We have not entered into any long-term supply agreements. However, we have worked for years in several countries with established global manufacturing leaders such as Flextronics and have a good experience with their level of commitment and ability to deliver. To date, we have been able to obtain sufficient amounts of these components to meet our needs and do not foresee any supply difficulty in obtaining timely delivery of any parts or components. However, an interruption in supply from any of these sources, especially with regard to signal processors from Texas Instruments Incorporated, or an unexpected termination of the manufacture of certain electronic components, could disrupt production, thereby adversely affecting our results. We generally maintain an inventory of critical components used in the manufacture and assembly of our products although our inventory of signal processor chips would likely not be sufficient in the event that we had to engage an alternate supplier for these components.
We utilize contract manufacturing for substantially all of our manufacturing processes. Most of our manufacturing is carried out by third-party subcontractors in Israel and China. We have extended our manufacturing capabilities through third party subcontractors in the United States and Mexico. Our internal manufacturing activities consist primarily of the production of prototypes, test engineering, materials purchasing and inspection, final product configuration and quality control and assurance.
Our products must comply with industry standards relating to telecommunications equipment. Before completing sales in a country, our products must comply with local telecommunications standards, recommendations of quasi-regulatory authorities and recommendations of standards-setting committees. In addition, public carriers require that equipment connected to their networks comply with their own standards. Telecommunication-related policies and regulations are continuously reviewed by governmental and industry standards-setting organizations and are always subject to amendment or change. Although we believe that our products currently meet applicable industry and government standards, we cannot be sure that our products will comply with future standards.
We are subject to telecom industry regulations and requirements set by telecommunication carriers that address a wide range of areas including quality, final testing, safety, packaging and use of environmentally friendly components. We comply with the European Union’s Restriction of Hazardous Substances Directive (under certain exemptions) that requires telecom equipment suppliers to stop the usage of some materials that are not environmentally friendly by July 1, 2006. These materials include cadmium, hexavalent chromium, lead, mercury, polybrominated biphenyls and polybrominatel diphenyl ethers. Under the directive, an extension for compliance through 2010 was granted with respect to the usage of lead in solders in Network Infrastructure equipment. We expect that other countries, including countries we operate in, will adopt similar directives or other additional regulations in the near future.
Competition in our industry is intense and we expect competition to increase in the future. Our competitors currently sell products that provide similar benefits to those that we sell. There has been a significant amount of merger and acquisition activity and strategic alliances frequently involving major telecommunications equipment manufacturers acquiring smaller companies, and we expect that this will result in an increasing concentration of market share among these companies, many of whom are our customers.
Our principal competitors in the area of analog media gateways (2 to 24 ports) for access and enterprise are Cisco Systems Inc., Mediatrix Telecom, Inc., Vega Stream Limited, Samsung, Innovaphone AG, Quintum Technologies, Tainet Communication System Corp., Welltech, Ascii Corp., D-Link Systems, Inc., Multitech Inc., Inomedia, OKI and LG. In addition we face competition in low, mid and high density gateways from internal development at companies such as Nortel, Alcatel-Lucent, Nokia-Siemens, Huawei, Ericsson, UTstarcom, ZTE and from Cisco Systems, Veraz Networks, Sonus Networks, General Bandwidth, Dialogic/Cantata Technologies and Commatch (Telrad).
Our principal competitors in the media server market segment are Cantata Technology, NMS Communications, Convedia/Radisys, IP Unity/Glenayre, Cognitronics and Aculab. In addition, we face competition in software-based and hardware-based media servers from internal development at companies such as Hewlett-Packard, Comverse-NetCentrex, Nortel, Alcatel - Lucent, Nokia-Siemens and Ericsson.
With respect to session border controllers, we compete against Acme Packets, Nextpoint, Covergence and Sonus. In the security gateway market, we compete against private companies such as Reefpoint and Azaire.
Our principal competitors in the sale of signal processing chips are Texas Instruments, Broadcom, Infineon, Centillium, Surf and Mindspeed. Several large manufacturers of generic signal processors, such as Motorola, Agere Systems, which merged with LSI Corporation in April 2007, and Intel have begun, or are expected to begin marketing competing processors. Our principal competitors in the communications board market are NMS Communications, Intel, Motorola, Cantata Technology, Acculab and PIKA Technologies, Inc.
We also face significant and increasing competition in the market for products utilized in the VoIP market. Our competitors in the market for VolP products include telecommunications companies, data communication companies and companies specializing in voice over IP products, some of which have greater name recognition, larger installed customer bases and significantly greater financial, technical, sales and marketing resources than we do.
Many of our competitors have the ability to offer vendor-sponsored financing programs to prospective customers. Some of our competitors with broad product portfolios may also be able to offer lower prices on products that compete with ours because of their ability to recoup a loss of margin through sales of other products or services. Additionally, voice, audio and other communications alternatives that compete with our products are being continually introduced.
In the future, we may also develop and introduce other products with new or additional telecommunications capabilities or services. As a result, we may compete directly with telephone companies and other telecommunications infrastructure providers. Additional competitors may include companies that currently provide computer software products and services, such as telephone, media, publishing and cable television. The ability of some of our competitors to bundle other enhanced services or complete solutions with VoIP products could give these competitors an advantage over us.
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Intellectual Property and Proprietary Rights
Our success is dependent in part upon proprietary technology. We rely primarily on a combination of patent, copyright and trade secret laws, as well as confidentiality procedures and contractual provisions, to protect our proprietary rights. We also rely on trademark protection concerning various names and marks that serve to identify it and our products. While our ability to compete may be affected by our ability to protect our intellectual property, we believe that, because of the rapid pace of technological change in our industry, maintaining our technological leadership and our comprehensive familiarity with all aspects of the technology contained in our signal processors and communication boards is also of primary importance.
We own U.S. patents that relate to our voice compression and session border control technologies. We also actively pursue patent protection in selected other countries of interest to us. In addition to patent protection, we seek to protect our proprietary rights through copyright protection and through restrictions on access to our trade secrets and other proprietary information which we impose through confidentiality agreements with our customers, suppliers, employees and consultants.
There are a number of companies besides us who hold or may acquire patents for various aspects of the technology incorporated in the ITU’s standards or other industry standards or proprietary standards, for example, in the fields of wireless and cable. While we have obtained cross-licenses from some of the holders of these other patents, we have not obtained a license from all of the holders. The holders of these other patents from whom we have not obtained licenses may take the position that we are required to obtain a license from them. Companies that have submitted their technology to the ITU (and generally other industry standards making bodies) for adoption as an industry standard are required by the ITU to undertake to agree to provide licenses to that technology on reasonable terms. Accordingly, we believe that even if we were required to negotiate a license for the use of such technology, we would be able to do so at an acceptable price. Similarly, however, third parties who also participate with respect to the same standards-setting organizations as do we may be able to negotiate a license for use of our proprietary technology at a price acceptable to them, but which may be lower than the price we would otherwise prefer to demand.
Under a pooling agreement dated March 3, 1995, as amended, between AudioCodes and DSP Group, Inc., on the one hand, and France Telecom, Université de Sherbrooke and their agent, Sipro Lab Telecom, on the other hand, we and DSP Group, Inc. granted to France Telecom and Université de Sherbrooke the right to use certain of our specified patents, and any other of our and DSP Group, Inc. intellectual property rights incorporated in the ITU G.723.1 standard. Likewise France Telecom and Université de Sherbrooke granted AudioCodes and DSP Group, Inc. the right to use certain of their patents and any other intellectual property rights incorporated in the G.723.1 standard. In each case, the rights granted are to design, make and use products developed or manufactured for joint contribution to the G.723.1 standard without any payment by any party to the other parties.
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In addition, each of the parties to the agreement granted to the other parties the right to license to third parties the patents of any party included in the intellectual property required to meet the G.723.1 standard, in accordance with each licensing party’s standard patent licensing agreement. The agreement provides for the fee structure for licensing to third parties. The agreement provides that certain technical information be shared among the parties, and each of the groups agreed not to assert any patent rights against the other with respect of the authorized use of voice compression products based upon the technical information transferred. Licensing by any of the parties of the parties’ intellectual property incorporated in the G.723.1 standard to third parties is subject to royalties that are specified under the agreement.
Each of the parties to the agreement is free to develop and sell products embodying the intellectual property incorporated into the G.723.1 standard without payment of royalties to other parties, so long as the G.723.1 standard is implemented as is, without modification. The agreement expires upon the last expiration date of any of the AudioCodes, DSP Group, Inc., France Telecom or Universite de Sherbrooke patents incorporated in the G.723.1 standard. The parties to the agreement are not the only claimants to technology underlying the G.723.1 standard.
We are aware of parties who may be infringing our technology that is part of the G.723.1 standard. We evaluate these matters on a case by case basis, directly or through our licensing partner. Although we have not yet determined whether to pursue legal action, we may do so in the future. There can be no assurance that any legal action will be successful.
Third parties have claimed, and from time to time in the future may claim, that our past, current or future products infringe their intellectual property rights. Intellectual property litigation is complex and there can be no assurance of a favorable outcome of any litigation. Any future intellectual property litigation, regardless of outcome, could result in substantial expense to us and significant diversion of the efforts of our technical and management personnel. Litigation could also disrupt or otherwise severely impact our relationships with current and potential customers as well as our manufacturing, distribution and sales operations in countries where relevant third party rights are held and where we may be subject to jurisdiction. An adverse determination in any proceeding could subject us to significant liabilities to third parties, require disputed rights to be licensed from such parties, assuming licenses to such rights could be obtained, or require us to cease using such technology and expend significant resources to develop non-infringing technology. We may not be able to obtain a license at an acceptable price.
We have entered into technology licensing fee agreements with third parties. We expect that in the ordinary course of business we may be required to enter into additional licensing agreements. Under one agreement, we agreed to pay a third party royalty fees until 2008, based on 0.75% - 0.9% of our revenues.
Legal Proceedings
We are not a party to any material legal proceedings, except for the proceedings referred to below related to our Nuera subsidiary.
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Prior to the acquisition of Nuera by us, one of Nuera’s customers had been named as a defendant in a patent infringement suit involving technology the customer purchased from Nuera. In the suit, the plaintiff alleged that the customer used devices to offer services that infringe upon a patent the plaintiff owns. The customer has sought indemnification from Nuera pursuant to the terms of a purchase agreement between Nuera and the customer relating to the allegedly infringing technology at issue.
Prior to the acquisition of Nuera by us, eight former employees of a French subsidiary of Nuera filed a labor grievance against the subsidiary claiming they were unfairly terminated. The French subsidiary filed for bankruptcy in 2004 and, in 2005, the court appointed liquidator sought to hold Nuera liable for the obligations of its French subsidiary. In June 2006, the court ruled in favor of Nuera that it was not liable for the obligations of its French subsidiary. In March 2007, the liquidator appealed the judgment and in April 2008 the appeal was denied by the court.
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B. | ORGANIZATIONAL STRUCTURE |
List of Significant Subsidiaries
AudioCodes Inc., our wholly-owned subsidiary, is a Delaware corporation.
AudioCodes UK Limited and AudioCodes Europe Limited, our wholly-owned subsidiaries, are incorporated in England.
CTI Squared Ltd., our wholly-owned subsidiary, is organized under the laws of Israel.
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C. | PROPERTY, PLANTS AND EQUIPMENT |
We lease our main facilities, located in Airport City, Lod, Israel, which occupy approximately 128,000 square feet for annual lease payments (including management fees) of approximately $2.6 million. In January 2008, we increased the amount of space we lease by approximately 74,000 square feet for annual lease payments (including management fees) of approximately $1.4 million. In addition, we have entered into an agreement regarding the neighboring property pursuant to which a building of approximately 145,000 square feet will be erected and leased to us for period of eleven years. This new building is expected to be completed in 2010. We estimate the annual lease payments (including management fees) to be in the range of $2.0 million to $3.2 million, depending on the amount expended by the lessor on improvements to the building.
Our U.S. subsidiary, AudioCodes Inc., leases a 7,000 square foot facility in San Jose, California. Our subsidiary has additional offices total of 20,000 square foot in Raleigh, Chicago, Boston and Dallas. AudioCodes Inc. also leases a 29,000 square foot facility in Somerset, New Jersey, a 68,000 square foot facility in San Diego, California, and a 20,000 square foot facility in Plano, Texas. The annual lease payments (including management fees) for all our offices in the United States is approximately $1.5 million.
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We believe that these properties are adequate to meet our current needs. We may need to increase the size of our current facilities, seek new facilities, close certain facilities or sublease portions of our existing facilities in order to address our needs in the future.
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| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None.
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| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
Statements in this Annual Report concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; product introductions and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are “forward-looking statements” as that term is defined under the United States Federal securities laws. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under “Risk Factors” in this Annual Report, as well as those discussed elsewhere in this Annual Report and in our other filings with the Securities and Exchange Commission.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or US GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the time that they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented.
On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition and allowance for sales returns, allowance for doubtful accounts, inventories, investment in an affiliated companies, goodwill and income taxes and valuation allowance. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See Note 2 to the Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by US GAAP.
Management believes the significant accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements and are the most critical to aid in fully understanding and evaluating AudioCodes’ reported financial results include the following:
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| • | Revenue recognition and allowance for sales returns; |
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| • | Allowance for doubtful accounts; |
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| • | Inventories; |
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| • | Marketable securities; |
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| • | Business combinations; |
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| • | Intangible assets; |
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| • | Goodwill; |
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| • | Income taxes and valuation allowance; and |
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| • | Stock-based compensation. |
Revenue Recognition and Allowance for Sales Returns
We generate our revenues primarily from the sale of products. We sell our products through a direct sales force and sales representatives. Our customers include original equipment manufacturers (OEMs), network equipment providers, systems integrators and distributors in the telecommunications and networking industries, all of whom are considered end users.
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: (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred, (iii) the fee is fixed or determinable and (iv) collectability is probable. We have no obligation to customers after the date on which products are delivered, other than pursuant to warranty obligations and any applicable right of return. We generally grant our customers the right of return or the ability to exchange a specific percentage of the total price paid for products they have purchased over a period of three months for other products.
We maintain a provision for product returns and exchanges. This provision is based on historical sales returns, analysis of credit memo data and other known factors. This provision amounted to $545,000 in 2005, $636,000 in 2006 and $559,000 in 2007.
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.
Allowance for Doubtful Accounts
Our trade receivables are derived from sales to customers located primarily in the Americas, the Far East, Israel and Europe. We perform ongoing credit evaluations of our customers and to date have not experienced any material losses from uncollected receivables. An allowance for doubtful accounts is determined with respect to those amounts that we have determined to be doubtful of collection. We usually do not require collateral on trade receivables because most of our sales are to large and well-established companies.
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Inventories
Inventories are stated at the lower of cost or market value. Cost is determined using the “moving average cost” method for raw materials and on the basis of direct manufacturing costs for finished products. We periodically evaluate 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 are provided to cover risks arising from slow moving items, technological obsolescence, excess inventories, discontinued products and for market prices lower than cost. We wrote-off inventory in a total amount of $1.8 million in 2005, $1.9 million in 2006 and $700,000 in 2007.
Marketable Securities
We account for investments in marketable debt securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). Management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date.
Debt securities are classified as held-to-maturity since we have 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. Any amortization and interest is included in the consolidated statement of income as financial income or expense, as appropriate. The accrued interest on short-term and long-term marketable securities is included in the balance of short-term marketable securities.
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Business Combinations
In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We engage third-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include, but are not limited to, the following: future expected cash flows from product sales, maintenance agreements, customer contracts and acquired developed technologies and patents and estimated cash flows from the projects when completed; the acquired company’s brand and market position as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates, relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as operating expenses, if otherwise.
In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation.
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Intangible assets
As a result of our previous acquisitions, our balance sheet includes acquired intangible assets, such as goodwill and current technology, in the aggregate amount of approximately $131 million as of December 31, 2006 and $130 million as of December 31, 2007. In the course of the analysis and valuation of intangible assets, we use financial and other information, including financial projections and valuations provided by third parties. Although we evaluate our intangible assets when there is an indication of impairment, our projections are based on the information available at the respective valuation dates, and may differ from actual results.
In accordance with SFAS No. 144, as of December 31, 2007, no impairment losses were recorded.
Goodwill
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) goodwill acquired in a business combination that closes on or after July 1, 2001 is deemed to have indefinite life and will not be amortized. SFAS 142 requires goodwill to be tested for impairment on adoption and at least annually thereafter or between annual tests in certain circumstances, and impaired, rather than being amortized as previous accounting standards required.
As of December 31, 2007, we had total goodwill of $120 million on our balance sheet. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. The fair value was determined based on the Company’s fair value. As of December 31, 2007 no impairment losses were identified.
Income Taxes and Valuation Allowance
As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure, which is accrued as taxes payable, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets, which are included within our consolidated balance sheet. We may record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
Although we believe that our estimates are reasonable, there is no assurance that the final tax outcome and the valuation allowance will not be different than those which are reflected in our historical income tax provisions and accruals.
We have filed or are in the process of filing federal, state and foreign tax returns that are subject to audit by the respective tax authorities. Although the ultimate outcome is unknown, we believe that adequate amounts have been provided for and any adjustments that may result from tax return audits are not likely to materially adversely affect our consolidated results of operations, financial condition or cash flows.
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In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized under SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest and penalties, and disclosure. On January 1, 2007, we adopted FIN 48. The initial application of FIN 48 to our tax positions had no effect on our Shareholders’ equity.
Stock-based Compensation
Effective January 1, 2006, we began accounting for stock-based compensation in accordance with Statement of Financial Accounting Statements Standards No. 123R-”Share-Based Payments”. We utilize the Black-Scholes option pricing model to estimate the fair value of stock-based compensation at the date of grant. The Black-Scholes model requires subjective assumptions regarding dividend yields, expected volatility, expected life of options and risk-free interest rates. These assumptions reflect management’s best estimates. Changes in these inputs and assumptions can materially affect the estimate of fair value and the amount of our stock-based compensation expenses. We recognized $8.7 million of stock-based compensation expense in 2006 and $8.0 million of stock-based compensation expense in 2007. As of December 31, 2007, there was approximately $8.0 million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements granted by us. As of December 31, 2007, that expense is expected to be recognized over a weighted-average period of 1.5 years.
You should read this discussion with the consolidated financial statements and other financial information included in this Annual Report.
Overview
We design, develop and market enabling technologies and system products for the transmission of voice, data, fax and multimedia communications over packet networks, which we refer to as the new voice infrastructure. Our products enable our customers to build high-quality packet networking equipment and network solutions and provide the building blocks to connect traditional telephone networks to the new voice infrastructure, as well as connecting and securing multimedia communication between different packet-based networks. Our products are sold primarily to leading original equipment manufacturers, or OEMs, system integrators and network equipment providers in the telecommunications and networking industries. We have continued to broaden our offerings, both from internal development and through acquisitions, as we have expanded in the last few years from selling chips to boards, subsystems, media gateway systems, media servers, session border controllers and messaging platforms.
Our headquarters and R&D facilities are located in Israel with R&D extensions in the U.S. and in the U.K. We have other offices located in Europe, the Far East, and Latin America.
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Effective January 1, 2006, we account for stock-based compensation in accordance with Statement of Financial Accounting Statements Standards No. 123R-”Share-Based Payments”. SFAS No. 123(R) requires the fair value of all equity-based awards granted to employees to be recognized in financial statements beginning in the first quarter of 2006. The result is that we are required to record an expense with respect to stock option grants, even if the exercise price of the stock options is equal to the market price of the underlying shares on the date of grant. The adoption of SFAS No. 123(R) had a material adverse affect on our results of operations in 2006 and 2007, as we recognized $8.7 million of stock-based compensation expense in 2006 and $8.0 million of stock-based compensation expense in 2007.
Nortel Networks accounted for 16.3% of our total revenues in 2005, 15.2% of our revenues in 2006 and 17.0% of our revenues in 2007. Our top five customers accounted for 31.1% of our revenues in 2005, 29.1% of our revenues in 2006 and 32.8% of our revenues in 2007. Based on our experience, we expect that our largest customers may change from period to period. If we lose a large customer and fail to add new customers to replace lost revenue our operating results may be materially adversely affected.
Revenues based on the location of our customers for the last three fiscal years are as follows:
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| | 2005 | | 2006 | | 2007 | |
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Americas | | | 57.5 | % | | 56.6 | % | | 56.6 | % |
Far East | | | 12.5 | | | 12.8 | | | 11.2 | |
Europe | | | 19.4 | | | 22.2 | | | 25.5 | |
Israel | | | 10.6 | | | 8.4 | | | 6.7 | |
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Total | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
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The increase in the percentage of our revenues in 2006 and 2007 from customers located in Europe was due to demand from service providers and system integrators in Europe increasing at a higher rate compared to the other locations.
Part of our strategy over the past few years has involved the acquisition of complementary businesses and technologies. We continued implementation of this strategy with three additional acquisitions in the past two years. In July, 2006, we completed the acquisition of Nuera (merged into AudioCodes Inc. as of December 31, 2007). Nuera provides Voice over Internet Protocol infrastructure solutions for broadband and long distance networks. This transaction is significantly larger than our other acquisitions and investments to date. Nuera became a wholly-owned subsidiary of AudioCodes Inc. and, accordingly, its results of operations have been included in our consolidated financial statements since the acquisition date. We cannot be sure that we will be successful in integrating Nuera’s products, employees and operations into our organization or that we will be able to operate Nuera’s business in a profitable manner.
In August 2006, we acquired Netrake (merged into AudioCodes Inc. as of December 31, 2007), a provider of session border controller, or SBC, and security gateway solutions. SBCs enable connectivity, policies and security for real-time media sessions, such as VoIP, video or fax, between public or private IP networks. Security gateways enable secure real-time sessions across wifi, broadband and wireless networks in field mobile convergence deployments.
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In April 2007, we completed the acquisition of CTI Squared. CTI Squared is a provider of enhanced messaging and communications platforms deployed globally by service providers and enterprises. CTI Squared’s platforms integrate data and voice messaging services over internet, intranet, PSTN, cellular, cable and enterprise networks.
We believe that prospective customers generally are required to make a significant commitment of resources to test and evaluate our products and to integrate them into their larger systems. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new communications equipment. For these reasons, the sales cycles of our products to new customers are often lengthy, averaging approximately six to twelve months. As a result, we may incur significant selling and product development expenses prior to generating revenues from sales.
The currency of the primary economic environment in which our operations are conducted is the U.S. dollar, and as such, we use the dollar as our functional currency. Transactions and balances originally denominated in dollars are presented at their original amounts. All transaction gains and losses from the remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations as financial income or expenses, as appropriate.
The demand for Voice over IP, or VoIP, technology has increased during the last three years. In recent 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 developed countries, traditional and alternative service providers adopt bundled triple play (voice, video and data) and quadruple play (voice, video, data and mobile) offerings. This trend, enabled by voice and multimedia over IP, has fueled competition among cable, wireline, ISP and mobile operators, increasing the pressure for adopting and deploying VoIP networks. In addition, underdeveloped markets without basic wire line service in countries such as China and India and certain countries in Eastern Europe are adopting the use of VoIP technology to deliver voice and data services that were previously unavailable.
