The board of directors of any merging company contemplating whether to approve a merger must determine, in light of the financial condition of the merging companies, whether in its opinion exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. If such reasonable concern exists, the board of directors will not authorize the merger.
For purposes of the shareholders vote of each party, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders’ meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power or the right to appoint 25% or more of the directors of the other party), vote against the merger (the “dissenting shares”). If a person holds at least 25% of the voting shares or 25% of the rights to appoint directors in both merging companies, the aforementioned limitation shall apply with respect to both merging companies. If the transaction would have been approved but for the objection of the dissenting shares, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the valuation of each of the parties to the merger and the consideration offered to the shareholders.
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposals for approval of the merger were filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed since the merger was approved by the shareholders of each merging company.
A merger is not subject to shareholders’ approval (i) of the target company – if such target company is a wholly-owned subsidiary of the acquiring company; (ii) of the acquiring company – if (a) the merger does not involve an amendment to the acquiring company’s articles of association or memorandum of association, and (b) the acquiring company does not issue within the framework of the merger more than 20% of voting rights (for that matter only – any securities held by such person which may be converted or exercised into shares shall be deemed to be converted or exercised, as applicable), and no person will become, as a result of any issuance of securities in the acquiring company within the framework of the merger, a controlling shareholder, and (c) if no circumstances which enable the dissenting shareholders to deny approval of the merger (as detailed above) exist.
If the target company shares are divided into more than one class of shares, the merger is also conditioned upon approval by the shareholders participating in all such class meetings. Notwithstanding the lack of such approval by all such class meetings, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the valuation of each of the parties to the merger and the consideration offered to the shareholders.
Full Tender Offer. The Companies Law also provides that if, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer. The Companies Law provides for appraisal rights if any shareholder who was an offeree in the tender offer files a request in court within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares. Shares acquired in violation of these provisions become dormant and cease to confer any rights upon their holder as long as the shares are held by the acquirer.
Regular Tender Offer. According to regulations promulgated under the Israeli Securities Law, an action of an offeror which is intended to persuade the public to sell to the offeror securities, including securities which may be converted or exercised into shares of a public company, constituting more than 5% of such registered securities, within any 6 months period, but excluding the acquisition of such securities on a stock exchange, must be made by a way of a tender offer directed to all such securities holders on equal terms.
Any tender offer must be made by a written document and meet specific requirements set forth in the regulations promulgated under the Israeli Securities Law. However, such regulations set forth that, with respect to a tender offer which is subject to, in addition the Israeli regulations, the law of a foreign state, including the rules and guidelines applicable to an exchange on which such company’s shares are registered for trade, the tender offer may be exempt from any provision of the regulations if the chairman of the Israeli Securities Authority concludes that such provision may be detriment to the tender offer and the waiver of such provision will not be detriment to a reasonable offeree.
Israel tax law treats share-for-share acquisitions between an Israeli company and another company less favorably than does U.S. tax law. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his or her ordinary shares for shares in another corporation to taxation prior to the sale of the shares received for such share-for-share swap.
Employees
As of December 31, 2007, we had 334 employees worldwide, of whom 118 were employed in research, development and engineering, 142 in sales and marketing, 33 in management and administration and 41 in operations. Of these employees, 251 were based in Israel, 19 were based in the United States, 13 were based in Europe, 15 were based in Latin America and 36 were based in Asia-Pacific.
As of December 31, 2006, we had 304 employees worldwide, of whom 108 were employed in research, development and engineering, 132 in sales and marketing, 28 in management and administration and 36 in operations. Of these employees, 220 were based in Israel, 20 were based in the United States, 14 were based in Europe, 16 were based in Latin America and 34 were based in Asia-Pacific.
As of December 31, 2005, we had 276 employees worldwide, of whom 105 were employed in research and development, 97 in sales and marketing, 28 in management and administration and 46 in operations. Of these employees, 217 were based in Israel, 17 were based in the United States, 11 were based in Europe, 9 were based in Latin America and 22 were based in Asia-Pacific.
We and our employees are not parties to any collective bargaining agreements. However, with respect to our Israeli employees, we are subject to Israeli labor laws, regulations and collective bargaining agreements between the Histadrut, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists Association, by extension orders of the Israeli Ministry of Labor and Welfare, as are in effect from time to time with respect to our Israeli employees. These laws and regulations principally concern matters such as paid annual vacation, paid sick days, length of the workday and work week, minimum wages, payment for overtime, payment during reserve duty, insurance for work-related accidents, severance payments and other conditions of employment. Generally, we provide our employees with benefits and working conditions above the legally required minimums.
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Israeli law generally requires severance pay upon the retirement or death of an employee or termination without due cause. We currently fund a partial amount of the severance obligations by making monthly payments in the amount of 8.33% of an employee’s monthly wages to approved pension funds or insurance policies.
Furthermore, we and our employees are required to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Such amounts also include payments by the employee for mandatory health insurance. The total payments to the National Insurance Institute are equal to approximately 17.68% of an employee’s salary (up to a maximum amount), of which the employee contributes approximately 12.00% and the employer contributes approximately 5.68% of the salary.
Substantially all of our employment agreements include employees’ undertakings with respect to non-competition, assignment to us of intellectual property rights developed in the course of employment and confidentiality. However, it should be noted that the enforceability of non-competition undertakings is rather limited under Israeli law.
Our employees are covered by a “managers insurance”, which provides life and pension insurance coverage with customary benefits to employees, including retirement and severance benefits. We contribute 13.33% of the employee’s base salary (which includes a severance amount) to “managers insurance” fund and the employees contribute 5.00% of their base salary to such funds. In addition, our employees are entitled to an “advanced education fund”. We contribute 7.50% of the employees’ base salary and the employees contribute 2.50% of their base salary to such fund.
Our employees are not represented by a labor union. To date, we have not experienced labor-related work stoppages and believe that our relations with our employees are good.
The employees of our subsidiaries are subject to local labor laws and regulations that vary from country to country.
Share Ownership
The following table sets forth certain information regarding the ordinary shares owned, and stock options held, by our directors and senior management as of March 14, 2008. The percentage of outstanding ordinary shares is based on 36,966,420 ordinary shares outstanding as of March 14, 2008.
Name
| Number of Ordinary
Shares
| Percentage of
Outstanding
Ordinary Shares
| Number of Stock
Options Held(1)
| Range of exercise
prices per share
of stock options
|
|---|
| | | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Zohar Zisapel | | | | 3,089,687 | | | 8.4 | | | 340,000 | | | $2.00 - $11.75 | |
| Ira Palti | | | | 0 | | | 0 | | | 800,000 | | | $4.49 - $9.09 | |
| All directors and senior | | |
| management as a group, | | |
| consisting of 12 people(2) | | | | 3,089,687 | | | 8.4 | | | 2,457,950 | | | $2.00 - $11.75 | |
| (1) | Each stock option is exercisable into one ordinary share, and expires 10 years from the date of its grant. |
| (2) | Each of the directors and senior managers other than Messrs. Zohar Zisapel and Ira Palti beneficially owns less than 1% of the outstanding ordinary shares as of March 14, 2008 (including options held by each such person and which are vested or shall become vested within 60 days of March 14, 2008) and have therefore not been separately disclosed. |
53
Stock Option Plans
1996 Key Employee Share Incentive Plan
In August 1996, we adopted our key employee share incentive plan. We ceased granting options under this plan as of December 31, 2002 in light of the adoption of our 2003 share option plan and a change in applicable Israeli tax laws, although options granted under this plan before December 31, 2002 are still valid subject to the plan. Employees of our company and our subsidiaries or affiliates belonging to the RAD-BYNET group were eligible to participate in the plan. The option committee of our board of directors administers the plan as the share incentive committee under the plan. No options may be granted to any person serving on the option committee or to any person who is or will become as a result of an option grant one of our controlling shareholders. The options expire five to ten years from the date of grant. The following table presents option grant information for this plan as of December 31, 2007:
Ordinary shares reserved
for option grants
| Options outstanding
| Weighted average
exercise price
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 387,200 | 387,200 | $6.54 |
Affiliate Employees Option Plan
In May 1997, we adopted our affiliate employees option plan. We ceased granting options under this plan as of February 2003 in light of the adoption of our 2003 share option plan and a change in applicable Israeli tax laws, although options granted under this plan before February 2003 are still valid subject to the plan. This plan has terms that are substantially identical to the terms of the 1996 key employee share incentive plan. The option committee of our board of directors administers the plan. Our employees, directors and officers, and consultants of our company, its subsidiaries and its RAD-BYNET affiliates, were eligible to participate in the plan. No options may be granted to any person serving on the option committee or to any person who is or will become as a result of an option grant one of our controlling shareholders. The options expire five to ten years from the date of grant. The following table presents option grant information for this plan as of December 31, 2007:
Ordinary shares reserved
for option grants
| Options outstanding
| Weighted average
exercise price
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 370,933 | 370,933 | $4.29 |
In September 2003, our shareholders approved the transfer of all unissued shares previously reserved by our shareholders for option grants for which no options were granted under the 1996 key employee share incentive plan and the affiliate employees plan for grants pursuant to the 2003 share option plan.
The 2003 Share Option Plan
In September 2003, our shareholders approved and adopted our 2003 share option plan. This plan complies with changes in Israeli tax law that were introduced in 2003 with respect to share options. The plan is designed to grant options pursuant to Section 102 or 3(i) of the Israeli Tax Ordinance (New Version), 1961. It is also intended to be a "qualified plan" as defined by U.S. tax law. Our worldwide employees, directors, consultants and contractors are eligible to participate in this plan. The option committee of our board of directors administers the plan. Generally, the options expire ten years from the date of grant. The option committee has an authority to include in the notice of grant a provision regarding the acceleration of the vesting period of any option granted upon the occurrence of certain events. In addition, our board of directors has sole discretion to determine, in the event of a transaction with other corporation, as defined in the plan, that each option shall either: (i) be substituted for an option to purchase securities of the other corporation; (ii) be assumed by the other corporation; or (iii) automatically vest in full. In the event that all or substantially all of the issued and outstanding share capital of the company shall be sold, each option holder shall be obligated to participate in the sale and to sell his/her options at the price equal to that of any other share sold. This plan has been approved by the Israeli Tax Authority as is required by applicable law. The following table presents option grant information for this plan as of December 31, 2007.
