Approved Enterprises and Corporate Taxes in Israel
We have elected the alternative package of tax exemptions and reduced tax rates for our production facilities that have received Approved Enterprise status. Accordingly, income derived from these facilities is generally entitled to a tax-exemption period of two to four years and a reduced corporate tax rate of 10% to 25% for an additional period of six to eight years, based on our percentage of foreign investment. The tax benefits for our existing Approved Enterprise programs are scheduled to gradually expire by 2013. The period of tax benefits for each capital investment plan expires upon the earlier of: (1) twelve years from completion of the investment under the approved plan, or (2) fourteen years from receipt of approval.
Out of our retained earnings as of December 31, 2005, approximately $540,000 are tax-exempt. If we were to distribute this tax-exempt income before our complete liquidation, it would be taxed at the reduced corporate tax rate applicable to these profits (10% to 25%), and an income tax liability of up to approximately $135,000 would be incurred. Our board of directors has determined that we will not distribute any amounts of our undistributed tax exempt income as dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to our Approved Enterprise.
If we fail to meet the requirements of an Approved Enterprise we would be subject to corporate tax in Israel at the regular statutory rate. We could also be required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index.
On April 1, 2005, an amendment to the law came into effect (“the Amendment”) and has significantly changed the provisions of the law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Beneficiary Enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
In addition, the law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company’s existing “Approved Enterprises” will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the law has amended, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt income.
Impact of Inflation, Devaluation and Fluctuation of Currencies on Results of Operations, Liabilities and Assets
Since the majority of our revenues are paid in or linked to the dollar, we believe that inflation and fluctuations in the NIS/dollar exchange rate have no material effect on our revenues. However, a portion of the cost of our Israeli operations, mainly personnel and facility-related, is incurred in NIS. Inflation in Israel and dollar exchange rate fluctuations, however, have some influence on our expenses and, as a result, on our net income. Our NIS costs, as expressed in dollars, are influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the dollar.
To protect against the changes in value of forecasted foreign currency cash flows resulting from payments in NIS, we maintain a foreign currency cash flow hedging program. We hedge portions of our forecasted expenses denominated in foreign currencies with forward contracts. These measures may not adequately protect us from material adverse effects due to the impact of inflation in Israel.
The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the dollar, and the rate of inflation in Israel adjusted for the devaluation:
| | | | | | | |
Year ended
December 31, | | Israeli
inflation
rate
% | | NIS
Devaluation
Rate
% | | Israeli inflation
adjusted for
devaluation
% | |
| |
| |
| |
| |
2003 | | (1.9) | | (7.6) | | 5.7 | |
2004 | | 1.2 | | (1.6) | | 2.8 | |
2005 | | 2.4 | | 6.8 | | (4.4) | |
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments to employees to be recognized based on their fair values while SFAS No. 123(R) requires all share-based payments to employees including grants of employee stock options and shares issued under the ESPP to be recognized based on their fair values. SFAS No. 123(R) also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. SFAS No. 123(R) is effective for us for periods commencing January 1, 2006. SFAS No. 123(R) permits public companies to adopt its requirements using either the modified prospective or modified retrospective method. We adopted SFAS No. 123(R), using the modified prospective method of adoption in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 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.
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In March 2005, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 provides the SEC staff’s position regarding the application of SFAS No. 123(R) and contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, and also provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. The adoption of SFAS No. 123(R) and SAB 107 have a material effect on our results of operations.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 does not have a material effect on our financial position or results of operation
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 statements of a voluntary change in accounting principles unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. As of December 31, 2005, adoption of SFAS No. 154 is not expected to have a material impact on our financial position or results of operation.
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 references to the existing other-than-temporary impairment guidance. The FSP clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made. The guidance in this FSP is to be applied to reporting periods beginning after December 15, 2005. As of December 31, 2005, adoption of FSP FAS 115-1 is not expected to have a material impact on our financial position or results of operations.
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| |
B. | LIQUIDITY AND CAPITAL RESOURCES |
We have financed our operations for the last three years from the remaining proceeds from prior public offerings of our Ordinary shares, as well as with cash from operations generated in 2004 and 2005. In November 2004, we raised net proceeds of approximately $120.2 million in a private placement of $125.0 million aggregate principal amount of our 2.00% Senior Convertible Notes due 2024. As of December 31, 2005, we had $220.3 million in cash and cash equivalents, short-term and long-term marketable securities, short-term and long-term bank deposits and structured notes. We expect to use approximately $85 million of cash in 2006 to pay the purchase price and related expenses in connection with our proposed acquisition of Nuera.
In connection with our acquisition of AudioCodes USA, formerly Ai-Logix, we paid an additional $10 million in March 2005 based on the achievement of revenue milestones and additional terms by the AudioCodes USA during 2004 and 2005. This payment was recorded as part of the acquisition cost as additional goodwill during 2005.
Our operating activities provided cash in the amount of $13.3 million in 2005, primarily due to our net income and depreciation and amortization expenses, which were partially offset by an increase in trade receivables and deferred tax assets. Our operating activities provided cash in the amount of $3.5 million in 2004, primarily due to our net income, depreciation and amortization expenses and an increase in trade payables and other payables and accrued expenses, which were partially offset by an increase in trade receivables and inventories and other receivables and prepaid expenses. Our operating activities used cash in the amount of $6.4 million in 2003, primarily due to our net loss and an increase in trade receivables, which were partially offset by depreciation and amortization expenses and an increase in trade payables and other payables and accrued expenses.
In 2005, our investing activities used cash in the amount of $113.0 million, primarily due to our investment of a significant portion of the proceeds from our sale of convertible notes in short-term and long-term marketable securities, short-term and long-term bank deposits and structured notes and payments in connection with the acquisition of AudioCodes USA. In 2004, our investing activities used cash in the amount of $15.9 million, primarily due to the acquisition of AudioCodes USA and UAS and the purchase of property and equipment. In 2003, our investing activities provided cash in the amount of $6.1 million primarily due to proceeds from short-term bank deposits, which were partially offset by investment in long-term bank deposits and structured notes, payments of $4.4 million in connection with the acquisition of UAS and the purchase of property and equipment. Our capital expenditures were $2.4 million in 2005, $4.3 million in 2004 and $2.0 million in 2003. The majority of our capital investment has been for testing equipment, an enterprise resources planning system, computers, peripheral equipment, software, office furniture and leasehold improvements. We used working capital to finance these expenditures.
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In 2005, financing activities provided $3.8 million due to proceeds from issuance of our shares upon exercise of options and from purchases of our shares under our Employee Stock Purchase Plans. In 2004, financing activities provided $130.4 million, due to the net proceeds of $120.2 million from our private placement of $125.0 million aggregate principal amount of our 2.00% Senior Convertible Notes due 2024 and $10.2 million from the issuance of our shares upon exercise of options and from purchases of our shares under our Employee Stock Purchase Plans. In 2003, financing activities provided $1.4 million due to issuance of shares upon exercise of options and from shares purchased under our Employee Stock Purchase Plans, partially offset by $215,000 used to repurchase our ordinary shares.
We anticipate that our operating expenses will be a material use of our cash resources for the foreseeable future. We believe that our current working capital is sufficient to meet our present cash requirements. Part of our strategy is to pursue acquisition opportunities. If we do not have available sufficient cash to finance our operations and the completion of one or more acquisitions, we may be required to obtain additional debt or equity financing. We cannot be certain that we will be able to obtain, if required, additional financing on acceptable terms or at all.
| |
C. | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. |
Research and Development
In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to improve our existing products and to develop new ones. We are developing more advanced communications boards and analog and digital media gateways for carrier and enterprise applications. Our platforms will feature increased trunk capacity, new functionalities, enhanced signaling software and compliance with new control protocols. As of December 31, 2005, 233 of our employees were engaged primarily in research and development on a full-time basis. We also employed 9 employees on a part-time basis.
Our research and development expenses were $24.4 million in 2005 compared to $20.0 million in 2004 and $15.5 million in 2003. From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS. As a recipient of grants from the OCS, we are obligated to perform all manufacturing activities for projects subject to the grants in Israel unless we receive an exemption. Know-how from the research and development which is used to produce products may not be transferred to third parties without the approval of the OCS and may further require material payments. The OCS approval is not required for the export of any products resulting from such research or development. Through December 31, 2005, we had obtained grants from the OCS aggregating $1.6 million for certain of our research and development projects. We are obligated to pay royalties to the OCS, amounting to 3%-4.5% of the sales of the products and other related revenues generated from such projects, up to 100% of the grants received, linked to the U.S. dollar and bearing interest at the rate of LIBOR at the time of grant. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales no payment is required.
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D. TREND INFORMATION
The accelerated demand for VoIP technology has impacted our business during the last three years. Over the past three years, the shift from traditional circuit-switched networks to next generation packet-switched networks continued to gain momentum. As data traffic becomes the dominant factor in communications, service providers are building and maintaining converged networks for integrated voice and data services. In addition, underdeveloped markets without basic wireline service in countries such as China and India and certain countries in Eastern Europe are beginning to use VoP technology to deliver voice and data services that were previously unavailable. These trends are helping to overcome the downturn in the telecommunications industry that affected us during previous years.
In 2005, we continued to experience pressure to shorten our lead times in supplying products to customers. Some of our customers are implementing “demand pull” programs by which they only purchase our product very close to the time, if not simultaneously with the time, they plan to sell their product. We are increasing our sales efforts in new markets, such as Latin America, Eastern Europe and Far East. We have introduced system level products, and new applications in our product lines. . We are still experiencing low visibility into customer demand for our products and our ability to predict our level of sales.
Unfavorable economic conditions affected the communications sector during the period from 2000 to 2003. This caused a decrease in our revenues from 2000 to 2001 and from 2001 to 2002. It also resulted in our net losses in 2001, 2002 and 2003. Sales of products, particularly for applications in converged networks, to OEMs for use by large service providers declined significantly during these periods. In response to our revenue decreases, we implemented expense control programs to reduce operating expenses, while at the same time we continued to invest in developing products that we believe our customers will need as the market for telecommunications equipment improves. Many companies that had reduced their capital expenditures during the recent economic downturn have begun to invest again in their communications networks. The acceptance of next generation packet-switched networks is contributing to these infrastructure investments as enterprises and service providers begin to increase their use of IP networks for data traffic, such as fax transmissions, and VoIP. These improving market conditions helped our revenues to increase in 2003, 2004 and 2005, and we expect our revenues in 2006 to exceed our revenues in 2005.
E. OFF-BALANCE SHEET ARRANGEMENTS
We do not have any “off-balance sheet arrangements” as this term is defined in Item 5E of Form 20-F.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
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As of December 31, 2005, our contractual obligations were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | PAYMENTS DUE BY PERIOD | |
| | | |
| | TOTAL | | LESS THAN 1
YEAR | | 1-3 YEARS | | 3-5 YEARS | | MORE THAN 5
YEARS | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | |
Senior convertible notes | | | 125,000 | | | - | | | - | | | - | | | 125,000 | |
| | | | | | | | | | | | | | | | |
Rental and lease commitments | | | 18,483 | | | 2,530 | | | 4,876 | | | 4,838 | | | 6,239 | |
| | | | | | | | | | | | | | | | |
Total cash obligations | | | 143,483 | | | 2,530 | | | 4,876 | | | 4,838 | | | 131,239 | |
Our obligation for accrued severance pay under Israel’s Severance Pay Law as of December 31, 2005 was $5.9 million, of which $5.4 million was funded through deposits into severance pay funds, leaving a net obligation of approximately $481,000.
| | |
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| |
A. | DIRECTORS AND SENIOR MANAGEMENT |
The following table sets forth certain information with respect to our directors, senior executive officers and key employees at June 16, 2006:
| | | | | |
| Name | | Age | | Position |
|
| |
| |
|
| Shabtai Adlersberg | | 53 | | Chairman of the Board, President and Chief Executive Officer |
| Nachum Falek | | 35 | | Vice President, and Chief Financial Officer |
| Eyal Frishberg | | 47 | | Vice President, Operations |
| Eli Nir | | 39 | | Vice President, Research and Development |
| Lior Aldema | | 40 | | Vice President, Marketing and Product Management |
| Ben Rabinowitz | | 39 | | Vice President, Marketing and Sales, North America |
| Yehuda Hershkowitz | | 39 | | Vice President, Systems |
| Tal Dor | | 37 | | Vice President, Human Resources |
| Gary Drutin | | 45 | | Vice President, Channel Operations and Marketing |
| Moshe Tal | | 52 | | President and Chief Executive Officer, AudioCodes USA Inc. |
| David Perez | | 44 | | Vice President, Sales, Asia Pacific |
| Joseph Tenne | | 50 | | Director |
| Dana Gross | | 39 | | Director |
| Dr. Eyal Kishon | | 46 | | Director |
| Doron Nevo | | 50 | | Director |
Shabtai Adlersberg co-founded AudioCodes in 1993, and has served as our Chairman of the Board and Chief Executive Officer since inception. Mr. Adlersberg co-founded DSP Group, a semiconductor company, in 1987. From 1987 to 1990, Mr. Adlersberg served as the Vice President of Engineering of DSP Group, and from 1990 to 1992, he served as Vice President of Advanced Technology. As Vice President of Engineering, Mr. Adlersberg established a research and development team for digital cellular communication which was spun-off in 1992 as DSP Communications. Mr. Adlersberg also serves as Chairman of the Board of Directors of Natural Speech Communication Ltd. and as a director of MailVision Ltd and CTI Squared Ltd. Mr. Adlersberg holds an M.Sc. in Electronics and Computer Engineering from Tel Aviv University and a B.Sc. in Electrical Engineering from the Technion-Israel Institute of Technology, or the Technion.
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Nachum Falek joined AudioCodes in April 2000 and became our Vice President, and Chief Financial Officer in November 2003. From 2000 to 2003, he served as Director of Finance. Prior to joining AudioCodes, Mr. Falek served as Controller at ScanVec-Amiable Ltd. From 1998 to 1999, he was a Manager at Ernst & Young in Israel. Mr. Falek holds a B.A. in Accounting and Economics from Haifa University, an M.B.A. from Tel Aviv University, and is a licensed CPA in Israel.
Eyal Frishberg has served as our Vice President, Operations since October 2000. From 1997 to 2000, Mr. Frishberg served as Associate Vice President, SDH Operations in ECI Telecom Ltd., a major telecommunication company. From 1987 to 1997, Mr. Frishberg worked in various operational positions in ECI Telecom including as manager of ECI production facility and production control. Mr. Frishberg worked from 1994 until 1997 for ELTA company, part of Israeli Aircraft Industries in the planning and control department. Mr. Frishberg holds a B.Sc. in Industrial Engineering from Tel Aviv University and an M.B.A. from Ben-Gurion University of the Negev.
Eli Nir has served as our Vice President, Research and Development since April 2001. He has been employed by us since 1996, when he founded and headed our System Software Group in our research and development department. Prior to 1996, Mr. Nir served as an officer in the Technical Unit of the Intelligence Corps of the Israeli Defense Forces (Major), heading both operational units and large development groups mostly related to digital processing. Mr. Nir holds an M.B.A. and an M.Sc. from Tel Aviv University in Digital Speech Processing and a B.Sc. from the Technion.
Lior Aldema has served as our Vice President, Product Management since January 2002. Mr. Aldema has also served as our Vice President Marketing since February 2003. He has been employed by us since 1998, when he was team leader and later headed our System Software Group in our research and development department. Prior to 1998, Mr. Aldema served as an officer in the Technical Unit of the Intelligence Corps of the Israeli Defense Forces (Major), heading both operational units and large development groups related to various technologies and headed one of the largest projects conducted in the IDF and executed by the Israeli Defense industry corporations. Mr. Aldema holds an M.B.A. from Tel Aviv University and a B.Sc. from the Technion.
Ben Rabinowitz joined us in December, 1999 and became our Vice President of Marketing and Sales for North America in October 2004. Previously, Mr. Rabinowitz served as Vice President of our Systems Group. From 1998 to 1999, Mr. Rabinowitz served as Director for Product Marketing at Westell Inc., a broadband access company. From 1997 to 1998, Mr. Rabinowitz served as Senior Director within the strategy practice of Technology Solutions Company, a technology consulting firm. Mr. Rabinowitz also previously served in Ernst & Young’s consulting practice from 1994 to 1997, and provided consulting services to telecommunications companies. Mr. Rabinowitz holds an M.B.A. from Georgetown University.
Yehuda Hershkovits has served as our Vice President, Systems Group since 2003. From 2001 to 2003, Mr. Hershkovits served as our Vice President, Advanced Products. From 2000 to 2001, Mr. Hershkovits served as our Director of Advanced Technologies. From 1994 to 1998 and during 1999, Mr. Hershkovits held a variety of research and development positions at Advanced Recognition Technologies, Ltd., a voice and handwriting recognition company, heading its research and development from 1999 to 2000 as Vice President, Research and Development. From 1998 to 1999, Mr. Hershkovits developed various wireless communication algorithms at Comsys, a telecommunications company. Mr. Hershkovits holds an M.Sc. and a B.Sc., from the Technion both in the area of telecommunications.
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Tal Dor has served as our Vice President of Human Resources since March 2000. For more than three years prior to March 2000, Ms. Dor acted as a consultant in Israel to, among others, telephone and cable businesses, as well as health and social service organizations. Ms. Dor holds a B.A. in psychology, from Ben-Gurion University of the Negev and an M.A. in psychology from Tel Aviv University.
Moshe Tal joined us in May 2004 in connection with the acquisition of Ai-Logix, now known as AudioCodes USA, Inc. and serves as the President and CEO of our AudioCodes USA subsidiary. Mr. Tal co-founded Ai-Logix in 1991, and has served as its President and CEO since 1998. Mr. Tal has more than twenty-five years of product design and engineering experience, principally associated with analog and digital signal processing technologies. Mr. Tal holds a B.Sc. in Electronic Engineering from Tel Aviv University
Gary Drutin joined us in 2004 as Vice President of Channel Operations and Marketing. From 2001 until 2004 Mr. Drutin was Country Manager and General Manager for Cisco Israel, Cyprus and Malta and from 1997 until 2001 served as regional sales manager for service providers and enterprises for Cisco Israel. From 1990 until 1997, he served in sales management roles at Digital Equipment Corporation Israel. Mr. Drutin holds an M.B.A degree from Tel-Aviv University in Information Systems and Marketing and a B.Sc. degree in Computer Engineering from the Technion.
David E. Perez joined us in February 2002, and became our Vice President of the Asia Pacific region in January 2006. Mr. Perez served as our Vice President of Sales for Latin America, Iberia and the Mediterranean area from 2003 until January 2006. Between 1998 and 2002, Mr. Perez served as Director of the Consulting Division and member of the management team for Oracle in Israel. From 1988 to 1998 Mr. Perez led the implementation group for New Applicom , a member of the Matrix group. Mr. Perez holds a BS.c in Industrial Engineering and Information Systems from the Technion.
Joseph Tenne has served as one of our directors since June 2003. Mr. Tenne is currently the Chief Financial Officer of Ormat Technologies, Inc., a company listed on the New York Stock Exchange, which is engaged in the geothermal and recovered energy business. From 2003 to 2004 Mr. Tenne was the Chief Financial Officer of Treofan Germany GmbH & Co. KG, a German company, which is engaged in the development, production and marketing of oriented polypropylene films, which are mainly used in the food packaging industry. From 1997 until 2003, Mr. Tenne was a partner in Kesselman & Kesselman, Certified Public Accountants in Israel and a member of PricewaterhouseCoopers International Limited. Mr. Tenne holds a B.A. in Accounting and Economics and an M.B.A. from Tel Aviv University. Mr. Tenne is also a Certified Public Accountant in Israel.
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Dana Gross has served as one of our directors since June 2000. Ms. Gross has served as Chief Marketing Officer of M-Systems Flash Disk Ltd. since April 2000, and as a director of M-Systems since September 2000. Prior to that, Ms. Gross served as Executive Vice President of the DiskOnChip business unit of M-Systems from 2000 and as Vice President of Worldwide Sales of M-Systems from 1998 until April 2000. Ms. Gross joined M-Systems in July 1992 as Vice President of Operations and became Chief Financial Officer in 1994, President of M-Systems Inc. in 1995 and Executive Vice President of Business Development in 1997. Ms. Gross also serves as a director of PowerDsine Ltd., a Power over Ethernet technology company that is traded on Nasdaq.. Ms. Gross holds a B.Sc. in Industrial Management Engineering from Tel Aviv University and an M.B.A. from San Jose State University.
Dr. Eyal Kishon has served as one of our directors since 1997. Since 1996, Dr. Kishon has been Managing Partner of Genesis Partners, an Israel based venture capital fund. From 1993 to 1996, Dr. Kishon served as Associate Director of Dovrat-Shrem/Yozma-Polaris Fund Limited Partnership. In his capacity as Managing Partner of Genesis, Dr. Kishon serves as a director of VCON Telecommunications Ltd., a video conferencing technology company. From 1991 to 1992, Dr. Kishon was a Research Fellow in the Multimedia Department of IBM Science & Technology. From 1989 to 1991, Dr. Kishon worked in the Robotics Research Department of AT&T Bell Laboratories. Dr. Kishon holds a B.A. in Computer Science from the Technion and an M.Sc. and a Ph.D. in Computer Science from New York University.
