales, marketing and customer education efforts. Moreover, we plan to continue to invest in research and development and strategic alliances to enhance our industry-leading solutions, delivering superior insight into driving improved operational and business results. We will continue to leverage the technology, operational and partnership synergies we derive from serving both the enterprise and public safety and security markets.
Increase market share through our strategic alliances. We have strong strategic relationships with industry leaders such as Avaya, IPC, SAS, Motorola, Siemens and BT. We intend to continue to leverage those and additional relationships to increase the value of our solutions to our end customers. For example, we have recently signed a strategic alliance with SAS to jointly offer a next generation business intelligence solution. This solution allows enterprises to link their billing, CRM, ERP and other systems’ transactional data with their unstructured multimedia interaction data, thereby providing a more complete view of their customers’ needs and potential revenue expansion opportunities.
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Expand and leverage our position within our existing customer base. Our solutions are deployed at over 23,000 customers, including over 75 of the Fortune 100 companies, across over 40,000 sites around the world. Many customers are still using previous generations of our products. Through our market leading position in the most demanding environments, including trading floors, emergency services and transportation authorities, we believe there are abundant opportunities to expand within this customer base and migrate it to our next-generation solutions.
Continue to pursue selective, disciplined acquisitions. We have a successful acquisition history spanning eight transactions over the past eight years. We intend to continue augmenting our organic growth through additional acquisitions that broaden our product and technology portfolio, expand our presence in selected geographic areas, broaden our customer base, and increase our distribution channels and vertical market access. We believe our acquisition strategy is aligned with our customers’ desire to procure broader, higher value solutions from a smaller group of strategic vendors.
Deliver integrated end-to-end solutions to new and existing customers. We believe there is a growing need for vendors that can deliver a complete offering, both in the enterprise and in the public safety and security markets. With one of the largest service organizations in the industry, we are well positioned to deliver such offerings. These offerings include the provisioning of services in designing a solution around the customers’ needs, the deployment of those solutions and the ongoing delivery of maintenance services following such implementations. We intend to continue to increase our direct sales force to expand the sale of these solutions, which provides increased services revenues and closer customer relationships.
Products
Our enterprise business intelligence solutions include recording, monitoring, quality management and business performance management solutions, which are designed to capture interactions, analyze them and take action based on this analysis to drive enterprise performance. They also help protect businesses and customers against risks posed by lost or misinterpreted voice or data transmissions andas well as capture evaluate and analyze customer
interactions in order to improve contact center agent performance business
processes and the customers'customers’ experience.
Voice recorders (or loggers)
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Our public safety and security solutions are systems that capture and record large
volumescomprised of voice data transmitted over multiple telephone or other communication
linesplatforms and allow usersapplications, digital video platforms and applications, and lawful interception products. Our voice platforms and applications offering to retrievethe public safety and playback specific communication data.
Traditionalsecurity market ranges in size and complexity from small, single-site single-recorder systems to large, multi-site, multi-recorder systems integrated with trunked radio and computer-aided dispatch systems. We provide emergency services and air traffic control organizations with a full range of recording features for voice, recorders were based on analog reel-to-reel technology, which
limited an organization's ability to storeradio and retrieve data efficiently, and
which could not interface with digital computer and telecommunication networks.
In the early 1990s, analog reel-to-reel recorders began to be replaced with
analog VHS-based products and, more recently, by digital products,trunked radio, including those based on magnetic disk, optical disk or digital audio tapes (or DAT).
Organizations' growing needs to record, process and store large amounts of voice
data resulted in the introduction of digitally-based voice recording systems
characterized by increased performance and improved system economics. Digital
multi-channel recording systems enable simultaneous recording and logging of a
large number of channels, while enabling a large number of users to process
voice data simultaneously. Digital systems' advantages over traditional analog
systems include the immediate randomon-line access to recorded data, open connectivity
and compact sizehundreds of both thehours of recording unit and storing and archiving media.
Advanced, industry-standard, digital voice recording systems employing CTI
technologies allow for integration of the recording and retrieval functions with
organizations' computer and telecommunications networks, thereby delivering
maximum business benefits, increased user efficiency, and wider access for a larger numbersquick response time, a choice of users.different types of archiving media, and a dubbing capability to edit calls on-line for courtroom presentations. The demandsystem enables the organizations to re-construct scenarios, investigate and improve performance. Our digital video platforms and applications provide continuous CCTV, recording, archiving, and debriefing capabilities that meet the needs of today’s demanding security environments. Our lawful interception products enable the interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions. These products handle both telephony and Internet data on the same platform and are fully compliant with the international standards defined by the European Telecommunications Standards Institute (ETSI), under various European legislations, and the Telecommunications Industry Association (TIA), under the Communications Assistance for sophisticated CTI digital voice
recording systemsLaw Enforcement Act (CALEA).
Products | Markets Served | Purpose | ||
NICE Perform | Enterprise and | Records and analyzes customer interactions with contact center agents | ||
NiceUniverse | Enterprise and | Evaluates agent performance and raises the level of customer service in contact centers through advanced voice and desktop screen recording technologies | ||
NiceLog | Enterprise and | Provides digital voice recording system, a computer telephony integrated multi-channel voice recording and retrieval system | ||
NICE VoIP Capture Unit | Enterprise and | Builds on NiceLog technology to provide a complete solution to audio storage in VoIP telephony | ||
NICE Storage Center | Enterprise and | Provides central storage option; integrates with various enterprise storage networks (SAN, NAS or DAS) for long term or medium term voice storage | ||
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NiceCall Focus III | Enterprise and | Provides a competitively priced voice recording system for organizations that have a relatively small number of input channels and a cost-effective solution for branch recording with centralized management and storage | ||
NiceUniverse Compact | Enterprise and | Provides a competitively priced voice recording and quality management system for organizations that have a relatively small number of input channels and a cost-effective solution for small contact centers with centralized management and storage | ||
Freedom Enterprise | Enterprise and | Provides recording and analysis of customer interactions with contact center agents | ||
Freedom FT | Enterprise and | Provides high-level fault-tolerant recording | ||
Mirra | Enterprise and | Provides small recording system that is suited to simple recording applications in which it can record up to 32 channels of voice traffic from a wide variety of analog and digital interfaces | ||
NiceVision Pro | Public Safety & Security | Provides premium solution designed for high-end applications requiring high-frame rate and/or a large number of cameras in a campus environment | ||
NiceVision Harmony | Public Safety & Security | Provides mid-range digital video recording solution designated for sites accommodating a large number of cameras yet requiring a variety of frame rates per channel | ||
NiceVision Alto | Public Safety & Security | Provides mid-range digital video recording solution | ||
NiceVision NVSAT | Public Safety & Security | Provides small scale digital video recording solution | ||
FAST alpha Silver | Public Safety & Security | Provides high quality digital video monitoring and recording solution for large to mid-size applications |
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FAST alpha Blue | Public Safety & Security | Provides “all in one” solution for high quality video monitoring and recording for small to mid-size applications | ||
NiceTrack | Public Safety & Security | Provides interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions | ||
Freedom rDT | Public Safety & Security | Works with the Motorola or M/A-COM trunked radio system to record radio communications dynamically and capture trunked radio data |
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NICE Perform is increasing asour flagship enterprise product. It is an integrated suite of solutions that offers innovative ways for organizations to generate insight from interactions to enhance performance. NICE Perform combines multiple data sources in a resultfully integrated architecture with a centralized data warehouse, allowing interoperability of many data sources to address a variety of business issues with a high level of accuracy. The data sources include word spotting, emotion detection, talk pattern analysis, customer surveys, Computer Telephony Integration (CTI) analysis, application activities and business data. With a set of advanced engines, NICE Perform provides multi-dimensional analytics of these data sources. State-of-the-art visualization techniques help enable analysts and executives to quickly and easily identify trends, deviations and situations requiring immediate action. While providing critical statistical data, NICE Perform goes beyond the increased demandscope of transactional analytics to help decision makers understand customer intent and market dynamics, identify current and future trends early enough for digital
recording systems, particularly inproactive management of challenges, opportunities and changes, and enhance corporate governance throughout the enterprise. NICE Perform also contains the contact center marketquality management capabilities of NiceUniverse. In addition, NICE Perform includes advanced online coaching capabilities that enable supervisors to coach the contact center agents in order to improve their skills and to empower them and cover matters as needed by different departments, such as marketing or order administration.
NiceUniverse, introduced in February 1998, is a comprehensive quality management solution used to evaluate contact center agent performance and to raise the conversionlevel of customer service in contact centers through advanced voice and desktop screen recording technologies. The NiceUniverse system provides objective evaluation tools and helps identify training requirements for contact center agents, including near real-time monitoring for instant access to live customer interactions and enhanced reporting and administration features. NiceUniverse uses a CTI that integrates with automatic call distributions (ACDs) that enable NiceUniverse to monitor and record agent sessions (voice and screen) on a user-defined schedule and store them in compressed digital format. Sessions can be retrieved later by the large installed base of analog systemsreviewers from their network PCs or thin clients, and agent performance is graded using customized on-screen templates. From these templates and other data, NiceUniverse generates detailed reports, statistics and graphs to digital technology,
specifically in the financial institutions, public safetyhelp identify training requirements and ATC markets.
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NiceLog, our flagship digital voice recording system, is a computer telephony integrated multi-channel voice recording and retrieval system. NiceLog is an open architecture system based on PC architecture and advanced audio compression technology that performs continuous, reliable recordings of up to thousands of analog and digital telephone lines, as well as radio channels, and enables simultaneous access by multiple users. NiceLog can be used either as a stand-alone unit or as part of a highly expandable and scaleable system comprised of several seamlessly integrated units. Each NiceLog unit can simultaneously record, monitor, archive and playback upplay back voice communications.
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NICE VoIP Capture Unit builds on our NiceLog technology to 224 channels allowing
for substantial space saving. NiceLog's open architectureprovide a complete solution to audio storage in VoIP telephony environments. The VoIP Capture Unit provides an IP-recording platform with a wide varietyrange of connectivity options to computer networksscaleable recording solutions that supports the leading telephony vendors. Our VoIP Capture Units are fully integrated with the NICE product portfolio, making all of our applications available for use over VoIP. NICE VoIP Loggers can serve alongside other logger types in a mixed VoIP/non-VoIP environment with the same familiar application software; users are unaware of the voice capture method being used. NICE VoIP Capture Unit’s active recording solutions integrate with leading vendors such as Novell/IPXAvaya, offering centralized recording of distributed environments and TCP/IP using Windows 95, Windows NT, Windows 2000, Windows XP and UNIX operating
systems, and telecommunication interfaces such as T1, E1, ISDN and analog
trunks. The modular design of the NiceLog system makes it a powerful voice
management tool that can be expanded to satisfy customers' needs by integrating
it with additional NiceLog units on the same local area network, or LAN.
The NiceLog's system administrator software enables the system's supervisor
to configure individual or multiple voice loggers from the central workstation
and to setup passwords for individual users. The supervisor software constantly
monitors the integrity of the system and displays error or warning messages when
storage capacity is low or if there are any other problems with the system. The
voice recorders are activated by commands received from a workstation through a
LAN. NiceLog stores all information on hard disk for immediate retrieval, and on
DAT for long-term archiving, through advanced compression technology. All stored
information can be accessed simultaneously by any number of authorized users
connected to the LAN through decompression of stored data.
NiceLog`sbenefits.
NICE Storage Center, NiceLog’s central storage option, can integrate with various enterprise storage networks (SAN, NAS or NAS)DAS) for long termlong-term or medium termmedium-term voice storage. Central storage sites can hold the entire voice recording from all the organization'sorganization’s different sites, thus reducinghelping to reduce management costs and redundancy. The retrieval process for voice on the central site is fully automatic.
NiceLog's playback function can be activated by any authorized user through
a workstation or a standalone PC, connected via a standard network interface.
Easy scanning and subsequent instantaneous random access playback of all
recorded voice communications can be performed by a single or several authorized
users at their desktop with the help of the NiceLog graphical user interface,
which operates under a Windows platform. The playback can be routed directly
through a speaker or via the private automatic branch exchange (PABX) to the
user's phone extension. The playback user interface provides for full playback
control, including advanced features such as random jumps, loops and optional
variable speed reproduction without pitch distortion.
NiceCLS is an add-on module included in the NiceLog system. NiceCLS is a
CTI server connected to the customer's switch, business data system and other
NiceLog system components. It collects call details such as start and stop
times, extension numbers, caller ID, routing path in the switch, agent
identification, agent group, and customer and transaction identification. This
information is integrated with the recorded voice, forming a comprehensive call
database and enabling additional recording solutions. With this high level of
integration, NiceLog provides
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additional advanced solutions, such as selective recording and recording on
demand, and enables calls to be quickly retrieved and analyzed. The
sophisticated indexing of the database enables prompt location and retrieval of
recordings. Free-seating environments, such as contact centers and trading
floors, where the trader or agent may log-in to any telephone station, require
NiceCLS' capabilities for immediate recognition of individual users regardless
of the telephone or channel accessed. NiceCLS also enables cost-effective
trunk-side recording. NiceCLS can be adapted to the customer's needs based on
the host environment and the size and type of database.
automated.
NiceCall Focus III is a voice recording system that records up to 3248 input channels and provides up to 400066,000 hours of on-line voice storage capacity.capacity (using NICE’s ACA compression) and supports a wide range of archiving devices for long-term storage options. NiceCall Focus III offers a wide range of connectivity to PABX and radio systems and is built on the next generation product replacing the NiceCall product.core technology of Nice High Density Logger. NiceCall Focus III provides organizations that have a relatively small number of input channels, such as public safety agencies, with a competitively priced yet technologically advanced digital recording product that offers many of the connectivity and processing features of the NiceLog. NiceCall Focus III is being targeted primarily at public safety facilities, including 911 emergency centers, and utilities, as well as small bank branches, financial trading sites, and contact centers.
NiceUniverse introduced in February 1998,Compact is a comprehensivenew total recording and quality management solution used to evaluate agent performance and to raise the level of
customer service infor contact centers through advanced voicewith up to 48 seats. NiceUniverse Compact integrates NICE’s market-leading interaction recording infrastructure with its highly successful quality management offering, creating a powerful, cost-effective recording and desktop screen
recording technologies. The NiceUniverse system provides objective evaluation
toolsquality management application packaged as a unique single-box solution, easily installed and helps identify training requirements for contact center agents,
including real-time monitoring for instant access to live customer interactions
and enhanced reporting and administration features. NiceUniverse uses a CTI that
integrates with ACDs. This enables NiceUniverse to monitor and record agent
sessions (voice and screen) on a user-defined schedule and store them in
compressed digital format. Sessions are later retrieved by the reviewers from
their network PCs, and agent performance is graded using customized on-screen
templates. From these templates and other data, NiceUniverse generates detailed
reports, statistics and graphs to help identify training requirements and set
relevant benchmarks for contact center agents.
Through the acquisition of TCS, NICE provides first responders and air
traffic control organizationsmaintained with a full rangeremarkably low total cost of recording features for voice,
radio and trunked radio, including on-line accessownership. NiceUniverse Compact is being targeted primarily at small contact centers with up to hundreds of hours of
recording for a quick response time, a choice of different types of archiving
media, and a dubbing capability to edit calls on-line for courtroom
presentations. The system enables the organizations to re-construct scenarios,
investigate and improve performance. NICE is a leader in this market and our
products are currently being used in a significant number of air traffic control
facilities, including FAA and NAV Canada,48 seats, as well as large police,
transportation, emergency services command and control centers.
The underlying voice recording platforms used in the public safety marketplace are similar to the products described above. Their primary use is to
recordfacilities that require total recording and replay voice conversationsquality management solutions.
Freedom Enterprise combines state-of-the-art recording technology for full-time or selective recording with advanced tools for optimizing contact center performance in virtually any telephony environment, including circuit-switched telephony, VoIP and associated data in order to be able to
reconstruct and analyze incidents that have occurred. However, there are some
significant technical differences owing to the need in many cases to capture not
only voice traffic coming into and out of the public service command and control
center, e.g. a 911 center, but also the radio traffic that is occurring between
the command and control center and the field personnel. Hence the technical
interfaces and architecture of the products are often different to those
required for commercialhybrid environments.
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The other major difference is that there may be the need to replay and
analyze multiple conversations that occurred in connection with an event in
order to fully analyze it. For example, it may be necessary to replay, in
synchronism, many different radio channels, together with the radio dispatch
conversations, together with the telephone conversations from multiple callers.
Our public safety products range in size and complexity from small,
single-site single- recorder systems to large, multi-site, multi-recorder
systems integrated with trunked radio and computer-aided dispatch systems. Below
is a description of our public safety products.
Wordnet is a medium sized
Freedom FT provides high-level fault-tolerant recording system and its current Series 3 version
is available with up to 128 channels per unit. Multiple units can be configured
into a larger, integrated system of many hundreds or thousands of channels.
Wordnet has a wide range of analogue and digital interfaces, to the
telecommunications networks that it is recording from and stores the digitized
voice and other data on internal hard disk and optional additional external RAID
hard disk storage systems. Voice recordings and associated data can be archived
for long term retention onto DVD disks or VXA tapes. Wordnet is usually
connected to a LAN to provide access to the system management and replay
applications that run on separate PC servers. Wordnet has a powerful CTI
capability and can be integrated with a wide rangedesign that eliminates single points of proprietary CTI interfaces
from companies including Aspect, Siemens, Avaya, Damovo, Nortel, Alcatel,
Motorolafailure and BT.
ensures that recordings are captured and accessible when required.
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Mirra is a small recording system that is particularly suited to simple recording applications in which it can record up to 32 channels of voice traffic from a wide variety of analogueanalog and digital interfaces. Mirra has been designed to be simple to install, operate and maintain and has been sold intoto many local, city and state public safety organizations that have a single site operation. Digitized voice and associated data are stored ontoon DVD disks that provide a robust and long-term archive medium. Mirra'sMirra’s design avoids using an internal hard disk for the operating system and consequently it starts-up very rapidly and avoids the maintenance liabilities associated with hard disks.
Tienna is a large recorder that is designed to form part
NiceVision consists of a Renaissance
solution. Renaissance solutions are used when the customer has a complex
requirement typically involving multiple recorders, multiple sitesNiceVision Pro, NiceVision Harmony, NiceVision Alto and dual-redundant components in order to provide very high performance and
resilience. Tienna can provide up to 480 channels per unit and multiple units
can be interconnected to form a system of many thousands of ports. Tienna is
unique in that it provides dynamic channel allocation between the active ports
on the recorder and a greater number of channels on the networks to which it is
connected. This provides a more efficient use of the system's resources than a
permanent 1:1 connection of channels to ports. Tienna contains internal hard
disks for short term storage but relies upon the Renaissance Centralized Mass
Storage Unit (CMSU) for all medium and long term storage and for archiving onto
tapes.
Renaissance solutions can incorporate combinations of Wordnet and Tienna
recorders as well as the Central Mass Storage Unit (CMSU), Calls Database and
Replay Server. These components operate together in a networked configuration to
provide a complete recording solution and can be fully duplicated in order to
provide very high levels of redundancy and reliability.
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MARKETS
The market for digital voice recording, quality monitoring and performance
management products has experienced steady growth in recent years as a result of
the increase in the use of telephones to obtain information, to initiate
business and consumer contacts, to provide services such as banking and
insurance, and to sell products through contact centers.
Users of our Voice Platforms and Applications, include financial
institutions, such as brokerage and trading houses; contact centers, such as
telemarketing, telebanking and teleinsurance facilities; public safety and
transportation agencies, such as police, fire and ambulance departments; ATC
centers; and intelligence agencies.
FINANCIAL INSTITUTIONS. Financial institutions conduct a substantial
portion of their business over the telephone and are increasingly relying upon
their ability to record, store and retrieve voice data of transactions in a
timely, reliable and efficient manner. Brokers and dealers record and store
recordings of transactions to provide back-up and verification of such
transactions and to guard against risks posed by lost or misinterpreted voice
communications. Our customers in the financial institutions market include ABN
AMRO Bank, Chase Manhattan Bank, Citibank, Deutsche Bank, Dresdner Bank, First
Chicago NBD, CIBC Oppenheimer, Bank of America, the Sydney Futures Exchange and
many others.
CONTACT CENTERS. Businesses and other organizations are increasingly using
dedicated centers for processing and managing high volumes of incoming and
outgoing customer telephone traffic. Contact centers have been used extensively
in such fields as credit card and consumer collections, telebanking,
teleinsurance, catalog sales, telemarketing and customer service. In these
contact centers, activities such as placing and receiving telephone calls are
linked to database management computer functions to capture, store and report
relevant customer information. Typically, the contact center is the primary
"hub" within an organization for placing or receiving a large volume of customer
calls. Customer service representatives are the contact center's workforce
responsible for talking with customers about subjects, including reservations,
product information, account information, and problem resolution. As the
importance of the contact center has increased and as more functions and
capabilities have been combined, a parallel industry has emerged. This industry
creates and supports the systems, software and services that are designed to
make these contact centers efficient, effective and well matched to the broader
corporate mission of the enterprise. The contact center market, particularly in
the United States, has been increasingly using continuous and random voice
recording systems to enable storage of the details of telephone orders and other
transactions, supervision of contact center operators and campaigns, and
evaluation of salespersons' efficiency, customer service and training. Users of
the NiceLog system in this market include Addison Lee, Banque Directe, British
Gas, Halifax Direct, The Montana Power Company, Thomas Cook, Vodafone Connect
and Yorkshire Electricity. Users of our NiceUniverse quality management system
include APAC Customer Services, Arch Communications, Boston Communications,
Electric Insurance Company, and TeleTech Holdings.
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PUBLIC SAFETY AND EMERGENCY SERVICES. These organizations include police,
fire, ambulance, coastguard, mountain rescue and other similar public and
private bodies that respond to calls for assistance from the public. In most
cases, local, state or federal law requires that all communications traffic be
recorded in order that evidence can be provided in courts of law, and in order
that the public safety body can verify that it is following prescribed processes
and meeting performance standards. Our customers in the public safety market
include: New York Police Department, Los Angeles Police Department, Chicago
Police Department, Indiana State Police, New Jersey State Police, Seattle Fire
Department, US Department of Defense, Hampshire Police - UK and Hertfordshire
Police - UK.
PUBLIC TRANSPORT AGENCIES. These organizations include rail, bus and mass
transit metro systems. They use large-scale, distributed, fixed and mobile
communications networks in order to provide command and control capabilities
between the mobile units and one or more control rooms. In the event of an
incident, they are required to be able to produce recordings of all associated
communications traffic. Many of these organizations are implementing the latest
generation of digital trunked radio systems according to one of the several
international standards, such as TETRA, Tetrapol or APCO25, and the recording
system is required to interface to these radio systems in order to capture and
identify all radio traffic. Our customers in the public transportation market
include authorities like Singapore Mass Transit Authority and Railtrack - UK.
AIR TRAFFIC CONTROL. The ATC market is a traditional user of voice
recording systems due to mandatory requirements for the recording of voice
communications and radio transmissions. ATC centers are evaluating the need to
upgrade their voice communications recording and archiving systems by installing
digital voice loggers. NiceLog was selected by the FAA as the voice recording
system to be installed in over 800 ATC centers in the United States. NiceLog and
Wordnet have also been selected by ICAO and other ATC authorities in Austria,
Canada, China, Croatia, Cyprus, Finland, Germany, Hong Kong, Hungary,
Kazakhstan, Iceland, Israel, Japan, the Maldive Islands, the Netherlands,
Norway, Poland, Romania, Switzerland and Turkey.
INTELLIGENCE AGENCIES. Law enforcement and intelligence agencies collect
large amounts of information in various media for analysis and evaluation,
although only a small portion of that information is valuable. Intelligence
agencies require sophisticated multi media recording systems that enable the
recording, retrieval and processing of the information gathered for purposes of
analysis and evaluation. Users who have installed NiceLog or Wordnet systems,
either as stand alone systems or in combination with other systems, include
intelligence agencies in more than twenty countries.
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SALES AND MARKETING, STRATEGIC RELATIONSHIPS
We market, distribute and service our Voice Platforms and Applications
worldwide primarily through independent dealers that predominantly specialize in
the voice recording market and contact center market, as well as through our own
sales and technical support force in the United States, Canada, Germany, the
United Kingdom, France, Hong Kong and Israel. Most of the sales made by our
sales force are made to our distributors, who then install the systems and
provide day-to-day support to end-users.
In the Financial Trading segment, we have established marketing, sales and
support arrangements with leading suppliers of complementary products such as
IPC and Etrali, two leading suppliers of telephony switching equipment to
financial institutions and trading rooms. These companies market and distribute
our products to their customers either as stand-alone systems or as integrated
components of their own systems, as follows:
o An OEM agreement with IPC Information Systems, Inc. IPC, a leading
provider of integrated communications solutions to the financial
services community, has embedded a NiceLog platform customized for IPC
into IPC's Alliance MX product line and sells this product as an
integral part of the IPC product.
o A marketing agreement with Etrali S.A., a telecom integrator serving
the financial community. Etrali is the European leader of dealerboard
systems for trading rooms. Etrali and we have closely integrated our
products for dealing rooms, which are distributed globally by Etrali
S.A.
o A marketing agreement with BT Syntegra, BT's selling and integration
company in the trading floor segment.
In the Contact Center segment, we have also entered into global
distribution agreements with Avaya Inc. (formerly the Enterprise Network Group
of Lucent Technologies), Siemens and Alcatel, as follows:
o A marketing partnership with Avaya Inc. (formerly the Enterprise
Network Group of Lucent Technologies). Avaya is the leading global
provider of enterprise business communication platforms in voice,
e-business and data. Avaya is co-selling our Voice Platforms and
Applications to its customers globally. In addition, and following our
acquisition of CenterPoint Solutions, Avaya sells our NICE
ANALYZER(TM) software as part of its software application suite.
o A non-exclusive marketing and reseller collaboration with Alcatel,
Siemens and Philips.
o We also participate in an alliance program with Aspect
Telecommunications Ltd. to ensure the compatibility of our call center
product line with Aspect's automatic call distribution systems and to
promote this integration through Aspect's marketing materials.
Additionally, we participate in an alliance program with Aspect to
promote the compatibility of the NiceLog system with Aspect's
automatic call distribution systems through Aspect's marketing
materials.
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o We also integrate our products with Siebel Systems and Amdocs (Clarify
Inc.) in the CRM Space. These integrations with leading CRM providers
enable our customers to capture and enhance their customers' entire
experience in the contact center from start to finish and to more
tightly integrate the functionality delivered by our products into
their business environment.
In the public safety market we distribute our products worldwide through a
network of over 100 national and local independent dealers and distributors that
also provide installation and maintenance services.
o A marketing agreement with Motorola Inc. for the co-marketing and
resale of our range of products for the public safety market in North
American and International markets. This relationship includes the
appointment of NICE as the only authorized Dimetra Application Partner
for Motorola's trunked radio solutions.
o We also market and sell systems through major regional or global
partners, such as BT, Siemens, Damovo, Marconi, Nokia and Alcatel.
In the ATC market, we have been awarded contracts for installation of
NiceLog systems on the basis of bids submitted to ATC authorities by Denro
Systems, Inc. (part of Northrup Grumman, Inc.) and others that incorporated
NiceLog as the voice recording system as part of their proposal. Pursuant to an
agreement dated August 1995 between the FAA and Denro, NiceLog was selected as
the voice recording system to be installed in various ATC centers in the United
States. We provide the NiceLog cards (including software) to Denro and Denro
assembles and installs the NiceLog cards.
2) DIGITAL VIDEO PLATFORMS AND APPLICATIONS
PRODUCTSNiceVision NVSAT. NiceVision is a state-of-the-art digital video and audio recording system that provides continuous closed circuit television, or CCTV, recording, archiving, and debriefing capabilities that meet the needs of today's demanding
security environment, includingfor, among others, central banks, Fortune 500 companies, transportation facilities, prisons and casinos.
Our NiceVision product line consists of the
NiceVision Pro and the
NiceVision Harmony The NiceVision Pro is a premium solution designed for high-end applications requiring high-high frame rate and/or a large number of cameras in a campus environment. Typical environments for the NiceVision Pro are airports, casinos and ground transportation facilities, etc.facilities. The NiceVision Pro accommodates 96 video channels in half real time (48 real time) in onea single box and can handle storage devices in the range of tera-bytes. These devicesterabytes. There are two types of two types:devices: disk based on-line storage (internal drives or external RAIDs) and tap-basedtape-based off-line juke box
devices.
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The
NiceVision Harmony is a mid-range digital video recording solution designated for sites accommodating a large number of cameras yet requiring a variety of frame rates per channel, spanning from single frames per second to full frame rate, when required. Typical environments for the NiceVision Harmony are retail shops, certain bank facilities and corporate buildings, etc.buildings. The NiceVision Harmony caters forsupports 64 video channels with a preset frame rate shared between groups of channels. The NiceVision Harmony can also support large storage devices aslike the NiceVision Pro.
MARKETS
The market for Digital Video platforms, which provide continuous
NiceVision Alto is a mid-range product that is able to support eight to 32 video surveillancechannels using variable frame rates and recording for security protection purposes, is currently
unfolding as CCTV applications shift from traditional analog recorders to
digital recorders. Users of our digital video recording systems include
correctional facilities, banks, telecommunication data-center hosting centers,
retail, casinos, transportation and city centers.
Customers for our products include the Bank of England, Dell Computer
Corporation, Atlanta Hartsfield International Airport, Toronto Pearson
International Airport, the Helsinki Railway Station - Finland, Casino Cosmopol
in Sweden, the Metropolitan Nashville Airport Authority, correctional facilities
in Brooklyn, New York, and Rush City, Minnesota, Wycombe District Council and
Dulwich College - UK and the Palace Indian Gaming Center of Lemoore, one of
California's largest gaming facilities,.
SALES AND MARKETING, STRATEGIC RELATIONSHIP
We have a dedicated sales organizationresolutions. Typical environments for the NiceVision Alto are distributed sites that require high image quality and adjustable level of service to meet different networking channels. The NiceVision Alto runs content analytics to support smart monitoring.
NiceVision NVSAT is a small scale unit that supports four to eight video channels. It is designed for distributed architectures, providing high image quality, level of service and content analytics.
FAST alpha Silver is designed for applications requiring monitoring and recording of high video quality at high frame rate. The system supports distributed architecture over IP based networks, using encoders and digital video recording system. We useservers, and supports up to 64 digital video streams in a network of dealers and security systems integrators
for the sale, installation and support of our solutions. Most of our NiceVision
sales and marketing organization focuses on the U.S. market and we have started
to develop the European market through a team in the U.K. and Israel. In North
America we work through key partnerssingle server. Typical applications are ones that require high video quality, such as Siemens Building Technologiescasinos, or distributed architecture, such as various transportation projects.
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FAST alpha Blue is an “all in one” solution for monitoring and Diebold. In EMEA we have recently startedrecording high quality video at varying frame rates. The system supports up to work with Thales Security32 channels in a single chassis and Surveillance group.
3) LAWFUL INTERCEPTION
PRODUCTS
In 2001, we introduced NiceTrack(TM),can be configured easily using a telecommunicationsconfiguration wizard. The FAST alpha Blue is suitable for small to mid-size installations that require a “plug and play” solution for high quality video monitoring system for the government law enforcement markets, that meets the United States
CALEA (Communications Assistance for Law Enforcement Act) requirements according
to the standard defined by TIA (Telecommunication Industry Association), and the
European ETSI (European Telecommunications Standard Institute) standard.
NiceTrack(TM) enables governmentrecording.
TheNiceTrack product line provides law enforcement agencies, internal security services and intelligence organizations with end-to-end solutions for the interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions. This product line provides intelligence analysts with a broad intelligence perspective to monitor the calls
of targets, which are intercepted by the service providers andensure that crucial information is always delivered to decision makers and operational staff in near real-time. NiceTrack also features an open architecture design that offers government agencies the monitoring agencies.
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NiceTrack(TM) is a comprehensive solution for monitoring a wide range of
targets' telecommunicationsflexibility to build an effective intelligence platform customized and in-depth analysis of their related meta-data.
NiceTrack(TM) monitors a variety of communications media, including analog
lines, fixed telephony, cellular networks, SMS, fax, data and Internet networks.
Internet monitoring may be implemented as a stand-alone system or may be fully
integrated with the telephony monitoring system, providing a unified monitoring
center.
NiceTrack(TM),localized to suit specific operational requirements. NiceTrack, as a lawful interception solution, is fully compliant with the international standards setdefined by ETSI standard 201671(under various European legislations) and TIA (under the American TIA
(J-std-025)CALEA legislation).
MARKET
The market for telecommunications monitoring systems for government law
enforcement
Freedom rDT works with the Motorola or M/A-COM trunked radio system to record radio communications dynamically and intelligence agencies has undergone some drastic changes incapture trunked radio data. It is a solution aimed at the last few years. Standards defining the methods and the protocols of delivery of
the intercepted targets' communications by the service providers to the law
enforcement agencies have been released by the American TIA, the European ETSI
and by other countries. These standards are being adopted by governments through
new regulations which place the responsibility of interception of targets'
traffic on the service providers and requires them to comply with these
standards. Additionally, these new regulations expand the freedom and scope of
monitoring targets' telecommunications.
SALES AND MARKETINGemergency services market.
Strategic Relationships
We have a dedicated sales and marketing organization for the NiceTrack
system. We market the system worldwideall of our products. In certain regions, most significantly, North America, a substantial part of our sales are made directly, while in other regions, most notably, Asia Pacific (APAC), sales are made through our direct sales force and
through distributors.
4) COMINT/DF
PRODUCTS
We develop, design, manufacture and market COMINT/DF systems, which are
used primarily for spectrum monitoring, signal tracing and direction finding
applications. Our COMINT/DF systems can be installed on a wide range of
platforms, including mobile and fixed ground installations as well as aboard
airplanes and ships. Users of our COMINT/DF systems include government agencies,
primarily intelligence gathering organizations. These systems are tailored to
the specific requirements of users.distribution channels. In addition, we partner with leading companies to deliver and support our COMINT/DF systems may be
used, insolutions. In the future, by ATC centers in order to detect the directionfinancial institutions market, we have established marketing, sales and support arrangements with leading suppliers of aircraftcomplementary products including BT, Etrali and for spectrum surveillance for commercial applications such as locating the
unauthorized use of frequencies.
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Our COMINT/DF principal systems are the CDF 1500 and the CDFS-5000,
powerful spectral surveillance and direction finding systems that operate in the
1.5-1200 MHz frequency range (CDF 1500) and in 0.5 to 3000 MHz frequency range
(CDFS-5000), enabling users to detect, locate and monitor transmitted
communications signals. Our NiceFix COMINT/DF system is specially adapted for
the ATC and VTS (Vessel Traffic Service) markets. We are currently in the final
developing phase of the CDFS-5000 product family, with first deliveries expected
in 2003. This system is based on wide band receiver technology and software
radio digital processing platforms designed to provide a solution for the
communication transmissions.
Our COMINT/DF systems are usually combined with our voice recording
systems, enabling the monitoring of detected transmissions as well as storage
and retrieval of the transmitted data. As a result, our COMINT/DF systems
provide users with the capability of archiving large volumes of recorded
information and applying sophisticated database management for automatic
retrieval and analysis.
The COMINT/DF systems can operate either as a stand alone single sensor to
measure direction of arrival, or to locate the transmitting object when using
two or more sensors. This information is stored on the system data base,
enabling retrieval of all relevant data, of transmitted communications. Our
COMINT/DF systems' modular approach, open system architecture and use of
commercial off the shelf, or COTS, elements enable us to cost effectively tailor
the interfaces and other features of the system to address the highly
specialized needs of individual users.
Our COMINT/DF systems are used by governmental/intelligence agencies in
order to detect and measure the direction of transmission signals. The Nicefix
COMINT/DF system is used by ATC/VTS centers to locate aircraft/vessels by
measuring the direction of the aircraft/vessel communications signal. This data
is then used by the control tower operator to direct the aircraft/vessel. To
date, our COMINT/DF systems are in use by more than ten governments/agencies.
SALES AND MARKETING
We sell standard systems to systems houses such as Elisra Electronic
Systems Ltd. as well as custom-made systems tailored to the specific needs of
their respective customers.IPC. These companies market and distribute our product
primarilyproducts to foreign governments and governmental agenciestheir customers either as stand-alone solutions or as integrated componentsparts of their sophisticated intelligence systems. Our relationshipsown solutions. For our contact center customers, we have entered into global distribution agreements as well as alliance and partnership programs with the systems houses allow us to take advantage of their strengths in selling
integrated communication intelligenceleading vendors including Avaya, BT, SAS and electronics systems to governments.
MANUFACTURING AND SOURCE OF SUPPLIES
Our products are built in accordance with industry standard infrastructure
and are PC compatible. The hardware elements in our products are based primarily
on standard commercial off the shelf components and utilize proprietary in-house
developed circuit cards and algorithms and digital processing techniques and
software.Siemens. In the fourth quarter of 2002,public safety and security markets, we started selling "software only"
solutions for screen loggers, based on standard HP and IBM servers.
Prior to the first quarter of 2002, our manufacturing operations
consisted primarily of final assembly and testing of components and
subassemblies. We manufactured our CTI and NiceVision products in our facility
in Ra'anana, Israel and our COMINT and special NiceLog systems in our facilities
in Ra'anana and Sunnyvale, California.
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During the first quarter of 2002, however, we began implementation of a
contract manufacturing agreement with Flextronics Israel Ltd., a subsidiary of a
global electronics manufacturing services (EMS) company. Under this agreement
Flextronics is providing us with a turnkey manufacturing solution from order
receipt to product shipment including purchasing, manufacturing, testing and
configuration. This agreement covers all of our product lines, including our
voice recording family of products, our video product lines, our upgrade lines
and our spare parts and RMA. We believe this outsourcing agreement provides us
with a number of cost advantages due to Flextronic's large-scale purchasing
power, and greater supply chain flexibility. We completed the transfer to
Flextronics of the production for all our products during the second half of
2002.
Some of the components have a single approved manufacturer while others
have two or more options for purchasing. In addition, for some of the components
and subassemblies we maintain an inventory to limit the potential for
interruption. We also carry out OEM relationships directly with some of the more
significant manufacturers of our components. Although certain components and
subassemblies we use in our existing products are purchased from a limited
number of suppliers, we believe that we can obtain alternative sources of supply
in the event that such suppliers are unable to meet our requirements in a timely
manner.
We also have a contract manufacturing agreement entered into by TCS prior
to its acquisition by NICE, with Instem Technologies Ltd, a UK company. Under
this agreement Instem is the exclusive manufacturer of all TCS products. This
manufacturing facility is located in the UK.