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Cumulative Ordinary Shares
Reserved for Option Grants
| Remaining Reserved
Shares Available for
Option Grants
| Options Outstanding
| Weighted Average Exercise
Price
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| 12,765,055 | 375,569 | 3,865,589 | $5.62 |
The following table presents certain option grant information concerning the distribution of options (granted under all three plans of the Company) among directors and employees of the Company as of December 31, 2007:
| Options Outstanding
| Unvested Options
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Directors and senior management | 2,137,950 | 935,000 |
| |
| All other grantees | 2,485,772 | 1,240,971 |
Amendment
Subject to applicable law, our board of directors may amend the plan, provided that any action by our board of directors which will alter or impair the rights or obligations of an option holder requires the prior consent of that option holder.
| ITEM 7. | | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
Major Shareholders
The following table sets forth stock ownership information as of March 31, 2008 (unless otherwise noted below) with respect to each person who is known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares, based on information provided to us by the holders or disclosed in public filings with the SEC.
Except where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares. The shareholders listed below do not have any different voting rights from any of our other shareholders. We know of no arrangements which would, at a subsequent date, result in a change of control of our company.
Total shares beneficially owned in the table below include shares that may be acquired upon the exercise of options that are exercisable within 60 days. The shares that may be issued under these options are treated as outstanding only for purposes of determining the percent owned by the person or group holding the options but not for the purpose of determining the percentage ownership of any other person or group. Each of our directors and officers who is also a director or officer of an entity listed in the table below disclaims ownership of our ordinary shares owned by such entity.
Each shareholder’s address is 24 Raoul Wallenberg St., Tel Aviv 69719, Israel.
Name
| Number of Ordinary
Shares
| Percentage of
Outstanding
Ordinary Shares(1)
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Zohar Zisapel(2) | | | | 3,429,687 | | | 9.2 | % |
| Yehuda Zisapel(2) | | | | 2,238,000 | | | 6.1 | % |
| (1) | Based on 36,966,420 ordinary shares issued and outstanding as of March 14, 2008. |
| (2) | Yehuda Zisapel and Zohar Zisapel are brothers. |
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As of March 14 2008, approximately 87% of our ordinary shares were held in the United States and there were 39 record holders with addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 86.9% of our outstanding ordinary shares as of said date).
Related Party Transactions
The RAD-BYNET Group of Companies
Yehuda Zisapel is a principal shareholder and Zohar Zisapel is Chairman of our board of directors and a principal shareholder of our company. They are brothers who do not vote as a group and do not have a voting agreement who, as of March 15, 2008, together control 15.3% of our company. Individually or together, they are also founders, directors or principal shareholders of several other companies which, together with us and the other affiliates, are known as the RAD-BYNET group. These corporations include the following, as well as several other real estate, holding, biotech and pharmaceutical companies:
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| AB-NET Communications Ltd. | Packetlight Networks Ltd. | RIT Technologies Ltd. |
| BYNET Data Communications Ltd. | RAD-Bynet Properties and Services (1981) Ltd. | SANRAD Inc. |
| BYNET Electronics Ltd. | RADCOM Ltd. | SILICOM Ltd. |
| BYNET SEMECH (Outsourcing) Ltd. | RAD Data Communications Ltd. and its subsidiaries | WISAIR Inc. |
| Bynet Software Systems Ltd. | RADLive Ltd. | |
| BYNET Systems Applications Ltd. | RADView Software Ltd. | |
| Chanellot Ltd. | RADVision Ltd. | |
| Commex Technologies Ltd. | RADWARE Ltd. | |
| Internet Binat Ltd | RADWIN Ltd. | |
The above list does not constitute a complete list of the investments of Messrs. Yehuda and Zohar Zisapel.
Mr. Atsmon, one of our directors, also serves as a director of RADVision Ltd., another company in the RAD-BYNET group. Ms Langer, one of our directors, acts as general counsel for several companies in the RAD- BYNET group.
In addition to engaging in other businesses, members of the RAD-BYNET group are actively engaged in designing, manufacturing, marketing and supporting data communications products, none of which currently compete with our products. Some of the products of members of the RAD-BYNET group are complementary to, and may be used in connection with, our products.
Members of the RAD-BYNET group provide us on an as-needed basis with management information systems, marketing, and administrative services, and we reimburse each company for its costs in providing these services. We lease our offices from other members of the RAD-BYNET group. The aggregate amount of these expenses was approximately $1.5 million in 2007.
We generally ascertain the market prices for goods and services that can be obtained at arms’ length from unaffiliated third parties before entering into any transaction with a member of the RAD-BYNET group for those goods and services. In addition, all of our transactions to date with members of the RAD-BYNET group were approved by our board of directors and audit committee. As a result, we believe that the terms of the transactions in which we have engaged and are currently engaged with other members of the RAD-BYNET group are beneficial to us and no less favorable to us than terms which might be available to us from unaffiliated third parties. Any future transaction and arrangement with entities, including other members of the RAD-BYNET group, in which our office holders have a personal interest will require approval by our audit committee, our board of directors and, if applicable, our shareholders.
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Lease Arrangements
We lease most of our office space for our current headquarters and principal administrative, finance, marketing and sales operations from real estate holding companies controlled by Yehuda and Zohar Zisapel. The leased facility is approximately 51,400 square feet in size. The leases for the majority of this facility are valid until December 2010, with an option to renew for an additional two-year period. Additionally, we lease space for our U.S. headquarters from a real estate holding company controlled by Yehuda Zisapel and Zohar Zisapel. This facility is approximately 5,800 square feet in size. The lease for this facility is valid until September 2008. The aggregate amount of rent and maintenance expenses related to these properties was approximately $778 thousand in 2007.
Supply Arrangement
We purchase components and products from RAD Data Communications Ltd., RADWIN Ltd. and other members of the RAD-BYNET group which we integrate into our products or product offerings. The aggregate purchase price of these components was approximately $3.4 million for the year ended December 31, 2007.
Registration Rights
In connection with the private placement of preferred shares before our initial public offering in August 2000, several of our shareholders were granted registration rights with respect to ordinary shares which resulted following conversion of their preferred shares immediately prior to the completion of our initial public offering. The agreement grants registration rights to each of:
| | — | the majority of the holders of the ordinary shares resulting from the conversion of such preferred shares; and |
| | — | Yehuda Zisapel and Zohar Zisapel. |
Under the agreement, each of these shareholders has the right to have its ordinary shares included in certain of our registration statements.
| ITEM 8: | | FINANCIAL INFORMATION |
Consolidated Statements and Other Financial Information
The annual financial statements required by this item are found at the end of this Annual Report, beginning on Page F-1.
Export Sales
In 2007, 99% of our sales were to customers located outside of Israel.
Legal Proceedings
We are not a party to any material legal proceedings, nor have there been any material legal proceedings in which any of our directors, members of senior management, or affiliates is either a party adverse to us or has a material interest adverse to us. There are no material legal or governmental proceedings which we know to be pending against us.
Dividends
We have never declared or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the future, except for the share dividend that was paid as a result of a 250-for-1 share recapitalization that took place immediately prior to our initial public offering. We currently intend to retain all future earnings to finance our operations and to expand our business.
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No Significant Changes
No significant changes to Ceragon’s financial condition have occurred since the date of the annual financial statements included herein.
| ITEM 9: | | THE OFFER AND LISTING |
Offer and Listing Details
Our ordinary shares have been listed on the Nasdaq Global Market, or Nasdaq, since August 4, 2000 and on the Tel Aviv Stock Exchange, or TASE, since September 12, 2004, both under the symbol “CRNT.”
The table below sets forth for the periods indicated the high and low market prices of our ordinary shares as reported on Nasdaq.
| Ordinary Shares
|
|---|
| High
| Low
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| 2003 (Annual) | | | $ | 7.55 | | $ | 1.00 | |
| | | |
| 2004 (Annual) | | | | 8.74 | | | 3.70 | |
| | | |
| 2005 (Annual) | | | | 6.77 | | | 3.40 | |
| | | |
| 2006 (Annual) | | | | 5.74 | | | 3.87 | |
| | | |
| 2007 (Annual) | | | | 21.89 | | | 5.11 | |
| | | |
| 2006 | | |
| First Quarter | | | | 5.19 | | | 3.87 | |
| Second Quarter | | | | 5.59 | | | 4.10 | |
| Third Quarter | | | | 4.72 | | | 3.96 | |
| Fourth Quarter | | | | 5.74 | | | 4.20 | |
| | | |
| 2007 | | |
| First Quarter | | | | 6.33 | | | 5.11 | |
| Second Quarter | | | | 11.86 | | | 5.55 | |
| Third Quarter | | | | 19.22 | | | 11.53 | |
| Fourth Quarter | | | | 21.89 | | | 9.72 | |
| | | |
| 2008 | | |
| First Quarter (through March 14, 2008) | | | | 11.59 | | | 6.32 | |
58
The table below sets forth the high and low market prices for our shares on Nasdaq during the most recent six-month period:
| High
| Low
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| September 2007 | | | $ | 19.22 | | $ | 13.82 | |
| October 2007 | | | | 21.89 | | | 15.22 | |
| November 2007 | | | | 17.99 | | | 11.35 | |
| December 2007 | | | | 13.91 | | | 9.72 | |
| January 2008 | | | | 11.59 | | | 7.65 | |
| February 2008 | | | | 9.53 | | | 8.02 | |
| March 2008 (through March 14, 2008) | | | | 8.59 | | | 6.32 | |
The table below sets forth for the periods indicated the high and low market prices of our ordinary shares on the TASE. The translation from NIS into U.S. dollars for the following two tables is based on representative rates of exchange published by the Bank of Israel.