Doron Nevo has served as one of our directors since 2000. From 1996 to 1999, Mr. Nevo served as President and CEO of NKO, Inc. Mr. Nevo established NKO in early 1995 as a startup subsidiary of Clalcom, Ltd. NKO designed and developed a full scale carrier grade IP Telephony system platform and established its own IP network. From 1992 to 1996, Mr. Nevo was President and CEO of Clalcom Ltd. Mr. Nevo established Clalcom in 1992 as a fax service provider in Israel. Mr. Nevo is President and CEO of KiloLambda Technologies Ltd. an optical subsystems company. He also serves on the board of a number of companies such as: Utility Wireless Corp. (a manufacturer of radio frequency sub-systems), Elcom Technologies (manufacturer of Satcom and Digital Radio synthesizers), Notox, Ltd. (a biotech company) and Cellaris, Ltd. (a new materials company). Mr. Nevo holds a B.Sc. in Electrical Engineering from the Technion and an M.Sc. in Telecommunications Management from Brooklyn Polytechnic.
The aggregate direct remuneration paid to all 15 persons who served in the capacity of director or senior executive officer during the year ended December 31, 2005 was approximately $1.9 million, including $212,000 which was set aside for pension and retirement benefits. This does not include amounts expended by us for automobiles made available to our officers, expenses (including business, travel, professional and business association dues and expenses) reimbursed to officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
Stock options to purchase our ordinary shares granted to persons who served in the capacity of director or executive officer under our 1997 and 1999 Stock Option Plans are generally exercisable at the fair market value at the date of grant, and expire ten years (under the 1997 Plan) and seven years (under the 1999 Plan), respectively, from the date of grant. The optionsx are generally exercisable in four or five equal annual payments, commencing one year from the date of grant.
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A summary of our stock option activity and related information for the years ended December 31, 2003, 2004 and 2005 for all 15 persons who served in the capacity of director or senior executive officer during the year ended December 31, 2005 is as follows:
| | | | | | | | | | | | | | | | | | | |
| | 2003 | | 2004 | | 2005 | |
| |
| |
| |
| |
| | Number
of
Options | | Weighted
Average
Exercise
Price | | Number
of
Options | | Weighted
Average
Exercise
Price | | Number
of
Options | | Weighted
Average
Exercise
Price | |
| |
| |
| |
| |
| |
| |
| |
|
Outstanding at the beginning of the year | | | 1,235,686 | | $ | 7.58 | | | 1,526,702 | | $ | 7.48 | | | 1,909,435 | | $ | 9.01 | |
Adjustments to opening balance | | | | | | | | | (39,600 | ) | | | | | 42,500 | | | | |
| | | | | | | | | | | | | | | | | | | |
Granted | | | 325,500 | | $ | 6.64 | | | 531,250 | | $ | 11.77 | | | 60,000 | | $ | 10.17 | |
Cancelled | | | - | | | - | | | - | | | - | | | - | | | | |
Exercised | | | (34,484 | ) | $ | 3.09 | | | (108,917 | ) | $ | 5.16 | | | (5,250 | ) | $ | 3.77 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at the end of the year | | | 1,526,702 | | $ | 7.48 | | | 1,909,435 | | $ | 9.11 | | | 2,006,685 | | $ | 9.06 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
As of December 31, 2005, options to purchase 1,285,165 ordinary shares were exercisable at an average exercise price of $8.82 per share.
Under the Israeli Companies Law, the compensation arrangements for officers who are not directors require the approval of the board of directors, unless the articles of association provide otherwise. Arrangements regarding the compensation of directors require the approval of the audit committee, the board and the shareholders, in that order.
Independent Directors; Audit Committee; Internal Auditor
Under the Israeli Companies Law, Israeli companies that have offered securities to the public in or outside of Israel are required to appoint at least two “outside” directors. Doron Nevo and Dr. Eyal Kishon are our outside directors. Under the requirements for listing on The Nasdaq National Market, we are required to have a majority of our directors be independent as defined by Nasdaq rules. Doron Nevo, Dr. Eyal Kishon, Dana Gross and Joeseph Tenne are independent directors for purposes of the Nasdaq rules.
To qualify as an outside director under Israeli law, an individual or his affiliates may not have, and may not have had at any time during the previous two years, any affiliation with the company or its affiliates, as such terms are defined in the Companies Law. In addition, no individual may serve as an outside director if the individual’s position or other activities create or may create a conflict of interest with his or her role as an outside director or are likely to interfere with his or her ability to serve as a director. For a period of two years from termination from office, a former outside director may not serve as a director or employee of the company or provide professional services to the company for consideration. Pursuant to a recent amendment to the Israeli Companies Law, at least one of the outside directors appointed by a publicly-traded company must have “financial and accounting expertise.” The other outside director should possess “professional expertise.” Regulations specifying the applicable criteria have not yet been promulgated. Both of the outside directors must serve on the company’s statutory audit committee.
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The outside directors must be elected by the shareholders, including at least one-third of the shares of non-controlling shareholders voted on the matter. However, the outside directors can be elected by shareholders without this one-third approval if the total shares of non-controlling shareholders voted against the election do not represent more than one percent of the voting rights in the company. The term of an outside director is three years and may be extended for one additional three-year term. An outside director can be removed from office only under very limited circumstances. Each committee of a company’s board of directors is required to include at least one outside director. If, at the time outside directors are elected, all current members of the board of directors are of the same gender, then at least one outside director must be of the other gender.
Under the Companies Law and the requirements for listing on the Nasdaq National Market, our board of directors is required to appoint an audit committee. Our audit committee must be comprised of at least three directors, including all of the outside directors. The audit committee consists of: Dr. Eyal Kishon, Doron Nevo and Joseph Tenne. Our Board of Directors has determined that Joseph Tenne is an “audit committee financial expert” and that he is independent under the applicable Securities and Exchange Commission and Nasdaq National Market rules.
The audit committee may not include the chairman of the board, a controlling shareholder and the members of his immediate family, or any director who is employed by the company or provides services to the company on a regular basis. Under Israeli law, the role of the audit committee is to examine flaws in our business management, in consultation with the internal auditor and the independent accountants, and to propose remedial measures to the board. The audit committee also reviews for approval transactions between the company and office holders or interested parties, as described below.
We have adopted an audit committee charter as required by the Nasdaq rules. Our audit committee assists the board of directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications and performance of our independent auditors. The audit committee also has the authority and responsibility to oversee our independent auditors, to recommend for shareholder approval the appointment and, where appropriate, replacement of our independent auditors and to pre-approve audit fees and all permitted non-audit services and fees.
Under the Companies Law, our board of directors is also required to appoint an internal auditor proposed by the audit committee. The internal auditor may be our employee, but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of our independent accounting firm. The role of the internal auditor is to examine, among other things, whether our activities comply with the law and orderly business procedure. Eitan Hashachar CPA has been our internal auditor since January 2001.
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As of July 2005, Nasdaq rules require that director nominees be selected or recommended for the board’s selection either by a committee composed solely of independent directors or by a majority of independent directors. Our Nominating Committee assists the board of directors in its selection of individuals as nominees for election to the board of directors and/or to fill any vacancies or newly created directorships on the board of directors. The Nominating Committee consists of four members: Dr. Eyal Kishon, Doron Nevo, Joseph Tenne and Dana Gross. All members of the Nominating Committee are independent under the applicable Securities and Exchange Commission and Nasdaq National Market rules.
Nasdaq rules also provide that the compensation of a company’s chief executive officer and other executive officers is required to be approved either by a majority of the independent directors on the board or a committee comprised solely of independent directors. Our board of directors has appointed Dr. Eyal Kishon and Dana Gross to serve on the compensation committee of the board of directors.
Pursuant to our articles of association, our directors were classified into three classes (classes I, II and III). The members of each class of directors and the expiration of the term of office is as follows:
| | | | | |
| Dana Gross | | Class I | | 2007 |
| Joseph Tenne | | Class II | | 2008 |
| Shabtai Adlersberg | | Class III | | 2006 |
Our outside directors under the Companies Law, Doron Nevo and Dr. Eyal Kishon, are not members of any class and serve in accordance with the provisions of the Companies Law. Mr. Nevo’s term ends in 2006 and Dr. Kishon’s term ends in 2008.
We had the following number of employees as of December 31, 2003, 2004 and 2005 in the areas set forth in the table below:
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| | As of December 31, | |
| |
| |
| | 2003 | | 2004 | | 2005 | |
| |
| |
| |
| |
Research and development | | | 145 | | | 213 | | | 233 | |
Sales & marketing, technical service & support | | | 119 | | | 144 | | | 186 | |
Operations | | | 45 | | | 63 | | | 73 | |
Management and administration | | | 19 | | | 25 | | | 30 | |
| |
|
| |
|
| |
|
| |
| | | 328 | | | 445 | | | 522 | |
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|
| |
|
| |
|
| |
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Our employees were located in the following areas as of December 31, 2003, 2004 and 2005.
| | | | | | | | | | |
| | As of December 31, | |
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| |
| | 2003 | | 2004 | | 2005 | |
| |
| |
| |
| |
Israel | | | 265 | | | 320 | | | 373 | |
United States | | | 50 | | | 105 | | | 124 | |
Far East | | | 11 | | | 15 | | | 17 | |
Europe | | | 2 | | | 3 | | | 5 | |
Latin America | | | -- | | | 2 | | | 3 | |
| |
|
| |
|
| |
|
| |
| | | 328 | | | 445 | | | 522 | |
| |
|
| |
|
| |
|
| |
The growth in the number of our employees over the past three years was primarily attributable to an increase in research and development personnel, increased sales and marketing efforts and our acquisition of Ai-Logix, now known as AudioCodes USA, in 2004.
Israeli labor laws and regulations are applicable to our employees in Israel. These laws principally concern matters such as paid annual vacation, paid sick days, length of the workday, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Israeli law generally requires severance pay, which may be funded by Manager’s Insurance, described below, upon the retirement or death of an employee or termination of employment without cause (as defined under Israeli law). Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute. Since January 1, 1995, such amounts also include payments for national health insurance. The payments to the National Insurance Institute are approximately 16.1% of wages, of which the employee contributes approximately 65% and the employer contributes approximately 35%.
Although not legally required, we regularly contribute to a “Manager’s Insurance” fund or to a privately managed pension fund on behalf of our employees located in Israel. These funds provide employees with a lump sum payment upon retirement (or a pension, in case of a pension fund) and severance pay, if legally entitled thereto, upon termination of employment. We provide for payments to a Manager’s Insurance Fund and pension fund contributions in the amount of 13.3% of an employee’s salary on account of severance pay and provident payment or pension, with the employee contributing 5.0% of his salary. We also pay an additional amount of up to 2.5% of certain of our employees’ salaries in connection with disability payments. In addition, we administer an Education Fund for our Israeli employees and pay 7.5% of these employees’ salaries thereto, with the employees contributing 2.5% of their salary.
Furthermore, our employees are subject to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists Associations) by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern cost of living increases, recreation pay and other conditions of employment. We generally provide our employees with benefits and working conditions above the required minimums. Our employees, as a group, are not currently represented by a labor union. To date, we have not experienced any work stoppages.
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The following table sets forth the share ownership and outstanding number of options of our directors and officers as of June 23, 2006.
| | | | | | | |
Name | | Total Shares
Beneficially Owned | | Percentage of
Ordinary Shares | | Number of
Options | |
Shabtai Adlersberg | | 5,016,139 | | 12.4 | | 633,718 | |
Nachum Falek | | * | | | | * | |
Eyal Frishberg | | * | | | | * | |
Eli Nir | | * | | | | * | |
Lior Aldema | | * | | | | * | |
Ben Rabinowitz | | * | | | | * | |
Yehuda Hershkowitz | | * | | | | * | |
Tal Dor | | * | | | | * | |
Gary Drutin | | * | | | | * | |
Moshe Tal | | * | | | | * | |
David Perez | | * | | | | * | |
Joseph Tenne | | * | | | | * | |
Dana Gross | | * | | | | * | |
Dr. Eyal Kishon | | * | | | | * | |
Doron Nevo | | * | | | | * | |
|
*Less than one percent. | | | | | | | |
Our officers and directors have the same voting rights as our other shareholders.
The following table sets forth information with respect to the options to purchase our ordinary shares held by Mr. Adlersberg as of June 23, 2006.
Shabtai Adlersberg
| | | | | | | | | | | | | | | | | | | | |
Number of
Options | | Grant Date | | Exercise Price | | Exercised | | Cancelled | | Vesting | | Expiration Date | |
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| |
| |
| |
| |
| |
| |
96,000 | | | | July 1, 1996 | | $ | 0.61 | | (96,000 | ) | | | - | | | 4 years | | | July 1, 2006 | |
96,000 | | | | July 1, 1998 | | $ | 1.10 | | (72,000 | ) | | | - | | | 4 years | | | July 1, 2008 | |
100,000 | | | | May 23, 2000 | | $ | 29.16 | | - | | | | - | | | 4 years | | | May 23, 2007 | |
225,000 | | | | December 19, 2001 | | $ | 4.18 | | - | | | | - | | | 4 years | | | December 19, 2008 | |
9,718 | | | | August 9, 2002 | | $ | 2.04 | | - | | | | - | | | 2 years | | | August 9, 2009 | |
275,000 | | | | September 23, 2004 | | $ | 12.84 | | - | | | | - | | | 4 years | | | September 23, 2011 | |
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Employee Share Plans
We have an Employee Share Purchase Plan and Employee Share Option Plans for the granting of options to our employees, officers, directors and consultants. Most of these plans are pursuant to the Israeli Income Tax Ordinance, entitling the beneficiaries who are our employees to tax benefits under Israeli law. There are various conditions that must be met in order to qualify for these benefits, including registration of the options in the name of a trustee for each of the beneficiaries who is granted options. Each option, and any ordinary shares acquired upon the exercise of the option, must be held by the trustee at least for a period commencing on the date of grant and ending no later than 30 months after the date of grant, in accordance with the period of time specified by Section 102 of Israel’s Income Tax Ordinance, and deposited in trust with the trustee. There are similar plans for our U.S. employees, which are designed to comply with the corresponding provisions of the Internal Revenue Code of 1986, as amended.
Employee Share Purchase Plans
We implemented two Employee Share Purchase Plans in May 2001. One plan is for our Israeli employees and the other for all our U.S. and other non-Israeli employees. Under these Plans an aggregate of 2,000,000 of our ordinary shares were reserved for sale to our employees at a price equal to 85% of the lesser of fair market value on the first day or last day of each offering period under the Plans. As of December 31, 2005, we had issued 966,710 of our ordinary shares pursuant to purchases under these plans.
Employee Share Option Plans
In 1999, our board restated three 1997 Employee Share Option Plans for our Israeli employees, officers, directors and consultants and two 1997 Share Option Plans for our U.S. employees, officers, directors and consultants. Additionally, in 1999 our board adopted an Employee Share Option Plan for our Israeli employees, officers, directors and consultants, and an Employee Share Option Plan for our U.S. employees, officers, directors and consultants. The terms of the 1999 Plans are substantially the same as those of the 1997 Plans, but have reduced the exercise period from 10 to 7 years. The board has the ability to grant options with longer or shorter terms. The terms of the 1999 Plans have been modified slightly since they were adopted and in 2003, the Israeli Plan was changed to conform to amendments to the Israeli Income Tax law.
As of December 31, 2005, options to purchase a total of 6,593,412 shares are outstanding under the 1997 and 1999 Israeli Plans and options to purchase a total of 1,340,960 shares are outstanding under the 1997 U.S. Plan. In addition, a reserve of 811,000 shares has been made available for grant under the 1999 Israeli Plan and a reserve of 726,000 shares has been made available for grant under the 1999 U.S. Plan. However, subject to our board deciding otherwise, each year on July 1, starting with July 1999, the number of shares that will be made available for grant under both of the 1999 Plans, will be automatically increased to that number of shares that is equal to 5% of our outstanding share capital on such a date.
The holders of options under all of the plans are responsible for all personal tax consequences relating to the options. The exercise prices of the options are based on the fair value of the ordinary shares at the time of grant as determined by our board of directors. The board considers many factors in establishing such prices, including our financial condition and operating results, investors’ valuations and the market for the securities of comparable industry group companies.
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| | |
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
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A. | MAJOR SHAREHOLDERS |
To our knowledge, (A) we are not directly or indirectly owned or controlled (i) by another corporation or (ii) by any foreign government and (B) there are no arrangements, the operation of which may at a subsequent date result in a change in control of AudioCodes. The following table sets forth, as of December 31, 2005, the number of our ordinary shares, which constitute our only voting securities, beneficially owned by (i) all shareholders known to us to own more than 5% of our outstanding ordinary shares, and (ii) all of our directors and senior executive officers as a group.
| | | | | | | |
Identity of Person or Group | | Amount Owned | | Percent of Class | |
| |
| |
| |
Shabtai Adlersberg(1) | | 5,442,071 | | | 13.3 | % | |
Leon Bialik(2) | | 4,014,312 | | | 9.9 | % | |
FMR Corp.(3) | | 5,769,634 | | | 14.2 | % | |
Kern Capital(4) | | 2,782,700 | | | 6.9 | % | |
All directors and senior executive officers as a group (15 persons)(5) | | 6,542,090 | | | 15.6 | % | |
| |
|
|
|
(1) | Includes options to purchase 427,468 shares, which may be purchased pursuant to options exercisable within sixty days following December 31, 2005. |
|
(2) | The information is derived from a statement on Schedule 13G/A, dated February 9, 2006 of Leon Bialik filed with the Securities and Exchange Commission. |
|
(3) | The information is derived from the joint statement on Schedule 13G/A, dated January 10, 2006, of FMR Corp., Edward C. Johnson 3d, Fidelity Management & Research Company and Fid Blue Chip Growth Fund filed with the Securities and Exchange Commission. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. |
|
(4) | The information is derived from a statement on Schedule 13G, dated February 14, 2006 of Kern Capital Management, Robert E. Kern Jr. and David G. Kern filed with the Securities and Exchange Commission. |
|
(5) | Includes 1,304,765 ordinary shares, which may be purchased pursuant to options exercisable within sixty days following December 31, 2005. |
During 2005, Mr. Adlersberg acquired 2,837 of our ordinary shares and Mr. Bialik acquired 86,090 of our ordinary shares. During 2004, Mr. Adlersberg acquired 93,421 of our ordinary shares and Mr. Bialik sold 421,500 of our ordinary shares. During 2003, Mr. Adlersberg acquired 285,130 of our ordinary shares and Mr. Bialik sold 208,000 of our ordinary shares.
FMR Corp. held 14.2% of our ordinary shares as of December 31, 2005, as compared to 8.2% of our ordinary shares as of December 31, 2004 and 7.3% of our ordinary shares as of December 31, 2003. Kern Capital held 6.9% of our ordinary shares as of December 31, 2005 as compared to 6.7% of our ordinary shares as of December 31, 2004 and less than 5% of our ordinary shares as of December 31, 2003.
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As of June 23, 2006, there were approximately 24 holders of record of our ordinary shares in the United States, although we believe that the number of beneficial owners of the ordinary shares is significantly greater. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees.
The major shareholders have the same voting rights as the other shareholders.
| |
B. | RELATED PARTY TRANSACTIONS |
None.
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C. | INTERESTS OF EXPERTS AND COUNSEL |
Not applicable.
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| ITEM 8. | FINANCIAL INFORMATION |
See Item 18.
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| ITEM 9. | THE OFFER AND LISTING |
| | |
A. | OFFER AND LISTING DETAILS |
Our ordinary shares are listed on the Nasdaq National Market and The Tel Aviv Stock Exchange under the symbol “AUDC.”
In accordance with Rule 4350(a)(1) of the Rules of Corporate Governance of The Nasdaq Stock Market, Inc., we have received an exemption from the requirement to distribute an annual report to our shareholders prior to our annual meeting of shareholders. The basis for the exemption is that the generally accepted business practice in Israel, where we are incorporated, is not to distribute an annual report to shareholders. We post our Annual Report on Form 20-F on our web site (www.audiocodes.com) as soon as practical following the filing of the Annual Report on Form 20-F with the Securities and Exchange Commission.
The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by the Nasdaq National Market.
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| | | | | | | | |
Calendar Year | | Price Per Share | |
| |
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| | High | | Low | |
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2005 | | | $ | 17.00 | | $ | 8.67 | |
2004 | | | $ | 16.88 | | $ | 8.48 | |
2003 | | | $ | 11.74 | | $ | 2.10 | |
2002 | | | $ | 5.91 | | $ | 1.61 | |
2001 | | | $ | 25.75 | | $ | 1.60 | |
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Calendar Period | | Price Per Share | |
| |
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| | | High | | Low | |
| | |
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2006 | | | | | | | | |
| Second quarter (through June 23, 2006) | | $ | 14.33 | | $ | 10.38 | |
| First quarter | | $ | 14.64 | | $ | 11.36 | |
2005 | | | | | | | | |
| Fourth quarter | | $ | 11.90 | | $ | 9.62 | |
| Third quarter | | $ | 11.20 | | $ | 8.95 | |
| Second quarter | | $ | 12.18 | | $ | 8.67 | |
| First quarter | | $ | 17.00 | | $ | 10.66 | |
2004 | | | | | | | | |
| Fourth quarter | | $ | 16.88 | | $ | 11.85 | |
| Third quarter | | $ | 13.97 | | $ | 9.51 | |
| Second quarter | | $ | 12.98 | | $ | 8.48 | |
| First quarter | | $ | 16.10 | | $ | 10.35 | |
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Calendar Month | | Price Per Share | |
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| | | High | | Low | |
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2006 | | | | | | | | |
| May | | $ | 14.00 | | $ | 11.91 | |
| April | | $ | 14.33 | | $ | 13.25 | |
| March | | $ | 14.64 | | $ | 11.57 | �� |
| February | | $ | 13.02 | | $ | 11.36 | |
| January | | $ | 13.28 | | $ | 11.37 | |
2005 | | | | | | | | |
| December | | $ | 11.85 | | $ | 10.01 | |
The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by The Tel Aviv Stock Exchange. Our shares commenced trading on The Tel Aviv Stock Exchange on October 21, 2001. All share prices shown in the following table are in NIS. As of December 31, 2005, the exchange rate was equal to approximately 4.603 NIS per U.S. $1.00.