Quality control is conducted at various stages at our manufacturing
outsourcers' facilities and at their subcontractors' facilities. Quality controlformed alliances for the COMINT DF systems is conducted at our facility. We generate reports to
monitor our operations, including statistical reports that track the performanceco-marketing and distribution of our products from production to installation. This comprehensive data allows
us to trace failurewith leading companies including Anixter, Diebold, Motorola, Siemens, Thales, Tyco and to perform corrective actions accordingly.
Our manufacturing operation has qualified forHoneywell.
Service and received the ISO-9002
quality standard for all of our products. Additionally, our COMINT/DF systems
are qualified for and have received the ISO-9001 quality standard.
SERVICE AND SUPPORTSupport
We have focused on building a strong service and support organization for all our systems.systems and have focused on rendering the various regions in which we operate to be as self sufficient as possible. Our partners and dealers as well as other telecommunications companies that
market our products, are primarily responsible for supporting the day-to-day requirements of the end-users, while we provide technical support to such dealerspartners and partners.dealers. In order to support our direct customers and partners, we established three regional support centers, the largest of which is in Denver, Colorado, to support our U.S. customers and partners, as well as one in Hong
Kongthe United Kingdom to support APACEMEA customers, dealers and partners, and one in the UKHong Kong to support EMEAAPAC customers, dealers
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In 2002, we significantly increased the revenues from services while
successfully integrating the TCS services group. We now have a consolidated
support group delivering services to both NICE and TCS business partners and
customers.
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Our systems are generally sold with a warranty for repairs of hardware and software defects and malfunctions, the term of which is usually one year after shipment. Longer warranty periods are applicable to sales in certain international and government markets. Extended warranty and service coverage is provided in certain instances and is usually made available to customers through our distributors on a contractual basis for an additional charge. Our customers may purchase a renewable maintenance agreement from our dealers or directly from us. The maintenance agreements generally provide for maintenance, upgrades of standard system software and on-site repair or replacement.
Due to the nature of the end-user market for our COMINT/DF systems and
their marketing channels, we are not ordinarily required to provide for their
service and support. Such end-users normally maintain their COMINT/DF systems
with their own personnel.
For our telecommunications monitoring systems, we provide first and second tier service and support either directly using our support organization or indirectly through local companies working closely with the law enforcement agencies.
RESEARCH AND DEVELOPMENT
Manufacturing and Source of Supplies
Our products are built in accordance with industry standard infrastructure and are PC compatible. The hardware elements in our products are based primarily on standard commercial off-the-shelf components and utilize proprietary in-house developed circuit cards and algorithms and digital processing techniques and software. In the fourth quarter of 2002, we started selling “software only” solutions for use on standard servers.
We manufacture our products through subcontractors. Under a contract manufacturing agreement with Flextronics Israel Ltd., a subsidiary of a global electronics manufacturing services (or EMS) company, Flextronics provides us with a turnkey manufacturing solution including order receipt purchasing, manufacturing, testing and configuration. This agreement covers all of our product lines, including our voice recording family of products, our video product lines, our upgrade lines and our spare parts and RMA. We believe this outsourcing agreement provides us with a number of cost advantages due to Flextronic’s large-scale purchasing power, and greater supply chain flexibility. We also have a contract manufacturing agreement with Dictaphone’s EMS division entered into by us simultaneously with the acquisition of CRS. Under this agreement EMS is the manufacturer of all ex-CRS products. This manufacturing facility is located in the United States.
Some of the components we use have a single approved manufacturer while others have two or more options for purchasing. In addition, for some of the components and subassemblies we maintain an inventory to limit the potential for interruption. We also carry out relationships directly with some of the more significant manufacturers of our components. Although certain components and subassemblies we use in our existing products are purchased from a limited number of suppliers, we believe that we can obtain alternative sources of supply in the event that such suppliers are unable to meet our requirements in a timely manner.
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We had a manufacturing agreement with Instem Technologies Ltd., a U.K. company, which was entered into by Thales Contact Solutions (or TCS) prior to its acquisition by us. On September 22, 2005, the manufacturing agreement with Instem was terminated due to Instem’s entering into bankruptcy. Our ex-TCS products are now manufactured for us by Flextronics.
Quality control is conducted at various stages at our manufacturing outsourcers’ facilities and at their subcontractors’ facilities. We generate reports to monitor our operations, including statistical reports that track the performance of our products from production to installation. This comprehensive data allows us to trace failure and to perform corrective actions accordingly.
We have qualified for and received the ISO-9001:2000 quality standard for all of our products.
Research and Development
We believe that the development of new products and the enhancement of existing products are essential to our future success. Therefore, we intend to continue to devote substantial resources to research and new product development, and to continuously improve our systems and design processes in order to reduce the cost of our products. Our research and development efforts have been financed through our internal funds and programs sponsored through the Government of Israel. We believe our research and development effort has been an important factor in establishing and maintaining our competitive position. Gross expenditures on research and development in 2000, 20012003, 2004 and 20022005 were approximately $25.4$26.4 million, $26.0$27.5 million and $24.7$33.4 million, respectively, of which approximately $1.2approximately $1.3 million, $1.4$1.3 million and $2.2$1.7 million, respectively, were derived from third-party funding, and $4.7$2.3 million, $5.4$1.3 million and $4.6$0.8 million, respectively, were capitalized software development costs.
As of January 1, 1999,
In 2005, we have beenwere qualified to participate in anseven programs funded by the Office of the Chief Scientist, or OCS, of the Israeli government-aided consortiumMinistry of Industry, Trade and Labor to develop generic technology relevant to the development of our wide band products, from which we received $240,000 in 1999.
In 2000, we were qualifiedproducts. Such programs are approved pursuant to participate in three additional Israeli
government-aided consortiumsthe Law for the developmentEncouragement of generic technology related
to our products. In 2002, we were qualified to participate in two additional
Israeli government-aided consortiums forIndustrial Research and Development, 1984, or the development of generic technology
related to our products. In 2000, 2001, 2002 we received a total of $1,330,000,
$1,318,000Research and $1,925,000, respectively,Development Law, and we anticipate receiving
approximately $1,600,000 in 2003 from these plans. The generic technology plans
are not subject to royalty payments.
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up tobetween 20% and 66% of certain research and development expenses relating to these programs. These programs include programs approved under certain Magnet consortiums and programs approved for companies with large research and development activities. Accordingly, as opposed to the standard type of OCS grants (described below), the grants under these programs are not required to be repaid. However, the restrictions of the Research and Development Law described below apply to these programs. In 2003, 2004 and 2005, we received a total of $1.4 million, $0.8 million and $2.2 million, respectively, and we anticipate receiving approximately $0.4 million in 2006 from these programs.
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We are eligible to receive grants from the GovernmentOCS under its “standard” programs, usually constituting a grant of Israel, through the
Officeup to 50% of the Chief Scientist, or OCS,certain approved research and development expenses, for the research and development of products intended
for export.approved technology. Under the terms of the OCS participation,these programs, a royaltygrant recipient is required to pay royalties of 3% to 5% of the net sales of products incorporating technology developed in, and related services resulting from, a project funded by OCS generally isthe OCS. Generally, the royalties are required to be paid beginning with the commencement of sales of such products and ending when 100% to 150% of the grant is repaid in New Israeli Shekels, or NIS, linked to the U.S. dollar plus LiborLIBOR interest. In 1999, 2000, 20012003, 2004 and 2002,2005, we received no such grants and incurred royalties on sales of such
products in the amounts of approximately $395,000, $227,000, $4,000no royalty obligations under these programs, and $0,
respectively. As of May 31, 2002, we have no further royalty obligations to the OCS. Terms
The Research and Development Law generally requires that the product developed under an OCS-funded program be manufactured in Israel. However, upon the approval of Israeli Government participationsthe OCS, some of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased, which increase might be up to 300% of the grant (depending on the portion of the total manufacturing volume that is performed outside of Israel). The OCS is authorized to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The Research and Development Law also requireallows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the OCS is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of the OCS whether to approve a program and the amount and other terms of benefits to be granted. For example, the increased royalty rate and repayment amount will be required in such cases.
The Research and Development Law also provides that know-how developed under an approved research and development program may not be conducted by the applicant for the grant as specified in the
application and that the manufacturing of products developed with government
grants be performed in Israel, unless a special approval has been granted.
Separate Israeli Government consent is required to transfertransferred to third parties technologies developed through projects in whichIsrael without the government participates.approval of the OCS. Such restrictions, however, doapproval is not apply to exportsrequired for the sale or export of any products resulting from Israel of products
developed with such technologies. From time to time the Government of Israel has
revised its policies regarding the availability of grants,research or development. The Research and there can be no
assuranceDevelopment Law further provides that the Government's support ofknow-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except in certain circumstances and subject to prior OCS approval. The OCS may approve the transfer of OCS-funded know-how outside Israel in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid in consideration for such OCS-funded know-how (according to certain formulas); or (b) the grant recipient receives know-how from a third party in exchange for its OCS-funded know-how; or (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperation in research and development activities.
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The Research and Development Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and interested parties to notify the OCS of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient and requires the new interested party to undertake to the OCS to comply with the Research and Development Law. In addition, the rules of the OCS may require prior approval of the OCS or additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares or ADSs will continue.
INTELLECTUAL PROPERTYbe required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the Research and Development Law.
The funds available for OCS grants out of the annual budget of the State of Israel were reduced in recent years, and the Israeli authorities have indicated in the past that the government may further reduce or abolish OCS grants in the future. Even if these grants are maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive.
In January 2006, we were selected to participate in the Sixth Framework Programme (FP6). FP6 is the European Community Framework Programme for Research, Technological Development and Demonstration. FP6 funds and promotes research. We anticipate that our program will commence in May 2006 and will be in effect for a period of approximately 2.5 years. FP6 will give us funding of approximately EUR 325,000 during this period. There are no royalty obligations associated with receiving such funding.
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Intellectual Property
We currently rely on a combination of trade secret, patent, copyright and trademark law, together with non-disclosure and non-compete agreements, to establish and/or protect the technology used in our systems. We hold the
following seven issued U.S. Patents:
o No. 5,861,959 titled "Facsimile Long Term Storage and Retrieval
System"
o No. 5,937,029 titled "Data Logging System Employing M[N + 1]
Redundancy"
o No. 6,122,665 titled "Communication Management System"
o No. 6,046,824 titled "CIF - Facsimile Long Term Storage and Retrieval
System"
o No. 6,330,025 titled "Digital Video Logging System"
o No.6,542,602 titled "Telephone Call Monitoring System"
o No. 5,353,168 titled "Recording and Reproduction System using Time
Division Multiplexing.
We currently have three otherhold 29 U.S. patents and 20 patents issued in additional countries and 46covering the same technology as the U.S. patents. We have over 128 patent applications pending in the U.SUnited States and other countries. We believe that the improvement of existing products, and the development of new products are important in establishing and maintaining a competitive advantage. We believe that the value of our products is dependent upon our proprietary software and hardware continuing to be "trade secrets"“trade secrets” or subject to copyright or patent protection. We generally enter into non-disclosure and non-compete agreements with our employees and subcontractors. However, there can be no assurance that such measures will protect our technology, or that others will not develop a similar technology or use technology in products competitive with those offered by us. Although we believe that our products do not infringe upon the proprietary rights of third parties, there can be no assurance that one or more third parties will not make a contrary claim or that we will be successful in defending such claim.
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In June 2000, Dictaphone Corporation, one of our competitors, filed a
patent infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.
In April 2002, we received a letter from Dictaphone stating that several of
our products were using technology protected by additional Dictaphone patents
and offering us a licensing arrangement for these patents. We believe that none
of our products infringe upon those patents.
From time to time, we receive "cease“cease and desist"desist” letters claiming patent infringements, however,infringements. However, no formal claims or other actions have been filed with respect to such letters.alleged infringement, except for claims filed by Dictaphone (which have since been settled and dismissed) and Witness Systems. We believe that none of these has merit. We cannot assure you, however, that we will be successful in defending the Dictaphone
infringement claim or othersuch claims, if asserted, or that infringement claims or other claims, if asserted, will not have a material adverse effect on our business, financial condition and results of operations. Defending the infringement claimclaims or other claims could involve substantial costs and diversion of management resources. In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms.
We own the following trademarks: 3600 View, Agent@home,trademarks in different countries: Insight from Interactions™, 3600 View™, Executive Connect,Connect®, Executive Insight, Experience Your Customer, Investigator, Lasting Loyalty,
Listen Learn Lead, MEGACORDER, Mirra,Insight™, Freedom®, Investigator®, Mirra®, Universe®, My Universe,Universe™, NICE®, NiceCall®, NiceCall Focus™, NiceCLS™, NICE NiceAdvantage, NICE
Analyzer, NiceCall, NiceCLS, NiceCMS, NICE Feedback, NiceFix, NiceGuard, NICE
Learning, NICE Link, NiceLog, NICELearning™, eNiceLink™, NiceLog®, Playback Organizer, Renaissance, ScreenSense,
NiceScreen, NiceSoft,Organizer™, Renaissance®, ScreenSense™, NiceScreen™, NICE Storage Center, NiceTrack,Center™, NiceTrack™, NiceUniverse®, NiceVision®, NiceVision Harmony™, NiceVision Mobile™, NiceVision Pro™, NiceVision NVSAT™, NiceVision Alto™, Scenario Replay™, Tienna®, Wordnet®, NICE Perform™, NICE Inform™, NICE Analyzer™, Last Message Replay™, NiceUniverse NiceUniverse
LIVE, NiceVision, NiceVision Harmony, NiceVision Mobile, NiceVision Pro,
NiceVision Virtual, NiceWatch, Renaissance, Secure Your Vision, Tienna,Compact™, Customer Feedback™, Interaction Capture Unit™, Dispatcher Assessment™, Encorder™, Freedom Connect®, FAST®, FAST Alpha Silver™, FAST Alpha Blue™ and Wordnet are trademarks of ours.Alpha®. Applications to register certain of these marks have been filed in certain countries, including Australia, Brazil, the European Union, Germany, Great Britain, Israel, Japan, Mexico, Argentina and the United States. Some of such applications have matured to registrations.
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Regulation
Israeli Export Restrictions
The export of certain defense products from Israel, such as our COMINT/DF
and NiceTrack(TM)NiceTrack products, requires a permit from the Defense Sales and Exports branch of the Israeli Ministry of Defense, (SIBAT).or SIBAT. In 2002, approximately 6.3%addition, the sale of products to certain customers, mostly armed forces, also requires a permit from the Israeli Ministry of Defense. In 2005, only a small portion of all of our sales werewas subject to such permit requirements. Additionally, certain
components of our COMINT/DF systems are manufactured in the United States,
requiring us to obtain a license from the United States government for the sale
of such products. To date, we have encountered no difficulties in obtaining such licenses.
COMPETITIONpermits. However, the Ministry of Defense notifies us from time to time not to conduct business with specific countries that are undergoing political unrest, violating human rights or exhibiting hostility toward Israel. We may be unable to obtain permits for our defense products we could otherwise sell in particular countries in the future.
New European Environmental Regulations
Our European activities require us to comply with Directive 2002/95/ec of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the RoHS Directive), which will take effect on July 1, 2006. This directive provides that producers of electrical and electronic equipment may not place new equipment containing lead, mercury and certain other materials deemed to be hazardous, in amounts exceeding any relevant set maximum concentration values, on the market in the European Union. Certain of our hardware products that include our business solutions may need to be modified to meet this regulation. Some of our suppliers may be required to comply with these new rules and may be unable to do so on a timely basis. Complying with this directive may impose some additional costs and administrative burden on us. If we fail to achieve compliance, including by reason of a delay or failure of our suppliers to comply, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
Our European activities also require us to comply with Directive 2002/96/EC of the European Parliament on Waste Electrical and Electronic Equipment, or the WEEE Directive. The WEEE Directive covers the labeling, recovery and recycling of IT/Telecommunications equipment, electrical and electronic tools, monitoring and control instruments and other types of equipment, devices and items, and already partly came into effect on August 13, 2005. Our products fall within the scope of the WEEE directive, and we are taking and will continue to take all requisite steps to ensure compliance. The WEEE directive is required to be implemented by each member country of the European Union through its own national legislation. Accordingly, we cannot at this time be certain that we will be able to comply with the specific regulations which will be enacted to implement the WEEE directive in each of the individual countries in the European Union. If we fail to achieve compliance, including by reason of a delay or failure to comply, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
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Competition
The market for our Voice Platforms and Applicationsenterprise interaction solutions is highly competitive and includes numerous products offering a broad range of features and capacities.capabilities. As the market is still developing, we anticipate that a number of our existing and potential competitors will be introducing new and enhanced products. Some of our competitors in the digital voice recording and quality management for contact center agent monitoring businesses include Dictaphone
Corporation, Witness Systems ,Inc., Teknekron Infoswitch Corporation (now calledAutonomy (formerly e-talk), and Verint Systems Inc. (formerly Comverse Infosys), a subsidiary of Comverse Technology Inc., and Witness Systems Inc.
We believe that competition in the sale of our Voice Platforms and
Applicationsevolving enterprise interaction solutions market is based on a number of factors includingrelated to the product offering and business model. With respect to products, we consider system performance and reliability, the ability to integrate with a variety of otherexternal computer and communications systems and ease of use as key factors. With respect to the business model, we consider marketing and distribution capacity, price and global service and support.support capacity as key factors. We believe that the wide rangeNICE Perform applications have a competitive advantage based on their holistic integration of features provided by the NiceLog
system and related applications,various unstructured data sources, their wideability to extract insight with a multi-dimensional approach, their wide-range connectivity and compatibility with telephone and computer networks and their ease of use createuse. We believe that we have a competitive advantage because of the size and capabilities of our global distribution network, our business partners, and our global service and support capacity.
Traditionally, public safety customer voice recording requirements for emergency phones and radio were relatively basic. As the command and control center is becoming more complex and advanced systems are being deployed, and as more trunk radio and IP-based systems are offered, the recording system has to be integrated with these systems. Our ability to deliver a more integrated and sophisticated recording system that can capture voice, video, data and meta-data information from trunk radio systems and computer aided dispatch, or CAD, systems, positions our products above the NiceLogcompetition mainly in the large high-end emergency centers. In addition, we believe that applications for scenario reconstruction of an incident connecting voice, video, data and such related applications compared to other similar
systems currently being offered onmeta-data together give us an advantage over the market.competition. Some of our competitors in the public safety market include ASC Telecom, Mercom and Voiceprint.
There are several small competitors who have products that compete with our Video Platformvideo platform and Applications, however ourapplications. Our main competitors in this market are Loronix Information Systems, Inc (a wholly owned subsidiary ofBosch (formerly VCS), Dallmeier, GE (formerly Visiowave), Pelco and Verint Systems
Inc.), Lennel and Dallmeier.
In the public safety market, there are a number of competitors providing
solutions, including Mercom Inc, CVDS Inc, Voiceprint Inc, Dictaphone
Corporation and Witness Systems, Inc.
We are aware of a limited number of manufacturers of systems for defense
applications that compete with our COMINT/DF systems such as Rhode & Schwartz,
Thales, Tadiran Ltd. and Elta Electronic Industries Ltd.Systems. We believe that our COMINT/DF systems offer high performance for relatively moderate priceapproach to provide a full solution based on our self-developed recording, management software, networking devices and therefore havereal-time content analysis creates a competitive advantage over other COMINT/DF systems, which may
require large expenditures by the customer.
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There are a number of competitors in the telecommunications monitoring market, having products competing with our NiceTrack(TM)NiceTrack system, the major ones being Raytheon Company, Siemens, ETI, JSI and Verint Systems Inc., Ectel Ltd., and ETI.Systems. We believe that our solution offers innovations that provide the law enforcement agencies the tools and capabilities they require to meet the challenges of today'stoday’s advanced telecommunications world, as well as being price competitive.
ORGANIZATIONAL STRUCTURE
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Organizational Structure
The following is a list of all of our significant subsidiaries, including the name, country of incorporation or residence, and the proportion of our ownership interest in each.
COUNTRY OF PERCENTAGE OF
INCORPORATION OR OWNERSHIP
NAME OF SUBSIDIARY RESIDENCE INTEREST
- ------------------------------------- ------------------ ---------------
NICE Systems, Inc. United States 100%
NICE Systems GmbH Germany 100%
NICE Systems Canada Ltd. Canada 100%
NICE CTI Systems UK Ltd. United Kingdom 100%
STS Software Systems (1993) Ltd.* Israel 100%
NICE APAC Ltd. Hong Kong 100%
NiceEye BV* Netherlands 100%
NiceEye Ltd.* Israel 100%
Nice Systems SARL France 100%
Racal Recorders Ltd United Kingdom 100%
* Inactive
PROPERTY AND EQUIPMENT
Name of Subsidiary | Country of | Percentage of | ||
Nice Systems Inc. | United States | 100% | ||
NICE Systems GmbH | Germany | 100% | ||
NICE Systems Canada Ltd. | Canada | 100% | ||
NICE CTI Systems UK Ltd. | United | 100% | ||
STS Software Systems (1993) Ltd. | Israel | 100% | ||
NICE APAC Ltd. | Hong Kong | 100% | ||
NiceEye BV | Netherlands | 100% | ||
NiceEye Ltd. | Israel | 100% | ||
Nice Systems S.A.R.L. | France | 100% | ||
Racal Recorders Systems Ltd. | United | 100% | ||
Nice Interactive Solutions India Private Ltd. | India | 100% | ||
Nice Japan Ltd. | Japan | 100% | ||
Nice Systems Latin America, Inc. | United States | 100% | ||
Nice Systems (Singapore) Pte. Ltd. | Singapore | 100% | ||
Nice Systems Australia PTY Ltd. | Australia | 100% | ||
Nice Switzerland AG | Switzerland | 100% | ||
Fast Video Security GmbH | Germany | 100% | ||
Fast Video Security (UK) Ltd. | United | 100% |
Property, Plants and Equipment
Our executive offices and engineering, research and development operations are located in Ra'anana,Ra’anana, Israel, where we occupy approximately 126,000140,000 square feet of space, pursuant to a lease expiring in 2008. This lease may be terminated by us at any time from the year 2003,2006, subject to certain conditions. The annual rent and maintenance fee for the facility is approximately $2.8$2.9 million linked to the changes in the U.S. consumer price index. We have leased various offices and other facilities in North America and in several other countries, as described below.
Our North American facilities consist of:
o Our North American headquarters in Rutherford, New Jersey, which
occupy approximately 25,000 square feet with a monthly rental of
approximately $57,000 We also have a warehouse facility in Lyndhurst,
New Jersey, which occupies approximately 6,000 square feet, with a
monthly rental of approximately $5,000;
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Our North American facilities consist of: | ||
— | Our North American headquarters in Rutherford, New Jersey, which occupy approximately 28,400 square feet. We also have a warehouse facility in Lyndhurst, New Jersey, which occupies approximately 6,000 square feet; | |
— | Our office in San Diego, California, which occupies approximately 6,250 square feet (subleased in its entirety to a third party); | |
— | Our office in Chicago, Illinois, which occupies approximately 1,000 square feet; | |
— | Our office in Denver, Colorado, which occupies approximately 30,775 square feet; | |
— | Our office in New York, New York, which occupies approximately 4,300 square feet; | |
— | Our office in Melbourne, Florida, which occupies approximately 5,000 square feet; | |
— | Our office in Stratford, Connecticut, which occupies 19 workstations; and | |
— | Our office in Herndon, Virginia, which occupies approximately 3,900 square feet. | |
Our international facilities consist of: | ||
— | Our office in Frankfurt, Germany, which occupies approximately 2,850 square feet; | |
— | Our office in Friedrichaphen, Germany, which occupies approximately 8,370 square feet; | |
— | Our office in Hunenberg, Switzerland, which occupies approximately 5,490 square feet; | |
— | Our office in London, UK, which occupies 3 workstations; | |
— | Our office in Southampton, UK, which occupies approximately 34,870 square feet; | |
— | Our office in Watford, UK, which occupies 30 workstations; | |
— | Our office in Paris, France which occupies approximately 3,175 square feet; | |
— | Our office in Hong Kong, which occupies approximately 4,810 square feet; | |
— | Our office in Tokyo, which occupies approximately 1,778 square feet; | |
— | Our office in Bangalore, which occupies approximately 1,047 square feet; | |
— | Our office in Singapore, which occupies approximately 2,232 square feet; | |
— | Our office in Sydney, Australia, which occupies approximately 2,755 square feet; and | |
— | Our office in Melbourne, Australia, which occupies approximately 170 square feet. | |
We believe that our existing facilities are adequate to meet our current and foreseeable needs. | ||
Unresolved Staff Comments |
None.
42
Operating and Financial Review and Prospects. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this annual report. OVERVIEWThis discussion contains certain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those set forth under Item 3D, “Key Information -- Risk Factors” and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. For more information about forward-looking statements, see the Preliminary Note that precedes the Table of Contents of this Annual Report on Form 20-F.
Overview
We develop, marketare a leading provider of solutions that capture, manage and supportanalyze unstructured multimedia content enabling companies and public organizations to enhance business and operational performance, address security threats and take proactive actions. Unstructured multimedia content includes phone calls to contact centers and back offices, video captured by closed circuit television cameras, radio communications between emergency services personnel, email and instant messaging. Our solutions include integrated, scalable, multimedia digital recording platforms, enhanced software applications and related professional services. These solutions captureaddress critical business processes and analyze unstructured (non-transaction)
data,risk management, compliance procedures and convert it into actionable knowledge forsecurity needs of corporations or government agencies. Our solutions facilitate faster decision-making and near real-time action, improving business and employee performance, and enhancing security performance management applications.and public safety. Our customers use our systems in a variety of enterprises, such as financial services, health care, outsourcers, retail, service providers, telecommunications, and utilities. Our public safety and security customers include air traffic control, correctional facilities, emergency services, gaming facilities, government intelligence agencies, homeland security and public transportation. Our solutions capture multiple formsare deployed at over 23,000 customers, including over 75 of interaction, including voice, fax, email, web chat, radio, and video
transmissionsthe Fortune 100 companies, across over wireline, wireless, packet telephony, terrestrial trunk radio
and data networks. The markets from which we currently derive40,000 sites around the majority of
our revenues and expect to continue to do so in the future are highly
competitive.
34
Our products are based on two types of recording platforms - audio and
video - and are used primarily in contact centers, trading floors, public safety
organizations, transportation, corporate security, gaming and correctional
facilities as well as various government and intelligence agencies.
Our development efforts for our recording platforms are aimed at addressing
several trends we see developing in the industry. The trend towards the
proliferation of voice over IP-based networks is leading to a greater
requirement for VOIP recording capabilities in financial trading, contact
centers and public safety environments. The continued trend towards replacing
analog video recording with digital video recording is leading to the need for
network applications in the video recording area.
We also see the continuation of a trend towards requirements for multimedia
recording capabilities, particularly in contact centers (voice, fax, email,
chat, screen) and public safety (voice, radio, video, data) markets. We are
beginning to see this same trend developing in the financial trading sector, and
we expect some Homeland Security initiatives in areas such as border control,
critical infrastructure security, first responder communications and lawful
interception to require multimedia capture platforms as well.
Our software applications enable our customers to capture, store, retrieve
and analyze unstructured data (multimedia interactions) and combine them with
data from other systems to create actionable knowledge that can be distributed
via reports and alerts to all relevant parties to improve performance.
There is growing demand from our customers for software applications that
will leverage the wealth of unstructured data captured by the recording platform
to improve overall performance. In turn, as these enhanced software applications
are being added, customers are considering our systems "mission critical". We
see an opportunity for more content analysis applications in contact centers for
quality monitoring and contact center management as well as for enterprise-wide
process improvement and business performance management. We see a trend towards
more software applications in financial trading environment for compliance
monitoring and dispute management to improve business performance. We see
similar trends happening in digital video recording. We expect video content
analysis applications to become increasingly important to building, campus, city
center, and infrastructure perimeter security, loss prevention in casinos,
retail and warehousing, as well as various homeland security applications to
enable proactive security management.
We expect to see an increase in the demand for VOIP recording products,
networked video security solutions, and multimedia recording solutions as well
as to increase the proportion of software in our product revenue mix and
gradually increase the amount of professional services and maintenance revenue.
35
Our products are sold primarily through a global network of distributors, system integrators and strategic partners; a portion of product sales and most services are sold directly to end-users. One distributor accounted for approximately 22%20%, 12%,19% and 19%21% of revenues in 2002, 20012003, 2004 and 2000,2005, respectively.
ACQUISITIONS
We have consummated three acquisitions during the past three years. These
Recent Acquisitions and Dispositions
The following acquisitions were accounted for as purchases, and, accordingly, the purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values. The results of operations related to each acquisition are included in our consolidated statement of operations from the date of acquisition. The following are detailsdisposed business was accounted for eachas a discontinued operation as of these
acquisitions:
othe date of its disposition.
43
In November 2002,January 2006, we consummated an agreement to acquire certain
assets and liabilitiesacquired all the outstanding shares of Thales Contact Solutions (or TCS),FAST Video Security AG, a Switzerland-based developer of customer-facing technologyinnovative video systems for public safety, financial
tradingsecurity and customer contact centers, based in the United Kingdom. TCS
was a unit of Thales Group, one of Europe's premier electronics
companies. In connection with the acquisition, we paid an initial
$29.9surveillance purposes, for approximately $21 million in cash, plus potential earn-outs based on performance milestones amounting to a maximum of an additional $12 million payable over the next three years.
In September 2005, we acquired the assets and issued 2,187,500 ordinary sharesassumed certain liabilities of Hannamax Hi-Tech Pty. Ltd. for $1.8 million. Hannamax was our distributor in Australia and New Zealand. With the acquisition of Hannamax, we expect to Thales
Group at a fair market value of $18.1 million calculated atexpand our customer base and presence in Australia and New Zealand and to expand and strengthen our support organization in the date
of closing. As a result, Thales Group holds approximately 14% of the
Company's shares and two Thales executives were elected to the Board
of Directors of NICE.region. Under the terms of the acquisition agreement, in the cash portionsecond quarter of the purchase
price2006, an additional $0.5 million was subject to downward adjustment based on the value of net
assets at closingpaid, and the full year 2002 sales of TCS. Based on the
actual value of net assets acquired and 2002 sales of TCS, we reduced
the cash portion of the purchase price as of December 31, 2002 by
$12.8 million. This amount is presented on our balance sheet asin 2007 a
Related Party Receivable. Thus, the adjusted purchase price paid,
including $4.5 million of capitalized acquisition costs, was recorded
as $39.7 million. Of the $12.8 million adjustment referred to above,
Thales paid us $6.6 million in March 2003, and pending agreement on
the actual value of net assets acquired, we expect to recover the
outstanding balance during 2003. Should we and Thales not reach
agreement on the net asset value, the matter will be submitted to
binding arbitration in accordance with the terms of the acquisition
agreement.
Also under the terms of the agreement, contingent cash paymentspayment of up to $10$0.5 million in 2003, $7.5 million in 2004, and $7.5 million in 2005
wouldwill be due if certain financial performance criteria are met, as part of a three-yeartwo-year earn-out provision related to the sale of a particular
product in 2002 through 2004. The relevant criteria for 2002 were not
met and therefore no contingent payment in respect of 2002 was
recorded.provision. Should any contingent paymentspayment be made under the agreement in the future, the additional consideration when determinable will increase the aggregate purchase price and, accordinglyas a result, we will record additional goodwillgoodwill.
In June 2005, we acquired the assets and assumed certain liabilities of Dictaphone Corporation’s Communications Recording Systems business (Dictaphone CRS) for approximately $38.5 million. Dictaphone CRS provides liability and quality management systems for emergency services, critical facilities, contact centers and financial trading floors. The parties have signed an amendment to the aforementioned asset purchase agreement with Dictaphone, according to which a final adjustment will be recorded.
36
fourth quarter of 2002, we recorded a current liability of $2.8
million and a long-term liability of $13.5 million reflecting
obligations under a long-term contract assumed by NICE in the TCS
acquisition. We have entered into negotiations to amend this contract
but there can be no assuranceparties agreed that we will be successful in these
negotiations.
o On December 5, 2000,are entitled to all previously undistributed interest and other investment income earned with respect to such escrow funds.
In March 2004, we completedsold the acquisition of certain assets and liabilities of Stevens Communications Inc. (SCI). SCI is a systems
distributor, whose activitiesour COMINT/DF military-related business to ELTA Systems Ltd. for $4.0 million. The assets and liabilities sold included the promotion, distribution,
installationintellectual property, fixed assets, inventory, and maintenancecontracts related to the COMINT/DF product line, which included high performance spectral surveillance and direction finding systems that detect, identify, locate, monitor and record transmission sources. In 2002, 2003 and 2004, the COMINT/DF business generated revenues of approximately $7.2 million, $6.5 million and $0.8 million, respectively, and net income of approximately $1.4 million, $1.5 million and $3.2 million (including gain on disposition), respectively.
2005 Public Offering
In December 2005, we completed a public offering on Nasdaq of 4,600,000 ADSs, representing 4,600,000 of our audio recording products and
related software applications in North America. We paid $7.0 million
in cash and issued 426,745 ADSsordinary shares, at a public offering price of which 186,818 were deemed target
shares contingent upon the achievement of certain objectives and
events through 2002 and 38,914 ADSs were allotted for the benefit of
certain SCI employees subject to vesting based on continued employment
with the Company.$46.25 per ADS. The contingent target shares were released to SCI
upon agreement as to the achievementproceeds of the determined objectives.
In October 2001, we entered intooffering, net of underwriting discount and other related expenses, amounted to approximately $201.7 million.
44
Off-Balance Sheet Transactions
We have not engaged in nor been a final settlement agreement with SCI
addressing a dispute with SCI regarding the fair valueparty to any off-balance sheet transactions.
Critical Accounting Policies
The preparation of the working
capital acquired. The terms of the final settlement resulted in a
charge to Other Expense, Net of $4.4 million representing settlement
of disputed items of $3.6 million and obligations for future
consulting services, which were no longer of value to us.
o In April 2000, we acquired all of the outstanding capital stock of
Centerpoint Solutions Inc. (CPS) for $3 million in cash and the
issuance of 200,000 ADSs of NICE of which 50,000 were deemed target
shares contingent upon the achievement of certain objectives, which
were not met. CPS is a developer of internet-based applications for
statistical monitoring, digital recording and automatic customer
surveys for contact centers.
In November 2002, we entered into a settlement agreement with Doug
Chapiewski, the sole shareholder of CPS, in respect of allegations of
misrepresentation, breach of contract and securities fraud in
connection with the acquisition of CPS. The terms of the settlement
agreement, which included 50,000 shares, resulted in a charge to Other
Expense, Net of $3.5 million.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements which have been
prepared in accordanceconformity with generally accepted accounting principles inGAAP requires management to make judgments and estimates that affect the United States ("US GAAP"). Our significant accounting principles are presented
within Note 2 to our Consolidated Financial Statements. While allreported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the accounting
policies impactdate of the financial statements certain policies may be viewed to be
critical. These policies are those that are both most important toand the portrayalreported amounts of our financial conditionrevenues and results of operations and require our
management's most difficult, subjective and complex judgments and estimates.expenses during the reporting period. Actual results could differ from those estimates.
37
o
— | Revenue recognition | |
— | Allowance for doubtful accounts | |
— | Inventory valuation | |
— | Impairment of long-lived assets | |
— | Provision for income taxes | |
— | Contingencies |
Revenue recognition
o Allowance for doubtful accounts
o Inventory valuation
o Impairment of long-lived assets
o Deferred income taxes
o Contingencies
o Restructuring expenses
REVENUES.Recognition. We derive our revenuerevenues primarily from two sources: product revenues, which include hardware and software sales; and service revenues, which include support and maintenance, installation, consulting and training revenue. Revenue related to sales of our products is generally recognized when persuasive evidence of an agreement exists;exists, the product has been delivered and title and risk of loss have passed to the buyer;buyer, the sales price is fixed andor determinable, no further obligations exist, and collectibility is probable. Sales agreements with specific acceptance terms are not recognized as revenue until the customer has confirmed that the product or service has been accepted.
Revenues from fixed-price contracts that require significant customization
are recognized using the percentage-of-completion method generally on the basis
of value added and results achieved out of the completeness of the product as a
whole. Revenues from maintenance and professional services are recognized ratably over the contract period or as services are performed.
When transactions involve
For arrangements with multiple elements, we allocate revenue is allocatedto each component of the arrangement using the residual value method based on vendor specific objective evidence (VSOE) of the undelivered elements. This means that we defer the arrangement fee equivalent to the elements based on Vendor Specific Objective Evidence ("VSOE")fair value of the relative
fair values of each element in the arrangement, according to the residual
method.undelivered elements until these elements are delivered. Our VSOE used to allocate the sales price to support services and
maintenance is based on the renewal price.percentage.
To assess the probability of collection for revenue recognition, we have an established credit policy that determines, by way of mathematical formulae based on the customers'customers’ financial statements and payment history, the level of open
accountcredit limit that reflects an amount that is deemed probably collectible for each customer. These credit limits are reviewed and revised periodically on the basis of new customer financial statement information and payment performance.
38
45
We record a provision for estimated sales returns and allowances on product sales in the same period as the related revenues are recorded. We base these estimates on the historical sales returns ratio and other known factors. Actual returns could be different from our estimates and current provisions for sales returns and allowances may need to be increased.
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
Allowance for Doubtful Accounts. We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer'scustomer’s inability to meet its financial obligations to us, we record a specific allowance against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due. Insured balances are not reserved.
If the financial condition of one of our significant customers or our customers
in general should deteriorate, our revenue growth may be limited and additional
allowances may be required.
INVENTORY VALUATION.
Inventory Valuation. At each balance sheet date, we evaluate our inventory balance for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product line and projections of future demand. In addition, we write off inventories that are considered obsolete. Remaining inventory balances are adjusted to the lower of cost or market value. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made.
During 2002 we completed the outsourcing of the manufacture of our audio and video product platforms. Under this arrangement, we take ownership of inventories at the conclusion of the manufacturing process, such inventories representing finished goods or spare parts. As we largely manufacture to order, we do not tend to accumulate finished goods. We are obligated, however, liable to purchase above a certain level, which is based on historical level of orders to the
contract manufacturer, excess raw material and subassembly inventories from the contract manufacturer that may be deemed obsolete or slow-moving. We monitor the levels of the contract manufacturer'smanufacturer’s relevant inventories periodically and, if required, will write-off such deemed excess or obsolete inventory.
IMPAIRMENT OF LONG-LIVED ASSETS.