Results of Operations
The following table sets forth the percentage relationships of certain items from our consolidated statements of operations, as a percentage of total revenues for the periods indicated:
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| | Year Ended December 31, | |
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Statement of Operations Data: | | 2005 | | 2006 | | 2007 | |
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Revenues | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of revenues | | | 40.6 | | | 41.6 | | | 43.7 | |
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Gross profit | | | 59.4 | | | 58.4 | | | 56.3 | |
Operating expenses: | | | | | | | | | | |
Research and development, net | | | 21.1 | | | 24.0 | | | 25.7 | |
Selling and marketing | | | 22.4 | | | 25.6 | | | 27.1 | |
General and administrative | | | 5.2 | | | 5.9 | | | 6.1 | |
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Total operating expenses | | | 48.7 | | | 55.5 | | | 58.9 | |
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Operating income | | | 10.7 | | | 2.9 | | | (2.6 | ) |
Financial income, net | | | 2.1 | | | 2.6 | | | 1.7 | |
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Income (loss) before taxes on income | | | 12.8 | | | 5.5 | | | (0.9 | ) |
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Taxes on income | | | 0.7 | | | 0.2 | | | 0.8 | |
Equity in losses of affiliated companies, net | | | 0.6 | | | 0.6 | | | 0.7 | |
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Net income (loss) | | | 11.6 | % | | 4.7 | % | | (2.4 | )% |
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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues. Revenues increased 7.4% to $158.2 million in 2007 from $147.4 million in 2006. The increase in revenues was primarily due to an increase in revenues from our networking business. Our results of operation include CTI Squared beginning in April 2007, Nuera beginning in July 2006 and Netrake beginning in August 2006.
Gross Profit. Cost of revenues includes the manufacturing cost of hardware, quality assurance, overhead related to manufacturing activity and technology licensing fees payable to third parties. Gross profit increased to $89.1 million in 2007 from $86.1 million in 2006. Gross profit as a percentage of revenues decreased to 56.3% in 2007 from 58.4% in 2006. The decrease in our gross profit percentage was primarily attributable to amortization expenses in 2007 related to the acquisitions of CTI Squared during the second quarter of 2007 and Nuera and Netrake during the third quarter of 2006. Amortization expense allocated to cost of revenues amounted to $2.5 million in 2007 and $1.2 million in 2006. The decrease in gross profit percentage was partially offset by the higher sales volume that allowed us to leverage our manufacturing overhead over a larger sales base. The decrease in gross profit percentage was also offset by a reduction in manufacturing costs which was primarily due to a reduction in our raw material costs.
Research and Development Expenses. Research and development expenses consist primarily of compensation and related costs of employees engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors. Research and development expenses increased 14.9% to $40.7 million in 2007, from $35.4 million in 2006 and increased as a percentage of revenues to 25.7% in 2007 from 24.0% in 2006. The increase in net research and development expenses, both on an absolute and a percentage basis, was primarily due to our research and development personnel resulting from the acquisitions of CTI Squared in the second quarter of 2007 and the acquisitions of Nuera and Netrake during the third quarter of 2006. We expect that research and development expenses will continue to increase in absolute dollar terms in 2008 as a result of our continued development of new products, as well as the inclusion of CTI Squared for a full year.
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Selling and Marketing Expenses. Selling and marketing expenses consist primarily of compensation for selling and marketing personnel, as well as exhibition, travel and related expenses. Selling and marketing expenses increased 13.9% in 2007 to $42.9 million from $37.7 million in 2006. As a percentage of revenues, selling and marketing expenses increased to 27.1% in 2007 from 25.6% in 2006. The increase in selling and marketing expenses was due to an increase in selling and marketing personnel and amortization expenses as a result of the acquisitions of CTI Squared, Nuera and Netrake. Amortization expense allocated to sales and marketing amounted to $1.0 million in 2007 and $522,000 in 2006. We expect that selling and marketing expenses will continue to increase in absolute dollar terms as a result of an expected increase in our sales force and marketing activities, as well as the inclusion of CTI Squared for a full year.
General and Administrative Expenses. General and administrative expenses consist primarily of compensation for finance, human resources, general management, rent, network and bad debt reserve, as well as insurance and professional services expenses. General and administrative expenses increased 9.9% to $9.6 million in 2007 from $8.8 million in 2006. As a percentage of revenues, general and administrative expenses increased to 6.1% in 2007 from 5.9% in 2006. The increase in general and administrative expenses was due to consolidating the expenses of our Nuera and Netrake subsidiaries, which were acquired in July 2006 and August 2006, and consolidating the expenses of our CTI Squared subsidiary, which was acquired in April 2007. We expect that general and administrative expenses will increase in absolute dollar terms to support our expected growth.
Financial Income, Net. Financial income consists primarily of interest derived on cash and cash equivalents, short-term and long-term marketable securities, short-term and long-term bank deposits and structured notes, net of interest accrued in connection with our senior convertible notes and bank charges. Financial income, net, in 2007 was $2.7 million compared to $3.8 million in 2006. The decrease in financial income, net in 2007 was primarily due to lower interest rates and interest income, net, on the remaining net proceeds from our sale of senior convertible notes in November 2004.
Taxes on Income. Taxes on Income were $1.3 million in 2007 compared to approximately $289,000 in 2006. The increase is principally attributable to a decrease in our deferred tax asset.
Equity in Losses of Affiliated Companies, Net. Equity in losses of affiliated companies, net was $1.1 million in 2007 compared to $916,000 in 2006.
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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues. Revenues increased 27.2% to $147.4 million in 2006 from $115.8 million in 2005. The increase in revenues was primarily due to an increase of $16.7 million in sales in the United States and an increase of $10.7 million in sales in Europe. Our results of operation include Nuera beginning in July 2006 and Netrake beginning in August 2006. Our increase in revenues in 2006 also reflected the increased interest and activity in the market for packet-based VoIP products.
Gross Profit. Cost of revenues includes the manufacturing cost of hardware, quality assurance, overhead related to manufacturing activity and technology licensing fees payable to third parties. Gross profit increased to $86.1 million in 2006 from $68.8 million in 2005. Gross profit as a percentage of revenues decreased to 58.4% in 2005 from 59.4% in 2005. The decrease in our gross profit percentage was primarily attributable to amortization expenses in 2006 related to the acquisitions of Nuera and Netrake during the third quarter of 2006. Amortization expense allocated to cost of revenues amounted to $1.2 million in 2006. The decrease in our gross margin was also due to expenses related to equity-based compensation resulting from the adoption of SFAS 123(R). Equity-based compensation expenses allocated to cost of revenues amounted to $620,000 in 2006. The decrease in gross profit percentage was partially offset by the higher sales volume that allowed us to leverage our manufacturing overhead over a larger sales base. The decrease in gross profit percentage was also offset by a reduction in manufacturing costs which was primarily due to a reduction in our raw material costs.
Research and Development Expenses. Research and development expenses consist primarily of compensation and related costs of employees engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors. Research and development expenses increased 45.1% to $35.4 million in 2006, from $24.4 million in 2005 and increased as a percentage of revenues to 24.0% in 2006 from 21.1% in 2005. The increase in net research and development expenses, both on an absolute and a percentage basis, was primarily due to expenses related to equity-based compensation resulting from the adoption of SFAS 123(R). Equity-based compensation expenses allocated to research and development expenses amounted to $3.1 million in 2006. The increase in research and development expenses was also due to additions to our research and development personnel resulting from the acquisitions of Nuera and Netrake during the third quarter of 2006. We expect that research and development expenses will continue to increase in absolute dollar terms in 2007 as a result of our continued development of new products, as well as the inclusion of Nuera and Netrake for a full year and the inclusion of CTI Squared beginning in April 2007.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of compensation for selling and marketing personnel, as well as exhibition, travel and related expenses. Selling and marketing expenses increased 45.2% in 2006 to $37.7 million from $25.9 million in 2005. As a percentage of revenues, selling and marketing expenses increased to 25.6% in 2006 from 22.4% in 2005. The increase in selling and marketing expenses, on an absolute and a percentage basis, was primarily due to expenses related to equity-based compensation resulting from the adoption of SFAS 123(R). Equity-based compensation expenses allocated to selling and marketing expenses amounted to $3.6 million in 2006. The increase in selling and marketing expenses was also due to an increase in selling and marketing personnel and amortization expenses as a result of the acquisitions of Nuera and Netrake. Amortization expense allocated to sales and marketing amounted to $ 522 thousands in 2006. We expect that selling and marketing expenses will continue to increase in absolute dollar terms as a result of an expected increase in our sales force and marketing activities, as well as the inclusion of Nuera and Netrake for a full year and the inclusion of CTI Squared beginning in April 2007.
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General and Administrative Expenses. General and administrative expenses consist primarily of compensation for finance, human resources, general management, rent, network and bad debt reserve, as well as insurance and professional services expenses. General and administrative expenses increased 46.0% to $8.8 million in 2006 from $6.0 million in 2005. As a percentage of revenues, general and administrative expenses increased to 5.9% in 2006 from 5.2% in 2005. The increase in general and administrative expenses, both on an absolute and a percentage basis, in 2006 was primarily the result of expenses related to equity-based compensation resulting from the adoption of SFAS 123(R). Equity-based compensation expenses allocated to general and administrative expenses amounted to $1.4 million in 2006. The increase in general and administrative expenses was also due to consolidating the expenses of our Nuera and Netrake subsidiaries, which were acquired in July 2006 and August 2006. We expect that general and administrative expenses will increase in absolute dollar terms to support our expected growth, as well as the inclusion of Nuera and Netrake for a full year and the inclusion of CTI Squared beginning in April 2007.
Financial Income, Net. Financial income consists primarily of interest derived on cash and cash equivalents, short-term and long-term marketable securities, short-term and long-term bank deposits and structured notes, net of interest accrued in connection with our senior convertible notes and bank charges. Financial income, net, in 2006 was $3.8 million compared to $2.5 million in 2005. The increase in financial income, net in 2006 was primarily due to higher interest rates and interest income, net, on the remaining net proceeds from our sale of senior convertible notes in November 2004.
Taxes on Income. Our effective tax rate was 4.0% in 2006 and 5.6% in 2005. These relatively low tax rates were mainly the result of the utilization of net operating losses and the Approved Enterprise status granted to our production facilities in Israel.
Equity in Losses of Affiliated Companies, Net. Equity in losses of affiliated companies, net were $916,000 in 2006 compared to $693,000 in 2005. We believe that the products being developed by affiliated companies may enable us to enter new markets and to offer new products.
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 majority 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.
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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
% | |
| | | | | | | | |
| | | | | | | | | | | | | |
2005 | | | 2.4 | | | | 6.8 | | | | (4.4 | ) | |
2006 | | | (0.1 | ) | | | (8.2 | ) | | | 8.1 | | |
2007 | | | 3.4 | | | | (9.0 | ) | | | 12.4 | | |
| | | | | | | | | | | | | |
Five months
ended May 31,
2008 | | | 2.2
| | | | (15.9
| )
| | | 18.2
| | |
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Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for us beginning January 1, 2008. The FASB issued a FASB Staff Position (FSP 157-2) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not expect that the adoption of SFAS No. 157 will have material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for us beginning in the first quarter of fiscal year 2008. We have determined that the adoption of SFAS 159 will not have an impact on our consolidated financial statements since we have not elected the fair value option for any of our existing assets or liabilities as of FAS 159 effective date.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS 141R could have a material effect on our consolidated financial statements if we were to enter into a business combination after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of the provisions of Statement No. 160 is not anticipated to materially impact our consolidated financial position and results of operations.
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In December, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110), which, effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), Share-Based Payment. Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of the option. The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available.
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B. | LIQUIDITY AND CAPITAL RESOURCES |
We have financed our operations for the last three years, from our sale of convertible notes, as well as with cash from operations in those years. 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. 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. The notes may be redeemed by us, in whole or in part at any time on or after November 9, 2009. The holders may require us to redeem the notes on November 9, 2009, November 9, 2014 or November 9, 2019, or upon certain fundamental changes.
As of December 31, 2007, we had $143.0 million in cash and cash equivalents, short-term and long-term marketable securities, short-term and long-term bank deposits and structured notes, an increase of approximately $9.4 million from $133.6 million at December 31, 2006. During 2007, we used $4.9 million of cash in connection with our acquisition of CTI Squared. We used an additional $5.0 million of cash in February 2008 in connection with our acquisition of CTI Squared.
In January 2008, our Board approved a program to repurchase up to 4,000,000 of our ordinary shares. Purchases will be made from time-to-time at the discretion of management subject, among other things, to our share price and market conditions. If management elects to have us purchase our shares, we will use a portion of our cash to effect these purchases. As of May 31, 2008, we had repurchased 2.3 million shares at an aggregate cost of $9.1 million.
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Our operating activities provided cash in the amount of $12.4 million in 2007, primarily due to a decrease of $5.0 million in trade receivables and non-cash charges of $8.0 million for stock-based compensation and $7.8 million for depreciation and amortization, offset, in part, by our net loss and a decrease of $5.1 million in trade and other payables and an increase of $2.6 million in inventories. Our operating activities provided cash in the amount of $6.6 million in 2006, primarily due to our net income and non-cash charges of $8.7 million for stock-based compensation and $5.5 million for depreciation and amortization, which were partially offset by an increase of $9.8 million in trade receivables and a decrease of $4.7 million in trade and other payables. Our receivables increased primarily as a result of higher sales volume. Our payables decreased due to repayment of payable balances after the acquisitions of Nuera and Netrake. Our operating activities provided cash in the amount of $13.3 million in 2005, primarily due to our net income and non-cash charges of $3.4 million for depreciation and amortization, which were partially offset by an increase of $3.5 million in trade receivables and $2.0 million in deferred tax assets. Our receivables increased as a result of higher sales volume and our deferred tax assets increased due to the utilization of net operating losses.
In 2007, our investing activities provided cash in the amount of $32.7 million, primarily due to our proceeds from the maturity of marketable securities and structured notes. In 2006, our investing activities used cash in the amount of $61.6 million, primarily due to our investment in Nuera and Netrake, offset in part by the net proceeds from the maturity of bank deposits. 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 2007, financing activities provided $4.8 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 2006, financing activities provided $9.2 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 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 April 2008 we entered into a loan agreement with a bank in Israel that provide for borrowings of up to $15.0 million. The loan bears interest at LIBOR plus 1.5% with respect to $11.5 million of borrowings and LIBOR plus 0.65% with respect to $3.5 million of borrowings. The principal amount borrowed is repayable in 20 equal quarterly payments through May 2013. The bank has a lien on our assets and we are required to maintain $3.5 million of compensating balances with the bank. The agreement requires us, among other things, to maintain shareholders’ equity at specified levels and to achieve certain levels of operating income. The agreement also restricts us from paying dividends. As of June 22, 2008, there was $15.0 million outstanding under this loan agreement.
We anticipate that our operating expenses and acquisitions 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 operating cash requirements for at least the next twelve months. 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 additional 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.
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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, analog and digital media gateways for carrier and enterprise applications, media servers and session border controllers. Our platforms will feature increased trunk capacity, new functionalities, enhanced signaling software and compliance with new control protocols. As of December 31, 2007, 297 of our employees were engaged primarily in research and development on a full-time basis. We also employed 6 employees on a part-time basis.
Our research and development expenses were $40.7 million in 2007 compared to $35.4 million in 2006 and $24.4 million in 2005. 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, 2007, we had obtained grants from the OCS aggregating $3.7 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.
The accelerated demand for VoIP technology has impacted our business during the last few years. Over the past few 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 wire line 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. In addition, the growth in broadband access and related technologies has driven the emergence of alternative service providers. This in turn stimulates competition with incumbent providers, encouraging them to adopt voice over packet technologies. The entry of new industry players and the demand for new equipment have impacted our business in the last few years.
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In 2007, 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 new system level products, and 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.
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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.
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F. | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS |
As of December 31, 2007, 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 | | | | | | | | | | | | | |
Rent and lease commitments | | | 17,587 | | | 4,967 | | | 9,352 | | | 2,242 | | | 1,026 | |
Severance pay fund (1) | | | 1,369 | | | | | | | | | | | | | |
Uncertain tax positions (2) | | | 288 | | | | | | | | | | | | | |
Other commitments | | | 3,096 | | | 3,096 | | | — | | | — | | | — | |
(1) Our obligation for accrued severance pay under Israel’s Severance Pay Law as of December 31, 2007 was $11.2 million. This obligation is payable only upon termination, retirement or death of the respective employee. $9.8 million was funded through deposits into severance pay funds, leaving a net obligation of approximately $1.4 million.
(2) Uncertain income tax position under FASB Interpretation No 48, “Accounting for Uncertainty in Income Taxes, “(“FIN 48”) are due upon settlement and we are unable to reasonably estimate the ultimate amount of timing of settlement. See also Note 13f in our Consolidated Financial Statements for further information regarding the Company’s liability under FIN 48.
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| 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 10, 2008:
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| | | | | | | | |
| Name | | | Age | | | Position | |
| | | | | | | | |
Shabtai Adlersberg | | 55 | | Chairman of the Board, President and Chief Executive Officer |
Nachum Falek | | 37 | | Vice President, and Chief Financial Officer |
Hanan Maoz | | 45 | | Vice President, Business Operations |
Eyal Frishberg | | 50 | | Vice President, Operations |
Eli Nir | | 42 | | Vice President, Research and Development |
Lior Aldema | | 42 | | Vice President, Marketing and Product Management |
Yehuda Hershkovits | | 41 | | Vice President, Systems |
Tal Dor | | 39 | | Vice President, Human Resources |
Gary Drutin | | 47 | | Vice President, Global Sales |
Moshe Tal | | 53 | | Vice President , NA Business Operations |
David E. Perez | | 47 | | Vice President, Sales, Asia Pacific |
Joseph Tenne | | 52 | | Director |
Dr. Eyal Kishon | | 47 | | Director |
Doron Nevo | | 52 | | Director |
Osnat Ronen | | 46 | | 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.
Nachum Falekjoined 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.
Hanan Maozjoined AudioCodes in February 2007 as Vice President of Business Operations. Mr. Maoz has over 17 years of experience in enterprise software sales and operations. From August 2003 until joining AudioCodes in 2007, Mr. Maoz was a Managing Director and Co-Founder of PerformanceSoft Israel, a privately held consulting firm providing corporate performance planning and business monitoring. From June 1996 to June 2003, Mr. Maoz worked for Oracle Corp. (Israel) in a variety of executive sales, alliances and business development positions. Mr. Maoz has an MBA in Finance and a MSc. in Information Technologies, both from the Tel-Aviv University, and is expecting his PhD in Industrial Engineering and Management from Ben-Gurion University.
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Eyal Frishberghas 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 Nirhas 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 Aldemahas 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. Mr. Aldema holds an M.B.A. from Tel Aviv University and a B.Sc. from the Technion.
Yehuda Hershkovitshas 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.
Tal Dorhas 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.
Gary Drutincurrently serves as our VP Global Sales. Mr. Drutin was the Vice President Sales for Europe, Middle East and Latin America from 2005 until 2007 and Vice President of Channel Operations and Marketing from 2004 until 2005. 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.
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Moshe Taljoined us in May 2004 in connection with our acquisition of Ai-Logix, now known as AudioCodes Inc. and serves as the President and CEO of our AudioCodes USA subsidiary (now called AudioCodes Inc.). 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.
David E. Perezjoined 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. Commencing in 2008, Mr. Perez serves as a director of Ramdor Systems Ltd., an Israeli public company traded on the Tel-Aviv Stock Exchange offering hosted software application solutions. 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 Tennehas 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. Since January 2006, Mr. Tenne has served as the Chief Financial Officer of Ormat Industries Ltd., an Israeli holding company listed on the Tel-Aviv Stock Exchange and the parent company of Ormat Technologies, Inc. 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.
Dr. Eyal Kishonhas 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. Prior to that, Dr. Kishon served as Chief Technology Officer at Yozma Venture Capital from 1992 to 1993. Dr. Kishon serves as a director of Allot Communications Ltd and Celtro Inc. 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 – Israel Institute of Technology and an M.Sc. and a Ph.D. in Computer Science from New York University.
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Doron Nevohas served as one of our directors since 2000. Mr. Nevo is President and CEO of KiloLambda Technologies Ltd., an optical subsystems company, which he co-founded in 2001. From 1999 to 2001, Mr. Nevo was involved in fund raising activities for Israeli-based startup companies. 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 telecom service provider in Israel. He also serves on the board of a number of companies, including Utility Wireless Corp. (a manufacturer of radio frequency sub-systems), Elcom Technologies (manufacturer of Satcom and digital radio synthesizers), Notox, Ltd. (a biotech company), BioCancell, Inc. and Bank Adanim. Mr. Nevo holds a B.Sc. in Electrical Engineering from the Technion – Israel Institute of Technology and an M.Sc. in Telecommunications Management from Brooklyn Polytechnic.
Osnat Ronenhas served as one of our directors since December 2007. Ms. Ronen has been the Deputy Chief Executive Officer of Leumi & Co. Investment House, the private equity investment arm and investment banking services arm of the Leumi Group, since 2001. Prior to this position, she was Deputy Head of the Subsidiaries Division of Leumi Group from 1999 until 2001. Ms. Ronen joined Viola PE, in January 2008. Ms. Ronen serves as a director of Leumi Leasing and Investments Ltd., National Consultants (Netconsultant) Ltd., Fox-Wizel Ltd., Paz Oil Company Ltd. and Keshet Broadcasting Ltd. Ms. Ronen received an M.B.A. degree and a B.Sc degree in mathematics and computer science from the Tel Aviv University.
The aggregate direct remuneration paid to the 15 persons who served in the capacity of director or senior executive officer during the year ended December 31, 2007 was approximately $2.7 million, including approximately $269,000 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 options are generally exercisable in three or five equal annual installments, commencing one year from the date of grant.
A summary of our stock option activity and related information for the years ended December 31, 2005, 2006 and 2007 for the 15 persons who served in the capacity of director or senior executive officer during the year ended December 31, 2007 is as follows:
| | | | | | | | | | | | | | | | | | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
| | 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 | | | 1,999,435 | | $ | 9.01 | | | 2,006,685 | | $ | 9.06 | | | 2,071,835 | | $ | 9.42 | |
Adjustments to opening balance | | | 42,500 | | | | | | (44,000 | ) | | | | | (194,566 | ) | | | |
Granted | | | 60,000 | | $ | 10.17 | | | 220,000 | | $ | 10.33 | | | 352,500 | | $ | 6.42 | |
Cancelled | | | — | | | | | | (20,000 | ) | | | | | (176,000 | ) | | | |
Exercised | | | (5,250 | ) | $ | 3.77 | | | (90,850 | ) | $ | 5.02 | | | (16,500 | ) | $ | 2.31 | |
| | | | | | | | | | | | | |
|
Outstanding at the end of the year | | | 2,006,685 | | $ | 9.06 | | | 2,071,835 | | $ | 9.42 | | | 2,037,269 | | $ | 7.54 | |
| | | | | | | | | | | | | |
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As of December 31, 2007, options to purchase 1,342,081 ordinary shares were exercisable by the 15 persons who served as an officer or director during 2007 at an average exercise price of $6.79 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.
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, 1999, or the Companies Law, relating to such matters as outside directors, the audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoing listing conditions of the Nasdaq Global Select Market and other relevant provisions of U.S. securities laws. Under the Nasdaq rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable Nasdaq requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. We have elected to follow the Companies Law with respect to the corporate approvals required to adopt or amend equity incentive plans and the distribution of annual reports to shareholders, rather than comply with the relevant Nasdaq requirements. 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.
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, Dr. Eyal Kishon and Osnat Ronen are our outside directors. Under the requirements for listing on the Nasdaq Global Select Market, we are required to have a majority of our directors be independent as defined by Nasdaq rules. Doron Nevo, Dr. Eyal Kishon, Osnat Ronen and Joseph Tenne are independent directors for purposes of the Nasdaq rules.
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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 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 directors are required to possess “financial and accounting expertise” or “professional expertise,” as these terms are defined in regulations promulgated under the Companies Law. Joseph Tenne is designated as the audit committee’s financial expert. This requirement does not apply to outside directors elected prior to January 2006.