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| | | | | | | |
Calendar Year | | Price Per Share | |
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| | | High | | Low | |
| | |
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2005 | | | | NIS 73.80 | | | NIS 40.20 | |
2004 | | | | NIS 74.90 | | | NIS 39.10 | |
2003 | | | | NIS 53.50 | | | NIS 10.42 | |
2002 | | | | NIS 26.94 | | | NIS 7.41 | |
2001 (commencing October 21, 2001) | | | NIS 26.90 | | | NIS 10.25 | |
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Calendar Period | | Price Per Share | |
| |
| |
| | | High | | Low | |
| | |
| |
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2006 | | | | | | | | |
| Second quarter (through June 23, 2006) | | | NIS 65.27 | | | NIS 46.98 | |
| First quarter | | | NIS 66.27 | | | NIS 50.52 | |
2005 | | | | | | | | |
| Fourth quarter | | | NIS 53.70 | | | NIS 46.55 | |
| Third quarter | | | NIS 50.05 | | | NIS 41.06 | |
| Second quarter | | | NIS 53.97 | | | NIS 40.20 | |
| First quarter | | | NIS 73.80 | | | NIS 46.91 | |
2004 | | | | | | | | |
| Fourth quarter | | | NIS 70.00 | | | NIS 52.12 | |
| Third quarter | | | NIS 57.93 | | | NIS 43.00 | |
| Second quarter | | | NIS 57.10 | | | NIS 39.10 | |
| First quarter | | | NIS 74.90 | | | NIS 46.01 | |
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Calendar Month | | Price Per Share | |
| |
| |
| | | High | | Low | |
| | |
| |
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2006 | | | | | | | | |
| May | | | NIS 62.29 | | | NIS 55.00 | |
| April | | | NIS 65.27 | | | NIS 60.22 | |
| March | | | NIS 66.27 | | | NIS 53.31 | |
| February | | | NIS 60.50 | | | NIS 53.38 | |
| January | | | NIS 61.75 | | | NIS 50.52 | |
2005 | | | | | | | | |
| December | | | NIS 53.70 | | | NIS 47.21 | |
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B. | PLAN OF DISTRIBUTION |
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| Not applicable. |
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C. | MARKETS |
Our ordinary shares are listed for trading on the Nasdaq National Market under the symbol “AUDC”. Our ordinary shares are also listed for trading on The Tel-Aviv Stock Exchange under the symbol “AUDC”. In addition, we are aware of our ordinary shares being traded on the following markets: Frankfurt Stock Exchange, Berlin Stock Exchange, Munich Stock Exchange and XETRA.
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D. | SELLING SHAREHOLDERS |
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| Not applicable. |
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E. | DILUTION |
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| Not applicable. |
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F. | EXPENSES OF THE ISSUE |
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| Not applicable. |
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| ITEM 10. | ADDITIONAL INFORMATION |
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A. | SHARE CAPITAL |
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| Not applicable. |
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B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
Objects and Purposes
Our registration number with the Israeli Registrar of Companies is 520044132. Our objects and purposes, set forth in Section 2 of our memorandum of association, are:
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| — | to plan, develop and market voice signal systems; |
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| — | to purchase, import, market and wholesale and retail distribute, in Israel and abroad, consumption goods and accompanying products; |
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| — | to serve as representatives of bodies, entrepreneurs and companies from Israel and abroad with respect to their activities in Israel and abroad; and |
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| — | to carry out any activity as determined by the lawful management. |
Borrowing Powers
The board of directors has the power to cause us to borrow money and to secure the payment of borrowed money. The board of directors specifically has the power to issue bonds or debentures, and to impose mortgages or other security interests on all or any part of our property.
Amendment of Articles of Association
Shareholders may amend our articles of association by a resolution adopted at a shareholders meeting by the holders of 50% of voting power represented at the meeting in person or by proxy and voting thereon.
Dividends
Under the Israeli Companies Law, we may pay dividends only out of our profits. The amount of any dividend to be distributed among shareholders is based on the nominal value of their shares. Our board of directors has determined that we will not distribute any amounts of our undistributed tax exempt income as dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to our Approved Enterprise program as the undistributed tax exempt income is essentially permanent in duration.
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Voting Rights and Powers
Unless any shares have special rights as to voting, every shareholder has one vote for each share held of record. A shareholder is not entitled to vote at any shareholders meeting unless all calls then payable by him in respect of his shares have been paid (this does not apply to separate meetings of the holders of a particular class of shares with respect to the modification or abrogation of their rights).
Under our articles of association, we may issue preferred shares from time to time, in one or more series. However, in connection with our listing on The Tel-Aviv Stock Exchange in 2001, we agreed that for such time as our ordinary shares are traded on The Tel-Aviv Stock Exchange, we will not issue any of the 2,500,000 preferred shares, nominal value NIS 0.01, authorized in our articles of association. Notwithstanding the foregoing, we may issue preferred shares if the preference of those shares is limited to a preference in the distribution of dividends and such preferred shares have no voting rights.
Business Combinations
Our articles of association impose restrictions on our ability to engage in any merger, asset or share sale or other similar transaction with a shareholder holding 15% or more of our voting shares.
Winding Up
Upon our liquidation, our assets available for distribution to shareholders will be distributed to them in proportion to the nominal value of their shares.
Redeemable Shares
We may issue and redeem redeemable shares.
Modification of Rights
Subject to the provisions of our memorandum of association, and without prejudice to any special rights previously conferred upon the holders of our existing shares, we may, from time to time, by a resolution approved by the holders of 50% voting power represented at the meeting in person or by proxy and voting thereon, provide for shares with such preferred or deferred rights or rights of redemption, or other special rights and/or such restrictions, whether in regard to dividends, voting repayment of share capital or otherwise, as may be stipulated in such resolution.
If at any time our share capital is divided into different classes of shares, we may modify or abrogate the rights attached to any class, unless otherwise provided by the articles of association, by a resolution approved by the holders of 50% voting power represented at the meeting in person or by proxy and voting thereon, subject to the consent in writing of the holders of 75% of the issued shares of that class.
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The provisions of our articles of association relating to general meetings also apply to any separate general meeting of the holders of the shares of a particular class, except that two or more members holding not less than 75% of the issued shares of that class must be present in person or by proxy at that separate general meeting for a quorum to exist.
Unless otherwise provided by our articles of association, the increase of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed to modify or abrogate the rights attached to previously issued shares of that class or of any other class.
Shareholders Meetings
An annual meeting of shareholders is to be held once a year, within 15 months after the previous annual meeting. The annual meeting may be held in Israel or outside of Israel, as determined by the board of directors.
The board of directors may, whenever it thinks fit, convene a special shareholders meeting. The board must convene a special shareholders meeting at the request of:
| | |
| — | at least two directors; |
| | |
| — | at least one-quarter of the directors in office; or |
| | |
| — | shareholders who hold at least 5% of the outstanding equity and at least 1% of the voting rights, or at least 5% of the outstanding voting rights. |
A special shareholders meeting may be held in Israel or outside of Israel, as determined by the board of directors.
Notice of General Meetings; Omission to Give Notice
The provisions of the Companies Law and the related regulations override the provisions of our articles of association, and provide for notice of a meeting of shareholders to be sent to each registered shareholder at least 21 days in advance of the meeting. Notice of a meeting of shareholders must also be published in two Israeli newspapers prior to the record date for the meeting.
Notice of a meeting of shareholders must specify the type of meeting, the place and time of the meeting, the agenda, a summary of the proposed resolutions, the majority required to adopt the proposed resolutions, and the record date for the meeting. The notice must also include the address and telephone number of our registered office, and a list of times at which the full text of the proposed resolutions may be examined at the registered office.
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The accidental omission to give notice of a meeting to any shareholder, or the non-receipt of notice sent to such shareholder, does not invalidate the proceedings at the meeting.
Limitations on Foreign Shareholders to Hold or Exercise Voting Rights
There are no limitations on foreign shareholders in our articles of association. Israeli law restricts the ability of citizens of countries that are in a state of war with Israel to hold shares of Israeli companies.
Indemnification of Directors and Officers
We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them against some types of claims, subject to dollar limits and other limitations. These agreements provide, subject to Israeli law, for us to indemnify each of these directors and senior officers for any of the following obligations or expenses that they may incur:
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| § | monetary liability imposed on the director or senior officer in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court, for an act that the director or senior officer performed by virtue of being our director or senior officer, |
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| § | reasonable legal costs, including attorneys’ fees, expended by a director or senior officer as a result of an investigation or proceeding instituted against the director or senior officer by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the director or senior officer and either: |
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| o | no financial liability was imposed on the director or senior officer in lieu of criminal proceedings, or |
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| o | financial liability was imposed on the director or senior officer in lieu of criminal proceedings but the alleged criminal offense does not require proof of criminal intent, and |
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| § | reasonable legal costs, including attorneys’ fees, expended by the director or senior officer or for which the director or senior officer is charged by a court: |
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| o | in an action brought against the director or senior officer by us, on our behalf or on behalf of a third party, |
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| o | in a criminal action in which the director or senior officer is found innocent, or |
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| o | in a criminal action in which the director or senior officer is convicted but in which proof of criminal intent is not required. |
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Approval of Transactions under Israeli Law
The Companies Law imposes fiduciary duties that “office holders,” including directors and executive officers, owe to their company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care generally requires an office holder to act with the level of care which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty generally requires an office holder to act in good faith and for the good of the company. Specifically, an office holder must avoid any conflict of interest between the office holder’s position in the company and his or her other positions or personal affairs. In addition, an office holder must avoid competing against the company or exploiting any business opportunity of the company for his or her own benefit or the benefit of others. An office holder must also disclose to the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position in the company. The term “office holder” includes any person who, either formally or in substance, serves as a director, general manager or chief executive officer, or who reports directly to the general manager or chief executive officer. Each person listed in the table under “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management” above is an “office holder” of AudioCodes.
Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the board of directors and, in certain cases, the prior approval of the audit committee. Arrangements as to compensation of directors also require audit committee and shareholder approval.
The Companies Law requires that an office holder promptly disclose any personal interest that he or she may have, and all related material information known to him or her, in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes a personal interest of the office holder’s relative or a corporation in which the office holder or the office holder’s relative is a 5% or greater shareholder, director or general manager or has the right to appoint at least one director or the general manager. The office holder’s duty to disclose shall not apply in the event that the personal interest only results from a personal interest of the office holder’s relative in a transaction that is not an extraordinary transaction. An extraordinary transaction is a transaction not in the ordinary course of business, not on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities.
For a transaction that is not an extraordinary transaction, under the Companies Law, once the office holder complies with the above disclosure requirement, the board of directors is authorized to approve the transaction, unless the articles of association provide otherwise. A transaction that is adverse to the company’s interest may not be approved. If the transaction is an extraordinary transaction, then it also must be approved by the company’s audit committee and board of directors, and, under certain circumstances, by the shareholders of the company. Generally, when an extraordinary transaction is considered by the audit committee and board of directors, the interested directors may not be present or vote.
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Duties of Shareholders
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder for the purpose of being a “controlling shareholder.” Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder or employee, generally require the approval of the audit committee, the board of directors and the shareholders. The shareholder approval must include at least one-third of the shares of non-interested shareholders voted on the matter. However, the transaction can be approved by shareholders without this one-third approval if the total shares of non-interested shareholders voted against the transaction do not represent more than one percent of the voting rights in the company.
In addition, under the Companies Law, each shareholder has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his or her power in the company, such as in shareholder votes. In addition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint an office holder or any other power with respect to the company. A recent amendment to the Companies Law provides that a breach of the duty of fairness will be governed by the laws governing breach of contract,mutatis mutandis. However, the Companies Law does not define the substance of this duty of fairness.
Israeli law permits a company to insure an office holder in respect of liabilities incurred by the office holder as a result of:
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| — | the breach of his or her duty of care to the company or to another person, or |
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| — | the breach of his or her fiduciary duty to the company, |
to the extent that the office holder acted in good faith and had reasonable cause to believe that the act would not prejudice the company. A company can also insure an office holder against monetary liabilities as a result of an act or omission that the office holder committed in connection with his or her serving as an office holder.
Moreover, a company can indemnify an office holder for any of the following obligations or expenses incurred in connection with his or her acts or omissions as an office holder:
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| — | monetary liability imposed upon the office holder in favor of other persons pursuant to a court judgment, including a compromise judgment or an arbitrator’s decision approved by a court; |
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| — | reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any financial liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a financial liability was imposed on the office holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and |
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| — | reasonable litigation expenses, including attorneys’ fees, actually incurred by the office holder or imposed upon the office holder by a court, in an action, suit or proceeding brought against the office holder by or on behalf of the company or other persons; in a criminal action in which the office holder was acquitted; or in a criminal action which does not require criminal intent in which the office holder was convicted. A company may also exculpate an office holder in advance, in whole or in part, from liability for damages sustained by a breach of duty of care to the company. |
Furthermore, a company can, with one limited exception, exculpate an office holder in advance, in whole or in part, from liability for damages sustained by a breach of duty of care to the company.
Our articles of association allow us to insure, indemnify and exculpate office holders to the fullest extent permitted by law, provided such insurance or indemnification is approved in accordance with law.
We have entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to certain limitations. This undertaking has been ratified by our audit committee, board of directors and shareholders. We have acquired directors’ and officers’ liability insurance covering our officers and directors and the officers and directors of our subsidiaries against certain claims.
On November 3, 2004, we entered into a purchase agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and CIBC World Markets Corp., with respect to the issue and sale of $100.0 million aggregate principal amount of our 2.00% Senior Convertible Notes due 2024 and the grant of an option for the purchase of an additional $25.0 million aggregate principal amount of our notes, which was exercised in full on November 16, 2004.
On November 9, 2004, we entered into an indenture with U.S. Bank National Association in connection with the issuance of our 2.00% Senior Convertible Notes due 2024. The indenture provides that the notes are senior, unsecured obligations of AudioCodes Ltd. Pursuant to the indenture, the notes accrue interest at a rate of 2.00% per annum, payable semi-annually on May 9 and November 9 of each year, with a final maturity on November 9, 2024. The indenture provides that the notes may be redeemed by us, in whole or in part, at any time after November 9, 2009, and that the holders of the notes may require us to redeem the notes on November 9, 2009, November 9, 2014 or November 9, 2019, or upon certain fundamental changes. If any notes are redeemed prior to November 9, 2009 based on certain fundamental changes, we will also be required to make a ‘make-whole’ premium payment to the redeeming note holders. Under the terms of the indenture and the notes, holders of the notes are entitled to convert the notes into our ordinary shares at a conversion rate of 53.4474 ordinary shares per $1,000 principal amount of notes, which is the equivalent to a conversion price of approximately $18.71 per share. The conversion rate is subject to adjustment in certain circumstances, such as changes in our capital structure or upon the issuance by us of share dividends or certain cash distributions.
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On November 9, 2004, we also entered into a registration rights agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and CIBC World Markets Corp., pursuant to which we agreed to file with the U.S. Securities and Exchange Commission within 150 days of November 9, 2004, a shelf registration statement covering our 2.00% Senior Convertible Notes due 2024 and shares issuable upon conversion of the notes, and to maintain the effectiveness of the registration statement until the earlier of the date on which all the shares have been resold under the registration statement, the date of expiration of the holding period under applicable law that would enable the resale of the shares without restriction or registration under applicable law, or November 16, 2006. Under the terms of the registration rights agreement, if either (i) on the day following the filing deadline, the shelf registration statement has not been filed with the SEC; (ii) on the 211th day following the earliest date of original issuance of any of the notes, the shelf registration statement is not declared effective, (iii) the registration statement ceases to be effective or fails to be usable without being succeeded within five business days by a post-effective amendment or a report filed with the SEC pursuant to the Exchange Act that cures the failure of the registration statement to be effective or usable or (iv) the prospectus has been suspended for more than 60 days (or more than 90 days in any twelve month period), then additional interest will accrue on our notes beginning on the day following such triggering event through the day on which the triggering event has been cured. The additional interest will accrue at a rate of 0.25% for the first ninety days of the triggering event, and 0.5% thereafter.
On May 12, 2004, we acquired the outstanding shares of capital stock of Ai-Logix, now known as AudioCodes USA, Inc. pursuant to a between us, AudioCodes Inc., Ai-Logix and AI Technologies N.V. We paid $10 million in cash at the closing and an additional $10 million in March 2005 based on the achievement of revenue milestones and additional terms by the acquired business during 2004 and 2005.
On May 16, 2006, we entered into an Agreement and Plan of Merger with Nuera Communications, Inc., or Nuera. The consideration for the transaction will consist of $85 million in cash, subject to reduction for certain expenses, plus an earn out arrangement under which we have agreed to pay up to an additional $5 million if Nuera achieves certain revenue milestones during the first 12 months after consummation of the transaction. There will be an escrow of $7.5 million of the purchase price paid at closing for a period of one year following closing, to secure up to $7.5 million of certain indemnification obligations under the merger agreement. Upon the consummation of the merger, Nuera will become a wholly-owned subsidiary of AudioCodes USA. The transaction is subject to customary conditions for transactions of this nature, including antitrust clearance under the Hart-Scott-Rodino Antitrust Improvement Act and other regulatory approvals. If these conditions are satisfied, the transaction is expected to be consummated early in the third quarter of 2006. The transaction has been approved by our board of directors and by the board of directors and stockholders of Nuera. We cannot be sure that the acquisition of Nuera will be consummated when anticipated or at all.
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Since January 1, 2003, all exchange control restrictions imposed by the State of Israel have been removed, although there are still reporting requirements for foreign currency transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. Nonresidents of Israel who purchase our ordinary shares are able to receive any dividends thereon (and any amounts payable upon the dissolution, liquidation and winding up of our affairs) freely repatriable in non-Israeli currency, provided that Israeli income tax has been paid or withheld on such amounts (see “Item 10. Additional Information—E. Taxation—Israeli Tax Considerations—Tax on Dividends”).
Non-residents of Israel may freely hold and trade our ordinary shares, and the proceeds of sale thereof are not subject to Israeli currency control restrictions. Our memorandum of association and articles of association do not restrict in any way the ownership of ordinary shares by non-residents of Israel and neither our memorandum of association and articles of association nor Israeli law restricts the voting rights of non-residents, except with respect to citizens of countries that are in a state of war with Israel.
The following is a summary of the material Israeli and United States federal tax consequences, Israeli foreign exchange regulations and certain Israeli government programs affecting us. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice, is not exhaustive of all possible tax considerations and should not be relied upon for tax planning purposes. Potential investors are urged to consult their own tax advisors as to the Israeli tax, United States federal income tax and other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Considerations
General Corporate Tax Structure
On July 25, 2005 the Israeli parliament passed the Law for the Amendment of the Income Tax Ordinance (No.147 and Temporary Order) - 2005 (hereinafter - the Amendment).
Under the amendment, a gradual decrease in the corporate tax rate in Israel will be in effect as follows: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%. Furthermore, beginning in 2010, upon reduction of the corporate tax rate to 25%, capital gains will be subject to a tax of 25%.
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Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959
Our facilities have been granted approved enterprise status pursuant to the Law for the Encouragement of Capital Investments, 1959 or the Investment Law, which provides certain tax and financial benefits to investment programs that have been granted such status.
The Investment Law provides that a proposed capital investment in eligible facilities may be designated as an “approved enterprise.” Until recently, the designation required advance approval from the Investment Center of the Israel Ministry of Industry, Trade and Labor (the Investment Center). Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, such as the equipment to be purchased and utilized pursuant to the program. The tax benefits under the Investment Law are not available for income derived from products manufactured outside of Israel.
A company owning an approved enterprise may elect to receive either governmental grants or an alternative package of tax benefits. Under the alternative package, a company’s undistributed income derived from an approved enterprise will be exempt from corporate tax for a period of two to ten years (depending on the geographic location of the approved enterprise within Israel). The exemption commences in the first year of taxable income, and the company is taxed at a reduced corporate rate of 10% to 25% for the following five to eight years, depending on the extent of foreign shareholders’ ownership of the company’s ordinary shares. The benefits period is limited to twelve years from completion of the investment under the approved plan or fourteen years from the date of approval, whichever is earlier. A Foreign Investors Company, or FIC, defined in the Investment Law as a company of which more than 25% of its shareholders are non-Israeli residents, may enjoy benefits for a period of up to ten years, or twelve years if it complies with certain export criteria stipulated in the Investment Law (the actual length of the benefits period is graduated based on the percentage of foreign ownership).
The tax benefits derived from any certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates.
Our production facilities have been granted the status of approved enterprise. Income arising from our approved enterprise facilities is tax-free under the alternative package of benefits described above and entitled to reduced tax rates based on the level of foreign ownership for specified periods. We have derived, and expect to continue to derive, a substantial portion of our operating income from our approved enterprise facilities. The tax benefits attributable to our current approved enterprises are scheduled to expire gradually from 2007 to 2013.
Distribution of earnings derived from approved enterprise which were previously taxed at reduced tax rates, would not result in additional tax consequences to us. However, if retained tax-exempt income is distributed in a manner, we would be taxed at the reduced corporate tax rate applicable to such profits (between 10%-25%). We are not obliged to distribute exempt retained earnings under the alternative package of benefits, and may generally decide from which source of income to declare dividends. We currently intend to reinvest the amount of our tax-exempt income and not to distribute such income as a dividend. Dividends from approved enterprises are generally taxed at a rate of 15% (which is withheld and paid by the company paying the dividend) if such dividend is distributed during the benefits period or within twelve years thereafter. The twelve-year limitation does not apply to an FIC.