Impairment of Long-Lived Assets. Our long-lived assets include property and equipment, long term investments,investment in affiliates, goodwill and other intangible assets. The fair value of the long-term investmentsinvestment in affiliates is dependent upon the performance of the companies in which we have invested. In assessing potential impairment of these investments, we consider this factor as well as the forecastforecasted financial performance of the investees and other pertinent information. We record an investment impairment charge when we believe that the investment has experienced a decline in value that is other than temporary. During 2002, we recognized $229
thousand$229,000 of impairment losses related to our long-term investments.investment in affiliates. As of December 31, 2002,2005, the carrying value of the Company's long-termour investments in affiliate was $1.2 million.
In assessing the recoverability of our property and equipment, goodwill and other intangible assets, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.
39
46
SFAS No. 142 "Goodwill“Goodwill and Other Intangible Assets". SFAS No. 142Assets” addresses the initial recognition and measurement of intangible assets acquired in a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives will be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested at least annually for impairment. We adopted SFAS No. 142 beginning January 1, 2002. Upon adoption of SFAS No. 142, we discontinued the amortization of recorded goodwill, which was approximately $3.4 million on an annual basis at that time. We performed an impairment test of our goodwill as of January 1, 2002 under the transitional provisions of SFAS No. 142;142, and our test did not indicate an impairment of goodwill. We confirmed that we have only one reporting unit (the
Company) to which we allocated all recorded goodwill, as well as all assets and liabilities.
By October 1, 2002, our stock price had declined significantly from January 1, 2002, at which point our market capitalization, based on our stock price, was below book value. The price of our ADSs was $17.04 per ADS on January 2, 2002 was $17.04 per ADS and declined to $8.47 per ADS onby October 1, 2002. We determined theour fair value
of the Company based on relative market multiples for comparable businesses and a discounted cash flow model. This evaluation indicated that an impairment might exist. We then performed Step 2 under SFAS No. 142 in which thean amount of the impairment loss, if any, must be measured. Four categories of intangible assets were identified as being separable from goodwill in accordance with SFAS No. 141.141 “Business Combinations.” These included:included trade names;names, an in-place distribution network;network, technology based intangible assets and maintenance contracts. In valuing the NICE trade name, a relief from royalty method was used. Under this method, the value of a trade name reflects the savings realized by owning the trade name. The value of the intangible asset under the relief from royalty method is dependent upon the following factors: the selected royalty rate, the revenues expected to be generated from the underlying intellectual property, the discount rate and the expected life of the intellectual property. The value of our distribution network was determined through the use of the cost approach. Using this method, the value of the distribution network is estimated as the after-tax direct costs that a potential acquirer would avoid spending in recreating a similar functional distribution network. The value of the intangible asset under the cost method is dependent upon the estimated direct cost of establishing a new distributor relationship. Qualifying technology-based intangible assets consist of current and core technology and technologies that were under development at the valuation date. The current and core technology was valued using a derivation of the income approach, namely the excess earnings method. This method is used to analyze the earnings contribution of an intangible asset. Under this method, the excess earnings that an intangible asset generates are calculated over the intangible asset'sasset’s expected life and discounted to the present to calculate the fair value of the intangible asset. Excess earnings are defined as the residual earnings after providing for appropriate returns on the other identified contributing assets. The value under the excess earnings method is dependent upon the following factors: the expected revenues generated by the intangible asset, the expected after-tax earnings on those revenues, the charges (or returns) required on other contributing assets and the discount rate. Our maintenance contracts, which are intangible assets under the contractual-legal criterion of SFAS No. 141, were valued using the excess earnings method. In determining the applicable discount rate to be used to estimate the fair value of our net assets, we calculated a market-derived rate based on theour estimated weighted average cost of capital for the Company.capital. In determining theour cost of equity, for the Company, we used a standard methodology based on the capital asset pricing model and analyzed selected guideline companies, industry data and factors specific to NICE.us. We expect to use a similar decision process in the future
40
future.
47
Following these analyses, we compared the carrying amount of goodwill to the implied fair value of the goodwill and determined that an impairment loss existed. A non-cash charge totaling $28.3 million was recorded in the fourth quarter of 2002 to write down goodwill to its fair value under the caption "Goodwill impairment". This impairment is primarily attributable to the change
in evaluation criteria for goodwill from an undiscounted cash flow approach,
which was previously used under the guidance in Accounting Principles Board
Opinion No. 17 INTANGIBLE ASSETS, to the fair value approach stipulated in SFAS
No.142.“Goodwill impairment.” The valuation of long-lived assets requires significant estimates and assumptions. These estimates contain management'smanagement’s best estimates, using appropriate and customary assumptions and projections at the time. If different estimates or projections were used, it is reasonably possible that our analysis would have generated materially different results.
DEFERRED INCOME TAXES.
In the fourth quarter of 2005, we performed our annual test on the remaining goodwill pursuant to the SFAS No. 142 requirements, applying the same methodologies as those used in the prior year. No additional impairment was found to exist. We will continue to perform an impairment test at least annually and on an interim basis should circumstances indicate that an impairment loss may exist. The outcome of such testing may lead to the recognition of an impairment loss.
Taxes on Income. We record income taxes using the asset and liability approach. Deferred income tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, and net operating loss and tax credit carryforwards. Our financial
statements contain fully reserved tax assets which have arisen as a result of
net operating losses, primarily incurred in 2001 and 2002, as well as other
temporary differences between book and tax accounting. Significant managementManagement’s judgment is required in determining our income tax expense in each of the jurisdictions in which we operate. The provision for income tax is calculated based on our estimates for our exposure to current taxes, which is based on assumptions as to our entitlement to various benefits pursuant to applicable tax laws in the jurisdictions in which we operate, together with our assessment of temporary differences resulting from differing treatment of certain items for accounting and tax purposes. We have recognized a deferred tax assets and liabilities and anyasset for net operating losses (less a valuation allowance recorded againstallowance), acknowledging our belief that our future income for tax purposes is expected to be reduced as a result of these net deferred tax assets.operating losses. We have considered future taxable income, future expected tax benefits, prudent and feasible tax planning and transfer pricing strategies and other available evidence in determining the need for a valuation allowance. We evaluate all of these factors to determine
whether itAlthough we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is more likely than notno assurance that some portion or all of the deferred
incomefinal tax assetsoutcome, possibly after audit by the relevant tax authorities, will not be realized. Asdifferent than those which are reflected in our historical income tax provisions and accruals. Such differences could have a result of significantmaterial effect on our income tax provision, net operating
losses incurred in 2001income and 2002, anticipated additional net operating losses
for the first quarter of 2003 and uncertainty as to the extent and timing of
profitability in future periods, we have continued to record a full valuation
allowance, which was approximately $14.8 million as of December 31, 2002. The
establishment and amount of the valuation allowance requires significant
estimates and judgment and can materially affect our results of operations. If
the realization of deferred tax assets in the future is considered more likely
than not, an adjustment to the deferred tax assets would increase net incomecash balances in the period in which such determination wasis made.
Our effective tax rate may vary from period to period based on changes in
estimated taxable income or loss, changes to the valuation allowance, changes to
state or foreign tax laws, future expansion into geographic areas with varying
country, state and local income tax rates, deductibility of certain costs and
expenses by jurisdiction and as a result of acquisitions, divestitures and
reorganizations.
41
CONTINGENCIES.
Contingencies. From time to time, we are defendant or plaintiff in various legal actions, which arise in the normal course of business. We are also a
defendant in an intellectual property infringement action. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysis of each individual action together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. A change in the required reserves would affect our earnings in the period the change is made.
RESTRUCTURING. We established exit plans for each
48
Results of the restructuring
activities which took place in 2001 and 2002. In early 2001, with mounting
evidence of an economic slowdown in the information technology and
telecommunications sectors as well as changing business dynamics, we conducted a
comprehensive review of our strategy, products, organization and infrastructure.
This review culminated in the restructuring of our global operations, including
the reduction of approximately 340 of our 1,110 employees, consolidation of our
field facilities in North America, expansion of our local presence in Europe and
Asia, and various other actions aimed at focusing on our core markets, products
and competencies. We accounted for the 2001 plan in accordance with EITF Issue
No. 94-3 "Liability Recognition for Certain Employee Benefits and Other Costs to
Exit an Activity (including Certain Costs incurred in a Restructuring)". Under
EITF 94-3, an entity recognized a liability for an exit cost on the date that
the entity committed itself to the exit plan. The exit cost included involuntary
employee termination benefits, estimates regarding our ability to sub-lease
vacated facilities, rates to be charged to a sub-tenant and the timing of the
sub-lease arrangement and included an estimate of the timing of the pace and
completion of the outsourcing of manufacturing to Flextronics, the contract
manufacturer. During the fourth quarter of 2002, we reduced the restructuring
accrual by $400 thousand to reflect mainly lower than estimated employee
termination costs. Our remaining cash lease commitments net of sub-lease income
related to restructured facilities are approximately $124 thousand, which is
fully accrued in the accompanying balance sheet.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities", SFAS No. 146
requires that a liability for a cost that is associated with an exit activity be
recognized only when the liability is incurred. It supersedes the guidance in
EITF 94-3. In SFAS No. 146, an entity's commitment to a plan does not, by
itself, create a present obligation to other parties that meets the definition
of a liability and establishes that fair value is the objective for the initial
measurement of the liability. Although SFAS No. 146 became effective for exit or
disposal activities initiated after December 31, 2002, we elected to adopt the
new ruling in respect of our fourth quarter 2002 restructuring plan. With the
acquisition of TCS, we identified an opportunity to increase flexibility and
focus, improve responsiveness and reduce unnecessary overhead. We adopted a plan
to achieve these objectives in December 2002 which involves the phased reduction
of approximately 140 of our initially combined 1,077 staff and consolidation of
certain offices. Some of the involuntary reductions were effected in December
and the liability related to those terminations of $282 thousand was included in
our fourth quarter 2002 results. The remaining reductions in force are planned
to be implemented over the first three quarters of 2003.
In the event that we redefine our strategic direction and/or difficult economic
conditions continue to prevail, we may be required to implement further
restructuring measures. We are not currently able to determine whether or to
what extent such circumstances may continue or worsen.
42
RESULTS OF OPERATIONSOperations
The following table sets forth our selected consolidated income statement dataof operations for NICE for each of the three years ended December 31, 2000, 2001,2003, 2004 and 20022005 expressed as a percentage of total revenues. FiguresTotals may not add up due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
| 2003 |
| 2004 |
| 2005 |
| |||
|
|
|
|
| ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
Products |
|
| 74.9 | % |
| 72.3 | % |
| 66.3 | % |
Services |
|
| 25.1 |
|
| 27.7 |
|
| 33.7 |
|
|
|
|
|
| ||||||
|
|
| 100.0 |
|
| 100.0 |
|
| 100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
Products* |
|
| 38.2 |
|
| 35.3 |
|
| 32.7 |
|
Services* |
|
| 74.9 |
|
| 71.2 |
|
| 65.6 |
|
|
|
|
|
| ||||||
|
|
| 47.4 |
|
| 45.2 |
|
| 43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
| 52.6 |
|
| 54.8 |
|
| 56.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
Research and development, net |
|
| 10.2 |
|
| 9.8 |
|
| 9.9 |
|
Selling and marketing |
|
| 23.8 |
|
| 24.6 |
|
| 23.5 |
|
General and administrative |
|
| 13.3 |
|
| 12.4 |
|
| 12.1 |
|
Restructuring, in-process research and development, legal settlement and other |
|
| 3.1 |
|
| 0.0 |
|
| 0.0 |
|
Amortization of acquired intangibles |
|
| 0.2 |
|
| 0.1 |
|
| 0.4 |
|
Total operating expenses |
|
| 50.6 |
|
| 46.9 |
|
| 45.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
| 2.0 |
|
| 7.9 |
|
| 10.3 |
|
Financial income, net |
|
| 0.9 |
|
| 1.4 |
|
| 1.7 |
|
Other income (expenses), net |
|
| 0.1 |
|
| 0.0 |
|
| 0.0 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
| 3.0 |
|
| 9.3 |
|
| 12.0 |
|
Taxes on income |
|
| 0.5 |
|
| 0.9 |
|
| 0.3 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
| 2.5 |
|
| 8.4 |
|
| 11.7 |
|
|
|
|
|
| ||||||
Net income from discontinued operations |
|
| 0.7 |
|
| 1.3 |
|
| 0.0 |
|
|
|
|
|
| ||||||
Net income |
|
| 3.2 |
|
| 9.7 |
|
| 11.7 |
|
|
|
|
|
| ||||||
49
Comparison of Years Ended December 31, 2002 AND 2001
REVENUES.2004 and 2005
Revenues
Our total revenues rose 28%approximately 23.1% to $162.5$311.1 million in 20022005 from $127.1$252.6 million in 2001.
43
Product revenues rose $22.1 million or 20%2004. Revenues from sales to $134.8the enterprise market were $237.4 million in 20022005, an increase of 22.3% from $112.62004, and revenues from sales to the public safety and security market were $73.7 million in the prior year due mainly to a net $19.9 million (23%)2005, an increase in sales of our audio platform and related applications mainly to
contact center and trading floor markets and an $8.3 million (60%) increase in
digital video platform sales. These increases were partially offset by a $6.1
million (46%) decrease in sales of our COMINT/DF products. We believe that our26.0% from 2004. Our growth in product salesrevenues was due primarily to contact center and financial trading floor markets
principally reflectsthe inclusion of the results of Dictaphone CRS beginning on June 1, 2005, market share gains but also the inclusion of $6.8 million
of revenues following the acquisition of TCS in November 2002. There can be no
assurance that we will continue to experiencethese markets and market share gains or that, given
the continuing weakened global economy, we will continue to report growth in
audio platform and related software application sales. We believe that the
high-end digital video market is still in its nascency and thus volatile;
consequently, looking forward, we do not expect to experience the same degree of
growth in revenues as we did in 2002.
Services revenues rose $13.2 million (92%) to $27.7 million in 2002 from
$14.5 million in the previous year.growth.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| |||||
|
| 2004 |
| 2005 |
| Dollar |
| Percentage |
| ||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues |
| $ | 182.6 |
| $ | 206.4 |
| $ | 23.8 |
|
| 13.0 | % |
Service Revenues |
|
| 70.0 |
|
| 104.7 |
|
| 34.7 |
|
| 49.6 |
|
|
|
|
|
|
|
|
| ||||||
Total Revenues |
| $ | 252.6 |
| $ | 311.1 |
| $ | 58.5 |
|
| 23.2 |
|
The increase reflectsin product revenues was due primarily to higher sales to the enterprise and public safety and security markets.
The increase in service revenues was due to an increasing portion
ofincrease in our installed customer base engaging us for maintenance services,resulting from new product sales, higher installation and training revenues relatedrelating mainly to the increase in contact centerproduct sales to the enterprise market and financial
trading floor sales and $1.5 million in servicesthe first time inclusion of the Dictaphone CRS service revenue following the
acquisition of TCS.beginning on June 1, 2005. Service revenues accounted for 17%represented 33.7% of total revenues, up from
11%as compared to approximately 27.7% in 2001.2004. Although we typically generate lower profit margins on services than on products, our strategy is to continue to grow our global services business, which we believe increases the competitiveness of our product offerings, and, thusas a result, we expect services to represent a growing portion of total revenues in the future.
Revenues in 20022005 in the Americas, which includes the United States, Canada Latinand Central and South America, rose 33%34.3% to $88.4$163.3 million, from $66.3as compared to $121.6 million in 2001.2004. The increase iswas largely attributable to the inclusion of the Dictaphone CRS revenues beginning on June 1, 2005 and higher sales of productspost-contract service and services to
contact center and financial trading floor markets.maintenance revenue. Sales to Europe, Middle East and Africa ("EMEA")(EMEA) rose 29%6.5% to $51.2$99.3 million in 2002 from $39.82005, as compared to $93.2 million in 2001.2004. The increase iswas due mainly to higher sales to the acquisition of TCS in November 2002
($6.6 million)security market and higher services and maintenance revenues primarily related to the more than doubling of digital video sales in this region.enterprise market. Sales to Asia-Pacific ("APAC")(APAC) increased 9%28.3% to $22.8$48.5 million in 2002 from $21.02005, as compared to $37.8 million in 2001.
COST OF REVENUES. 2004 due mainly to higher sales to the enterprise market.
50
Cost of revenues was $84.7 million in 2002 compared with
$73.8 million in 2001.Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2004 |
| 2005 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues |
| $ | 64.4 |
| $ | 67.5 |
| $ | 3.1 |
|
| 4.8 | % |
Cost of Service Revenues |
|
| 49.9 |
|
| 68.7 |
|
| 18.8 |
|
| 37.7 |
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
| $ | 114.3 |
| $ | 136.2 |
| $ | 21.9 |
|
| 19.2 |
|
Cost of product revenues rose 8% to $58.7 million in 2002 from $54.3
million in 2001.increased slightly on a dollar basis while decreasing as a percentage of product revenues. The slight increase in cost in 2002 ison a dollar basis was due mainly to the higher sales volume. Cost of services revenue rose 34% to $26.1 million from $19.4 million in 2001.revenues increased on a dollar basis while decreasing as a percentage of service revenues. The increase in cost ison a dollar basis was due principally to higher labor, travelsubcontractor and material costs associated with the growth in product installations and maintenance contracts and $1.4 million of service costs incurred following the acquisition
of TCS.
GROSS PROFIT. contracts.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
| ||||||||
|
|
|
|
| |||||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2004 |
| 2005 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit on Product Revenues |
| $ | 118.2 |
| $ | 138.8 |
| $ | 20.6 |
|
| 17.4 | % |
as a percentage of product revenues |
|
| 64.7 | % |
| 67.3 | % |
|
|
|
|
|
|
Gross Profit on Service Revenue |
|
| 20.1 |
|
| 36.1 |
|
| 16.0 |
|
| 79.6 |
|
as a percentage of service revenues |
|
| 28.8 | % |
| 34.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit |
| $ | 138.3 |
| $ | 174.9 |
| $ | 36.6 |
|
| 26.5 |
|
as a percentage of total revenues |
|
| 54.8 | % |
| 56.2 | % |
|
|
|
|
|
|
The improvement in gross profit on product revenues represented 56.5% ofwas due primarily to higher sales volume, product revenues in 2002 compared with 51.8% in 2001 due mainly tocost reductions and a higher proportion of sales of our comparatively higher margin audio platform and applicationssoftware in the sales mix and product manufacturing cost efficiencies achieved through both
the outsourcing of manufacturing to the contract manufacturer over the course of
the year and engineering design modifications mainly to our digital video
recording platform. Grossmix. The improvement in gross profit margin on services revenue was 6% in 2002
compared with a loss of 34% in 2001 due primarily to the higher growth rate in
services revenues as compared with service expenses. For the reasons mentioned
above, gross profit was $77.8 million or 47.8% of total revenues in 2002
compared with $53.3 million or 42.0% of revenues in 2001. On a forward-looking
basis, we expect our gross margins to increase gradually as we realize the
benefit of contract manufacturing efficiencies, of leveraging our global service
operationsreflected improved staff utilization and of a growing proportion of software applications in our product
revenue mix.
44
other efficiencies.
51
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2004 |
| 2005 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net |
| $ | 24.9 |
| $ | 30.9 |
| $ | 6.0 |
|
| 24.1 | % |
Selling and marketing |
|
| 61.8 |
|
| 72.8 |
|
| 11.0 |
|
| 17.8 |
|
General and administrative |
|
| 31.3 |
|
| 37.7 |
|
| 6.4 |
|
| 20.4 |
|
Amortization of acquired intangible assets |
|
| 0.3 |
|
| 1.3 |
|
| 1.0 |
|
| 333 |
|
Research and Development, Net. Research and development expense,expenses, before capitalization of software development costs and government grants, declinedincreased to $24.7$33.4 million in 2002 from $26.02005, as compared to $27.5 million in 20012004 and represented 15.2%10.7% and 20.5%10.9% of revenues in 20022005 and 2001,2004, respectively. The decreaseincrease in gross outlays isthese expenses was due mainly to the impact of the approximate 7% annual devaluation of the New Israel
Shekel to the US dollar on R&D labor costs, as approximately 75% of our R&D
staff is basedincrease in Israel, and a lower average number of R&D staff in 2002 versus
2001.
Software development costs capitalized were $4.6 million in 2002 compared
with $5.4 million in 2001. Net research and development expense decreased 7% in
2002 to $17.9 million from $19.2labor costs.
Capitalized software development costs were $0.8 million in 2001.2005, as compared to $1.3 million in 2004. Amortization of capitalized software development costs included in cost of product revenues was $4.3$2.4 million and $2.8$4.1 million in 20022005 and 2001,2004, respectively.
SELLING AND MARKETING EXPENSES.
Selling and marketing expenses in 2002
increased 16% to $40.5 million from $35.0 million in 2001.Marketing Expenses. The increase in selling and marketing expenses was due principallyprimarily to the inclusion of Dictaphone CRS beginning on June 1, 2005 and higher labor costssales commissions resulting mainly from the acquisition of TCS, higher commission expenses and higher discretionary
marketing outlays for trade shows and promotional activities.increase in sales. Selling and marketing expenses represented 24.9%23.4% of total revenues in 20022005, as compared to 24.6% in 2004.
General and Administrative Expenses. The increase in general and administrative expenses in 2005 was due principally to an increase in legal expenses associated with 27.6% in 2001. We expect that we will continue to leverage our global salespending litigation and distribution infrastructure in the future such that selling and marketing
expenses, while increasing on an absolute dollar basis, will decline moderately
as a percentage of total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES.labor costs. General and administrative expenses decreased 12%represented 12.1% of total revenues in 20022005, as compared to $23.8 million from $27.1 million12.4% in 2001. The reduction
in cost in 2002 was due primarily to lower legal costs and general cost
containment efforts only partly offset by higher corporate insurance premiums
and allowances for doubtful accounts.2004.
Financial Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2004 |
| 2005 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income, net |
| $ | 3.6 |
| $ | 5.4 |
| $ | 1.8 |
|
| 50 | % |
Other income (expense) |
|
| 0.1 |
|
| (0.0 | ) |
| (0.1 | ) |
| (100 | ) |
Financial Income, Net. The increase in the allowance for doubtful
accounts in 2002 compared with 2001 is mainly due to specific accounts deemed
uncollectible and an increase in the aging of receivables reflecting weak
general economic conditions worldwide. Onfinancial income, net reflects a forward-looking basis, general and
administrative expenses are expected to increase in absolute terms due mainly to
the inclusion for a full year of the operations of TCShigher average cash balance and higher corporate
insurance premiums.
RESTRUCTURING. In connection with the restructuring plan implemented in
December 2002, we recorded restructuring and other related charges of $282
thousand in accordance with SFAS No. 146. All of the staff whose termination
costs were included in our fourth quarter 2002 financial statements were located
in North America. The plan also included vacating a portion of our Southampton
facility and the closing of our Herndon, Virginia and Bergisch Gladbach, Germany
offices.
45
In the quarter ending December 31, 2002, we reduced the remaining 2001
restructuring plan accrual by $400 thousand. The 2001 restructuring plan charge
of $14.6 million included severance and outplacement costs of $9.6 million,
consolidation of facility costs of $1.9 million, related property write-downs of
$1.9 million and impairment of intangible assets and other of $1.1 million. The
2001 restructuring plan was substantially completed by December 31, 2001 with
the principal exception of employee terminations related to the completion of
the outsourcing of manufacturing of our products. The remaining amounts net of
sub-lease income relating to the consolidation of facilities in Sunnyvale and
Las Vegas of $124 thousand will be paid over the respective lease terms mainly
through 2005.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of
TCS and in accordance with SFAS No. 2 "Accounting for Research and Development
Costs", a portion of the purchase price, $1.3 million, was allocated to
purchased in-process research and development. As part of the process of
analyzing this acquisition, we made a decision to buy three technologies that
had not yet been commercialized rather than develop those technologies
internally. In doing so, we considered our internal research resource allocation
and our progress on comparable technology, if any. At the date of the
acquisition, technological feasibility had not yet been established for the
in-process research and development projects and they had no alternative future
use. Accordingly, the fair value allocated to these technologies, which was
based on an analysis of the discounted excess earnings that the intangible
assets generate over their expected lives, was immediately expensed at
acquisition.
AMORTIZATION OF ACQUIRED INTANGIBLES. Amortization expense was $3.4 million
in 2001. With the adoption of SFAS No. 142 as of January 1, 2002, we ceased to
amortize acquired intangibles of indefinite lives, primarily goodwill.
GOODWILL IMPAIRMENT. During the fourth quarter of 2002 we performed our
annual impairment test of acquired intangible assets as prescribed by SFAS No.
142. Our stock price had declined significantly from January 1, 2002, at which
point our market capitalization, based on our stock price, was below book value.
We determined the fair value of the Company based on relative market multiples
for comparable businesses and a discounted cash flow model. This evaluation
indicated that an impairment loss might exist. We then performed Step 2 under
SFAS No. 142 and compared the carrying amount of goodwill to the implied fair
value of the goodwill and determined that an impairment loss existed.
A non-cash charge totaling $28.3 million was recorded in the fourth quarter
of 2002 to write down the goodwill recorded primarily in the acquisitions of
SCI, CPS and STS to its fair value. We will perform an impairment test at least
annually and on an interim basis should circumstances indicate that an
impairment loss may exist. The outcome of such testing may lead to the
recognition of an impairment loss. As of December 31, 2002, we had $33.7 million
of non-amortizable goodwill and other intangible assets.
FINANCIAL INCOME, NET. Financial income, net decreased 6% to $4.0 million
in 2002 from $4.3 million in 2001. The decrease in 2002 reflects lower
prevailing average market interest rates in 20022005, as compared with 2001 only partly
offset by exchange gains.
46
to 2004.
52
Taxes on Income.In 2002, we recorded $3.5 million in respect
of the settlement of claims by Douglas Chapiewski, the sole shareholder of CPS;
$335 thousand representing the cost of moving our North American headquarters to
a different facility, and $229 thousand to write-off of our long-term investment
in Espro Ltd. In 2001, we recorded a $4.4 million charge following the
settlement of a dispute with SCI relating to certain post-closing adjustments in
connection with the acquisition of certain assets and liabilities by NICE.
TAXES ON INCOME. In 2002,2005, we recorded a provision for income taxes of $350
thousand$0.9 million, as compared with $198 thousandto $2.3 million in 2001.2004. The increase isdecrease was primarily related to operating$4.8 million of net deferred tax assets, recognized for the first time. We expect that our effective corporate tax rate will continue to increase into the high-teens mainly due to an increase in financial income, the reversal of our deferred tax assets, the possible recognition of deferred tax liabilities on tax-exempt income, a geographic change in the jurisdictions in which our profits recorded at certain distribution subsidiaries where net
operating loss carryforwards are not available to offset operating profitsearned and changesas a result of any future possible acquisitions of companies which operate in US state tax laws.
NET LOSS.a high-tax environment.
Net lossIncome from Continuing Operations. Net income from continuing operations was $34.0$36.6 million in 20022005, as compared with a net loss of
$46.8to $21.3 million in 2001.2004. The decreaseincrease in 20022005 resulted primarily from the increase in revenues and gross margin.
YEARS ENDED DECEMBER
Net Income from Discontinued Operations. Net income from the discontinued operations of our COMINT/DF military-related business was $0 in 2005, as compared to approximately $3.2 million (including gain on disposition) in 2004.
Comparison of Years Ended December 31, 2001, AND 2000
REVENUES.2003 and 2004
Revenues
Our total revenues decreasedincreased approximately 13% to $127.1$252.6 million in 20012004 from $153.2$224.3 million in 2000. The 17% decrease2003. Revenues from sales to the enterprise market were $194.1 million in 2004, an increase of 13% from the prior year, and revenues from sales to the public safety and security market were $58.5 million, an increase of 11% from the prior year. Our growth in revenues was due principally to market share gains in 2001these markets and market growth.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2003 |
| 2004 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues |
| $ | 168.1 |
| $ | 182.6 |
| $ | 14.5 |
|
| 8.6 | % |
Service Revenues |
|
| 56.2 |
|
| 70.0 |
|
| 13.8 |
|
| 24.6 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
| $ | 224.3 |
| $ | 252.6 |
| $ | 28.3 |
|
| 12.6 |
|
The increase in product revenues was due primarily to higher sales to both the enterprise market and public safety markets.
The increase in services revenues was generated partly by the increase in our installed customer base resulting from new product sales, and higher installation and training revenues related mainly to the increase in product sales to the enterprise market. Service revenues for 2004 represented 28% of total revenues compared with approximately 25% in 2003.
53
Revenues in 2004 in the Americas, which includes the United States, Canada and Central and South America, rose 3% to $121.6 million from $118.6 million in 2003. The increase was largely attributable to higher post-contract support. Sales to EMEA rose 26% to $93.2 million in 2004 from $73.8 million in 2003. The increase was due mainly to higher sales to the enterprise market and post-contract service and maintenance. Sales to APAC increased 19% to $37.8 million in 2004 from $31.8 million in 2003 due mainly to higher sales to the enterprise market in the region.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2003 |
| 2004 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues |
| $ | 64.2 |
| $ | 64.4 |
| $ | 0.2 |
|
| 0.3 | % |
Cost of Service Revenues |
|
| 42.1 |
|
| 49.9 |
|
| 7.8 |
|
| 18.5 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
| $ | 106.3 |
| $ | 114.3 |
| $ | 8.0 |
|
| 7.5 |
|
The slight increase in cost of product revenues was due mainly to the higher sales volume. The increase in cost of services revenue was due principally to higher labor, subcontractor and material costs associated with the growth in product installations and maintenance contracts.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2003 |
| 2004 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit on Product Revenues |
| $ | 103.9 |
| $ | 118.2 |
| $ | 14.3 |
|
| 13.8 | % |
as a percentage of product revenues |
|
| 61.8 | % |
| 64.7 | % |
|
|
|
|
|
|
Gross Profit on Service Revenues |
|
| 14.1 |
|
| 20.1 |
|
| 6.0 |
|
| 42.6 |
|
as a percentage of service revenues |
|
| 25.1 | % |
| 28.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit |
| $ | 117.9 |
| $ | 138.3 |
| $ | 20.4 |
|
| 17.3 |
|
as a percentage of total revenues |
|
| 52.6 | % |
| 54.8 | % |
|
|
|
|
|
|
The improvement in gross profit on product revenues was due primarily to the overall slowdown in technology spending combined with the impact, particularly
in North America,higher sales volume, product cost reductions and a higher proportion of internal operational changes implemented in early 2001.
Sales in North America declined 26% in 2001 (after increasing 40% in 2000).
Sales in Europe (including Israel) decreased 14% and salessoftware in the rest of the
world rose 2%product mix. The improvement in 2001. On a product line basis, sales of our audio recording
platform and related applications for contact centers and financial trading
floors decreased 22% to $99.8 million in 2001 and represented 79% of total
revenues; sales of digital video products declined 11% to $14.1 million and
represented 11% of total revenues, and revenues from sales of COMINT systems
increased 52% to $13.2 million and accounted for 10% of total revenues.
COST OF REVENUES. Cost of revenues was $73.8 million in 2001 compared with
$73.6 million in 2000. During 2000, we more than doubled the number of customer
support staff who provide installation and technical support to our customers
from about 100 at the start of the year to approximately 210 at the end of
December 2000. Of the total, 37 support employees joined us as part of the
December 2000 acquisition of the direct sales and customer support channel and
service and maintenance agreements of our then largest distributor in North
America, Stevens Communications, Inc. As a result, the increase in cost of
revenues in 2001 was due primarily to the impact on an annual basis of the
significant increase in the number of customer support employees and related
costs without a commensurate increase in customer support revenue, which
resulted in a substantial negative gross profit margin on customer support. This
increase in customer support cost was only partly offset by lower sales volumeservices revenue reflects improved staff utilization and manufacturing labor costs.
47
efficiencies.
54
Operating Expenses
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| Years Ended December 31, |
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| ||||||
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| |||||||
|
|
|
| Dollar |
| Percentage Change |
| ||||||
2003 |
| 2004 | |||||||||||
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| ||||||||
|
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|
|
|
|
|
|
Research and development, net |
| $ | 22.8 |
| $ | 24.9 |
| $ | 2.1 |
|
| 9.2 | % |
Selling and marketing |
|
| 53.4 |
|
| 61.8 |
|
| 8.4 |
|
| 15.7 |
|
General and administrative |
|
| 29.8 |
|
| 31.3 |
|
| 1.5 |
|
| 5.0 |
|
Amortization of acquired intangibles |
|
| 0.4 |
|
| 0.3 |
|
| (0.1 | ) |
| (25 | ) |
Research and 52.0% in 2001 and 2000, respectively.
RESEARCH AND DEVELOPMENT, NET.Development, Net. Research and development expense, before capitalization of software development costs and grants, roseincreased to $26.0$27.5 million in 20012004 from $25.4$26.4 million in 20002003 and represented 20.5%10.9% and 16.6%11.8% of revenues in 20012004 and 2000,2003, respectively. The level of spending reflects our efforts to
continue to improve our long-term competitive position. In 2000, we increased
the number of R&D staff by 24% in order to support the development of new or
enhanced products for each of our product lines. In 2001, these efforts included
major functionality improvements to our voice recording platforms and quality
monitoring and contact center performance applications as well as the market
introduction of the NICEVISION PRO high-end video recording platform and the
NICETRACK telecommunications monitoring solution. The increase in gross outlays was due mainly to the increase of research and development expense in 2001 resulted from the overall average higher level
of R&D staff.
Softwarelabor costs.
Capitalized software development costs capitalized were $5.4$1.3 million in 20012004, as compared with $4.7to $2.3 million in 2000. Net research and development expense decreased 2% in
2001 to $19.2 million from $19.5 million in 2000.2003. Amortization of capitalized software development costs, included in cost of product revenues, was $2.8$4.1 million and $1.6$5.7 million in 20012004 and 2000,2003, respectively.
SELLING AND MARKETING EXPENSES.
Selling and marketing expenses in 2001 were
$35.0 million compared with $35.4 million in 2000.Marketing Expenses. The decreaseincrease in selling and marketing expenses was due principallyprimarily to reductionsan increase in staff, lower
revenue-related expensesour corporate and lower discretionary marketing outlays only partly
offset by expansion of ourregional sales and marketing infrastructureefforts and higher sales commissions resulting mainly from the increase in Europesales. Selling and Asia.
GENERAL AND ADMINISTRATIVE EXPENSES.marketing expenses represented 24.8% of total revenues in 2004 compared with 23.9% in 2003.
General and Administrative Expenses. The increase in general and administrative expenses in 2004 was due principally to increases in labor costs and depreciation expenses. General and administrative expenses represented 12.4% of total revenues in 2004 compared with 13.3% in 2003.
Other Special Charges
|
|
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|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
| |||||
|
|
|
|
| ||||||
|
|
|
| Percentage |
| |||||
2003 |
| 2004 | ||||||||
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
| $ | 1.9 |
| $ | 0.0 |
|
| (100 | )% |
Legal Settlement |
|
| 5.2 |
|
| 0.0 |
|
| (100 | ) |
|
|
|
|
|
|
| ||||
Total other special charges |
| $ | 7.1 |
| $ | 0.0 |
|
| (100 | )% |
55
Restructuring. In December 2002, we adopted a restructuring plan, which involved the phased reduction of approximately 75 of our 1,077 staff members and consolidation of certain offices. Some of the involuntary reductions were $27.1effected in December 2002 and, in accordance with SFAS No. 146, a liability of $282,000 was recorded as of December 31, 2002 in connection with those terminations. This liability was utilized as of June 30, 2003. The remaining reductions in personnel and facility closures were implemented during 2003. We included in our results for 2003 costs of approximately $1.9 million, in 2001 and $28.3 million in 2000. The decrease in 2001 was
duewhich related primarily to involuntary terminations and facility closures.
Legal Settlement. In June 2000, Dictaphone Corporation, one of our competitors, filed a patent infringement claim relating to certain technology embedded in some of our products. The claim was for damages for past infringement and enjoinment of any continued infringement of Dictaphone patents. In the reductionfourth quarter of 2003, we reached a settlement with Dictaphone in administrative staffwhich both parties agreed to dismiss all claims and cost containment
efforts.
RESTRUCTURING AND OTHER SPECIAL CHARGES.
RESTRUCTURING. As a resultcounterclaims connected with the patent infringement claim. The terms of the declinesettlement required us to pay Dictaphone $10.0 million, of which approximately $4.8 million was paid by our insurance carrier in general economic and business
conditions in late 2000December 2003 and the changing competitive environment, we implemented
a restructuring program in 2001 to better align our cost structure with the
current business environment and to focus our resources on the highest potential
growth areas of our business. As a result, we incurred a $14.6 million charge
for restructuring costs in the first quarter of 2001.
Our restructuring program included a 30% reduction in force across all
business functions. Approximately 60% of such employees were based in Israel and
the remainder were based in primarily in North America. The workforce reduction
resulted in a charge of $9.6 million for termination benefits. We also
consolidated our North American operations into two main facilities and
eliminated excess field office space. The restructuring program included a
charge of $1.9 million for lease terminations and estimated losses on subleases
and $1.9 million for nonrecoverable investments in leasehold improvements and
facility equipment. The restructuring program included exiting a product line
acquired as part of the Dees transaction.balance was paid by us. As a result, a charge of $1.1approximately $5.2 million relatingwas recorded in the last quarter of 2003. We and Dictaphone also agreed to grant each other a worldwide, royalty-free, perpetual license to certain of their patents including the impairment of the associated goodwill was taken.
48
The restructuring program was substantially completed by December 31, 2001disputed patents. We and Dictaphone further agreed to enter into enforcement proceedings with the principal exception of employee terminations relatedrespect to the completion
of the outsourcing of manufacturingboth companies’ patent portfolios and to share any proceeds from these actions. As a result of our products. The cash impactacquisition of Dictaphone CRS in June 2005, the total chargeagreement with respect to patents was $11.0 million, of which $9.0 million was paid in 2001terminated since we acquired the relevant patents.
Financial and the
remainder was substantially paid by mid-2002. Amounts relating to the
consolidation of facilities will be paid over the respective lease terms mainly
through 2003.
OTHER SPECIAL CHARGES. In 2000, the Company recorded a charge of $6.8
million related to in-process research and development of software acquired in
the CenterPoint Solutions, Inc. transaction for which technological feasibility
had not yet been established and for which no alternative future use existed.