| High
| Low
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2005 (Annual) | | | $ | 6.67 | | $ | 3.46 | |
| | | |
| 2006 (Annual) | | | | 5.70 | | | 3.79 | |
| | | |
| 2007 (Annual) | | | | 20.33 | | | 5.15 | |
| | | |
| 2005 | | |
| First Quarter | | | | 6.67 | | | 4.95 | |
| Second Quarter | | | | 5.23 | | | 4.36 | |
| Third Quarter | | | | 5.02 | | | 4.36 | |
| Fourth Quarter | | | | 4.62 | | | 3.46 | |
| | | |
| 2006 | | |
| First Quarter | | | | 5.08 | | | 3.84 | |
| Second Quarter | | | | 5.49 | | | 4.18 | |
| Third Quarter | | | | 5.02 | | | 3.79 | |
| Fourth Quarter | | | | 5.70 | | | 4.21 | |
| | | |
| 2007 | | |
| First Quarter | | | | 6.40 | | | 5.15 | |
| Second Quarter | | | | 11.20 | | | 5.67 | |
| Third Quarter | | | | 18.68 | | | 11.28 | |
| Fourth Quarter | | | | 20.33 | | | 9.79 | |
| | | |
| 2008 | | |
| First Quarter (through March 14, 2008) | | | | 11.71 | | | 6.67 | |
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The table below sets forth the high and low market prices for our shares on the TASE during the most recent six-month period:
| High
| Low
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| September 2007 | | | $ | 18.68 | | $ | 13.71 | |
| October 2007 | | | | 20.33 | | | 15.24 | |
| November 2007 | | | | 19.05 | | | 11.58 | |
| December 2007 | | | | 13.95 | | | 9.79 | |
| January 2008 | | | | 11.71 | | | 7.90 | |
| February 2008 | | | | 9.43 | | | 8.35 | |
| March 2008 (through March 14, 2008) | | | | 8.98 | | | 6.67 | |
Markets
See “Offer and Listing Details” above.
| ITEM 10. | | ADDITIONAL INFORMATION |
Memorandum and Articles of Association
A description of our memorandum and articles of association was previously provided in our registration statement on Form F-1 (Registration Statement 333-12312) filed with the Securities and Exchange Commission on August 3, 2000, and is incorporated herein by reference. The articles of association as amended in November 2006 are included as Exhibit 1.2 to this annual report.
Material Contracts
None.
Exchange Controls
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
Taxation
The following is a short summary of the tax environment to which shareholders may be subject. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal advisor.
This summary is based on the current provisions of tax law and, except for the foregoing, does not anticipate any possible changes in law, whether by legislative, regulatory, administrative or judicial action. Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income at the rate of 29% for the 2007 tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Israeli Tax Ordinance”), which came into effect on January 1, 2006, the corporate tax rate is scheduled to decrease as follows: 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003.
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However, the effective tax rate payable by a company that derives income from an approved enterprise, discussed further below, may be considerably lower. See “The Law for the Encouragement of Capital Investments, 1959” below.
The Law for the Encouragement of Capital Investments, 1959
Tax Benefits before the 2005 amendment
The Law for the Encouragement of Capital Investments, 1959, commonly referred to as the Investments Law, provides that a proposed capital investment in eligible facilities may be designated as an approved enterprise. See “Tax Benefits under the 2005 Amendment” below regarding an amendment to the Investments Law that came into effect in 2005.
Each certificate of approval for an approved enterprise, received upon application to the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel, or the Investment Center, relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, for example, the equipment to be purchased and utilized under the program. The tax benefits derived from any certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted average of the applicable rates.
Taxable income of a company derived from an approved enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate tax rates, for the benefit period. This period is ordinarily seven or ten years depending upon the geographic location of the approved enterprise within Israel, and whether the company qualifies as a foreign investors’ company as described below, commencing with the year in which the approved enterprise first generates taxable income after the commencement of production. Tax benefits under the Investments Law may also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business.
A company owning an approved enterprise may elect to forego certain government grants extended to an approved enterprise in return for an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income after the commencement of production, depending on the geographic location of the approved enterprise within Israel, and the company will be eligible for a reduced tax rate for the remainder of the benefits period. However, this period is limited to twelve years from commencement of production or fourteen years from the date of approval, whichever is earlier. This limitation does not apply to the exemption period.
A company that has an approved enterprise program is eligible for further tax benefits if it qualifies as a foreign investors’ company. A foreign investors’ company is a company in which more than 25% of its share capital and combined share and loan capital is owned by non-Israeli residents. A company that qualifies as a foreign investors’ company and has an approved enterprise program is eligible for tax benefits for a ten-year benefit period (instead of seven). Depending on the geographic location of the approved enterprise within Israel, income derived from the approved enterprise program may be exempt from tax on its undistributed income for a period of between two and ten years and will be subject to a reduced tax rate for rest of the benefits period (up to eight years). The tax rate for the additional benefits period is 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate is 20% if the foreign investment is 49% or more and less than 74%; 15% if 74% or more and less than 90%; and 10% if 90% or more. A company that has elected the alternative package of benefits and that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to tax on the gross amount distributed. The tax rate will be the rate which would have been applicable had the company not elected the alternative package of benefits. This rate is generally 10%-25%, depending on the percentage of the company’s shares held by foreign shareholders. The dividend recipient is subject to withholdings of tax at the source by the company at the reduced rate applicable to dividends from approved enterprises, which is 15% if the dividend is distributed during the tax exemption period or within 12 years after the period. This limitation does not apply to a foreign investors’ company.
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The benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investments Law and its regulations and the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, in whole or in part, it would be required to refund the amount of tax benefits, with the addition of the consumer price index linkage adjustment and interest.
The Investment Center has granted approved enterprise status to three investment programs at our former facility in Tel Aviv and we have derived and expect to continue to derive a substantial portion of our income from these programs. We have elected the alternative package of benefits under these approved enterprise programs. The portion of our income derived from these approved enterprise programs will be exempt from tax for a period of two years commencing in the first year in which there is taxable income after the commencement of production and will be subject to a reduced company tax of up to 25% for the subsequent period of five years, or up to eight years if the percentage of non-Israeli investors who hold our ordinary shares exceeds 25%. The period of tax benefits for our approved enterprise programs has not yet commenced, because we have yet to realize taxable income.
Tax Benefits under the 2005 Amendment
On April 1, 2005, an amendment to the Investments Law (the “Amendment”) came into force. The Amendment includes revisions to the criteria for investments qualified to receive tax benefits as an approved enterprise. The Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to December 31, 2004, whose benefits will remain as they were on the date of such approval. However, a company that was granted benefits according to section 51 of the Investments Law (prior to the amendment) would not be allowed to choose a new tax year as a year of election (as described below) under the new amendment for a period of 3 years from the company’s previous year of commencement under the old Investment Law.
The Company will continue to enjoy its current tax benefits in accordance with the provisions of the Investment Law prior to its revision. However, if the Company is granted any new benefits in the future, they will be subject to the provisions of the amended Investment Law. Therefore, the above discussion is a summary of the Investment Law prior to its amendment and the following is a discussion of the relevant changes contained in the new legislation.
The Amendment simplifies the approval process: according to the Amendment, only approved enterprises receiving cash grants require the approval of the Investment Center. The Investment Center was entitled to approve such programs only until December 31, 2007.
Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export (referred to as a “Benefited Enterprise”). In order to receive the tax benefits, the Amendment states that the company must make an investment in the Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise (the “Year of Election”). A company wishing to receive the tax benefits afforded to a Benefited Enterprise is required to select the tax year from which the period of benefits under the Investments Law are to commence by notifying the Israeli Tax Authority within 12 months of the end of that year. Companies are also granted the right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment. Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Benefited Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion.
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The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, or 12 years from the first day of the Year of Election. The tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax routes, which may be applicable to us:
| | — | Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the dividend that we may distribute. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise; and |
| | — | A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents. |
Generally, a company that is Abundant in Foreign Investment (owned by at least 74% foreign shareholders and has undertaken to invest a minimum sum of $20 million in the Beneficiary Enterprise) is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.
The Amendment changes the definition of “foreign investment” in the Investments Law so that the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the definition of “foreign investment” took effect retroactively from 2003.
Among the results of the Amendment are that (a) tax-exempt income generated under the provisions of the new law will subject us to taxes upon distribution or liquidation and (b) we may be required to record a deferred tax liability with respect to such tax-exempt income. As of December 31, 2007, we did not generate income under the provisions of the new law.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to scientific research and development projects, for the year in which they are incurred if:
| | — | the expenditures are approved by the relevant Israeli government ministry, determined by the field of research; |
| | — | the research and development is for the promotion or development of the company; and |
| | — | the research and development is carried out by or on behalf of the company seeking the deduction. |
However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible over a three-year period if the R&D is for the promotion or development of the company.
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
According to the Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, an industrial company is a company resident in Israel, at least 90% of the income of which, in a given tax year, determined in Israeli currency exclusive of income from specified government loans, capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity.
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Under the Industry Encouragement Law, industrial companies are entitled to the following preferred corporate tax benefits, among others:
| | — | deduction of purchases of know-how, patents and the right to use a patent over an eight-year period for tax purposes; |
| | — | deduction over a three-year period of specified expenses incurred with the issuance and listing of shares on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel (including Nasdaq); |
| | — | the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies; and |
| | — | accelerated depreciation rates on equipment and buildings. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that we currently qualify as an industrial company within the definition of the Industry Encouragement Law. We cannot assure you that we will continue to qualify as an industrial company or that the benefits described above will be available to us in the future.
Special Provisions Relating to Taxation under Inflationary Conditions
Under the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes were measured in real terms in accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”). Accordingly, until 2002, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Commencing in fiscal year 2003, we have elected to measure our taxable income and file our tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Such an election obligated us for three years. Accordingly, commencing with fiscal year 2003, results for tax purposes are measured in terms of earnings in dollars. We filed for one-year extensions in 2006 and 2007. Beginning January 1, 2008, the Inflationary Adjustments Law was repealed.