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Future approved enterprises will be reviewed separately, and the decisions whether to approve or reject a designation as an approved enterprise will be based, among other things, on the criteria set forth in the Investment Law and related regulations, the then prevailing policy of the Investment Center, and the specific objectives and financial criteria of the company. Accordingly, there can be no assurance that any new investment programs will be approved as approved enterprises. In addition, the benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investment Law and related regulations and the criteria set forth in the specific certificate of approval. In the event that a company does not meet these conditions, it will be subject to corporate tax at the rate then in effect under Israeli law for such tax year. As of December 31, 2005, management believes that we meet all of the aforementioned conditions.
On April 1, 2005, an amendment to the law came into effect (“the Amendment”) and has significantly changed the provisions of the law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Beneficiary Enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
In addition, the law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, our existing “Approved Enterprises” will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the law has amended, will subject us to taxes upon distribution or liquidation and we may be required to record a deferred tax liability with respect to such tax-exempt income.
Law for the Encouragement of Industrial Research and Development, 1984
Under the Law for the Encouragement of Industrial Research and Development, 1984 and the related regulations, or the Research Law, research, development and pre-manufacturing programs that meet specified criteria and are approved by a governmental committee (the Research Committee) of the Office of Chief Scientist (OCS) are eligible for grants of up to 50% of the expenditures on the program. Each application to the OCS is reviewed separately, and grants are based on the program approved by the Research Committee. Expenditures supported under other incentive programs of the State of Israel are not eligible for OCS grants. As a result, we cannot be sure that applications to the OCS will be approved or, if approved, that we will receive the amounts for which we apply.
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Recipients of these grants are required to pay royalties on the revenues derived from the sale of product developed in accordance with the program. The royalties are payable at the rate of 3% of revenues during the first three years, 4% of revenues during the following three years, and 5% of revenues in the seventh year and thereafter, with the total royalties not to exceed 100% of the dollar value of the OCS grant.
The terms of the Israeli government participation require that products developed with OCS grants must generally be manufactured in Israel. If we receive OCS approval for any portion of this manufacturing to be performed outside of Israel, the royalty rate would be increased and the repayment schedule would be accelerated, based on the extent of the manufacturing conducted outside of Israel. Depending upon the extent of the manufacturing volume that is performed outside of Israel, the ceiling on royalties would increase to 120%, 150% or 300% of the grant. Under an amendment to the Research Law effective June 7, 2005, the authority of the Research Committee to approve the transfer of manufacture outside of Israel was expanded.
The technology developed pursuant to the terms of these grants may not be transferred to third parties without the prior approval of the Research Committee. This approval is required only for the export of the technology, and not for the export of any products that incorporate the sponsored technology. Approval of the transfer of technology may be granted only if the recipient agrees to abide by all the provisions of the Research Law, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased. The amendment to the Research Law effective June 7, 2005 granted authority to the Research Committee to approve the transfer of sponsored technology outside of Israel, subject to various conditions.
We have received grants from the OCS, and therefore we are subject to various restrictions under the Research Law on the transfer of technology or manufacturing. These restrictions do not terminate upon the full payment of royalties.
In order to meet specified conditions in connection with the grants and programs of the OCS, we have made representations to the Government of Israel about our Israeli operations. From time to time the conduct of our Israeli operations has deviated from our representations. If we fail to meet the conditions to grants, including the maintenance of a material presence in Israel, or if there is any material deviation from the representations made by us to the Israeli government, we could be required to refund the grants previously received (together with an adjustment based on the Israeli consumer price index and an interest factor) and would likely be ineligible to receive OCS grants in the future.
Tax Benefits Under the Law for the Encouragement of Industry
(Taxation), 1969
According to the Law for the Encouragement of Industry (Taxation), 1969, or the Industry Encouragement Law, an “industrial company” is a company resident in Israel, that at least 90% of its income, in any tax year (determined in Israeli currency, exclusive of income from certain government loans, capital gains, interest and dividends) is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity. We currently believe that we qualify as an industrial company within the definition of the Industry Encouragement Law. Under the Industry Encouragement Law, industrial companies are entitled to the following preferred corporate tax benefits:
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| — | deduction of purchases of know-how and patents over an eight-year period for tax purposes; |
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| — | the right to elect, under specified conditions, to file a consolidated tax return with related Israeli industrial companies; and |
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| — | accelerated depreciation rates on equipment and buildings. |
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. The Israeli tax authorities may determine that we do not qualify as an industrial company, which would entail our loss of the benefits that relate to this status. In addition, no assurance can be given that we will continue to qualify as an industrial company, in which case the benefits described above will not be available in the future.
Special Provisions Relating to Measurement of Taxable Income
Commencing in taxable year 2003, we elected to measure our taxable income and file our tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Such an elective obligates the Company for three years. Accordingly, commencing taxable year 2003, results for tax purposes are measured in terms of earnings in dollars. We elected to extend the term of the above mentioned tax measurement by another year.
Capital Gains Tax Applicable to Resident and Non-Resident Shareholders
Israeli law generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise. Regulations promulgated under the Israeli Income Tax Ordinance provided for an exemption from Israeli capital gains tax for gains accrued before January 1, 2003 and derived from the sale of shares of an industrial company, as defined by the Industry Encouragement Law, that are traded on specified non-Israeli markets, including The Nasdaq National Market, provided that the sellers purchased their shares either in the company’s initial public offering or in public market transactions thereafter. This exemption does not apply to shareholders who are in the business of trading securities, or to shareholders that are Israeli resident companies subject to the Inflationary Adjustments Law. We believe that we are currently an industrial company, as defined by the Industry Encouragement Law. The status of a company as an industrial company may be reviewed by the tax authorities from time to time. There can be no assurance that the Israeli tax authorities will not deny our status as an industrial company, possibly with retroactive effect.
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On January 1, 2003, the Tax Reform came into effect thus imposing capital gains tax at a rate of 15% on gains derived on or after January 1, 2003 from the sale of shares in Israeli companies:
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| — | publicly traded on The Tel Aviv Stock Exchange, or the TASE; |
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| — | publicly traded on Nasdaq or a recognized stock exchange or regulated market in a country that has a treaty for the prevention of double taxation with Israel; or |
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| — | companies dually traded on both the TASE and on Nasdaq or a recognized stock exchange or a regulated market outside of Israel. |
This tax rate does not apply to the sale of shares:
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| — | to a relative (as defined in the tax reform); |
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| — | by dealers in securities; |
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| — | by shareholders that report in accordance with the Inflationary Adjustments Law; or |
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| — | by shareholders who acquired their shares prior to an initial public offering (that are subject to a different tax arrangement). |
This tax rate is contingent upon the shareholder not claiming a deduction for financing expenses in connection with such shares.
Regulations adopted in connection with the Tax Reform deal with the taxation of the gain on securities acquired prior to the effectiveness of the Tax Reform and sold subsequent to the effectiveness of the Tax Reform (allocation of the gain as between the exempt period and the taxable period).
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE, provided such gains do not derive from a permanent establishment of such shareholders in Israel. Non-Israeli residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to the exemption with respect to gains derived from the sale of shares of Israeli companies publicly traded on the TASE, if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be subject to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.
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United States-Israel Tax Treaty
Pursuant to the Convention Between the Government of the United States of America and the Government of Israel with respect to Taxes on Income, as amended, or the United States-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares by a person who holds the ordinary shares as a capital asset and who qualifies as a resident of the United States within the meaning of the United States- Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States-Israel Tax Treaty, or a Treaty United States Resident, generally will not be subject to the Israeli capital gains tax unless such Treaty United States Resident holds, directly or indirectly, shares representing 10% or more of the voting power of our company during any part of the twelve-month period preceding such sale, exchange or disposition, subject to certain conditions. A sale, exchange or disposition of shares by a Treaty United States Resident who holds, directly or indirectly, shares representing 10% or more of the voting power of our company at any time during such preceding twelve-month period would be subject to such Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, such Treaty United States Resident would be permitted to claim a credit for such taxes against the United States federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in United States laws applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to state or local taxes.
Tax on Dividends
Non-residents of Israel are subject to Israeli income tax on income accrued or derived from sources in Israel or received in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends, other than bonus shares and stock dividends, income tax at the rate of 25% is withheld at the source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. If the dividends are distributed out of approved enterprise earnings, the applicable tax rate would be 15%. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty United States Resident will be 25%, however that tax rate is reduced to 12.5% for dividends not generated by an approved enterprise to a corporation which holds 10% or more of the voting power of our company during a certain period preceding distribution of the dividend. Dividends derived from an approved enterprise will still be subject to 15% tax withholding.
Foreign Exchange Regulations
Dividends, if any, paid to the holders of the ordinary shares, and any amounts payable upon dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid or withheld on such amounts.
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United States Tax Considerations
United States Federal Income Taxes
The following summary describes the material U.S. federal income tax consequences to “U.S. holders” (as defined below) arising from the purchase, ownership and disposition of our ordinary shares. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended, or the “Code,” the final, temporary and proposed U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all of which are subject to change, possibly with retroactive effect. For purposes of this summary, a “U.S. holder” will be deemed to refer only to any of the following holders of our ordinary shares:
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| — | an individual who is either a U.S. citizen or a resident of the U.S. for U.S. federal income tax purposes; |
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| — | a corporation (or an entity taxable as a corporation) created or organized under the laws of the U.S. or any political subdivision thereof; |
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| — | an estate, the income of which is subject to U.S. federal income tax regardless of the source of its income; and |
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| — | a trust, if either (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all the substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
This summary does not consider all aspects of U.S. federal income taxation that may be relevant to particular U.S. holders by reason of their particular circumstances, including potential application of the alternative minimum tax, or any aspect of state, local or non-U.S. federal tax laws. In addition, this summary is directed only to U.S. holders that hold our ordinary shares as capital assets and does not address the considerations that may be applicable to particular classes of U.S. holders, including financial institutions, insurance companies, broker-dealers, tax-exempt organizations, holders whose functional currency is not the U.S. dollar, holders who acquired our ordinary shares through exercise of options or otherwise as compensation, holders of our ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” holders, directly, indirectly or through attribution, of 10% or more of our outstanding ordinary shares and persons who own our ordinary shares through a partnership or other pass-through entity.
Each U.S. holder should consult with its own tax advisor as to the particular tax consequences to it of the purchase, ownership and sale of our ordinary shares, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.
Distributions With Respect to Our Ordinary Shares
The amount of a distribution with respect to our ordinary shares will equal the amount of cash and the fair market value of any property distributed and will also include the amount of any Israeli taxes withheld, as described below under “Israeli Tax Considerations – Tax on Dividends.” Other than distributors in liquidation and distributions in redemption of stock that are treated as exchanges, a distribution paid by us with respect to our ordinary shares to a U.S. holder generally will be treated as a dividend to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of any distribution that exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its ordinary shares, and then generally as capital gain. Currently, an individual U.S. holder’s “qualified dividend income” is subject to tax at a reduced rate of 15%.
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For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation to an individual holder if such U.S. holder meets certain minimum holding period requirements and either (a) the stock of such corporation is readily tradable on an established securities market in the U.S., including the Nasdaq National Market, or (b) such corporation is eligible for the benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The U.S. Secretary of the Treasury has indicated that the income tax treaty between the U.S. and Israel is satisfactory for this purpose. Dividends paid by a foreign corporation will not qualify for the 15% U.S. federal income tax rate, however, if such corporation is treated, for the tax year in which the dividends are paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes.
As discussed in more detail below under “Passive Foreign Investment Company Status,” we do not believe that we currently would be classified as a “passive foreign investment company” for U.S. federal income tax purposes. Accordingly, dividend distributions with respect to our ordinary shares should be treated as “qualified dividend income” and, subject to U.S. holders’ satisfaction of certain minimum holding period requirements, should be eligible for the reduced 15% U.S. federal income tax rate. Corporate holders of our ordinary shares generally will not be allowed a deduction for dividends received on our ordinary shares.
A dividend paid by us in NIS will be included in the income of U.S. holders at the dollar amount of the dividend, based on the “spot rate” of exchange in effect on the date the distribution is includable in the U.S. holders’ income, regardless of whether the payment is in fact converted into dollars. The “spot rate” generally refers to a rate that reflects a fair market rate of exchange available to the public for currency under a “spot contract” in a free market and involving representative amounts. A “spot contract” is a contract to buy or sell a currency no more than two business days following the date of the execution of the contract. If a spot rate cannot be demonstrated, the U.S. Internal Revenue Service has the authority to determine the spot rate. U.S. holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that dollar value. Any subsequent gain or loss on NIS arising from exchange rate fluctuations during the period from the date a U.S. holder includes the dividend payment in income to the date such U.S. holder converts the payment to dollars will be taxable as ordinary income or loss and will be U.S.-source income or loss for U.S. foreign tax credit purposes.
Dividend income derived with respect to our ordinary shares will constitute “portfolio income” for purposes of the limitation on the use of passive activity losses and, therefore, generally may not be offset by passive activity losses, and generally will be treated as “investment income” for purposes of the limitation on the deduction of investment interest expense. Dividends paid by us generally will be foreign-source passive income for U.S. foreign tax credit purposes or, in the case of a U.S. holder that is a financial services entity, financial services income. Subject to certain limitations, U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability any Israeli income tax withheld from dividends received on our ordinary shares. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld. In addition, special rules may apply to the computation of foreign tax credits relating to qualified dividend income. The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign income taxes, the availability of deductions is complex and involves the application of rules that depend on a U.S. holder’s particular circumstances. U.S. holders are urged to consult their own tax advisors regarding the availability to them of foreign tax credits or deductions in respect of any Israeli tax withheld or paid.
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Disposition of Our Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Status,” a U.S. holder’s sale or exchange of our ordinary shares generally will result in the recognition by such U.S. holder of capital gain or loss in an amount equal to the difference between the United States dollar value of the amount realized and the U.S. holder’s tax basis in the ordinary shares sold. This gain or loss will be long-term capital gain or loss if the ordinary shares sold have been held for more than one year at the time of the sale or exchange. If the U.S. holder’s holding period on the date of the sale or exchange is one year or less, such gain or loss will be a short-term capital gain or loss. Individual U.S. holders currently are subject to a maximum tax rate of 15% on long-term capital gains for tax years beginning on or before December 31, 2008. Short-term capital gains generally are taxed at the same rates applicable to ordinary income. See “Israeli Tax Considerations -- Capital Gains Tax Applicable to Resident and Non-Resident Shareholders” for a discussion of taxation by Israel of capital gains realized on sales of capital assets. Any capital loss realized upon the sale, exchange or other disposition of our ordinary shares generally will be deductible only against capital gains and not against ordinary income, except that in the case of non-corporate U.S. holders, a capital loss is deductible in any year to the extent of capital gains plus ordinary income up to $3,000. In general, any capital gain recognized by a U.S. holder upon the sale or exchange of our ordinary shares will be treated as U.S.-source income for U.S. foreign tax credit purposes. Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other disposition of ordinary shares by a holder who is a resident of the United States for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign-source income for U.S. foreign tax credit purposes.
A U.S. holder’s tax basis in its ordinary shares generally will be equal to the purchase price paid therefore by such U.S. holder. The holding period of each ordinary share owned by a U.S. holder will begin on the day following the date of the U.S. holder’s purchase of such ordinary share and will include the day on which the ordinary share is sold by such U.S. holder.
In the case of a U.S. holder who uses the cash basis method of accounting and who receives NIS in connection with the sale or taxable disposition of ordinary shares, the amount realized will be based on the spot rate as determined on the settlement date of such exchange. If such U.S. holder subsequently converts NIS into dollars at a conversion rate other than the spot rate in effect on the settlement date, such U.S. holder may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. A U.S. holder who uses the accrual method of accounting may elect the same treatment required of cash basis taxpayers with respect to a sale or taxable disposition of ordinary shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the U.S. Internal Revenue Service. If an accrual basis U.S. holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. holder may be deemed to have realized an immediate foreign currency gain or loss for U.S. federal income tax purposes because of differences between the dollar value of the NIS on the date of sale or other taxable disposition and on the settlement date. Any such currency gain or loss generally would be treated as U.S. source ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. holder on the sale or taxable disposition of ordinary shares.
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Passive Foreign Investment Company Status
Generally, a foreign corporation is treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for any tax year if, in such tax year, either (i) 75% or more of its gross income, including its pro rata share of the gross income of any company in which it is considered to own 25% or more of the shares by value, is passive in nature (the “Income Test”), or (ii) the average percentage of its assets during such tax year, including its pro rata share of the assets of any company in which it is considered to own 25% or more of the shares by value, which produce, or are held for the production of, passive income (determined by averaging the percentage of the fair market value of its total assets which are passive assets as of the end of each quarter of such year) is 50% or more (the “Asset Test”).
Based on the composition of our gross income and the composition and value of our gross assets during 2005, we do not believe that we were a PFIC in 2005. While it is possible that we would have been classified as a PFIC under the Asset Test in 2001, 2002 and 2003 principally because a significant portion of our assets continued to consist of the cash raised in connection with the two public offerings of our ordinary shares in 1999, and the public market value of our ordinary shares declined significantly during 2001, 2002 and the first half of 2003, we do not believe we would have been treated as a PFIC in 2004. The tests for determining whether we are a PFIC for any tax year are applied annually, and it is difficult to make accurate predictions regarding the composition of our future income and assets, the factors which are relevant to this determination. In addition, there is no definitive method prescribed in the Code, United States Treasury Regulations or administrative or judicial interpretations thereof for determining the value of a foreign corporation’s assets for purposes of the Asset Test. While the legislative history of the United States Taxpayer Relief Act of 1997 indicates that “the total value of a publicly-traded foreign corporation’s assets generally will be treated as equal to the sum of the aggregate value of its outstanding stock plus its liabilities,” there remains substantial uncertainty regarding the valuation of a publicly-traded foreign corporation’s assets for purposes of the Asset Test. Moreover, certain factors relevant to the PFIC determination, such as declines in the market value of our stock, are not within our control and can cause us to become a PFIC. Accordingly, there can be no assurance that we will not be deemed a PFIC in any future tax year.
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In view of the uncertainty regarding our use of the net proceeds realized from our sale of notes in November 2004, the valuation of our assets for purposes of the Asset Test and the complexity of the issues regarding our treatment as a PFIC, U.S. holders are urged to consult their own tax advisors for guidance as to our status as a PFIC. For those U.S. holders who determine that we were a PFIC in 2005 or in any subsequent tax year and notify us in writing of their request for the information required in order to effectuate the QEF Election described below, we will promptly make such information available to them.
If we are treated as a PFIC for U.S. federal income tax purposes for any year during a U.S. holder’s holding period of our ordinary shares and the U.S. holder does not make a QEF Election or a “mark-to-market” election (both as described below):
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— | “Excess distributions” by us to a U.S. holder would be taxed in a special way. “Excess distributions” with respect to any U.S. holder are amounts received by such U.S. holder with respect to our ordinary shares in any tax year that exceed 125% of the average distributions received by such U.S. holder from us during the shorter of (i) the three previous years, or (ii) such U.S. holder’s holding period of our ordinary shares before the then-current tax year. Excess distributions must be allocated ratably to each day that a U.S. holder has held our ordinary shares. A U.S. holder must include amounts allocated to the current tax year in its gross income as ordinary income for that year. A U.S. holder must pay tax on amounts allocated to each prior tax year in which we were a PFIC at the highest rate in effect for such prior year on ordinary income and the tax is subject to an interest charge at the rate applicable to deficiencies for income tax. |
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— | The entire amount of any gain realized by a U.S. holder upon the sale or other disposition of our ordinary shares also would be treated as an excess distribution subject to tax as described above. |
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— | The tax basis in ordinary shares acquired from a decedent who was a U.S. holder would not receive a step-up to fair market value as of the date of the decedent’s death but would instead be equal to the decedent’s basis, if lower. |
Although we generally will be treated as a PFIC as to any U.S. holder if we are a PFIC for any year during the U.S. holder’s holding period, if we cease to satisfy the requirements for PFIC classification, the U.S. holder may avoid the consequences of PFIC classification for subsequent years by electing to recognize gain based on the unrealized appreciation in the notes or ordinary shares through the close of the tax year in which we cease to be a PFIC. Additionally, if we are treated as a PFIC, a U.S. holder who acquires ordinary shares from a decedent would be denied the normally available step-up in tax basis for these ordinary shares to fair market value at the date of death and instead would have a tax basis equal to the decedent’s tax basis.
A U.S. holder who beneficially owns shares of a PFIC must file Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) with the IRS for each tax year in which the U.S. holder holds shares in a PFIC. This form describes any distributions received with respect to these shares and any gain realized upon the disposition of these shares.
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For any tax year in which we are treated as a PFIC, a U.S. holder may elect to treat its ordinary shares as an interest in a qualified electing fund (a “QEF Election”), in which case, the U.S. holder would be required to include in income currently such U.S. holder’s proportionate share of our earnings and profits in years in which we are a PFIC regardless of whether distributions of our earnings and profits are actually distributed to the U.S. holder. Any gain subsequently recognized upon the sale or other disposition by the U.S. holder of the ordinary shares, however, generally would be taxed as capital gain and the denial of the basis step-up at death described above would not apply.