AMORTIZATION OF ACQUIRED INTANGIBLES. Amortization expense was $3.4 million
and $0.9 million in 2001 and 2000, respectively.Other Income
|
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|
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|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
|
|
| Dollar |
| Percentage |
| ||||||
2003 |
| 2004 | |||||||||||
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income |
| $ | 2.0 |
| $ | 3.6 |
| $ | 1.6 |
|
| 80.0 | % |
Other income (expense) |
|
| 0.3 |
|
| 0.1 |
|
| (0.2 | ) |
| (66.7 | ) |
Financial Income, Net. The increase in 2001 is due
mainly to the acquisition of certain assets of SCI.
FINANCIAL INCOME, NET. Financialfinancial income, net decreased 31% to $4.3 million
in 2001 from $6.2 million in 2000. The decrease in 2001 reflects lowera higher average cash balancesbalance and lowerhigher prevailing average interest rates in 20012004 compared with 2000.
OTHER INCOME (EXPENSE), NET.2003.
Other expense,Income, Net. Other income, net was $4.8$0.1 million in 20012004 compared with other income, net of $53 thousand$0.3 million in 2000.2003. In 2001,2003, we recorded a
$4.4$0.3 million charge followingof income reflecting amounts received from our insurance carrier in respect of the settlement of a dispute with SCI relating to
certain post-closing adjustmentslitigation in connection with the April 2000 acquisition of certain
assets and liabilities by NICE.
NET LOSS. Net loss was $46.8Centerpoint Solutions Inc. In 2004, other income represented a capital gain recognized upon the disposal of fixed assets.
Taxes on Income. In 2004, we recorded a provision for income taxes of $2.3 million compared with $1.2 million in 20012003. The increase was primarily related to operating profits recorded at certain distribution subsidiaries.
56
Net Income (Loss) from Continuing Operations. Net income from continuing operations was $21.3 million in 2004 compared with $5.3$5.6 million in 2000.2003. The decreaseincrease in 20012004 resulted primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Weincrease in revenues and gross margin.
Net Income from Discontinued Operations. As discussed above under “Recent Acquisitions and Dispositions,” on March 31, 2004 we sold the assets and liabilities of our COMINT/DF military-related business to ELTA for $4.0 million in cash. Net income from this discontinued operation was approximately $3.2 million (including gain on disposition) and $1.5 million for 2004 and 2003, respectively.
Liquidity and Capital Resources
In recent years, we have historically financed our operations through cash generated from operations and sales of equity securities. Weoperations. Generally, we invest our excess cash in instruments that are highly liquid, investment grade securities. At December 31, 2002,2005, we had approximately $ 68.6$411.6 million of cash and cash equivalents and shortshort-term and long-term investments, as compared with $89.0to $165.9 million at December 31, 20012004 and $98.0$107.3 million at December 31, 2000.2003. The decreaseincrease in 20022005 is primarily attributable to approximately $201.7 million of proceeds we received from a public offering of 4,600,000 ADSs, representing 4,600,000 of our ordinary shares, which we completed in December 2005. In addition, the increase in 2005 was due to an increase in our net income and the paymentproceeds from the issuance of $29.9shares upon the exercise of stock options and under our employee share purchase plan, which was partially offset by cash payments made in respect of the purchase of Dictaphone CRS and the Hannamax Hi-Tech Pty. Ltd. businesses.
Cash provided by operating activities of continuing operations was $65.7 million and 44.3 million in the acquisition of TCS partly offset by net operating cash
flow.
For 2002, cash provided by operations was $20.1 million2005 and 2004, respectively, compared with $2.3$36.9 million in 2001.2003. The improvement in 2002 compared with 20012005 was primarily attributable to the narrowedhigher net lossoperating income and continued improvementan increase in working
capital. We place particular focus on managing our working capital, particularly
the level of accounts receivable days sales outstanding and inventories. Days
sales outstanding (DSO) in accounts receivable for 2002, excluding the effect of
the acquisition of TCS, was 94 days compared with 99 days at the end of 2001.
The improvement is primarily attributable to the implementation of process
improvements and our credit policy. Including the impact of the acquisition of
the assets of TCS, our DSO was 118 days. We expect to see our DSO return to
levels below 100 days during the first half of 2003. In connection with the TCS
acquisition, we recorded a current liability of $2.8 million and a long-term
liability of $13.5 million reflecting obligations under a long-term contract
assumed by NICE. We have entered into negotiations to amend this contract but
there can be no assurance that we will be successful in these negotiations.
49
For 2001, cash provided by operations was $2.3 million, compared with cash
used in operations of $2.1 million in 2000 The improvement in 2001 compared with
2000 was primarily attributable to an overall improvement in working capital
associated with substantial reductions in accounts receivable and inventories
largely offset by the $46.8 million loss incurred in the year. Days sales
outstanding (DSO) in accounts receivable was 99 days at the end of 2001 compared
with 113 days at December 31, 2000.liabilities.
Net cash used in investing activities from continuing operations was $28.3$64.3 million and $72.3 million in 2005 and 2004, respectively, compared with net
cash provided by investing activities of $2.5$39.8 million in 2001. The decrease in
2002 is due to2003. In June 2005, we paid $39.7 million for Dictaphone CRS (including $1.2 million of acquisition-related costs). In September 2005, we paid $1.8 million for the acquisition of TCS.Hannamax Hi-Tech Pty. Ltd. business. Capital expenditures were $5.4$6.1 million in 2002 and $7.62005, $6.7 million in 2001.2004 and $5.5 million in 2003. Capital expenditures in 20022005 and 2004 included investment in additional modules for our global ERP system including the implementation of
the order management and financial system modules at TCS' Southampton facility
following the acquisition andback-office IT systems, equipment for research and development and demonstration purposes.testing purposes, and general computer equipment. As of December 31, 2002,2005, we havehad no material commitmentcommitments for capital expenditures.
Net cash provided by investing activities was $2.5 million in 2001 and net
cash used in investing activities was $18.1 million in 2000. The increase in
2001 reflects lower capital expenditures and lower outlays for acquisitions.
Capital expenditures were $7.6 million and $14.2 million in 2001 and 2000,
respectively. 2001 capital expenditures related primarily to investment in a
global ERP system and equipment for research and development purposes.
Net cash provided by financing activities (mainlywas $226.9 million, $19.9 million and $12.1 million in 2005, 2004 and 2003, respectively, of which $201.7 million represents the net proceeds of our public offering of ADSs in December 2005 and the balance represents the net proceeds from the issuance of shares upon the exercise of stock options) was $2.1 million, $1.9
millionoptions and $15.0 millionunder our employee share purchase plan. As of December 31, 2005, we had authorized credit lines from banks in 2002, 2001 and 2000, respectively, primarily as a
resultthe amount of stock options exercised. We have available for use short-term
revolving lines of credit at a number of commercial banks totaling up to $25$353 million. As of December 2002,31, 2005, we also have availableno outstanding borrowings under these credit lines; however, $6.3 million of the $353 million were utilized for use committedbank guarantees. Any borrowing under these credit lines will be denominated in dollars and will bear interest at the rate of $22up to LIBOR + 0.7% per year. Any borrowing under two of these credit lines, having an aggregate borrowing limit of $328 million, would be secured by oneour marketable securities. One of our commercial bond portfolios. There are
no financialcredit lines contains a negative pledge covenant and one contains covenants associated with these credit lines. As of December 31,
2002, we had less than $0.1 million outstanding on our lines of credit. As of
May 1, 2003, no amounts were drawn against our short-term lines of credit. The
availability under the lines of credit has been reduced, however, by $2.2
million in outstanding guarantees and letters of credit. Additionally, we have
one advance payment guarantee in therequiring us to maintain a minimum amount of $1.6 million which stipulates
that the Company will have at least $20 million of cash and long term
investments and shareholders' equity of $100 million.shareholders’ equity.
57
We believe that based on our current operating forecast, the combination of existing working capital, expected cash flows from operations and available credit lines will be sufficient to finance our ongoing operations for the next twelve months. Depending upon our future growth,This belief takes into consideration the successsteps we have taken to limit certain customer-related risks through insuring a significant portion of our accounts receivable and achieving ISO 9000-2001 certification to help ensure the quality of our products and services, which in turn lowers our exposure to certain commercial risks.
Research and Development
For information on our research and development policies, please see Item 4, “Information on the Company” in this annual report.
Trend Information
Our development efforts for our recording platforms are aimed at addressing several trends we see developing in the industry. The trend towards the proliferation of voice over IP-based networks is leading to a greater requirement for VoIP recording capabilities in financial trading, contact centers, public safety environments and telecommunications monitoring. The continued trend towards replacing analog video recording with digital video recording is leading to the need for network applications in the video recording area.
We also see the continuation of a trend towards requirements for multimedia recording capabilities, in contact centers (voice, fax, email, chat screen), public safety (voice, radio, video, data) and telecommunications monitoring (voice, fax, internet) markets. We are beginning to see this same trend developing in the financial trading sector, and we expect some Homeland Security initiatives in areas such as border control, critical infrastructure security and first responder communications to require multimedia capture platforms as well.
We also see the migration to VoIP network as a driver for additional recording system for centralized branch recording and manage services.
Our software applications enable our customers to capture, store, retrieve and analyze unstructured data (multimedia interactions) and combine them with data from other systems to create actionable knowledge that can be distributed via reports and alerts to all relevant parties to improve performance.
58
There is growing demand from our customers for software applications that will leverage the wealth of unstructured data captured by the recording platform to improve overall performance. In turn, as these enhanced software applications are being added, customers are considering our systems “mission critical.” We see an opportunity for applications that analyze the content of unstructured interactions in contact centers for quality monitoring and contact center management as well as for enterprise-wide process improvement and business initiativesperformance management. We see a trend towards more software applications in the financial trading environment for compliance monitoring and acquisition opportunities, we will consider from timedispute management to timeimprove business performance. We see similar trends happening in digital video recording. We expect video content analysis applications to become increasingly important to building, campus, city center, and infrastructure perimeter security, loss prevention in casinos, retail and warehousing, as well as various financing alternativeshomeland security applications to enable proactive security management.
For more information on trends in our industry, please see Item 4, “Information on the Company–Business Overview–Industry Background and may seekTrends.”
For more information on uncertainties, demands, commitments or events that are reasonably likely to raise additional capital to
finance our strategic efforts through debt or equity financing, the sale of
non-strategic assets or to enter into strategic arrangements.
50
Contractual Obligations
Set forth below are our contractual obligations and other commercial commitments over the medium term as of December 31, 2002($ in thousands)2005 (in thousands of U.S. dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments Due by Period |
| ||||||||
|
|
| |||||||||
Contractual Obligations |
| Total |
| Less than |
| 1- 3 years |
| 3-5 |
| More |
|
|
|
|
|
|
| ||||||
Long-Term Debt |
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
| 11,584 |
| 5,636 |
| 5,948 |
|
|
|
|
|
Unconditional Purchase Obligations |
| 4,108 |
| 2,225 |
| 1,646 |
| 237 |
|
|
|
Other Long-Term Obligations |
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations |
| 15,692 |
| 7,861 |
| 7,594 |
| 237 |
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments |
| Total | Amount of Commitment Expiration Per Period |
| |||||||
| Less than |
| 1- 3 |
| 3-5 |
| More than | ||||
|
|
|
|
|
| ||||||
Lines of Credit |
|
|
|
|
|
|
|
|
|
|
|
Standby Letters of Credit |
|
|
|
|
|
|
|
|
|
|
|
Guarantees – continuing operations |
| 2,844 |
| 1,566 |
| 241 |
| 15 |
| 1,022 |
|
Guarantees – discontinued operation |
| 3,430 |
| 3,430 |
|
|
|
|
|
|
|
Standby Repurchase Obligations |
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments |
| 22 |
| 22 |
|
|
|
|
|
|
|
Total Commercial Commitments |
| 6,296 |
| 5,018 |
| 241 |
| 15 |
| 1,022 |
|
Qualitative and Quantitative Disclosure About Market Risk
For information on the market risks relating to our operations, please see Item 11, “Quantitative and Qualitative Disclosures about Market Risk” in this annual report.
Recently Issued or Adopted Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment”. SFAS No. 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in APB No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. We will be required to apply SFAS No. 123(R) as of the first annual reporting period that begins after June 15, 2005. As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB No. 25’s intrinsic value method.
60
Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our result primarily from weak economic
conditionsof operations, although it will have no impact on our overall financial position. We plan to adopt SFAS No. 123(R) using the “modified prospective” method. The “modified prospective” method requires compensation cost to be recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The impact of adoption of SFAS No. 123(R) on future periods cannot be predicted at this time because it will depend on levels of share-based payments granted in the marketsfuture. However, had we adopted SFAS No. 123(R) in which we sell our productsprior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and changesearnings per share in interest
rates and exchange rates. To manage the volatility relatedNote 2(t) to the latter
exposure, we may enter into various derivative transactions. Our objective is to
reduce, where it is deemed appropriate to do so, fluctuations in earnings and
cash flows associated with changes in currency exchange rates. It is our policy
and practice to use derivative financial instruments only to manage exposures.
We do not use financial instruments for trading purposes and are not a party to
any leveraged derivative.
FOREIGN CURRENCY RISK. We conduct our business primarily in U.S. dollars
but also in the currencies of the United Kingdom, Canada, the European Union and
Israel. Thus, we are exposed to foreign exchange movements, primarily in UK,
European and Israel currencies. We monitor foreign currency exposure and, from
time to time, may enter into various contracts to preserve the value of sales
transactions and commitments.
INTEREST RATE RISK. We invest in investment-grade U.S. corporate bonds and
dollar deposits with FDIC-insured U.S. banks. Since these investments carry
fixed interest rates and since our policy and practice is to hold these
investments to maturity, interest income over the holding period is not
sensitive to changes in interest rates. As ofstatements.
In December 31, 2002, we had no other
exposure to changes in interest rates and had no interest rate derivative
financial instruments outstanding.
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2002,2004, the FASB issued SFAS No. 146, "Accounting153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, “Accounting for Costs
Associated with Exit or Disposal Activities"Nonmonetary Transactions” (“APB No. 29”), which addresses significant issues
regardingis based on the recognition, measurement, and reportingprinciple that exchanges of costs associated with
exit and disposal activities, including restructuring activities.nonmonetary assets should be measured based on the fair value of the assets exchanged. APB No. 29 included certain exceptions to that principle. SFAS No. 146
requires153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that costs associated with exit or disposal activities be recognized
when theydo not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are incurred rather than atexpected to change significantly as a result of the date of a commitment to an exit or
disposal plan.exchange. SFAS No. 146153 is effective for all exit or disposal activities
initiatednonmonetary assets exchanges occurring in fiscal periods beginning after December 31, 2002. The Company elected earlyJune 15, 2005. We do not expect that the adoption of SFAS No. 146.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate globally in a dynamic and changing environment that involves
numerous risks and uncertainties. The following section lists some, but not all,
of those risks and uncertainties that could cause actual results and outcomes to
differ materially from those contained in153 will have any forward-looking statement made by
or on behalf of the Company.
THE OVERALL ECONOMIC ENVIRONMENT CONTINUES TO BE WEAK. We are subject to
the effects of general global economic and market conditions. Our operating
results have been materially adversely affected as a result of recent
unfavorable economic conditions and reduced information technology spending,
particularly in the product segments in which we compete. During 2002, there was
an increase in demand for our type of products as customers allocated resources
to enhance their recording and analysis capabilities for compliance and risk
management and for security. However, customer purchase decisions may be
significantly affected by a variety of factors including trends in spending for
information technology, enterprise software, market competition, and the
viability or announcement of alternative technologies. If economic conditions
continue to be weak, demand for our products could decrease resulting in lower
revenues, profits and cash flows.
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OUR BUSINESS STRATEGY CONTINUES TO EVOLVE. Historically we have supplied
the hardware and some software for implementing multimedia recording solutions.
Our shift to providing professional support services and now towards an
enterprise software business model has required and will continue to require
substantial change, potentially resulting in some disruption to our business.
These changes may include changes in management and technical personnel;
expanded or differing competition resulting from entering the enterprise
software market; increased need to expand our distribution network to include
system integrators which could impact revenues and gross margins, and, as our
applications are sold either to our installed base or to new customers together
with our recording platforms, the rate of adoption of our software applications
by the market.
WE MAY EXPERIENCE DIFFICULTY MANAGING CHANGES IN OUR BUSINESS. The changes
in our business may place a significant strain on our operational and financial
resources. We may experience substantial disruption from changes and could incur
significant expenses and write-offs. If we do not carefully manage expense and
inventory levels consistent with product demand and do not carefully manage
accounts receivable to limit credit risk, this could materially adversely affect
our results of operations.
OUR SERVICE REVENUES ARE DEPENDENT ON OUR INSTALLED BASE OF CUSTOMERS. We
derive a significant portion of our revenues from services, which include
maintenance, project management, support and training. As a result, if we lose a
major customer or if a support contract is delayed or cancelled, our revenues
would be adversely affected. In addition, customers who have accounted for
significant services revenues in the past may not generate revenues in future
periods. Our failure to obtain new customers or additional orders from existing
customers could also materially affect our results of operations.
RISKS ASSOCIATED WITH OUR DISTRIBUTION CHANNELS MAY MATERIALLY ADVERSELY
AFFECT OUR FINANCIAL Results. We have agreements in place with many
distributors, dealers and resellers to market and sell our products and services
in addition to our direct sales force. We derive a significant percentage of our
revenues from one or more of our distributor channels. Our financial results
could be materially adversely affected if our contracts with channel partners
were terminated, if our relationship with channel partners were to deteriorate
or if the financial condition of our channel partners were to weaken. In
addition, as our market opportunities change, we may have increased reliance on
particular channel partners, which may negatively impact gross margins. There
can be no assurance that we will be successful in maintaining or expanding these
channels. If we are not successful, we may lose sales opportunities, customers
and market share. In addition, there can be no assurance that our channel
partners will not develop or market products or services in competition with us
in the future.
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OUR UNEVEN SALES PATTERNS COULD SIGNIFICANTLY IMPACT OUR QUARTERLY REVENUES
AND EARNINGS. The sales cycle for our solutions is variable, typically ranging
between a few weeks to several months from initial contact with the potential
client to the signing of a contract. Frequently, sales orders accumulate towards
the latter part of a given quarter. Looking forward, given the lead-time
required by our contract manufacturer, if a large portion of sales orders are
received late in the quarter, we may not be able to deliver product within the
quarter and thus such sales will be deferred to a future quarter. There can be
no assurance that such deferrals will result in sales in the near term, or at
all. Thus, delays in executing client orders may affect our revenue and cause
our operating results to vary widely. Additionally, as a high percentage of our
expenses, particularly employee compensation, is relatively fixed, a variation
in the level of sales, especially at or near the end of any quarter, may have a
material adverse impact on our quarterly operating results.
COMPETITIVE PRICING AND DIFFICULTY MANAGING PRODUCT COSTS COULD MATERIALLY
ADVERSELY AFFECT OUR REVENUES AND EARNINGS. The market for our products and
related services, in general, is highly competitive. Additionally, some of our
principal competitors such as Witness Inc., Verint, Inc., and ASC may have
significantly greater resources and larger customer bases than do we. We have
seen evidence of deep price reductions by our competitors and expect to continue
to see such behavior in the future, which, if we are required to match such
discounting, will adversely affect our gross margins and results of operations.
To date, we have been able to manage our product design and component costs.
However, there can be no assurance that we will be able to continue to achieve
reductions in component and product design costs. Further, the relative and
varying rates of increases or decreases in product price and cost could have a
material adverse impact on our earnings.
OUR GROSS MARGINS ARE HIGHLY DEPENDENT UPON OUR PRODUCT MIX. It is
difficult to predict the exact mix of products for any period between hardware,
software and services as well as within the product category between audio
platforms and related applications, digital video and COMINT.
IF OUR SUPPLIERS ARE NOT ABLE TO MEET OUR REQUIREMENTS, WE COULD HAVE
DECREASED REVENUES AND EARNINGS:
o We migrated the manufacturing of all of our key products to a contract
manufacturer. The TCS product line is also manufactured by a third
party. We may experience delivery delays due the inability of the
outsourcers to consistently meet our quality or delivery requirements.
If these suppliers or any other supplier were to cancel contracts or
commitments with us or fail to meet the quality or delivery
requirements needed to satisfy customer orders for our products, we
could lose time-sensitive customer orders and have significantly
decreased quarterly revenues and earnings, which would have a material
adverse effect on our business,financial position or results of operationsoperations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income for the period of the change, the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retroactive application to prior periods’ financial condition.
o Should we have on-going performance issues with our contract
manufacturers, the process to move from one contractor to another is a
lengthy and costly process that could affect our ability to execute
customer shipment requirements and /or might negatively affect revenue
and/or costs.
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We depend on certain critical components in the production of our products and
parts. Some of these components are obtained only from a single supplier and
only in limited quantities. In addition, some of our major suppliers use
proprietary technology and software code that could require significant redesign
of our products in the casestatements of a voluntary change in vendor. Further, if suppliers
discontinue their products, or modify them in manners incompatible with our
current use, or use manufacturing processes and tools that could not be easily
migrated to other vendors, we could have significant delays in product
availability, which would have a significant adverse impact on our results of
operations and financial condition.
UNDETECTED PROBLEMS IN OUR PRODUCTS COULD DIRECTLY IMPAIR OUR FINANCIAL
RESULTS. If flaws in design, production, assembly or testing of our products (by
us or our suppliers) were to occur, we could experience a rate of failure in our
products that would result in substantial repair, replacement or service costs
and potential liability and damage to our reputation. There can be no assurance
that our efforts to monitor, develop, modify and implement appropriate test and
manufactruing processesaccounting principles unless it is impracticable. SFAS 154 is effective for our products will be sufficicent to permit us to
avoid a rate of failure in our products that results in substantial delays in
shipment, significant repair or replacement costs or potential damage to our
reputation, any of which could have a material adverse effect on our business,
results of operations and financial condition.
OUR GROWTH IS DEPENDENT UPON RECRUITING AND RETAINING KEY PERSONNEL. If our
growth continues, we will be required to hire and integrate new employees. There
can be no assurance that we will be able to successfully recruit and integrate
new employees. Competition for highly skilled employees, including sales,
technical and management personnel, may again become high in the technology
industry. We may experience personnel changes as a result of our move from
multimedia recording equipment towards business performance solutions. Our
failure to attract talented employees or retain the services of key personnel,
could have a material adverse effect on our results of operations and financial
position.
WE MAY EXPERIENCE DIFFICULTY MANAGING OPERATIONAL EXPANSION. We have
recently established a sales infrastructure in Hong Kong by relocating a portion
of our Israel-based sales operations and by recruiting new managers and sales
persons in order to bring about a growth in revenue in the Asia Pacific market.
We may establish additional operations within the region where growth
opportunities are projected to warrant the investment. However, we cannot assure
you that our revenues will increase as a result of this expansion or that we
will be able to recover the expenses we incurred in effecting the expansion. Our
failure to effectively manage our expansion of our sales, marketing, service and
support organizations could have a negative impact on our business. To
accommodate our global expansion, we are continuously implementing new or
expanded business systems, procedures and controls. There can be no assurance
that the implementation of such systems, procedures, controls and other internal
systems can be completed successfully.
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CHANGES IN FOREIGN CONDITIONS COULD MATERIALLY ADVERSELY AFFECT OUR
FINANCIAL RESULTS. Approximately half of our revenues are derived from sales
outside the United States. Accordingly, our future results could be materially
adversely affected by a variety of factors including changes in exchange rates,
general economic conditions, regulatory requirements, tax structures or changes
in tax laws, and longer payment cycles in the countries in our geographic areas
of operations.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE
RISKS ASSOCIATED WITH ACQUISITIONS AND INVESTMENTS. As part of our growth
strategy, we have made a number of acquisitions and have made minority
investments in complementary businesses, products or technologies. We frequently
evaluate the tactical or strategic opportunity available related to
complementary businesses, products or technologies. The process of integrating
an acquired company's business into our operations and/or of investing in new
technologies, may result in unforeseen operating difficulties and large
expenditures and may absorb significant management attention that would
otherwise be available for the ongoing development of our business. Other risks
commonly encountered with acquisitions include the effect of the acquisition on
our financial and strategic position and reputation; the failure of the acquired
business to further our strategies, the inability to successfully integrate or
commercialize acquired technologies or otherwise realize anticipated synergies
or economies of scale on a timely basis and the potential impairment of acquired
assets. Moreover, there can be no assurance that the anticipated benefits of any
acquisition or investment will be realized. Future acquisitions or investments
contemplated and/or consummated could result in potentially dilutive issuances
of equity securities, the incurrence of debt and contingent liabilities,
amortization expenses related to intangible assets, any of which could have a
material adverse effect on our operating results and financial condition. We
have also invested in companies, which can still be considered in the start-up
or development stages. These investments are inherently risky as the market for
the technologies or products they have under development are typically in the
early stages and may never materialize. We could lose our entire initial
investment in these companies.
WE MAY BE UNABLE TO KEEP PACE WITH RAPID INDUSTRY, TECHNOLOGICAL AND MARKET
CHANGES. The market for our products and services is subject to rapid
technological change and new product introductions. Current competitors and/or
new market entrants may develop new, proprietary products with features that
could adversely affect the competitive position of our products. We may not
successfully anticipate market demand for new products or services, or introduce
them in a timely manner. The convergence of voice and data networks, wired and
wireless communications could require substantial modification and customization
of our current products and business models, as well as the introduction of new
products. Further, customer acceptance of these new technologies may be slower
than we anticipate. We may not be able to compete effectively in these markets.
In addition, our products must readily integrate with major third party
security, telephone, front-office and back-office systems. Any changes to these
third party systems could require us to redesign our products, and any such
redesign might not be possible on a timely basis or achieve market acceptance.
Additional factors that may cause actual results to differ materially from our
expectations include industry specific factors; our ability to continuously
develop, introduce and deliver commercially viable products, solutions and
technologies, and the market's rate of acceptance of the solutions we offer and
our ability to keep pace with market and technologyaccounting changes and to compete
successfully.
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WE FACE POTENTIAL PRODUCT LIABILITY CLAIMS AGAINST US. We may be subject to
claims that our products are defective or that some function or malfunctioncorrections of our products caused or contributed to property, bodily or consequential damages.
We minimize this risk by incorporating provisions into our distribution and
standard sales agreements that are designed to limit our exposure to potential
claimserrors made in fiscal years beginning after December 15, 2005. As of liability. We carry product liability insurance in the amountDecember 31, 2005, adoption of $10,000,000 per occurrence and $10,000,000 overall. No assurance can be given
that all claims will be covered either by the contractual provisions limiting
liability or by the insurance, or that the amount of any individual claim or all
claims will be covered by the insurance or that the amount of any individual
claim or all claims in the aggregate will not exceed policy coverage limits.
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY. Our
success is dependent, to a certain extent, upon our proprietary technology. We
currently rely on a combination of patent, trade secret, copyright and trademark
law, together with non-disclosure and non-compete agreements, to establish and
protect the technology used in our systems. However, we cannot assure you that
such measures will protect our proprietary technology that competitors will not
develop products with features based upon, or otherwise similar to, our systems
or that we will prevail in any proceeding instituted by us in order to enjoin
competitors from selling similar products.
WE ARE INVOLVED IN LITIGATION AND MAY BECOME INVOLVED IN LITIGATION THAT
MAY MATERIALLY ADVERSELY AFFECT US. In our industry, there has been extensive
litigation regarding patents and other intellectual property rights. Although we
believe that our products do not infringe upon the proprietary rights of third
parties, we cannot assure you that one or more third parties will not make a
contrary claim or that we will be successful in defending such claim. In June
2000, Dictaphone Corporation, one of our competitors, filed a patent
infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.
In April 2002, we received a letter from Dictaphone stating that several of
our products were using technology protected by additional Dictaphone patents
and offering us a licensing arrangement for these patents. We believe that none
of our products infringe upon those patents. We cannot assure you, however, that
we will be successful in defending the Dictaphone infringement claim or other
claims, or that infringement claims or other claims, if asserted,SFAS No. 154 will not have a material adverse effectimpact on our business, financial conditionposition or results of operations. Any claims,operation.
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In November 2005, the FASB issued FSP FAS 115-1. The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity.” The FSP replaces the impairment evaluation guidance of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” with or without merit, could be costly and
time-consumingreferences to defend, divert our management's attention, cause product
delays and havethe existing other-than-temporary impairment guidance. The FSP clarifies that an adverse effect on our revenues and operating results. If any
of our products were foundinvestor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to infringe a third party's proprietary rights, we
could be required to enter into royalty or licensing agreementssell an impaired security has not been made. The guidance in this FSP is to be ableapplied to sell our products, which may not be available on terms acceptable to us or at
all.
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CHANGES IN ISRAELI GOVERNMENT BENEFIT PROGRAMS COULD MATERIALLY ADVERSELY
AFFECT US. We derive and expect to continue to derive significant benefits from
various programs and laws in Israel including tax benefits relating to our
"Approved Enterprise" programs and grants from the Officereporting periods beginning after December 15, 2005. As of the Chief
Scientist, or OCS, for research and development. To be eligible for these
grants, programs and tax benefits, we must continue to meet certain conditions,
including making certain specified investments in fixed assets. From time to
time, the Israeli Government has discussed reducing or eliminating the
availabilityDecember 31, 2005, adoption of these grants, programs and benefits. Pursuant to an amendment to
Israeli regulations, income from two of our "Approved Enterprises" is exempt
from income tax for only two years. Following this two year period, the
Approved Enterprise" will be subject to corporate tax at a reduced rate of
10-25% (based on the percentage of foreign ownership in each taxable year) for
the following eight years. Income from the other two "Approved Enterprises" are
tax exempt for four years. Following this four year period, the "Approved
Enterprises" are subject to corporate tax at a reduced rate of 10-25% (based on
the percentage of foreign ownership in each taxable year) for the following six
years. If grants, programs and benefits available to us or the laws under which
they were granted are eliminated or their scope is further reduced, or if we
fail to meet the conditions of existing grants, programs or benefits and are
required to refund grants or tax benefits already received (together with
interest and certain inflation adjustments) or fail to receive approval for
future Approved Enterprises, our business, financial condition and results of
operations could be materially adversely affected.
WE MAY HAVE EXPOSURE TO ADDITIONAL INCOME TAX LIABILITIES. As a global
corporation, we are subject to income taxes both in Israel and various foreign
jurisdictions. Our domestic and international tax liabilities are subject to the
allocation of revenues and expenses in different jurisdictions and the timing of
recognizing revenues and expenses. Additionally, the amount of income taxes paid
is subject to our interpretation of applicable laws in the jurisdictions in
which we file. From time to time, we are subject to income tax audits. While we
believe we comply with all applicable income tax laws, there can be no assurance
that a governing tax authorityFSP FAS 115-1 will not have a different interpretation of the
law and assess us with additional taxes. Should we be assessed additional taxes,
there could be a material adverse affectimpact on our financial position or results of operationsoperations.
62
Directors, Senior Management and Employees. |
Directors and financial condition.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED BY WAR, TERRORISM AND
NATURAL DISASTER. In the event of war, acts of terrorism or natural disaster,
such as widespread disease, earthquake and flood, we could experience
significant business interruption. Such conflicts may also cause damage or
disruption to transportation and communication systems, which could affect our
suppliers' ability to deliver products and to our employees' and distributors'
ability to conduct business and provide services.
OUR STOCK PRICE IS VOLATILE. Numerous factors, some of which are beyond our
control, may cause the market price of our ordinary shares or the American
Depositary Shares (ADSs) representing our ordinary shares to fluctuate
significantly.
58
These factors include, among other things, announcements of technological
innovations, customer orders or new products by us or our competitors, earning
releases by us or our competitors, market conditions in the industry and the
general state of the securities markets (with particular emphasis on the
technology and Israeli sectors of the securities markets).
59
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
DIRECTORS AND SENIOR MANAGEMENTSenior Management
The following table sets forth, as of June 15, 2003,May 16, 2006, the name, age and position of each of our directors and executive officers:
Name | Age | Position | |
Ron | 48 | Chairman of the Board of Directors | |
Joseph | 57 | Vice-Chairman of the Board of Directors | |
Rimon | 61 | Director | |
Yoseph Dauber(2)(3) | 70 | Director | |
Dan | 61 | Director | |
John Hughes | 54 | Director | |
David Kostman | 41 | Director | |
Dr. Leora | 58 | Director | |
Haim Shani | 49 | Chief Executive Officer | |
Dr. Shlomo Shamir | 59 | President | |
Ran Oz | 39 | Corporate Vice President and Chief Financial Officer | |
Koby Huberman | 48 | Corporate Vice President, Strategic Alliances & Business Development | |
Yechiam Cohen | 49 | Corporate Vice President, General Counsel and Corporate Secretary | |
Eran Porat | 43 | Corporate Vice President, | |
Zvi Baum | 49 | Corporate Vice President | |
Israel Livnat | 55 | Corporate Vice President & President, Security Group | |
Yoav Zaltzman | 48 | Corporate Vice President & President, Intelligence Solutions | |
Doron Eidelman | 51 | Corporate Executive Vice President & President, NiceVision | |
Jim Park | 50 | Corporate Vice President | |
Eran Gorev | 41 | President and Chief Executive Officer, | |
Tamir Ginat | 43 | President, | |
Doron Ben Sira | 47 | President, Nice APAC |
(1) | Member of the Audit Committee. | |
(2) | Member of the Compensation Committee. | |
(3) | Member of the Internal Audit Committee. | |
(4) | Outside Director. See Item 6, “Directors, Senior Management and Employees–Board Practices– Outside Directors.” | |
63
Set forth below is a biographical summary of each of the above-named directors and executive officers of NICE. RON GUTLEREach of our directors qualifies as an independent director under the Nasdaq rules.
Ron Gutler has been a directorserved as one of NICEour directors since May 2001 and chairmanChairman of the boardBoard since May 2002. Mr. Gutler is currently the chairmanChairman of G.J.EG.J.E. 121 Promoting Investment Ltd., a real estate investment company.company, and a member of the Advisory Board of Poalim Real Estate (part of Poalim Capital Market Group). Between 2000 and 2002, he managed the Blue Border Horizon Fund, a global macro fund. Mr. Gutler is a former Managing Director and a Partner of Bankers Trust Company (currently part of DeutcheDeutsche Bank). Between 1987 and 1999, he filledheld various positions with Bankers Trust. Mr. Gutler headed the Tradingits trading and Sales Activitiessales activities in Asia, South America and Emerging Europe. He also established and headed the Israeli office of Bankers Trust. Mr. Gutler holds a Bachelor'sBachelor’s degree in economicsEconomics and international relationsInternational Relations and a Master`sMaster’s degree in Business Administration, cum
laude, both from the Hebrew University in Jerusalem.
JOSEPH ATSMON
Joseph Atsmon has been a directorserved as one of NICEour directors since September 2001 and Vice-Chairman of the Board since May 2002. Mr. Atsmon currently serves as a Directordirector of Ceragon Networks.Networks Ltd., Radvision Ltd. and Vocaltec Communications Ltd.. From 1995 untilto 2000, Mr. Atsmon served as Chief Executive Officer of Teledata Communications Ltd., a public company acquired by ADC Telecommunications Inc. in 1998. Mr. Atsmon had a twenty yeartwenty-year career with Tadiran Ltd. In his last role at Tadiran Ltd., Mr. Atsmon served as Corporate VPVice President for business development.Business Development. Prior to that, he served as President of various of its military communications divisions. Mr. Atsmon receivedholds a B.Sc.Bachelor’s degree in Electrical Engineering suma cum laude, from the Technion – Israel Institute of Technology.
RIMON BEN-SHAOUL
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Rimon Ben-Shaoul has been a directorserved as one of NICEour directors since September 2001. Since 2001, Mr. Ben-Shaoul currently serveshas served as co-Chairman,Co-Chairman, President, and CEOChief Executive Officer of Koonras Technologies Ltd. which he joined on February 1, 2001. Koonras Technologies Ltd.
is, a technology investment company controlled by Poalim Investments Ltd., a large Israeli holding company. Mr. Ben-Shaoul also serves as Chairman of Nipson Digital Printing Systems PLC and as a director of Dor Chemicals Ltd. and MIND C.T.I. Ltd., BVR Systems Ltd., Cimatron Ltd. and several private companies. In addition, he is the President and Chief Executive Officer of Polar Communications Ltd., which manages media and communications investments. Between 1997 and February 1, 2001, Mr. Ben-Shaoul was the President and CEOChief Executive Officer of Clal Industries and Investments Ltd., one of the largest holding companies in Israel with substantial holdings in the high tech industry. During that time, Mr. Ben-Shaoul also served as Chairman of the Board of Directors of Clal Electronics Industries Ltd., Scitex Corporation Ltd., and various other companies within the Clal Group.group. Mr. Ben-Shaoul also served as a director of ECI Telecom Ltd., Fundtech Ltd., Creo Products, Inc., and Nova Measuring Instruments Ltd., and other public and private companies. From 1985 to 1997, Mr. Ben-Shaoul was President, Chief Executive Officer and CEOa director of Clal Insurance Company Ltd. and a director
of the company and its various subsidiaries. Mr. Ben-Shaoul holds a bachelor'sBachelor’s degree in economicsEconomics and Statistics and a master'sMaster’s degree in business administration,Business Administration, both from Tel-AvivTel Aviv University.
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JOSEPH DAUBER
Yoseph Dauber has been a directorserved as one of NICEour directors since April 2002. Mr. Dauber is
currently the chairman of the B.O.D of the Maritimehas served in various senior positions at Bank Of Israel.Hapoalim since 1973. Until June 2002, he was deputy chairmanDeputy Chairman of the boardBoard of Management and joint Managing Director of Bank HaPoalimHapoalim and was responsible for the commercial division of the bank. During the years 1994-1996Between 1994 and 1996 and until 6/June 2002, Mr. Dauber served as Chairman of Poalim American Express and of the Isracard Group. From 2002 to 2003, he served as Chairman of the Israel Maritime Bank Ltd. He currently serves as a director of Bank Hapoalim. He also serves as a director of Clal Insurance Holding Ltd., Vita Pri Galil Ltd., Lodzia Rotex Ltd., Afcon Industries Ltd. and Orbit Alchut Technologies Ltd. Mr. Dauber holds a Bachelor'sBachelor’s degree in Economics and Statistics and an MBA, both from the Hebrew University in Jerusalem and a Masters degree in Law from Bar Ilan University.
Dan Falk has served as one of Jerusalem.