Israeli Capital Gains Tax on Sales of Shares
Israeli law imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain that is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
Generally, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, retroactive from January 1, 2003, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e. such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company) the tax rate will be 25%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of publicly-traded shares, unless such companies were not subject to the Inflationary Adjustments Law (or certain regulations) as of August 10, 2005, in which case the applicable tax rate is 25%. However, the foregoing tax rates would not apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering.
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The tax basis of publicly-traded shares acquired prior to January 1, 2003, will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE, provided such gains did not derive from a permanent establishment of such shareholders in Israel, and are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock market outside of Israel (including Nasdaq), provided however that such capital gains are not derived from a permanent establishment in Israel, that such shareholders are not subject to the Inflationary Adjustments Law and that such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.
Under the convention between the United States and Israel concerning taxes on income, as amended (the “U.S.-Israel Tax Treaty”), generally, Israeli capital gains tax will not apply to the sale, exchange or disposition of ordinary shares by a person who:
| | — | holds the ordinary shares as a capital asset; and |
| | — | qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty; and |
| | — | is entitled to claim the benefits available to the person by the U.S.-Israel tax treaty. |
However, this exemption will not apply if (i) the treaty U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition, subject to specified conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In this case, the sale, exchange or disposition would be subject to Israeli tax, to the extent applicable. However, under the U.S.-Israel tax treaty, the treaty U.S. resident would be permitted to claim a credit for the taxes against the U.S. federal income tax imposed on the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.
Israeli Taxation of Dividends Distributed to Non-Resident Holders of Our Shares
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income, including dividends, royalties and interest, as well as non-passive income from services provided in Israel. On distributions of dividends other than bonus shares or stock dividends, income tax is withheld at source at the following rates: (i) for dividends distributed prior to January 1, 2006 – 25%; (ii) for dividends distributed on or after January 1, 2006 – 20%, or 25% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution; unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. As stated earlier, dividends of income generated by an approved enterprise are subject to withholding tax at a rate of 15%.
Dividends not generated by an approved enterprise (or Benefited Enterprise)
Dividends generated by
an approved enterprise (or
Benefited Enterprise)
| U.S. company holding 10% or more of our issued voting
power during the part of the tax year which precedes
the date of payment of the dividend and during the
whole of its prior tax year
| Other non-resident
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 15% | 12.5% | 20%-25% |
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U.S. Federal Income Tax Considerations
Subject to the limitations described below, the following discussion summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition of our ordinary shares to a U.S. holder that owns our ordinary shares as a capital asset (generally, for investment). A U.S. holder is a holder of our ordinary shares that is for U.S. federal income tax purposes:
| | — | an individual citizen or resident of the United States; |
| | — | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any political subdivision thereof or the District of Columbia; |
| | — | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
| | — | a trust if (i) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person. |
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.
Certain aspects of U.S. federal income taxes relevant to a holder of our ordinary shares (other than a partnership) that is not a U.S. holder (a “Non-U.S. holder”) are also discussed below.
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury Regulations, and administrative and judicial decisions as of the date of this annual report, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder in light of the holder’s individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to U.S. holders that are subject to special treatment, including U.S. holders that:
| | — | are broker-dealers or insurance companies; |
| | — | have elected mark-to-market accounting; |
| | — | are tax-exempt organizations or retirement plans; |
| | — | are certain former citizens or long-term residents of the United States; |
| | — | are financial institutions or financial services entities; |
| | — | hold ordinary shares as part of a straddle, hedge or conversion transaction with other investments; |
| | — | acquired their ordinary shares upon the exercise of employee stock options or otherwise as compensation; |
| | — | are real estate investment trusts or regulated investment companies; |
| | — | own directly, indirectly or by attribution at least 10% of our voting power; or |
| | — | have a functional currency that is not the U.S. dollar. |
This discussion is not a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase our ordinary shares. For example, this discussion does not address any aspect of state, local or non-U.S. tax laws or the possible application of United States federal gift or estate taxes.
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Each holder of our ordinary shares is advised to consult his or her own tax advisor with respect to the specific tax consequences to him or her of purchasing, owning or disposing of our ordinary shares, including the applicability and effect of federal, state, local and foreign income and other tax laws to his or her particular circumstances.
Taxation of Distributions Paid on Ordinary Shares
Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” a U.S. holder will be required to include in gross income as dividend income the amount of any distribution paid on our ordinary shares, including any non-U.S. taxes withheld from the amount paid, on the date the distribution is received to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of earnings and profits will be applied against and will reduce the U.S. holder’s tax basis in its ordinary shares and, to the extent in excess of that basis, will be treated as gain from the sale or exchange of ordinary shares. The dividend portion of such distribution generally will not qualify for the dividends received deduction otherwise available to corporations.
Dividends that are received by U.S. holders that are individuals, estates or trusts will be taxed at the rate applicable to long-term capital gains (currently a maximum rate of 15% for taxable years beginning on or before December 31, 2010), provided that such dividends meet the requirements of “qualified dividend income.” Subject to the holding period and risk-of-loss requirements discussed below, dividends paid by a foreign corporation that is not a passive foreign investment company (as discussed below) will be qualified dividend income if the stock with respect to which the dividend is paid is readily tradable on an established securities market in the United States such as the Nasdaq Global Market. Dividends that fail to meet such requirements, and dividends received by corporate U.S. holders, are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend if (1) the U.S. holder held the ordinary share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical securities) or (2) the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinary share with respect to which the dividend is paid. If we were to be a “passive foreign investment company” (as such term is defined in the Code) for any year, dividends paid on our ordinary shares in such year or in the following year would not be qualified dividends. In addition, a non-corporate U.S. holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income rates.
Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. holder (including any non-U.S. taxes withheld from the distributions) will be includible in the income of a U.S. holder in a dollar amount calculated by reference to the exchange rate on the date of the distribution. A U.S. holder that receives a foreign currency distribution and converts the foreign currency into dollars after the date of distribution will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss.
U.S. holders will have the option of claiming the amount of any non-U.S. income taxes withheld at source either as a deduction from gross income or as a dollar-for-dollar credit against their U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the non-U.S. income taxes withheld, but the amount may be claimed as a credit against the individual’s U.S. federal income tax liability. The amount of non-U.S. income taxes that may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. These limitations include rules which limit foreign tax credits allowable for specific classes of income to the U.S. federal income taxes otherwise payable on each such class of income.
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The total amount of allowable foreign tax credits in any year cannot exceed the pre-credit U.S. tax liability for the year attributable to non-U.S. source taxable income. Distributions of current or accumulated earnings and profits will generally be non-U.S. source passive income for U.S. foreign tax credit purposes; however, special rules will apply if we are a “United States-owned foreign corporation.” In that case, distributions of current or accumulated earnings and profits will be treated as U.S. source and non-U.S. source income in proportion to our earnings and profits in the year of the distribution allocable to U.S. and non-U.S. sources. We will be treated as a United States-owned foreign corporation as long as stock representing 50% or more of the voting power or value of our ordinary shares is owned, directly or indirectly, by United States persons. Non-U.S. taxes allocable to the portion of our distributions treated as from U.S. sources under these rules may not be creditable against a U.S. holders’ U.S. federal income tax liability on such portion.
A U.S. holder will be denied a foreign tax credit for non-U.S. income taxes withheld from a dividend received on the ordinary shares if (1) the U.S. holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend or (2) to the extent the U.S. holder is under an obligation to make related payments with respect to positions in substantially similar or related property. Any days during which a U.S. holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the required 16-day holding period.
Taxation of the Disposition of Ordinary Shares
Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other disposition of our ordinary shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the U.S. holder’s basis in the ordinary shares, which is usually the cost to the U.S. holder of the ordinary shares, and the amount realized on the disposition. A disposition of ordinary shares will be considered to occur on the trade date, regardless of the U.S. holder’s method of accounting. Capital gain from the sale, exchange or other disposition of ordinary shares held more than one year will be long-term capital gain and may, in the case of non-corporate U.S. holders, be subject to a reduced rate of taxation (long-term capital gains are currently taxable at a maximum rate of 15% for taxable years beginning on or before December 31, 2010). Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares will generally be treated as U.S. source income for U.S. foreign tax credit purposes. The deductibility of a capital loss recognized on the sale, exchange or other disposition of ordinary shares is subject to limitations.
A U.S. holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles. However, a U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss. A U.S. holder may avoid realizing foreign currency gain or loss if he or she has elected to use the settlement date to determine its proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition of ordinary shares and converts the foreign currency into dollars after the settlement date or trade date (whichever date the U.S. holder is required to use to calculate the value of the proceeds of sale) will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss.
Tax Consequences if We Are a Passive Foreign Investment Company
For U.S. federal income tax purposes, we will be classified as a passive foreign investment company, or PFIC, for any taxable year in which either, after applying certain look-through rules, (i) 75% or more of our gross income is passive income or (ii) at least 50% of the average value of our total assets for the taxable year produce or are held for the production of passive income (the “Asset Test”). For this purpose, cash is considered to be an asset which produces passive income. Passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of certain assets which produce passive income.
Based on our income, assets, activities and market capitalization, we do not believe that we were a PFIC for the taxable year ended December 31, 2007. However, there can be no assurances that the United States Internal Revenue Service (“IRS”) will not challenge this conclusion. If we were not a PFIC for 2007, U.S. holders who acquired our ordinary shares in 2007 will not be subject to the PFIC rules described below (regardless as to whether we were a PFIC in any prior years) unless we are classified as a PFIC in future years. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets, activities and market capitalization, which are relevant to this determination.