A U.S. holder may make a QEF Election with respect to a PFIC for any tax year of the U.S. holder. A QEF Election is effective for the year in which the election is made and all subsequent tax years of the U.S. holder. Procedures exist for both retroactive elections and the filing of protective statements. An additional election is available to defer the payment of taxes that may result from a QEF Election, although interest must be paid on any deferred taxes. A U.S. holder making the QEF Election must make the election on or before the due date, as extended, for the filing of the U.S. holder’s income tax return for the first tax year to which the election will apply. A U.S. holder must make a QEF Election by completing Form 8621 and attaching it to its U.S. federal income tax return, and must satisfy additional filing requirements each year the election remains in effect.
As an alternative to a QEF Election, a U.S. holder generally may elect to mark its ordinary shares to market annually, recognizing ordinary income or loss (subject to certain limitations) equal to the difference, as of the close of the taxable year, between the fair market value of the ordinary shares and their adjusted tax basis. Losses would be allowed only to the extent of net mark-to-market gain accrued under the election. If a mark-to-market election with respect to ordinary shares is in effect on the date of a U.S. holder’s death, the normally available step-up in tax basis to fair market value will not be available. Rather, the tax basis of the ordinary shares in the hands of a U.S. holder who acquired them from a decedent will be the lesser of the decedent’s tax basis or the fair market value of the ordinary shares. Once made, a mark-to-market election generally continues, unless revoked with the consent of the IRS.
The implementation of many aspects of the Code’s PFIC rules requires the issuance of regulations which in many instances have yet to be promulgated and which may have retroactive effect. We cannot be sure that any of these regulations will be promulgated or, if so, what form they will take or what effect they will have on the foregoing discussion. Accordingly, and due to the complexity of the PFIC rules, U.S. holders should consult their own tax advisors regarding our status as a PFIC and the eligibility, manner and advisability of making a QEF Election or a mark-to-market election.
Information Reporting And Backup Withholding
Any dividends paid on our ordinary shares to U.S. holders may be subject to U.S. federal tax information reporting requirements and the U.S. backup withholding tax (the backup withholding rate currently is 28%). In addition, the proceeds of a U.S. holder’s sale of ordinary shares may be subject to tax information reporting and the U.S. backup withholding tax. Backup withholding will not apply if the U.S. holder (i) is a corporation or other exempt recipient, and demonstrates the fact when so required, or (ii) the U.S. holder provides a U.S. taxpayer identification number, certifies as to no loss of exemption from backup withholding and complies with any other applicable backup withholding requirements. U. S. holders required to establish their exemption from backup withholding generally must provide a certification on the U.S. Internal Revenue Service Form W-9. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. holder’s U.S. federal income tax liability, provided the required information is furnished to the U.S. Internal Revenue Service.
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The foregoing discussion of certain U.S. federal income tax considerations is for general information only and is not tax advice. Accordingly, each U.S. holder should consult with his, her or its own tax adviser regarding U.S. federal, state, local and non-U.S. income and other tax consequences of the acquisition, ownership and disposition of ordinary shares.
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F. | DIVIDENDS AND PAYING AGENTS |
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| Not applicable. |
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G. | STATEMENT BY EXPERTS |
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| Not applicable. |
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H. | DOCUMENTS ON DISPLAY |
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission, or SEC. You may read and copy any document we file, including any exhibits, with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Certain of our SEC filings are also available to the public at the SEC’s website athttp://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. We have obtained an exemption from Nasdaq’s requirement to send an annual report to shareholders prior to our annual general meetings. We file annual reports on Form 20-F electronically with the SEC and post a copy on our website,www.audiocodes.com.
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I. | SUBSIDIARY INFORMATION |
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| Not applicable. |
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| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities. Our marketable securities portfolio includes U.S. government debt instruments and corporate debt instruments. The fair value of our long and short-term securities is based upon their market values as of December 31, 2005. In addition, we have contracted several structured note deals that are sensitive to changes in interest rates. Due to the nature of our investments, we do not believe that there is any material market risk exposure. Therefore, no quantitative tabular disclosures are required. However, we may in the future undertake hedging or other similar transactions or invest in market risk sensitive instruments if management determines that it is necessary to offset these risks. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Operations in Israel.”
To protect against the changes in value of forecasted foreign currency cash flows resulting from salary payments, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted expenses denominated in foreign currencies with forward contracts.
During 2003, we entered into forward contracts to hedge a portion of the anticipated NIS payroll payments for periods of one to six months. These forward contracts are designated as cash flows hedges, as defined by SFAS No. 133, as amended, and are all highly effective as hedges of these expenses when the salary is recorded. The effective portion of the hedged instruments is included in payroll expenses in the statement of operations. During the year ended December 31, 2003, we recognized net income of $426,000 related to the forward contracts hedging salary payments. At December 31, 2003, we expected to reclassify $145,000 of net profit on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months.
During the year ended December 31, 2004, we recognized net income of $87,000 related to the forward contracts hedging salary payments. At December 31, 2004, we expected to reclassify $353,000 of net profit on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months.
During the year ended December 31, 2005, we recognized net loss of $151,000 related to the forward contracts hedging salary payments. At December 31, 2005, we expected to reclassify $84,000 of net profit on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months.
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| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
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| Not applicable. | |
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PART II
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| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
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| Not applicable. |
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| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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| Not applicable |
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| ITEM 15. | CONTROLS AND PROCEDURES |
As of the end of the period covered by this report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 15d-15(e) under the Exchange Act). The evaluation was performed with the participation of our key corporate senior management and under the supervision and with the participation of our chief executive officer and chief financial officer. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
In addition, no changes in our internal control over financial reporting have occurred during the period covered by this Annual Report that have materially affected our internal controls over financial reporting.
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| ITEM 16. | [RESERVED] |
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| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our Board of Directors has determined that Joseph Tenne is an “audit committee financial expert” as defined in Item 16A of Form 20-F and is “independent” as defined in the applicable regulations.
In 2004, we adopted a Code of Conduct and Business Ethics that applies to our chief executive officer, chief financial officer and other senior financial officers. This Code has been posted on our website,www.audiocodes.com.
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| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served as our independent public accountants for each of the years in the three-year period ended December 31, 2005. The following table presents the aggregate fees for professional audit services and other services rendered by Kost Forer Gabbay & Kasierer in 2004 and 2005.
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| | Year ended December 31,
(Amounts in thousands) | |
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| | 2004 | | 2005 | |
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Audit Fees | | | 80 | | | 115 | |
Audit Related Fees | | | 230 | | | 51 | |
Tax Fees | | | 53 | | | 65 | |
All Other Fees | | | — | | | 4 | |
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Total | | | 363 | | | 235 | |
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Audit Fees consist of fees billed for the annual audit of the company’s consolidated financial statements and the statutory financial statements of the company. They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include the provision of consents and the review of documents filed with the SEC.
Audit Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the company’s financial statements and include operational effectiveness of systems. They also include fees billed for other services in connection with merger and acquisition due diligence, as well as our offering of convertible notes and our filing of a registration statement on Form F-3 with respect to the convertible notes.
Tax Fees include fees billed for tax compliance services, including the preparation of tax returns and claims for refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, transfer pricing, and requests for rulings or technical advice from taxing authorities; tax planning services; and expatriate tax compliance, consultation and planning services.
Audit Committee Pre-approval Policies and Procedures
The Audit Committee of AudioCodes’ Board of Directors is responsible, among other matters, for the oversight of the external auditor subject to the requirements of Israeli law. The Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by our independent auditors (the “Policy”).
Under the Policy, proposed services either (i) may be pre-approved by the Audit Committee without consideration of specific case-by-case services as “general pre-approval”; or (ii) require the specific pre-approval of the Audit Committee as “specific pre-approval”. The Audit Committee may delegate either type of pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, tax and other services that have received the general pre-approval of the Audit Committee, including those described in the footnotes to the table, above; these services are subject to annual review by the Audit Committee. All other audit, audit-related, tax and other services must receive a specific pre-approval from the Audit Committee.
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The Audit Committee establishes budgeted fee levels annually for each of the four categories of audit and non-audit services that are pre-approved under the Policy, namely, audit, audit-related, tax and other services. Requests or applications to provide services that require specific approval by the Audit Committee are submitted to the Audit Committee by both the external auditor and the chief financial officer. At each regular meeting of the Audit Committee, the external auditor provides a report in order for the Audit Committee to review the services that the external auditor is providing, as well as the status and cost of those services.
During 2005, no services provided to AudioCodes by Kost Forer Gabbay & Kasierer were approved by the Audit Committee pursuant to the de minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
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| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
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| Not applicable. |
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| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
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| Not applicable. |
PART III
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| ITEM 17. | FINANCIAL STATEMENTS |
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| Not applicable. |
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| ITEM 18. | FINANCIAL STATEMENTS |
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| Reference is made to pages F-1 to F-39 hereto. |
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| ITEM 19. | |
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| The following exhibits are filed as part of this Annual Report: |
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Exhibit
No. | | Exhibit |
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1.1 | | Memorandum of Association of Registrant.*† |
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1.2 | | Articles of Association of Registrant, as amended.** |
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2.1 | | Indenture, dated November 9, 2004, between AudioCodes Ltd. and U.S. Bank National Association, as Trustee, with respect to the 2.))% Senior Convertible Notes due 2024.**** |
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4.1 | | AudioCodes Ltd. 1997 Key Employee Option Plan (C).* |
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4.2 | | AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (D).* |
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4.3 | | Founder’s Agreement between Shabtai Adlersberg and Leon Bialik, dated January 1, 1993.*† |
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4.4 | | License Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as of May 6, 1999.*† |
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4.5 | | Lease Agreement between AudioCodes Inc. and Spieker Properties, L.P., dated January 26, 2000.** |
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4.6 | | Shareholders Agreement by and among DSP Group, Inc., Shabtai Adlersberg, Leon Bialik, Genesis Partners I, L.P., Genesis Partners I (Cayman) L.P., Polaris Fund II (Tax Exempt Investors) L.L.C., Polaris Fund II L.L.C., Polaris Fund II L.P., DS Polaris Trust Company (Foreign Residents) (1997) Ltd., DS Polaris Ltd., Dovrat, Shrem Trust Company (Foreign Funds) Ltd., Dovrat Shrem-Skies 92 Fund L.P. and Chase Equity Securities CEA, dated as of May 6, 1999.* |
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4.7 | | AudioCodes Ltd. 1997 Key Employee Option Plan (D).* |
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4.8 | | AudioCodes Ltd. 1997 Key Employee Option Plan (E).* |
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4.9 | | AudioCodes Ltd. 1999 Key Employee Option Plan (F), as amended.*** |
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4.10 | | AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (E).* |
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Exhibit
No. | | Exhibit |
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|
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4.11 | | AudioCodes Ltd. 1999 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (F).*** |
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4.12 | | AudioCodes Ltd. 2001 Employee Stock Purchase Plan—Global Non U.S.§ |
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4.13 | | AudioCodes Ltd. 2001 U.S. Employee Stock Purchase Plan.§ |
| | |
4.14 | | Lease Agreement between AudioCodes Ltd. and Nortel Networks (Marketing and Sales) Israel Ltd., effective as of December 31, 2002.**†† |
| | |
4.15 | | Sublease Agreement between AudioCodes USA, Inc. and Continental Resources, Inc., dated December 30, 2003.§§ |
| | |
4.16 | | Stock Purchase Agreement by and among AudioCodes Ltd., AudioCodes Inc., Ai-Logix, Inc. and AI Technologies N.V, dated as of May 12, 2004.§§ |
| | |
4.17 | | OEM Purchase and Sale Agreement No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of April 28, 2003 *****§§ |
| | |
4.18 | | Amendment No. 1 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of May 1, 2003 *****§§ |
| | |
4.19 | | Purchase and Sale Agreement by and among Nortel Networks, Ltd., AudioCodes Inc. and AudioCodes Ltd., dated as of April 7, 2003.§§ |
| | |
4.20 | | Purchase Agreement, dated as of November 9, 2004, between AudioCodes Ltd. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lehman Brothers Inc., as representatives of the initial purchasers of AudioCodes’ 2.00% Senior Convertible Notes due 2024.**** |
| | |
4.21 | | Registration Rights Agreement, dated as of November 9, 2004, between AudioCodes Ltd. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and CIBC World Markets Corp.**** |
| | |
4.22 | | Amendment No. 2 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of January 1, 2005 *****§§§ |
| | |
4.23 | | Amendment No. 3 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of February 15, 2005 *****§§§ |
| | |
4.24 | | Amendment No. 5 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of January 1, 2005 *****§§§ |
| | |
4.25 | | Amendment No. 6 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of April 1, 2005 §§§ |
-107-
| | |
Exhibit
No. | | Exhibit |
| |
|
| | |
4.26 | | Lease Agreement between AudioCodes Inc. and CA-Gateway Office Limited Partnership, effective as of December, 2004. §§§ |
| | |
4.27 | | Amendment No. 4 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of April 28, 2005 # |
| | |
4.28 | | Agreement and Plan of Merger, dated as of May 16, 2006, among Audiocodes Ltd., Audiocodes, Inc., Green Acquisition Corp., Nuera Communications, Inc. and Robert Wadsworth, as Sellers’ Representative. |
| | |
8.1 | | Subsidiaries of the Registrant. |
| | |
12.1 | | Certification of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
12.2 | | Certification of Nachum Falek, Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
13.1 | | Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
13.2 | | Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
14.1 | | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. |
| |
|
* | Incorporated herein by reference to Registrant’s Registration Statement on Form F-1 (File No. 333-10352) . |
| |
† | Hebrew original and English summary of Hebrew original. |
| |
†† | English summary of Hebrew original. |
| |
‡ | Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 (File No. 333-13268) . |
| |
§ | Incorporated herein by reference to Registrant’s Registration Statement on Form S-8 (File No. 333-13378) . |
| |
** | Incorporated herein by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2000. |
| |
*** | Incorporated herein by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2002. |
| |
**** | Incorporated by reference herein to Registrant’s Registration Statement on Form F-3 (File No. 333-123859). |
| |
***** | Confidential treatment has been granted for certain portions of the indicated document. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission as required by Rule 24b-2 promulgated under the Securities Exchange Act of 1934. |
-108-
| |
§§ | Incorporated herein by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2003. |
| |
§§§ | Incorporated herein by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2004 |
| |
# | A request for confidentiality has been filed for certain portions of the indicated document. Confidential portions have been omitted and filed separately with the Securities and Exchange Commission as required by Rule 24b-2 promulgated under the Securities Exchange Act of 1934. |
-109-
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.
| | |
| AUDIOCODES LTD. |
| | |
| By: | /s/ NACHUM FALEK |
| |
|
| | Nachum Falek |
| | Vice President Finance and
Chief Financial Officer |
| | |
Date: June 29, 2006 | | |
EXHIBIT INDEX
| | |
Exhibit
No. | | Exhibit |
| |
|
| | |
4.27 | | Amendment No. 4 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of April 28, 2005 * |
| | |
4.28 | | Agreement and Plan of Merger, dated as of May 16, 2006, among Audiocodes Ltd., Audiocodes, Inc., Green Acquisition Corp., Nuera Communications, Inc. and Robert Wadsworth, as Sellers’ Representative. |
| | |
8.1 | | Subsidiaries of the Registrant. |
| | |
12.1 | | Certification of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
12.2 | | Certification of Nachum Falek, Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
13.1 | | Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
13.2 | | Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
14.1 | | Consent of Kost Forer and Gabbay & Kasierer, a member of Ernst & Young Global. |
| |
|
* A request for confidentiality has been filed for certain portions of the indicated document. Confidential portions have been omitted and filed separately with the Securities and Exchange Commission as required by Rule 24b-2 promulgated under the Securities Exchange Act of 1934. |
AUDIOCODES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
IN U.S. DOLLARS
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AUDIOCODES LTD.