DAN FALK has been a director of NICEour directors since January 2002. Mr. Falk also serves as a memberdirector of the boards of directors of Orbotech Systems Ltd., Attunity Ltd., Orad Hi Tech Systems Ltd., Netafim Ltd., VisionixPlastopil Ltd., Ramdor Ltd., Medcon Ltd., Advanced
Vision TechnologyNova Measuring Instruments Ltd., ClickSoftware Technologies Ltd., Dor ChemicalsDmatek Ltd., Jacada Ltd., Poalim Ventures 1 Ltd. and Poalim(C.M.) Hi-Tech Ltd., all of which are Israeli companies. In1999 andOrmat Technology Inc. From 1999 to 2000, Mr. Falk was President and Chief Operating Officer of Sapiens International Corporation N.V. From 1985 to 1999, Mr. Falk served in various positions in Orbotech Systems Ltd., the last of which were Chief Financial Officer and Executive Vice President. From 1973 to 1985, he served in several executive positions in the Israel Discount Bank. Mr. Falk holds a Bachelor'sBachelor’s degree in Economics and Political Science and a Master'sMaster’s degree in Business Administration from the Hebrew University in Jerusalem. As described above, Mr. Falk serves on
the board of directors of a number of companies, both public and private and qualifies as an Outside Directoroutside director under Israeli law. See "-- Outside Directors."
JOHN HUGHES
John Hughes has been a directorserved as one of NICEour directors since November 2,2002.Mr2002. Mr. Hughes is currently Chairman of Intec Telecom Systems plc and Executive Chairman of Parity Group plc. From December 2000 to July 2004, he held senior executive positions at Thales Group, most recently as Executive Vice President and COOChief Executive Officer of all civil activities for the Thales Group and CEO of its
IT&S Aerospace Business Areas. During the yearsgroup. From 1997 untilto 2000, he held various positions with Lucent Technologies, and wasincluding President of its GMS/GSM/UMTS division
and in the yearsdivision. From 1991 throughto 1997,Mr Mr. Hughes served as Director of Convex Global Field operationsOperations within the Hewlett Packard Company. Prior to that Mr. Hughes
held various positions with UK and US companies. Mr. Hughes holds a bachelorBachelor of scienceScience degree in Electrical and Electronic Engineering from the University of Hertfordshire.
DAVID KOSTMAN
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David Kostman has been a directorserved as one of NICEour directors since January 2000. Mr. Kostman is currently the Chief OperatingExecutive Officer of Delta Galil USA Inc., a subsidiary of Delta Galil Industries Ltd., a Nasdaq-listed apparel manufacturer. Until May,From April 2003 to April 2005, he was Chief Operating Officer of Delta Galil USA. From 2000 to 2002 he was the Chief Operating Officer of VerticalNet, Inc. and of VerticalNet
International, which he joined in June 2000., a Nasdaq-listed software company. Prior thereto, Mr. Kostman was a Managing Director in the Investment Banking Divisioninvestment banking division of Lehman Brothers Inc., which he joined in 1994. Mr. Kostman holds a bachelor'sBachelor’s degree in lawLaw from Tel-AvivTel Aviv University and a master'sMaster’s degree in business administrationBusiness Administration from INSEAD, France.
LEORA (RUBIN) MERIDOR
Dr. Leora (Rubin) Meridor has been a directorserved as one of NICEour directors since January 2002. Since 2001, Dr. Meridor has been the Chairman of the Boarda financial and business consultant. From 2001 to 2005, she served as Chair of Bezeq International
Poalim Capital Markets and Walla Telecommunication. From 2001 to 2004, Dr. Meridor served as Chair of Poalim Capital Markets. From 1996 to 2000, Dr.
Meridorshe served as Senior Vice President, Head of the Credit and Risk Management Division of the First International Bank of Israel. BetweenFrom 1983 andto 1996, Dr. Meridor held various positions in the Bank of Israel, the last of which was Head of the Research Department. Dr. Meridor is a director of Teva Pharmaceutical Industries Ltd., Isrotel Ltd., G.J.E. 121 Promoting Investment Ltd. and Gilat Satellite Networks Ltd. She has held various teaching positions with the Hebrew University in Jerusalem and holds a Bachelor'sBachelor’s degree in mathematicsMathematics and physics,Physics, a Master'sMaster’s degree in Mathematics and a PhDDoctoral degree in Economics from the Hebrew University in Jerusalem. Dr. Meridor serves on several boards of directors andShe qualifies as an Outside Directoroutside director under Israeli law. See "--Outside Directors."
62
TIMOTHY ROBINSON has been a director of NICE since November 2, 2002. Mr.
Robinson is currently Senior Vice President of the Secure Operations business
unit of the Thales Group. During the years 1997-2001 Mr. Robinson was Chief
Executive of the DCS Group prior to which he was Managing Director of Silicon
Graphics/Cray Research. In the years 1984-1995 Mr. Robinson held several
positions with IBM Corporation in Europe and Asia the last of which was Director
of IBM UK. Mr. Robinson holds a Bachelor of Science (Hons) from the University
of Leeds and is currently a director of Camelot, the National Lottery Operator
for the United Kingdom.
HAIM SHANI
Haim Shani has served as President andour Chief Executive Officer of NICE
since January 2001. Mr. Shani cameHe also served as our President from January 2001 to NICEApril 2005 and as a director from Applied Materials (Israel),
whereJanuary 2001 to September 2005. From 1998 to 2000, he served as General Manager in itsof the Israeli office from 1998 to 2000,
heading upof Applied Materials Inc., where he headed the Process Diagnosticprocess diagnostic and Control (PDC)control business group formed following the acquisition by Applied Materials of Opal Ltd. and Orbot Instruments, Ltd. Prior to joining Applied Materials,thereto, Mr. Shani held various management positions at Orbotech Ltd. From 1995 to 1998, he served as Corporate Vice President of Marketing and Business Development, from 1993 to 1995, he served as President of Orbotech'sOrbotech’s subsidiary in Asia Pacific, based in Hong Kong, and from 1992 to 1993, he served as President of Orbotech Europe, based in Brussels. From 1982 to 1992, Mr. Shani held various management positions at Scitex Corporation and IBM Israel. Mr. Shani holds a bachelor'sBachelor’s degree in industrialIndustrial and managementManagement engineering from the Technion -– Israel Institute of Technology and a master'sMaster’s degree in business administrationMusiness Administration from INSEAD, France.
LAURI HANOVER
Dr. Shlomo Shamir has served as our President since March 2005. From April 2001 to April 2005, he served as President and Chief Executive Officer of NICE Systems Inc., our wholly owned subsidiary and corporate headquarters in North America. From 2000 to April 2001, Dr. Shamir served as President and Chief Executive Officer of CreoScitex America, Inc. From 1997 to 2000, he served as President and Chief Executive Officer of Scitex America Corp. and from 1994 to 1997, he served as Scitex Ltd.’s Corporate Vice President of Operations. Prior to 1994, Dr. Shamir served in the Israel Defense Force (IDF) where he attained the rank of Brigadier General. Dr. Shamir built and led the planning division in the IDF headquarters and served as Israel’s military attaché to Germany. He holds a bachelor’s degree in physics from the Technion – Israel Institute of Technology and Master’s and Doctoral degrees in Engineering and Economic Systems from Stanford University, California.
66
Ran Oz has served as our Corporate Vice President and Chief Financial Officer of NICE since December 2000. Ms. Hanover previously served as Executive
Vice President andSeptember 2004. Prior thereto, he worked for Ceragon Networks Ltd., an international fixed wireless company, where he was Chief Financial Officer of Sapiens International Corporation
N.V. since March 1997.from 2001 to 2004. From 19841995 to 1997, Ms. Hanover served in2001, he worked for Jacada Ltd., an international software company, where he held a variety of financial management positions includingin finance and operations, most recently as General Manager of the parent company and Corporate Controller, at Scitex
Corporation Ltd. Prior thereto, Ms. Hanover wasChief Financial Officer. Mr. Oz is a senior financial analyst at
Philip Morris Companies, Inc. Ms. Hanovercertified public accountant and holds a bachelor'sBachelor’s degree in financeAccounting and Economics and a Master’s degree in Business Administration and economics from the Wharton SchoolHebrew University in Jerusalem.
Koby Huberman has served as one of Businessour Corporate Vice Presidents since January 2000 and a bachelor of arts degree from the
College of Arts and Sciences, both of the University of Pennsylvania. Ms.
Hanover also holds a master's degree in business administration from New York
University. Ms. Hanover is a Director and Chairman of the Audit Committee of
Nova Measuring Instruments Ltd.
YA'AKOV HUBERMAN has servedcurrently serves as Corporate Vice President, Business Development of NICE since January 2000.and Strategic Planning. From 1998 to January 2000, Mr. Huberman served as Vice President of Marketing for the Enterprise Internetworking Systems Group of Lucent Technologies Ltd. and, from 1995 to 1998, he was Vice President of Global Marketing and Business Development for Lannet Data Communications Ltd., which was acquired by Lucent in 1998. Prior thereto, Mr. Huberman was the Managing Director of ServiceSoft Europe, a pan-European leading vendor of artificial intelligence and knowledge-based software for call center and customer service applications. Mr. Huberman serves voluntarily as chairman and board member of several non-profit organizations in the field of education and civil society community development. Mr. Huberman holds a bachelor'sBachelor’s degree in economicsEconomics and business administrationBusiness Administration from the Leon Recanati BusinessGraduate School of Tel-AvivBusiness Administration of Tel Aviv University.
63
DR. RIVI SHERMAN
Yechiam Cohen has served as Chief Technology Officer of NICE since
December 2001. From 1997 to 2001, she served as General Manager Advanced
Products Development of Applied Materials (Israel). From 1989 to 1997, Dr.
Sherman held several positions with Orbot Instruments, including Vice President,
Wafer Inspection Product Line .Prior to that she conducted research in the area
of distributed computing in the University of California. Dr. Sherman holds a
bachelor's degree in Mathematics from the Tel Aviv University and a Master's
degree and PhD in Computer Science from the Weizmann Institute of Science. Dr.
Sherman has various publications and patents to her name.
DAPHNA KEDMI has served asour Corporate Vice President, General Counsel and Corporate Secretary of NICE since February 2000.2005. From 19891996 to December 1999, Ms.
Kedmi2004, he served as General Counsel of Amdocs, a leading provider of billing and CRM software solutions to Elisra Electronic Systemsthe telecommunications industry. Before joining Amdocs, Mr. Cohen was a partner in the Tel Aviv law firm of Dan Cohen, Spigelman & Company. From 1987 to 1990, he was an associate with the New York law firm of Dornbush, Mensch, Mandelstam and Schaeffer. Mr. Cohen served as a law clerk to Justice Beijski of the Supreme Court of Israel in Jerusalem. He holds a Bachelor’s degree from the Hebrew University School of Law and is admitted to practice law in Israel and New York.
Eran Porat has served as our Corporate Vice President, Finance since 2005. From March 2000 to 2005, he served as our Corporate Controller. From 1997 to February 2000, Mr. Porat served as Corporate Controller of Tecnomatix Technologies Ltd. From 1996 to 1997, he served as Corporate Controller of Nechushtan Elevators Ltd. Mr. Porat is a certified public accountant and then to
Tadiranholds a Bachelor’s degree in economics and accounting from Tel Aviv University.
67
Zvi Baum has served as our Corporate Vice President and President, Enterprise Interaction Solutions since April 2005. He previously served in the positions of General Manager of the Product Division, Director of Product Management in the EIS Division and Corporate Vice President of Marketing. Before joining us in January 2002, Mr. Baum served as the Managing Director of Call Vision Israel Ltd., botha company that specialized in the development of advanced web-based quality monitoring solutions for call centers. Prior thereto, he served as the Vice President of International Sales and Marketing at STS Software Systems, which are subsidiariesdeveloped recording solutions and was acquired by us at the end of Koor Industries Ltd.1999. From 1979
through 1988, Ms. Kedmi was an attorney1987 to 1998, Mr. Baum worked for a number of American and then Deputy General Counsel within
the legal Department of the Israel Ministry of Defense. Ms. Kedmi hasEuropean companies in several areas, including technical management, marketing and channel management. Mr. Baum holds a bachelor'sBachelor’s degree in lawEngineering from Tel-Avivthe Technion – Israel Institute of Technology and a Master’s degree in Computer Science and a Master’s degree in Business Administration, both from the University and is a member of the Israeli
Bar.
MENI GAL has servedCalifornia in Los Angeles.
Israel Livnat will serve as Corporate Vice President Human Resources since
January 2001.& President Security Group as of May 15, 2006. Prior to joining NICE, he served since 2001 as the President and CEO of Elta Systems Ltd.. Prior to his last position as the President of Elta Systems, Mr. GalLivnat was heading a division in the Israeli Aircraft Industries, leading the development of the Arrow weapons system. Before that he was VP Engineering in the same division in the Israeli Aircraft Industries, and director for hardware engineering in Daisy Systems Mountain View California, leading state-of-the-art developments in the hardware and software of large computer-embedded systems. Mr. Livnat holds a B.Sc in Electrical Engineering from the Technion, and an Executive MBA from Stanford University California. He was awarded the prestigious Israeli Industry Prize in 2004.
Yoav Zaltzman has served as Director of Human
Resources of Applied Materials Israel since 1999. From 1994 to 1999, Mr. Gal
served as Seniorour Corporate Vice President of Human Resources for Strauss Company, an
international food company. From 1986 to 1994, Mr. Gal held senior management
positionsand President, Intelligence Solutions since 2003. He previously served in human resources at Tadiran Communications, a developerthe position of
communications technologies for the defense and military industries. Mr. Gal
holds a bachelor's degree in education and Behavioral Sciences from Tel-Aviv
University.
YOAV ZALTZMAN has served as Corporate Vice President, Business Operations
of NICE sinceOperations. Before joining us in May 2001, and is now Corporate Vice President, NiceTrack. Prior to
joining NICE, Mr. Zaltzman served as Senior Director of Sales for Applied Materials Israel since(Israel) from 1997. From 1994 to 1997, Mr. Zaltzman served as General Manager of Orbot Instruments in Europe, based in Brussels, which was acquired by Applied Materials in 1997. From 1987 to 1992, Mr. Zaltzman held various sales and marketing positions for Oracle in Israel. Mr. Zaltzman holds a bachelor'sBachelor’s degree in Computer Sciences and a master'sMaster’s degree in business administration,Business Administration, both from Tel Aviv University.
DORON EIDELMAN serves
Doron Eidelman has served as our Corporate Executive Vice President and President, NiceVision since May 2002. Previously,Prior thereto, he was COOthe Chief Operating Officer of AudioCodes Ltd., a telecommunications company. From 1992 to 2001, Mr. Eidelman was Executive Vice President and President of the Display Division of Orbotech and from 1987 to 1992, he held various positions in Optrotech, the last of which was Vice President. Mr. Eidelman served in an elite intelligence unit in the IDF and was awarded the prestigious Israel Defense Award .HeAward. He holds a bachelor'sBachelor’s degree in electronic engineeringElectronic Engineering from the Technion-IsraelTechnion – Israel Institute of Technology and a master'sMaster’s degree in electronic
engineeringElectronic Engineering from the University of Tel Aviv.
64
Aviv University.
68
Jim Park serves as our Corporate Vice President Product Lines. From 2000 to
2001, he was Vice& President, Professional Services and from 2001 to 2002, he
served as Vice President R&D of the Company . Prior to joining NICE,Public Safety. Mr. Bar
held several positions with the STS Group, including General Manager of STS
Software Systems Ltd.
ZVI BAUM served as Director of Product Management in the CEM Division of
NICE since January 2002. In May 2003 Mr. Baum was promoted to the position of
Corporate VP of Marketing. Before joining NICE, Mr. Baum served as the Managing
Director of Call Vision Israel Ltd - a company that specialized in the
development of advanced web-based quality monitoring solutions for call centers.
Prior to that, he served as the VP of International Sales and Marketing at STS
Software Systems which developed recording solutions and was acquired by NICE at
the end of 1999. Between 1987 and 1998 Mr. Baum worked for a number of American
and European companies in several areas, including technical management,
marketing and channel management. Mr. Baum holds a B.Sc. in Engineering from the
Technion - Israel Institute of Technology and M.Sc. in Computer Science and MBA
- - both from the University of California LA (UCLA).
DR. SHLOMO SHAMIR has served as President and Chief Executive Officer of
NICE Systems Inc., NICE's wholly owned subsidiary and corporate headquarters in
North America, since April 2001. Dr. ShamirPark previously served as President and
CEO of CreoScitex America, Inc. from 2000 to April 2001. From 1997 to 2000, Dr.
Shamir served as President and CEO of Scitex America Corp. and from 1994 to
1997, he served as its Corporate Vice President of Operations. Prior to 1994,
Dr. Shamir served in the IDF where he attained the rank of Brigadier General.
Dr. Shamir also built and led the planning division in the IDF headquarters and
served as Israel's military attache to Germany. Dr. Shamir holds a bachelor's
degree in physics from the Technion - Israel Institute of Technology and masters
of science and doctorate degrees in engineering and economic systems from
Stanford University.
JIM PARK is currently the President of NICE SytemsSystems CTI UK Ltd, NICE'sLtd., our wholly owned subsidiary and corporate headquarters in EMEA. Mr. ParkPrior thereto, he was previously CEOthe Chief Executive Officer of Thales Contact Solutions (Previously(previously Racal Recorders), which waswe acquired by NICE, in Nov 2002. Prior to Joiningjoining Racal in 1998, Mr. Park held various senior management positions at Mitel Telecom. From 1996 to 1998, he served as General Manager for Mitel'sMitel’s EMEA switching business, from 1994 to 1996 he was VPVice President of business development,Business Development, from 1991 to 1994 he was directorDirector of Marketing, and from 1982 to 1991 he held various sales management roles in Europe, the Middle East and Africa. Mr. Park'sPark’s early career was spent in various engineering roles with Siemens UK (1979 to 1982) and British Telecom (1974 to 1979), who sponsored him through college.
DORON BEN SIRA
Eran Gorev has served as the President and Chief Executive Officer of NICE Systems Inc. since March 2005. From 2002 to 2004, Mr. Gorev was President of the North America – Major Clients division at Amdocs. From 2000 to 2002, he served as Corporate Vice President and Head of Worldwide Sales at Amdocs. Prior thereto, Mr. Gorev held various marketing and sales management positions in the information technology industry. Mr. Gorev holds a Bachelor’s degree in Law from Tel Aviv University and a joint Master’s degree in Business Administration from the Kellogg School of Management of Northwestern University and the Leon Recanati Graduate School of Business Administration of Tel Aviv University.
Tamir Ginat has served as President of EMEA since July 2005. From 2000 to 2003, Mr. Ginat served as the General Manager of NICE UK and in 2003 was promoted to Vice President Sales, U.K. & Ireland, a position he held until June 2005. Prior thereto, Mr. Ginat held various sales positions in our company and before joining us in 1995, he served for five years within the International Marketing Department of ISCAR. Mr. Ginat holds a Bachelor’s degree in Economics and Business from Haifa University and a Master’s degree in Business Administration from Heriot Watt University.
Doron Ben-Sira has served as President of NICE APAC Ltd. since FebruaryMay 2002. Mr. Ben-Sira came to NICE from Orbotech, wherePrior thereto, he served as Vicewas the vice president of its Assemblythe assembly division based in Hong Kong, from 1998of Orbotech Asia Pacific, responsible for all electronic assembly solutions sold to 2002, leading all sales,
marketing and customer support activities of that division. Prior to joining
Orbotech, Mr. Ben Sira served fromAsian customers. From 1996 to 1998, Mr. Ben-Sira was the Eastern European regional director for Cisco Systems and also served as the East Europe Regional
Director of Cisco Systems, ChannelEastern European and OEM Director atMiddle Eastern channel director for that company. Mr. Ben-Sira also held management positions in Siemens Data communication from 1995 to 1997, basedCommunication (Germany) and in Munich, and Sales & Marketing Vice
President at Mashov Computers where he was responsible for all Novell
activities in the Middle East region from 1989 to1995. Mr. Ben-Sira(Israel). He holds a bachelor'sBachelor’s degree in economicsEconomics and a master'sManagement and Master’s degree in business administrationBusiness Administration, both from Tel Aviv University.
65
ERAN PORAT has served as Corporate Controller
There are no family relationships between any of NICE since March 2000.
From 1997 to February 2000, Mr. Porat served as Corporate Controller of
Technomatics Technologies Ltd. From 1996 to 1997, he served as Corporate
Controller of Nechushtan Elevators Ltd. Mr. Porat is a CPA and holds a
bachelor's degree in economics and accounting from the University of Tel-Aviv.
COMPENSATIONdirectors or executive officers named above.
Compensation
The aggregate compensation paid to or accrued on behalf of all our directors and executive officers as a group (27(22 persons) during 20022005 consisted of approximately $3.3$4.9 million in salary, fees, bonus, commissions and directors'directors’ fees and $50,000approximately $0.1 million in amounts set aside or accrued for to provide pension, retirement or similar benefits, but excluding amounts we expended for automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to our officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
69
During 2002,2005, our officers and directors received, in the aggregate, options to purchase up to 410,000466,000 ordinary shares under our 19952003 Stock Option Plan. These options have an average exercise price of $11.87$37.35 and will expire 6six years after the date the options were granted.
Compensation and reimbursement for Outside Directors (as described below) is statutorily determined pursuant to the Israeli Companies Law, 5759-1999,5759–1999, or the Israeli Companies Law. The statutory rates for Outside Directors isare approximately NIS 46,000 per annum and approximately NIS 1,800 per meeting. Compensation and reimbursementWe pay each of all otherour directors who dois not serve as
officers arean Outside Director an annual fee of $15,000 and a meeting attendance fee of $600, including for meetings of committees of the same as the statutory rates paid toboard of directors. We pay each member of our audit committee, excluding Outside Directors, except
foran additional annual fee of $2,500. The chairman of the chairmanBoard receives 150% of the annual amount and the vice chairman of the Board who receive 150% andreceives 137.5% of the annual amount, respectively. We do not have directors who serve as officers
in the Company.
BOARD PRACTICESamount. The chairman was also entitled to an additional monthly fee of approximately $4,000 through September 2005.
Board Practices
Our articles of association provide that the number of directors serving on the board shall be not less than three but shall not exceed 13.thirteen. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by an extraordinary resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The board may appoint additional directors (whether to fill a vacancy or create new directorship)directorships) to serve until the next annual shareholders meeting, provided, however, that the board shall have no obligation to fill any vacancy unless the number of directors is less than three.
The board may, subject to the provisions of the Israeli Companies Law, appoint a committee of the board and delegate to such committee all or any of the powers of the board as it deems appropriate. Notwithstanding the foregoing, the board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The board has appointed an internal audit committee, as required under the Israeli Companies Law, that has three members, an audit committee that currently has fivefour members and a compensation committee that has threefour members. 66
OUTSIDE DIRECTORSWe do not have, nor do our subsidiaries have, any directors’ service contracts granting to the directors any benefits upon termination of their employment.
Outside Directors
Under the Israeli Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel are required to appoint at least two "outside"“outside” directors.
70
To qualify as an outside director, an individual or his or her relative, partner, employer or any entity under his or her control, may not have as of the date of appointment as an outside director, and may not have had during the previous two years, any affiliation with the company, with any entity controlling the company on the date of the appointment or with any entity that
is awhose controlling shareholder, on the date of the appointment or during the previous two years, is the company or an entity controlling the company. In general, the term "affiliation"“affiliation” includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o
• | an employment relationship; | |
• | a business or professional relationship maintained on a regular basis; | |
• | control; and | |
• | service as an office holder. |
No person may serve as an outside director if the person'sperson’s position or other activities create, or may create, a conflict of interest with the person'sperson’s responsibilities as an outside director or may otherwise interfere with the person'sperson’s ability to serve as an outside director.
Outside directors are to be elected by a majority vote at a shareholders'shareholders’ meeting, provided that either:
o the majority of shares voted at the meeting shall include at least
one-third of the shares of non-controlling shareholders present at the
meeting and voting on the matter (without taking into account the
votes of the abstaining shareholders); or
o
• | the majority of shares voted at the meeting shall include at least one-third of the shares of non-controlling shareholders present at the meeting and voting on the matter (without taking into account the votes of the abstaining shareholders); or | |
• | the total number of shares of non-controlling shareholders voted against the election of the outside directors does not exceed one percent of the aggregate voting rights in the company. |
The term of an outside director will be three years and may be extended for an additional term of three years. Each committee of a company'scompany’s board of directors which is empowered to exercise any of the board'sboard’s powers is required to include at least one outside director. We intend to take all actions required for us to
comply with the Israeli Companies Law and its requirements for outside
directors.
Our outside directors were elected for a second term at a Specialour Annual General Meeting held on December 26, 2001.AnOctober 19, 2004. An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection
with service as directorfrom the company.
Financial and Accounting Expertise
Pursuant to new provisions of the company.
67
Companies Law effective from April 2006, our board of directors has determined that at least one member of our board of directors must be an “accounting and financial expert.” The Companies Law requires that at least one outside director must be such an expert and that all other outside directors must be “professionally qualified.” Under the Nasdaq rules, each member of our audit committee must be financially literate and at least one of the members must be designated as a financial expert having accounting or related financial expertise. Our board of directors has designated Dan Falk as our audit committee financial expert.
71
Independent Directors
Under the rules of the Nasdaq NationalStock Market, applicable
to listed companies. Under the Nasdaq rules applicable to us, wea majority of our directors are required to appoint a minimumbe “independent” as defined in Nasdaq’s rules. All of two independent directors.our directors satisfy the respective independence requirements of Nasdaq.
Audit Committee
The independence standard under
the Nasdaq rules excludesalso require that the audit committee of a listed company must be composed of at least three directors, each of whom is (i) independent; (ii) does not receive any compensation (except for board fees) from the company; (iii) is not an affiliated person who is a current or former employee of athe company or any subsidiary; and (iv) has not participated in the preparation of the company’s (or a current subsidiary’s) financial statements during the past three years. All of the current members of our audit committee (presently comprised of Joseph Atsmon (Chairman), Ron Gutler, Dan Falk and Leora Meridor) meet the Nasdaq standards described above.
Our audit committee has adopted a charter specifying the committee’s purpose and outlining its affiliates,duties and responsibilities which include, among other things: (i) appointing, retaining and compensating the company’s independent auditor, subject to shareholder approval, and (ii) pre-approving all services of the independent auditor. The audit committee must review and approve all related party transactions. Our audit committee is also authorized to act as well as any immediate family memberour “qualified legal compliance committee.” As such, our audit committee will be responsible for investigating reports made by attorneys appearing and practicing before the SEC in representing us, of an
executive officerperceived material violations of a companyU.S. federal or state securities laws, breaches of fiduciary duty or similar material violations of U.S. law by us or any of its affiliates. At least two of our current directorsagents.
We believe we currently meet the independence standard of theapplicable Nasdaq rules.
AUDIT COMMITTEE AND INTERNAL AUDIT COMMITTEErequirements and we intend to continue to take all actions as may be necessary for us to maintain our compliance with applicable Nasdaq requirements.
Internal Audit Committee
The Israeli Companies Law requires public companies to appoint an internal audit committee. The role of the internal audit committee under the Israeli
Companies Law is to examine flaws in the business management of the companycompany’s business in consultation with the internal auditors and the independent accountants, and to propose remedial measures to the board. The internal audit committee also reviews interested party transactions for approval as required by law. Under the
Israeli Companies Law, an internal audit committee must consist of at least three directors, including all of the outside directors. The chairman of the board of directors, any director employed by or otherwise providing services to the company on a regular basis, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the internal audit committee. In addition, underAll of the Nasdaq rules applicable to us, we are required to
maintain ancurrent members of our internal audit committee (presently comprised of a majority of independent directors.
The responsibilities of the audit committee under the Nasdaq rules include,
among other things, evaluating the independence of a company's outside auditors.
Pursuant to the Sarbanes-Oxley Act of 2002, the SecuritiesLeora Meridor (Chairperson), Dan Falk and Exchange
Commission (the "SEC") has issued new rules, which would, among other things,
require Nasdaq to impose independence requirements on each member of the audit
committee. Nasdaq has proposed rules that would comply with the SEC's
requirements and which are expected to be applicable to us in 2004.
The proposed requirements would implement two basic criteria for
determining independence: (i) audit committee members would be barred from
accepting any consulting, advisory or other compensatory fee from the issuer or
an affiliate of the issuer, other than in the member's capacity as a member of
the board of directors and any board committee, and (ii) audit committee members
of an issuer that is not an investment company may not be an "affiliated person"
of the issuer or any subsidiary of the issuer apart from his or her capacity as
a member of the board and any board committee.
The SEC has proposed to define "affiliate" for non-investment companies as
"a person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is proposed to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise." A safe harbor has been proposed by the
SEC, under which a person who is not an executive officer, director or 10%
shareholder of the issuer would be deemed not to have control of the issuer.
68
Joseph Dauber) meet these qualifications.
72
Internal Auditor
Under the final rules adopted by the SEC, an issuer is required to disclose
in its annual report, beginning with the annual report for 2003, whether or not
such issuer has at least one audit committee financial expert. If it does, the
issuer must disclose the name of the expert. If not, the issuer must disclose
why it does not have an audit committee financial expert.
We intend to continue to take all actions as may be necessary for us to
maintain our compliance with applicable Nasdaq requirements.
INTERNAL AUDITOR
Under the Israeli Companies Law, the board of directors must appoint an internal auditor, proposed by the internal audit committee. The role of the internal auditor is to examine, among other matters, whether the company'scompany’s activities comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the company but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company'scompany’s independent accounting firm or its representative. We have appointed an internal auditor in accordance with the requirements of the IsraeliCompanies Law.
Compensation Committee
As required by Nasdaq rules, our compensation committee approves the compensation of our executive officers. The compensation of our chief executive officer also requires the approval of our board of directors under the Companies Law. EMPLOYEESThe compensation committee is also authorized to approve the grant of stock options and other securities to eligible grantees under our benefit plans pursuant to guidelines adopted by our board of directors. However, grants of stock options and other securities to our executive officers also requires approval of our board of directors. The current members of this committee, each of whom satisfies the respective independence requirements of Nasdaq, are Messrs. Falk, who is the chairman, Ben Shaoul, Dauber and Gutler.
Nominations Committee
As required by Nasdaq rules, our nominations committee recommends candidates for election to our board of directors pursuant to a written charter. The current members of this committee, all of whom are independent directors, are Ron Gutler and Dan Falk.
Employees
At December 31, 2002,2005, we had approximately 10761,416 employees worldwide, which represented an increase of 29%32.7% from year-end 2001.2004.
The following table sets forth the number of our full-time employees at the end of each of the last three fiscal years as well as the main category of activity and geographic location of such employees:
69
73
|
|
|
|
|
|
|
|
|
|
|
�� |
| At December 31, |
| |||||||
Category of Activity |
| 2003 |
| 2004 |
| 2005 |
| |||
|
|
|
| |||||||
| ||||||||||
Operations |
|
| 90 |
|
| 86 |
|
| 105 |
|
Customer Support |
|
| 312 |
|
| 316 |
|
| 466 |
|
Sales & Marketing |
|
| 252 |
|
| 261 |
|
| 327 |
|
Research & Development |
|
| 260 |
|
| 273 |
|
| 361 |
|
General & Administrative |
|
| 137 |
|
| 131 |
|
| 157 |
|
|
|
|
|
| ||||||
Total |
|
| 1,051 |
|
| 1,067 |
|
| 1,416 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Geographic Location |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Israel |
|
| 516 |
|
| 518 |
|
| 625 |
|
North America |
|
| 333 |
|
| 339 |
|
| 526 |
|
Europe |
|
| 183 |
|
| 179 |
|
| 195 |
|
Asia Pacific |
|
| 19 |
|
| 31 |
|
| 70 |
|
|
|
|
|
| ||||||
Total |
|
| 1,051 |
|
| 1,067 |
|
| 1,416 |
|
|
|
|
|
| ||||||
We also utilize temporary employees in various activities. On average, we employed approximately 1739 such temporary employees and 44136 contractor employees (not included in the numbers set forth above) during 2002.2005.
Our future success will depend in part upon our ability to attract and retain highly skilled and qualified personnel. Although competition for such personnel in Israel is generally intense, we believe that adequate personnel resources are currently available in Israel to meet our requirements.
We are not a party to any collective bargaining agreement with our employees or with any labor organization. However, we are subject to certain labor related statutes, and to certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists'Industrialists’ Association of Israel) that are applicable to our Israeli employees by order of the Israeli Ministry of Labor and Welfare. These statutes and provisions principally concern the length of the work day and the work week, minimum wages for workers, contributions to a pension fund, insurance for work-related accidents, determination of severance pay and other conditions of employment. Furthermore, pursuant to such provisions, the wages of most of our employees are automatically adjusted based on changes in the Israeli consumer price index, or CPI. The amount and frequency of these adjustments are modified from time to time.
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Israeli law generally requires the payment by employers of severance pay upon the death of an employee, his retirement or upon termination of employment by the employer without due 70
2(s)2(r) to our consolidated financial statements. In addition, according to the National Insurance Law, Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute, an organization similar to the United States Social Security Administration. These contributions entitle the employees to benefits in periods of unemployment, work injury, maternity leave, disability, reserve military service and bankruptcy or winding-up of the employer. Since January 1, 1995, such amount also includes payments for national health insurance. The payments to the National Insurance Institute are equal to approximately 16.25% of an employee'semployee’s wages (up to a certain cap as determined from time to time by law), of which the employee contributes approximately 66% and the employer contributes approximately 34%.
EMPLOYMENT AGREEMENTS
Employment Agreements
We have employment agreements with our officers. Pursuant to these employment agreements, each party may terminate the employment for no cause by giving a 30, 60 or 90 day prior written notice (six months in the case of certain senior employees). In addition, we may terminate such agreement for cause with no prior notice. The agreements generally include non-competenon-competition and non-disclosure provisions.
SHARE OWNERSHIPprovisions, although the enforceability of non-competition provisions in employment agreements under Israeli law is very limited.
Share Ownership
As of May 31, 2003,16, 2006, our directors and executive officers beneficially owned an aggregate of 14,321642,400 ordinary shares, or approximately 0.090%2.5% of our outstanding ordinary shares. Rimon Ben-Shaoul, one of our directors, is deemedshares, which amount includes options to have beneficial ownership of 600,000purchase 608,994 ordinary shares (approximately 3.7%that were vested on such date or that were scheduled to vest within the following 60 days. The options have an average exercise price of $34.16 per share and expire between 2006 and 2011. As of May 16, 2006, our chief executive officer, Mr. Haim Shani, beneficially owned 251,633 ordinary shares, or approximately 1.0% of our outstanding ordinary shares) heldshares, which includes options to purchase 251,189 ordinary shares that were vested on such date or that were scheduled to vest within the following 60 days, and 444 ordinary shares owned by Koonras Technologies Ltd.,him. Of the 251,189 options, 242,600 options have an exercise price of which he
is the Co-Chairman of the Board, President$55.5 per share and Chief Executive Officer. Other
than Mr. Ben-Shaoul, noexpire on October 22, 2006. The remaining 8,589 options have exercises prices ranging from $12.1 per share to $23.4 per share, and expire between May 2007 and December 2009. No other individual director or executive officer beneficially owns 1% or more of our outstanding ordinary shares.
As of May 31, 2003, all of our directors and executive officers, in the
aggregate, held options under our stock option plans to purchase up to 1,924,500
ordinary shares.
The following is a description of each of our option plans, including the amount of options currently outstanding and the weighted average exercise price.
On December 9, 1998, our board of directors decided to reduce the exercise
price of all outstanding employee stock options having an original exercise
price above $22.50, excluding options held by members of our board of directors.
The amount of options that were repriced was 1,122,066 and the new exercise
price was set at $22.50, the fair market value of the ordinary shares on such
date. The original exercise price of these options ranged from $33.00 to $42.00.
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1995 STOCK OPTION PLANStock Option Plan
In 1995, we adopted the NICE-Systems Ltd. 1995 Stock Option Plan, or 1995 Plan, to attract, motivate and retain talented employees by rewarding performance and encouraging behavior that will improve our profitability. Under the 1995 Plan, our employees and officers may be granted options to acquire our ordinary shares. The options to acquire ordinary shares are granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain exceptions which may be determined by our board of directors. We have registered, through the filing of registration statements on Form S-8 with SEC under the Securities Act of 1933, 6,000,000 ADSs for issuance under the 1995 Plan.
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Under the terms of the 1995 Plan, 25% of each stock option granted becomes exercisable on each of the first, second, third and fourth anniversaries of the date of grant so long as the grantee is, subject to certain exceptions, employed by us at the date the stock option becomes exercisable. As of February 15, 2000, our board of directors adopted a resolution amending the exercise terms of the 1995 Plan whereby 25% of the stock options granted become exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Stock options expire six years after the date of grant. Stock options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.
Pursuant toOrdinance, or the Tax Reform (as defined below) and in order to comply with
the provisions of Section 102 of the Income Tax Ordinance (Amendment No. 132),
5762-2002 (the "Ordinance"), on February 11, 2003 our board of directors adopted
an addendum to our share option plan with respect to options granted as of
January 1, 2003 to grantees who are residents of Israel (the "Addendum"). The
Addendum does not add to nor modify our share option plan in respect of grantees
that are not residents of Israel.Ordinance.
On December 19, 2003 the board of directors resolved to elect the "Capital“Capital Gains Route"Route” (as defined in Section 102(b)(2) of the Tax Ordinance) for the grant of options to Israeli grantees. Generally, subject to the fulfillment of the provisions of Section 102 of the Tax Ordinance, under the Capital Gains Route gains realized from the sale of shares issued upon exercise of options shallwill generally be taxed at a rate of only 25% and not at the marginal income tax rate applicable to the grantee (up to 50%49%). In general, according to the
Addendum and pursuant to the election of the Capital gains Route by our board of
directors, all options granted to Israeli grantees, shares issued upon exercise of such options and any bonus shares issued with respect to such shares, shallwill be held in trust for the benefit of the grantee and registered in the name of a
trustee appointed by the Company and approved by the Israeli tax authorities.
Such options and shares will, subject to the provisions of Section 102 of the
Ordinance and any regulations, rules or orders promulgated thereunder, be held
in trustgrantee. for at least a period which is the shorter of 30 months from the date of grant, or two years from the end of the tax year in which the options are granted. Following an amendment to the Tax Ordinance which came into effect on January 1, 2006, the aforementioned trust period for options granted and shallon or after January 1, 2006 is 24 months from the date of grant. The options may not be released from the trust prior to the payment of the grantee'sgrantee’s tax liabilities. In the event the requirements of Section 102 for the allocation of options according to the Capital Gains Route are not met, - the options will be regarded as options granted under Section
102(c) of the Ordinance and the applicable marginal income tax rate shallrates will apply.