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If we are a PFIC, a U.S. holder of our ordinary shares could be subject to increased tax liability upon the sale or other disposition (including gain deemed recognized if the ordinary shares are used as security for a loan) of its ordinary shares or upon the receipt of amounts treated as “excess distributions,” which could result in a reduction in the after-tax return to such U.S. holder. In general, a excess distribution is the amount of distributions received during a taxable year that exceed 125% of the average amount of distributions received by a U.S. holder in respect of the ordinary shares during the preceding three taxable years, or if shorter, during the U.S. holder’s holding period prior to the taxable year of the distribution. Under these rules, the excess distribution and any gain on the disposition of ordinary shares would be allocated ratably over the U.S. holder’s holding period for the ordinary shares. The amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that taxable year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to taxable years prior to the year of the disposition or distribution cannot be offset by net operating losses. In addition, holders of stock in a PFIC may not receive a “step-up” in basis on shares acquired for a decedent.
As an alternative to the tax treatment described above, a U.S. holder could elect to treat us as a “qualified electing fund” (“QEF”), in which case the U.S. holder would be required to include in income, for each taxable year that we are a PFIC, its pro rata share of our ordinary earnings as ordinary income and its pro rata share of our net capital gains as capital gain, subject to a separate election to defer payment of taxes which deferral is subject to an interest charge. Any income inclusion will be required whether or not such U.S. holder owns our ordinary shares for an entire taxable year or at the end of our taxable year. The amount so includible will be determined without regard to our prior year losses or the amount of cash distributions, if any, received from us. Special rules apply if a U.S. holder makes a QEF election after the first year in its holding period in which we are a PFIC. Although a U.S. holder normally is not permitted to make a retroactive QEF election, a retroactive election may be made for a taxable year of the U.S. holder (the “retroactive election year”) if the U.S. holder (i) reasonable believed that, as of the date the QEF election was due, the foreign corporation was not a PFIC for its taxable year that ended during the retroactive election year and (ii) filed a protective statement with respect to the foreign corporation, applicable to the retroactive election year, in which the U.S. holder described the basis for its reasonable belief and extended the period of limitation on the assessment of taxes determined under Sections 1291 through 1298 of the Code with respect to the foreign corporation (PFIC related taxes) for all taxable years of the shareholder to which the protective statement applies. We will supply U.S. holders that make a request in writing with the information needed to report income and gain under a QEF election if we are a PFIC.
A. U.S. holder’s basis in its ordinary shares will increase by any amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long as a U.S. holder’s QEF election is in effect with respect to the entire holding period for its ordinary shares, any gain or loss realized by such holder on the disposition of its ordinary shares held as a capital asset ordinarily would be capital gain or loss. Such capital gain or loss ordinarily would be long-term if such U.S. holder had held such ordinary shares for more than one year at the time of the disposition. For non-corporate U.S. holders, long-term capital gain is generally subject to a maximum federal income tax rate of 15% for taxable years beginning on or before December 31, 2010. The QEF election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. holder and can be revoked only with the consent of the IRS.
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As an alternative to making a QEF election, a U.S. holder of PFIC stock which is “marketable stock” (e.g., “regularly traded” on the Nasdaq National Market) may in certain circumstances avoid certain of the tax consequences generally applicable to holders of stock in a PFIC by electing to mark the stock to market as of the beginning of such U.S. holder’s holding period for the ordinary shares. As a result of such election, in any taxable year that we are a PFIC, a U.S. holder would generally be required to report gain or loss to the extent of the difference between the fair market value of the ordinary shares at the end of the taxable year and such U.S. holder’s tax basis in its ordinary shares at that time. Any gain under this computation, and any gain on an actual disposition of the ordinary shares, would be treated as ordinary income. Any loss under this computation, and any loss on an actual disposition of the ordinary shares, generally would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining loss from marking ordinary shares to market will not be allowed, and any remaining loss from an actual disposition of ordinary shares generally would be capital loss. A U.S. holder’s tax basis in its ordinary shares is adjusted annually for any gain or loss recognized under the mark-to-market election. There can be no assurances that there will be sufficient trading volume with respect to the ordinary shares for the ordinary shares to be considered “regularly traded” or that our ordinary shares will continue to trade on the Nasdaq National Market. Accordingly, there are no assurances that the ordinary shares will be marketable stock for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. holder and can only be revoked with consent of the IRS (except to the extent the ordinary shares no longer constitute “marketable stock”).
The U.S. federal income tax consequences to a U.S. holder if we were to be classified as a PFIC in 2007 or any previous taxable year are complex. A U.S. holder should consult with his or her own advisor with regard to those consequences, as well as with regard to whether he or she should make either of the elections described above.
Tax Consequences for Non-U.S. Holders of Ordinary Shares
Except as described in “Information Reporting and Back-up Withholding” below, a Non-U.S. holder of ordinary shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our ordinary shares, unless:
| | — | the item is effectively connected with the conduct by the Non-U.S. holder of a trade or business in the United States and in the case of a resident of a country which has a treaty with the United States, the item is attributable to a permanent establishment, or in the case of an individual, the item is attributable to a fixed place of business in the United States; or |
| | — | the Non-U.S. holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met. |
Information Reporting and Back-up Withholding
U.S. holders generally are subject to information reporting requirements with respect to dividends paid in the United States on, or proceeds from the disposition of, our ordinary shares. In addition, a U.S. holder may be subject, under certain circumstances, to backup withholding at a rate of up to 28% with respect to dividends paid on, or proceeds from the disposition of, our ordinary shares unless the U.S. holder provides proof of an applicable exemption or correct taxpayer identification number and otherwise complies with the applicable requirements of the backup withholding rules. A U.S. holder of our ordinary shares who provides an incorrect taxpayer identification number may be subject to penalties imposed by the IRS. Amounts withheld under the backup withholding rules are not an additional tax and may be refunded or credited against the U.S. holder’s federal income tax liability, provided the required information is furnished to the IRS.
Non-U.S. holders generally are not subject to information reporting or back-up withholding with respect to dividends paid in the United States on, or proceeds from the disposition of, our ordinary shares, provided that the Non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or establishes another exemption to the information reporting or back-up withholding requirements.
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 SEC. These reports include certain financial and statistical information about us, and may be accompanied by exhibits. You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at100 F Street, N.E., Room 1580, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy statements, information statements and other material that are filed through the SEC’s Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system.
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You may also visit us on the World Wide Web atwww.ceragon.com. However, information contained on our website does not constitute a part of this Annual Report.
| ITEM 11. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We do not use derivative financial instruments for trading purposes. Accordingly, we have concluded that there is no material market risk exposure of the type contemplated by Item 11, and that no quantitative tabular disclosures are required. We are exposed to certain other types of market risks, as described below.
We are exposed to financial market risk associated with changes in foreign currency exchange rates. A majority of our revenue is generated, and a substantial portion of our expenses is incurred, in dollars. A portion of our expenses, however, is denominated mainly in NIS. Since our financial results are reported in dollars, fluctuations in the rates of exchange between the dollar and non-dollar currencies may have an effect on our results of operations. In order to reduce such effect, we hedge a portion of certain cash flow transactions denominated in non-dollar currencies as well as a portion of certain monetary items in the balance sheet, such as trade receivables and trade payables, denominated in non-dollar currencies. The following sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At December 31, 2007, a 10% strengthening of the U.S. dollar versus other currencies would have resulted in an increase of approximately $200 thousand in our net assets position, while a 10% weakening of the dollar versus all other currencies would have resulted in a decrease of approximately $200 thousand.
The counter-parties to our hedging transactions are major financial institutions with high credit ratings. As of December 31, 2007, we had forward contracts to sell up to $16.3 million for a total amount of approximately NIS 63.6 million (that would mature on or before June 30, 2008), and forward contracts to sell up to €3.0 million for a total of approximately $4.4 million (that would mature on March 31, 2008). During the year ended December 31, 2007 we recognized a loss of $375 thousand as a result of these derivative instruments.
We invest in investment grade U.S. corporate and government bonds and dollar deposits with banks. Since these investments typically carry fixed interest rates and since our policy and practice is to hold these investments to maturity, financial income over the holding period is not sensitive to changes in interest rates.
We do not invest in interest rate derivative financial instruments.
| ITEM 12. | | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. |
Not applicable.
PART II
| ITEM 13. | | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. |
None.
| ITEM 14. | | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. |
Amendment to Articles
In October, 2007, our shareholders approved an amendment to our Memorandum of Association and Articles of Association to reflect an increase in the registered share capital of the Company from NIS 400,000 divided into 40 million shares to NIS 600,000 divided into 60 million shares of a nominal value of One Agora (NIS 0.01) each.
This amendment was described in Item A of our Notice and Proxy Statement for the Annual General Meeting of our shareholders held on October 25, 2007, included in our report on Form 6-K, furnished to the SEC on September 24, 2007, which is incorporated herein by reference. The text of the amendments to our Memorandum and Articles of Association as amended in October 2007 are included as Exhibits 1.1 and 1.2 to this annual report.
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Use of Proceeds
As of December 31, 2007, approximately 75% of the net offering proceeds remaining from our initial public offering and from our follow-on offering was invested in short-term investments. The 25% balance of the net offering proceeds was invested in long-term investments. During fiscal year 2007, we used the proceeds for capital expenditures and general corporate purposes.
| ITEM 15. | | CONTROLS AND PROCEDURES |
(a)Disclosure Controls and Procedures
The Company performed an evaluation of the effectiveness of its disclosure controls and procedures that are designed to ensure that the material financial and non-financial information required to be disclosed to the SEC is recorded, processed, summarized and reported timely. Based on the Company’s evaluation, the Company’s management, including the CEO and CFO, has concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report are effective. Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within Ceragon to disclose material information otherwise required to be set forth in the Company’s reports.
(b)Management’s Report on Internal Control Over Financial Reporting
The Company performed an evaluation of the effectiveness of its internal control over financial reporting that is designed by, or under the supervision of, the Company’s principal executive and principal financial officers, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| (i) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| (ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| (iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
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.
Based on the Company’s evaluation, our management, including the CEO and CFO, has concluded that the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report are effective. Notwithstanding the foregoing, there can be no assurance that the Company’s internal control over financial reporting will detect or uncover all failures of persons within Ceragon to comply with these procedures.
(c)Report of Independent Registered Public Accounting Firm on Internal Controls
See the report of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global, an independent registered public accounting firm, included under “Item 18. Financial Statements” on page F-3.