We have audited the accompanying consolidated balance sheets of AudioCodes Ltd. (“the Company”) and its subsidiaries as of December 31, 2004 and 2005, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits includes 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, assessing the accounting principles used and significant estimates made by management, and 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 its subsidiaries at December 31, 2004 and 2005, and the related consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
| | |
Tel-Aviv, Israel | | KOST FORER GABBAY & KASIERER |
February 1, 2006 | | A Member of Ernst & Young Global |
F - 2
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS |
|
U.S. dollars in thousands |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2004 | | 2005 | |
| |
| |
| |
| | | | | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 166,832 | | $ | 70,957 | |
Short-term bank deposits and structured note | | | - | | | 61,929 | |
Short-term marketable securities and accrued interest | | | - | | | 9,863 | |
Trade receivables (net of allowance for doubtful accounts of $685 and $553 as of December 31, 2004 and 2005, respectively) | | | 14,470 | | | 17,990 | |
Other receivables and prepaid expenses | | | 4,608 | | | 4,891 | |
Inventories | | | 10,059 | | | 11,562 | |
| |
|
| |
|
| |
| | | | | | | |
Total current assets | | | 195,969 | | | 177,192 | |
| |
|
| |
|
| |
| | | | | | | |
LONG-TERM INVESTMENTS: | | | | | | | |
Long-term bank deposits and structured notes | | | 50,195 | | | 27,781 | |
Long-term marketable securities | | | - | | | 49,791 | |
Investment in affiliated companies | | | 487 | | | 1,112 | |
Deferred tax assets | | | - | | | 2,489 | |
Severance pay funds | | | 4,538 | | | 5,406 | |
| |
|
| |
|
| |
| | | | | | | |
Total long-term investments | | | 55,220 | | | 86,579 | |
| |
|
| |
|
| |
| | | | | | | |
PROPERTY AND EQUIPMENT, NET | | | 6,694 | | | 6,494 | |
| |
|
| |
|
| |
| | | | | | | |
INTANGIBLE ASSETS, DEFERRED CHARGES AND OTHER, NET | | | 5,127 | | | 3,279 | |
| |
|
| |
|
| |
| | | | | | | |
GOODWILL | | | 9,135 | | | 18,679 | |
| |
|
| |
|
| |
| | | | | | | |
Total assets | | $ | 272,145 | | $ | 292,223 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS |
|
U.S. dollars in thousands, except share and par value data |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2004 | | 2005 | |
| |
| |
| |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Trade payables | | $ | 6,541 | | $ | 7,774 | |
Other payables and accrued expenses | | | 17,981 | | | 18,620 | |
| |
|
| |
|
| |
| | | | | | | |
Total current liabilities | | | 24,522 | | | 26,394 | |
| |
|
| |
|
| |
| | | | | | | |
ACCRUED SEVERANCE PAY | | | 4,978 | | | 5,887 | |
| |
|
| |
|
| |
| | | | | | | |
SENIOR CONVERTIBLE NOTES | | | 120,660 | | | 120,836 | |
| |
|
| |
|
| |
| | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | |
Share capital - | | | | | | | |
Ordinary shares of NIS 0.01 par value- | | | | | | | |
Authorized: 100,000,000 as of December 31, 2004 and 2005; | | | | | | | |
Issued: 43,808,132 shares as of December 31, 2004 and 44,529,943 shares as of December 31, 2005; Outstanding: 39,865,993 shares as of December 31, 2004 and 40,587,804 shares as of December 31, 2005 | | | 126 | | | 128 | |
Additional paid-in capital | | | 126,700 | | | 130,616 | |
Treasury stock | | | (11,320 | ) | | (11,320 | ) |
Deferred stock compensation | | | (108 | ) | | (72 | ) |
Accumulated other comprehensive income | | | 353 | | | 84 | |
Retained earnings | | | 6,234 | | | 19,670 | |
| |
|
| |
|
| |
| | | | | | | |
Total shareholders’ equity | | | 121,985 | | | 139,106 | |
| |
|
| |
|
| |
| | | | | | | |
Total liabilities and shareholders’ equity | | $ | 272,145 | | $ | 292,223 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
AUDIOCODES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands, except per share data
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2003 | | 2004 | | 2005 | |
| |
| |
| |
| |
|
Revenues | | $ | 44,228 | | $ | 82,756 | | $ | 115,827 | |
Cost of revenues | | | 20,037 | | | 34,375 | | | 46,993 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Gross profit | | | 24,191 | | | 48,381 | | | 68,834 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Research and development, net | | | 15,476 | | | 20,009 | | | 24,415 | |
Selling and marketing | | | 14,537 | | | 19,891 | | | 25,944 | |
General and administrative | | | 4,066 | | | 4,851 | | | 6,004 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total operating expenses | | | 34,079 | | | 44,751 | | | 56,363 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating income (loss) | | | (9,888 | ) | | 3,630 | | | 12,471 | |
Financial income, net | | | 1,883 | | | 2,165 | | | 2,457 | |
Equity in losses of affiliated companies, net | | | 429 | | | 516 | | | 693 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income (loss) before taxes on income | | | (8,434 | ) | | 5,279 | | | 14,235 | |
Taxes on income | | | - | | | 273 | | | 799 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net income (loss) | | $ | (8,434 | ) | $ | 5,006 | | $ | 13,436 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Basic net earnings (loss) per share | | $ | (0.22 | ) | $ | 0.13 | | $ | 0.33 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted net earnings (loss) per share | | $ | (0.22 | ) | $ | 0.12 | | $ | 0.31 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
AUDIOCODES LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. dollars in thousands
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Share
capital | | Additional
paid-in
capital | | Treasury
stock | | Deferred
stock
compensation | | Accumulated
other
comprehensive
income | | Retained
earnings | | Total
comprehensive
income (loss) | | Total
shareholders’
equity | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
Balance as of January 1, 2003 | | $ | 120 | | $ | 114,635 | | $ | (11,105 | ) | $ | - | | $ | 72 | | $ | 9,662 | | | | | $ | 113,384 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of treasury stock | | | - | | | - | | | (215 | ) | | - | | | - | | | - | | | | | | (215 | ) |
Issuance of shares upon exercise of options and employee stock purchase plan | | | 1 | | | 1,659 | | | - | | | - | | | - | | | - | | | | | | 1,660 | |
Deferred stock compensation | | | - | | | 224 | | | - | | | (224 | ) | | - | | | - | | | | | | - | |
Amortization of deferred stock compensation | | | - | | | - | | | - | | | 50 | | | - | | | - | | | | | | 50 | |
Comprehensive loss, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on forward contracts, net | | | - | | | - | | | - | | | - | | | 73 | | | - | | $ | 73 | | | 73 | |
Net loss | | | - | | | - | | | - | | | - | | | - | | | (8,434 | ) | | (8,434 | ) | | (8,434 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total comprehensive loss, net | | | | | | | | | | | | | | | | | | | | $ | (8,361 | ) | | | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance as of December 31, 2003 | | | 121 | | | 116,518 | | | (11,320 | ) | | (174 | ) | | 145 | | | 1,228 | | | | | | 106,518 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares upon exercise of options and employee stock purchase plan | | | 5 | | | 10,182 | | | - | | | - | | | - | | | - | | | | | | 10,187 | |
Amortization of deferred stock compensation | | | - | | | - | | | - | | | 66 | | | - | | | - | | | | | | 66 | |
Comprehensive income, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on forward contracts, net | | | - | | | - | | | - | | | - | | | 208 | | | - | | $ | 208 | | | 208 | |
Net income | | | - | | | - | | | - | | | - | | | - | | | 5,006 | | | 5,006 | | | 5,006 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total comprehensive income, net | | | | | | | | | | | | | | | | | | | | $ | 5,214 | | | | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance as of December 31, 2004 | | | 126 | | | 126,700 | | | (11,320 | ) | | (108 | ) | | 353 | | | 6,234 | | | | | | 121,985 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares upon exercise of options and employee stock purchase plan | | | 2 | | | 3,916 | | | - | | | - | | | - | | | - | | | | | | 3,918 | |
Amortization of deferred stock compensation | | | - | | | - | | | - | | | 36 | | | - | | | - | | | | | | 36 | |
Comprehensive income, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss on forward contracts, net | | | - | | | - | | | - | | | - | | | (269 | ) | | - | | $ | (269 | ) | | (269 | ) |
Net income | | | - | | | - | | | - | | | - | | | - | | | 13,436 | | | 13,436 | | | 13,436 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total comprehensive income, net | | | | | | | | | | | | | | | | | | | | $ | 13,167 | | | | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance as of December 31, 2005 | | $ | 128 | | $ | 130,616 | | $ | (11,320 | ) | $ | (72 | ) | $ | 84 | | $ | 19,670 | | | | | $ | 139,106 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
| | |
| | AUDIOCODES LTD. AND ITS 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 (loss) | | $ | (8,434 | ) | $ | 5,006 | | $ | 13,436 | |
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 3,040 | | | 2,979 | | | 3,369 | |
Amortization of marketable securities premiums and accretion of discounts, net | | | - | | | - | | | 143 | |
Equity in losses of affiliated companies, net | | | 429 | | | 516 | | | 693 | |
Amortization of deferred stock compensation | | | 50 | | | 66 | | | 36 | |
Amortization of senior convertible notes discount and deferred charges | | | - | | | 28 | | | 198 | |
Decrease (increase) in accrued interest on marketable securities, bank deposits and structured notes | | | (270 | ) | | 75 | | | (736 | ) |
Increase in trade receivables, net | | | (3,274 | ) | | (4,907 | ) | | (3,520 | ) |
Decrease (increase) in other receivables and prepaid expenses | | | (940 | ) | | (1,248 | ) | | 57 | |
Decrease (increase) in inventories | | | 10 | | | (3,712 | ) | | (1,503 | ) |
Increase in deferred tax assets | | | - | | | - | | | (2,033 | ) |
Increase in trade payables | | | 1,795 | | | 1,329 | | | 1,233 | |
Increase in other payables and accrued expenses | | | 1,145 | | | 3,155 | | | 1,914 | |
Increase in accrued severance pay, net | | | 20 | | | 68 | | | 41 | |
Other | | | - | | | 98 | | | (12 | ) |
| |
|
| |
|
| |
|
| |
|
Net cash provided by (used in) operating activities | | | (6,429 | ) | | 3,453 | | | 13,316 | |
| |
|
| |
|
| |
|
| |
Cash flows from investing activities: | | | | | | | | | | |
Investments in affiliated companies | | | (621 | ) | | (512 | ) | | (1,318 | ) |
Short-term loan to unrelated company | | | - | | | - | | | (350 | ) |
Purchase of property and equipment | | | (1,997 | ) | | (4,257 | ) | | (2,393 | ) |
Proceeds from sale of property and equipment | | | - | | | 6 | | | 96 | |
Investment in short-term bank deposits | | | - | | | - | | | (33,969 | ) |
Proceeds from sale of short-term bank deposits | | | 63,074 | | | - | | | 3,969 | |
Investment in long-term bank deposits and structured notes | | | (50,000 | ) | | (18,000 | ) | | (20,000 | ) |
Proceeds from structured notes called by the issuer | | | - | | | 18,000 | | | 10,000 | |
Investment in short-term and long-term marketable securities | | | - | | | - | | | (59,060 | ) |
Payment for acquisition of Universal Audio Server (“UAS”) (1) | | | (4,373 | ) | | (2,500 | ) | | - | �� |
Payment for acquisition of Ai-Logix (2) | | | - | | | (8,684 | ) | | (10,000 | ) |
| |
|
| |
|
| |
|
| |
|
Net cash provided by (used in) investing activities | | | 6,083 | | | (15,947 | ) | | (113,025 | ) |
| |
|
| |
|
| |
|
| |
Cash flows from financing activities: | | | | | | | | | | |
Proceeds from issuance of senior convertible notes | | | - | | | 125,000 | | | - | |
Issuance costs for senior convertible notes | | | - | | | (394 | ) | | (84 | ) |
Initial purchasers discount in respect of senior convertible notes | | | - | | | (4,365 | ) | | - | |
Proceeds from issuance of shares upon exercise of options and employee stock purchase plan | | | 1,660 | | | 10,187 | | | 3,918 | |
Purchase of treasury stock | | | (215 | ) | | - | | | - | |
| |
|
| |
|
| |
|
| |
|
Net cash provided by financing activities | | | 1,445 | | | 130,428 | | | 3,834 | |
| |
|
| |
|
| |
|
| |
|
Increase (decrease) in cash and cash equivalents | | | 1,099 | | | 117,934 | | | (95,875 | ) |
Cash and cash equivalents at the beginning of the year | | | 47,799 | | | 48,898 | | | 166,832 | |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents at the end of the year | | $ | 48,898 | | $ | 166,832 | | $ | 70,957 | |
| |
|
| |
|
| |
|
| |
|
Supplemental disclosure of cash flow activities: | | | | | | | | | | |
Cash paid during the year for income taxes | | $ | 120 | | $ | 91 | | $ | 760 | |
| |
|
| |
|
| |
|
| |
|
Cash paid during the year for interest | | $ | - | | $ | - | | $ | 2,500 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
| | |
| | AUDIOCODES LTD. AND ITS SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS | | |
|
|
|
U.S. dollars in thousands | | |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
(1) | Payment for acquisition of UAS | | | | | | | | | | |
| | | | | | | | | | | |
| Net fair value of assets acquired of UAS at the date of acquisition
(see also Note 1b): | | | | | | | | | | |
| Property and equipment | | $ | 380 | | $ | - | | $ | - | |
| Technology | | | 1,173 | | | - | | | - | |
| Goodwill | | | 4,320 | | | 1,000 | | | - | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | | 5,873 | | | 1,000 | | | - | |
| Paid (unpaid) accrued liability | | | (1,500 | ) | | 1,500 | | | - | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 4,373 | | $ | 2,500 | | $ | - | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
(2) | Payment for acquisition of Ai-Logix | | | | | | | | | | |
| | | | | | | | | | | |
| Net fair value of assets acquired and liabilities assumed of Ai-Logix at the date of acquisition (see also Note 1c): | | | | | | | | | | |
| Working capital, net (excluding cash and cash equivalents) | | $ | - | | $ | 1,440 | | $ | - | |
| Property and equipment | | | - | | | 329 | | | - | |
| Technology | | | - | | | 3,100 | | | - | |
| Goodwill | | | - | | | 3,815 | | | 10,000 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | - | | $ | 8,684 | | $ | 10,000 | |
| | |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 1: – | GENERAL |
| |
| a. | Business overview: |
| | |
| | AudioCodes Ltd. (“the Company”) and its subsidiaries (together “the Group”) design, develop and market enabling technologies and system products for the transmission of voice data and fax communications over packet network. The Group’s products are designed to enable the new voice infrastructure and are sold to original equipment manufacturers, network equipment providers, systems integrators and distributors in the telecommunications and networking industries. |
| | |
| | The Company operates through its wholly-owned subsidiaries in the United States, United Kingdom, Germany, Argentina, Brazil, India and Korea. |
| | |
| b. | Acquisition of the Universal Audio Server (“UAS”) business from Nortel Networks Limited (“Nortel”): |
| | |
| | On April 7, 2003, the Group purchased from Nortel selected assets of its UAS business. As part of the transaction, Nortel granted the Group a license to use its UAS technology and the Group has undertook to act as an exclusive supplier to Nortel for its UAS products over a period of three years from the acquisition. In addition, the parties have entered into a development agreement in relation to future platforms. |
| | |
| | The consideration for the transaction amounted to $5,500 in cash, of which: $2,000 was paid at the closing date, $2,000 was paid nine months after the closing date, and $1,500 was paid twelve months after the closing date. Under the terms of the acquisition agreement (“the Agreement”), the Group was also required to pay $1,000 as a contingent payment, upon Nortel completing product integration under the development agreement. In March 2004, product integration was completed and the $1,000 contingent payment was paid and recorded as part of the acquisition cost as additional goodwill in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combination”. |
| | |
| | The acquisition was accounted for under the purchase method of accounting in accordance with SFAS No. 141. The results of UAS operations have been included in the consolidated financial statements since the acquisition date. |
| | |
| | Pro forma information in accordance with SFAS No. 141 has not been provided, since the revenues and net income of the UAS business, were not material in relation to total consolidated revenues and net loss. |
F - 9
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 1: – | GENERAL (Cont.) |
| |
| | Based upon an independent valuation of tangible and intangible assets acquired, the Group has allocated the total acquisition cost of the UAS assets, as follows: |
| | | | | |
| | | April 7, 2003 | |
| | |
| |
| | | | | |
| Property and equipment | | $ | 380 | |
| Technology (five years useful life) | | | 1,173 | |
| Goodwill *) | | | 5,320 | |
| | |
|
| |
| | | | | |
| Total assets acquired | | $ | 6,873 | |
| | |
|
| |
| | | |
| | *) | Including $1,000 of the total acquisition cost which was allocated to goodwill in March 2004. |
| | | |
| | Goodwill includes but is not limited to the synergistic value and potential competitive benefits that could be realized by the Company from the acquisition. Goodwill is not deductible for tax purposes. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill arising from this acquisition will not be amortized (see also Note 2n). |
| | |
| | The value assigned to tangible assets and intangible assets has been determined as follows: |
| | |
| | Property and equipment are presented at current replacement cost. |
| | |
| | The value assigned to technology amounted to $1,173. The fair value of technology was determined using the income approach. |
| | |
| | In accordance with the agreement, contingent payments in the maximum aggregate amount of $12,500 was to be paid to Nortel based on net orders for UAS products placed by Nortel over the 18 month period following the closing date. These contingent payments were not considered part of the acquisition cost and, as they accrued, were offset against related revenues earned by the Group from orders by Nortel for each respective period. The Group periodically assessed the expected earn out payments, based on net sales from orders placed by Nortel. In 2003, the Group accrued earn-out payments in the amount of $1,600, which was included in other payables and accrued expenses in the net amount. In 2004, the Group paid Nortel $4,917 in cash with respect to actual sales for the relevant 18 month period. As of December 31, 2004, no further obligation for contingent payments to Nortel remains. |
| | |
| c. | Acquisition of Ai-Logix Inc. (“Ai-Logix”): |
| | |
| | On May 12, 2004, the Group acquired all of the outstanding Ordinary shares of Ai-Logix, a provider of advanced voice and data recording hardware integration cards for the call recording and voice or data logging industry. The Group has undertaken to apply Ai-Logix’s technology, strategic partnerships and customer base to expand its business into the call recording and computer telephony integration markets. |
F - 10
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 1: – | GENERAL (Cont.) |
| |
| | The Group paid $10,000 in cash at the closing of the transaction. An additional payment of $10,000 in cash was made in March 2005 based on the achievement of revenue milestones and additional terms by the Ai-Logix business during 2004 and 2005. This payment was recorded as part of the acquisition cost as additional goodwill in accordance with the provisions of SFAS No. 141. |
| | |
| | Ai-Logix became a wholly-owned subsidiary of AudioCodes Inc. and accordingly, its results of operations have been included in the consolidated financial statements of the Group since the acquisition date. |
| | |
| | This acquisition was accounted for under the purchase method of accounting in accordance with SFAS No. 141. |
| | |
| | Based upon an independent valuation of tangible and intangible assets acquired, the Group has allocated the total acquisition cost of Ai-Logix’s assets and liabilities, as follows: |
| | | | | |
| | | May 12, 2004 | |
| | |
|
| |
|
| Trade receivables | | $ | 1,846 | |
| Inventories | | | 1,680 | |
| Prepaid expenses | | | 180 | |
| Property and equipment | | | 329 | |
| | |
|
| |
| | | | | |
| Total tangible assets acquired | | | 4,035 | |
| | |
|
| |
| | | | | |
| Technology (five years useful life) | | | 3,100 | |
| Goodwill *) | | | 13,359 | |
| | |
|
| |
| | | | | |
| Total intangible assets acquired | | | 16,459 | |
| | |
|
| |
| | | | | |
| Total tangible and intangible assets acquired | | | 20,494 | |
| | |
|
| |
| | | | | |
| Trade payables | | | (1,015 | ) |
| Accrued expenses | | | (1,045 | ) |
| Other current liabilities | | | (206 | ) |
| | |
|
| |
| | | | | |
| Total liabilities assumed | | | (2,266 | ) |
| | |
|
| |
| | | | | |
| Net assets acquired | | $ | 18,228 | |
| | |
|
| |
| | | |
| | *) | During 2005, the Company paid an additional payment in the amount of $10,000 out of the total acquisition cost which was allocated to goodwill. The goodwill was reduced in the amount of $456 upon utilization of pre–acquisition carryforward tax losses in accordance with SFAS No. 141 (see also Note 14). |
| | | |
| | Goodwill includes, but is not limited to, the synergistic value and potential competitive benefits that could be realized by the Company from the acquisition. Goodwill is not deductible for tax purposes. In accordance with SFAS No. 142, goodwill arising from this acquisition will not be amortized (see also Note 2n). |
F - 11
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 1: – | GENERAL (Cont.) |
| |
| | The value assigned to tangible assets, intangible assets and liabilities has been determined as follows: |
| | |
| | Current assets and liabilities are recorded at their carrying amounts. The carrying amounts of current assets and liabilities were reasonable proxies for their market value due to their short-term maturity. Property and equipment are presented at current replacement cost. |
| | |
| | The value assigned to technology amounted to $3,100. The fair value of technology was determined using the income approach. |
| | |
| | The following unaudited pro forma information does not purport to represent what the Group’s results of operations would have been had the acquisition of Ai-Logix been consummated on January 1, 2003 and 2004, respectively, nor does it purport to represent the results of operations of the Group for any future period. |
| | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | |
| | |
| |
| |
| | | Unaudited | |
| | |
| |
| | | | |
| Revenues | | $ | 57,532 | | $ | 88,125 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Net income (loss) | | $ | (8,045 | ) | $ | 4,831 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Basic net earnings (loss) per share | | $ | (0.21 | ) | $ | 0.13 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Diluted net earnings (loss) per share | | $ | (0.21 | ) | $ | 0.11 | |
| | |
|
| |
|
| |
| | |
| d. | The Group is dependent upon sole source suppliers for certain key components used in its products, including certain digital signal processing chips. Although there is a limited number of manufacturers of these particular components, management believes that other suppliers could provide similar components at comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which could adversely affect the operating results of the Group and its financial position. |
| | |
| e. | As to a major customer data, see Note 17b. |
F - 12
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES |
| |
| The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). |
| | |
| a. | Use of estimates: |
| | |
| | The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. |
| | |
| b. | Financial statements in U.S. dollars: |
| | |
| | A majority of the revenues of the Group is generated in U.S. dollars (“dollar”). In addition, a substantial portion of the Group’s costs is incurred in dollars. The Group’s management believes that the dollar is the primary currency of the economic environment in which all the Group’s entities operate. Thus, the functional and reporting currency of each of the Group’s entities is the dollar. |
| | |
| | Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with SFAS No. 52, “Foreign Currency Translation”. All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate. |
| | |
| c. | Principles of consolidation: |
| | |
| | The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation. |
| | |
| d. | Cash equivalents: |
| | |
| | Cash equivalents are short-term highly liquid investments that are readily convertible into cash with maturities of three months or less, at the date acquired. |
| | |
| e. | Short-term bank deposits: |
| | |
| | Short-term bank deposits are deposits with maturities of more than three months but less than one year. The deposits are in U.S. dollars and bear interest at an average rate of 3.23%. The short-term deposits are presented at their cost. The accrued interest is included in other receivables and prepaid expenses. |
| | |
| 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”. |
F - 13
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| | Management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and evaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity since the Company has the intent and ability to hold the securities to maturity and, accordingly, debt securities are stated at amortized cost. |
| | |
| | The amortized cost of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are included in the consolidated statement of operations as financial income or expenses, as appropriate. The accrued interest on short-term and long-term marketable securities is included in the balance of short-term marketable securities. |
| | |
| g. | Inventories: |
| | |
| | Inventories are stated at the lower of cost or market value. Cost is determined as follows: |
| | |
| | Raw materials - using the “average cost” method. |
| | |
| | Finished products – using the“average cost” method with the addition of direct manufacturing costs. |
| | |
| | The Group periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume and technological obsolescence. Based on these evaluations, inventory write-offs and write-down provisions are provided due to slow moving items, technological obsolescence, excess inventories, discontinued products and for market prices lower than cost. |
| | |
| h. | Long-term bank deposits: |
| | |
| | Bank deposits with maturities of more than one year are included in long-term investments and presented at their cost including accrued interest. |
| | |
| i. | Structured notes: |
| | |