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 additional three-year terms. An outside director can be removed from office only under very limited circumstances. All of the outside directors must serve on a company’s statutory audit committee and each other committee of a company’s board of directors is required to include at least one outside director. If, at the time an outside director is elected, all current members of the board of directors are of the same gender, then the elected outside director must be of the other gender.
Under the Companies Law and the requirements for listing on the Nasdaq Global Select 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, Joseph Tenne and Osnat Ronen. Our Board of Directors has determined that Joseph Tenne is an “audit committee financial expert” and that all members of the Audit Committee are independent under the applicable Securities and Exchange Commission and Nasdaq 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.
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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.
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 Osnat Ronen. All members of the Nominating Committee are independent under the applicable Securities and Exchange Commission and Nasdaq 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 Joseph Tenne to serve on the compensation committee of the board of directors.
Pursuant to our articles of association, our directors, other than our outside directors, are 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:
| | | | | |
| Vacant | | Class I | | 2010 |
| Joseph Tenne | | Class II | | 2008 |
| Shabtai Adlersberg | | Class III | | 2009 |
We currently do not have a Class I director.
Our outside directors under the Companies Law, Doron Nevo, Dr. Eyal Kishon and Osnat Ronen, are not members of any class and serve in accordance with the provisions of the Companies Law. Mr. Nevo’s term ends in 2009, Dr. Kishon’s term ends in 2008, and Ms. Ronen’s term ends in 2010.
We had the following number of employees as of December 31, 2005, 2006 and 2007 in the areas set forth in the table below:
| | | | | | | | | | |
| | As of December 31, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
Research and development | | | 233 | | | 312 | | | 296 | |
Sales & marketing, technical service & support | | | 186 | | | 240 | | | 249 | |
Operations | | | 73 | | | 102 | | | 99 | |
Management and administration | | | 30 | | | 47 | | | 44 | |
| | | | | | | |
| | | 522 | | | 701 | | | 688 | |
| | | | | | | |
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Our employees were located in the following areas as of December 31, 2005, 2006 and 2007.
| | | | | | | | | | |
| | As of December 31, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
Israel | | | 373 | | | 416 | | | 425 | |
United States | | | 124 | | | 234 | | | 197 | |
Europe | | | 5 | | | 25 | | | 29 | |
Far East | | | 17 | | | 22 | | | 31 | |
Latin America | | | 3 | | | 4 | | | 6 | |
| | | | | | | |
| | | 522 | | | 701 | | | 688 | |
| | | | | | | |
The growth in the number of our employees in 2006 was primarily attributable to our acquisitions of Nuera, now part of AudioCodes Inc., and Netrake, now part of AudioCodes Inc. The decrease in the number of employees in 2007 was primarily attributable to our cost reduction plan implemented in 2007, partially offset by the employees added as a result of our acquisition of CTI Squared Ltd.
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, which include payments for national health insurance. The payments to the National Insurance Institute currently range from approximately 5% to 17% of wages up to specified wage levels, of which the employee contributes approximately 65% and the employer contributes approximately 35%.
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 Minister of Industry, Trade and Labor. 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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Pursuant to a recent order issued in December 2007 by the Israeli Minister of Industry, Trade and Labor, new provisions relating to pension arrangements in the collective bargaining agreements between the Histadrut and the Coordination Bureau of Economic Organizations will apply to all employees in Israel, including our employees. 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.
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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 10, 2008.
| | | |
Name | Total Shares
Beneficially
Owned | Percentage of
Ordinary Shares | Number of
Options |
Shabtai Adlersberg | 5,342,762 | 13.8 | 533,718 |
Nachum Falek | * | | * |
Hanan Maoz | * | | * |
Eyal Frishberg | * | | * |
Eli Nir | * | | * |
Lior Aldema | * | | * |
Yehuda Hershkovitz | * | | * |
Tal Dor | * | | * |
Gary Drutin | * | | * |
Moshe Tal | * | | * |
David E. Perez | * | | * |
Joseph Tenne | * | | * |
Dr. Eyal Kishon | * | | * |
Doron Nevo | * | | * |
Osnat Ronen | * | | * |
|
*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 10, 2008.
| | | | | | |
Number of
Options | Grant Date | Exercise
Price | Exercised | Cancelled | Vesting | Expiration Date |
|
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 |
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 | — | — | 5 years | September 23, 2011 |
Employee Share Plans
We have Employee Share Purchase Plans 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.
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Employee Share Purchase Plans
We implemented two Employee Share Purchase Plans in May 2001. One plan, the global plan, was for our non-U.S., employees and the other our U.S. employees. We amended and restated the global plan in July 2007 and adopted an additional plan for U.S. employees in July 2007. Under these Plans, a maximum of 6,500,000 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, 2007, we had issued 1,940,323 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, 2007, options to purchase a total of 5,723,072 shares are outstanding under the 1997 and 1999 Israeli Plans and options to purchase a total of 1,668,188 shares are outstanding under the 1997 U.S. Plan. In addition, a reserve of 970,620 shares has been made available for grant under the 1999 Israeli Plan and a reserve of 1,120,250 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 current practice of our board of directors is to grant options with exercise prices that equal 100% of the closing price of our ordinary shares on the applicable date of grant.
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| | |
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| | |
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 May 31, 2008, 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) | 5,766,480 | 13.9% |
Leon Bialik(2) | 4,030,882 | 9.8% |
Soros Fund Management LLC(3) | 4,937,043 | 10.7% |
FMR Corp.(4) | 2,969,427 | 7.1% |
Rima Management, LLC(5) | 2,382,113 | 5.8% |
All directors and senior executive officers as a group (15 persons)(6) | 6,808,593 | 16.0% |
| |
| |
|
(1) | Includes options to purchase 423,718 shares, exercisable within sixty days of December 31, 2008. |
|
(2) | The information is derived from a statement on Schedule 13G/A, dated February 12, 2008 of Leon Bialik filed with the Securities and Exchange Commission. |
|
(3) | The information is derived from a statement on Schedule 13G, dated February 19, 2008, of Soros Fund Management LLC, George Soros, Robert Soros and Jonathan Soros filed with the Securities and Exchange Commission. All of the shares beneficially owned are issuable upon conversion of our senior convertible notes held by Soros Fund Management. |
|
(4) | The information is derived from the joint statement on Schedule 13G/A, dated February 14, 2008, of FMR Corp., Edward C. Johnson 3d and Fidelity Management & Research Company filed with the Securities and Exchange Commission. The shares beneficially owned include 534,474 shares issuable upon conversion of our senior convertible notes held by FMR. |
|
(5) | The information is derived from a statement on Schedule 13G, dated May 28, 2008, of Rima Management, LLC and Richard Mashaal filed with the Securities and Exchange Commission. |
|
(6) | Includes 1,465,831 ordinary shares which may be purchased pursuant to options exercisable within sixty days following May 31, 2008. |
Mr. Adlersberg held 13.9% of our ordinary shares as of December 31, 2007, as compared to 13.1% of our ordinary shares as of December 31, 2006 and 13.3% of our ordinary shares as of December 31, 2005.
Mr. Bialik held 9.8% of our ordinary shares as of December 31, 2007 as compared to 9.6% of our ordinary shares as of December 31, 2006 and 9.9% of our ordinary shares as of December 31, 2005.
Soros Fund Management LLC benecially owned 10.7% our ordinary shares as of February 14, 2008 and 10.6% of our ordinary shares as of December 31, 2007 (in each case issuable upon conversion of our senior convertible notes), and less than 5.0% of our ordinary shares as of December 31, 2006 and 2005.
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FMR Corp. held 7.1% of our ordinary shares as of December 31, 2007 (including shares issuable upon conversion of our senior convertible notes), as compared to 6.4% of our ordinary shares as of December 31, 2006 and 14.2% of our ordinary shares as of December 31, 2005.
Kern Capital held 5.5% of our ordinary shares as of December 31, 2006 and 6.9% of our ordinary shares as of December 31, 2005. As of December 31, 2007, Kern Capital ceased to be a beneficial owner of more than 5.0% of our ordinary shares.
Rima Management, LLC held 5.8% of our ordinary shares as of May 28, 3008 and less than 5.0% of our ordinary shares as of December 31, 2007, 2006 and 2005.
As of May 31, 2008, there were approximately 22 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.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
| | |
| ITEM 8. | FINANCIAL INFORMATION |
See Item 18.
| | |
| ITEM 9. | THE OFFER AND LISTING |
| | |
A. | OFFER AND LISTING DETAILS |
Our ordinary shares are listed on the Nasdaq Global Select Market and The Tel Aviv Stock Exchange under the symbol “AUDC.”
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The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by the Nasdaq Global Select Market.
| | | | | | | |
Calendar Year | | Price Per Share | |
| | | |
| | High | | Low | |
| | | | | |
2007 | | $ | 10.40 | | $ | 4.55 | |
2006 | | $ | 14.64 | | $ | 8.77 | |
2005 | | $ | 17.00 | | $ | 8.67 | |
2004 | | $ | 16.88 | | $ | 8.48 | |
2003 | | $ | 11.74 | | $ | 2.10 | |
| | | | | | | | |
Calendar Period | | | Price Per Share | |
| | | | |
| | | High | | Low | |
| | | | | | |
2008 | | | | | | | | |
| Second quarter (through June 10, 2008) | | $ | 4.73 | | $ | 3.65 | |
| First quarter | | $ | 5.26 | | $ | 2.50 | |
2007 | | | | | | | | |
| Fourth quarter | | $ | 7.04 | | $ | 4.87 | |
| Third quarter | | $ | 6.59 | | $ | 4.55 | |
| Second quarter | | $ | 7.19 | | $ | 5.01 | |
| First quarter | | $ | 10.40 | | $ | 6.60 | |
2006 | | | | | | | | |
| Fourth quarter | | $ | 11.24 | | $ | 8.77 | |
| Third quarter | | $ | 11.33 | | $ | 9.13 | |
| Second quarter | | $ | 14.33 | | $ | 10.38 | |
| First quarter | | $ | 14.64 | | $ | 11.36 | |
| | | | | | | | |
Calendar Month | | | Price Per Share | |
| | | | |
| | | High | | Low | |
| | | | | | |
2008 | | | | | | | | |
| May | | $ | 4.73 | | $ | 3.90 | |
| April | | $ | 4.29 | | $ | 3.65 | |
| March | | $ | 4.26 | | $ | 3.15 | |
| February | | $ | 5.04 | | $ | 4.16 | |
| January | | $ | 5.26 | | $ | 3.78 | |
2007 | | | | | | | | |
| December | | $ | 5.61 | | $ | 4.87 | |
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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. All share prices shown in the following table are in NIS. As of December 31, 2007, the exchange rate was equal to approximately 3.553 NIS per U.S. $1.00.
| | | | | | | | |
Calendar Year | | | Price Per Share | |
| | | | |
| | | High | | Low | |
| | | | | | |
2007 | | | | NIS 44.00 | | | NIS 18.90 | |
2006 | | | | NIS 66.27 | | | NIS 38.10 | |
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 | |
|
Calendar Period | | | Price Per Share | |
| | | | |
2008 | | | | | | | | |
| Second quarter (through June 10, 2008) | | | NIS 15.62 | | | NIS 12.60 | |
| First quarter | | | NIS 20.20 | | | NIS 10.81 | |
2007 | | | | | | | | |
| Fourth quarter | | | NIS 28.00 | | | NIS 18.90 | |
| Third quarter | | | NIS 27.78 | | | NIS 19.32 | |
| Second quarter | | | NIS 28.66 | | | NIS 22.00 | |
| First quarter | | | NIS 44.00 | | | NIS 27.82 | |
2006 | | | | | | | | |
| Fourth quarter | | | NIS 48.20 | | | NIS 38.10 | |
| Third quarter | | | NIS 45.40 | | | NIS 41.00 | |
| Second quarter | | | NIS 65.27 | | | NIS 47.65 | |
| First quarter | | | NIS 66.27 | | | NIS 50.90 | |
| | | | | | | | |
Calendar Month | | | Price Per Share | |
| | | | |
| | | High | | Low | |
| | | | | | |
2008 | | | | | | | | |
| May | | | NIS 15.62 | | | NIS 13.25 | |
| April | | | NIS 15.14 | | | NIS 12.60 | |
| March | | | NIS 15.65 | | | NIS 10.81 | |
| February | | | NIS 17.69 | | | NIS 15.45 | |
| January | | | NIS 20.20 | | | NIS 14.05 | |
2007 | | | | | | | | |
| December | | | NIS 21.61 | | | NIS 18.90 | |
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| |
B. | PLAN OF DISTRIBUTION |
| |
| Not applicable. |
| |
C. | MARKETS |
Our ordinary shares are listed for trading on the Nasdaq Global 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 |
| |
| Not applicable. |
| |
E. | DILUTION |
| |
| Not applicable. |
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F. | EXPENSES OF THE ISSUE |
| |
| Not applicable. |
| |
| ITEM 10. | ADDITIONAL INFORMATION |
| |
A. | SHARE CAPITAL |
| |
| Not applicable. |
| |
B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
Objects and Purposes
We were incorporated in 1992 under the laws of the State of Israel. 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:
| | |
| • | to plan, develop and market voice signal systems; |
| | |
| • | to purchase, import, market and wholesale and retail distribute, in Israel and abroad, consumption goods and accompanying products; |
| | |
| • | to serve as representatives of bodies, entrepreneurs and companies from Israel and abroad with respect to their activities in Israel and abroad; and |
| | |
| • | to carry out any activity as determined by the lawful management. |
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Share Capital
Our authorized share capital consists of NIS 1,025,000 divided into 100,000,000 ordinary shares, nominal value NIS 0.01 per share, and 2,500,000 preferred shares, nominal value NIS 0.01 per share. As of May 31, 2008, we had 41,158,796 ordinary shares outstanding and no preferred shares outstanding.
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.
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.
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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
Subject to our undertaking to the Tel-Aviv Stock Exchange as described above, 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 75% 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 75% 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.
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.
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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 or 35 days in advance of the meeting. Notice of a meeting of shareholders must also be published in two Israeli newspapers at least five days 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.
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.
Fiduciary Duties; 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.
Duty of care.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. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant information material to these actions.
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Duty of loyalty.The duty of loyalty generally requires an office holder to act in good faith and for the benefit 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. A company may approve any of the acts mentioned above provided that all the following conditions apply: the office holder acted in good faith and neither the act nor the approval of the act prejudices the good of the company, and the office holder disclosed the essence of his or her personal interest in the act, including any substantial fact or document, a reasonable time before the date for discussion of the approval.
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.
Compensation.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.
Disclosure of personal interest.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, as defined in the Companies Law, 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. “Personal interest” does not apply to a personal interest stemming merely from holding shares in the company.
The office holder must make the disclosure of his personal interest no later than the first meeting of the company’s board of directors that discusses the particular transaction. 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”. The Companies Law defines an “extraordinary transaction” as 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, and a “relative” as a spouse, sibling, parent, grandparent, descendent, spouse’s descendant and the spouse of any of the foregoing.
Approvals.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. Our articles of association do not provide otherwise. Such approval must determine that the transaction is not adverse to the company’s interest. If the transaction is an extraordinary transaction, or if it concerns exculpation, indemnification or insurance of an office holder, 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. An office holder who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee generally may not be present at this meeting or vote on this matter unless a majority of the board of directors or the audit committee has a personal interest in the matter. If a majority of the board of directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.
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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.”
Approval of the audit committee, the board of directors and our shareholders, in that order, is required for:
| | |
| • | extraordinary transactions, including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest; and |
| | |
| • | the terms of compensation or employment of a controlling shareholder or his or her relative, as an officer holder or employee of our company. |
The shareholders approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional tests:
| | |
| • | the majority includes at least one-third of the shares voted by shareholders who have no personal interest in the transaction; or |
| | |
| • | the total number of shares, other than shares held by the disinterested shareholders, that voted against the approval of the transaction does not exceed 1% of the aggregate voting rights of our company. |
Under the Companies Law, a shareholder has a duty to act in good faith and in a customary manner towards the company and other shareholders, and to refrain from abusing his or her power in the company, including when voting in a shareholders meeting or in a class meeting on matters such as the following:
| | |
| • | an amendment to our articles of association; |
| | |
| • | an increase in our authorized share capital; |
| | |
| • | a merger; or |
| | |
| • | approval of related party transactions that require shareholder approval. |
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In addition, any controlling shareholder, any shareholder who knows that he or she possesses the power to determine the outcome of a shareholders meeting or a shareholders class meeting and any shareholder who has the power to prevent the appointment of an office holder, is under a duty to act with fairness towards the company. The Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking into account the position in the company of those who breached the duty of fairness.
Insurance, Indemnification and Exculpation of Directors and Officers; Limitations on Liability
Insurance of Office Holders
The Companies Law permits a company, if permitted by its articles of association, to insure an office holder in respect of liabilities incurred by the office holder as a result of:
| | |
| • | the breach of his or her duty of care to the company or to another person, or |
| | |
| • | the breach of his or her duty of loyalty 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 imposed on the office holder in favor of a third party as a result of an act or omission that the office holder committed in connection with his or her serving as an office holder.
Indemnification of Office Holders
Under the Companies Law, a company can, if permitted by its articles of association, 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:
| | |
| • | 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; |
| | |
| • | 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 either: |
| | |
| • | no financial liability was imposed on the office holder in lieu of criminal proceedings, or |
| | |
| • | financial liability was imposed on the office holder in lieu of criminal proceedings but the alleged criminal offense 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 brought against the office holder by the company, on behalf of the company or on behalf of a third party; |
| | |
| • | in a criminal action in which the office holder is found innocent; or |
| | |
| • | in a criminal action in which the office holder is convicted but in which proof of criminal intent is not required. |
A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification, other than legal costs, must be limited to foreseeable events in light of the company’s actual activities when the company undertook such indemnification, and reasonable amounts or standards, as determined by the board of directors.
Exculpation of Office Holders
Under the Companies Law, a company may, if permitted by its articles of association, 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.
Limitations on Exculpation, Insurance and Indemnification
Under the Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.
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. Pursuant to the Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, our office holders must be approved by our audit committee and our board of directors and, if the office holder is a director, also by our shareholders.
We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them to the full extent permitted by law against some types of claims, subject to dollar limits and other limitations. These agreements have 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.
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On July 6, 2006, we completed the acquisition of Nuera, which became our wholly-owned subsidiary. Under the acquisition agreement, Nuera was acquired for a purchase price of $82.5 million in cash, subject to reduction for certain expenses.
On August 14, 2006, we completed the acquisition of Netrake, which became our wholly-owned subsidiary. Under the definitive agreement, Netrake was acquired for a purchase price of $13.8 million in cash.
In April 2007, we acquired the remaining outstanding common stock of CTI Squared Ltd. Prior to this acquisition, we had an investment in CTI Squared in the amount of $1.6 million. In consideration for the acquisition, we paid $4.9 million in cash at the closing of the transaction in April 2007 and committed to pay an additional $5.0 million by April, 2008. In February 2008, we paid the additional amount of $5.0 million.
In April 2008, we entered into a loan agreement with First International Bank of Israel that provides for borrowings in the aggregate amount of $15 million. See Item 5B of this Annual Report on Form 20-F for a summary of the loan agreement.
Non-residents of Israel who own our ordinary shares may freely convert all amounts received in Israeli currency in respect of such ordinary shares, whether as a dividend, liquidation distribution or as proceeds from the sale of the ordinary shares, into freely-repatriable non-Israeli currencies at the rate of exchange prevailing at the time of conversion (provided in each case that the applicable Israeli income tax, if any, is paid or withheld).
Since January 1, 2003, all exchange control restrictions on transactions in foreign currency in Israel have been eliminated, although there are still reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls may be imposed by administrative action at any time.
The State of Israel does not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to subjects of countries that are in a state of war with Israel.
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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
Israeli companies were generally subject to corporate tax at the rate of 29% of their taxable income in 2007. Pursuant to tax reform legislation that came into effect in 2005, the corporate tax rate is to undergo further staged reductions to 25% by the year 2010. In order to implement these reductions, the corporate tax rate in Israel is scheduled to decline to 27% in 2008 and 26% in 2009. However, the effective tax rate payable by a company that derives income from an approved enterprise (as discussed below) may be considerably less.
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 (these limits do not apply to the exemption period). 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).
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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 years and a reduced corporate tax rate of 10% to 25% for an additional period of five 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 (these limits do not apply to the exemption period).
Out of our retained earnings as of December 31, 2007, 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 currently 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.
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 or privileged enterprise will be based, among other things, on the criteria set forth in the Investment Law and related regulations (as amended in April 2005 as described below), 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, 2007, 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 Privileged Enterprise, such as provisions generally requiring that at least 25% of the Privileged 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 granted prior to December 31, 2004 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 as amended, will subject us to taxes upon distribution or liquidation and we may be required to record a deferred tax liability with respect to such tax-exempt income.
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 since 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 2005 amendment to the Research Law 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; and |
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| • | deductions over a three-year period of expenses involved with the issuance and listing of shares on the Tel Aviv Stock Exchange or, on or after January 1, 2003, on a recognized stock market outside of Israel. |
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
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. Accordingly, commencing taxable year 2003, results for tax purposes are measured in terms of earnings in dollars.
Capital Gains Tax
Israeli law generally imposes a capital gains tax on the sale of publicly traded securities. Pursuant to changes made to the Israeli Income Tax Ordinance in January 2006, capital gains on the sale of our ordinary shares will be subject to Israeli capital gains tax, generally at a rate of 20% unless the holder holds 10% or more of our voting power during the 12 months preceding the sale, in which case it will be subject to a 25% capital gains tax.
However, as of January 1, 2003, 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.
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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.
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. Generally, on distributions of dividends, other than bonus shares and stock dividends, income tax at the rate of 25% is withheld at the source (except that dividends distributed on or after January 1, 2006 to an individual who is deemed “a non-substantial shareholder” are subject to tax at the rate of 20%), unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty 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 acquisition, ownership and disposition of our ordinary shares. This summary is based on 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 as of the date hereof and all of which are subject to change (possibly with retroactive effect) or different interpretations. 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 other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or 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 (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 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 U.S. federal alternative minimum tax, or any aspect of state, local or non-U.S. federal tax laws or U.S. federal tax laws other than U.S. federal income tax laws. In addition, this summary is directed only to U.S. Holders that hold our ordinary shares as “capital assets” within the meaning of Section 1221 of the Code and does not address the considerations that may be applicable to particular classes of U.S. Holders, including financial institutions, regulated investment companies, real estate investment trusts, pension funds, insurance companies, broker-dealers, tax-exempt organizations, grantor trusts, partnerships or other pass-through entities, holders whose functional currency is not the U.S. dollar, holders who have elected mark-to-market accounting, holders who acquired our ordinary shares through the exercise of options or otherwise as compensation, holders who hold our ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” holders selling our ordinary shares short, holders deemed to have sold our ordinary shares in a “constructive sale,” and holders, directly, indirectly or through attribution, of 10% or more (by vote or value) of our outstanding ordinary shares. If a partnership (including for this purpose any entity, domestic or foreign, treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ordinary shares, the U.S. federal income tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partnership. A partnership that is a beneficial owner of our ordinary shares, and partners in such partnership, are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares.
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Each U.S. Holder should consult with its own tax advisor as to the particular tax consequences to it of the acquisition, ownership and disposition of our ordinary shares, including the effects of applicable tax treaties, state, local, foreign or other tax laws and possible changes in the tax laws.