The Addendum, the trustee and the Company's election of the "Capital Gains
Route" is approved by the Israeli tax authorities.
The 1995 Plan is generally administered by our board of directorscompensation committee, which determines the grantees under the 1995 Plan and the number of options to be granted. As of May 31, 2003,April 30, 2006, options to purchase 3,274,396751,114 ordinary shares were outstanding under the 1995 Plan at a weighted average exercise price of $35.04
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$36.95.
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1997 EXECUTIVE SHARE OPTION PLANExecutive Share Option Plan
In 1996, we adopted the NICE-Systems Ltd. 1997 Executive Share Option Plan, or 1997 Plan, to provide an incentive to our officers and to our directors who are also officers by enabling them to share in the future growth of our business. We have registered, through the filing of registration statements on Form S-8 with SEC under the Securities Act, 2,000,000 ADSs for issuance under the 1997 Plan.
Under the terms of the 1997 Plan, stock options will be exercisable during a 60-day period ending four years after grant. Notwithstanding the foregoing, if our year-end earnings per share shall reach certain defined targets, 40% of such stock options shall become exercisable; if earnings per share shall reach certain higher defined targets, an additional 30% of such stock options shall become exercisable; and if earnings per share shall reach certain higher defined targets, an additional 30% of such stock options shall become exercisable, provided that with respect to all of the above-referenced periods, our operating profit shall not be less than 10% of revenues and earnings per share shall exclude any non-recurring expenses related to mergers and acquisitions. Notwithstanding the foregoing, none of the stock options shall be exercisable before the expiration of two years from the date of issuance. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.
The 1997 Plan is generally administered by our board of directors,compensation committee, which determines the grantees under the 1997 Plan and the number of options to be granted. As of May 31, 2003,April 30, 2006, there were no outstanding options to purchase ordinary shares under the 1997 Plan. All of the outstanding options under this plan have expired.
2001 STOCK OPTION PLANStock Option Plan
In 2001, we adopted the NICE-Systems Ltd. 2001 Stock Option Plan, or 2001 Plan, for the purpose of providing an incentive to certain employees, directors, officers and consultants options to acquire our ordinary shares in order to further the advancement our business. The options to acquire our ordinary shares are granted at an exercise price equal to the closing price of our ADSs as quoted on the Nasdaq National Market on the most recent date prior to the date of the resolution of our board of directors to grant the option for which the price was quoted. We have registered, through the filing of a registration statement on Form S-8 with SEC under the Securities Act, 4,000,000 ADSs for issuance under the 2001 Plan.
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Under the terms of the 2001 Plan, one-third of the stock options granted became exercisable ten months after the date of grant and the remaining two-thirds will become exercisable on the first and second anniversaries of the first date of exercise so long as the grantee is, subject to certain exceptions, employed by us at the date the stock option becomes exercisable. The third portion of the options granted under this plan may be exercised at the end of the second anniversary of the first date of exercise if we meet a pre-tax profit target of 20%, as determined by our board of directors in its discretion. Unless otherwise determined by our board of directors as of the date of grant, stock options expire six years after the date of grant. Stock options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.
The 2001 Plan is generally administered by our board of directorscompensation committee which determines the grantees under the 2001 Plan and the number of options to be granted. As of May 31, 2003,April 30, 2006, options to purchase 2,292,810243,114 ordinary shares were outstanding under the 2001 Plan at a weighted average exercise price of $12.10.
2001 STOCK OPTION PLAN FOR TRANSITIONAL EMPLOYEES.$12.1.
2003 Stock Option Plan
In 2001,December 2003, we adopted the NICE-Systems Ltd. 20012003 Employee Stock Option Plan, for
Transitional Employees, or 2001 Transitional Employees2003 Plan, forto attract, motivate and retain talented employees by rewarding performance and encouraging behavior that will improve our profitability. Under the purpose of
providing, during a period of transition during which we terminate or transfer
certain of2003 Plan, our activities, certainemployees, officers and other employeesdirectors may be granted options to acquire our ordinary shares. The options to acquire ordinary shares are granted at an exercise price equal toof not less than the closing pricefair market value of our ADSs as quotedthe ordinary shares on the
Nasdaq National Market on the most recent date prior to the date of the resolution ofgrant, subject to certain exceptions which may be determined by our board of directors to grant the option for which the price was
quoted.directors. We have registered, through the filing of a registration statementstatements on Form S-8 with SEC under the Securities Act 200,000of 1933, 2,000,000 ADSs for issuance under the 2001 Transitional Employees2003 Plan.
Under the terms of the 2001 Transitional Employees2003 Plan, each stock option
granted generally becomes exercisable upon the optionee's termination of
employment in accordance with the optionee's termination agreement with us and
will remain exercisable until the first to occur of the date which is six months
following the date of such termination and the expiration25% of the stock option's
term. Unless otherwise determined by our board of directors asoptions granted become exercisable on the first anniversary of the date of grant stockand 6.25% becomes exercisable once every quarter during the subsequent three years. Stock options expire on December 31, 2002.six years after the date of grant. Stock options are non-transferable except upon the death of the grantee.
Pursuant to the Tax Reform and in order to comply with the provisions of Section 102 of the Ordinance, on January 5, 2004 our board of directors adopted an addendum to our share option plan with respect to options granted as of December 2, 2003 to grantees who are residents of Israel (the “Addendum”). The 2001 Transitional EmployeesAddendum does not add to nor modify our share option plan in respect of grantees that are not residents of Israel. On December 19, 2003 the board of directors resolved to elect the “Capital Gains Route” (as defined in Section 102(b)(2) of the Ordinance) for the grant of options to Israeli grantees, which is described above under “1995 Stock Option Plan.”
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On September 28, 2005, our shareholders approved the transfer of ordinary shares reserved for issuance under our ESPP (as defined below) to the 2003 Plan. Accordingly, 200,000 ordinary shares remain reserved under the ESPP, and the balance of approximately 600,000 ordinary shares were transferred to the 2003 Plan. The ESPP provides for an annual addition of 250,000 ordinary shares to the pool of ordinary shares. Those additional shares will be transferred to the 2003 Plan each year until calendar year 2009.
The 2003 Plan is generally administered by our board
of directorscompensation committee, which determines the grantees under the 2001 Transitional Employees2003 Plan and the number of options to be granted. As of May 31, 2003, there were no
outstandingApril 30, 2006, options to purchase 2,734,843 ordinary shares were outstanding under the 2001 Transitional
Employees Plan. All2003 Plan at a weighted average exercise price of the outstanding options under this plan have expired.
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1999 EMPLOYEE STOCK PURCHASE PLANAmended and Restated Employee Stock Purchase Plan
In 1999, we adopted the NICE-Systems Ltd. 1999 Employee Stock Purchase Plan, or ESPP, in order to provide an incentive to our employees and the employees of our subsidiaries by providing them with an opportunity to purchase our ordinary shares through accumulated payroll deductions, and thereby enable such persons to share in the future growth of our business. We amended the ESPP in December 2003 and in December 2005. We have registered, through the filing of a registration statement on Form S-8 with SEC under the Securities Act, 500,0002,250,000 ADSs for issuance under the ESPP.
Under the terms of the ESPP, eligible employees (generally, all our employees and the employees of our eligible subsidiaries who are not directors or controlling shareholders) may, on January 1 and July 1 of each year in which the ESPP is in effect, elect to become participants in the ESPP for that six-month period by filing an agreement with us arranging for payroll deductions of between 2% and 10% of such employee'semployee’s compensation for the relevant period. An employee'semployee’s election to purchase ordinary shares under the ESPP is subject to his or her right to withdraw from the ESPP prior to exercise, six months after the offering date. The electionoption update price under the ESPP is 85%95% of the lowestclosing sales price of our ordinary sharesone ADR as quoted on the Nasdaq National Market on the commencement date of each offering period orsemi-annual purchase date.
For information on the semi-annual purchase date.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
MAJOR SHAREHOLDERStransfer of ordinary shares reserved for issuance under the ESPP to the 2003 Plan, please see the description under the caption “2003 Stock Option Plan” above.
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Major Shareholders and Related Party Transactions. |
Major Shareholders
The following table sets forth certain information with respect to the beneficial ownership of our ordinary shares as of May 31, 2003the dates stated below, with respect to each person known to us to be the beneficial owner of 5% or more of our outstanding ordinary shares. None of our major shareholders has any different voting rights than any other shareholder.
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| Shares Beneficially Owned |
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Name and Address |
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| Number |
| Percent(1) |
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FMR Corp. | and | Fidelity International Limited(2) |
| 3,073,708 |
| 12.5 | % |
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82 Devonshire Street |
| P.O. Box HM 670 |
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Boston, MA 02109 |
| Hamilton HMCX, Bermuda |
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Massachusetts Financial Services Company and affiliates(3) |
| 2,143,057 |
| 8.7 | % |
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500 Boylston St. |
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Boston, MA 02116 |
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(1) | Based upon 24,648,101 ordinary shares issued and outstanding on May 16, 2006. |
(2) | Based upon information provided to us by FMR Corp. and Fidelity International Limited as of May 10, 2006. |
(3) | Based upon information provided to us by MFS Investment Management as of February 20, 2006. |
As of May 31, 2003,April 3, 2006, we had 4178 ADS holders of record in the United States, holding approximately 47%76% of our outstanding ordinary shares, as reported by The Bank of New York, the depositary for our ADSs.
As of December 31, 2005, Bank Hapoalim funds held 925,918, or 3.8%, of our ordinary shares. This information is based upon a Schedule 13G/A, filed by Bank Hapoalim with the SEC on February 14, 2006, with respect to the aggregate holdings of various of its affiliated mutual funds and provident funds. As of November 11, 2005, Bank Hapoalim informed us that it held 967,981.75, or approximately 5%, of our ordinary shares.
As of June 9, 2005, Bank Leumi held 875,174, or 4.6%, of our ordinary shares. This information is based upon a report provided to us by Bank Leumi pursuant to Israeli law with respect to the aggregate holdings of various of its affiliated mutual funds and provident funds. As of March 31, 2004, Bank Leumi reported that it held 1,271,000, or 7.3%, of our ordinary shares. The method used to compute holdings under Israeli law does not necessarily bear the same result as the method used to compute beneficial ownership under SEC rules and regulations.
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Between April 28, 2004 and June 2, 2005, Thales S.A. sold 762,025ordinary shares. Consequently, Thales SA now holds less than 5% of our ordinary shares. This information is based upon the information contained in an amendment to Schedule 13D filed with the SEC on June 3, 2005 by Thales SA.
To our knowledge, we are not directly or indirectly owned or controlled by another corporation or by any foreign government and there are no arrangements that might result in a change in control of our company.
RELATED PARTY TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
In November 2002, we consummated an agreement to acquire certain assets
Related Party Transactions
None.
Financial Information. |
Consolidated Statements and liabilities of Thales Contact Solutions (or TCS), a developer of customer-facing
technology for public safety, financial trading and customer contact centers,
based in the United Kingdom. TCS was a unit of Thales Group, one of Europe's
premier electronics companies. In connection with the acquisition, we issued
2,187,500 ordinary shares to the Thales Group. In November 2, 2002, we entered
into a Registration Rights Agreement with Thales SA relating to the 2,187,500
ordinary shares issued to the Thales Group. Under the agreement, we agreed to
prepare and file under the Securities Act of 1933 a registration statement
covering the offer and sale of the ordinary shares by June 30, 2003. We agreed
to bear the expense of such registration. For a discussion of the TCS
acquisition, please see "Item 5, Operating andOther Financial Review."
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ITEM 8. FINANCIAL INFORMATION.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.Information.
See "Item 18. Financial Statements" and pages F-1 through F-39.
LEGAL PROCEEDINGS.Item 18, “Financial Statements.”
Legal Proceedings
We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operation, except as noted below.
DICTAPHONE PATENT INFRINGEMENT CLAIM
CipherActive Lawsuit
On October 19, 2004, CipherActive filed an action against us in the District Court of Tel Aviv. In June 2000, Dictaphone Corporation,this lawsuit, CipherActive claims that under a development agreement with us, it is entitled to receive license fees in respect of certain software that it allegedly developed for us and which has been embedded in one of our competitors,products. CipherActive claims that it is entitled to license fees in an amount of $600,000, in addition to the amount of $100,000 already paid to CipherActive by us in respect of such license fees. In our statement of defense we claim that the software developed by CipherActive under the agreement has not been successful in the market, is no longer embedded in our product and, therefore, CipherActive is not entitled to any additional license fees. The lawsuit is in its initial stages.
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Witness Patent Infringement Lawsuits
On July 20, 2004, STS Software System Ltd., or STS, a wholly owned subsidiary of ours, brought a lawsuit against Witness Systems, Inc. asserting that Witness Systems is infringing three U.S. patents of STS relating to voice over internet protocol, or VoIP. STS claims that Witness Systems infringes the VoIP patents by marketing and selling products that incorporate methods of detecting, monitoring and recording information – all fully protected by the patents. STS is seeking an injunction to prevent Witness Systems from making, using, offering to sell or selling any product in the United States that infringes these patents. In response, Witness Systems is asserting that the patents are invalid and not infringed. The case, which is pending in the U.S. District Court for the Northern District of Georgia, is in discovery and claims construction stage and no trial date has been set.
On August 30, 2004, Witness Systems filed a patent infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.
THE 2001 SECURITIES ACTIONS
On February 8, 2001, the trading price of our securities dropped, following
our announcements that, among other things, we would be restating our revenue
for fiscal year 1999 and the first three quarters of 2000 and that we were
revising downward our revenue estimates for the final quarter of 2000.
Thereafter, various plaintiffs filedlawsuit in the United States District Court for the Northern District of New Jersey fourteen putative classGeorgia against Nice Systems Inc., a wholly owned subsidiary of ours. Witness Systems is alleging infringement of two U.S. patents entitled “Method and Apparatus for Simultaneously Monitoring Computer User Screen and Telephone Activity from a Remote Location” and is seeking unspecified damages and injunctive relief. On February 24, 2005, Witness Systems filed a similar action securities lawsuitsin the Northern District of Georgia against us and several of our present or former officers and directors. The
first of these actions was commenced on February 13, 2001. Allalleging infringement of the same two patents. The two actions were consolidated in April 2005. We have denied infringing these patents and are vigorously defending against Witness Systems’ claims. The case is currently in discovery and no trial date has been allocated to the Newark vicinage of the District of New Jersey, and
all have been assigned to the Hon. Joseph A. Greenaway, Jr., U.S.D.J.
The complaintset.
On January 19, 2006, Witness Systems filed a new patent infringement action in each action alleges that we and the individual defendants
violated Section 10(b) of the Exchange Act, 15 U.S.C. ss. 78j(b), and Rule 10b-5
promulgated thereunder. The plaintiffs also attempt to state a "control person"
claim against several of the individual defendants under Section 20(a) of the
Exchange Act, 15 U.S.C. ss. 78t(a). While there are differences among the
fourteen complaints, the plaintiffs essentially contend that we and the
individual defendants misrepresented to investors, either affirmatively or
through omissions, our financial results and the value of our securities. The
plaintiffs seek damages in an unspecified amount. The plaintiffs in each such
action seek to represent a class of investors in our securities throughout a
specified period, approximately from February 2000 to February 2001.
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On April 11, 2001, we and several of the individual defendants successfully
moved to consolidate the various actions under the caption "IN RE: NICE SYSTEMS
LTD. SECURITIES LITIGATION," Master File No. 01-CV-00737 (JAG), and to establish
a schedule for the filing by plaintiffs of an amended consolidated complaint and
our and the individual defendants' response to such complaint.
By Order dated May 21, 2001, a group of plaintiffs were appointed "lead
plaintiffs" pursuant to the Private Securities Litigation Reform Act of 1995, 15
U.S.C. ss. 78u-4(a)(3)(B). On August 20, 2001, the Lead Plaintiffs filed and
served a Consolidated Amended Class Action Complaint, purporting to bring their
securities claims on behalf of a class of persons who purchased our ADSs between
November 3, 1999, and February 7, 2001. On October 22, 2001, we and the
individual defendants moved to dismiss the consolidated complaint in its
entirety, for failure to state a claim upon which relief could be granted, for
failure to plead fraud with the requisite particularity, and on grounds of FORUM
NON CONVENIENS in favor of proceedings in Israel. Briefing on that motion was
completed on December 27, 2001.
Before that motion was decided by the Court, the parties to the litigation
entered into a settlement of the claim, without any admission of liability or
wrongdoing on our part, in the amount of ten million dollars, including
attorneys' fees. We received the funds for this settlement through our directors
and officers insurance policy.
Because the action was brought as a class action, the settlement was
subject to court approval. By Order dated April 7, 2003, the settlement was
approved by the United States District Court for the Northern District of New Jersey,
over the objectionsGeorgia against NICE-Systems Ltd. and Nice Systems Inc., alleging infringement of two shareholders. On April 30, 2003, onea U.S. patent relating to technology to extract particular information from recorded telephone conversations. This technology is used as an option with a NICE product called NicePerform. Witness Systems is requesting unspecified damages and an injunction to prevent any sale of those
shareholders, James J. Hayes, appealed from that Order to the United Stated
Courtallegedly infringing products. We have denied all material allegations and are asserting a number of Appeals for the Third Circuit.
Class action proceedings were also filed against usdefenses. This lawsuit is in Israel as a result
of the revenue restatement announcement and ensuing decline in the trading price
of our securities. On March 7, 2001, Mr. Volfin, a shareholder, filed a request
for a class action against us and Benjamin Levin, our former Chairman of the
Board, claiming that our financial reports for fiscal year 1999 and the first
three quarters of 2000 did not reflect our actual earnings and were therefore
misleading. The classits early stages. We believe that the plaintiff requestedclaims are without merit and intend to represent included all
shareholders that purchased our ordinary shares that are traded on the Tel-Aviv
Stock Exchange between February 16, 2000vigorously defend against them.
On May 10, 2006, NICE Systems, Ltd. and February 8, 2001. The plaintiff
sought damages with respect to each shareholder in the class in an amount equal
to the difference between the purchase price paid for our ordinary shares by
such shareholder and the value of our ordinary shares after our financial
restatement announcement. In March 2002, we agreed to settle this class action
for approximately $4 million, including attorneys fees, without any admission of
liability or wrongdoing on our part. We received the funds for this settlement
through our directors and officers insurance policy.
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THE CHAPIEWSKI ACTION
In April 2000, we acquired all of the stock of CenterPoint Solutions, Inc.,
or CenterPoint, an application developer of Web-enabled solutions for
statistical tracking, digital recording and automated customer surveys for
contact centers, from Douglas Chapiewski, CenterPoint's sole shareholder, in
exchange for $3 million in cash and up to 200,000 ordinary shares, of which
50,000 ordinary shares were placed in escrow as target shares for sales target
to be achieved by December 31, 2000. Following the acquisition, CenterPoint was
merged into aits wholly owned subsidiary, NICE Systems, Inc. filed a new lawsuit against Witness Systems, Inc. in the United States District Court for District of ours.Delaware claiming that Witness Systems is infringing ten U.S. patents. These patents cover various aspects of recording customer interaction communications and traditional logging including event triggered call and screen recording, “cradle-to-grave” recording of customer calls, traditional TDM loggers, off-site storage of calls, and multi-stage telephone data logging. In this lawsuit, we claim that Witness Systems infringes our patents by marketing and selling products that use methods, products and systems which we believe are protected by our patents. The sales target was not achieved
asWitness products we have accused of December 31, 2000infringing our patents include Impact 360®, ContactStore®, eQuality ContactStore®, ContactStore for Communication Manager®, eQuality ContactStore for Communication Manager® and Eyretel’s MediaStore®. We are seeking an injunction to prevent Witness Systems from making, using, or offering to sell or selling any product in the United States which infringes these patents. In addition, we are therefore entitledseeking damages for Witness Systems’ past willful infringement of these patents.
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Origin Dispute
The Company is currently in dispute with Origin Data Realisation Limited relating to receive the escrow
shares.
By complaint dated March 19, 2002, Mr. Chapiewskiterms of a license of software supplied by Origin and incorporated within our Wordnet Series 3 voice recorder and certain other matters. We and Origin agreed to submit the disputes to mediation and, accordingly, attended a mediation session on July 25, 2005. The mediation did not result in a resolution of the disputes, but the parties have continued to negotiate with the aim of reaching a settlement. To date, no formal legal proceedings have been instituted by either side.
Dictaphone Corp. v. Mercom Systems, Inc.
On July 28, 2004, Dictaphone Corp. filed an action against us and NICE Centerpoint,Mercom Systems, Inc. in the United States District Court Cityfor the Southern District of New York asserting that Mercom Systems is infringing two U.S. patents, which we subsequently acquired from Dictaphone. Pursuant to the terms of our agreement with Dictaphone, we succeeded to the right to enforce these patents and Countyto control this litigation. In response, Mercom Systems is asserting that the patents are invalid and not infringed, including alleging that our previous defense of Denver, Statean action by Dictaphone against us in which we challenged the validity of Colorado, under the caption "CHAPIEWSKI V. NICE SYSTEMS LTD. AND
NICE-CENTERPOINT SOLUTIONS, INC.," Case No. 02 CV 2603. In this complaint, Mr.
Chapiewski alleged that we violated Sections 604(3) and 604(4)one of the Colorado
Securities Act, committed common law fraudpatents at issue in this action, estopped us from making the claim of infringement. We and negligent misrepresentation, and
breached representations and warrantiesMercom Systems have reached an agreement in principle to settle the action. It is expected that the documentation for this agreement will be shortly concluded.
Dictaphone Corp. v. VoicePrint.
On July 27, 2004, Dictaphone Corp. filed an action against VoicePrint in the agreement relatingUnited States District Court for the Central District of California asserting the infringement by VoicePrint of the same patents as those asserted in the Mercom Systems lawsuit, which we subsequently acquired from Dictaphone. Similar to the Mercom Systems lawsuit, this lawsuit has also been settled in principle. The documentation for this settlement is expected to be completed and signed shortly.
Calyon Dispute
In April 2006, the Company received a letter from Calyon Corporate and Investment Bank (Calyon), demanding that the Company pay an amount of $648,144 to Calyton. This amount was deducted by the Company in January 2004 from an amount transferred by Calyon to the Company’s account at the instruction of Thales, in connection with the acquisition of Thales Contact Solutions (TCS). Calyon now claims it was not done rightfully. The Company notified TCS in 2004 that it had setoff such amount with respect to an overdue payment by misrepresentingTCS. The Company had previously notified Calyon that it had sent TCS a setoff notice to Mr. Chapiewski, either affirmatively or
through omissions,that effect, and therefore, believes that Calyon’s claim is not justified.
83
Evesham School District Investigation
The U.S. Consumer Product Safety Commission has brought to our financial resultsattention and the valueprovided us an opportunity to comment on an alleged incident of our securities. Mr.
Chapiewski also claimed thata fire allegedly involving a NICE Centerpoint breached severance provisions of
an employment agreement with himproduct used in a school building in the amountEvesham New Jersey School District. We have retained special counsel and engineering consultants who have investigated this matter and concluded that the fire was not the result of $80,000. Mr. Chapiewski sought
damagesfailure in an unspecified amount.
On November 25, 2002 we settled the claim with Mr. Chapiewski, without any
admission of liabilitydesign, manufacturing, installation, service or wrongdoingabuse on our part for an amountand that the fire was caused by a third party commercial off-the-shelf product. We have been advised, based on the results of three million
dollarsthe investigation, that a formal response to the Commission is not necessary. The Commission is not conducting a formal investigation of us and fifty thousand NICEtherefore, this is not a pending case.
Dividends
Since our initial public offering on Nasdaq in 1996, we have not declared or paid dividends on our ordinary shares. We are now seeking reimbursement fromintend to retain our insurance companyearnings for future growth and therefore do not anticipate paying any cash dividends in the foreseeable future.
Significant Changes
In April 2006, we signed a definitive agreement to acquire Performix Technologies Ltd., a pioneer of contact center performance management. Under the terms of the portiondefinitive agreement, we will acquire Performix for a total purchase price of $13.2 million in cash. The purchase price may increase by up to an additional $6.15 million (of which up to $3 million may be payable at closing) based on certain performance criteria. The transaction is subject to the satisfaction of customary closing conditions and is anticipated to close towards the end of the settlement amount which is,second or the beginning of the third quarter of 2006.
For a description of additional significant changes that occurred in our
opinion, covered by our Directors2006, please see Item 10, “Additional Information–Material Contracts–IEX Corporation Acquisition and Officers insurance policy
79
FAST Video Security AG Acquisition.”
84
The Offer and Listing. |
Trading in the ADSs
Our American Depositary Shares, or ADSs, have been quoted on The Nasdaq National Market under the symbol "NICEV"“NICEV” from our initial public offering in January 1996 until April 7, 1999, and thereafter under the symbol "NICE."“NICE.” Prior to that time, there was no public market for our ordinary shares in the United States. Each ADS represents one ordinary share. The following table sets forth, for the periods indicated, the high and low last reported saleclosing prices for our ADSs.
ADSS
----------------------------------
HIGH LOW
-------------- --------------
ANNUAL
1997 ......................... $ 57.500 $ 18.625
1998 ......................... 48.750 12.000
1999 ......................... 50.000 21.375
2000 ......................... 99.000 17.500
2001 ......................... 27.750 8.875
2002 ......................... 17.040 6.700
QUARTERLY 2001
- --------------
First Quarter ................ $ 27.750 $ 9.813
Second Quarter ............... 15.270 8.875
Third Quarter ................ 15.600 12.000
Fourth Quarter ............... 17.750 12.670
QUARTERLY 2002
- --------------
First Quarter ................ $ 17.040 $ 13.320
Second Quarter ............... 14.090 11.670
Third Quarter ................ 12.000 8.390
Fourth Quarter ............... 11.280 6.700
MONTHLY 2002/2003
- -----------------
December .................... $ 11.280 $ 8.070
January ..................... 9.200 8.340
February .................... 10.250 8.400
March ....................... 11.130 9.750
April ....................... 12.190 11.100
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| Low |
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Annual |
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| |
| 2001 |
| $ | 27.75 |
| $ | 8.88 |
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| 2002 |
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| 17.04 |
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| 6.70 |
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| 2003 |
|
| 25.35 |
|
| 8.34 |
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| 2004 |
|
| 31.39 |
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| 17.88 |
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| 2005 |
|
| 49.86 |
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| 29.66 |
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Quarterly 2004 |
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| First Quarter |
| $ | 29.88 |
| $ | 22.56 |
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| Second Quarter |
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| 25.75 |
|
| 21.16 |
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| Third Quarter |
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| 23.38 |
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| 17.88 |
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| Fourth Quarter |
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| 31.39 |
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| 21.04 |
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Quarterly 2005 |
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| First Quarter |
| $ | 35.03 |
| $ | 29.66 |
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| Second Quarter |
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| 39.85 |
|
| 30.57 |
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| Third Quarter |
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| 48.00 |
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| 39.50 |
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| Fourth Quarter |
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| 49.86 |
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| 40.67 |
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Quarterly 2006 |
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| First Quarter |
| $ | 54.48 |
| $ | 47.19 |
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Monthly |
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| November 2005 |
| $ | 46.82 |
| $ | 43.34 |
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| December 2005 |
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| 49.86 |
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| 44.36 |
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| January 2006 |
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| 52.80 |
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| 47.19 |
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| February 2006 |
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| 53.90 |
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| 48.71 |
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| March 2006 |
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| 54.48 |
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| 49.99 |
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| April 2006 |
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| 54.80 |
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| 46.80 |
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| May 2006 (through May 15) |
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| 57.25 |
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| 54.50 |
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85
On May ......................... 15.110 12.140
On June 17, 2003,15, 2006, the last reported sale price of our ADSs was $14.72$ 54.50 per ADS.
80
The Bank of New York is the depositary for our ADSs. Its address is 101 Barclay Street, New York, New York 10286.
TRADING IN THE ORDINARY SHARES
Trading in the Ordinary Shares
Our ordinary shares have been listed on the Tel-Aviv Stock Exchange, or TASE, since 1991. Our ordinary shares are not listed on any other stock exchange and have not been publicly traded outside Israel (other than through ADSs as noted above). The table below sets forth the high and low last reported prices of our ordinary shares (in NIS and dollars) on the TASE. The translation into dollars is based on the daily representative rate of exchange published by the Bank of Israel.
86
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Annual |
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| 2001 |
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| 97.90 |
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| 23.68 |
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| 39.19 |
|
| 9.27 |
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| 2002 |
|
| 75.50 |
|
| 16.81 |
|
| 32.02 |
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| 6.63 |
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| 2003 |
|
| 113.30 |
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| 25.04 |
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| 37.96 |
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| 8.01 |
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| 2004 |
|
| 137.70 |
|
| 31.10 |
|
| 79.51 |
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| 17.52 |
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| 2005 |
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| 229.20 |
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| 49.60 |
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| 130.40 |
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| 29.56 |
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| |
Quarterly 2004 |
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| |
| First Quarter |
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| 137.70 |
|
| 31.10 |
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| 100.80 |
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| 22.36 |
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| Second Quarter |
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| 117.90 |
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| 25.99 |
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| 97.56 |
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| 21.43 |
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| Third Quarter |
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| 107.10 |
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| 23.90 |
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| 79.51 |
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| 17.52 |
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| Fourth Quarter |
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| 131.90 |
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| 30.40 |
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| 92.79 |
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| 20.74 |
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Quarterly 2005 |
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| |
| First Quarter |
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| 151.30 |
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| 34.90 |
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| 130.40 |
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| 29.56 |
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| Second Quarter |
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| 177.40 |
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| 38.78 |
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| 135.40 |
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| 30.96 |
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| Third Quarter |
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| 213.70 |
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| 47.73 |
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| 181.00 |
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| 39.50 |
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| Fourth Quarter |
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| 229.20 |
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| 49.60 |
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| 190.10 |
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| 41.10 |
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Quarterly 2006 |
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| |
| First Quarter |
|
| 254.80 |
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| 54.28 |
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| 214.00 |
|
| 46.24 |
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Monthly |
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| |
| November 2005 |
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| 218.40 |
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| 46.61 |
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| 203.80 |
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| 43.92 |
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| December 2005 |
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| 229.20 |
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| 49.60 |
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| 206.60 |
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| 44.39 |
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| January 2006 |
|
| 243.50 |
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| 52.28 |
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| 214.00 |
|
| 46.24 |
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| February 2006 |
|
| 248.50 |
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| 52.96 |
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| 227.70 |
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| 48.52 |
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| March 2006 |
|
| 254.80 |
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| 54.28 |
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| 235.40 |
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| 50.29 |
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| April 2006 |
|
| 246.10 |
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| 54.65 |
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| 220.70 |
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| 47.98 |
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| May 2006 (through May 15) |
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| 254.80 |
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| 57.32 |
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| 244.90 |
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| 54.47 |
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As of June 17, 2003,May 15, 2006, the last reported price of our ordinary shares on the TASE was NIS 63.90247.50 (or $14.68)$ 55.51) per share.
ITEM 10. ADDITIONAL INFORMATION.
MEMORANDUM AND ARTICLES OF ASSOCIATION
ORGANIZATION AND REGISTER
87
Additional Information. |
Memorandum and Articles of Association
Organization and Register
We are a company limited by shares organized in the State of Israel under the Israeli Companies Law. We are registered with the Registrar of Companies of the State of Israel and have been assigned company number 52-0036872.
OBJECTS AND PURPOSES
In our annual general meeting of shareholders held on September 28, 2005, we increased our authorized share capital to 75 million ordinary shares and adopted amended and restated articles of association.
Objects and Purposes
Our objects and purposes include a wide variety of business purposes, including all kinds of research, development, manufacture, distribution, service and maintenance of products in all fields of technology and engineering and to engage in any other kind of business or commercial activity. Our objects and purposes are set forth in detail in Section 2 of our memorandum of association.
In our annual general meeting of shareholders held on December 24, 2002,we
adopted amended and restated articles of association of the Company.
DIRECTORS
Directors
Our articles of association provide that the number of directors serving on the board shall be not less than three but shall not exceed 13.thirteen, including two outside directors. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by an extraordinary resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The board may appoint additional directors (whether to fill a vacancy or create new directorship) to serve until the next annual shareholders meeting, provided, however, that the board shall have no obligation to fill any vacancy unless the number of directors is less than three. Our officers serve at the discretion of the board.
The board of directors may meet and adjourn its meetings according to the Company'sCompany’s needs but at least once every three months. A meeting of the board may be called at the request of eachany director. The quorum required for a meeting of the board consists of a majority of directors.directors who are lawfully entitled to participate in the meeting and vote thereon. The adoption of a resolution by the board requires approval by a simple majority of the directors present at a meeting in which such resolution is proposed. In lieu of a board meeting, a resolution may be adopted if all of the directors lawfully entitled to vote thereon consent not to convene a majority of directors consent in writing.meeting.
88
Subject to the Companies law, the board may appoint a committee of the board and delegate to such committee all or any of the powers of the board, as it deems appropriate. Under the Companies Law the board of directors must appoint an internal audit committee, comprised of at least three directors and including both of the outside directors. The function of the internal audit committee is to review irregularities in the management of the Company’s business and recommend remedial measures. The committee is also required, under the Companies Law to approve certain related party transactions. Notwithstanding the foregoing, the board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The board has appointed an internal audit committee which has three members, an audit committee which has fivefour members and a compensation committee which has threefour members. 82
APPROVAL OF CERTAIN TRANSACTIONSFor more information on the Company’s committees, please see Item 6, “Directors, Senior Management and Employees–Board Practices” in this annual report.
Fiduciary Duties of Officers
The Companies Law codifies the fiduciary duties that "office“office holders,"” including directors and executive officers, owe to a company. An office holder'sholder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes avoiding any conflict of interest between the office holder'sholder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company'scompany’s affairs which the office holder has received due to his position as an office holder.
Approval of Certain Transactions
Under the Companies Law, all arrangements as to compensation of office holders who are not directors, or controlling parties, require approval of the board of directors. Arrangements regarding the compensation of directors also require internal audit committee and shareholder approval.
The Companies Law requires that an office holder of the company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder'sholder’s spouse, siblings, parents, grandparents, descendants, spouse'sspouse’s descendants and the spouses of any of the foregoing. In addition, the office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction other than in the ordinary course of business, otherwise than on market terms, or that is likely to have a material impact on the company'scompany’s profitability, assets or liabilities.
89
In the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, only board approval is required unless the articles of association of the company provide otherwise. The transaction must not be adverse to the company'scompany’s interest. Furthermore, if the transaction is an extraordinary transaction, then, in addition to any approval stipulated by the articles of association, it also must be approved by the company'scompany’s audit committee and then by the board of directors, and, under certain circumstances, by a meeting of the shareholders of the company. An office holder who has a personal interest in a mattertransaction that is considered at a meeting of the board of directors or the audit committee generally may not be present at the deliberations or vote on this matter. If a majority of the directors has a personal interest in an extraordinary transaction with the Company, shareholder approval of the transaction is required.
The Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the board of directors and the shareholders of the company by simple majority, provided that either such majority vote must include at least one-third of the shareholders who have no personal interest in the transaction and are present at the meeting (without taking into account the votes of the abstaining shareholders), or that the total shareholdings of those who have no personal interest in the transaction who vote against the transaction represent no more than one percent of the voting rights in the company.
83
In addition, under the Companies Law, a private placement of securities thatrequires approval by the board of directors and the shareholders of the company if it will cause a person to become a controlling shareholder or if:
• the securities issued amount to twenty percent or more of the company’s outstanding voting rights before the issuance;
• some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
• the transaction will increase the relative holdings of a shareholder that holds five percent or more of the company'scompany’s outstanding share capital (assuming the exercise or conversion of all
securities held by such person that are exercisable for or convertible into
shares)voting rights or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company'scompany’s outstanding share capital requires approval byor voting rights.
According to the boardCompany’s Articles of directors and the shareholders of the company.
However, if the receiving party is not a director in the company, its CEO, or a
controlling shareholder, and will not become a controlling shareholder as a
result of the private placement, shareholder approval is not required if the
allotted securities amount to twenty percent or less, of the company's
outstanding share capital before the allotment.
Certain types ofAssociation certain resolutions, called special or extraordinary resolution, such as resolutions amending a company's articles of associationregarding mergers, and regarding
changes in capitalization, mergers, consolidations, windings up, or authorizing
a class of shares with special rights, require approval of the holders of 75% of the shares represented at the meeting and voting thereon. Under the provisions
90
Duties of the Companies Law, the shareholders of a company may decide to amend such
company's articles of association to reduce the percentage required for a
special resolution to as low as a simple majority or eliminate the distinction
between ordinary and special resolutions completely; such an amendment must be
adopted by a 75% majority. We have not so amended our articles of association.Shareholders
Under the Companies Law, a shareholder has a duty to act in good faith towards the companyCompany and other shareholders and to refrain from abusing his or her power in the company including, among other things, voting in a general meeting of shareholders on the following matters:
o any amendment to the articles of association;
o an increase of the company's authorized share capital;
o a merger; or
o
• | any amendment to the articles of association; | |
• | an increase of the company’s authorized share capital; | |
• | a merger; or | |
• | approval of interested party transactions which require shareholder approval. |
In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company'scompany’s articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty.
84
EXEMPTION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
EXEMPTION OF OFFICE HOLDERSduty but provides that a breach of his duty is tantamount to a breach of fiduciary duty of an officer of the Company.
Exemption, Insurance and Indemnification of Directors and Officers
Exemption of Office Holders
Under the Companies Law, an Israeli company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions), provided the articles of association of the company allow it to do so. Our articles of association do not allow us to exempt our office
holders to the fullest extent permitted by law.
OFFICE HOLDER INSURANCEdo so.
Office Holder Insurance
Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to:
o
• | a breach of his duty of care to us or to another person, | |
• | a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his act would not prejudice our interests, or | |
• | a financial liability imposed upon him in favor of another person concerning an act performed by him in his capacity as an office holder. |
91
Indemnification of his duty of care to us or to another person,
o a breach of his fiduciary duty to us, provided that the office holder
acted in good faith and had reasonable grounds to assume that his act
would not prejudice our interests, or
o a financial liability imposed upon him in favor of another person
concerning an act performed by him in his capacity as an office
holder.