(d)Changes in Internal Controls Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| ITEM 16A. | | AUDIT COMMITTEE FINANCIAL EXPERT |
The Company’s board of directors has determined that Mr. Joseph Atsmon is the audit committee financial expert. Mr. Atsmon is one of our independent directors for the purposes of the Nasdaq Rules.
In November 2003, the Company’s board of directors adopted a Code of Ethics that applies to the chief executive officer, chief financial officer and controller. A copy of the Company’s Code of Ethics may be obtained, without charge, upon a written request addressed to the Company’s investor relations department, 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel (Telephone no. +972-3-645-5733) (e-mail:ir@ceragon.com).
| ITEM 16C. | | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Fees Paid to Independent Auditors
The following table sets forth, for each of the years indicated, the fees billed by our independent auditors and the percentage of each of the fees out of the total amount billed by the auditors.
| Year Ended December 31, |
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| 2006
| 2007
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| Services Rendered | Fees | Percentages | Fees | Percentages |
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| Audit (1) | | | $ | 75,235 | | | 78 | | $ | 260,000 | | | 85 | |
| Audit-related(2) | | | | 11,780 | | | 12 | | | 10,000 | | | 3 | |
| Tax (3) | | | | 10,000 | | | 10 | | | 38,000 | | | 12 | |
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| Total | | | $ | 97,015 | | | 100 | | $ | 308,000 | | | 100 | |
| (1) | Audit fees consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide. These fees include fees for the audit of internal control over financial reporting and the audit related to our follow-on equity offering. |
| (2) | Audit-related fees relate to assurance and associated services that traditionally are performed by the independent auditor, including: accounting consultation and consultation concerning financial accounting and reporting standards. |
| (3) | Tax fees relate to tax compliance, planning and advice. |
Policies and Procedures
Our Audit Committee has adopted a policy and procedures for approval of audit and non-audit services rendered by our independent auditors, Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global. The policy requires the Audit Committee’s approval of the scope of the engagement of our independent auditor. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors.
| ITEM 16D. | | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
None.
| ITEM 16E. | | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
None.
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PART III
| ITEM 17. | | FINANCIAL STATEMENTS |
Not applicable.
| ITEM 18. | | FINANCIAL STATEMENTS |
The Consolidated Financial Statements and related notes thereto required by this item are contained on pages F-1 through F-33 hereof.
Index to Consolidated Financial Statements
| PAGE
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| Report of Independent Registered Public Accounting Firm | F-2 - F-3 |
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| Consolidated Balance Sheets at December 31, 2007 and 2006 | F-4 - F-5 |
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| Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005 | F-6 |
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| Statements of Changes in Shareholders' Equity for the Years Ended December 31, |
| 2007, 2006 and 2005 | F-7 |
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| Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 | F-8 |
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| Notes to Consolidated Financial Statements | F-9 - F-33 |
| 1.1 | Memorandum of Association, as amended October 25, 2007 (English translation) |
| 1.2 | Articles of Association, as amended October 25, 2007 |
| 4.1 | Tenancy Agreement, dated as of February 22, 2000, by and among the Company, Zisapel Properties Ltd. and Klil & Michael Properties Ltd. (English translation)* |
| 10.1 | Consent of Independent Registered Public Accounting Firm |
| 12.1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 12.2 | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 13.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Previously filed as exhibit 10.3 in connection with the Company’s Registration Statement on Form F-1 (Registration Statement 333-12312) on August 3, 2000 and incorporated herein by reference.
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SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
CERAGON NETWORKS LTD.
By: /s/ Ira Palti
——————————————
Ira Palti
President and Chief Executive Officer |
Date: March 26, 2008
CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Ceragon Networks Ltd.
We have audited the accompanying consolidated balance sheets of Ceragon Networks Ltd. (the “Company”) and 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 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company and 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 U.S. generally accepted accounting principles.
As discussed in Note 2q to the consolidated financial statements, the Company adopted the provision of Statement of Financial Accounting Standard No. 123(R), “Shared-Based Payment”, effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s 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 March 26, 2008 expressed an unqualified opinion thereon.
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| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| March 26, 2008 | A Member of Ernst & Young Global |
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON MANAGEMENT'S
ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
Ceragon Networks Ltd.
We have audited Ceragon Networks Ltd.’s (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”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We 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, the Company 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 the Company and 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 of the Company and our report dated March 26, 2008 expressed an unqualified opinion thereon.
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| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| March 26, 2008 | A Member of Ernst & Young Global |
F - 3
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED BALANCE SHEETS |
|
| U.S. dollars in thousands |
| | December 31,
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| Note
| 2006
| 2007
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| ASSETS | | | | | | | | | | | |
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| CURRENT ASSETS: | | |
| Cash and cash equivalents | | | | | | $ | 10,170 | | $ | 58,650 | |
| Short-term bank deposits | | | | | | | 5,364 | | | 25,997 | |
| Short-term marketable securities | | | | 3 | | | 6,578 | | | 6,399 | |
| Trade receivables (net of allowance for doubtful accounts of $ 842 | | |
| and $ 1,279 at December 31, 2006 and 2007, respectively) | | | | | | | 27,433 | | | 40,533 | |
| Other accounts receivable and prepaid expenses | | | | 4 | | | 6,925 | | | 10,888 | |
| Inventories | | | | 5 | | | 27,311 | | | 36,763 | |
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| Total current assets | | | | | | | 83,781 | | | 179,230 | |
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| LONG-TERM ASSETS: | | |
| Long-term bank deposits | | | | | | | 2,873 | | | 12,030 | |
| Long-term marketable securities | | | | 3 | | | 4,500 | | | 18,665 | |
| Severance pay fund | | | | | | | 2,537 | | | 3,268 | |
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| Total long-term assets | | | | | | | 9,910 | | | 33,963 | |
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| PROPERTY AND EQUIPMENT, NET | | | | 6 | | | 2,660 | | | 4,447 | |
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| Total assets | | | | | | $ | 96,351 | | $ | 217,640 | |
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The accompanying notes are an integral part of the consolidated financial statements
F - 4
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED BALANCE SHEETS |
|
| U.S. dollars in thousands (except share and per share data) |
| | December 31,
|
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| Note
| 2006
| 2007
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| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
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| CURRENT LIABILITIES: | | |
| Trade payables | | | | | | $ | 22,147 | | $ | 25,173 | |
| Deferred revenues | | | | | | | 3,739 | | | 6,702 | |
| Other accounts payable and accrued expenses | | | | 7 | | | 10,627 | | | 14,935 | |
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| Total current liabilities | | | | | | | 36,513 | | | 46,810 | |
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| LONG TERM LIABILITIES: | | |
| Accrued severance pay | | | | | | | 4,352 | | | 5,286 | |
| Other payables | | | | 8a | | | 7,925 | | | 4,650 | |
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| Total long-term liabilities | | | | | | | 12,277 | | | 9,936 | |
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| COMMITMENTS AND CONTINGENT LIABILITIES | | | | 8 | | | | | | | |
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| SHAREHOLDERS' EQUITY: | | | | 9 | | | | | | | |
| Share capital - | | |
| Ordinary shares of NIS 0.01 par value - | | |
| Authorized: 40,000,000 and 60,000,000 shares at December 31, | | |
| 2006 and 2007, respectively; Issued and outstanding: | | |
| 27,436,090 and 36,918,196 shares at December 31, 2006 and | | |
| 2007, respectively | | | | | | | 68 | | | 91 | |
| Additional paid-in capital | | | | | | | 181,128 | | | 281,086 | |
| Accumulated other comprehensive income | | | | | | | 64 | | | 280 | |
| Accumulated deficit | | | | | | | (133,699 | ) | | (120,563 | ) |
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| Total shareholders' equity | | | | | | | 47,561 | | | 160,894 | |
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| Total liabilities and shareholders' equity | | | | | | $ | 96,351 | | $ | 217,640 | |
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The accompanying notes are an integral part of the consolidated financial statements
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| March 26, 2008 | Naftali Idan | Ira Palti |
|
|
|
| Date of approval of the | Naftali Idan | Ira Palti |
| financial statements | Executive Vice President and | President and Chief Executive |
| | Chief Financial Officer | Officer |
F - 5
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
|
| U.S. dollars in thousands (except per share data) |
| | Year ended December 31,
|
|---|
| Note
| 2005
| 2006
| 2007
|
|---|
| | | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Revenues | | | | 11 | | $ | 73,777 | | $ | 108,415 | | $ | 161,888 | |
| Cost of revenues | | | | | | | 52,487 | | | 80,776 | | | 103,406 | |
| |
| |
| |
| |
| | | |
| Gross profit | | | | | | | 21,290 | | | 27,639 | | | 58,482 | |
| |
| |
| |
| |
| | | |
| Operating expenses: | | |
| Research and development | | | | | | | 10,713 | | | 13,336 | | | 15,457 | |
| Less - grants and participations | | | | | | | 1,752 | | | 1,543 | | | - | |
| |
| |
| |
| |
| | | |
| Research and development, net | | | | | | | 8,961 | | | 11,793 | | | 15,457 | |
| Selling and marketing | | | | | | | 13,629 | | | 17,420 | | | 25,344 | |
| General and administrative | | | | | | | 3,134 | | | 5,170 | | | 5,277 | |