Distributions With Respect to Our Ordinary Shares
For U.S federal income tax purposes, the amount of a distribution with respect to our ordinary shares will equal the amount of cash distributed, the fair market value of any property distributed and the amount of any Israeli taxes withheld on such distribution as described above under “Israeli Tax Considerations – Tax on Dividends.” Other than distributions in liquidation or in redemption of our ordinary shares that are treated as exchanges, a distribution 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 (but not below zero), and then generally as capital gain from a deemed sale or exchange of such ordinary shares. Corporate U.S. Holders generally will not be allowed a deduction under Section 243 of the Code for dividends received on our ordinary shares and thus will be subject to tax at the rate applicable to their taxable income. Currently, a noncorporate U.S. Holder’s “qualified dividend income” generally is subject to tax at a rate of 15%. For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if, among other things, the noncorporate 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 us will not qualify for the 15% U.S. federal income tax rate, however, if we are 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. See the discussion below under the heading “Passive Foreign Investment Company Status.” U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of their receipt of any distributions with respect to our ordinary shares.
A dividend paid by us in NIS will be included in the income of U.S. Holders at the U.S. dollar amount of the dividend, based on the “spot rate” of exchange in effect on the date of receipt or deemed receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. U.S. Holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any gain or loss upon the subsequent conversion of the NIS into U.S. dollars or other disposition of the NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes.
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Dividends received 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. Dividends received with respect to our ordinary shares also generally will be treated as “investment income” for purposes of the investment interest deduction limitation contained in Section 163(d) of the Code, and as 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 distributions with respect to our ordinary shares which constitute dividends under U.S. income tax law. A U.S. Holder that does not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only if the U.S. Holder elects to do so with respect to all foreign income taxes in such year. In addition, special rules may apply to the computation of foreign tax credits relating to “qualified dividend income,” as defined above. 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 are complex and involve 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 with respect to any dividends which may be paid with respect to our ordinary shares.
Disposition of Our Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Status,” a U.S. Holder’s sale, exchange or other taxable disposition 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 U.S. dollar value of the amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed of (measured in U.S. dollars). This gain or loss will be long-term capital gain or loss if such ordinary shares have been held or are deemed to have been held for more than one year at the time of the disposition. Individual U.S. Holders currently are subject to a maximum tax rate of 15% on long-term capital gains recognized during tax years beginning on or before December 31, 2010. If the U.S. Holder’s holding period on the date of the taxable disposition is one year or less, such gain or loss will be a short-term capital gain or loss. Short-term capital gains generally are taxed at the same rates applicable to ordinary income. See “Israeli Tax Considerations – Capital Gains Tax” for a discussion of taxation by Israel of capital gains realized on sales of our ordinary shares. Any capital loss realized upon the taxable disposition of our ordinary shares generally will be deductible only against capital gains and not against ordinary income, except that noncorporate U.S. Holders generally may deduct annually from ordinary income up to $3,000 of net capital losses. In general, any capital gain or loss recognized by a U.S. Holder upon the taxable disposition of our ordinary shares will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes. However, under the tax treaty between the United States and Israel, gain derived from the taxable disposition of ordinary shares by a U.S. Holder who is a resident of the U.S. 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.
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A U.S. Holder’s tax basis in its ordinary shares generally will be the U.S. dollar purchase price paid by such U.S. Holder to acquire such ordinary shares. The U.S. dollar cost of ordinary shares purchased with foreign currency generally will be the U.S. dollar value of the purchase price on the date of purchase or, in the case of our ordinary shares that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date for the purchase. Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of the U.S. Internal Revenue Service. The holding period of each ordinary share owned by a U.S. Holder will commence 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 a taxable disposition of our ordinary shares, the amount realized will be based on the “spot rate” of exchange on the settlement date of such taxable disposition. If such U.S. Holder subsequently converts NIS into U.S. 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 treated as ordinary income or loss for U.S. federal income tax purposes. A U.S. Holder who uses the accrual method of accounting may elect the same treatment required of cash method taxpayers with respect to a 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 method U.S. Holder does not elect to be treated as a cash method taxpayer (pursuant to U.S. 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 in the event of any difference between the U.S. dollar value of the NIS on the date of the taxable disposition and the settlement date. Any such currency gain or loss generally would be treated as U.S.-source ordinary income or loss and would be subject to tax in addition to any gain or loss recognized by such U.S. Holder on the taxable disposition of ordinary shares.
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”). Passive income for this purpose generally includes dividends, interest, rents, royalties and gains from securities and commodities transactions.
There is no definitive method prescribed in the Code, U.S. Treasury Regulations or relevant administrative or judicial interpretations for determining the value of a foreign corporation’s assets for purposes of the Asset Test. While the legislative history of the U.S. Taxpayer Relief Act of 1997 (the “1997 Act”) indicates that for purposes of the Asset Test, “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,” it is unclear whether other valuation methods could be employed to determine the value of a publicly-traded foreign corporation’s assets for purposes of the Asset Test.
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Based on the composition of our gross income and the composition and value of our gross assets during 2004, 2005, 2006 and 2007, we do not believe that we were a PFIC during any of such tax years. It is likely, however, that under the asset valuation method described in the legislative history of the 1997 Act, we would have been classified as a PFIC in 2001, 2002 and 2003 primarily because (a) a significant portion of our assets consisted of the remaining proceeds of our two public offerings of ordinary shares in 1999, and (b) the public market valuation of our ordinary shares during such years was relatively low. There can be no assurance that we will not be deemed a PFIC in any future tax year.
U.S. Holders are urged to consult their own tax advisors for guidance as to our status as a PFIC in any tax year. For those U.S. Holders who determine that we are a PFIC in any 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 the 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. Thus, the U.S. Holder would be required to include in its gross income amounts allocated to the current tax year as ordinary income for that year, pay tax on amounts allocated to each prior tax year in which we were a PFIC at the highest rate on ordinary income in effect for such prior year and pay an interest charge on the resulting tax at the rate applicable to deficiencies of U.S. federal income tax. |
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| • | The entire amount of any gain realized by the 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 instead would 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 be a PFIC, 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 its ordinary shares through the close of the tax year in which we cease to be a PFIC.
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A U.S. Holder who beneficially owns shares of a PFIC must file U.S. Internal Revenue Service Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) with the U.S. Internal Revenue Service for each tax year in which such U.S. Holder holds shares in a PFIC. Once properly completed, this form describes any distributions received with respect to these shares and any gain realized upon the disposition of these shares.
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 its 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 made to the U.S. Holder. Any gain subsequently recognized by the U.S. Holder upon the sale or other disposition of its 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. A QEF Election is effective for the tax 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. A U.S. Holder making the QEF Election must make the election on or before the due date, as extended, for the filing of its U.S. federal 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 U.S. Internal Revenue Service 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. Upon a U.S. Holder’s request, we will provide to such U.S. Holder the information required to make a QEF Election and to make subsequent annual filings.
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 tax year, between the fair market value of its ordinary shares and the adjusted tax basis of such shares. 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 U.S. Internal Revenue Service.
The implementation of many aspects of the Code’s PFIC rules requires the issuance of Treasury Regulations which in many instances have yet to be promulgated and which may have retroactive effect when promulgated. 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 if we are treated as a PFIC.
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Information Reporting and Backup Withholding
Payments in respect of our ordinary shares that are made in the U.S. or by certain U.S.-related financial intermediaries may be subject to information reporting requirements and U.S. backup withholding tax at rates equal to 28% through 2010 and 31% after 2010. The information reporting requirements will not apply, however, to payments to certain U.S. Holders, including corporations and tax-exempt organizations. In addition, the backup withholding tax will not apply to a U.S. Holder that furnishes a correct taxpayer identification number on U.S. Internal Revenue Service Form W-9 (or substitute form). The backup withholding tax is not an additional tax. Amounts withheld under the backup withholding tax rules may be credited against a U.S. Holder’s U.S. federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding tax rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service. U.S. Holders should consult their own tax advisors regarding their qualification for an exemption from the backup withholding tax and the procedures for obtaining such an exemption, if applicable.
The foregoing discussion of certain U.S. federal income tax considerations is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes. Accordingly, each U.S. Holder should consult with 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 our 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.
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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 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 |
We are exposed to financial market risk associated with changes in foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. The majority of our revenues and expenses are generated in U.S. dollars. A portion of our expenses, however, is denominated in NIS. In order to protect ourselves against the volatility of future cash flows caused by changes in foreign exchange rates, we use currency forward contracts and currency options. We hedge the part of our forecasted expenses denominated in NIS. If our currency forward contracts and currency options meet the definition of a hedge, and are so designated, changes in the fair value of the contracts will be offset against changes in the fair value of the hedged assets or liabilities through earnings. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Our hedging program reduces, but does not eliminate, the impact of foreign currency rate movements and due to the general economic slowdown along with the devaluation of the dollar, our results of operations may be adversely affected.
Our investment portfolio includes held to maturity marketable securities. The contractual cash flows of these investments are either agencies of the U.S. government that have implied guaranty by the U.S. government or were issued by highly rated corporations. As of December 31, 2007, the securities in our portfolio were rated at least as A. Securities representing about 35% of the portfolio are rated as AAA. The recent declines in interest rates may reduce our interest income.
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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 |
Disclosure Controls and Procedures
Our management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in 13a-15(e) under the Securities Exchange Act) as of December 31, 2007. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were (i) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our management, including our chief executive officer and chief financial officer, by others within those entities, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this report was being prepared and (ii) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:
| |
• | pertain to the maintenance of our records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions; |
| |
• | provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles; |
| |
• | provide reasonable assurance that our receipts and expenditures are made only in accordance with authorizations of our management and board of directors (as appropriate); and |
| |
• | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
109
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework for Internal Control - Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment under that framework and the criteria established therein, our management concluded that the Company’s internal control over financial reporting were effective as of December 31, 2007.
Attestation Report of the Registered Public Accounting Firm
This annual report includes an attestation report of our registered public accounting firm regarding internal control over financial reporting on page F-3 of our audited consolidated financial statements set forth in “Item 18 - Financial Statements”, and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
| | |
| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our Board of Directors has determined that 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.
We have 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.
110
| | |
| 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, 2007. The following table presents the aggregate fees for professional audit services and other services rendered by Kost Forer Gabbay & Kasierer in 2006 and 2007.
| | | | | | | |
| | Year Ended December 31
(Amounts in thousands) | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
|
Audit Fees | | $ | 191 | | $ | 331 | |
Audit Related Fees | | | 315 | | | 21 | |
Tax Fees | | | 129 | | | 94 | |
| | | | | | | |
Total | | $ | 635 | | $ | 446 | |
| | | | | | | |
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 services rendered for the integrated audit over internal controls as required under Section 404 of the Sarbanes-Oxley Act applicable in 2007, 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.
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.
111
The Audit Committee pre-approves fee levels annually for the audit services., Non-audited services are pre-approved as required. The Chairman of the audit committee may approve non-audit services of up to $25,000 and then request the audit committee to ratify his decision.
During 2007, 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.
| | |
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
| | |
| Not applicable. |
| | |
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
| | |
| Not applicable. |
PART III
| | |
| ITEM 17. | FINANCIAL STATEMENTS |
| | |
| Not applicable. |
| | |
| ITEM 18. | FINANCIAL STATEMENTS |
| | |
| Reference is made to pages F-1 to F-68 hereto. |
| | |
| ITEM 19. | EXHIBITS |
| | |
| The following exhibits are filed as part of this Annual Report: |
| | |
Exhibit
No. | | Exhibit |
| | | |
| | |
1.1 | | Memorandum of Association of Registrant.*† |
| | |
1.2 | | Articles of Association of Registrant, as amended.** |
| | |
2.1 | | Indenture, dated November 9, 2004, between AudioCodes Ltd. and U.S. Bank National Association, as Trustee, with respect to the 2.00% Senior Convertible Notes due 2024.**** |
| | |
4.1 | | AudioCodes Ltd. 1997 Key Employee Option Plan (C).* |
112
| | |
Exhibit
No. | | Exhibit |
| | | |
| | |
4.2 | | AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (D).* |
| | |
4.3 | | Founder’s Agreement between Shabtai Adlersberg and Leon Bialik, dated January 1, 1993.*† |
| | |
4.4 | | License Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as of May 6, 1999.*† |
| | |
4.5 | | Lease Agreement between AudioCodes Inc. and Spieker Properties, L.P., dated January 26, 2000.** |
| | |
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.* |
| | |
4.7 | | AudioCodes Ltd. 1997 Key Employee Option Plan (D).* |
| | |
4.8 | | AudioCodes Ltd. 1997 Key Employee Option Plan (E).* |
| | |
4.9 | | AudioCodes Ltd. 1999 Key Employee Option Plan (F), as amended.*** |
| | |
4.10 | | AudioCodes Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (E).* |
| | |
4.11 | | AudioCodes Ltd. 1999 Key Employee Option Plan, Qualified Stock Option Plan—U.S. Employees (F).*** |
| | |
4.12 | | AudioCodes Ltd. 2001 Employee Stock Purchase Plan—Global Non U.S., as amended. § |
| | |
4.13 | | AudioCodes Ltd. 2001 U.S. Employee Stock Purchase Plan, as amended.§ |
| | |
4.13a | | AudioCodes Ltd. 2007 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.§§ |
113
| | |
Exhibit
No. | | Exhibit |
| | | |
| | |
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 | | Amendment No. 2 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of January 1, 2005 *****§§§ |
| | |
4.22 | | Amendment No. 3 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of February 15, 2005 *****§§§ |
| | |
4.23 | | Amendment No. 5 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of January 1, 2005 *****§§§ |
| | |
4.24 | | Amendment No. 6 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of April 1, 2005 §§§ |
| | |
4.25 | | Lease Agreement between AudioCodes Inc. and CA-Gateway Office Limited Partnership, effective as of December, 2004. §§§ |
| | |
4.26 | | Amendment No. 4 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and Nortel Networks Ltd., dated as of April 28, 2005 ***** §§§§ |
| | |
4.27 | | 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. §§§§ |
| | |
4.28 | | Building and Tenancy Lease Agreement, dated May 11, 2007, by and between Airport City Ltd. and AudioCodes Ltd. †§§§§§ |
114
| | |
Exhibit
No. | | Exhibit |
| | | |
| | |
4.29 | | Agreement and Plan of Merger, dated as of July 6, 2006, by and among AudioCodes Ltd., AudioCodes, Inc., Violet Acquisition Corp., Netrake Corporation and Will Kohler, as Sellers’ Representative.§§§§§ |
| | |
4.30 | | Series E Preferred Share Purchase Agreement, dated as of November 13, 2005, by and between CTI Squared Ltd. and AudioCodes Ltd.§§§§§ |
| | |
4.31 | | Amended and Restated Second Option Agreement, dated as of October 6, 2006, by and among CTI Squared Ltd., AudioCodes Ltd. and each of the other parties thereto.§§§§§ |
| | |
4.32 | | Amendment No. 7 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd. and Nortel Networks Ltd., dated as of December 15, 2006.§§§§§ |
| | |
4.33 | | Endorsement and Transfer of Rights Agreement, dated March 29, 2007, by and between Nortel Networks (Sales and Marketing) Ltd. Israel and AudioCodes Ltd. †§§§§§ |
| | |
4.34 | | Amendment No. 9 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd. and Nortel Networks Ltd., dated as of October 30, 2007.# |
| | |
4.35 | | Letter Agreements, dated April 30, 2008 between First International Bank of Israel, as lender, and AudioCodes Ltd., as borrower. † |
| | |
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. |
| | |
15.1 | | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. |
| | |
15.2 | | Consent of Squar, Milner, Peterson, Miranda and Williamson, LLP. |
| |
|
* | Incorporated herein by reference to Registrant’s Registration Statement on Form F-1 (File No. 333-10352). |
| |
† | English summary of Hebrew original. |
115
| |
‡ | 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. 333-144823). |
| |
** | 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. |
| |
§§ | 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. |
| |
§§§§ | Incorporated herein by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2005. |
| |
§§§§§ | Incorporated herein by reference to Registrant’s Form 20-F for the fiscal year ended December 31, 2006. |
| |
§§§§§§ | Incorporated by reference to Registrant’s Registration Statement on Form S-8 (File No. 333-144825). |
| |
# | 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. |
116
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 24, 2008
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDIOCODES LTD. AND ITS SUBSIDIARIES
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
NATURAL SPEECH COMMUNICATION LTD.
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the board of directors and Shareholders of
AudioCodes LTD. and its subsidiaries
We have audited the accompanying consolidated balance sheets of AudioCodes Ltd. (“the Company”) and its subsidiaries as of December 31, 2006 and 2007, 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, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a wholly-owned subsidiary, which statements reflect total assets of 2% as of December 31, 2006, and total revenues of 5% for the period from July 6, 2006 through December 31, 2006. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this subsidiary, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion and the opinion of the other auditors, 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, 2006 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2r to the consolidated financial statements, in 2007 the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”, effective January 1, 2007. As discussed in Note 2v to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, as revised, effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 22, 2008 expressed an unqualified opinion thereon.
| |
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
June, 22, 2008 | A Member of Ernst & Young Global |
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AudioCodes LTD. and its subsidiaries
We have audited AudioCodes Ltd’s (“AudioCodes” or “the Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AudioCodes’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, AudioCodes maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AudioCodes and its subsidiaries as of December 31, 2006 and 2007 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, 2007 and our report dated June 22, 2008 expressed an unqualified opinion thereon. We did not audit the financial statements of a wholly-owned subsidiary, which statements reflect total assets of 2% as of December 31, 2006, and total revenues of 5% for the period from July 6, 2006 through December 31, 2006. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this subsidiary, is based solely on the report of the other auditors.