INDEMNIFICATION OF OFFICE HOLDERSOffice Holders
Our articles of association provide that we may indemnify an office holder against:
o
• | a financial liability imposed on or incurred by an office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court concerning an act performed in his capacity as an office holder. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that the undertaking is limited to types of events which our board of directors deems to be foreseeable in light of our actual operations at the time of the undertaking and limited to an amount or criterion determined by our board of directors to be reasonable under the circumstances, and further provided that such events and amounts or criterion are set forth in the undertaking to indemnify, and provided that the total amount of indemnification for all persons we have agreed to indemnify in such circumstances does not exceed, in the aggregate twenty-five percent (25%) of our shareholders’ equity at the time of the actual indemnification; |
• | reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and | |
• | reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him by a court, in proceedings instituted against him by or on our behalf or by another person, or in a criminal charge from which he was acquitted, or a criminal charge in which he was convicted for a criminal offense that does not require proof of intent, in each case relating to an act performed in his capacity as an office holder. |
We have undertaken to indemnify our directors and officers pursuant to applicable law. We have obtained directors and officers liability imposedinsurance for the benefit of our directors and officers.
Limitations on him in favor of another person by any
judgment, including a settlement or an arbitrator's award approved by
a court concerning an act performed in his capacity as an office
holder,Exemption, Insurance and o reasonable litigation expenses, including attorneys' fees, expended by
the office holder or charged to him by a court, in proceedings
instituted against him by or on our behalf or by another person, or in
a criminal charge from which he was acquitted, or a criminal charge in
which he was convicted for a criminal offense that does not require
proof of intent, in each case relating to an act performed in his
capacity as an office holder.
LIMITATIONS ON EXEMPTION, INSURANCE AND INDEMNIFICATIONIndemnification
The Israeli Companies Law provides that a company may not exempt or 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:
o a breach by the office holder of his duty of loyalty unless, with
respect to insurance coverage, the office holder acted in good faith
and had a reasonable basis to believe that the act would not prejudice
the company;
85
• | a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, 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 duty of care if the breach was done intentionally or recklessly; | |
• | any act or omission done with the intent to derive an illegal personal benefit; or | |
• | any fine levied against the office holder. |
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Required Approvals
In addition, under the Companies Law, any exemption of, indemnification of, or 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 have obtained such approvals for the procurement of liability insurance covering our officers and directors and for the grant of indemnification letters to our officers and directors.
Rights of Ordinary Shares
Our Ordinary Shares confer upon our shareholders MATERIAL CONTRACTS
the right to receive notices of, and to attend, shareholder meetings, the right to one vote per Ordinary Share at all shareholders’ meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by our Board of Directors; and upon liquidation or dissolution, the right to participate in the distribution of any surplus assets of the Company legally available for distribution to shareholders after payment of all debts and other liabilities of the Company. All Ordinary Shares rank pari passu in all respects with each other. Our Board of Directors may, from time to time, make such calls as it may think fit upon a shareholder in respect of any sum unpaid in respect of shares held by such shareholder which is not payable at a fixed time, and each shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments).
Meetings of Shareholders
An annual general meeting of our shareholders shall be held once in every calendar year at such time and at such place either within or without the State of Israel as may be determined by our Board of Directors.
Our Board of Directors may, whenever it thinks fit, convene a special general meeting at such time and place, within or without the State of Israel, as may be determined by the Board of Directors. Special general meetings may also be convened upon requisition in accordance with the Companies Law.
The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules. Although Nasdaq generally requires a quorum of 33-1/3%, we have an exception under the Nasdaq rules and follow the generally accepted business practice for companies in Israel, which have a quorum requirement of 25%. A meeting adjourned for lack of a quorum generally 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.
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Mergers and Acquisitions
A merger of the Company shall require the approval of the holders of a majority of seventy five percent (75%) of the voting power represented at the annual or special general meeting in person or by proxy or by written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Companies Law. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company. These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company. The tender offer must be extended to all shareholders, but the offerer is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offerer 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. If as a result of a full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer. If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares.
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Material Contracts
IEX Corporation Acquisition
In April 2006, we signed a definitive agreement to acquire IEX Corporation, a worldwide provider of contact center workforce management solutions. Under the terms of the definitive agreement, we will acquire the shares of IEX, a wholly owned subsidiary of Tekelec, for approximately $200 million in cash. The transaction is subject to the satisfaction of customary closing conditions and is anticipated to close towards the end of the second or the beginning of the third quarter of 2006.
FAST Video Security AG Acquisition
On January 4, 2006, pursuant to a share purchase agreement, we acquired all the outstanding shares of FAST Video Security AG, a Switzerland-based developer of innovative video systems for security and surveillance purposes, for approximately $21 million in cash, with potential earn-outs based on performance milestones amounting to a maximum of $12 million payable over the next three years.
Settlement Agreement with Dictaphone
In June 2000, Dictaphone Corporation, one of our competitors, filed a patent infringement claim relating to certain technology embedded in some of our products. The claim was for damages for past infringement and enjoinment of any continued infringement of Dictaphone patents. On December 11, 2003, we agreed with Dictaphone to dismiss all claims and counterclaims in connection with Dictaphone’s patent infringement claim against us. Under the terms of the settlement we were required to pay Dictaphone $10 million, of which approximately $4.8 million was paid by our insurance carrier in December 2003 and the balance was paid by us. Each of the companies was to grant the other a worldwide, royalty-free, perpetual license to certain of their respective patents including the disputed patents. The two companies further agreed to enter into enforcement proceedings with respect to both companies’ patent portfolios and to share any proceeds from these actions.
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Dictaphone Acquisition
On June 1, 2005, we consummated an agreement to acquire the assets and assume certain liabilities of Dictaphone’s Communications Recording Systems (CRS™) business for approximately $38.5 million. Dictaphone’s CRS business is a leading provider of liability and quality management systems for first responders, critical facilities, contact centers and financial trading floors.
Among the assets we acquired in the transaction are all of Dictaphone’s rights to receive any damage award or other economic benefit with respect to a violation of any of the rights related to the intellectual property of Dictaphone’s CRS business arising prior to the closing of the transaction.
The parties signed an amendment to the aforementioned asset purchase agreement with Dictaphone, according to which a final adjustment will be made to the audited closing balance sheet, which will reduce the purchase price under the asset purchase agreement by $2.0 million. In addition, the parties agreed, that we are entitled to all previously undistributed interest and other investment income earned with respect to such escrow funds. ”
TCS ACQUISITIONAcquisition
In November 2002, we consummated an agreement to acquire certain assets and liabilities of Thales Contact Solutions (or TCS), a developer of customer-facing technology for public safety, financial trading and customer contact centers, based in the United Kingdom. TCS was a unit of Thales Group, one of Europe'sEurope’s premier electronics companies. In connection with the acquisition, we paid an initial $29.9 million in cash and issued 2,187,500 ordinary shares to Thales Group at a fair market value of $18.1 million calculated at the date of closing.
As
In the fourth quarter of 2002, we recorded a result, Thales Group holds approximately 14%current liability of $2.8 million and a long-term liability of $13.5 million reflecting obligations under a long-term contract we assumed in the TCS acquisition. In the second quarter of 2003 we completed negotiations to terminate this contract as of November 2004 and to amend the terms in the interim. Under the terms of the Company's shares and
two Thales executives were electedamended contract, the cost to the Board of Directors of NICE.Company was $5.2 million less than the amount provided at the acquisition date and consequently, TCS acquisition goodwill was reduced by this amount.
Under the terms of the agreement, the cash portion of the purchase price was subject to downward adjustment based on the value of net assets at closing and the full year 2002 sales of TCS. Based on our calculation of the actual value of net assets acquired and 2002 sales of TCS, we reduced the cash portion of the purchase price as of December 31, 2002 by $12.8 million. This amount iswas presented on our balance sheet as a Related Party Receivable. Thus,Receivable as of December 31, 2002.Thus, the adjusted purchase price paid, including $4.5 million of capitalized acquisition costs, was recorded as $39.7 million. Of the $12.8 million adjustment referred to above, Thales paid us $6.6 million in March 2003, and pending agreement on the actual value2003.
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Thales disputed our calculation of net
assets acquired, we expect to recover the outstanding balance during 2003.
Should we and Thales not reach agreement on the net asset value at closing and the matter will
bewas submitted in September 2003 to binding arbitration by an Independent Accountant, in accordance with the terms of the acquisition agreement..agreement. The Independent Accountant determined a higher net asset value at closing than our calculation of the actual value of net assets acquired in the amount of $2.2 million. Also, under the terms of the agreement, contingentthe cash paymentsportion of upthe purchase price was subject to $10 million in 2003, $7.5 million in 2004,adjustment mechanisms and $7.5 million in 2005 would be due
if certain financial performance criteria are met as part of a three-year
earn-out provisionindemnities related to the saleassets sold to us. On September 8, 2004, we notified Thales of a particular product in 2002 through
2004. The relevant criteria for 2002 were not met and therefore no contingent
paymentclaims in respect of 2002 was recorded. We cannot predict with certainty
whether, howeversuch price adjustment mechanisms. NICE and Thales signed a settlement agreement in respect of such claims on February 24, 2005, according to which Thales paid us a total indemnity amount of $2.6 million.
Sale of Comint/DF Business to Elta
On March 31, 2004, we do not believesold the net assets of our COMINT/DF military-related business to ELTA Systems Ltd (“ELTA”) for $4 million in cash. The net assets sold include the intellectual property, fixed assets, inventory, and contracts related to the COMINT/DF product line which includes high performance spectral surveillance and direction finding systems that thedetect, identify, locate, monitor and record transmission sources. The COMINT/DF business is therefore treated as a discontinued operation in our financial criteria will be met in
yearsstatements.
In 2002, 2003 and 2004. Should any contingent payments be made under2004, the agreement
in the future, the additional consideration when determinable will increase the
purchase price and accordingly additional goodwill will be recorded.
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In the fourth quarterCOMINT/DF business generated revenues of 2002, we recorded a current liability of $2.8approximately $7.2 million, $6.5 million and a long-term liability$0.8 million, respectively, and net income of $13.5approximately $1.4 million, reflecting obligations under
a long-term contract assumed by NICE in the TCS acquisition. We have entered
into negotiations to amend this contract but there can be no assurance that we
will be successful in these negotiations.
STEVENS ACQUISITION
On October 31, 2000, we entered into an Asset Purchase Agreement, among us,
our subsidiary Nice Systems, Inc.$1.5 million and Stevens Communications, Inc.$3.2 million (including gain on disposition), or Stevens.
This agreement related to our acquisition of certain assets of Stevens, a
systems distributor, relating to the promotion, distribution, installation and
maintenance of our products in North America, which was consummated in December
2000. Pursuant to the agreement, we acquired the Stevens assets in exchange for
approximately $7.0 million in cash, subject to adjustment, and up to 426,745
ordinary shares, of which 95,804 ordinary shares were placed in escrow as
security for the indemnification obligations of Stevens to us, 186,818 ordinary
shares were placed in escrow as target shares and 38,914 ordinary shares were
placed in escrow for the benefit of certain employees of Stevens who we employed
following the acquisition, which we released to such employees based on their
continued employment by us.
In October 2001, Stevens and we agreed to settle certain disputes relating
to the Asset Purchase Agreement and provide mutual releases from certain claims
arising under or relating to that agreement. According to the settlement
agreement, Stevens paid us approximately $1.3 million, which represented
collections by Stevens of accounts receivable for assets purchased by us in the
acquisition, less monies owed by us to Stevens for claims under the Asset
Purchase Agreement, certain equipment and services received from Stevens and
fees for use of Stevens' Business Support Center. In addition, Stevens and we
agreed that all of the indemnification and target shares held in escrow pursuant
to the Asset Purchase Agreement would be transferred to Stevens.
CENTERPOINT ACQUISITION
On February 19, 2000, we entered into an Amended and Restated Agreement and
Plan of Reorganization, among us, CPS Merger Corp., CenterPoint Solutions, Inc.,
or CenterPoint, and Douglas Chapiewski, the sole stockholder of CenterPoint.
This agreement related to our acquisition of all of the stock of CenterPoint, an
application developer of Web-enabled solutions for statistical tracking, digital
recording and automated customer surveys for contact centers, which was
consummated in April 2000. Pursuant to the agreement, we acquired the
CenterPoint stock from Mr. Chapiewski in exchange for $3 million in cash and up
to 200,000 ordinary shares, of which 50,000 ordinary shares were placed in
escrow as target shares for sales target to be achieved by December 31, 2000. We
filed a shelf registration statement on Form F-3 to register the resale by Mr.
Chapiewski of up to 200,000 ADSs, representing the ordinary shares he received
in the transaction. Following the acquisition, CenterPoint was merged into a
wholly owned subsidiary of ours.
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By complaint dated March 19, 2002, Mr. Chapiewski filed an action against
us and NICE Centerpoint, in Colorado alleging that we violated several Colorado
securities laws, committed common law fraud and negligent misrepresentation, and
breached representations and warranties in the agreement relating to the
acquisition, by misrepresenting to Mr. Chapiewski, either affirmatively or
through omissions, our financial results and the value of our securities. Mr.
Chapiewski also claimed that NICE Centerpoint breached severance provisions of
an employment agreement with him in the amount of $80,000. Mr. Chapiewski sought
damages in an unspecified amount. On May 9, 2002, Nice-Centerpoint and we filed
and served an answer to the Mr. Chapiewski's complaint. On November 25, 2002 we
settled the claim with Chapiewski, without any admission of liability or
wrongdoing on our part, for an amount of three million dollars and fifty
thousand of the Company's shares. We are now seeking reimbursement from our
insurance company of the portion of the settlement amount which is, in our
opinion, covered by our Directors and Officers insurance policy.
EXCHANGE CONTROLSrespectively.
Exchange Controls
Holders of ADSs are able to convert dividends and liquidation distributions into freely repatriable non-Israeli currencies at the rate of exchange prevailing at the time of repatriation, pursuant to regulations issued under the Currency Control Law, 5738-1978,5738–1978, provided that Israeli income tax has been withheld by us with respect to amounts that are being repatriated to the extent applicable or an exemption has been obtained.
Our ADSs may be freely held and traded pursuant to the General Permit and the Currency Control Law. The ownership or voting of ADSs by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel, are not restricted in any way by the our memorandum of association or articles of association or by the laws of the State of Israel.
TAXATION
Taxation
The following is a discussion of Israeli and United States tax consequences material to our United States shareholders. The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.
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Holders of our ADSs should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ADSs, including, in particular, the effect of any foreign, state or local taxes.
ISRAELI TAX CONSIDERATIONS
Israeli Tax Considerations
The following is a summary of the currentprincipal tax laws applicable to companies in Israel, with special reference to their effect on us. The following contains a discussion of the State of Israel
and certain material Israeli tax considerationsconsequences to purchasers of our ordinary shares or ADSs. 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 appropriate tax authorities or the courts. The discussion is not intended, and should not be construed, as they apply to our United
States shareholders.legal or professional tax advice and is not exhaustive of all possible tax considerations. For a discussion of certain Israeli government programs benefiting various Israeli businesses, including us, please see "ItemItem 5, Operating“Operating and Financial Review and Prospects."
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TAX REFORM
On January 1, 2003,”
General Corporate Tax Structure
Generally, Israeli companies are subject to Corporate Tax on taxable income at the Lawrate of 34% for Amendment of the 2005 tax year. Following an amendment to the Israeli Income Tax Ordinance (Amendment No.132)[New Version], 5762-2002, known as the Tax Reform, came into effect,
following its enactment by the Israeli Parliament on July 24, 2002. On December
17, 2002, the Israeli Parliament approved a number of amendments to the tax
reform,1961 (the “Tax Ordinance”), which came into effect on January 1, 2003. The tax reform, aimed at
broadening2006, the categories of taxable income and reducing the tax rates imposed
on employment income, introduced the following, among other things:
o Reduction of thecorporate tax rate levied onis scheduled to decrease as follows: 31% for the 2006 tax year, 29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003,2003. However, the effective tax rate payable by a company that derives income from an Approved Enterprise may be considerably less.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959
We derive and expect to continue to derive significant tax benefits in Israel relating to our “Approved Enterprise” programs, pursuant to the Law for Encouragement of Capital Investments, 1959, or the Investments Law. To be eligible for these tax benefits, we must continue to meet certain conditions, including making certain specified investments in fixed assets. In the event of a generalfailure to comply with these conditions, the benefits may be canceled and we may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2005, we believe that we are in compliance with all the conditions required by the law.
Income from two of our “Approved Enterprises” is exempt from income tax for two years. Following this two-year period, income from the “Approved Enterprise” will be subject to corporate tax at a reduced rate of 25%10-25% (based on the percentage of foreign ownership in each taxable year) for the following eight years. Income from our other two “Approved Enterprises” is tax exempt for four years. Following this four-year period, income from these “Approved Enterprises” will be subject to corporate tax at a reduced rate of 10-25% (based on the percentage of foreign ownership in each taxable year) for the following six years.
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If we distribute dividends from the income which was exempted from taxes pursuant to our “Approved Enterprise” benefits, we will be taxed as if the exempt income was subject to the regular reduced corporation taxes arising under our “Approved Enterprise” programs. We intend to reinvest the total amount of our tax-exempt income and not to distribute this income to shareholders. The tax-exempt income attributable to an “Approved Enterprise” can be distributed to shareholders without subjecting us to taxes only upon our complete liquidation.
Income from sources other than the “Approved Enterprise” during the period of benefits will be taxable at regular corporate tax rates.
On April 1, 2005, an amendment to the Investments Law came into force. Pursuant to the amendment, a company’s facility will be granted the status of “Approved Enterprise” only if it is proven to be an industrial facility (as defined in such law) that contributes to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. The amendment incorporates certain changes to both individualsthe criteria and corporations. Regarding
assets acquired priorprocedure for obtaining “Approved Enterprise” status for an investment program, and changes to January 1, 2003, the reduced tax ratebenefits afforded in certain circumstances to “Approved Enterprises” under such law (which in some cases is referred to as a Benefiting Enterprise following such amendment). The amendment will apply to a proportionate partApproved Enterprise programs in which the year of commencement of benefits under the law is 2004 or later, unless such programs received approval from the applicable government authority prior to December 31, 2004 in which case the provisions of the gain,amendment will not apply.
As a result of the amendment, where we benefit from tax-exempt income pursuant to the new Benefiting Enterprise regime, we will be subject to taxes upon the distribution of such tax-exempt income or upon our liquidation. Accordingly, we may be required to record a deferred tax liability with respect to such tax-exempt income. We are currently evaluating the impact of the amendment on us. Based on our preliminary analysis, it may materially increase our provision for income taxes in accordancefuture years.
Stamp Duty
The Israeli Stamp Duty on Documents Law, 1961 (the “Stamp Duty Law”), provides that any document (or part thereof) that is signed in Israel or that is signed outside of Israel and refers to an asset or other thing in Israel or to an action that is executed or will be executed in Israel, is subject to a stamp duty, generally at a rate of between 0.4% and 1% of the value of the subject matter of such document. De facto, it has been common practice in Israel not to pay such stamp duty unless a document is filed with a governmental authority. An amendment to the Stamp Duty Law that came into effect on June 1, 2003, determines, among other things, that stamp duty on most agreements shall be paid by the parties that signed such agreement, jointly or severally, or by the party that undertook under such agreement to pay the stamp duty. As a result of the aforementioned amendment to the Stamp Duty Law, the Israeli tax authorities have approached many companies in Israel and requested disclosure of all agreements signed by such companies after June 1, 2003, with the holding periodsaim of collecting stamp duty on such agreements.
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Based on advice from our Israeli counsel, we believe that we may only be required to pay stamp duty on documents signed on or after August 2004. However, we cannot give any assurance that the tax authorities or the courts will accept such view. At this stage it is not yet possible to evaluate the effect, if any, on us of the asset, before2003 amendment to the Stamp Duty Law.
Under an order published in December 2005, the said requirement to pay stamp duty was cancelled with respect to documents signed on or after January 1, 2003, on a linear basis;
o Imposition of2006
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research, and the research and development must be for the promotion of the company and carried out by or on allbehalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible over a three-year period.
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 (as defined below) are entitled to the following tax benefits, among others:
— | deductions over an eight-year period for purchases of know-how and patents; | |
— | deductions over a three-year period of expenses involved with the issuance and listing of shares on the Tel Aviv Stock Exchange or, on or after January 1, 2003, on a recognized stock market outside of Israel; | |
— | the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies; and | |
— | accelerated depreciation rates on equipment and buildings. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli residents, individuals
and corporations, regardless of the territorial sourcecurrency, exclusive of income including
incomefrom government loans, capital gains, interest and dividends, is derived from passive sources suchan “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as interest, dividends and
royalties;
o Introduction of controlled foreign corporation (CFC) rules into the
Israeli tax structure. Generally, under such rules, an Israeli resident who
holds, directly of indirectly,10% or more of the rightsenterprise whose major activity in a foreign
corporation whose shares are not publicly traded, in which more than 50% of
the rights are held directly or indirectly by Israeli residents, and a
majority of whose income in agiven tax year is considered passive income,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 liableavailable in the future.
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Special Provisions Relating to Taxation Under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. Until December 31, 2001 we measured our Israeli taxable income in accordance with this law, but from January 1, 2002 we have elected to measure our Israeli taxable income in relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation index. We were permitted to make such a change pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for so doing. A company that elects to measure its results for tax purposes based on the portionU.S. dollar/NIS exchange rate cannot change that election for a period of three years following the election. We believe that we meet the necessary conditions and as such, income attributedcontinue to his holdings
in such corporation, as if such income were distributed to him as a
dividend; and
o Imposition of capital gainsmeasure our results for tax on capital gains realized by individuals
as of January 1, 2003, from the sale of shares of publicly traded companies
(such gain was previously exempt from capital gains tax in Israel). For
information with respect to the applicability of Israeli capital gains
taxespurposes based on the saleU.S. dollar/NIS exchange rate.
Capital Gains Tax on Sales of ordinary shares, see "CAPITAL GAINS AND INCOME TAXES
APPLICABLE TO NON-ISRAELI SHAREHOLDERS" below;
o Introduction of a new regime for the taxation of shares and options
issued to employees and officers (including directors).
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CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERSOur Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder'sshareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain, which is equivalent to the increase of the relevant asset'sasset’s purchase price, which is attributable to the increase in the Israeli consumer price index 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.
Prior
The following discussion refers to the tax reform, salessale of our ordinary shares by individuals were
generally exempt fromshares. However, the same tax treatment would apply to the sale of our ADSs.
Taxation of Israeli Residents
Generally, up until the 2006 tax year, capital gains tax for so long as they were quotedwas imposed on Nasdaq or listed on a stock exchange in a country appearing in a list
approved by the Controller of Foreign Currency and we qualified as an Industrial
Company. Pursuant to the tax reform, generally, capital gains tax is imposedIsraeli resident individuals at a rate of 15% on real gains derived on or after January 1, 2003, from the sale of shares in, among others, (i) Israeli companies (i) publicly traded on Nasdaq or on a recognized stock market in a country that has a treaty for the preventions of double taxation with Israel, or (ii) companies dually traded on both the Tel Aviv Stock Exchange ("TASE") or; (ii) (subject to a necessary determination by the Israeli Minister
of Finance) Israeli companies publicly traded onand Nasdaq or a recognized stock exchangemarket outside of Israel (such as NICE). This tax rate doeswas contingent upon the shareholders not claiming a deduction for financing expenses in connection with such shares (in which case the gain was generally taxed at a rate of 25%), and did not apply to: (i) the sale of shares by dealers in securities; (ii) the sale of shares by shareholders that report in accordance with the Income Tax Law (Inflationary Adjustments), 1985, referred to as the Inflationary Adjustment Law;Adjustments Law (that were generally taxed at Corporate Tax rates for corporations and at marginal tax rates for individuals); or (iii) the sale of shares by shareholders who acquired their shares prior to an initial public offering (that aremay be subject to a different tax arrangement).
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As of January 1, 2006, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e., such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company) the tax rate will be 25%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of shares, unless such companies were not subject to the Adjustments Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance, in which case the applicable tax rate is 25%. However, different tax rates may apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering.
The tax basis of shares acquired prior to January 1, 2003, will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Taxation of Non-Israeli Residents
Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a the TASE andprovided such gains did not derive from a permanent establishment of such shareholders in Israel. Non-Israeli residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchangemarket outside of Israel, provided however that such capital gains are not derive from
a permanent establishment in Israel and provided that such shareholders did not acquire their shares prior to anthe issuer’s initial public offering.offering and that the gains did not derive from a permanent establishment of such shareholders in Israel and that such shareholders are not subject to the Inflationary Adjustments Law. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In any event,addition, the provisionssale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the tax reform shall not effect the
exemptionU.S.-Israel Tax Treaty) holding ordinary shares as a capital asset is also exempt from Israeli capital gains tax forunder the U.S.-Israel Tax Treaty unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale or (ii) the capital gains accrued before January 1, 2003, as
described above.
Individuals whoarising from such sale are non-residentsattributable to a permanent establishment of Israelthe shareholder located in Israel. If the above conditions are not met, the U.S. resident would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the gain would be treated as foreign source income for United States foreign tax credit purposes and such U.S. resident would be permitted to claim a graduatedcredit for such taxes against the United States income tax imposed on such sale, exchange or disposition, subject to the limitations under the United States federal income tax laws applicable to foreign tax credits.
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Taxation of Dividends Paid on our Ordinary Shares
The following discussion refers to dividends paid on our ordinary shares. However, the same tax treatment would apply to dividends paid on our ADSs.
Taxation of Israeli Residents
Israeli resident individuals are generally subject to Israeli income tax on income derived or accrued from sources in Israel or received in
Israel. Dividend distributions,the receipt of dividends paid on our ordinary shares, other than bonus shares (share dividends) or stock dividends, which is withheld at the source at the following rates: (i) for dividends distributed prior to January 1, 2006 - 25%; (ii) for dividends distributed on or after January 1, 2006 - 20%, or 25% for a shareholder that is considered a Material Shareholder at any time during the 12-month period preceding such distribution. Dividends paid from income derived from our Approved Enterprise are subject to withholding at the rate of 15%, although we cannot assure you that we will designate the profits that are being distributed in a 25% withholdingway that will reduce shareholders’ tax (15% inliability.
Taxation of Non-Israeli Residents
Non-residents of Israel are generally subject to Israeli income tax on the casereceipt of dividends distributed from
taxable income derived from an Approved Enterprise),paid on our ordinary shares, at the rates applicable to Israeli residents, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder'sshareholder’s country of residence.
Under the U.S.-Israel Treaty, the maximum Israeli withholding tax on dividends paid by us is 25%. Dividends of an Israeli company distributed from income of an Approved Enterprise (or Benefiting Enterprise) are subject to a 15% withholding tax under Israeli law. The withheldU.S.-Israel Tax Treaty further provides for a 12.5% Israeli dividend withholding tax ison dividends paid by an Israeli company to a United States corporation owning at least 10% or more of such Israeli company’s issued voting power for, in general, the finalpart of the tax year which precedes the date of payment of the dividend and the entire preceding tax year, provided such United States corporation meets certain limitations concerning the amount of its dividend and interest income. The lower 12.5% rate applies only to dividends from income not derived from an Approved Enterprise (or Benefiting Enterprise) in the applicable period and does not apply if the company has more than 25% of its gross income derived from certain types of passive income. Residents of the United States generally will have withholding tax in Israel on dividends paiddeducted at source. They may be entitled to non-residents.
See "--U.S.-Israel Tax Treaty."
90
a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
103
A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer.
Residents of the United States generally will have withholding tax in
Israel deducted at source. They may be entitled to a credit or deduction for
United States federal income tax purposes in the amount of the taxes withheld,
subject to detailed rules contained in United States tax legislation.
U.S.-ISRAEL TAX TREATY
Pursuant to the U.S.-Israel
U.S. Federal Income Tax Treaty, which became effective as of
January 1, 1995, the sale, exchange or disposition of ADSs by a person who
qualifies as a resident of the United States within the meaning of, and who is
entitled to claim the benefits afforded to such resident by, the U.S.-Israel Tax
Treaty ("Treaty U.S. Resident") will not be subject to the Israeli capital gains
tax unless 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, or exchange or disposition, subject to certain
conditions. A sale, exchange or disposition of ADSs by a Treaty U.S. Resident
who holds, directly or indirectly, shares representing 10% or more of the voting
power of NICE at any time during such preceding 12-month period would be subject
to such Israeli tax, to the extent applicable; however, under the U.S.-Israel
Tax Treaty, the gain would be treated as foreign source income for United States
foreign tax credit purposes and such Treaty U.S. Resident would be permitted to
claim a credit for such taxes against the United States income tax imposed on
such sale, exchange or disposition, subject to the limitations under the United
States federal income tax laws applicable to foreign tax credits.
Under the U.S.-Israel Treaty, the maximum Israeli withholding tax on
dividends is 25%. Dividends of an Israeli company derived from income of an
Approved Enterprise are subject to a 15% withholding tax under Israeli law. The
U.S.-Israel Tax Treaty further provides for a 12.5% Israeli dividend withholding
tax on dividends paid to a United States corporation owning 10% or more of an
Israeli company's voting stock for, in general, the current and preceding tax
years of the Israeli company provided such United States corporation meets
certain limitations concerning the amount of its dividend and interest income.
The lower 12.5% rate applies only on dividends from income not derived from an
Approved Enterprise in the applicable period and does not apply if the company
has certain amounts of passive income. See "--Capital Gains and Income Taxes
Applicable to Non-Israeli Shareholders."
U.S. FEDERAL INCOME TAX CONSIDERATIONSConsiderations
The following is a summary of certain material U.S. Federal income tax consequences that apply to U.S. Holdersholders who hold ADSs as capital assets.assets for tax purposes. This summary is based on U.S. Federal income tax laws, regulations, rulings and decisions in effect as of the date of this annual report, all of which are subject to change at any time, possibly with retroactive effect. This 91
This summary does not account foraddress tax considerations applicable to a holder of an ADS that may be subject to special tax rules including, without limitation, the specific
circumstances of any particular investor such as
o broker-dealers;
o financial institutions;
o certain insurance companies;
o investors liable for alternative minimum tax;
o tax-exempt organizations;
o investors that actually or constructively own 10 percent or more of
our voting shares;
o investors holding ADSs as part of a straddle or a hedging or
conversion transaction; and
o investors that are treated as partnerships or other pass through
entities for U.S. federal income tax purposes.following:
— | dealers or traders in securities, currencies or notional principal contracts; | |
— | financial institutions; | |
— | insurance companies; | |
— | real estate investment trusts; | |
— | banks; | |
— | investors liable for alternative minimum tax; | |
— | tax-exempt organizations; | |
— | regulated investment companies; | |
— | investors that actually or constructively own 10 percent or more of our voting shares; | |
— | investors that will hold the ADSs as part of a hedging or conversion transaction or as a position in a straddle or a part of a synthetic security or other integrated transaction for U.S. Federal income tax purposes; | |
— | investors that are treated as partnerships or other pass through entities for U.S. Federal income tax purposes and persons who hold the ADSs through partnerships or other pass through entities; and | |
— | investors whose functional currency is not the U.S. dollar. |
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This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation.taxation or the indirect effects on the holders of equity interests in a holder of an ADS.
You are urged to consult your tax advisors regarding the foreign and United
StatesU.S. Federal, state and local tax considerationsconsequences of an investment in ADSs.
For purposes of this summary, a U.S. Holder is:
o an individual who“U.S. holder” is a citizen or,beneficial owner of ADSs that is, for U.S. Federal income tax purposes, a resident of the United States;
o a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision thereof;
o purposes:
— | an individual who is a citizen or, for U.S. Federal income tax purposes, a resident of the United States; | ||
— | a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof; | ||
— | an estate whose income is subject to U.S. Federal income tax regardless of its source; or | ||
— | a trust if: | ||
(a) | a court within the United States is able to exercise primary supervision over administration of the trust; and | ||
(b) | one or more United States persons have the authority to control all substantial decisions of the trust. | ||
In general, if you hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. Federal income tax regardlesspurposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of its source; or
o a trust if:
(a) a court withinforeign tax credits for U.S. holders of ADSs. Such actions would also be inconsistent with the United States is able to exercise primary
supervision over administrationclaiming of the trust; and
(b) one or more United States persons havereduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the authority to control
all substantial decisionsanalysis of the trust.
TAXATION OF DIVIDENDScreditability of Israeli taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by parties to whom the ADSs are released.
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U.S. Taxation of ADSs
Distributions
Subject to the discussion below under "passive foreign investment
companies,"“Passive Foreign Investment Companies” below, the gross amount of any distributions that you receive with respect
to ADSs,distribution, including the amount of any Israeli taxes withheld from these distributions, actually or constructively received by a U.S. holder with respect to ADSs will constitute dividends forbe taxable to the U.S. Federal income tax purposes,holder as a dividend to the extent of our current and accumulated earnings and profits as determined for
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YouThe U.S. holder will not be eligible for any dividends received deduction in respect of the dividend otherwise allowable to corporations. Distributions in excess of earnings and profits will be requirednon-taxable to include this amountthe U.S. holder to the extent of, dividendsand will be applied against and reduce, the U.S. holder’s adjusted tax basis in gross income as ordinary income on the date such dividend is
actually or constructively received.ADSs. Distributions in excess of earnings and profits and such adjusted tax basis will generally be taxable to the U.S. holder as capital gain from the sale or exchange of property. We do not maintain calculations of our earnings and profits under U.S. Federal income tax principles. If we do not report to a U.S. holder the portion of a distribution that exceeds earnings and profits, the distribution will generally be taxable as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital toor as capital gain under the extentrules described above. The amount of your
tax basis in the ADSs and, to the extent in excessany distribution of your tax basis,property other than cash will be treated as capital gain. See "--Dispositionsthe fair market value of ADSs" belowthat property on the date of distribution.
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “2003 Act”) enacted on May 28, 2003, certain dividends received by non-corporate U.S. holders after December 31, 2002, will be subject to a maximum income tax rate of 15%. This reduced income tax rate is only applicable to dividends paid by a “qualified corporation” that is not a “passive foreign investment company” and only with respect to shares held by a qualified U.S. holder (i.e., a non-corporate holder) for a minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date). We should be considered a qualified corporation (see “Passive Foreign Investment Companies” below). Accordingly, dividends paid by us to individual U.S. holders on shares held for the discussion
on the taxation of capital gains. Dividends generally will not qualifyminimum holding period should be eligible for the dividends-received deduction availablereduced income tax rate. The reduced tax rate for qualified dividends is scheduled to corporations.
Dividends that we payexpire on December 31, 2008, unless further extended by Congress.
The amount of any distribution paid in NIS,a currency other than U.S. dollars (a “foreign currency”) including the amount of any Israeli taxes
withheld from these dividends,withholding tax thereon, will be included asin the gross income to you inof a U.S. holder in an amount equal to the U.S. dollar amountvalue of the foreign currencies calculated by reference to the exchange rate in effect on the day
such dividendsdate of receipt, regardless of whether the foreign currencies are distributed. If you convert dividends paid in NISconverted into U.S. Dollarsdollars. If the foreign currencies are converted into U.S. dollars on the day the dividends are distributed, youdate of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss within respect of the dividend. If the foreign currencies received in the distribution are not converted into U.S. dollars on the date of receipt, a U.S. holder will have a basis in the foreign currencies equal to such
conversion.its U.S. dollar value on the date of receipt. Any gain or loss resulting fromon a subsequent exchangeconversion or other disposition of such NIS
generallythe foreign currencies will be treated as U.S. source ordinary income or loss.
Dividends received by a U.S. holder with respect to ADSs will be treated as foreign source income for the purposes of calculating that holder’s foreign tax credit limitation. Subject to certain conditions and limitations, youany Israeli taxes withheld on dividends may elect to claimbe deducted from taxable income or credited against a credit against yourU.S. holder’s U.S. Federal income tax liabilityliability. The limitation on foreign taxes eligible for Israeli tax withheld
from dividends received in respect of the ADSs. Dividends generally will be
treated as foreign-source passive income or financial services income for United
StatesU.S. foreign tax credit purposes.is calculated separately with respect to specific classes of income. The rules relating to the determination of
the foreign tax creditcredits and the timing thereof are complex, and youcomplex. U.S. holders should consult your personaltheir own tax advisors to determine whether and to what extent you would be entitled to this
credit. Alternatively, you may elect to claim a U.S. tax deduction, insteadregarding the availability of a foreign tax credit under their particular situation. Under the 2003 Act, the amount of the qualified dividend income paid by us to a U.S. holder that is subject to the reduced dividend income tax rate and that is taken into account for purposes of calculating the U.S. holder’s U.S. foreign tax credit limitation must be reduced by the “rate differential portion” of such Israelidividend. Each qualified U.S. holder is urged to consult its own tax but only foradvisor regarding the possible applicability of the reduced rate under the 2003 Act and the related restrictions and special rules.
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Sale or Other Disposition of ADSs
If a year in which you elect
to do so with respect to all foreign income taxes. DISPOSITIONS OF ADSS
If you sellU.S. holder sells or otherwise disposedisposes of yourits ADSs, you will recognize gain or loss will be recognized for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and yoursuch holder’s adjusted tax basis in yourthe ADSs. Subject to the discussion below under the heading "--Passive“Passive Foreign Investment Companies,"” such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if youthe holder had held the ADSs for more than one year at the time of the sale or other disposition. Long-term capital gains realized by individual U.S. Holdersholders generally are subject to a lower marginal U.S. federalFederal income tax rate than ordinary income. Under most circumstances, any gain that you recognizea holder recognizes on the sale or other disposition of ADSs will be U.S.-sourceU.S. source for purposes of the foreign tax credit limitation; and losses recognized will be allocated against U.S. source income.
PASSIVE FOREIGN INVESTMENT COMPANIES
If a U.S. holder receives foreign currency upon a sale or exchange of ADSs, gain or loss, if any, recognized on the subsequent sale, conversion or disposition of such foreign currency will be ordinary income or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. holder, the U.S. holder generally should not be required to recognize any gain or loss on such conversion.
Passive Foreign Investment Companies
For U.S. Federal income tax purposes, we will be considered a passive foreign investment company or PFIC,(“PFIC”) for any taxable year in which either 75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gain over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. Holdersholders owning ADSs. Accordingly, youU.S. holders are urged to consult yourtheir own tax advisors regarding the application of such rules.