| Expense in respect of settlement reserve | | | | | | | - | | | - | | | 450 | |
| |
| |
| |
| |
| | | |
| Total operating expenses | | | | | | | 25,724 | | | 34,383 | | | 46,528 | |
| |
| |
| |
| |
| | | |
| Operating income (loss) | | | | | | | (4,434 | ) | | (6,744 | ) | | 11,954 | |
| Financial income, net | | | | 12a | | | 607 | | | 1,284 | | | 1,182 | |
| |
| |
| |
| |
| | | |
| Net income (loss) | | | | | | $ | (3,827 | ) | $ | (5,460 | ) | $ | 13,136 | |
| |
| |
| |
| |
| | | |
| Net earnings (loss) per share: | | | | 12b | | | | | | | | | | |
| Basic net earnings (loss) per share | | | | | | $ | (0.15 | ) | $ | (0.20 | ) | $ | 0.44 | |
| |
| |
| |
| |
| Diluted net earnings (loss) per share | | | | | | $ | (0.15 | ) | $ | (0.20 | ) | $ | 0.41 | |
| |
| |
| |
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
|
| U.S. dollars in thousands (except share and per share data) |
| Ordinary
shares
| Share
capital
| Additional
paid-in
capital
| Deferred
stock
compensation
| Accumulated
other
comprehensive
income
| Accumulated
deficit
| Total other
comprehensive
income
(loss)
| Total
shareholders'
equity
|
|---|
| | | | | | | | | |
|---|
| | | | | | | | |
|---|
| | | | | | | | |
|---|
| | | | | | | | |
|---|
| Balance as of January 1, 2005 | | | | 25,853,421 | | $ | 64 | | $ | 176,546 | | $ | (73 | ) | $ | 62 | | $ | (124,412 | ) | | | | $ | 52,187 | |
| | | |
| Exercise of stock options | | | | 481,582 | | | 1 | | | 677 | | | - | | | - | | | - | | | | | | 678 | |
| Amortization of stock compensation related to | | |
| accelerated options | | | | - | | | - | | | 115 | | | - | | | - | | | - | | | | | | 115 | |
| Amortization of deferred stock compensation | | | | - | | | - | | | - | | | 47 | | | - | | | - | | | | | | 47 | |
| Comprehensive loss: | | |
| Income tax benefit derived from exercise of | | |
| employee stock options *) | | | | - | | | - | | | - | | | - | | | - | | | - | | $ | - | | | - | |
| Unrealized loss from hedging activities | | | | - | | | - | | | - | | | - | | | (11 | ) | | - | | | (11 | ) | | (11 | ) |
| Net loss | | | | - | | | - | | | - | | | - | | | - | | | (3,827 | ) | | (3,827 | ) | | (3,827 | ) |
|
| |
| |
| |
| |
| |
| |
| |
| |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | $ | (3,838 | ) | | | |
| | | | | | | | | | | | |
| | | |
| Balance as of December 31, 2005 | | | | 26,335,003 | | | 65 | | | 177,338 | | | (26 | ) | | 51 | | | (128,239 | ) | | | | | 49,189 | |
| | | |
| Exercise of stock options | | | | 1,101,087 | | | 3 | | | 2,104 | | | - | | | - | | | - | | | | | | 2,107 | |
| Reversal of deferred stock compensation upon | | | | - | |
| adoption of SFAS 123(R) | | | | | | | - | | | (26 | ) | | 26 | | | - | | | - | | | | | | - | |
| Stock-based compensation expense | | | | - | | | - | | | 1,712 | | | - | | | - | | | - | | | | | | 1,712 | |
| Comprehensive loss: | | |
| Income tax benefit derived from exercise of | | |
| employee stock options *) | | | | - | | | - | | | - | | | - | | | - | | | - | | $ | - | | | - | |
| Unrealized gain from hedging activities | | | | - | | | - | | | - | | | - | | | 13 | | | - | | | 13 | | | 13 | |
| Net loss | | | | - | | | - | | | - | | | - | | | - | | | (5,460 | ) | | (5,460 | ) | | (5,460 | ) |
|
| |
| |
| |
| |
| |
| |
| |
| |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | $ | (5,447 | ) | | | |
| | | | | | | | | | | | |
| | | |
| Balance as of December 31, 2006 | | | | 27,436,090 | | | 68 | | | 181,128 | | | - | | | 64 | | | (133,699 | ) | | | | | 47,561 | |
| | | |
| Issuance of shares, net of issuance expenses | | | | 6,990,000 | | | 18 | | | 88,246 | | | - | | | - | | | - | | | | | | 88,264 | |
| Exercise of stock options | | | | 2,492,106 | | | 5 | | | 9,954 | | | - | | | - | | | - | | | | | | 9,959 | |
| Stock-based compensation expense | | | | - | | | - | | | 1,758 | | | - | | | - | | | - | | | | | | 1,758 | |
| Comprehensive income: | | |
| Income tax benefit derived from exercise of | | | | | |
| employee stock options *) | | | | - | | | - | | | - | | | - | | | - | | | - | | | | | | - | |
| Unrealized gain from hedging activities | | | | - | | | - | | | - | | | - | | | 216 | | | - | | | 216 | | | 216 | |
| Net income | | | | - | | | - | | | - | | | - | | | - | | | 13,136 | | | 13,136 | | | 13,136 | |
|
| |
| |
| |
| |
| |
| |
| |
| |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | $ | 13,352 | | | | |
| | | | | | | | | | | | |
| | | |
| Balance as of December 31, 2007 | | | | 36,918,196 | | $ | 91 | | $ | 281,086 | | $ | | | $ | 280 | | $ | (120,563 | ) | | | | $ | 160,894 | |
|
| |
| |
| |
| |
| |
| | | |
| |
| *) | The income tax benefit for the years ended December 31, 2005, 2006 and 2007 was $ 168, $ 524 and $1,673, respectively, for which a full valuation allowance was provided (see also Note 10f). |
The accompanying notes are an integral part of the consolidated financial statements
F - 7
| CERAGON NETWORKS 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) | | | $ | (3,827 | ) | $ | (5,460 | ) | $ | 13,136 | |
| Adjustments required to reconcile net income (loss) to net cash | | |
| used in operating activities: | | |
| Depreciation | | | | 972 | | | 1,194 | | | 1,342 | |
| Stock-based compensation expense | | | | 162 | | | 1,712 | | | 1,758 | |
| Gain from sale of property and equipment | | | | (2 | ) | | (45 | ) | | (24 | ) |
| Accrued severance pay, net | | | | 243 | | | 533 | | | 203 | |
| Increase in accrued interest on bank deposits | | | | (42 | ) | | (89 | ) | | (317 | ) |
| Interest accrued and amortization of premium on held-to-maturity | | |
| marketable securities | | | | 269 | | | 37 | | | (438 | ) |
| Increase in trade receivables, net | | | | (8,140 | ) | | (12,354 | ) | | (13,100 | ) |
| Increase in other accounts receivable and prepaid expenses | | | | (717 | ) | | (1,771 | ) | | (3,747 | ) |
| Decrease (increase) in inventories | | | | 2,939 | | | (11,167 | ) | | (9,452 | ) |
| Decrease in long-term receivables | | | | 390 | | | - | | | - | |
| Increase in trade payables | | | | 3,034 | | | 9,765 | | | 3,026 | |
| Increase in deferred revenues | | | | 342 | | | 283 | | | 2,963 | |
| Increase in other accounts payable and accrued expenses | | | | 65 | | | 5,086 | | | 3,597 | |
| Increase (decrease) in other long-term payables | | | | - | | | 7,925 | | | (3,275 | ) |
|
| |
| |
| |
| | | |
| Net cash used in operating activities | | | | (4,312 | ) | | (4,351 | ) | | (4,328 | ) |
|
| |
| |
| |
| | | |
| Cash flows from investing activities: | | |
| | | |
| Purchase of property and equipment | | | | (938 | ) | | (1,393 | ) | | (2,855 | ) |
| Proceeds from sale of property and equipment | | | | 20 | | | 48 | | | 25 | |
| Investment in short and long-term bank deposits | | | | (3,993 | ) | | (2,495 | ) | | (35,654 | ) |
| Proceeds from maturities of short and long-term bank deposits | | | | 3,220 | | | 3,586 | | | 6,181 | |
| Investment in held-to-maturity marketable securities | | | | (4,770 | ) | | (3,116 | ) | | (22,186 | ) |
| Proceeds from maturities of held-to-maturity marketable securities | | | | 9,176 | | | 5,469 | | | 8,638 | |
|
| |
| |
| |
| | | |
| Net cash provided by (used in) investing activities | | | | 2,715 | | | 2,099 | | | (45,851 | ) |
|
| |
| |
| |
| | | |
| Cash flows from financing activities: | | |
| Proceeds from issuance of shares, net of issuance costs | | | | - | | | - | | | 88,700 | |
| Proceeds from exercise of stock options | | | | 678 | | | 2,107 | | | 9,959 | |
|
| |
| |
| |
| | | |
| Net cash provided by financing activities | | | | 678 | | | 2,107 | | | 98,659 | |
|
| |
| |
| |
| | | |
| Increase (decrease) in cash and cash equivalents | | | | (919 | ) | | (145 | ) | | 48,480 | |
| Cash and cash equivalents at the beginning of the year | | | | 11,234 | | | 10,315 | | | 10,170 | |
|
| |
| |
| |
| | | |
| Cash and cash equivalents at the end of the year | | | $ | 10,315 | | $ | 10,170 | | $ | 58,650 | |
|
| |
| |
| |
| Supplemental disclosures of non cash financing and investing | | |
| activities: | | |
| Issuance costs | | | $ | - | | $ | - | | $ | 436 | |
|
| |
| |
| |
| Purchase of property and equipment | | | $ | - | | $ | - | | $ | 275 | |
|
| |
| |
| |
| Unrealized gain (loss) from hedging activities | | | $ | (11 | ) | $ | 13 | | $ | 216 | |
|
| |
| |
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| | Ceragon Networks Ltd. (“the Company”) is a leading provider of high capacity wireless backhaul solutions that enable wireless service providers to deliver voice and premium data services, such as Internet browsing, music and video applications. The Company’s wireless backhaul solutions use microwave technology to transfer large amounts of network traffic between base stations and the infrastructure at the core of the mobile network. |
| | The Company sells its products through a direct sales force, systems integrators, distributors and original equipment manufacturers. |
| | The Company has ten wholly-owned subsidiaries in Brazil, France, Hong Kong, Singapore, India, Mexico, the Philippines, the United Kingdom, Australia and the United States. The subsidiaries provide marketing, distribution, sales and technical support to the Company’s customers worldwide. |
| | As to principal markets and major customers, see Note 11. |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES |
| | The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). |
| | 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. |
| | c. | Financial statements in U.S. dollars: |
| | A majority of the revenues of the Company and certain of its subsidiaries are generated in U.S. dollars (“dollars”). In addition, a substantial portion of the Company’s and certain of its subsidiaries’ costs is incurred in dollars. Since management believes that the dollar is the currency of the primary economic environment in which the Company and certain of its subsidiaries operate, the dollar is their functional and reporting currency. Accordingly, amounts in currencies other than U.S dollars have been remeasured in accordance with Statement 52 of the Financial Accounting Standards Board (“FASB”), “Foreign Currency Translation” as follows: |
| | Monetary balances – at the exchange rate in effect on the balance sheet date. |
| | Costs – at the exchange rates in effect as of the date of recognition of the transaction. |
| | All exchange gains and losses from the remeasurement mentioned above are reflected in the statement of operations in financial income, net. |
| | Management considers the non-U.S. subsidiaries to be a direct, integral extension of the parent company’s operations. Accordingly, the functional currency of these subsidiaries is the dollar. |
F - 9
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | d. | Principles of consolidation: |
| | The consolidated financial statements include the accounts of the Company and its subsidiaries (“the Group”). Intercompany balances and transactions including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation. |
| | Cash equivalents include short-term, highly liquid investments that are readily convertible to cash with original maturities of three months or less. |
| | f. | Short-term and long-term bank deposits: |
| | Short-term bank deposits are deposits with maturities of more than three months and up to one year. The short-term bank deposits are in U.S. dollars and bear interest at an average rate of 4.84%. The short-term bank deposits are presented at their cost, including accrued interest. |