| |
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
June 22, 2008 | A Member of Ernst & Young Global |
F-3
AUDIOCODES LTD. AND ITS SUBSIDIARIES
| | | | | | | |
| | December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 25,171 | | $ | 75,063 | |
Short-term bank deposits and structured notes | | | 28,658 | | | 18,065 | |
Short-term marketable securities and accrued interest | | | 29,422 | | | 17,244 | |
Trade receivables (net of allowance for doubtful accounts of $854 and $521
at December 31, 2006 and 2007, respectively) | | | 30,501 | | | 25,604 | |
Other receivables and prepaid expenses | | | 3,309 | | | 6,592 | |
Deferred tax assets | | | 1,282 | | | 1,001 | |
Inventories | | | 16,093 | | | 18,736 | |
| | | | | | | |
| | | | | | | |
Total current assets | | | 134,436 | | | 162,305 | |
| | | | | | | |
| | | | | | | |
LONG-TERM ASSETS: | | | | | | | |
Long-term bank deposits and structured notes | | | 30,435 | | | 32,670 | |
Long-term marketable securities | | | 19,942 | | | — | |
Investment in companies | | | 3,999 | | | 1,343 | |
Deferred tax assets | | | 2,460 | | | 1,057 | |
Severance pay funds | | | 7,231 | | | 9,799 | |
| | | | | | | |
| | | | | | | |
Total long-term assets | | | 64,067 | | | 44,869 | |
| | | | | | | |
| | | | | | | |
PROPERTY AND EQUIPMENT, NET | | | 7,847 | | | 7,094 | |
| | | | | | | |
| | | | | | | |
INTANGIBLE ASSETS, DEFERRED CHARGES AND OTHER, NET | | | 21,853 | | | 19,007 | |
| | | | | | | |
| | | | | | | |
GOODWILL | | | 108,853 | | | 111,212 | |
| | | | | | | |
| | | | | | | |
Total assets | | $ | 337,056 | | $ | 344,487 | |
| | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS |
| |
U.S. dollars in thousands, except share and per share data |
| | | | | | | |
| | December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Trade payables | | $ | 7,522 | | $ | 8,849 | |
Deferred tax liabilities | | | 1,321 | | | — | |
Other payables and accrued expenses | | | 28,139 | | | 28,780 | |
| | | | | | | |
| | | | | | | |
Total current liabilities | | | 36,982 | | | 37,629 | |
| | | | | | | |
| | | | | | | |
LONG-TERM LIABILITIES: | | | | | | | |
Deferred tax liabilities | | | 6,459 | | | — | |
Accrued severance pay | | | 7,915 | | | 11,168 | |
Senior convertible notes | | | 121,015 | | | 121,198 | |
| | | | | | | |
| | | | | | | |
Total long-term liabilities | | | 135,389 | | | 132,366 | |
| | | | | | | |
| | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | |
Share capital - | | | | | | | |
Ordinary shares of NIS 0.01 par value -
Authorized: 100,000,000 at December 31, 2006 and 2007; Issued:
46,051,867 shares at December 31, 2006 and 47,031,691 shares at
December 31, 2007; Outstanding: 42,109,728 shares at December 31,
2006 and 43,089,552 shares at December 31, 2007 | | | 131 | | | 133 | |
Additional paid-in capital | | | 149,205 | | | 161,970 | |
Treasury stock | | | (11,320 | ) | | (11,320 | ) |
Accumulated other comprehensive income | | | 122 | | | 1,047 | |
Retained earnings | | | 26,547 | | | 22,662 | |
| | | | | | | |
| | | | | | | |
Total shareholders’ equity | | | 164,685 | | | 174,492 | |
| | | | | | | |
| | | | | | | |
Total liabilities and shareholders’ equity | | $ | 337,056 | | $ | 344,487 | |
| | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
AUDIOCODES LTD. AND ITS SUBSIDIARIES
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
| | | | | | | | | | |
Revenues | | $ | 115,827 | | $ | 147,353 | | $ | 158,235 | |
Cost of revenues | | | 46,993 | | | 61,242 | | | 69,185 | |
| | | | | | | | | | |
| | | | | | | | | | |
Gross profit | | | 68,834 | | | 86,111 | | | 89,050 | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Research and development, net | | | 24,415 | | | 35,416 | | | 40,706 | |
Selling and marketing | | | 25,944 | | | 37,664 | | | 42,900 | |
General and administrative | | | 6,004 | | | 8,766 | | | 9,637 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total operating expenses | | | 56,363 | | | 81,846 | | | 93,243 | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating income (loss) | | | 12,471 | | | 4,265 | | | (4,193 | ) |
Financial income, net | | | 2,457 | | | 3,817 | | | 2,670 | |
| | | | | | | | | | |
| | | | | | | | | | |
Income (loss) before taxes on income | | | 14,928 | | | 8,082 | | | (1,523 | ) |
Taxes on income, net | | | 799 | | | 289 | | | 1,265 | |
Equity in losses of affiliated companies, net | | | 693 | | | 916 | | | 1,097 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net income (loss) | | $ | 13,436 | | $ | 6,877 | | $ | (3,885 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Basic net earnings (loss) per share | | $ | 0.33 | | $ | 0.16 | | $ | (0.09 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Diluted net earnings (loss) per share | | $ | 0.31 | | $ | 0.16 | | $ | (0.09 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-6
|
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, 2005 | | $ | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares upon exercise of options and employee stock purchase plan | | | 3 | | | 9,178 | | | — | | | — | | | — | | | — | | | | | | 9,181 | |
Stock compensation related to options granted to employees | | | — | | | 8,707 | | | — | | | — | | | — | | | — | | | | | | 8,707 | |
Excess tax benefit from net operating loss utilization | | | — | | | 776 | | | — | | | — | | | — | | | — | | | | | | 776 | |
Reclassification of deferred stock compensation due to implementation of SFAS 123R | | | — | | | (72 | ) | | — | | | 72 | | | — | | | — | | | | | | | |
Comprehensive income, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on forward contracts, net | | | — | | | — | | | — | | | — | | | 38 | | | — | | $ | 38 | | | 38 | |
Net income | | | — | | | — | | | — | | | — | | | — | | | 6,877 | | | 6,877 | | | 6877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income, net | | | | | | | | | | | | | | | | | | | | $ | 6,915 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | 131 | | | 149,205 | | | (11,320 | ) | | — | | | 122 | | | 26,547 | | | | | | 164,685 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares upon exercise of options and employee stock purchase plan | | | 2 | | | 4,798 | | | — | | | — | | | — | | | — | | | | | | 4,800 | |
Stock compensation related to options granted to employees | | | — | | | 7,967 | | | — | | | — | | | — | | | — | | | | | | 7,967 | |
Comprehensive income, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains on foreign currency cash flow hedges | | | — | | | — | | | — | | | — | | | 925 | | | — | | $ | 925 | | | 925 | |
Net loss | | | — | | | — | | | — | | | — | | | — | | | (3,885 | ) | | (3,885 | ) | | (3,885 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss, net | | | | | | | | | | | | | | | | | | | | $ | (2,960 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2007 | | $ | 133 | | $ | 161,970 | | $ | (11,320 | ) | $ | — | | $ | 1,047 | | $ | 22,662 | | | | | $ | 174,492 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
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, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | 13,436 | | $ | 6,877 | | $ | (3,885 | ) |
Adjustments required to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 3,369 | | | 5,543 | | | 7,789 | |
Amortization of marketable securities premiums and accretion of discounts, net | | | 143 | | | 225 | | | 39 | |
Equity in losses of affiliated companies, net | | | 693 | | | 916 | | | 1,097 | |
Stock-based compensation expenses | | | 36 | | | 8,707 | | | 7,967 | |
Amortization of senior convertible notes discount and deferred charges | | | 198 | | | 199 | | | 203 | |
Increase in accrued interest on marketable securities, bank deposits and structured notes | | | (736 | ) | | (130 | ) | | (519 | ) |
Decrease (increase) in deferred tax assets, net | | | (2,033 | ) | | (1,001 | ) | | 2,390 | |
Decrease (increase) in trade receivables, net | | | (3,520 | ) | | (9,751 | ) | | 5,014 | |
Decrease (increase) in other receivables and prepaid expenses | | | 57 | | | 1,457 | | | (1,504 | ) |
Increase in inventories | | | (1,503 | ) | | (1,954 | ) | | (2,643 | ) |
Increase (decrease) in trade payables | | | 1,233 | | | (2,671 | ) | | 1,263 | |
Increase (decrease) in other payables and accrued expenses | | | 1,914 | | | (2,005 | ) | | (5,181 | ) |
Increase in accrued severance pay, net | | | 41 | | | 203 | | | 356 | |
Other | | | (12 | ) | | 15 | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash provided by operating activities | | | 13,316 | | | 6,630 | | | 12,386 | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Investments in affiliated companies | | | (1,318 | ) | | (3,453 | ) | | (1,003 | ) |
Short-term loan to unrelated Company | | | (350 | ) | | — | | | — | |
Purchase of property and equipment | | | (2,393 | ) | | (3,067 | ) | | (2,629 | ) |
Proceeds from sale of property and equipment | | | 96 | | | — | | | — | |
Investment in short-term and long-term bank deposits | | | (33,969 | ) | | (20,000 | ) | | (29,065 | ) |
Proceeds from sale of short-term bank deposits | | | 3,969 | | | 51,300 | | | 28,700 | |
Investment in structured notes | | | (20,000 | ) | | — | | | — | |
Proceeds from structured notes called by the issuer | | | 10,000 | | | — | | | 10,000 | |
Investment in short-term and long-term marketable securities | | | (59,060 | ) | | — | | | — | |
Proceeds from marketable securities held to maturity | | | — | | | 9,000 | | | 31,600 | |
Proceeds from sale of held-to-maturity marketable securities | | | — | | | 979 | | | — | |
Additional payment for the acquisition of AudioCodes USA Inc. | | | (10,000 | ) | | — | | | — | |
Payment for acquisition of Nuera Communication Inc. (1) | | | — | | | (82,520 | ) | | — | |
Payment for acquisition of Netrake Corporation. (2) | | | — | | | (13,836 | ) | | — | |
Payment for acquisition of CTI Squared Ltd (“CTI2”) (3) | | | — | | | — | | | (4,897 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (113,025 | ) | | (61,597 | ) | | 32,706 | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Issuance costs for senior convertible notes | | | (84 | ) | | — | | | — | |
Proceeds from issuance of shares upon exercise of options and employee stock purchase plan | | | 3,918 | | | 9,181 | | | 4,800 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash provided by financing activities | | | 3,834 | | | 9,181 | | | 4,800 | |
| | | | | | | | | | |
| | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | (95,875 | ) | | (45,786 | ) | | 49,892 | |
Cash and cash equivalents at the beginning of the year | | | 166,832 | | | 70,957 | | | 25,171 | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash and cash equivalents at the end of the year | | $ | 70,957 | | $ | 25,171 | | $ | 75,063 | |
| | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-8
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| |
U.S. dollars in thousands |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | | | |
| | | 2005 | | 2006 | | 2007 | |
| | | | | | | | |
(1) | Payment for acquisition of Nuera Communication Inc. | | | | | | | | | | |
| Net fair value of assets acquired and liabilities assumed of Nuera at the date of acquisition (see also Note 1b): | | | | | | | | | | |
| Working capital, net (excluding cash and cash equivalents) | | $ | — | | $ | (6,728 | ) | $ | — | |
| Technology | | | — | | | 6,020 | | | — | |
| Backlog | | | — | | | 750 | | | — | |
| Customer relationship | | | — | | | 8,001 | | | — | |
| Trade name | | | — | | | 466 | | | — | |
| Deferred tax liability | | | — | | | (6,176 | ) | | — | |
| Existing contracts | | | — | | | 204 | | | — | |
| Deferred tax assets | | | — | | | 1,201 | | | — | |
| Goodwill | | | — | | | 78,782 | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | $ | — | | $ | 82,520 | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(2) | Payment for acquisition of Netrake Corporation. | | | | | | | | | | |
| Net fair value of assets acquired and liabilities assumed of Netrake at the date of acquisition (see also Note 1c) | | | | | | | | | | |
| Working capital, net (excluding cash and cash equivalents) | | $ | — | | $ | (2 | ) | $ | — | |
| Core technology | | | — | | | 5,688 | | | — | |
| Backlog | | | — | | | 87 | | | — | |
| Deferred tax liability | | | — | | | (2,310 | ) | | — | |
| Goodwill | | | — | | | 10,373 | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | $ | — | | $ | 13,836 | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(3) | Payment for acquisition of CTI Squared Ltd. | | | | | | | | | | |
| Net fair value of assets acquired and liabilities assumed ofCTI2 at the date of acquisition (see also Note 1d): | | | | | | | | | | |
| Working capital, net (excluding cash and cash equivalents) | | $ | — | | $ | — | | $ | (7,519 | ) |
| Technology | | | — | | | — | | | 1,530 | |
| Backlog | | | — | | | — | | | 41 | |
| Goodwill | | | — | | | — | | | 10,845 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | $ | — | | $ | — | | $ | 4,897 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(4) | Supplemental disclosure of cash flow activities: | | | | | | | | | | |
| Cash paid during the year for income taxes | | $ | 760 | | $ | 1,237 | | $ | 403 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Cash paid during the year for interest | | $ | 2,500 | | $ | 2,500 | | $ | 2,500 | |
| | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-9
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
| a. | Business overview: |
| | |
| | AudioCodes Ltd. (“the Company”) and its subsidiaries (together “the Group”) designs, develops and markets products for voice, data and video over IP networks to service providers and channels (such as distributors), OEMs, network equipment providers and systems integrators. |
| | |
| | The Company operates through its wholly-owned subsidiaries in the United States, United Kingdom, France, Germany, Italy, Russia, Argentina, Brazil, India, Singapore, Hong-Kong, Japan, Korea and Mexico. |
| | |
| b. | Acquisition of Nuera Communications Inc. (renamed: AudioCodes California Inc.): |
| | |
| | On July 6, 2006, the Group acquired all of the outstanding common stock of Nuera Communications Inc, a leading provider of Voice over Internet Protocol (VoIP) infrastructure solutions for broadband and long distance with an extensive client base in North America as well as in Asia and Europe. |
| | |
| | The Group paid $82,520 in cash at the closing of the transaction including acquisition costs in the amount of $2,376. |
| | |
| | Nuera Communications Inc. 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 Statement of Financial Accounting Standard No. 141 “Business Combinations” (SFAS 141). |
F-10
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
| Based upon an independent valuation of tangible and intangible assets acquired, the Group has allocated the total acquisition cost of Nuera Communication Inc.’s assets and liabilities as follows: |
| | | | |
| | July 6, 2006 | |
| | | |
| | | | |
Trade receivables | | $ | 2,213 | |
Inventories | | | 931 | |
Other receivables and prepaid expenses | | | 356 | |
Deferred tax asset | | | 1,201 | |
Property and equipment | | | 673 | |
| | | | |
| | | | |
Total tangible assets acquired | | | 5,374 | |
| | | | |
| | | | |
Technology (five years useful life) | | | 6,020 | |
Backlog (one year useful life) | | | 750 | |
Customer relationship (nine years useful life) | | | 8,001 | |
Existing contracts (three years useful life) | | | 204 | |
Trade name (three years useful life) | | | 466 | |
Goodwill | | | 78,782 | |
| | | | |
| | | | |
Total intangible assets acquired | | | 94,223 | |
| | | | |
| | | | |
Total tangible and intangible assets acquired | | | 99,597 | |
| | | | |
| | | | |
Trade payables | | | (1,292 | ) |
Deferred tax liability | | | (6,176 | ) |
Other current liabilities and accrued expenses | | | (9,609 | ) |
| | | | |
| | | | |
Total liabilities assumed | | | (17,077 | ) |
| | | | |
| | | | |
Net assets acquired | | $ | 82,520 | |
| | | | |
| |
| 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, 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 fair value due to their short-term maturity. Property and equipment are presented at current replacement cost. The fair value of intangible assets was determined using the income approach. |
F-11
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 1:- | GENERAL (Cont.) |
| | |
| c. | Acquisition of Netrake Corporation. (renamed: AudioCodes Texas Inc.): |
| | |
| | On August 14, 2006, the Group acquired all of the outstanding common stock of Netrake Corporation, a leading provider of Session Border Controller (SBC) and Security Gateway solutions. SBC’S enable connectivity, policies and security for real-time applications such as VoIP and video when traversing IP to IP networks. Security Gateways enable secure real-time session across wifi, broadband and wireless networks in Field Mobile Convergence (FMC) deployments. |
| | |
| | The Group paid $13,836 in cash at the closing of the transaction including acquisition costs in the amount of $649. |
| | |
| | Netrake Corporation 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. |
F-12
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 1:- | GENERAL (Cont.) |
| | |
| | Based upon an independent valuation of tangible and intangible assets acquired, the Group has allocated the total acquisition cost of Netrake Corporation’s assets and liabilities, as follows: |
| | | | | |
| | | August 14,
2006 | |
| | | | |
| | | | | |
| Trade receivables | | $ | 554 | |
| Inventories | | | 1,646 | |
| Other receivables and prepaid expenses | | | 311 | |
| | | | | |
|
| | | | 2,511 | |
| Property and equipment | | | 528 | |
| | | | | |
|
| Total tangible assets acquired | | | 3,039 | |
| | | | | |
|
| Technology (five years useful life) | | | 5,688 | |
| Backlog (two years useful life) | | | 87 | |
| Goodwill | | | 10,373 | |
| | | | | |
|
| Total intangible assets acquired | | | 16,148 | |
| | | | | |
|
| Total tangible and intangible assets acquired | | | 19,187 | |
| | | | | |
|
| Trade payables | | | (1,127 | ) |
| Deferred tax liability | | | (2,310 | ) |
| Other current liabilities and accrued expenses | | | (1,914 | ) |
| | | | | |
|
| Total liabilities assumed | | | (5,351 | ) |
| | | | | |
|
| Net assets acquired | | $ | 13,836 | |
| | | | | |
| | |
| | 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). |
| | |
| | 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 fair value due to their short-term maturity. Property and equipment are presented at current replacement cost. The fair value of intangible assets was determined using the income approach. |
F-13
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 1:- | GENERAL (Cont.) |
| | |
| d. | Acquisition of CTI Squared Ltd.: |
| | |
| | On April 1, 2007, the Group acquired the remaining outstanding common stock of CTI Squared Ltd (“CTI2”), a leading provider of enhanced messaging and communications platforms deployed globally by service providers and enterprises. CTI2’s platforms integrate data and voice messaging services over internet, intranet, PSTN, cellular, cable and enterprise networks. Prior to this acquisition, the Group had an investment in CTI2 in the amount of $1,565. |
| | |
| | In consideration for the acquisition the Group paid $4,897 in cash at the closing of the transaction in April 2007 and committed to pay additional $5,000 as of April, 2008. In February 2008 the Group paid the additional amount of $5,000. |
| | |
| | CTI2 became a wholly-owned subsidiary of the Company 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. |
| | | | |
| | April 2,
2007 | |
| | | |
| | | | |
Trade receivables | | $ | 117 | |
Other receivables and prepaid expenses | | | 134 | |
Property and equipment | | | 10 | |
| | | | |
| | | | |
Total tangible assets acquired | | | 261 | |
| | | | |
| | | | |
Technology (six years useful life) | | | 1,530 | |
Backlog (one year useful life) | | | 41 | |
Goodwill | | | 10,845 | |
| | | | |
| | | | |
Total intangible assets acquired | | | 12,416 | |
| | | | |
| | | | |
Total tangible and intangible assets acquired | | | 12,677 | |
| | | | |
| | | | |
Trade payables | | | (64 | ) |
Other current liabilities and accrued expenses | | | (822 | ) |
Accrued severance pay, net | | | (329 | ) |
| | | | |
| | | | |
Total liabilities assumed | | | (1,215 | ) |
| | | | |
| | | | |
Net assets acquired | | $ | 11,462 | |
| | | | |
F-14
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 1:- | GENERAL (Cont.) |
| | |
| | Based upon an independent valuation of tangible and intangible assets acquired, the Group has allocated the total acquisition cost of CTI2’s assets and liabilities, as follows: |
| | |
| | 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). |
| | |
| | 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 fair value due to their short-term maturity. Property and equipment are presented at current replacement cost. The fair value of intangible assets 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 CTI2 been consummated on January 1, 2006, nor does it purport to represent the results of operations of the Group for any future period. |
| | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
| | | | | | | |
Revenues | | $ | 148,323 | | $ | 158,349 | |
| | | | | | | |
| | | | | | | |
Net income (loss) | | $ | 4,742 | | $ | (4,698 | ) |
| | | | | | | |
| | | | | | | |
Basic net loss per share | | $ | 0.11 | | $ | (0.11 | ) |
| | | | | | | |
| | | | | | | |
Diluted net loss per share | | $ | 0.11 | | $ | (0.11 | ) |
| | | | | | | |
| | |
| e. | The Group is dependent upon sole source suppliers for certain key components used in its products, including certain digital signal processing chips. Although there are 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. |
| | |
| f. | As to a major customer data, see Note 16b. |
F-15
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
| | |
| The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). |
| | |
| 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 Company’s revenues is generated in dollars. In addition, most of the Company’s costs are denominated and determined in U.S. dollars and in New Israeli Shekels. The Company’s management believes that the dollar is the currency in the primary economic environment in which the Company operates. Thus, the functional and reporting currency of the Company 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, including profits from intercompany sales not yet realized outside the Company, have been eliminated upon consolidation. |
| | |
| d. | Cash equivalents: |
| | |
| | Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original 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 5.18% and 4.57% for 2006 and 2007, respectively. Short-term deposits are presented at their cost. The accrued interest is included in other receivables and prepaid expenses. |
F-16
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| f. | Marketable securities: |
| | |
| | The Company accounts for investments in debt securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. |
| | |
| | Management determines the appropriate classification of 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 income 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. |
| | |
| | FASB Staff Position (“FSP”) No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment” (“FSP 115-1”) and SAB Topic 5M “Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities” provides guidance for determining when an investment is considered impaired, whether impairment is other-than temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment decreased below its cost in an other-than temporary manner. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other than - temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. FSP 115-1 nullifies certain provisions of Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”) while retaining the disclosure requirements of EITF 03-1 which the Company adopted in 2003. |
| | |
| g. | Inventories: |
| | |
| | Inventories are stated at the lower of cost or market value. Cost is determined as follows: |
| | |
| | Raw materials - using the “moving average” method. |
| | Finished products - using the “moving average” 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 are taken based on slow moving items, technological obsolescence, excess inventories, discontinued products and for market prices lower than cost. |
F-17
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| 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. The deposits are in U.S. dollars and bear interest at an average rate of 5.10% for 2006 and 2007. Long-term deposits are presented at their cost. Accrued interest is included in other receivables and prepaid expenses. |
| | |
| i. | Structured notes: |
| | |
| | The Group accounts for investments in structured notes in accordance with Emerging Issues Task Force (“EITF”) Issue 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, 2007 the Company did not have any structured notes. |
| | |
| j. | Investment in companies: |
| | |
| | The Company accounts for its investments in 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”. If the Company does not have the ability to exercise significant influence over operating and financial policies of these companies, the investment in these companies are stated at cost. |
| | |
| | Investment in companies represents 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 such companies are recognized based on the ownership level of the particular 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, 2006 and 2007, based on management’s most recent analyses, no impairment losses have been identified. |
F-18
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| 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 (mainly 15%) |
Leasehold improvements | Over the shorter of the term of the lease or the life of the asset |
| | |
| 1. | 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. Amortization is calculated by the straight-line method over the estimated useful lives of the assets as follows: |
| | |
| | Years |
| | |
| | |
Acquired technology | | 5 - 10 |
Customer relationship | | 9 |
Backlog | | 1 - 2 |
Trade name | | 3 |
Existing contracts for maintenance | | 3 |
| | |
| | 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”. |
| | |
| m. | Impairment of long-lived assets: |
| | |
| | The Group’s long-lived assets and identifiable intangibles which are subject to amortization 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, 2006 and 2007, no impairment losses have been identified. |
F-19
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| n. | Goodwill: |
| | |
| | Goodwill represents an excess of costs over the fair value of the net assets of businesses acquired under SFAS No. 142. |
| | |
| | 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 each year. The test was done in the forth quarter of 2007 based on the Group’s single operating segment and reporting unit structure. As of December 31, 2006 and 2007, no impairment losses had been identified. |