| | The Group accounts for investments in structured notes in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and Emerging Issues Task Force (“EITF”) No. 96-12, “Recognition of Interest Income and Balance Sheet Classification of Structure Notes”. Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Group has the intent and ability to hold these securities to maturity and are stated at amortized cost. As of December 31, 2004 and 2005, investments in structured notes approximate their market value. |
F - 14
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| j. | Investment in affiliated companies: |
| | |
| | The Company accounts for its investments in affiliated companies in which it has the ability to exercise significant influence over the operating and financial policies, using the equity method of accounting in accordance with the requirements of Accounting Principle Board (“APB”) No. 18, “The Equity Method of Accounting for Investments in Common Stock”. |
| | |
| | Investment in affiliated companies represent investments in Ordinary shares, Preferred shares and convertible loans. The Company applies EITF No. 99-10, “Percentage Used to Determine the Amount of Equity Method Losses”. Accordingly, losses of the affiliated companies are recognized based on the ownership level of the particular investee security held by the investor. |
| | |
| | The Company’s investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable, in accordance with APB No. 18. As of December 31, 2005, based on management’s most recent analyses, no impairment losses have been identified. |
| | |
| k. | Property and equipment: |
| | |
| | Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates: |
| | | | |
| | | % | |
| | |
| |
| | | | |
| Computers and peripheral equipment | | 33 | |
| Office furniture and equipment | | 6 - 20 | |
| Motor vehicles | | 15 | |
| Leasehold improvements | | Over the shorter of the term of the lease or the life of the asset | |
| | |
| l. | Intangible assets and deferred charges: |
| | |
| | Intangible assets are amortized over their useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with SFAS No. 142. Accordingly, acquired technology is amortized over five years. |
| | |
| | Cost incurred in respect of issuance of senior convertible notes are deferred and amortized using the effective interest method and classified as a component of interest expense, over the period from issuance to maturity, which is 20 years, in accordance with APB No. 21 “Interest on Receivables and Payables”. |
F - 15
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| m. | Impairment of long-lived assets: |
| | |
| | The Group’s long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2005, no impairment losses have been identified. |
| | |
| | Effective October 1, 2003, as a result of the expected relocation of the Company’s facilities in Israel, the Group changed the estimated useful life of certain leasehold improvements and other equipment to four months. The effect of the change in estimated useful life on the net loss and net loss per share for the year ended December 31, 2003 was $(689) and $(0.02). The annual expected effect of this change of estimated useful life for the following years is immaterial. |
| | |
| | Under SFAS No. 144, a long-lived group of assets that is to be abandoned is considered disposed of when it ceases to be used. Thus, an entity that intends to abandon a group of long-lived assets in operations, should evaluate that group of assets as “held and used” and should determine whether it should revise its depreciation estimates to reflect a useful life that is shorter than initially expected and a salvage value consistent with the intention to abandon. |
| | |
| n. | Goodwill: |
| | |
| | Goodwill represents an excess of costs over the fair value of the net assets of businesses acquired under SFAS No. 142, “Goodwill and Other Intangible Assets”. |
| | |
| | SFAS No. 142 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill is tested for impairment at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Fair value is determined using market capitalizations. The Company elected to perform its analysis of goodwill impairment during the fourth quarter of 2005. The test was based on the Group’s single operating segment and reporting unit structure. As of December 31, 2005, no impairment losses had been identified. |
| | |
| o. | Revenue recognition: |
| | |
| | The Group generates its revenues primarily from the sale of products. The Group sells its products through a direct sales force and sales representatives. The Group’s products are delivered to its customers, which include original equipment manufacturers, network equipment providers, systems integrators and distributors in the telecommunications and networking industries, all of whom are considered end-users. |
F - 16
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| | Revenues from products are recognized in accordance with Staff Accounting Bulleting (“SAB”) No. 104, “Revenue Recognition in Financial Statements”, when the following criteria are met: persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is probable. The Group has no obligation to customers after the date in which products are delivered other than pursuant to warranty obligations and right of return. |
| | |
| | The Group generally grants to its customers a right of return or the ability to exchange a specific percentage of total price paid for products they have purchased over a period of three months for other products. The Group maintains a provision for product returns and exchanges based on their experience with historical sales returns, analysis of credit memo data and other known factors, in accordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists”. The provision was deducted from revenues and amounted to $294, $619 and $545 as of December 31, 2003, 2004 and 2005, respectively. |
| | |
| | Revenues from the sale of products which were not yet determined to be final sales due to market acceptance or technological compatibility were deferred and included in deferred revenues. |
| | |
| p. | Warranty costs: |
| | |
| | The Group generally provides a warranty period of 12 months, at no extra charge. The Group estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Group’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Group periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. A tabular reconciliation of the changes in the Company’s aggregate product warranty liability was not provided due to immateriality. |
| | |
| q. | Research and development costs: |
| | |
| | Research and development costs, net of grants received, are charged to the statement of operations as incurred. |
F - 17
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| r. | Income taxes: |
| | |
| | The Group accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. This Statement prescribes the use of the liability method whereby account balances of deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Group provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. |
| | |
| s. | Concentrations of credit risk: |
| | |
| | Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, structured notes, marketable securities and trade receivables. |
| | |
| | The majority of the Group’s cash and cash equivalents, bank deposits and structured notes are invested in U.S. dollar instruments with major banks in Israel and the United States. Such investments in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Group’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these financial investments. |
| | |
| | Marketable securities include investments in debentures of corporations, U.S. government and agencies. Management believes that those corporations and agencies are financially sound, the portfolio is well diversified, and accordingly, minimal credit risk exists with respect to these marketable debt securities. |
| | |
| | The trade receivables of the Group are derived from sales to customers located primarily in the Americas, the Far East, Israel and Europe. The Group performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is determined with respect to those amounts that the Group has determined to be doubtful of collection. The Group usually does not require collateral on trade receivables because most of its sales are to large and well-established companies. |
| | |
| t. | Senior convertible notes: |
| | |
| | The Company presents the outstanding principal amount of its senior convertible notes as a long-term liability, in accordance with APB No. 14 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. The debt is classified as a long-term liability until the date of conversion on which it would be reclassified to equity, or at the first contractual redemption date, on which it would be reclassified as a short-term liability. Accrued interest on the senior convertible notes is included in “other payables and accrued expenses”. The Initial Purchasers discount is recorded as a discount to the debt and amortized according to the interest method over the term of the senior convertible notes in accordance with EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Industries”, which is 20 years. |
F - 18
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except share data |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| u. | Basic and diluted net earnings (loss) per share: |
| | |
| | Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus potential dilutive Ordinary shares considered outstanding during the year, in accordance with SFAS No. 128, “Earnings Per Share”. |
| | |
| | Senior convertible notes and certain outstanding stock options and warrants have been excluded from the calculation of the diluted net earnings (loss) per Ordinary share since such securities are anti-dilutive for all periods presented. The total weighted average number of shares related to the senior convertible notes and outstanding options and warrants that have been excluded from the calculations of diluted net earnings (loss) per share was 7,836,696, 4,972,991 and 8,598,556 for the years ended December 31, 2003, 2004 and 2005, respectively. |
| | |
| v. | Accounting for stock-based compensation: |
| | |
| | The Group has elected to follow APB No. 25, “Accounting for Stock Issued to Employees” and FIN No. 44, “Accounting for Certain Transactions Involving Stock Compensation”, in accounting for its employee stock option plans and its non-compensatory Employee Share Purchase Plan (“ESPP”). Under APB No. 25, when the exercise price of the Company’s share options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized. |
| | |
| | The Group adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, which amended certain provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the prior year. The Group continues to apply the provisions of APB No. 25, in accounting for stock-based compensation. |
| | |
| | Pro forma information regarding the Group’s net income (loss) and net earnings (loss) per share is required by SFAS No. 123 and has been determined as if the Group had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123. |
| | |
| | The fair value for these options was estimated at the date of grant using the Black and Scholes option pricing model and amortized over the vesting period. Fair values were estimated using the following weighted-average assumptions: |
| | | | | | | | | | | |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
| Dividend yield | | 0 | % | | 0 | % | | 0 | % | |
| Expected volatility | | 108 | % | | 87 | % | | 75 | % | |
| Risk-free interest | | 3 | % | | 3 | % | | 4 | % | |
| Expected life | | 4 years | | 4 years | | 4.5 years | |
F - 19
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| | The Black-Scholes pricing-model was used to estimate the fair value of the ESPP compensation. Assumptions are not provided due to immateriality. |
| | |
| | Pro forma information under SFAS No. 123 is as follows: |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
| Net income (loss) as reported | | $ | (8,434 | ) | $ | 5,006 | | $ | 13,436 | |
| Add: stock-based compensation expenses determined under the intrinsic value based method included in the reported net income (loss) | | | 50 | | | 66 | | | 36 | |
| Deduct: stock-based compensation expenses determined under the fair value based method for all awards | | | (10,865 | ) | | (8,509 | ) | | (8,869 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Pro forma net income (loss) | | $ | (19,249 | ) | $ | (3,437 | ) | $ | 4,603 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Basic net earnings (loss) per share as reported | | $ | (0.22 | ) | $ | 0.13 | | $ | 0.33 | |
| | |
|
| |
|
| |
|
| |
|
| Diluted net earnings (loss) per share as reported | | $ | (0.22 | ) | $ | 0.12 | | $ | 0.31 | |
| | |
|
| |
|
| |
|
| |
|
| Pro forma basic net earning (loss) per share | | $ | (0.51 | ) | $ | (0.09 | ) | $ | 0.11 | |
| | |
|
| |
|
| |
|
| |
|
| Pro forma diluted net earning (loss) per share | | $ | (0.51 | ) | $ | (0.09 | ) | $ | 0.11 | |
| | |
|
| |
|
| |
|
| |
| | |
| | The Group applies SFAS No. 123 and EITF No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, with respect to options and warrants issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date. |
| | |
| w. | Severance pay: |
| | |
| | The Group’s liability for severance pay for Israeli employees is calculated pursuant to Israel’s Severance Pay Law, based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment, or a portion thereof. The Group’s liability for all of its Israeli employees is fully provided for by monthly deposits with severance pay funds, insurance policies and by an accrual. |
| | |
| | The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies and includes immaterial profits. |
| | |
| | Severance expenses for the years ended December 31, 2003, 2004 and 2005, amounted to approximately $1,127, $1,182 and $1,514, respectively. |
F - 20
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| x. | Advertising expenses: |
| | |
| | Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31, 2003, 2004 and 2005, amounted to $211, $359 and $371, respectively. |
| | |
| y. | Fair value of financial instruments: |
| | |
| | The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments: |
| | |
| | The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate their fair value due to the short-term maturity of such instruments. |
| | |
| | The carrying amounts of bank deposits and structured notes are estimated by discounting the future cash flows using current interest rates for deposits of similar terms and maturities. The carrying amount of long-term deposits approximates their fair value. |
| | |
| | The fair value of marketable securities is based on quoted prices and do not differ significantly from the carrying amount (see Notes 3 and 6). |
| | |
| | The fair value of senior convertible notes is based on quoted market values and prevailing market rates, and approximates their carrying amount. |
| | |
| | The fair value of foreign currency contracts (used for hedging purposes) is estimated by obtaining current quotes from banks. |
| | |
| z. | Derivative instruments: |
| | |
| | SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, requires a company to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. |
| | |
| | The Group uses derivatives instruments to manage exposures to foreign currency related to salary payments denominated in New Israeli Shekel (“NIS”). The Group’s objectives for holding derivatives are to minimize risks. |
| | |
| | For those derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. |
F - 21
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | Since the amounts of forward transactions do not exceed salary payments, those transactions are all highly effective and the results are recorded as payroll expenses, at the time that the hedged expense is recorded. When the Group hedges payrolls for following periods, then the results as of the balance sheet date are recorded in other comprehensive income. |
| | |
| | At December 31, 2005, the Group expects to reclassify $84 of net gains on derivative instruments from accumulated other comprehensive income to income during the next nine months due to actual payment of variable interest associated with the floating rate debt. |
| | |
| aa. | Impact of recently issued accounting standards: |
| | |
| | On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments to employees to be recognized based on their fair values while SFAS No. 123(R) requires all share-based payments to employees including grants of employee stock options and shares issued under the ESPP to be recognized based on their fair values. SFAS No. 123(R) also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. SFAS No. 123(R) will be effective for periods commencing January 1, 2006. SFAS No. 123(R) permits public companies to adopt its requirements using either the modified prospective or modified retrospective method. The Company currently expects to adopt SFAS No. 123(R), using the modified prospective method of adoption in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 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. |
| | |
| | In March 2005, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 provides the SEC staff’s position regarding the application of SFAS No. 123(R) and contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, and also provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made relating to the accounting for share-based payment transactions. The Company is currently reviewing the effect of SAB 107 and SFAS No. 123(R) on its financial position, results of operations and cash flows. The Company expects that the adoption of SFAS No. 123(R) and SAB 107 will have a material effect on its financial position and results of operations. |
F - 22
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 2: – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of SFAS No. 151 will have a material effect on its financial position or results of operations. |
| |
| 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 statements of a voluntary change in accounting principles unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. As of December 31, 2005, adoption of SFAS No. 154 will not have a material impact on the Company’s financial position or results of operation. |
| |
| 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 references to the existing other-than-temporary impairment guidance. The FSP clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made. The guidance in this FSP is to be applied to reporting periods beginning after December 15, 2005. As of December 31, 2005, adoption of FSP FAS 115-1 will not have a material impact on the Company’s financial position or results of operations. |
F - 23
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 3: – | SHORT-TERM MARKETABLE SECURITIES AND ACCRUED INTEREST |
| |
| During 2005, the Company invested in marketable debt securities which are classified as held-to-maturity investments. |
| | | | | | | | | | |
| | December 31, 2005 | |
| |
| |
| | Amortized
cost | | Net
unrealized
losses | | Market
Value | |
| |
| |
| |
| |
Held-to-maturity - matures within one year: | | | | | | | | | | |
| | | | | | | | | | |
Corporate debentures | | $ | 8,040 | | $ | 53 | | $ | 7,987 | |
U.S. government and agencies debts | | | 1,000 | | | 4 | | | 996 | |
Accrued interest | | | 823 | | | - | | | 823 | |
| |
|
| |
|
| |
|
| |
|
| | $ | 9,863 | | $ | 57 | | $ | 9,806 | |
| |
|
| |
|
| |
|
| |
| |
| The unrealized losses on the Company’s investments in all types of securities are due to interest rate increases. The contractual cash flows of these investments are either guaranteed by the U.S. government or an agency of the U.S. government or were issued by highly rated corporations. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Since the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2005. In addition, the unrealized losses are for periods not longer than twelve months. |
| |
NOTE 4: – | INVENTORIES |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2004 | | 2005 | |
| |
| |
| |
|
Raw materials | | $ | 4,384 | | $ | 4,598 | |
Finished products | | | 5,675 | | | 6,964 | |
| |
|
| |
|
| |
|
| | $ | 10,059 | | $ | 11,562 | |
| |
|
| |
|
| |
| |
| In the years ended December 31, 2003, 2004 and 2005, the Group wrote-off and wrote-down inventory in a total amount of $835, $1,237 and $1,168, respectively. These amounts are included in cost of revenues. |
F - 24
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 5: – | LONG-TERM BANK DEPOSITS AND STRUCTURED NOTES |
| |
| Long-term bank deposits and structured notes are composed as follows: |
| | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | |
| |
| | | 2004 | | 2005 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| |
| | | Weighted average interest | | | | | | | |
| | |
| | | | | | | |
| Long-term bank deposits (in U.S. dollars) | | | | 2.7 | % | | | | - | | | $ | 25,195 | | $ | - | |
| Structured notes (1) | | | | 3.8 | % | | | | 3.0 | % | | | 25,000 | | | 27,781 | |
| | | | | | | | | | | | |
|
| |
|
| |
|
| | | | | | | | | | | | | $ | 50,195 | | $ | 27,781 | |
| | | | | | | | | | | | |
|
| |
|
| |
| | |
| (1) | As of December 31, 2005, the Group purchased callable structured notes at par value totaling $28,000 for settlement during 2006 to 2010 from several banks. Under the arrangements with the banks, whether or not the structured notes bear interest depends upon the three month to one year LIBOR rate. |
| | |
| | For each day in which the relevant LIBOR rate is below an agreed annual fixed rate, which ranges from 2.5% to 6% the structured notes bear interest at the rate of 3.2% to 5.75% per annum. On all other days, the structured notes do not bear any interest. As of December 31, 2005, investments in structured notes securities approximate their market value. |
| |
NOTE 6: – | LONG-TERM MARKETABLE SECURITIES |
| |
| During 2005, the Company invests in marketable debt securities which are classified as held-to-maturity investments. |
| | | | | | | | | | | |
| | | December 31, 2005 | |
| | |
| |
| | | Amortized
cost | | Net
unrealized
losses | | Market
Value | |
| | |
| |
| |
| |
| Held-to-maturity - matures after one year through three years: | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate debentures | | $ | 33,792 | | $ | 265 | | $ | 33,527 | |
| U.S. government and agencies debts | | | 15,999 | | | 130 | | | 15,869 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 49,791 | | $ | 395 | | $ | 49,396 | |
| | |
|
| |
|
| |
|
| |
| |
| The unrealized losses on the Company’s investments in all types of securities are due to interest rate increases. The contractual cash flows of these investments are either guaranteed by the U.S. government or an agency of the U.S. government or were issued by highly rated corporations. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Since the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2005. In addition, the unrealized losses are for periods not longer than twelve months. |
F - 25
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| | |
NOTE 7: – | INVESTMENT IN AFFILIATED COMPANIES |
| |
| a. | In December 2000, the Company signed an agreement to invest in an unrelated privately-held company (“affiliated company”). During 2005, the Company granted convertible loans in the amount of $ 611. The loans bear no interest and shall be convertible into shares. The date of conversion, the type of the shares and the number of shares granted will be determined by the board of directors of the investee. As of December 31, 2005, the Company holds 41% of the affiliated company’s share capital. |
| | | | | | | | | |
| | | December 31, | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| | | | | | | | |
| Equity, net (1) | | $ | 487 | | $ | (232 | ) |
| Convertible loans | | | - | | | 611 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Total investments | | $ | 487 | | $ | 379 | |
| | |
|
| |
|
| |
| (1) | Net equity as follows: | | | | | | | |
| | | | | | | | | |
| | Net equity as of purchase date | | $ | 93 | | $ | 93 | |
| | Unamortized goodwill | | | 2,389 | | | 2,389 | |
| | Accumulated net losses | | | (1,995 | ) | | (2,714 | ) |
| | | |
|
| |
|
| |
|
| | | | $ | 487 | | $ | (232 | ) |
| | | |
|
| |
|
| |
| | |
| b. | In July, 2005, the Company signed a share purchase agreement with another unrelated privately-held company and certain of its shareholders to acquire 19.5% of its Ordinary shares for a total purchase price in the amount of $707. |
| | | | | | | | |
| | | December 31, | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| | | | | | | | |
| Net equity as of purchase date | | $ | - | | $ | (106 | ) |
| Unamortized goodwill | | | - | | | 813 | |
| Accumulated net income | | | - | | | 26 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Total investment | | $ | - | | $ | 733 | |
| | |
|
| |
|
| |
F - 26
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 8: – | PROPERTY AND EQUIPMENT |
| | | | | | | | |
| | | December 31, | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| Cost: | | | | | | | |
| Computers and peripheral equipment | | $ | 10,492 | | $ | 11,767 | |
| Office furniture and equipment | | | 5,244 | | | 6,333 | |
| Motor vehicles | | | 48 | | | 48 | |
| Leasehold improvements | | | 1,357 | | | 1,289 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | | 17,141 | | | 19,437 | |
| | |
|
| |
|
| |
| Accumulated depreciation: | | | | | | | |
| Computers and peripheral equipment | | | 8,004 | | | 9,184 | |
| Office furniture and equipment | | | 2,127 | | | 3,327 | |
| Motor vehicles | | | 48 | | | 48 | |
| Leasehold improvements | | | 268 | | | 384 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | | 10,447 | | | 12,943 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Depreciated cost | | $ | 6,694 | | $ | 6,494 | |
| | |
|
| |
|
| |
| |
| Depreciation expenses amounted to $ 2,880, $ 2,352 and $ 2,509 for the years ended December 31, 2003, 2004 and 2005, respectively. |
| |
NOTE 9: – | INTANGIBLE ASSETS, DEFERRED CHARGES AND OTHER |
| | | | | | | | | |
| | | | December 31, | |
| | | |
| |
| | | | 2004 | | 2005 | |
| | | |
| |
| |
|
| a. | Cost: | | | | | | | |
| | Acquired technology | | $ | 4,273 | | $ | 4,273 | |
| | Deferred charges | | | 1,644 | | | 478 | |
| | Other | | | – | | | 200 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
| | | | | 5,917 | | | 4,951 | |
| | | |
|
| |
|
| |
| | Accumulated amortization: | | | | | | | |
| | Acquired technology | | | 787 | | | 1,647 | |
| | Deferred charges | | | 3 | | | 25 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
| | | | | 790 | | | 1,672 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
| | Amortized cost | | $ | 5,127 | | $ | 3,279 | |
| | | |
|
| |
|
| |
| | |
| b. | Amortization expenses related to acquired technology amounted to $160, $627 and $860 for the years ended December 31, 2003, 2004 and 2005, respectively. |
F - 27
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 9: – | INTANGIBLE ASSETS, DEFERRED CHARGES AND OTHER (Cont.) |