93
If we are treated as a PFIC for any taxable year,
o you would be required to allocate income recognized upon receiving
certain dividends or gain recognized upon the disposition of ADSs
ratably over your holding period for such ADSs,
o
— | a U.S. holder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ADSs ratably over its holding period for such ADSs, |
107
— | the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year, | |
— | gain recognized upon the disposition of ADSs would be taxable as ordinary income, and | |
— | a U.S. holder would be required to make an annual return on IRS Form 8621 regarding distributions received and gain realized with respect to |
One method to avoid the aforementioned treatment is for a U.S. holder to make an election to treat us as a qualified electing fund. A U.S. holder may make a qualified electing fund election only if we furnish the U.S. holder with certain tax information and we do not presently intend to prepare or provide this information. Alternatively, another method to avoid the aforementioned treatment is for a U.S. holder to make a timely mark-to-market election in respect of yourits ADSs. If you electa U.S. holder elects to mark-to-market yourits ADSs, you will generally include in income any excess of the fair market value of the ADSs at the close of each tax year over yourthe adjusted basis in the
ADSs.such ADSs will generally be included in income. If the fair market value of the ADSs had depreciated below yourthe adjusted basis at the close of the tax year, youthe U.S. holder may generally deduct the excess of the adjusted basis of the ADSs over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that youwere included in income by such holder with respect to ADSs in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ADSs with respect to which the mark-to-market election is made, is treated as ordinary income or loss.
Based on our estimated gross income, the average value of our gross assets and activities for the year 2002,nature of our business, we do not believe that we were not a PFIC for that year, nor do we expect to becomewill be classified as a PFIC in the foreseeable future. However,current taxable year. Our status in any taxable year will depend on our assets and activities in each year and because this is a factual determination made annually at the end of each taxable year, there can be no assurancesassurance that we will not be considered a PFIC for any future taxable year. If we were treated as a PFIC forin any year during which a U.S. holder owns ADSs, certain adverse tax consequences could apply, as described above. Given our current business plans, however, we do not expect that year or any taxable year. If we are or becomewill be classified as a PFIC for any taxable year included in future years.
You are urged to consult your holding period, we generally will remaintax advisor regarding the possibility of us being classified as a PFIC for all subsequent taxable yearsand the potential tax consequences arising from the ownership and disposition (directly or indirectly) of an interest in a PFIC.
108
Backup Withholding and Information Reporting
Payments of dividends with respect to your holding of our ADSs.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE POSSIBILITY OF US
BEING CLASSIFIED AS A PFIC AND THE POTENTIAL TAX CONSEQUENCES ARISING FROM THE
OWNERSHIP AND DISPOSITION (DIRECTLY OR INDIRECTLY) OF AN INTEREST IN A PFIC.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments in respectADSs and the proceeds from the sale, retirement, or other disposition of ADSs maymade by a U.S. paying agent or other U.S. intermediary will be subjectreported to information reportingthe IRS and to the U.S. Internal Revenue Service andholder as may be required under applicable U.S. Treasury regulations. We, or an agent, a broker, or any paying agent, as the case may be, may be required to U.S.withhold tax, currently at the rate of 28% (the backup withholding tax. Backup
withholding willtax), if a non-corporate U.S. holder that is not apply, however, if you furnish a correctotherwise exempt fails to provide an accurate taxpayer identification number and make anycomply with other IRS requirements concerning information reporting. Certain U.S. holders (including, among others, corporations and tax-exempt organizations) are not subject to backup withholding. Backup withholding is not an additional tax. Any amount of backup withholding withheld may be used as a credit against your U.S. Federal income tax liability provided that the required certification or are otherwise
exemptinformation is furnished to the IRS. U.S. holders should consult their tax advisors as to their qualification for exemption from backup withholding. Generally,withholding and the procedure for obtaining an exemption.
U.S. Federal Income Tax Consequences to Non-U.S. Holders
Sale, Exchange or Retirement of Securities
If you sell, exchange or redeem ADSs, you will providegenerally not be subject to U.S. Federal income tax on any gain, unless one of the following applies:
— | the gain is connected with a trade or business that you conduct in the United States through an office or other fixed place of business, or | |
— | you are an individual, you are present in the United States for at least 183 days during the year in which you dispose of the ADSs, and certain other conditions are satisfied. |
Backup Withholding and Information Reporting
United States rules concerning information reporting and backup withholding are described above. These rules apply to non-U.S. holders as follows:
Information reporting and backup withholding may apply if you use the U.S. office of a broker or agent, and information reporting (but not backup withholding) may apply if you use the foreign office of a broker or agent that has certain connections to the United States. You may be required to comply with applicable certification procedures to establish that you are not a U.S. holder in order to avoid the application of such certificationinformation reporting and backup withholding requirements. You should consult your tax advisor concerning the application of the information reporting and backup withholding rules.
Non-U.S. holders are urged to consult legal and tax advisors in the countries of their citizenship, residence and domicile to determine the possible tax consequences of holding and selling ADSs under the laws of their respective jurisdictions in light of their own particular circumstances.
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Documents on Form W-9 (Request for Taxpayer Identification Number and Certification).
94
DOCUMENTS ON DISPLAYDisplay
We are subject to certain of the information reporting requirements of the Securities and Exchange Act of 1934, as amended. We, as a "foreign“foreign private issuer"issuer” are exempt from the rules and regulations under the Securities 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"“short-swing” profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file reports and financial statements with the Securities and Exchange CommissionSEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. However, we will file with the Securities and Exchange CommissionNasdaq rules generally require that companies send an annual report to shareholders prior to the annual general meeting. We have an exception under the Nasdaq rules and follow the generally accepted business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, containingwhich contain financial statements audited by an independent accounting firm.firm, electronically with the SEC and post a copy on our website. We will also furnish to the SEC quarterly reports on Form 6-K containing unaudited financial information after the end of each of the first three quarters.
You may read and copy any document we file with the SEC at its public reference facilities at, 450 Fifth100 F Street, N.W.N.E., Washington, D.C. 20549 and at the SEC'sSEC’s regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth100 F Street, N.W.N.E., Washington, D.C. 20549. The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of this web site is http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. In addition, our ADSs are quoted on the Nasdaq Stock Market, so our reports and other information can be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERAL
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Quantitative and Qualitative Disclosures About Market Risk. |
General
Market risks relating to our operations result primarily from weak economic conditions in the markets in which we sell our products and changes in interest rates and exchange rates. To manage the volatility related to the latter exposure, we may enter into various derivative transactions. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in currency exchange rates. It is our policy and practice to use derivative financial instruments only to manage exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivative.
FOREIGN CURRENCY RISK.
Foreign Currency Risk. We conduct our business primarily in U.S. dollars but also in the currencies of the United Kingdom, Canada, the European Union and Israel.Israel as well as other currencies. Thus, we are exposed to foreign exchange movements, primarily in UK, European and Israel currencies. We monitor foreign currency exposure and, from time to time, may enter into various contracts to preserve the value of sales transactions and commitments.
95
INTEREST RATE RISK.
Interest Rate Risk. We invest in investment-grade U.S. corporate bonds and dollar deposits with FDIC-insured U.S.US banks. At least 80% of our securities investments are in corporate and US government agency bonds. Since these investments carry fixed interest rates and since our policy and practice is to hold these investments to maturity, interest income over the holding period is not sensitive to changes in interest rates. Up to 20% of our investment portfolio may be made in investment grade Callable Range Accrual Notes whose principal is guaranteed. As of December 31, 2002, we had no other
exposure2005, 3.4% of our investment portfolio was in such Notes. The Notes are subject to interest rate, liquidity and price risks. Since our policy is to hold these investments to maturity or until called, the interest income from these notes will not be effected by changes in their market value or to liquidity risk. However, a significant increase in prevailing interest rates may effect whether or not interest income is received for a particular period. As of December 31 2005, we did not invest in auction rate securities.
Other risks and had no interest rate derivative
financial instruments outstanding.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.uncertainties that could affect actual results and outcomes are described in Item 3, “Key Information–Risk Factors.”
Description of Securities Other than Equity Securities. |
Not Applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, NICE carried out an
Defaults, Dividend Arrearages and Delinquencies. |
None.
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Material Modifications to the Rights of Security Holders and Use of Proceeds. |
None.
Controls and Procedures. |
An evaluation was performed under the supervision and with the participation of NICE'sNICE’s management, including ourits Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of NICE'sNICE’s disclosure controlcontrols and procedures pursuant to Rule 13a-14(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934.1934, as amended) as of the end of the period covered by this report. Based uponon that evaluation, NICE'sthe Chief Executive Officer and Chief Financial Officer concluded that NICE'sthese disclosure controls and procedures were effective. There has been no change in NICE’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the NICE’s internal control over financial reporting.
Audit Committee Financial Expert. |
Our board of directors has determined that Dan Falk meets the definition of an audit committee financial expert, as defined in Item 401 of Regulation S-K, and is independent under the applicable regulations.
Code of Ethics. |
We have adopted a Code of Ethics for executive and financial officers, that also applies to all of our employees. The Code of Ethics is publicly available on our website at www.nice.com. Written copies are effective in timely
alerting themavailable upon request. If we make any substantive amendments to material information relatingthe Code of Ethics or grant any waivers from a provision of this code to NICE (including its
consolidated subsidiaries) requiredour chief executive officer, principal financial officer or corporate controller, we will disclose the nature of such amendment or waiver on our website.
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Principal Accountant Fees and Services. |
Fees Paid to Independent Auditors
Ernst & Young, has served as our independent auditor for the fiscal years ended December 31, 2004 and 2005. Fees billed or expected to be included in NICE's periodic SEC
filings. Since the datebilled by Ernst & Young for professional services for each of the evaluation, there have been no significant
changeslast two fiscal years were as follows:
|
|
|
|
|
|
|
|
Services Rendered |
| 2004 Fees |
| 2005 Fees |
| ||
|
|
| |||||
Audit (1) |
| $ | 495,000 |
| $ | 620,000 |
|
Audit-related (2) |
|
| 54,000 |
|
| 224,000 |
|
Tax (3) |
|
| 207,000 |
|
| 112,000 |
|
Total |
| $ | 756,000 |
| $ | 956,000 |
|
(1) | Audit fees consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide. |
(2) | Audit-related fees relate to assurance and associated services that traditionally are performed by the independent auditor, including: accounting consultation and consultation concerning financial accounting, reporting standards and government approvals. |
(3) | Tax fees relate to tax compliance, planning, advice and preparation of transfer pricing documentation. |
Policies and Procedures
Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our internal controlsindependent registered public accounting firm, Ernst & Young. The policy generally requires the Audit Committee’s approval of the scope of the engagement of our independent auditor or in other factors that could significantly
affect the controls. We intend to continue to refine our internal controls on an ongoing basis asindividual basis. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors.
Exemptions from the Listing Standards for Audit Committees. |
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
In 2005, neither we deem appropriate with a view towards making improvements.
ITEM 16. [RESERVED]
97
nor our affiliates purchased any of our own shares.
113
PART III
ITEM 17. FINANCIAL STATEMENTS.
Financial Statements. |
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS.
Financial Statements. |
See pages F-1 through F-42,F-39, incorporated herein by reference.
ITEM 19. EXHIBITS.
114
Exhibits. | |||
Exhibit No. | Description | ||
1.1 | Amended and Restated Memorandum of Association of NICE-Systems Ltd. | ||
1.2 | Amended and Restated Articles of Association of NICE-Systems Ltd. approved by the Annual General Meeting of the | ||
2.1 | Form of Share Certificate (filed as Exhibit 4.1 to Amendment No. 1 to NICE-Systems Ltd. | ||
2.2 | Form of Deposit Agreement including Form of ADR Certificate (filed as Exhibit A to NICE-Systems Ltd. | ||
4.3 | Sales and Purchase Agreement dated July 30, 2002 by and among NICE-Systems | ||
4.4 | Registration Rights Agreement between NICE-Systems Ltd. and Thales SA. (filed as Exhibit 4.4 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the Commission on June 26, 2003, and incorporated herein by reference). | ||
4.5 | Manufacturing Outsourcing Agreement | ||
115
4.6 | Settlement Agreement, dated | ||
4.7 | Asset Purchase and Sale Agreement, dated as of April 11, 2005, between Dictaphone Corporation and NICE Systems Inc. (filed as Exhibit 4.8 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the Commission on June 29, 2005, and incorporated herein by reference). | ||
4.8 | Amendment No. 1, dated as of May 31, 2005, to the Asset Purchase and Sale Agreement, dated as of April 11, 2005, between Dictaphone Corporation and NICE Systems Inc. (filed as Exhibit 4.9 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the Commission on June 29, 2005, and incorporated herein by reference). | ||
4.9 | Share Purchase Agreement, dated as of November 17, 2005, between certain shareholders of FAST Video Security AG and NICE-Systems Ltd. | ||
4.10 | Share Purchase Agreement, dated as of April 27, 2006, between IEX Corporation and NICE-Systems Ltd. | ||
4.11 | Amendment No. 2, dated as of March 27, 2006, to the Asset Purchase and Sale Agreement, dated as of April 11, 2005, between Dictaphone Corporation and NICE-Systems Inc. | ||
8.1 | List of significant subsidiaries |
10.1 | Consent of Kost, Forer, Gabbay & | ||
12.1 | Certification | ||
12.2 | Certification by Ran Oz, the Chief Financial Officer of NICE-Systems Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
13.1 | Certification by Haim Shani, the Chief Executive Officer of NICE-Systems Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
13.2 | Certification by Ran Oz, the Chief Financial Officer of |
116
NICE-SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20022005
IN U.S. DOLLARS IN THOUSANDS
INDEX
PAGE
------------------
F - 1
 | n | Kost Forer Gabbay & Kasierer | n | Phone: 972-3-6232525 |
| 3 Aminadav St. Tel-Aviv 67067, Israel | Fax: 972-3-5622555 |
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3 - F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11 - F-42
- - - - - - - - - -
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
NICE SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of NICE Systems Ltd. ("(“the Company"Company”) and subsidiaries as of December 31, 20012004 and 2002,2005, and the related consolidated statements of operations, changes in shareholders'income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002.2005. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries as of December 31, 20012004 and 2002,2005, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2002,2005, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2l to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" effective January 1, 2002.
/s/ Kost Forer & Gabay
----------------------
Tel-Aviv, Israel KOST FORER & GABBAY
May 28, 2003 A Member of Ernst & Young Global
F-2
| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| February 8, 2006 | A Member of Ernst & Young Global |
F - 2
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| U.S. |
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 26,579 | $ | 254,956 | ||||
| Short-term bank deposits | 175 | 102 | ||||||
| Marketable securities | 24,348 | 36,159 | ||||||
| Trade receivables (net of allowance for doubtful accounts of $ 2,661 and $ | ||||||||
| 2,214 at December 31, 2004 and 2005, respectively) | 46,407 | 66,153 | ||||||
| Other receivables and prepaid expenses | 8,581 | 9,544 | ||||||
| Inventories | 12,615 | 23,172 | ||||||
| Deferred tax assets | - | 3,360 | ||||||
| Total current assets | 118,705 | 393,446 | ||||||
| LONG-TERM ASSETS: | ||||||||
| Marketable securities | 114,805 | 120,342 | ||||||
| Investment in affiliates | 1,200 | 1,200 | ||||||
| Severance pay fund | 7,356 | 7,907 | ||||||
| Other receivables and prepaid expenses | 854 | 648 | ||||||
| Deferred tax assets | - | 4,976 | ||||||
| Property and equipment, net | 16,981 | 14,888 | ||||||
| Other intangible assets, net | 12,665 | 23,990 | ||||||
| Goodwill | 25,745 | 49,853 | ||||||
| Total long-term assets | 179,606 | 223,804 | ||||||
| Total assets | $ | 298,311 | $ | 617,250 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F - F-3 -
3
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| U.S. |
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Trade payables | $ | 11,975 | $ | 18,194 | ||||
| Accrued expenses and other liabilities | 55,302 | 100,544 | ||||||
| Total current liabilities | 67,277 | 118,738 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Accrued severance pay | 8,163 | 8,901 | ||||||
| Deferred tax liabilities | - | 2,493 | ||||||
| Other long-term liabilities | - | 77 | ||||||
| Total long-term liabilities | 8,163 | 11,471 | ||||||
| COMMITMENTS AND CONTINGENT LIABILITIES | ||||||||
| SHAREHOLDERS' EQUITY: | ||||||||
| Share capital- | ||||||||
| Ordinary shares of NIS 1 par value: | ||||||||
| Authorized: 50,000,000 and 75,000,000 shares at December 31, 2004 and | ||||||||
| 2005, respectively; Issued and outstanding: 18,180,260 and 24,137,643 | ||||||||
| shares at December 31, 2004 and 2005, respectively; | 5,464 | 6,772 | ||||||
| Additional paid-in capital | 244,400 | 473,203 | ||||||
| Accumulated other comprehensive income | 5,506 | 2,996 | ||||||
| Retained earnings (accumulated deficit) | (32,499 | ) | 4,070 | |||||
| Total shareholders' equity | 222,871 | 487,041 | ||||||
| Total liabilities and shareholders' equity | $ | 298,311 | $ | 617,250 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F - F-4 -
4
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF |
| U.S. |
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | 2005 | |||||||||
| Revenues: | |||||||||||
| Products | $ | 168,055 | $ | 182,616 | $ | 206,355 | |||||
| Services | 56,203 | 70,027 | 104,755 | ||||||||
| Total revenues | 224,258 | 252,643 | 311,110 | ||||||||
| Cost of revenues: | |||||||||||
| Products | 64,231 | 64,432 | 67,543 | ||||||||
| Services | 42,084 | 49,876 | 68,683 | ||||||||
| Total cost of revenues | 106,315 | 114,308 | 136,226 | ||||||||
| Gross profit | 117,943 | 138,335 | 174,884 | ||||||||
| Operating expenses: | |||||||||||
| Research and development, net | 22,833 | 24,866 | 30,896 | ||||||||
| Selling and marketing | 53,351 | 61,855 | 72,829 | ||||||||
| General and administrative | 29,840 | 31,269 | 37,742 | ||||||||
| Amortization of acquired intangibles | 350 | 317 | 1,331 | ||||||||
| Restructuring expenses and settlement of litigation | 7,082 | - | - | ||||||||
| Total operating expenses | 113,456 | 118,307 | 142,798 | ||||||||
| Operating income | 4,487 | 20,028 | 32,086 | ||||||||
| Financial income, net | 2,034 | 3,556 | 5,398 | ||||||||
| Other income (expenses), net | 292 | 54 | (13 | ) | |||||||
| Income before taxes on income | 6,813 | 23,638 | 37,471 | ||||||||
| Taxes on income | 1,205 | 2,319 | 902 | ||||||||
| Net income from continuing operations | 5,608 | 21,319 | 36,569 | ||||||||
| Net income from discontinued operation | 1,483 | 3,236 | - | ||||||||
| Net income | $ | 7,091 | $ | 24,555 | $ | 36,569 | |||||
| Net earnings per share: | |||||||||||
| Basic: | |||||||||||
| Continuing operations | $ | 0.35 | $ | 1.22 | $ | 1.91 | |||||
| Discontinued operation | 0.09 | 0.18 | - | ||||||||
| Net earnings | $ | 0.44 | $ | 1.40 | $ | 1.91 | |||||
| Diluted: | |||||||||||
| Continuing operations | $ | 0.33 | $ | 1.14 | $ | 1.77 | |||||
| Discontinued operation | 0.09 | 0.17 | - | ||||||||
| Net earnings | $ | 0.42 | $ | 1.31 | $ | 1.77 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
F - F-5 -
5
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
| U.S. |
| Share capital | Additional paid-in capital | Deferred stock compensation | Accumulated other comprehensive income | Retained earnings (accumulated deficit) | Total comprehensive income | Total shareholders' equity | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of January 1, 2003 | $ | 4,908 | $ | 213,003 | $ | (12 | ) | $ | 782 | $ | (64,145 | ) | $ | 154,536 | |||||||||
| Issuance of shares of ESPP | 49 | 1,470 | - | - | - | 1,519 | |||||||||||||||||
| Amortization of deferred stock compensation | - | - | 12 | - | - | 12 | |||||||||||||||||
| Exercise of share options | 185 | 10,382 | - | - | - | 10,567 | |||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | 3,031 | - | $ | 3,031 | 3,031 | |||||||||||||||
| Unrealized gains on derivative instruments, net | - | - | - | 75 | - | 75 | 75 | ||||||||||||||||
| Net income | - | - | - | - | 7,091 | 7,091 | 7,091 | ||||||||||||||||
| Total comprehensive income | $ | 10,197 | |||||||||||||||||||||
| Balance as of December 31, 2003 | 5,142 | 224,855 | - | 3,888 | (57,054 | ) | 176,831 | ||||||||||||||||
| Issuance of shares of ESPP | 31 | 2,234 | - | 2,265 | |||||||||||||||||||
| Exercise of share options | 291 | 17,311 | - | 17,602 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | 1,617 | - | $ | 1,617 | 1,617 | |||||||||||||||
| Unrealized gains on derivative instruments, net | - | - | - | 1 | - | 1 | 1 | ||||||||||||||||
| Net income | - | - | - | - | 24,555 | 24,555 | 24,555 | ||||||||||||||||
| Total comprehensive income | $ | 26,173 | |||||||||||||||||||||
| Balance as of December 31, 2004 | 5,464 | 244,400 | - | 5,506 | (32,499 | ) | 222,871 | ||||||||||||||||
| Issuance of shares upon public offering, net | 1,003 | 201,377 | - | - | - | 202,380 | |||||||||||||||||
| Issuance of shares of ESPP | 37 | 4,285 | - | - | - | 4,322 | |||||||||||||||||
| Exercise of share options | 268 | 21,640 | - | - | - | 21,908 | |||||||||||||||||
| Tax Benefit in respect of exercised options | - | 1,501 | - | - | - | 1,501 | |||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | (2,493 | ) | - | $ | (2,493 | ) | (2,493 | ) | ||||||||||||
| Unrealized losses on derivative instruments, net | - | - | - | (17 | ) | - | (17 | ) | (17 | ) | |||||||||||||
| Net income | - | - | - | - | 36,569 | 36,569 | 36,569 | ||||||||||||||||
| Total comprehensive income | $ | 34,059 | |||||||||||||||||||||
| Balance as of December 31, 2005 | $ | 6,772 | $ | 473,203 | $ | - | $ | 2,996 | $ | 4,070 | $ | 487,041 | |||||||||||
| Accumulated unrealized gains on derivative instruments | $ | 48 | |||||||||||||||||||||
| Accumulated foreign currency translation adjustments | 2,948 | ||||||||||||||||||||||
| Accumulated other comprehensive income as of | |||||||||||||||||||||||
| December 31, 2005 | $ | 2,996 | |||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| U.S. dollars in thousands |
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | 2005 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 7,091 | $ | 24,555 | $ | 36,569 | |||||
| Less: net income from discontinued operation | (1,483 | ) | (3,236 | ) | - | ||||||
| Net income from continuing operations | 5,608 | 21,319 | 36,569 | ||||||||
| Adjustments required to reconcile net income from continuing | |||||||||||
| operations to net cash provided by operating activities from | |||||||||||
| continuing operations: | |||||||||||
| Depreciation and amortization | 17,617 | 13,793 | 13,152 | ||||||||
| Amortization of deferred stock compensation | 12 | - | - | ||||||||
| Accrued severance pay, net | 124 | 37 | 187 | ||||||||
| Amortization of premium (accretion of discount) and accrued | |||||||||||
| interest on held-to-maturity marketable securities | 1,459 | 1,205 | 812 | ||||||||
| Tax benefit in respect of exercised options | - | - | 1,501 | ||||||||
| Deferred taxes, net | - | - | (4,841 | ) | |||||||
| Decrease (increase) in trade receivables | 3,901 | (585 | ) | (11,488 | ) | ||||||
| Decrease (increase) in other receivables and prepaid expenses | 1,247 | (654 | ) | 566 | |||||||
| Decrease (increase) in inventories | 1,515 | (122 | ) | (3,930 | ) | ||||||
| Increase (decrease) in trade payables | (104 | ) | (3,761 | ) | 5,782 | ||||||
| Increase in accrued expenses and other liabilities | 4,819 | 13,043 | 27,339 | ||||||||
| Increase in long-term liabilities related to legal settlement | 667 | - | - | ||||||||
| Other | (5 | ) | (7 | ) | 54 | ||||||
| Net cash provided by operating activities from continuing operations | 36,860 | 44,268 | 65,703 | ||||||||
| Net cash provided by operating activities from discontinued | |||||||||||
| operation | 1,316 | 750 | - | ||||||||
| Net cash provided by operating activities | 38,176 | 45,018 | 65,703 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| U.S. dollars in thousands |
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | 2005 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property and equipment | (5,492 | ) | (6,701 | ) | (6,128 | ) | |||||
| Proceeds from sale of property and equipment | 747 | 89 | 66 | ||||||||
| Investment in marketable securities | (72,077 | ) | (122,192 | ) | (218,472 | ) | |||||
| Proceeds from maturity of marketable securities | 33,997 | 17,710 | 190,682 | ||||||||
| Proceeds from sale and call of held-to-maturity marketable | |||||||||||
| securities | 8,500 | 41,345 | 9,630 | ||||||||
| Investment in short-term bank deposits | (132 | ) | (129 | ) | (39 | ) | |||||
| Proceeds from short-term bank deposits | 165 | 149 | 108 | ||||||||
| Payment for the acquisition of certain assets and liabilities of | |||||||||||
| Dictaphone CRS division (a) | - | - | (39,724 | ) | |||||||
| Payment for the acquisition of certain assets and liabilities of | |||||||||||
| Hannamax Hi-Tech Pty. Ltd. (b) | - | - | (1,889 | ) | |||||||
| Decrease in accrued acquisition costs | (3,008 | ) | (75 | ) | - | ||||||
| Payments and proceeds in respect of TCS acquisition | (199 | ) | (1,236 | ) | 2,531 | ||||||
| Capitalization of software development costs | (2,291 | ) | (1,305 | ) | (806 | ) | |||||
| Deferred acquisition costs | - | - | (256 | ) | |||||||
| Net cash used in investing activities from continuing operations | (39,790 | ) | (72,345 | ) | (64,297 | ) | |||||
| Net cash provided by (used in) investing activities from | |||||||||||
| discontinued operation | (52 | ) | 4,136 | - | |||||||
| Net cash used in investing activities | (39,842 | ) | (68,209 | ) | (64,297 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of shares upon public offering, net | - | - | 201,724 | ||||||||
| Proceeds from issuance of shares upon exercise of options and | |||||||||||
| ESPP, net | 12,086 | 19,867 | 25,259 | ||||||||
| Short-term bank credit, net | (24 | ) | - | - | |||||||
| Net cash provided by financing activities | 12,062 | 19,867 | 226,983 | ||||||||
| Effect of exchange rate changes on cash | 182 | 44 | (12 | ) | |||||||
| Increase (decrease) in cash and cash equivalents | 10,578 | (3,280 | ) | 228,377 | |||||||
| Cash and cash equivalents at the beginning of the year | 19,281 | 29,859 | 26,579 | ||||||||
| Cash and cash equivalents at the end of the year | $ | 29,859 | $ | 26,579 | $ | 254,956 | |||||
| Supplemental disclosure of cash flows activities: | |||||||||||
| Cash paid during the year for: | |||||||||||
| Income taxes | $ | 564 | $ | 598 | $ | 389 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| U.S. dollars in thousands |
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | 2005 | |||||||||
| (a) Payment for the acquisition of certain assets and liabilities of | |||||||||||
| Dictaphone CRS Division | |||||||||||
| Estimated fair value of assets acquired and liabilities assumed at | |||||||||||
| the acquisition date: | |||||||||||
| Working capital deficit (excluding cash and cash equivalents) | $ | (913 | ) | ||||||||
| Property and equipment | 202 | ||||||||||
| Other Intangible assets | 15,400 | ||||||||||
| Goodwill | 25,311 | ||||||||||
| Less - accrued acquisition costs | (276 | ) | |||||||||
| $ | 39,724 | ||||||||||
| (b) Payment for the acquisition of certain assets and liabilities of | |||||||||||
| Hannamax Hi-Tech Pty. Ltd. | |||||||||||
| Estimated fair value of assets acquired and liabilities assumed at | |||||||||||
| the acquisition date: | |||||||||||
| Working capital deficit (excluding cash and cash equivalents) | $ | (50 | ) | ||||||||
| Property and equipment | 10 | ||||||||||
| Other intangible assets | 930 | ||||||||||
| Goodwill | 1,159 | ||||||||||
| Other long-term liabilities | (38 | ) | |||||||||
| Less - accrued acquisition costs | (122 | ) | |||||||||
| $ | 1,889 | ||||||||||
| Non-cash activities: | |||||||||||
| (i) Adjustments of goodwill in respect of TCS acquisition: | |||||||||||
| Related party receivables | $ | 2,156 | |||||||||
| Accrued expenses and other liabilities | (319 | ) | |||||||||
| Other long-term liability | (5,162 | ) | |||||||||
| $ | (3,325 | ) | |||||||||
| (ii) Adjustment of goodwill in respect of discontinued operation sale | $ | (250 | ) | ||||||||
| (iii) Deferred tax benefit on offering expenses | $ | 1,002 | |||||||||
| (iv) Accrued offering expenses | $ | 346 | |||||||||
| (v) Receivables on account of shares in respect of exercise of options | $ | 971 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands |
| NOTE 1: | – | GENERAL |
| a. | General: |
| NICE Systems Ltd. (“NICE”) and subsidiaries (collectively – “the Company”) develop, market and support integrated, scalable multimedia digital recording platforms, enhanced software applications and related professional services. These solutions capture and analyze unstructured (non-transaction) data and convert it for business and security performance management applications. The Company’s solutions capture multiple forms of |
| The Company’s products are based on two types of recording platforms – audio and video. The Company’s solutions are offered to various vertical markets in two major sectors: (1) the Enterprise Interaction Solutions Sector – contact centers and trading floors and (2) the Public Safety and Security Sector – safety organizations, transportation, corporate security, gaming and correctional facilities and government and intelligence agencies. |
| The Company’s products are sold primarily through a global network of distributors, system integrators and strategic partners; a portion of product sales and most services are sold directly to end-users. |
| The Company’s markets are located primarily in North America, EMEA and the Far East. |
| The Company depends on a limited number of contract manufacturers for producing its products. If any of these manufacturers become unable or unwilling to continue to manufacture or fail to meet the quality or delivery requirements needed to satisfy the Company’s customers, it could result in the loss of sales, which could adversely affect the Company’s results of operations and financial position. |
| The Company relies upon a number of independent distributors to market, sell and service its products in certain markets. If the Company is unable to effectively manage and maintain relationships with its distributors, or to enter into similar relationships with others, its ability to market and sell its products in these markets will be affected. In addition, a loss of a major distributor, or any event negatively affecting such distributors’ financial condition, could cause a material adverse effect on the Company’s results of operations and financial position. |
| As for major customer data, see Note 15c. |
| b. | Acquisitions: |
| 1. | Acquisition of Dictaphone’s Communications Recording Systems (“CRS”): |
| On June 1, |
F - 10
| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands |
| NOTE 1: | – | GENERAL (Cont.) |
| The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of CRS. The results of the CRS’s operations have been included in the consolidated financial statements since June 1, 2005 (“the closing date”). |
| With the acquisition of CRS, the Company expanded its customer base, presence in the U.S and Europe, and its network of distributors and partners. Additionally, the Company broadened its product offerings and global professional services team. |
| The following table summarizes the estimated fair values of the assets acquired and liabilities assumed: |
| Trade receivables | $ | 8,931 | ||||
| Other receivables and prepaid expenses | 216 | |||||
| Inventories | 7,730 | |||||
| Property and equipment | 202 | |||||
| Trademarks | 400 | |||||
| Core technology | 4,900 | |||||
| Distribution network | 10,100 | |||||
| Goodwill | 25,311 | |||||
| Total assets acquired | 57,790 | |||||
| Trade payables | (571 | ) | ||||
| Accrued expenses and other liabilities | (17,219 | ) | ||||
| Total liabilities assumed | (17,790 | ) | ||||
| Net assets acquired | $ | 40,000 | ||||
| Trademarks, core technology and distribution network in the amount of $ |
| 2. | Acquisition of Hannamax Hi-Tech Pty. Ltd, (“Hannamax”): |
| On September 1, 2005, the Company consummated an agreement to acquire the assets and assume certain liabilities of Hannamax Hi-Tech Pty. Ltd, (“Hannamax”) business for $ |
| The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of |
| With the acquisition of Hannamax, the Company expects to expand its customer base and presence in Australia and New Zealand and to expand and strengthen the Company’s support organization in the region. |
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| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share data |
| NOTE 1: | – | GENERAL (Cont.) |
| Under the terms of the acquisition agreement (“the agreement”), contingent cash payments of |
| The following table summarizes the estimated fair values of the assets acquired and liabilities assumed: |
| Trade receivables | $ | 332 | ||||
| Other receivables and prepaid expenses | 16 | |||||
| Inventories | 318 | |||||
| Property and equipment | 10 | |||||
| Distribution network | 930 | |||||
| Goodwill | 1,159 | |||||
| Total assets acquired | 2,765 | |||||
| Trade payables | (91 | ) | ||||
| Accrued expenses and other liabilities | (625 | ) | ||||
| Other long-term liability | (38 | ) | ||||
| Total liabilities assumed | (754 | ) | ||||
| Net assets acquired | $ | 2,011 | ||||
| Distribution network in the amount of $ 930 is amortized using the straight-line method at an annual rate of 10%. |
| 3. | Acquisition of Thales Contact Solutions (“TCS”): |
| In November 2002, the Company consummated an agreement to acquire certain assets and liabilities of TCS, a developer of customer-facing technology for public safety, financial trading and customer contact centers, based in the United Kingdom. TCS was a unit of Thales Group, one of Europe’s premier electronics companies. In connection with the acquisition, the Company paid an initial $ 29,900 in cash and issued 2,187,500 ordinary shares to Thales Group at a fair market value of |
| In 2002, the Company recorded a current liability of |
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| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands |
| NOTE 1: | – | GENERAL (Cont.) |
| Under the terms of the agreement, the cash portion of the purchase price was subject to downward adjustment based on the value of net assets at closing and the full year 2002 sales of TCS. Based on our calculation of the actual value of net assets acquired and 2002 sales of TCS, the Company reduced the cash portion of the purchase price as of December 31, |
| Thales disputed the Company’s calculation of |
| Under the terms of the agreement, the cash portion of the purchase price was subject to adjustment mechanisms and indemnities related to the assets sold to the Company. In September 2004, the Company notified Thales of claims in respect of such price adjustment mechanisms, mainly relating to uncollected receivables and inventory. NICE and Thales signed a settlement agreement in respect of such claims on February 24, 2005, according to which Thales paid the Company a total indemnity amount of approximately $ 2,600. |
| 4. | Unaudited Pro-forma condensed results of operations: |
| The following represents the unaudited pro-forma condensed results of operations for the years ended December 31, 2004 and 2005, assuming that the acquisitions of CRS and Hannamax occurred on January 1, 2004 and 2005. The pro-forma information is not necessarily indicative of the results of operations, which actually would have occurred if the acquisition had been consummated on that dates, nor does it purport to represent the results of |
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| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. |
| NOTE 1: | – | GENERAL (Cont.) |
| Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | ||||||||
| Unaudited | |||||||||
| Revenues | $ | 318,479 | $ | 336,145 | |||||
| Net income (loss) from continuing | |||||||||
| operations | $ | (1,701 | ) | $ | 33,150 | ||||
| Net income (loss) | $ | (4,937 | ) | $ | 33,150 | ||||
| Basic net earnings (loss) per share | |||||||||
| from continuing operations | $ | (0.28 | ) | $ | 1.73 | ||||
| Basic net earnings (loss) per share | $ | (0.10 | ) | $ | 1.73 | ||||
| Diluted net earnings (loss) per share | |||||||||
| from continuing operations | $ | (0.28 | ) | $ | 1.61 | ||||
| Diluted net earnings (loss) per share | $ | (0.11 | ) | $ | 1.61 | ||||
| c. | Disposal by |
| In the fourth quarter of 2003, the Company reached a definitive agreement to sell the assets and liabilities of its COMINT/DF military-related business to ELTA Systems Ltd. for $ 4,000 in cash. On March 31, 2004, the Company completed the sale of the COMINT/DF operation. The COMINT/DF business was treated as a discontinued operation in the financial statements. |
| The Company’s balance sheets at December 31, 2004 and 2005 reflect the assets of |
| Summarized selected financial |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | 2005 | ||||||||||
| Revenues | $ | 6,510 | $ | 816 | $ | - | ||||||
| Net income | $ | 1,483 | $ | *) 3,236 | $ | - | ||||||
| *) | Includes gain from the sale in the amount of $ 3,286. |
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| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES |
| The consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"). |
| a. | Use of |
| The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and |
| b. | Financial statements in United States dollars: |
| The currency of |
| NICE and certain subsidiaries’ transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured to dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”. All transaction gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of operations as financial income or expenses, as appropriate. |
| For those subsidiaries whose functional currency has been determined to be their local currency, assets |
| c. | Principles of |
| Intercompany transactions and balances have been eliminated upon consolidation. |
| d. | Cash equivalents: |
| The Company considers short-term unrestricted highly liquid investments that are readily convertible into cash, purchased with maturities of |
| e. | Short-term bank deposits: |
| Bank deposits with maturities of more than three months but less than one year are included in short-term bank |
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| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| f. | Marketable securities: |
| The Company accounts for investments in debt securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Management determines the appropriate classification of |
| Debt securities are classified as held-to-maturity when the Company has the positive intent and |
| Interest income resulting from investments |
| Auction rate securities are classified as available-for-sale and accordingly, these securities are stated at fair |
| g. | Inventories: |
| Inventories are stated at the |
| Inventory provisions are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, discontinued products and for market prices lower than cost. Inventory provisions for 2003, 2004 and 2005 were $ |
| h. | Investment in affiliates: |
| The investments in affiliated companies are stated at cost, since the Company does not have the ability to exercise significant influence over operating and financial policies of those investees. |
| The Company’s investment in affiliates is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount |
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| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| i. | Property and equipment, |
| 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 and peripheral equipment | 33 | ||
| Office furniture and equipment | 6-15 | ||
| Motor vehicles | 15 |
| Leasehold improvements are amortized by the straight-line method over the term of the lease or the estimated useful life of the improvements, whichever is shorter. |
| j. | Other intangible assets, net: |
| Intangible assets |
| Amortization is calculated using the straight-line method over the estimated useful lives at the following annual rates: |
| Weighted average % | |||
|---|---|---|---|
| Capitalized software development costs (see | 33 | ||
| Core technology | 32 | ||
| Trademarks | 34 | ||
| Distribution network | 11 | ||
| Maintenance contracts | 33 |
| k. | Impairment of long-lived assets: |
| The Company’s long-lived assets |
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| NICE SYSTEMS LTD. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| l. | Goodwill: |
| Goodwill represents the excess of the cost over the fair value of the net assets of businesses acquired. |
SFAS No. 142
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