| | |
| o. | Revenue recognition: |
| | |
| | The Group generates its revenues primarily from the sale of 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. |
| | |
| | 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 on 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 the 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 its 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 $545, $636 and $559 as of December 31, 2005, 2006 and 2007, 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. |
F-20
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| 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 government grants received, are charged to the statement of operations as incurred. |
| | |
| 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 asset and 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. |
| | |
| | In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized under SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest and penalties, and disclosure. On January 1, 2007, the Company adopted FIN 48. The initial application of FIN 48 to the Company’s tax positions did not have a material effect on the Company’s Shareholders’ Equity. |
| | |
| 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. |
F-21
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| | The majority of the Group’s cash and cash equivalents and bank deposits 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. |
| | |
| | As a result of the recent turmoil in capital markets the Company tightened its control and monitoring over its marketable securities portfolio in order to minimize potential risks stemming from the current capital markets environment. Such measures included among others: the Company’s investment policy approved by the Investment Committee that limits the amount the Company may invest in any one type of investment or issuer and the grade of the security with the intent of, reducing credit risk concentrations. |
| | |
| | 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 with respect to its trade receivables. 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 within one year of 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 Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Industries”, which is 20 years. |
F-22
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| u. | Basic and diluted net earnings per share: |
| | |
| | Basic net earnings per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share are 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 per Ordinary share since such securities are anti-dilutive for all years 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 per share was 8,598,556, 9,924,624 and 11,765,438 for the years ended December 31, 2005, 2006 and 2007, respectively. |
| | |
| v. | Equity-based compensation expenses: |
| | |
| | On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123(R). The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). |
| | |
| | The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting from January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the years ended December 31, 2006 and 2007, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated in accordance with the modified prospective transition method. |
| | |
| | The Company recognizes compensation expenses for the value of its awards based on the accelerated method over the requisite service period of each of the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. |
F-23
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Pro forma information regarding the Group’s net income and net earnings 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: |
| |
| 2005 |
| |
| |
Dividend yield | 0% |
Expected volatility | 75% |
Risk-free interest | 4% |
Expected life | 4.5 years |
| |
| The Black-Scholes pricing-model was used to estimate the fair value of the Employee Stock Purchase Plan (“ESPP”) compensation. Assumptions are not provided due to immateriality. |
| |
| Pro forma information under SFAS No. 123 is as follows: |
| | | | |
| | Year ended
December 31,
2005 | |
| | | |
| | | | |
Net income as reported | | $ | 13,436 | |
Add: stock-based compensation expenses determined under the intrinsic value based method included in the reported net income | | | 36 | |
Deduct: stock-based compensation expenses determined under the fair value based method for all awards | | | (8,869 | ) |
| | | | |
| | | | |
Pro forma net income | | $ | 4,603 | |
| | | | |
| | | | |
Basic net earnings per share as reported | | $ | 0.33 | |
| | | | |
Diluted net earnings per share as reported | | $ | 0.31 | |
| | | | |
| | | | |
Pro forma basic net earning per share | | $ | 0.11 | |
| | | | |
Pro forma diluted net earning per share | | $ | 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. |
| |
| As of December 31, 2007, the total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $8,003, which is expected to be recognized over a weighted-average period of 1.5 years. The total intrinsic value of stock options exercised during 2007 was $613. The Company recorded cash received from the exercise of stock options of $1,189 during the year ended December 31, 2007. |
F-24
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2006 and 2007, was $5.81 and $3.23 per share, respectively, using the Black-Scholes option pricing formula. Fair values were estimated using the following weighted-average assumptions (annualized percentages): |
| | | | | | | |
| | Year ended
December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
| | | | | | | |
Dividend yield | | | 0% | | | 0% | |
Expected volatility | | | 61.9% | | | 54.7% | |
Risk-free interest | | | 4.6% | | | 4.6% | |
Expected life | | | 4.8 years | | | 4.8 years | |
Forfeiture rate | | | 5.1% | | | 7.0% | |
| |
| The dividend yield assumption is based on the Company’s historical experience and expectation of no future dividend payouts and may be subject to substantial change in the future. |
| |
| The Company used its historical volatility in accordance with SFAS No. 123(R). The computation of volatility uses historical volatility derived from the Company’s exchange traded shares. |
| |
| The risk-free interest rate assumption is the implied yield currently available on United States treasury zero-coupon issues with a remaining term equal to the expected life of the Company’s options. |
| |
| The Company determined the expected life of the options according to the simplified method based on the average of vesting and the contractual term of the Company’s stock options. |
| |
| The Company’s compensation cost for the years ended December 31, 2006 and 2007 totaled $8,707 and $7,967, respectively. |
| |
| The total equity-based compensation expense relating to all of the Company’s equity-based awards recognized for the twelve months ended December 31, 2006 and 2007 was included in items of the consolidated statements of income as follows: |
| | | | | | | |
| | Year ended
December 31 | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
|
Cost of revenues | | $ | 620 | | $ | 613 | |
Research and development, net | | | 3,053 | | | 3,011 | |
Selling and Marketing expenses | | | 3,628 | | | 3,476 | |
General and administrative expenses | | | 1,406 | | | 867 | |
| | | | | | | |
| | | | | | | |
Total equity-based compensation expenses | | $ | 8,707 | | $ | 7,967 | |
| | | | | | | |
F-25
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| 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 surrendered value of these policies and includes immaterial profits. |
| | |
| | Severance pay expenses for the years ended December 31, 2005, 2006 and 2007, amounted to approximately $1,514, $1,766 and $2,409, respectively. |
| | |
| x. | Employees benefit plan |
| | |
| | During 2007, the Company merged its separate 401(k) defined contribution plans into one plan covering employees in the U.S. All eligible employees may elect to contribute a portion of their annual compensation to the plan through salary deferrals, subject to the IRS limit of $15.5 during 2007 ($20.5 including catch-up contributions for participants age 50 or over). The Company matches employee contributions to the plan up to a limit of 3.75% of their eligible compensation, subject to IRS limits. In 2005, 2006 and 2007, the Company matched contributions in the amount of $236, $271 and $361, respectively. |
| | |
| y. | Advertising expenses: |
| | |
| | Advertising expenses are charged to the statements of income as incurred. Advertising expenses for the years ended December 31, 2005, 2006 and 2007, amounted to $371, $402 and $350, respectively. |
| | |
| z. | 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 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. |
F-26
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | The fair value of marketable securities is based on quoted prices and do not differ significantly from the carrying amount (see Note 4). |
| | |
| | The fair value of senior convertible notes is based on quoted market values in the amount of $107, 500. |
| | |
| | The fair value of foreign currency contracts (used for hedging purposes) is estimated by obtaining current quotes from banks. |
| | |
| aa. | Derivative instruments: |
| | |
| | Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. |
| | |
| | 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. |
| | |
| | For 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 period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. |
| | |
| | Cash flow hedging strategy - To hedge against the risk of overall changes in cash flows resulting from forecasted foreign currency salary payments during the year, the Company hedges portions of its forecasted expenses denominated in NIS with currency forwards and options. These option contracts are designated as cash flow hedges, as defined by SFAS No. 133 and Derivative Implementation Group No. G20, “Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased option Used in a Cash Flow Hedge” (“DIG 20”) and are all effective. |
| | |
| | During 2007, the Company recorded accumulated other comprehensive income in the amount of $925 from its currency forward and option transactions with respect to payroll expenses expected to be incurred during 2008. Such amount will be recorded into earnings during 2008. |
| | |
| ab. | Reclassification: |
| | |
| | Certain amounts in prior years’ financial statements have been reclassified to conform to the current year’s presentation. |
F-27
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| ac. | Impact of recently issued accounting standards: |
| | |
| | In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issued a FASB Staff Position (FSP 157-2) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not expect the adoption of SFAS No. 157 will have material impact on its consolidated financial statements. |
| | |
| | In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008. The company has determined that the adoption of SFAS 159 will not have an impact on its consolidated financial statements since it has not elected the fair value option for any of its existing assets or liabilities as of FAS 159 effective date. |
| | |
| | In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS 141R might have a material effect if and when the Company enters into a business combination after December 31, 2008. |
| | |
| | In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of the provisions of Statement No. 160 is not anticipated to materially impact the Company’s consolidated financial position and results of operations. |
F-28
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| | In December, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110), which, effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), Share-Based Payment. Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of the option. |
| | |
| | The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. |
| | |
NOTE 3:- | BANK DEPOSITS AND STRUCTURED NOTES |
| |
| Bank deposits and structured notes are composed as follows: |
| | | | | | | | | | | | | |
| | December 31, |
| | |
| | 2006 | | 2007 | | 2006 | | 2007 | |
| | | | | | | | | |
| | Weighted average interest | | | | | |
| | | | | | | |
| | | | | | | | | | | | | |
Short-term bank deposits (in U.S. dollars) | | | 5.18 | % | | 4.57 | % | $ | 10,700 | | $ | 18,065 | |
Structured notes (1) | | | — | | | — | | | 17,958 | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | 28,658 | | | 18,065 | |
| | | | | | | | | | | | | |
Long-term bank deposits (in U.S. dollars) | | | 5.10 | % | | 5.10 | % | | 20,287 | | | 32,670 | |
Structured notes (2) | | | 5.51 | % | | — | | | 10,148 | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | 30,435 | | | 32,670 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | $ | 59,093 | | $ | 50,735 | |
| | | | | | | | | | | | | |
| | |
| (1) | As of December 31, 2006, the Group had callable structured notes at par value totaling $18,000 for settlement during 2007 from several banks. Under the arrangements with the banks, whether or not the structured notes bear interest depends upon the rate of the three months to one year LIBOR. |
| | |
| | For each day in which the relevant LIBOR rate is below an agreed annual fixed rate, which ranged from 2.5% to 4.5% the structured notes bear interest at the rate of 3.2% to 4.5% per annum. On all other days, the structured notes do not bear any interest. As of December 31, 2006, investments in structured notes approximated their market value. |
F-29
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 3:- | BANK DEPOSITS AND STRUCTURED NOTES (Cont.) |
| | |
| (2) | As of December 31, 2006, the Group had callable structured notes at par value totaling $10,000 for settlement during 2010. Under the arrangements with the bank, whether or not the structured notes bear interest depends upon the six month LIBOR rate. |
| | |
| | For each day in which the relevant LIBOR rate is below an agreed annual fixed rate, which ranged from 5.25% to 6% the structured notes bear interest at the rate of 5.75% per annum. On all other days, the structured notes bear interest at the rate of 2.5%. As of December 31, 2006, investments in structured notes securities approximated their market value. |
| | |
| | During 2007, structured note at par amount of $10,000 was called by the bank. |
| | |
| | As of December 31, 2007, the Company did not have any structured notes. |
| |
NOTE 4:- | MARKETABLE SECURITIES AND ACCRUED INTEREST |
| |
| The following is a summery of held to maturity marketable securities. |
| | | | | | | | | | | | | | | | | | | |
| | December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
| | Amortized
cost | | Net
unrealized
losses | | Market
Value | | Amortized
cost | | Net
unrealized
losses | | Market
Value | |
| | | | | | | | | | | | | |
Corporate debentures: | | | | | | | | | | | | | | | | | | | |
Maturing within one year | | $ | 19,682 | | $ | 84 | | $ | 19,598 | | $ | 12,985 | | $ | 21 | | $ | 12,964 | |
Maturing within one to three years | | | 12,943 | | | 126 | | | 12,817 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | 32,625 | | | 210 | | | 32,415 | | | 12,985 | | | 21 | | | 12,964 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
U.S. Government and agencies debts | | | | | | | | | | | | | | | | | | | |
Maturing within one year | | | 9,000 | | | 49 | | | 8,951 | | | 4,000 | | | — | | | 4,000 | |
Maturing within one to three years | | | 6,999 | | | 48 | | | 6,951 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | 15,999 | | | 97 | | | 15,902 | | | 4,000 | | | — | | | 4,000 | |
| | | | | | | | | | | | | | | | | | | |
Accrued interest | | | 740 | | | — | | | 740 | | | 259 | | | — | | | 259 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | $ | 49,364 | | $ | 307 | | $ | 49,057 | | $ | 17,244 | | $ | 21 | | $ | 17,223 | |
| | | | | | | | | | | | | | | | | | | |
| |
| 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, 2007. |
F-30
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | | | | | |
| | December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
| | | | | | | |
Raw materials | | $ | 5,431 | | $ | 9,879 | |
Finished products | | | 10,662 | | | 8,857 | |
| | | | | | | |
| | | | | | | |
| | $ | 16,093 | | $ | 18,736 | |
| | | | | | | |
| |
| In the years ended December 31, 2005, 2006 and 2007, the Group wrote-off inventory in a total amount of $1,800, $1,900 and $700, respectively. |
| |
NOTE 6:- | INVESTMENT IN COMPANIES |
| | |
| a. | Through December 31, 2007, the Group had invested an aggregate of $4,600 in Natural Speech Communication Ltd., a privately-held Company engaged in speech recognition, which is in a development stage, in order for the Company to achieve substantive technological milestone. As of December 31, 2007, the Group owned 45.2% of the outstanding share capital of this Company and 41.5% of the share capital of this Company on a fully diluted basis. |
| | | | | | | |
| | December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
| | | | | | | |
Equity, net (1) | | $ | 33 | | $ | 435 | |
Convertible loans | | | 558 | | | — | |
| | | | | | | |
| | | | | | | |
Total investments | | $ | 591 | | $ | 435 | |
| | | | | | | |
| | |
| (1) | Net equity as follows: |
| | | | | | | |
Net equity as of purchase date | | $ | 93 | | $ | 93 | |
Unamortized goodwill | | | 3,511 | | | 4,972 | |
Accumulated net losses | | | (3,571 | ) | | (4,630 | ) |
| | | | | | | |
| | | | | | | |
| | $ | 33 | | $ | 435 | |
| | | | | | | |
| |
| During 2006 and 2007 the investee’s net loss was $1,780 and $1,736, respectively. |
F-31
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 6:- | INVESTMENT IN COMPANIES (Cont.) |
| | |
| 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. During 2006 and 2007, the Company made convertible loans in the aggregate amount of $272 to this Company. The loans bear interest at the rate of 9% per annum and are convertible into shares. The loans are payable during 2008. As of December 31, 2007, the Company owned 19.5% of the investee’s outstanding share capital and 17.4% of the investee’s share capital on a diluted basis without taking into account shares that may be issued upon conversion of the loans. As of December 31, 2006 and 2007 no impairment was identified. |
| | | | | | | | |
| | | December 31, | |
| | | | |
| | | 2006 | | 2007 | |
| | | | | | |
| | | | | | | | |
| Net equity as of purchase date | | $ | (106 | ) | $ | (106 | ) |
| Unamortized goodwill | | | 985 | | | 1,085 | |
| Accumulated net loss | | | (33 | ) | | (71 | ) |
| | | | | | | | |
| | | | | | | | |
| Total investment | | $ | 846 | | $ | 908 | |
| | | | | | | | |
| | |
| c. | In December 2006, the Company made a convertible loan in the amount of $1,000 to another unrelated privately-held Company. The loan bears interest at LIBOR+2% per annum and was due and payable in December 2007. In addition, the Company received warrants valid until the consummation of an exit transaction to purchase in consideration for 40% of the principal amount ($400), in consideration of $941.91 per share. In December, 2007 the Company requested repayment of loan. The Company received part of the loan and expects to receive the remaining balance of the loan during 2008. |
| |
NOTE 7:- | PROPERTY AND EQUIPMENT |
| | | | | | | | |
| | December 31, | |
| | | |
| | | 2006 | | 2007 | |
| | | | | | |
| | | | | | | | |
| Cost: | | | | | | | |
| Computers and peripheral equipment | | $ | 14,022 | | $ | 16,073 | |
| Office furniture and equipment | | | 8,079 | | | 8,515 | |
| Motor vehicles | | | 48 | | | — | |
| Leasehold improvements | | | 1,561 | | | 1,731 | |
| | | | | | | | |
| | | | | | | | |
| | | | 23,710 | | | 26,319 | |
| | | | | | | | |
| Accumulated depreciation: | | | | | | | |
| Computers and peripheral equipment | | | 10,868 | | | 12,848 | |
| Office furniture and equipment | | | 4,429 | | | 5,733 | |
| Motor vehicles | | | 48 | | | — | |
| Leasehold improvements | | | 518 | | | 644 | |
| | | | | | | | |
| | | | | | | | |
| | | | 15,863 | | | 19,225 | |
| | | | | | | | |
| | | | | | | | |
| Depreciated cost | | $ | 7,847 | | $ | 7,094 | |
| | | | | | | | |
| |
| Depreciation expenses amounted to $2,509, $2,920 and $3,392 for the years ended December 31, 2005, 2006 and 2007, respectively. |
F-32
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 8:- | INTANGIBLE ASSETS, DEFERRED CHARGES AND OTHER |
| | | | | | | | | |
| | | | December 31, | |
| | | | | |
| | | | 2006 | | 2007 | |
| | | | | | | |
| | | | | | | | | |
| a. | Cost: | | | | | | | |
| | Acquired technology | | $ | 15,982 | | $ | 17,512 | |
| | Customer relationship | | | 8,001 | | | 8,001 | |
| | Trade name | | | 466 | | | 466 | |
| | Existing contracts for maintenance | | | 204 | | | 204 | |
| | Backlog | | | 837 | | | 878 | |
| | Deferred charges | | | 478 | | | 478 | |
| | Other | | | 200 | | | 200 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | 26,168 | | | 27,739 | |
| | | | | | | | | |
| | Accumulated amortization: | | | | | | | |
| | Acquired technology | | | 3,322 | | | 6,146 | |
| | Customer relationship | | | 445 | | | 1,333 | |
| | Trade name | | | 78 | | | 234 | |
| | Existing contracts for maintenance | | | 34 | | | 102 | |
| | Backlog | | | 391 | | | 852 | |
| | Deferred charges | | | 45 | | | 65 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | 4,315 | | | 8,732 | |
| | | | | | | | | |
| | | | | | | | | |
| | Amortized cost | | $ | 21,853 | | $ | 19,007 | |
| | | | | | | | | |
| | |
| b. | Amortization expenses amounted to $860, $2,623 and $4,397 for the years ended December 31, 2005, 2006 and 2007, respectively. |
| | |
| c. | Amortization expenses related to deferred charges amounted to $22, $20 and $20 for the years ended December 31, 2005, 2006 and 2007, respectively. |
| | |
| d. | Expected amortization expenses for the years ended December 31: |
| | | | |
2008 | | $ | 3,860 | |
2009 | | $ | 3,281 | |
2010 | | $ | 2,938 | |
2011 | | $ | 2,337 | |
2012 | | $ | 1,735 | |
F-33
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 9:- | OTHER PAYABLES AND ACCRUED EXPENSES |
| | | | | | | |
| | December 31, | |
| | | |
| | 2006 | | 2007 | |
| | | | | |
| | | | | | | |
Employees and payroll accruals | | $ | 11,614 | | $ | 8,047 | |
Royalties provision | | | 2,067 | | | 1,786 | |
Government authorities | | | 873 | | | 420 | |
Accrued expenses | | | 10,857 | | | 15,506 | |
Deferred revenues | | | 1,753 | | | 1,594 | |
Others | | | 975 | | | 1,427 | |
| | | | | | | |
| | | | | | | |
| | $ | 28,139 | | $ | 28,780 | |
| | | | | | | |
| |
NOTE 10:- | SENIOR CONVERTIBLE NOTES |
| |
| In November 2004, the Company issued an aggregate of $125,000 (including the exercise of the option as described below) 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, 2007, 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. As of December 31, 2006 and 2007 the Company did not record a separate derivative in the financial statements due to immateriality. |
| |
| The additional amount that the Company can be required to pay in respect of the withholding taxes was recorded as a liability. |
F-34
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 11:- | 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: |
| | | | | |
2008 | | | $ | 4,967 | |
2009 | | | | 4,910 | |
2010 | | | | 4,442 | |
2011 | | | | 1,160 | |
2012 | | | | 1,082 | |
Thereafter | | | | 1,026 | |
| | | | | |
| | | | | |
| | | $ | 17,587 | |
| | | | | |
| | |
| | Rent expenses for the years ended December 31, 2005, 2006 and 2007, were approximately $2,938, $3,087 and $4,471 respectively. |
| | |
| b. | Other commitments: |
| | |
| | The Company is obligated under certain agreements with its suppliers to purchase goods and under an agreement with its manufacturing subcontractor to purchase excess inventory. Non- cancelable obligations as of December 31, 2007, were approximately $3,000: |
| | |
| c. | 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. |
| | |
| | As of December 31, 2007, the Company has a contingent obligation to pay royalties in the amount of approximately $ 3,519. |
| | |
| d. | Royalty commitments to third parties: |
| | |
| | Previously, the Group has entered into technology licensing fee agreements with third party. Under the agreements, the Group agreed to pay the third parties royalties until 2008, based on 0.75%-0.9% of the Group’s total consolidated revenues. |
F-35
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | | |
| | Periodically, 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. |
| | |
| e. | Legal proceedings |
| | |
| | 1. | In January 2005, prior to the acquisition of Nuera, the Company was notified that one of Nuera’s customers had been named as a defendant in a patent infringement suit involving similar technology. In the suit, the plaintiff alleged that the customer uses devices to offer services that infringe upon a patent the plaintiff owns. The customer has sought indemnification from Nuera pursuant to the terms of a purchase agreement between Nuera and the customer relating to the allegedly infringing technology at issue. |
| | | |
| | 2. | Prior to the acquisition of Nuera by the Company, eight former employees of a French subsidiary of Nuera filed a labor grievance against the subsidiary claiming they were unfairly terminated. The French subsidiary filed for bankruptcy in 2004 and, in 2005, the court appointed liquidator sought to hold Nuera liable for the obligations of its French subsidiary. In June 2006, the court ruled in favor of Nuera that it was not liable for the obligations of its French subsidiary. In March 2007, the liquidator appealed the judgment and in April 2008 the appeal was denied by the court. |
| | | |
| | As of December 31, 2007, based on the estimate of the Company’s management and a legal opinion, sufficient amount has been reserved. |
| |
NOTE 12:- | SHAREHOLDERS’ EQUITY |
| | |
| a. | Treasury stock: |
| | |
| | Through January, 2001 the Company had a share repurchase program pursuant to which the Company was authorized to purchase up to an aggregate amount of 4,000,000 of its outstanding Ordinary shares. |
| | |
| | As of December 31, 2006 and 2007, the Company had purchased 3,942,139 of its outstanding Ordinary shares, at a weighted average price per share of $2.87. |
F-36
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 12:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| b. | Warrants issued to consultants: |
| | |
| | During 2001, the Company issued warrants to consultants to purchase 50,000 Ordinary shares of NIS 0.01 par value at an exercise price of $18.82 per share, expiring seven years from the date of grant. |
| | |
| | As of December 31, 2006 and 2007, 34,000 and 4,000 warrants to consultants are outstanding and exercisable at a weighted average exercise price of $18.82 and $18.82, respectively. |