| | |
| c. | Expected amortization expenses related to acquired technology for the years ended December 31: |
| | | | | |
| 2006 | | $ | 860 | |
| 2007 | | | 860 | |
| 2008 | | | 673 | |
| 2009 | | | 233 | |
| | |
|
| |
| | | | | |
| | | $ | 2,626 | |
| | |
|
| |
| | |
| d. | Amortization expenses related to deferred charges amounted to $ 3 and $ 22 for the years ended December 31, 2004 and 2005, respectively. |
| |
NOTE 10: – | OTHER PAYABLES AND ACCRUED EXPENSES |
| | | | | | | | |
| | | December 31, | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
|
| Employees and payroll accruals | | $ | 6,355 | | $ | 8,088 | |
| Technology licensing fee provision | | | 3,974 | | | 2,901 | |
| Government authorities | | | 874 | | | 738 | |
| Accrued expenses | | | 5,187 | | | 6,568 | |
| Deferred revenues | | | 1,430 | | | 300 | |
| Others | | | 161 | | | 25 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | $ | 17,981 | | $ | 18,620 | |
| | |
|
| |
|
| |
F - 28
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except share and per share data |
| |
NOTE 11: – | SENIOR CONVERTIBLE NOTES |
| |
| In November 2004, the Company issued $ 125,000 (including the exercise of the option as described below) in an aggregate principal amount of 2% Senior Convertible Notes due November 9, 2024 (“the Notes”). The Company is obligated to pay interest on the Notes semi-annually on May 9 and November 9 of each year. |
| |
| The Notes are convertible, at the option of the holders at any time before the maturity date, into Ordinary shares of the Company at a conversion rate of 53.4474 Ordinary shares per $ 1 principal amount of Notes, representing a conversion price of approximately $ 18.71 per share. The Notes are subject to redemption at any time on or after November 9, 2009, in whole or in part, at the option of the Company, at a redemption price of 100% of the principal amount plus accrued and unpaid interest. The Notes are subject to repurchase, at the holders’ option, on November 9, 2009, November 9, 2014 or November 9, 2019, at a repurchase price equal to 100% of the principal amount plus accrued and unpaid interest, if any, on such repurchase date. The Company can choose to pay the repurchase price in cash, Ordinary shares or a combination of cash and Ordinary shares. As of December 31, 2005, the Notes are presented as a long-term liability. |
| |
| The Notes also contain a provision for a “make-whole” premium to be paid by the Company to holders of the Notes in the event of certain changes in control that could occur during the life of the Notes. The premium is payable in the form of cash, the Company’s Ordinary shares, or the same form of consideration used to pay for the shares of the Company’s Ordinary shares in connection with the transaction constituting the change in control. The premium declines over time and is based upon the price of the Company’s Ordinary shares as of the effective date of the change in control. Due to immateriality, the Company did not record separate derivative in the financial statements. |
| |
| The Notes were issued with a conversion price equal to $ 18.71 per share, which reflected the closing share price on the Nasdaq on the date of the offering, which was $ 14.12, plus a premium of 32.5%. In accordance with EITF No. 00-27, no beneficial conversion feature was recognized or recorded. |
| |
| The additional amount that the Company can be required to pay in respect of the withholding taxes was recorded as a liability. |
| |
| As part of the offering, the Company granted the Initial Purchasers an option to purchase at any time during 30 days from the date of the offering, up to an additional $ 25,000 principal amount of senior convertible notes. The option, in accordance with SFAS No. 133, is not embedded and therefore should be measured on a stand-alone basis. On November 16, 2004, the option was exercised in full. Due to immateriality, the Company did not record this option and its exercise in the financial statements. |
F - 29
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 12: – | COMMITMENTS AND CONTINGENT LIABILITIES |
| | |
| a. | Lease commitments: |
| | |
| | The Group’s facilities are rented under several lease agreements in Israel and the U.S. for periods ending in 2013. |
| | |
| | Future minimum rental commitments under non-cancelable operating leases for the years ended December 31, are as follows: |
| | | | | |
| 2006 | | $ | 2,530 | |
| 2007 | | | 2,429 | |
| 2008 | | | 2,447 | |
| 2009 | | | 2,466 | |
| 2010 and thereafter | | | 8,611 | |
| | |
|
| |
| | | | | |
| | | $ | 18,483 | |
| | |
|
| |
| | |
| | Rent expenses for the years ended December 31, 2003, 2004 and 2005, were approximately $ 1,829, $ 2,927 and $ 2,938, respectively. |
| | |
| b. | Royalty commitment to the Office of the Chief Scientist of Israel (“OCS”): |
| | |
| | Under the research and development agreements of the Company with the OCS and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3%-4.5% of sales of products developed with funds provided by the OCS, up to an amount equal to 100% of the OCS research and development grants received, linked to the U.S. dollar plus interest on the unpaid amount received based on the 12-month LIBOR rate applicable to dollar deposits. The Company is obligated to repay the Israeli Government for the grants received only to the extent that there are sales of the funded products. |
| | |
| | The Company did not repay or accrue royalties for the year ended December 31, 2005, relating to such grants. |
| | |
| | As of December 31, 2005, the Company had a contingent obligation to pay royalties in the amount of approximately $ 1,617. |
| | |
| c. | Royalty commitments to third parties: |
| | |
| | The Group entered into technology licensing fee agreements with third parties. Under the agreements, the Group agreed to pay the third parties royalties until 2008, based on 0.3%-0.9% of the Group’s total consolidated revenues. |
| | |
| | From time to time, the Group may be subject to patent infringement claims that arise in the ordinary course of its business activities. The Group estimates and records liabilities for those contingent claims for which it believes future expenditures will be required and for which such expenditures can be reasonably estimated. |
F - 30
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 13: – | SHAREHOLDERS’ EQUITY |
| | |
| a. | Treasury stock: |
| | |
| | On January 10, 2001 and on April 28, 2002, the Company’s Board of Directors approved a share repurchase program pursuant to which the Company is authorized to purchase up to an aggregate amount of 4,000,000 of its outstanding Ordinary shares. As of December 31, 2005, the Company had purchased 3,942,139 of its outstanding Ordinary shares, at a weighted average price per share of $ 2.87. |
| | |
| b. | Warrants issued to consultants: |
| | |
| | During 1999, the Company issued warrants to consultants to purchase 4,000 and 50,000 Ordinary shares of NIS 0.01 par value at an exercise price of $ 9.82 per share and $ 18.82 per share, respectively, expiring seven years from the date of grant. Warrants to purchase 24,000 Ordinary shares at an exercise price of $ 18.82 per share were exercisable immediately, and warrants to purchase 30,000 Ordinary shares are exercisable in four equal annual installments from the date of grant. During 2001, warrants to purchase 10,000 Ordinary shares at an exercise price of $ 18.82 were exercised. |
| | |
| | As of December 31, 2005, 44,000 warrants are outstanding and exercisable at a weighted average exercise price of $ 18. |
| | |
| c. | Employee Stock Purchase Plan: |
| | |
| | In May 2001, the Company’s Board of Directors adopted the Employee Stock Purchase Plan (“the Purchase Plan”), which provides for the issuance of a maximum of 2,000,000 Ordinary shares. As of December 31, 2005, 1,033,290 shares are still available for future issuance. Eligible employees can have up to 15% of their wages, up to certain maximums, used to purchase Ordinary shares. The Purchase Plan is implemented with purchases every six months occurring on January 31 and July 31 of each year. The price of the Ordinary shares purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the Ordinary shares on the commencement date of each offering period or on the semi-annual purchase date. |
| | |
| | During the years ended December 31, 2003, 2004 and 2005, 290,605, 208,952 and 257,746 shares, respectively, were issued under the Purchase Plan for aggregate considerations of $ 537, $ 1,332 and $ 2,134, respectively. |
| | |
| d. | Employee Stock Option Plans: |
| | |
| | Under the Company’s 1997 and 1999 Stock Option Plans (“the Plans”), options to purchase Ordinary shares may be granted to officers, directors, employees and consultants of the Group. |
| | |
| | The total number of shares authorized for grant of options under the Plans is 14,704,523. As of December 31, 2005, 1,536,509 shares are still available for future option grants. |
| | |
| | Stock options granted under the Plans are exercisable usually at the fair market value of the Ordinary shares at the date of grant and expire ten or seven years from the date of grant. The options generally vest over four or five years, from the date of grant. Any options, which are forfeited or cancelled before expiration, become available for future grants. |
F - 31
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except share and per share data |
| |
NOTE 13: – | SHAREHOLDERS’ EQUITY (Cont.) |
| |
| A summary of the Group’s stock option activity and related information for the years ended December 31, 2003, 2004 and 2005, is as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | Numberof options | | Weighted
average
exercise
price | | Number of options | | Weighted
average
exercise
price | | Number of options | | Weighted
average
exercise
price | |
| | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | |
| Outstanding at the beginning of the year | | | 7,202,088 | | $ | 8.21 | | | 8,425,947 | | $ | 7.76 | | | 7,852,800 | | $ | 9.46 | |
| Granted | | | 1,737,500 | | $ | 3.94 | | | 1,693,000 | | $ | 11.96 | | | 1,029,500 | | $ | 10.26 | |
| Exercised | | | (269,742 | ) | $ | 4.14 | | | (1,869,446 | ) | $ | 4.72 | | | (466,065 | ) | $ | 3.86 | |
| Forfeited | | | (243,899 | ) | $ | 5.92 | | | (396,701 | ) | $ | 6.28 | | | (525,863 | ) | $ | 17.18 | |
| | |
|
| | | | |
|
| | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | |
| Outstanding at the end of the year | | | 8,425,947 | | $ | 7.76 | | | 7,852,800 | | $ | 9.46 | | | 7,890,372 | | $ | 9.38 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | |
| Options exercisable at the end of the year | | | 4,526,834 | | $ | 9.46 | | | 4,094,213 | | $ | 10.98 | | | 4,819,818 | | $ | 9.55 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
| The options outstanding as of December 31, 2005, have been separated into ranges of exercise prices, as follows: |
| | | | | | | | | | | | | | | | | |
| Range of
exercise
price | | Options
outstanding
as of
December 31,
2005 | | Weighted
average
remaining
contractual
life | | Weighted
average
exercise
price | | Options
exercisable
as of
December 31,
2005 | | Weighted
average
exercise price of
exercisable
options | |
|
| |
| |
| |
| |
| |
| |
| | | | | | (Years) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| $ 0.61 | | | 121,000 | | | 2.16 | | $ | 0.61 | | | 121,000 | | $ | 0.61 | |
| $ 1.1 | | | 163,600 | | | 2.51 | | $ | 1.10 | | | 163,600 | | $ | 1.10 | |
| $ 1.73-2.51 | | | 808,393 | | | 3.81 | | $ | 2.29 | | | 553,893 | | $ | 2.26 | |
| $ 2.67-4 | | | 590,443 | | | 3.38 | | $ | 3.14 | | | 405,855 | | $ | 3.05 | |
| $ 4.1-6.04 | | | 1,204,680 | | | 3.51 | | $ | 4.45 | | | 913,847 | | $ | 4.36 | |
| $ 6.51-9.24 | | | 1,278,306 | | | 2.70 | | $ | 7.63 | | | 1,051,556 | | $ | 7.53 | |
| $ 9.32-14.76 | | | 2,888,750 | | | 5.94 | | $ | 11.01 | | | 814,242 | | $ | 10.84 | |
| $ 15.94-20.38 | | | 141,000 | | | 2.70 | | $ | 17.74 | | | 101,625 | | $ | 18.44 | |
| $ 25.5-36.53 | | | 670,200 | | | 1.30 | | $ | 29.03 | | | 670,200 | | $ | 29.03 | |
| $ 50.50 | | | 24,000 | | | 1.49 | | $ | 50.50 | | | 24,000 | | $ | 50.50 | |
| | |
|
| | | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | |
| | | | 7,890,372 | | | | | $ | 9.38 | | | 4,819,818 | | $ | 9.55 | |
| | |
|
| | | | |
|
| |
|
| |
|
| |
| |
| The Company has recorded deferred stock compensation for options issued with an exercise price below the fair market value of the Ordinary shares on the date of grant. The deferred stock compensation has been amortized and recorded as compensation expense ratably over the vesting period of the options. Compensation expenses of approximately $50, $66 and $36 were recognized during the years ended December 31, 2003, 2004 and 2005, respectively. |
F - 32
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 13: – | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | Options granted to employees in 2003, 2004 and 2005 have an exercise price equal to the fair market value of an Ordinary share at the grant date, except for options that were granted in 2003 to certain employees with an exercise price less than the share market price at the grant date. The weighted average fair values of the options granted during 2003, 2004 and 2005, were $3.77, $7.63 and $6.27, respectively. |
| | |
| e. | Dividends: |
| | |
| | In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company does not intend to pay cash dividends in the foreseeable future. (See also Note 14a.) |
| |
NOTE 14: – | TAXES ON INCOME |
| | | |
| a. | Israeli taxation: |
| | | |
| | 1. | Measurement of taxable income: |
| | | |
| | | Commencing in taxable year 2003, the Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Such an elective obligates the Company for three years. Accordingly, commencing taxable year 2003, results for tax purposes are measured in terms of earnings in dollars. The Company has elected to extend the term of the above mentioned tax measurement by another year. |
| | | |
| | 2. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the law”): |
| | | |
| | | The Company’s production facilities have been granted the status of an “Approved Enterprise” in accordance with the law under four separate investment programs. According to the provisions of such Israeli law, the Company has been granted the “Alternative Benefit Plan”, under which the main benefits are tax exemption and reduced tax rate. Therefore, the Company’s income derived from Approved Enterprise will be entitled to a tax exemption for a period of two to four years and to an additional period of six to eight years of reduced tax rates of 10% - 25% (based on the percentage of foreign ownership). The duration of tax benefits of reduced tax rates is subject to a limitation of the earlier of 12 years from commencement of production, or 14 years from the approval date. The Company utilized tax benefits from the first program in 1998 and is eligibled for benefits through 2007. Tax benefits from the remaining programs are scheduled to gradually expire through 2013. |
F - 33
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 14: – | TAXES ON INCOME (Cont.) |
| |
| As of December 31, 2005, retained earnings included approximately $540 in tax-exempt income earned by the Company’s “Approved Enterprise”. The Company’s Board of Directors has decided not to declare dividends out of such tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s “Approved Enterprise”. |
| |
| Tax-exempt income attributable to the “Approved Enterprise” cannot be distributed to shareholders without subjecting the Company to taxes except upon complete liquidation of the Company. If such retained tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative tax benefits (currently between 10% - 25%) and an income tax liability of approximately up to $135 would be incurred by the Company. |
| |
| The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above law, regulations published thereunder and the certificate of approval for the specific investments in “Approved Enterprises”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2005, management believes that the Company is in compliance with all of the aforementioned conditions. |
| |
| Income from sources other than the “Approved Enterprise” during the benefit period will be subject to tax at the regular tax rate prevailing at that time. |
| |
| On April 1, 2005, an amendment to the law came into effect (“the Amendment”) and has significantly changed the provisions of the law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Beneficiary Enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the law so that companies no longer require Investment Center approval in order to qualify for tax benefits. |
| |
| In addition, the law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company’s existing “Approved Enterprises” will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the law has amended, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt income. |
F - 34
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 14: – | TAXES ON INCOME (Cont.) |
| | | |
| | 3. | Net operating losses carryforwards: |
| | | |
| | | As of December 31, 2005, the Company has accumulated losses for tax purposes in the amount of approximately $80 million, which can be carried forward and offset most of against taxable income in the future for an indefinite period. |
| | | |
| | 4. | Tax benefits under the Law for the Encouragement of Industry (Taxation), 1969: |
| | | |
| | | The Company currently qualifies as an “Industrial Company” under the above law and as such is entitled to certain tax benefits, including accelerated depreciation and the deduction of public offering expenses in three equal annual payments. |
| | | |
| | 5. | Tax rates: |
| | | |
| | | Under an amendment to the Israeli Income Tax Ordinance appeal on July 25, 2005, a gradual decrease in the corporate tax rate in Israel will be in effect as follows: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%. |
| | | |
| b. | Income (loss) before taxes on income comprised as following: |
| | | | | | | | | | | | |
| | | | Year ended December 31, | |
| | | |
| |
| | | | 2003 | | 2004 | | 2005 | |
| | | |
| |
| |
| |
| | | | | | | | | | | | |
| | Domestic | | $ | (7,338 | ) | $ | 2,303 | | $ | 6,694 | |
| | Foreign | | | (1,096 | ) | | 2,976 | | | 7,541 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| | | | $ | (8,434 | ) | $ | 5,279 | | $ | 14,235 | |
| | | |
|
| |
|
| |
|
| |
| | |
| c. | Taxes on income are comprised as follows: |
| | | | | | | | | | | | |
| | Current taxes | | $ | - | | $ | 273 | | $ | 3,048 | |
| | Tax in respect of prior years | | | - | | | - | | | 240 | |
| | Deferred taxes *) | | | - | | | - | | | (2,489 | ) |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| | | | $ | - | | $ | 273 | | $ | 799 | |
| | | |
|
| |
|
| |
|
| |
| | | |
| | *) | Including $456 of the total deferred tax assets upon utilization of pre-acquisition carryforward tax losses derived from acquisition of Ai-Logix in accordance with SFAS No. 141 (See also Note 1c). |
| | | | | | | | | | | | |
| | | | Year ended December 31, | |
| | | |
| |
| | | | 2003 | | 2004 | | 2005 | |
| | | |
| |
| |
| |
| | | | | | | | | | | | |
| | Domestic | | $ | - | | $ | - | | $ | 2,167 | |
| | Foreign | | | - | | | 273 | | | (1,368 | ) |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| | | | $ | - | | $ | 273 | | $ | 799 | |
| | | |
|
| |
|
| |
|
| |
F - 35
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 14: – | TAXES ON INCOME (Cont.) |
| | |
| d. | Deferred income taxes: |
| | |
| | Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group’s deferred tax liabilities and assets are as follows: |
| | | | | | | | | |
| | | | December 31, | |
| | | |
| |
| | | | 2004 | | 2005 | |
| | | |
| |
| |
| | Deferred tax assets: | | | | | | | |
| | Net operating loss carryforwards | | $ | 40,475 | | $ | 34,616 | |
| | Reserves and allowances | | | 6,544 | | | 7,071 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
| | Net deferred tax assets before valuation allowance | | | 47,019 | | | 41,687 | |
| | Valuation allowance | | | (47,019 | ) | | (39,198 | ) |
| | | |
|
| |
|
| |
| | | | | | | | | |
| | Net deferred tax assets | | $ | - | | $ | 2,489 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
| | Domestic | | $ | - | | $ | 2,489 | |
| | | |
|
| |
|
| |
| | |
| | The Company’s U.S. subsidiaries have estimated total available carryforward tax losses of approximately $22 million to offset against future taxable profit between 2015 and 2024. As of December 31, 2005, the Company recorded a deferred tax asset of $2,489 relating to the available net carryforward tax losses. |
| | |
| | Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. |
| | |
| | The Company has provided valuation allowances in respect of deferred tax assets resulting from tax benefits related to employee stock option exercises, which will be credited to additional paid-in capital when realized. Management currently believes that it is more likely than not that those deferred tax deductions will not be realized in the foreseeable future. |
F - 36
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 14: – | TAXES ON INCOME (Cont.) |
| | |
| e. | Reconciliation of the theoretical tax expenses: |
| | |
| | A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the statement of operations is as follows: |
| | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2004 | | 2005 | |
| | |
| |
| |
| Income before taxes, as reported in the consolidated statements of income | | $ | 5,279 | | $ | 14,235 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Statutory tax rate | | | 35 | % | | 34 | % |
| | |
|
| |
|
| |
| | | | | | | | |
| Theoretical tax expenses on the above amount at the Israeli statutory tax rate | | | 1,848 | | | 4,840 | |
| Deferred taxes resulting from “Approved Enterprise” benefits for which a valuation allowance was provided (1) | | | (4,335 | ) | | (3,543 | ) |
| Tax adjustment in respect of different tax rate of foreign subsidiaries | | | - | | | (84 | ) |
| Non-deductible expenses | | | 1,355 | | | 1,663 | |
| Deferred taxes on losses for which a valuation allowance was provided | | | 1,223 | | | (4,278 | ) |
| Inter-company charges | | | - | | | 1,725 | |
| Equity in losses of affiliated companies, net | | | 182 | | | 236 | |
| Income taxes in respect of prior years | | | - | | | 240 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Actual tax expense | | $ | 273 | | $ | 799 | |
| | |
|
| |
|
| |
| | | | | | | | |
| (1) | Per share amounts (basic) of the tax benefit resulting from the exemption | | $ | 0.11 | | $ | 0.09 | |
| | |
|
| |
|
| |
| | Per share amounts (diluted) of the tax benefit resulting from the exemption | | $ | 0.10 | | $ | 0.08 | |
| | |
|
| |
|
| |
F - 37
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 15: – | BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| Numerator: | | | | | | | | | | |
| | | | | | | | | | | |
| Net income (loss) available to shareholders of Ordinary Shares | | $ | (8,434 | ) | $ | 5,006 | | $ | 13,436 | |
| | |
|
| |
|
| |
|
| |
| Denominator: | | | | | | | | | | |
| | | | | | | | | | | |
| Denominator for basic earnings (loss) per share - weighted average number of Ordinary shares, net of treasury stock | | | 37,509,000 | | | 38,613,597 | | | 40,295,591 | |
| Effect of dilutive securities: | | | | | | | | | | |
| Employee stock options and ESPP | | | * ) - | | | 3,993,000 | | | 2,790,110 | |
| Senior convertible notes | | | - | | | *) - | | | * ) - | |
| | |
|
| |
|
| |
|
| |
| Denominator for diluted net earnings (loss) per share - adjusted weighted average number of shares | | | 37,509,000 | | | 42,606,597 | | | 43,085,701 | |
| | |
|
| |
|
| |
|
| |
| |
NOTE 16: – | FINANCIAL INCOME (EXPENSES), NET |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
| Financial expenses: | | | | | | | | | | |
| Foreign currency translation differences | | $ | (396 | ) | $ | (403 | ) | $ | (438 | ) |
| Interest | | | - | | | (381 | ) | | (3,357 | ) |
| Amortization of marketable securities premiums and accretion of discounts, net | | | - | | | - | | | (143 | ) |
| Others | | | (105 | ) | | (94 | ) | | (155 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | | (501 | ) | | (878 | ) | | (4,093 | ) |
| | |
|
| |
|
| |
|
| |
| Financial income: | | | | | | | | | | |
| Foreign currency translation differences | | | 376 | | | 310 | | | 447 | |
| Interest | | | 2,008 | | | 2,726 | | | 6,103 | |
| Others | | | - | | | 7 | | | - | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | | 2,384 | | | 3,043 | | | 6,550 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 1,883 | | $ | 2,165 | | $ | 2,457 | |
| | |
|
| |
|
| |
|
| |
F - 38
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands |
| |
NOTE 17: – | MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION |
| | |
| a. | Summary information about geographic areas: |
| | |
| | The Group manages its business on a basis of one reportable segment (see Note 1 for a brief description of the Group’s business). The data is presented in accordance with SFAS No. 131 “Disclosure About Segments of an Enterprise and Related Information”. Revenues in the table below are attributed to geographical areas based on the location of the end customers. |
| | |
| | The following presents total revenues for the years ended December 31, 2003, 2004 and 2005 and long-lived assets as of December 31, 2003, 2004 and 2005. |
| | | | | | | | | | | | | | | | | | | | |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | Total
revenues | | Long-
lived
assets | | Total
revenues | | Long-
lived
assets | | Total
revenues | | Long-
lived
assets | |
| | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | |
| Israel | | $ | 2,984 | | $ | 3,811 | | $ | 8,332 | | $ | 7,357 | | $ | 12,235 | | $ | 6,248 | |
| Americas | | | 25,179 | | | 6,086 | | | 51,573 | | | 13,594 | | | 66,622 | | | 22,193 | |
| Europe | | | 5,587 | | | - | | | 10,972 | | | 5 | | | 22,434 | | | 7 | |
| Far East | | | 10,478 | | | - | | | 11,879 | | | - | | | 14,536 | | | 4 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | |
| | | $ | 44,228 | | $ | 9,897 | | $ | 82,756 | | $ | 20,956 | | $ | 115,827 | | $ | 28,452 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| b. | Major customer’s data as a percentage of total revenues: |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
| Customer A | | | 14% | | | 19% | | | 16% | |
| | |
| c. | Product lines: |
| |
| | Total revenues from external customers divided on the basis of the Company’s product lines are as follows: |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2003 | | 2004 | | 2005 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
| Technology | | $ | 28,507 | | $ | 48,500 | | $ | 62,287 | |
| Networking | | | 15,721 | | | 34,256 | | | 53,540 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| | | $ | 44,228 | | $ | 82,756 | | $ | 115,827 | |
| | |
|
| |
|
| |
|
| |
F - 39