| | |
| c. | Employee Stock Purchase Plan: |
| | |
| | In May 2001 and in July 2007, the Company’s Board of Directors adopted the Employee Stock Purchase Plan (“the Purchase Plan”), and amended the Purchase Plan in July 2007. As amended, the Purchase Plan provides for the issuance of a maximum of 6,500,000 Ordinary shares. As of December 31, 2007, 4,324,136 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. The Purchase Plan is considered a compensatory plan. Therefore the Company recorded compensation expense in accordance to SFAS 123R |
| | |
| | During the years ended December 31, 2005, 2006 and 2007, 257,746, 323,303 and 649,853 shares, respectively, were issued under the Purchase Plan for aggregate considerations of $2,134, $2,665 and $3,619, 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 17,041,864. As of December 31, 2007, 2,090,870 shares are still available for future option grants. |
F-37
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 12:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | Stock options granted under the Plans are exercisable usually at the fair market value of the Ordinary shares at the date of grant and usually expire seven or ten years from the date of grant. The options generally vest over four or five years from the date of grant. Any options that are forfeited or cancelled before expiration become available for future grants. |
| | |
| | The following is a summary of the Group’s stock option activity and related information for the years ended December 31, 2005, 2006 and 2007: |
| | | | | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2007 | |
| | | |
| | Amount
of options | | Weighted
average
exercise
price | | Weighted
average
remaining
contractual
term (in
years) | | Aggregate
intrinsic
value | |
| | | | | | | | | |
| | | | | | | | | |
Outstanding at beginning of year | | | 7,981,826 | | $ | 9.92 | | | 3.8 | | $ | 22,353 | |
Changes during the year: | | | | | | | | | | | | | |
Granted | | | 1,254,375 | | $ | 6.31 | | | | | | | |
Exercised | | | (329,971 | ) | $ | 3.60 | | | | | | | |
Forfeited | | | (905,970 | ) | $ | 10.31 | | | | | | | |
Expired | | | (613,000 | ) | $ | 29.80 | | | | | | | |
| | | | | | | | | | | | | |
Options outstanding at end of year | | | 7,387,260 | | $ | 7.85 | | | 3.7 | | $ | 3,583 | |
| | | | | | | | | | | | | |
Vested and expected to vest | | | 6,870,152 | | $ | 7.85 | | | 3.7 | | $ | 3,332 | |
| | | | | | | | | | | | | |
Options exercisable at end of year | | | 4,492,490 | | $ | 7.19 | | | 2.5 | | $ | 3,580 | |
| | | | | | | | | | | | | |
| | |
| | The weighted-average grant-date fair value of options granted during the year ended December 31, 2007 was $3.23. The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the fiscal year. This amount changes based on the fair market value of the Company’s shares. |
| | |
| | Total intrinsic value of options exercised for the twelve months ended December 31, 2005, 2006 and 2007 was $3,373, $4,790 and $613 respectively. As of December 31, 2007, there was $8,003 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.5 years. |
| | |
| | Cash received from exercise of options for the years ended December 31, 2005, 2006 and 2007 were approximately $1,800, $6,515 and $1,189 respectively. |
F-38
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | |
NOTE 12:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | The options outstanding as of December 31, 2007, have been separated into ranges of exercise prices, as follows: |
| | | | | | | | | | | | | | | | |
Range of
exercise
price | | Options
outstanding
as of
December 31,
2007 | | Weighted
average
remaining
contractual
life | | Weighted
average
exercise
price | | Options
exercisable
as of
December 31,
2007 | | Weighted
average
exercise price
of exercisable
options | |
| | | | | | | | | | | | |
(Years) | |
| |
$ 0.61 | | | | 96,000 | | | | | 0.30 | | | | $ | 0.61 | | | | 96,000 | | | | $ | 0.61 | |
$ 1.1 | | | | 127,800 | | | | | 0.51 | | | | $ | 1.10 | | | | 127,800 | | | | $ | 1.10 | |
$ 1.73-2.51 | | | | 440,568 | | | | | 1.87 | | | | $ | 2.28 | | | | 440,568 | | | | $ | 2.28 | |
$ 2.67-4 | | | | 405,734 | | | | | 1.23 | | | | $ | 3.10 | | | | 405,734 | | | | $ | 3.10 | |
$ 4.1-6.49 | | | | 1,810,150 | | | | | 4.21 | | | | $ | 5.22 | | | | 862,275 | | | | $ | 4.43 | |
$ 6.51-9.24 | | | | 996,558 | | | | | 3.05 | | | | $ | 7.55 | | | | 737,808 | | | | $ | 7.79 | |
$ 9.32-14.76 | | | | 3,457,950 | | | | | 4.39 | | | | $ | 10.90 | | | | 1,782,930 | | | | $ | 11.01 | |
$ 15.94-20.38 | | | | 52,500 | | | | | 4.00 | | | | $ | 15.94 | | | | 39,375 | | | | $ | 15.94 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 7,387,260 | | | | | | | | | $ | 7.85 | | | | 4,492,490 | | | | $ | 7.19 | |
| | | | | | | | | | | |
| | |
| e. | During 2007, the Company decided on an exceptional and ex-gratia basis to extend the validity of certain options granted to employees by a period of 2 years and re-priced the exercise price to certain employees. |
| | |
| | The Company accounted for these changes as modifications in accordance with FAS 123R. The Company calculated the incremental value of these modifications and recorded compensation cost in a total amount of $283. |
| | |
| f. | 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 13a.) |
| | |
F-39
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | |
| a. | Israeli taxation: |
| | |
| | 1. | Measurement of taxable income: |
| | | |
| | | 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. Accordingly, results for tax purposes are measured in terms of earnings in dollars. |
| | | |
| | | |
| | | |
| | 2. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the Investment Law”): |
| | | |
| | | The Company’s production facilities have been granted the status of an “Approved Enterprise” in accordance with the Investment Law under four separate investment programs. According to the provisions of such Israeli Investment Law, the Company has been granted the “Alternative Benefit Plan”, under which the main benefits are tax exempt and reduced tax rates. |
| | | |
| | | 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 five 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 no longer eligible for benefits in 2007. Tax benefits from the remaining programs are scheduled to gradually expire through 2013. |
| | | |
| | | As of December 31, 2007, 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. |
F-40
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | |
NOTE 13:- | TAXES ON INCOME (Cont.) |
| | | |
| | | The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above Investment 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, 2007, 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 Investment Law came into effect (“the Amendment”) that has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as a Privileged Enterprise including a provision generally requiring that at least 25% of the Privileged 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 Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. |
| | | |
| | | However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Investment 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 Investment Law, as 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. As of December 31, 2007, there was no taxable income attributable to the Privileged Enterprise. |
| | | |
| | 3. | Net operating loss carryforward: |
| | | |
| | | As of December 31, 2007, the Company has accumulated losses for tax purposes in the amount of approximately $76,000, which can be carried forward and offset 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. |
F-41
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | |
NOTE 13:- | TAXES ON INCOME (Cont.) |
| | | |
| | 5. | Tax rates: |
| | |
| | | Under an amendment to the Israeli Income Tax Ordinance enacted on July 25, 2005, a gradual decrease in the corporate tax rate in Israel will be in effect as follows: 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, | |
| | | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | | | | |
| | | | | | | | | | |
Domestic | | | $ | 7,387 | | | $ | 6,683 | | | $ | 3,131 | |
Foreign | | | | 7,541 | | | | 1,399 | | | | (4,654 | ) |
| | | | | | | | | | | | | |
|
| | | $ | 14,928 | | | $ | 8,082 | | | $ | (1,523 | ) |
| | | | | | | | | | | | | |
| | |
| c. | Taxes on income are comprised as follows: |
| | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| | | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | | | | |
| | | | | | | | | | |
Current taxes | | | $ | 3,167 | | | $ | 1,290 | | | $ | (1,125 | ) |
Deferred taxes | | | | (2,368 | ) | | | (1,001 | ) | | | 2,390 | |
| | | | | | | | | | | | | |
|
| | | $ | 799 | | | $ | 289 | | | $ | 1,265 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| | | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | | | | |
|
Domestic | | | $ | 2,167 | | | $ | 846 | | | $ | (1,575 | ) |
Foreign | | | | (1,368 | ) | | (557 | ) | | 2,840 | |
| | | | | | | | | | | | | |
|
| | | $ | 799 | | | $ | 289 | | | $ | 1,265 | |
| | | | | | | | | | | | | |
F-42
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 13:- | 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, | |
| | | | | |
| | 2006 | | 2007 | |
| | | | | | | | | |
Deferred tax assets: | | | | | |
Net operating loss carry forward | | | $ | 44,645 | | | | $ | 58,513 | | |
Reserves and allowances | | | | 7,879 | | | | | 5,823 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Deferred tax assets before valuation allowance | | | | 52,524 | | | | | 64,336 | | |
Valuation allowance | | | | (48,782 | ) | | | | (62,278 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Deferred tax assets | | | $ | 3,742 | | | | $ | 2,058 | | |
Deferred tax liability, related to intangible assets | | | $ | (7,780 | ) | | | $ | — | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Deferred tax asset (liabilities), net | | | $ | (4,038 | ) | | | $ | 2,058 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Foreign: | | | | | | | | | | | |
Current deferred tax assets | | | $ | 1,282 | | | | $ | 1,001 | | |
Current deferred tax liability | | | | (1,321 | ) | | | | — | | |
Non current deferred tax asset | | | | 2,460 | | | | | 1,057 | | |
Non current deferred tax liability | | | | (6,459 | ) | | | | — | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | $ | (4,038 | ) | | | $ | 2,058 | | |
| | | | | | | | | | | |
| |
| The Company’s U.S. subsidiaries have estimated total available carry forward tax losses of approximately $80,000 to offset against future taxable income between 2015 and 2024. As of December 31, 2007, the Company recorded a deferred tax asset of $2,058 relating to the available net carry forward 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. |
F-43
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 13:- | 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 income is as follows: |
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
Income (loss) before taxes, as reported in the consolidated statements of operations | | $ | 14,928 | | $ | 8,082 | | $ | (1,523 | ) |
| | | | | | | | | | |
|
Statutory tax rate | | | 34 | % | | 31 | % | | 29 | % |
| | | | | | | | | | |
| | | | | | | | | | |
Theoretical tax expenses (benefits) on the above amount at the Israeli statutory tax rate | | | 5,076 | | | 2,505 | | | (442 | ) |
Income taxed at rate other than the Israeli statutory tax rate (1) | | | (3,543 | ) | | (4,672 | ) | | 655 | |
Non-deductible expenses including equity based compensation expenses | | | 1,663 | | | 4,008 | | | 2,432 | |
Deferred taxes on losses for which a valuation allowance was provided | | | (2,813 | ) | | (261 | ) | | 3,333 | |
Utilization of operation losses carry forward | | | (2,291 | ) | | (1,232 | ) | | (3,355 | ) |
Taxes in respect to prior years | | | — | | | (66 | ) | | (1,588 | ) |
State and Federal taxes | | | 826 | | | 425 | | | 689 | |
Inter-company charges | | | 1,725 | | | (299 | ) | | (430 | ) |
Other individually immaterial income tax item | | | 156 | | | (119 | ) | | (29 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Actual tax expense | | $ | 799 | | $ | 289 | | $ | 1,265 | |
| | | | | | | | | | |
| | | | | | | | | | |
(1) Per share amounts (basic) of the tax benefit resulting from the exemption | | $ | 0.09 | | $ | 0.11 | | $ | 0.02 | |
| | | | | | | | | | |
Per share amounts (diluted) of the tax benefit resulting from the exemption | | $ | 0.08 | | $ | 0.11 | | $ | 0.02 | |
| | | | | | | | | | |
F-44
AUDIOCODES LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 13:- | TAXES ON INCOME (Cont.) |
| | |
| f. | The Company adopted the provisions of FIN 48 on January 1, 2007. Prior to 2007 the Company used the provisions of SFAS 5 to determine tax contingencies. As of January 1, 2007 there was no difference in the Company’s tax contingencies under the provisions of FIN 48. As a result, there was no effect on the Company’s shareholders equity upon the Company’s adoption of FIN 48. |
| | |
| | A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: |
| | | | |
Gross unrecognized tax benefits as of January 1, 2007 | | $ | 275 | |
| | | | |
Increase in tax position for current year | | | 13 | |
| | | | |
| | | | |
Gross unrecognized tax benefits as of December 31, 2007 | | $ | 288 | |
| | | | |
| | |
| | The Company recognizes interest and penalties related to unrecognized tax benefits in tax expenses. The liability for unrecognized tax benefits included accrued interest and penalties of $130 and $113 at December 31, 2007 and January 1, 2007, respectively |
| |
NOTE 14:- | BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE |
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
Numerator: | | | | | | | | | | |
| | | | | | | | | | |
Net income (loss) available to shareholders of Ordinary Shares | | $ | 13,436 | | $ | 6,877 | | $ | (3,885 | ) |
| | | | | | | | | | |
Denominator: | | | | | | | | | | |
| | | | | | | | | | |
Denominator for basic earnings per share - weighted average number of Ordinary shares, net of treasury stock | | | 40,295,591 | | | 41,716,626 | | | 42,699,307 | |
Effect of dilutive securities: | | | | | | | | | | |
Employee stock options and ESPP | | | 2,790,110 | | | 1,972,767 | | | *) — | |
Senior convertible notes | | | *) — | | | *) — | | | *) — | |
| | | | | | | | | | |
Denominator for diluted net earnings per share - adjusted weighted average number of shares | | $ | 43,085,701 | | $ | 43,689,393 | | $ | 42,699,307 | |
| | | | | | | | | | |
F-45
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 15:- | FINANCIAL INCOME, NET |
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
| | | | | | | | | | |
Financial expenses: | | | | | | | | | | |
Interest | | $ | (3,357 | ) | $ | (2,961 | ) | $ | (2,582 | ) |
Amortization of marketable securities premiums and accretion of discounts, net | | | (143 | ) | | (224 | ) | | (40 | ) |
Others | | | (146 | ) | | (240 | ) | | (617 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | (3,646 | ) | | (3,425 | ) | | (3,239 | ) |
| | | | | | | | | | |
Financial income: | | | | | | | | | | |
Interest and others | | | 6,103 | | | 7,242 | | | 5,909 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | $ | 2,457 | | $ | 3,817 | | $ | 2,670 | |
| | | | | | | | | | |
| |
NOTE 16:- | 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, 2005, 2006 and 2007 and long-lived assets as of December 31, 2005, 2006 and 2007. |
| | | | | | | | | | | | | | | | | | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
| | Total
revenues | | Long-
lived
assets | | Total
revenues | | Long-
lived
assets | | Total
revenues | | Long-
lived
assets | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Israel | | $ | 12,235 | | $ | 6,248 | | $ | 12,411 | | $ | 11,463 | | $ | 10,604 | | $ | 23,261 | |
Americas | | | 66,622 | | | 22,193 | | | 83,352 | | | 127,079 | | | 89,614 | | | 113,894 | |
Europe | | | 22,434 | | | 7 | | | 32,704 | | | 6 | | | 40,305 | | | 105 | |
Far East | | | 14,536 | | | 4 | | | 18,886 | | | 5 | | | 17,712 | | | 53 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | $ | 115,827 | | $ | 28,452 | | $ | 147,353 | | $ | 138,553 | | $ | 158,235 | | $ | 137,313 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| b. | Major customer’s data as a percentage of total revenues: |
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
| | | | | | | | | | |
Customer A | | | 16 | % | | 15 | % | | 17 | % |
F-46
|
AUDIOCODES LTD. AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 16:- | MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.) |
| | |
| 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, | |
| | | |
| | 2005 | | 2006 | | 2007 | |
| | | | | | | |
| | | | | | | | | | |
Technology | | $ | 62,287 | | $ | 70,013 | | $ | 56,426 | |
Networking | | | 53,540 | | | 77,340 | | | 101,809 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | $ | 115,827 | | $ | 147,353 | | $ | 158,235 | |
| | | | | | | | | | |
| |
NOTE 17:- | SUBSEQUENT EVENTS (UNAUDITED) |
| |
| In April 2008, the Company entered into a loan agreement with a bank in Israel that provides for borrowings of up to $15,000. The loan bears interest at LIBOR plus 1.5% with respect to $11,500 of borrowings and LIBOR plus 0.65% with respect to $3,500 of borrowings. The principal amount borrowed is repayable in 20 equal quarterly payments through May 2013. The bank has a lien of our assets and we are required to maintain $3,500 of compensating balances with the bank. The agreement requires the Company, among other things, to maintain shareholders’ equity at specified levels and to achieve certain levels of operating income. The agreement also restricts the Company from paying dividends. As of June 22, 2008, there was $15,000 outstanding under this loan agreement. |
- - - - -- - - - - - - - - - - - - - - - - - - -
F-47
NATURAL SPEECH COMMUNICATION LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
F-48
| |
|
Kost Forer Gabbay & Kasierer
|
3 Aminadav St. |
Tel-Aviv 67067, Israel |
|
Tel: 972 (3)6232525 |
Fax: 972 (3)5622555 |
www.ey.com/il |
AUDITORS’ REPORT
To the Shareholders of
NATURAL SPEECH COMMUNICATION LTD.
We have audited the accompanying balance sheets of Natural Speech Communication Ltd. (“the Company”) as of December 31, 2007 and 2006, and the related statements of operations, changes in shareholders’ equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards in Israel, including those prescribed by the Auditors’ Regulations (Auditor’s Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 2b to the financial statements, the financial statements have been prepared in U.S. dollars and not in reported amount, as required by Accounting Standard No. 12 of the Israel Accounting Standard Board.
As discussed in Note 1b to the financial statements, the Company has incurred an accumulated deficit of $ 16,264 thousand since inception, and has negative cash flows from operating activities. The Company’s ability to continue its operations is dependent upon additional support from investors until profitability is achieved. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
In our opinion, except for the two matters discussed above, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006 and the results of operations, changes in shareholder’s equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2007, in conformity with generally accepted accounting principles in Israel.
| |
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
June 22, 2008 | A Member of Ernst & Young Global |
F-49
|
NATURAL SPEECH COMMUNICATION LTD. |
|
BALANCE SHEETS |
| |
U.S. dollars in thousands |
| | | | | | | |
| | December 31, | |
| | | |
| | 2007 | | 2006 | |
| | | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 446 | | $ | 154 | |
Trade receivables | | | 34 | | | 210 | |
Other receivables and prepaid expenses | | | 16 | | | 7 | |
Inventories | | | 57 | | | 50 | |
| | | | | | | |
| | | | | | | |
Total current assets | | | 553 | | | 421 | |
| | | | | | | |
| | | | | | | |
LONG-TERM LEASE DEPOSITS | | | 18 | | | 22 | |
| | | | | | | |
| | | | | | | |
PROPERTY AND EQUIPMENT, NET (Note 3) | | | 444 | | | 162 | |
| | | | | | | |
| | | | | | | |
Total assets | | $ | 1,015 | | $ | 605 | |
| | | | | | | |
The accompanying notes are an integral part of the financial statements.
F-50
|
NATURAL SPEECH COMMUNICATION LTD. |
|
BALANCE SHEETS |
| |
U.S. dollars in thousands |
| | | | | | | |
| | December 31, | |
| | | |
| | 2007 | | 2006 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Trade payables | | $ | 244 | | $ | 98 | |
Employees and payroll accruals | | | 253 | | | 162 | |
Deferred Revenues | | | 120 | | | 6 | |
Other payables and accrued expenses | | | 142 | | | 49 | |
| | | | | | | |
| | | | | | | |
Total current liabilities | | | 759 | | �� | 315 | |
| | | | | | | |
| | | | | | | |
LONG-TERM LIABILITIES: | | | | | | | |
Accrued severance pay | | | 74 | | | 45 | |
Long-term loans from shareholders (Note 4) | | | — | | | 1,350 | |
| | | | | | | |
| | | | | | | |
Total long-term liabilities | | | 74 | | | 1,395 | |
| | | | | | | |
| | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5) | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ DEFICIENCY (Note 6): | | | | | | | |
Share capital | | | 88 | | | 40 | |
Additional paid-in capital | | | 16,358 | | | 13,383 | |
Accumulated deficit | | | (16,264 | ) | | (14,528 | ) |
| | | | | | | |
| | | | | | | |
Total shareholders’ equity (deficiency) | | | 182 | | | (1,105 | ) |
| | | | | | | |
| | | | | | | |
Total liabilities and shareholders’ equity (deficiency) | | $ | 1,015 | | $ | 605 | |
| | | | | | | |
The accompanying notes are an integral part of the financial statements.
F-51
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2007 | | 2006 | | 2005 | |
| | | | | | | |
| | | | | | | | | | |
Revenues | | $ | 1,123 | | $ | 378 | | $ | 691 | |
Cost of revenues | | | 230 | | | 62 | | | 90 | |
| | | | | | | | | | |
| | | | | | | | | | |
Gross profit | | | 893 | | | 316 | | | 601 | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Research and development | | | 1,499 | | | 1,084 | | | 1,233 | |
Sales and marketing | | | 756 | | | 721 | | | 733 | |
General and administrative | | | 348 | | | 258 | | | 209 | |
| | | | | | | | | | |
| �� | | | | | | | | | |
Total operating expenses | | | 2,603 | | | 2,063 | | | 2,175 | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating loss | | | 1,710 | | | 1,747 | | | 1,574 | |
Financial expenses, net | | | 26 | | | 33 | | | 21 | |
| | | | | | | | | | |
| | | | | | | | | | |
Loss | | $ | 1,736 | | $ | 1,780 | | $ | 1,595 | |
| | | | | | | | | | |
The accompanying notes are an integral part of the financial statements.
F-52
|
NATURAL SPEECH COMMUNICATION LTD. |
|
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIENCY) |
| |
U.S. dollars in thousands |
| | | | | | | | | | | | | | | | | | | |
| | Ordinary
shares | | Preferred
shares | | Additional
paid-in
capital | | Advances on
account of
shares | | Deficit
accumulated | | Total
shareholders’
equity
(deficiency) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2005 | | $ | 1 | | $ | 23 | | $ | 11,704 | | $ | — | | $ | (11,153 | ) | $ | 575 | |
| | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | — | | | — | | | — | | | (1,595 | ) | | (1,595 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | | 1 | | | 23 | | | 11,704 | | | — | | | (12,748 | ) | | (1,020 | ) |
| | | | | | | | | | | | | | | | | | | |
Issuance of Preferred shares | | | — | | | 16 | | | 1,201 | | | 478 | | | — | | | 1,695 | |
Net loss | | | — | | | — | | | — | | | — | | | (1,780 | ) | | (1,780 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | 1 | | | 39 | | | 12,905 | | | 478 | | | (14,528 | ) | | (1,105 | ) |
| | | | | | | | | | | | | | | | | | | |
Issuance of Preferred shares, net | | | — | | | 48 | | | 2,245 | | | 730 | | | — | | | 3,023 | |
Net loss | | | — | | | — | | | — | | | — | | | (1,736 | ) | | (1,736 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2007 | | $ | 1 | | $ | 87 | | $ | 15,150 | | $ | 1,208 | | $ | (16,264 | ) | $ | 182 | |
| | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the financial statements.
F-53
|
NATURAL SPEECH COMMUNICATION LTD. |
|
STATEMENTS OF CASH FLOWS |
| |
U.S. dollars in thousands |
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2007 | | 2006 | | 2005 | |
| | | | | | | |
Cash flows from operating activities: | | | | | | | | | | |
| | | | | | | | | | |
Net loss | | $ | (1,736 | ) | $ | (1,780 | ) | $ | (1,595 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | |
Depreciation | | | 76 | | | 80 | | | 103 | |
Increase (decrease) in accrued severance pay | | | 29 | | | (28 | ) | | — | |
Decrease (increase) in trade receivables | | | 176 | | | 154 | | | (258 | ) |
Decrease (increase) in other receivables, prepaid expenses and long-term lease deposits | | | (5 | ) | | (1 | ) | | 281 | |
Increase in inventories | | | (7 | ) | | (5 | ) | | (16 | ) |
Increase (decrease) in trade payables | | | 52 | | | 42 | | | (11 | ) |
Increase (decrease) in employees and payroll accruals | | | 91 | | | 5 | | | (10 | ) |
Increase (decrease) in deferred revenues | | | 114 | | | (4 | ) | | (4 | ) |
Increase (decrease) in other payables and accrued expenses | | | 93 | | | (36 | ) | | 55 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash used in operating activities | | | (1,117 | ) | | (1,573 | ) | | (1,455 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
| | | | | | | | | | |
Purchase of property and equipment | | | (264 | ) | | (33 | ) | | (100 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash used in investing activities | | | (264 | ) | | (33 | ) | | (100 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
| | | | | | | | | | |
Proceeds from issuance of Preferred shares, net | | | 943 | | | 1,217 | | | 1,433 | |
Proceeds from receipt of advances on account of shares | | | 730 | | | 478 | | | 10 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash provided by financing activities | | | 1,673 | | | 1,695 | | | 1,443 | |
| | | | | | | | | | |
| | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 292 | | | 89 | | | (112 | ) |
Cash and cash equivalents at the beginning of the year | | | 154 | | | 65 | | | 177 | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash and cash equivalents at the end of the year | | $ | 446 | | $ | 154 | | $ | 65 | |
| | | | | | | | | | |
| | | | | | | | | | |
Supplement disclosure of non-cash investing activities: | | | | | | | | | | |
| | | | | | | | | | |
Purchasing property and equipment | | $ | 96 | | $ | 2 | | $ | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Supplemental disclosure of non-cash financing activities: | | | | | | | | | | |
| | | | | | | | | | |
Issuance of Preferred shares against long-term loans from shareholders | | $ | 1,350 | | $ | — | | $ | — | |
| | | | | | | | | | |
The accompanying notes are an integral part of the financial statements.
F-54
|
NATURAL SPEECH COMMUNICATION LTD. |
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
| a. | Natural Speech Communication Ltd. (“the Company”) provides speech recognition products for the telephony and security markets. |
| | |
| b. | The Company has an accumulated deficit of $16,264 and negative cash flows from operating activities. The Company’s ability to continue to operate is dependent upon additional financial support from investors. The Company’s management believes that additional funds can be raised from existing and new investors. |
| | | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
| | | |
| The significant accounting policies applied in the preparation of the financial statements on a consistent basis, are as follows: |
| | | |
| 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 reported amounts in the financial statements and the accompanying notes. Actual results could differ from those estimates. |
| | | |
| b. | Financial statements in U.S. dollars: |
| | | |
| | The Company’s management believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar. |
| | | |
| | Non-monetary assets and liabilities (assets and liabilities presented in historical values as of the date of purchase or production) have been adjusted in accordance to the changes in the U.S. dollar exchange rate as of the date of purchase or production. |
| | | |
| | Monetary assets and liabilities (assets and liabilities that are presented at current or realization values as of balance sheet date) are presented in the financial statements according to U.S. dollar exchange rate as of the balance sheet date. |
| | | |
| | Statement of income amounts have been translated using average exchange rates prevailing during the year. |
| | | |
| c. | Cash equivalents: |
| | | |
| | Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less. |
F-55
|
NATURAL SPEECH COMMUNICATION LTD. |
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| d. | Inventories: |
| | |
| | As of January 1, 2007, the Company applies Accounting Standard No. 26, “Inventories”. Inventories are measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and costs necessary to make the sale. An evaluation of net realizable value is carried out in each subsequent period. |
| | |
| | Cost of inventory includes the inventory purchase costs. |
| | |
| | Cost is determined as follows: |
| | |
| | Raw materials and parts - using the weighted average cost method. |
| | |
| | Finished products - using the “average cost” method with the addition of direct manufacturing costs. |
| | |
| | The Company periodically evaluates the condition and age of inventories and provides for slow moving inventories accordingly. |
| | |
| | The Company does not believe that the adoption of Accounting Standard No. 26 has a material effect on its financial position or results of operations. |
| | |
| e. | Allowance for doubtful accounts: |
| | |
| | The allowance for doubtful accounts is principally determined in respect of specific debts whose collection, in the opinion of the Company’s management, is doubtful. |
| | |
| f. | Property and equipment: |
| | |
| | As of January 1, 2007, the Company applies the provisions of Accounting Standard No. 27, “Fixed Assets” of the Israel Accounting Standards Board. Fixed assets are stated at cost, including direct acquisition costs and accumulated depreciation, and excluding day-to-day servicing expenses. |
| | |
| | Depreciation is computed by the straight-line method over the estimated useful lives of the assets at the following annual rates: |
| | | |
| | | % |
| | | |
| | | |
| Computers and peripheral equipment | | 12 - 33 |
| Office furniture and equipment | | 7 - 33 |
| Leasehold improvements | | Over the term of the lease,
including renewal options |
| | |
| | The Company does not believe that the adoption of Accounting Standard No. 27 has a material effect on its financial position or results of operations. |
F-56
|
NATURAL SPEECH COMMUNICATION LTD. |
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| g. | Impairment of long-lived assets: |
| | |
| | The Company evaluates the need to record an impairment of the carrying amount of non-financial assets whenever events or changes in circumstances indicate that the carrying amount of the asset is not recoverable. Where the carrying amount of a non-financial asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. |
| | |
| | As of December 31, 2007 and 2006, no impairment losses have been identified. |
| | |
| h. | Research and development costs: |
| | |
| | Research costs are expensed as incurred. An intangible asset arising from development expenditure on an individual project is recognized only when the Company can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of required resources - technical, financial or other - to complete the asset, and the ability to measure reliably the expenditure during the development. |
| | |
| i. | Revenue recognition: |
| | |
| | Revenues are recognized in the income statement when they can be measured reliably, the economic benefits associated with the transaction are expected to flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenues are measured at the fair value of the consideration in the transaction less commercial rebates, volume discounts and returns. |
| | | |
| | 1. | Revenues from sale of goods: |
| | | |
| | | The Company applies Accounting Standard No. 25 regarding revenues recognition of products. Revenues from sale of goods are recognized once all the significant risks and rewards of ownership of the goods have been transferred to the buyer, the seller no longer retains continuing managerial involvement to the degree usually associated with ownership and no longer retains effective control over the goods sold. |
| | | |
| | 2. | Recognition of revenues from contracts in progress: |
| | | |
| | | Revenues from performance contracts are recognized on the percentage of completion basis provided that the revenues are fixed or can be reasonably estimated, collection is probable, costs related to performing the work are determinable or can be reasonably determined, there is no substantial uncertainty regarding the ability of the Company to complete the contract and to meet the contractual terms, and the percentage of completion can be reasonably estimated. |
F-57
| |
| NATURAL SPEECH COMMUNICATION LTD. |
| |
NOTES TO FINANCIAL STATEMENTS | |
| |
U.S. dollars in thousands, except share and per share data | |
| | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| j. | Concentrations of credit risks: |
| | |
| | Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. |
| | |
| | Cash and cash equivalents are invested in major banks in Israel. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. |
| | |
| | The trade receivables of the Company are mainly derived from sales to customers located primarily in Israel. The Company performs ongoing credit evaluations of its customers. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. |
| | |
| | The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. |
| | |
| k. | Share-based payments: |
| | |
| | According to the transition provisions of Accounting Standard No. 24 of the Israel Accounting Standards Board, “Share-based Payment”, the Company recognized a benefit in respect of grants to employees only for equity-settled share-based payment transactions made subsequent to March 15, 2005 that had not yet vested as of January 1, 2006. |
| | |
| | The Company’s employees and other service providers are entitled to remuneration in the form of share-based payment transactions as consideration for equity instruments (“equity settled transactions”). |
| | |
| | In connection with services provided to the Company, employees and other service providers are entitled to share-based payments settled in shares. The cost of equity-settled transactions with employees or service providers is measured at the fair value of the equity instruments on the date of grant. The fair value is determined by an independent appraiser using a binomial option-pricing model, see Note 7e. |
| | |
| l. | Fair value of financial instruments: |
| | |
| | The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: |
| | |
| | The carrying amounts of cash and cash equivalents, trade receivables, other accounts receivable and prepaid expenses, trade payables and other accounts payable and accrued expenses approximate their fair value due to the short-term maturity of such instruments. |
F-58
| |
| NATURAL SPEECH COMMUNICATION LTD. |
| |
NOTES TO FINANCIAL STATEMENTS | |
| |
U.S. dollars in thousands, except share and per share data | |
| | | | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| | Disclosure of the effects of new Accounting Standards in the period prior to their adoption/Disclosure of the effects of a new Accounting Standard in the period prior to its adoption: |
| | | |
| | 1. | Accounting Standard No. 13 (Revised), “Effects of Changes in Foreign Currency Exchange Rates”: |
| | | |
| | | In May 2007, the Israel Accounting Standards Board published Accounting Standard No. 13 (Revised), “Effects of Changes in Foreign Currency Exchange Rates” (“the Standard”), which deals with determining the functional currency of an entity or of it’s foreign operations, the translation of transactions in foreign currency, the translation of financial statements of foreign operations and the translation of financial statements from the functional currency to the presentation currency. The Standard applies to financial statements for periods commencing on January 1, 2008 and thereafter. |
| | | |
| | | According to the Standard, the term “reporting currency” was replaced by two terms: “functional currency” and “presentation currency”. |
| | | |
| | | Functional currency: |
| | | |
| | | |
| | | The Company’s functional currency is the currency that best reflects the economic environment in which the Company operates and conducts its transactions. |
| | | |
| | | The functional currency is separately determined for each investee, including an affiliate which is presented at equity, and is used to measure the investee’s financial position and operating results. When the investee’s functional currency differs from that of the Company, the investee represents a foreign operation whose financial statements are translated in order to be included in the Company’s financial statements as follows: |
| | | | |
| | | a) | Assets and liabilities in all balance sheets presented (including comparative data) are translated at the closing rate as of each balance sheet presented. Goodwill and all fair value adjustments of the assets and liabilities on the date of acquisition of the foreign operation are treated as the foreign operation’s assets and liabilities and are translated at the closing rate at each balance sheet date. |
| | | | |
| | | b) | Income and expenses for every period presented in the statements of income (including comparative data) are translated at the average exchange rates for each of the periods presented; however, if there have been significant changes in foreign exchange rates, income and expenses are translated at the exchange rate prevailing on the dates of the actual transactions. |
| | | | |
| | | c) | Share capital, capital reserves and other changes in capital are translated at the exchange rate prevailing as of the date of incurrence. |
F-59
| |
| NATURAL SPEECH COMMUNICATION LTD. |
| |
NOTES TO FINANCIAL STATEMENTS | |
| |
U.S. dollars in thousands, except share and per share data | |
| | | | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | | | |
| | | d) | Retained earnings are translated based on the opening balance at the exchange rate as of that date and other relevant transactions during the period are translated as described in b) and c) above. |
| | | | |
| | | e) | All translation differences are recorded as a separate item in shareholders’ equity (“foreign currency translation adjustments of foreign operations”). |
| | | | |
| | | Presentation currency: |
| | | | |
| | | The Company can present its financial statements in any currency (or currencies). The translation of the Company’s financial statements from the functional currency to the presentation currency will be presented in an appendix to the financial statements. |
| | | | |
| | | The translation of the Company’s results and financial position from the functional currency to the presentation currency will be done as follows: |
| | | | |
| | | a) | Assets and liabilities in all balance sheets presented (including comparative data) are translated at the closing rate as of each balance sheet presented. Goodwill and all fair value adjustments of the assets and liabilities on the date of acquisition of the foreign operation are treated as the foreign operation’s assets and liabilities and are translated at the closing rate at each balance sheet date. |
| | | | |
| | | b) | Income and expenses for every period presented in the statements of income (including comparative data) are translated at the average exchange rates for each of the periods presented; however, if there have been significant changes in foreign exchange rates, income and expenses are translated at the exchange rate prevailing on the dates of the actual transactions. |
| | | | |
| | | c) | Share capital, capital reserves and other changes in capital are translated at the exchange rate prevailing as of the date of incurrence. |
| | | | |
| | | d) | Retained earnings are translated based on the opening balance at the exchange rate as of that date and other relevant transactions during the period are translated as described in b) and c) above. |
| | | | |
| | | e) | All translation differences are recorded as a separate item in shareholders’ equity (“foreign currency translation adjustments of foreign operations”). |
| | | | |
| | | The Company does not expect the adoption of Accounting Standard No. 13 (Revised) will have material impact on its financial statements. |
F-60
| |
| NATURAL SPEECH COMMUNICATION LTD. |
| |
NOTES TO FINANCIAL STATEMENTS | |
| |
U.S. dollars in thousands, except share and per share data | |
| |
NOTE 3:- | PROPERTY AND EQUIPMENT |
| | | | | | | |
| | December 31, | |
| | | |
| | 2007 | | 2006 | |
| | | | | |
Cost: | | | | | | | |
Computers and peripheral equipment | | $ | 1,096 | | $ | 770 | |
Office furniture and equipment | | | 253 | | | 243 | |
Leasehold improvements | | | 176 | | | 154 | |
| | | | | | | |
| | | | | | | |
| | | 1,525 | | | 1,167 | |
| | | | | | | |
Accumulated depreciation: | | | | | | | |
Computers and peripheral equipment | | | 735 | | | 678 | |
Office furniture and equipment | | | 210 | | | 201 | |
Leasehold improvements | | | 136 | | | 126 | |
| | | | | | | |
| | | | | | | |
| | | 1,081 | | | 1,005 | |
| | | | | | | |
| | | | | | | |
Depreciated cost | | $ | 444 | | $ | 162 | |
| | | | | | | |
| | |
NOTE 4:- | LONG-TERM LOANS FROM SHAREHOLDERS |
| | |
| During the first quarter of 2007, the Company entered into a loan conversion and investment agreement with its shareholders. According to the agreement, the loans, in the amount of $ 1,350, which were received in U.S. dollars during 2005, bear no interest and have unidentified payment date, were converted to Preferred F1 (see also Note 7). |
| | |
NOTE 5:- | ACCRUED SEVERANCE PAY |
| | |
| a. | Composition: |
| | | | | | | |
| | December 31, | |
| | | |
| | 2007 | | 2006 | |
| | | | | |
| | | | | | | |
Accrued severance pay, net | | $ | 74 | | $ | 45 | |
| | | | | | | |
| | |
| b. | According to Israeli GAAP, the severance pay liability is measured based on the employee’s latest monthly salary multiplied by the number of years of employment as of each balance sheet date, based on the “shut down” method, and severance pay funds are measured at their redemption value at each balance sheet date. |
F-61
| |
| NATURAL SPEECH COMMUNICATION LTD. |
| |
NOTES TO FINANCIAL STATEMENTS | |
| |
U.S. dollars in thousands, except share and per share data | |
| | |
NOTE 6:- | COMMITMENTS AND CONTINGENT LIABILITIES |
| | |
| The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. The Company had obtained grants from the Office of the Chief Scientist at Israel’s Ministry of Industry, Trade and Labor (“the OCS”) aggregating to $ 3,239 for certain of the Company’s development projects. The Company is obligated to pay royalties to the OCS, amounting to 3% of the sales of the products and other related revenues generated from such projects, up to an amount equal to 100% of the grants received, linked to the U.S. dollar plus interest on the unpaid amount received based on the twelve month LIBOR rate applicable to dollar deposits. |
| | |
| Royalties paid or accrued amounted to $ 65 and $ 11 in 2007 and 2006, respectively. |
| | |
| As of December 31, 2007, the Company has an outstanding contingent obligation to pay royalties (including accumulated interest) in the amount of $ 3,488. |
| | |
NOTE 7:- | SHAREHOLDERS’ EQUITY (DEFICIENCY) |
| | |
| a. | Share capital: |
| | | | | | | | | | | | | |
| | Authorized | | Issued and outstanding | |
| | | | | |
| | December 31, | | December 31, | |
| | | | | |
| | 2007 | | 2006 | | 2007 | | 2006 | |
| | | | | | | | | |
| | Number of shares *) | |
| | | |
Shares of NIS 1 par value each: | | | | | | | | | | | | | |
Ordinary shares (1) | | | 1,304,000 | | | 684,000 | | | 3,299 | | | 3,299 | |
Ordinary Class A shares (2) | | | 3,000 | | | 3,000 | | | 200 | | | 200 | |
Preferred A shares (3) | | | 2,500 | | | 2,500 | | | 919 | | | 919 | |
Preferred B shares (3) | | | 2,500 | | | 2,500 | | | 983 | | | 983 | |
Preferred C shares (3) | | | 1,500 | | | 1,500 | | | 809 | | | 809 | |
Preferred D shares (3) | | | 2,500 | | | 2,500 | | | 1,863 | | | 1,863 | |
Preferred E shares (3) | | | 4,000 | | | 4,000 | | | 3,246 | | | 3,246 | |
Preferred F shares (3) | | | 200,000 | | | 200,000 | | | 94,381 | | | 94,381 | |
Preferred F1 shares (3) | | | 80,000 | | | — | | | 75,000 | | | — | |
Preferred G shares (3) | | | 100,000 | | | 100,000 | | | 72,222 | | | 67,526 | |
Preferred H shares (3) | | | 100,000 | | | — | | | 34,736 | | | — | |
Preferred I shares (3) | | | 200,000 | | | — | | | 87,926 | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2,000,000 | | | 1,000,000 | | | 375,584 | | | 173,226 | |
| | | | | | | | | | | | | |
| | |
| *) | Each 100 shares of NIS 0.01 par value were consolidated to one share of NIS 1 par value (see note 7c). |
|
| (1) | Ordinary shares: |
| |
The Ordinary shares confer upon the holders the right to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends, if declared.
|
F-62
NATURAL SPEECH COMMUNICATION LTD.
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | |
NOTE 7:- | SHAREHOLDERS’ EQUITY (DEFICIENCY) (Cont.) |
| | | |
| | (2) | Ordinary Class A shares: |
| | | |
| | | Ordinary Class A shares confer upon their holders the right to participate in any distribution of dividends, bonus shares or any other distribution of assets of the Company. They do not confer upon their holders the right to vote and/or to participate in the general meetings of the Company. The Ordinary Class A shares are convertible into Ordinary shares, upon an IPO of the Company, on a one-for-one basis. |
| | | |
| | (3) | Preferred shares: |
| | | |
| | | The Preferred shares (“A”, “B”, “C”, “D”, “E”, “F”, “F1”, “G”, “H” and “I”) have the same rights as the Ordinary shares. In addition, the shares are convertible into Ordinary shares and have a preference in liquidation. The Preferred shares are convertible, at the holders’ option, or upon an IPO of the Company, into Ordinary shares on a weighted average ratchet basis, according to the share purchase agreement. |
| | | |
| b. | In April 2006, the Company entered into an investment agreement, according to which the Company should issue 72,222 Preferred G shares of NIS 1 par value each, for a total consideration of $1,300. As of December 31, 2006 the Company issued only 67,526 Preferred G shares and therefore recorded in additional paid in capital an amount of $84. During 2007 the Company issued the remaining 4,696 Preferred G shares. |
| | | |
| | During 2006 the Company received from its shareholders payments on account of future investment agreement in the amount of $478. The payments were recorded as advances on account of shares. |
| | | |
| | On January 18, 2007, the Company entered into an investment agreement, according to which the Company issued 34,736 Preferred H shares of NIS 1 par value each, for a total consideration of $625. As part of Preferred H shares issuance the Company recorded advances on account of shares in the amount of $478 and received an additional amount of $147. |
| | | |
| | On January 18, 2007, the Company entered into a loan conversion and investment agreement, according to which the Company issued 75,000 Preferred F1 shares of NIS 1 par value each, for a total consideration of $1,350. As part of the agreement, the Company converted long term loans from shareholders in the amount of $1,350 (see also Note 4). |
| | | |
| | On April 26, 2007, the Company entered into an investment agreement, according to which the Company should issue 88,889 Preferred I shares of NIS 1 par value each, for a total consideration of $800. As part of the issuance, the Company received $800 from its shareholders, net of issuance expenses in the amount of $4. |
| | | |
| | During 2007 the Company received from its shareholders payments on account of future investment agreement in the amount of $730. The payments were recorded as advances on account of shares. |
F-63
NATURAL SPEECH COMMUNICATION LTD.
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | |
NOTE 7:- | SHAREHOLDERS’ EQUITY (DEFICIENCY) (Cont.) |
| |
| c. | On April 26, 2007, the Company approved a reverse split at a ratio of 100-to-1 of all shares (authorized and issued) included in these financial statements for all periods presented. |
| | |
| | Namely, each 100 shares of NIS 0.01 par value shall be consolidated to one share of NIS 1 par value. |
| | |
| d. | On May 21, 2007, the Company cancelled most of its outstanding employee stock options and granted new options. The Company accounted for these changes as modification in accordance with Accounting Standard No. 24. |
| | |
| e. | Stock option plans: |
| | |
| | On May 21, 2007, the Company’s 2002 option plan was cancelled. |
| | |
| | Under the Company’s 2003 Stock Option Plan (“the Plan”), options may be granted to officers, directors and employees of the Company. |
| | |
| | As of December 31, 2007, an aggregate of 9,849 Ordinary shares of the Company are still available for future grant. |
| | |
| | The options granted under the plan vest over a period of four years. The options expire no later than 10 years from the date of grant. Any options, which are forfeited or cancelled before expiration, become available for future grants. |
| | |
| | The fair value of each option is estimated on the date of grant using the Black & Scholes option valuation model that uses the assumptions noted in the following table: |
| | | | | |
| | Year ended
December 31
2007 | |
| | | |
|
Expected volatility | | | 50 | % | |
Expected dividends | | | 0 | % | |
Expected term (in years) | | | 3.04-6.25 | |
Risk free interest | | | 5 | % | |
| As of December 31, 2007 the fair value of the Company’s Ordinary shares was estimated in the amount of $0 per share, therefore, compensation expenses were not recorded. |
F-64
|
NATURAL SPEECH COMMUNICATION LTD. |
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 7:- | SHAREHOLDERS’ EQUITY (DEFICIENCY) (Cont.) |
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2007 | | 2006 | |
| | | | | |
| | Number
of options | | Weighted
average
exercise
price | | Weighted
average
remaining
contractual
term (in
years) | | Number
of options | | Weighted
average
exercise
price | | Weighted
average
remaining
contractual
term (in
years | |
| | | | | | | | | | | | | |
Options outstanding at beginning of year
| | | 14,269 | | $ | 41 | | | | | | 15,620 | | $ | 43 | | | | |
Cancelled | | | (13,026 | ) | $ | 41 | | | | | | — | | $ | — | | | | |
Granted | | | 83,000 | | $ | 11.68 | | | 9.39 | | | — | | $ | — | | | | |
Forfeited | | | (1,043 | ) | $ | 42 | | | | | | (1,351 | ) | $ | 57 | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Options outstanding at end of year | | | 83,200 | | $ | 11.66 | | | 9.39 | | | 14,269 | | $ | 41 | | | 7.4 | |
| | | | | | | | | | | | | | | | | | | |
|
Options exercisable at end of year | | | 35,868 | | $ | 11.03 | | | 9.39 | | | 7,753 | | $ | 58 | | | 7.28 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| *) | Each 100 shares of NIS 0.01 par value were consolidated to one share of NIS 1 par value (see also note 7c). |
| | |
| f. | Warrants issued to customer: |
| | |
| | On January 5, 2003, the Company entered into a commercial agreement, which regulated the relationship between the Company and a customer for a period of six years. |
| | |
| | As part of the agreement the customer will have the right to exercise a warrant to purchase 4,444 Preferred B shares at an exercise price equal to their par value, provided that the customer shall commercially launch a service to its subscribers based upon the Company’s products, exercisable for a period of 12 months from the date of launching the service, which has not yet commenced. |
| | |
NOTE 8:- | INCOME TAXES |
| |
| a. | Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: |
| | |
| | The Company’s results for tax purposes are measured under the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”). Accordingly, until 2004, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. |
| | |
| b. | Corporate tax rates in Israel: |
| | |
| | Taxable income of Israeli companies is subject to tax at the rate of 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter |
F-65
|
NATURAL SPEECH COMMUNICATION LTD. |
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| | | |
NOTE 8:- | INCOME TAXES (Cont.) |
| |
| c. | Net operating losses carryforwards: |
| | |
| | The Company has accumulated net operating losses carryforward for tax purposes as of December 31, 2007, amounting to approximately $16,000, which may be carried forward and offset against taxable income in the future for an indefinite period. |
| | |
NOTE 9:- | FINANCIAL INSTRUMENTS |
| |
| a. | Risks arising from financial instruments: |
| | |
| | The Company’s activities expose it to various financial risks such as market risk (including currency risk and other price risks) and credit risk. |
| | |
| | 1. | Foreign currency exchange rate risk: |
| | | |
| | | The Company operates in a number of countries and is exposed to foreign currency exchange rate risks resulting from the exposure to different currencies. Foreign currency exchange rate risks arise from recognized assets and liabilities denominated in a currency other than the functional currency and net investments in foreign operations. |
| | | |
| | 2. | Credit risk: |
| | | |
| | | The Company performs ongoing credit evaluations of its customers. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. |
| | | |
| | 3. | Cash flow risk in respect of interest rates: |
| | | |
| | | The Company is exposed to risk in respect of changes in the market rate of interest. The Company is obligated to pay royalties to the OCS linked to the U.S. dollar plus interest on the unpaid amount received based on the twelve month LIBOR rate applicable to dollar deposits. The variable rates of interest expose the Company to cash flow risk. |
F-66
NATURAL SPEECH COMMUNICATION LTD.
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 10:- | ADDITIONAL DISCLOSURE OF PROFIT AND LOSS ITEMS |
| | | | | | | | | | |
| | Year ended December 31, | |
| | | |
| | 2007 | | 2006 | | 2005 | |
| | | | | | | |
Revenues | | | | | | | | | | |
| | | | | | | | | | |
Revenues from sales | | $ | 1,123 | | $ | 378 | | $ | 691 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | $ | 1,123 | | $ | 378 | | $ | 691 | |
| | | | | | | | | | |
| | | | | | | | | | |
Cost of revenues | | | | | | | | | | |
| | | | | | | | | | |
Cost of revenues from sales | | $ | 230 | | $ | 62 | | $ | 90 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | $ | 230 | | $ | 62 | | $ | 90 | |
| | | | | | | | | | |
| | | | | | | | | | |
Research and development expenses | | | | | | | | | | |
| | | | | | | | | | |
Salaries and related expenses | | $ | 1,050 | | $ | 822 | | $ | 864 | |
Subcontractors | | | 174 | | | 35 | | | 59 | |
Car rental and maintenance | | | 100 | | | 96 | | | 102 | |
Other expenses | | | 175 | | | 131 | | | 208 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total research and development expenses | | $ | 1,499 | | $ | 1,084 | | $ | 1,233 | |
| | | | | | | | | | |
| | | | | | | | | | |
Sales and marketing expenses | | | | | | | | | | |
| | | | | | | | | | |
Salaries and related expenses | | $ | 469 | | $ | 318 | | $ | 321 | |
Subcontractors | | | 101 | | | 201 | | | 239 | |
Travel expenses | | | 43 | | | 68 | | | 43 | |
Car rental and maintenance | | | 56 | | | 46 | | | 41 | |
Other expenses | | | 87 | | | 88 | | | 89 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total sales and marketing expenses | | $ | 756 | | $ | 721 | | $ | 733 | |
| | | | | | | | | | |
| | | | | | | | | | |
General and administrative expenses | | | | | | | | | | |
| | | | | | | | | | |
Salaries and related expenses | | $ | 174 | | $ | 113 | | $ | 114 | |
Consultancy and professional fees | | | 60 | | | 24 | | | 32 | |
Others expenses | | | 114 | | | 121 | | | 63 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total general and administrative expenses | | $ | 348 | | $ | 258 | | $ | 209 | |
| | | | | | | | | | |
F-67
NATURAL SPEECH COMMUNICATION LTD.
|
NOTES TO FINANCIAL STATEMENTS |
| |
U.S. dollars in thousands, except share and per share data |
| |
NOTE 11:- | DISCLOSURE OF RECONCILIATION TO US GAAP |
| |
| There were no adjustments required to the net loss for each of the three years ended December 31, 2007. |
| |
NOTE 12:- | SUBSEQUENT EVENT |
| |
| On October 11, 2007, the Company entered into an investment agreement, according to which the Company should issue 93,257 Preferred I shares of NIS 1 par value each, for a total consideration of $839. An amount of $730 was recorded as advances on account of shares during 2007 (See also note 7b). During January 2008, the Company received from its shareholders the remaining payments in the amount of $109. |
F-68
EXHIBIT INDEX
| | |
Exhibit
No. | | Exhibit |
| | | |
| | |
4.34 | | Amendment No. 9 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd. and Nortel Networks Ltd., dated as of October 30, 2007.# |
| | |
4.35 | | Letter Agreements, dated April 30, 2008 between First International Bank of Israel, as lender, and AudioCodes Ltd., as borrower. † |
| | |
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. |
| | |
15.1 | | Consent of Kost Forer and Gabbay & Kasierer, a member of Ernst & Young Global. |
| | |
15.2 | | Consent of Squar, Milner, Peterson, Miranda and Williamson, LLP. |
| |
|
# 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. |
| |
† English summary of Hebrew original. |