| | Long-term bank deposits are deposits with maturities of more than one year. The long-term deposits are in U.S. dollars and bear interest at an average rate of 4.19%. The long-term bank deposits are presented at their cost, including accrued interest. |
| | The Company accounts for investments in marketable 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. Marketable securities are classified as held-to-maturity as the Company has the positive intent and ability to hold the securities to maturity. Such marketable securities are stated at amortized cost plus accrued interest. |
| | During the years ended December 31, 2006 and 2007, all securities accounted in accordance with SFAS 115 were designated by the Company’s management as held-to-maturity. |
| | Amortization of premium and accretion of discounts, as well as interest, are included in financial income, net. |
| | Inventories are stated at the lower of cost or market value. |
| | Cost is determined as follows: |
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | Raw materials | - | using the moving average cost method plus indirect costs. |
| | Work in progress | - | using the moving average cost method plus indirect costs. |
| | Finished products | - | using the moving average cost method plus indirect costs. |
F - 10
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Company periodically assesses its inventory and writes down the value of inventory to cover risks arising from technological obsolescence or excess inventory. |
| | i. | 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, manufacturing and peripheral equipment | 15 - 33 |
| Office furniture and equipment | 7 |
| Leasehold improvements | By the shorter of the term of the |
| | lease or the life of the asset |
| | j. | Impairment of long-lived assets: |
| | The Company’s and its subsidiaries’ long-lived assets are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During 2005, 2006 and 2007, no impairment losses have been identified. |
| | The Company and its subsidiaries account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This Statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and for carryforward losses deferred taxes are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that some portion or all of the deferred tax asset will not be realized. |
| | On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company elected to classify interest recognized in the financial statements as interest expenses and penalties recognized in the financial statements as income taxes. As of December 31, 2007, no interest expenses and penalties were recognized. The adoption of the new interpretation did not have a significant impact on the company’s consolidated financial position, results of operations or liquidity. |
F - 11
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Company and its subsidiaries generate revenues from selling products to end users, distributors, system integrators and original equipment manufacturers (“OEM”). |
| | Revenues from product sales are recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB 104”), when delivery has occurred, persuasive evidence of an arrangement exists, the vendor’s fee is fixed or determinable, no future obligation exists and collectibility is probable. |
| | The Company generally does not grant a right of return to its customers. When a right of return exists, the Company creates a provision for returns according to SFAS 48, “Revenue Recognition When Right of Return Exists”. |
| | When sale arrangements include a customer acceptance provision with respect to products, revenue is not recognized before the Company has demonstrated that the criteria specified in the acceptance provisions have been satisfied, or that the acceptance provision has lapsed. |
| | Revenue from certain arrangements includes multiple elements which are the sale of products and post delivery installation services that are not essential to the functionality of the equipment. The Company’s accounting policy complies with the requirements set forth in Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), relating to the separation of multiple deliverables into individual accounting units and revenue from such deliverables is recognized under SAB 104. |
| | In arrangements which include multiple elements, the Company considers the sale of equipment and its installation to be two separate units of accounting in the arrangement, since the installation is not essential to the functionality of the equipment, the equipment has value to the customer on a standalone basis, and fair value of the installation services exists. In such arrangement, revenues from the sale of equipments are recognized upon delivery, if all other revenue recognition criteria are met and the Company defers the fair value of the installation service (but not less than the amount contingent upon completion of installation, if any) to the period in which such installation occurs. |
F - 12
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Company also applies Emerging Issues Task Force (“EITF”) 99-19, “Reporting Revenues Gross as a Principal versus Net as an Agent” (“EITF 99-19”), regarding arrangements where the Company also provides third party equipment and reports revenues gross as a principal. |
| | Deferred revenues include amounts received from customers for which revenue has not been recognized. |
| | m. | Research and development costs: |
| | Research and development costs, net of grants received, are charged to the statement of operations as incurred. |
| | n. | Royalty-bearing grants: |
| | Royalty-bearing grants from the Government of Israel for funding approved research and development projects are recognized at the time the Company was entitled to such grants, on the basis of the costs incurred and included as a reduction in research and development costs. Such grants were recorded as a reduction in research and development costs since when received it was not probable that the grants will be repaid (see also Notes 7 and 8a). |
| | o. | Derivative instruments: |
| | The Company has instituted a foreign currency cash flow hedging program using foreign currency forward and options (“derivative instruments”) in order to hedge the exposure to variability in expected future cash flows resulting from changes in related foreign currency exchange rates. These transactions are designated as cash flow hedges, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”(“SFAS 133”). |
| | SFAS 133 requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. |
| | For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. |
| | 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 (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. |
F - 13
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Company’s cash flow hedging strategy is 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 forward exchange contracts. These forward exchange 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. |
| | Fair value hedging strategy – The Company enters into forward exchange contracts to hedge a portion of its certain monetary items in the balance sheet, such as trade receivables and trade payables denominated in foreign currencies for a period of up to three months. The purpose of the Company’s foreign currency hedging activities is to protect the fair value due to foreign exchange rates. |
| | The Company recognized a loss from derivative instruments of $ (28), $ (264) and $ (375) during the years ended December 31, 2005, 2006 and 2007, respectively, which have been recorded in the statement of operations. |
| | The balance in accumulated other comprehensive income related to derivative instruments as of December 31, 2007 is expected to be recognized in the statement of operations over the next three months. |
| | p. | Concentrations of credit risk: |
| | Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, short-term and long-term bank deposits, marketable securities and trade receivables. |
| | The majority of the Company’s cash and cash equivalents and short-term and long-term bank deposits are invested in U.S. dollar instruments with major banks worldwide. Such cash and cash equivalents and deposits 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 Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. |
| | The Company’s marketable securities include securities issued by U.S government and agencies and debentures of corporations. Management believes that the financial institutions that hold the Company’s investments are financially sound and that the portfolio is well diversified and, accordingly, minimal credit risk exists with respect to these marketable securities. |
| | The Company’s trade receivables are derived from sales to customers located in North America, Europe, the Middle East, Africa, Asia-Pacific and Latin America. The Company and its subsidiaries generally do not require collateral; however, in certain circumstances, the Company and its subsidiaries may require letters of credit, additional guarantees or advance payments. The Company and its subsidiaries perform ongoing credit evaluations of their customers and insure certain trade receivables under credit insurance policies. An allowance for doubtful accounts is determined with respect to a general reserve and specific receivables, of which the collection may be doubtful. |
F - 14
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | Changes in the Company’s allowance for doubtful accounts are as follows: |
| | Allowance for
doubtful
accounts
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Balance as of January 1, 2005 | | | $ | 575 | |
| Provision, net of recoveries | | | | 295 | |
| Write-off | | | | (352 | ) |
| |
| |
| | | |
| Balance as of December 31, 2005 | | | | 518 | |
| Provision, net of recoveries | | | | 457 | |
| Write-off | | | | (133 | ) |
| |
| |
| | | |
| Balance as of December 31, 2006 | | | | 842 | |
| Provision, net of recoveries | | | | 437 | |
| |
| |
| | | |
| Balance as of December 31, 2007 | | | $ | 1,279 | |
| |
| |
| | q. | Accounting for stock-based compensation: |
| | 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 107 in its adoption of SFAS No. 123(R). |
| | Effective January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective transition method. 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. |
F - 15
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | SFAS No. 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated income statements. Prior to the adoption of SFAS No. 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and recognized compensation expenses, over the requisite service period of each of the awards. Forfeitures were accounted for as occurred. |
| | The pro-forma table below reflects the Company’s stock-based compensation expense, net loss and basic and diluted net loss per share for the year ended December 31, 2005, had the Company applied fair value recognition provision of SFAS 123, as follows: |
| | Year ended
|
|---|
| | December 31, 2005
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Net loss as reported | | | $ | (3,827 | ) |
| Add: stock-based compensation expenses included in the reported | | |
| net loss under APB 25 | | | | 162 | |
| Deduct: stock-based compensation expenses determined under fair | | |
| value based method for all awards | | | | (1,884 | ) |
| |
| |
| | | |
| Pro forma net loss | | | $ | (5,549 | ) |
| |
| |
| | | |
| Net loss per share - | | |
| | | |
| Basic and diluted net loss per share - pro forma | | | $ | (0.21 | ) |
| |
| |
| | | |
| Basic and diluted net loss per share- as reported | | | $ | (0.15 | ) |
| |
| |
| | The Company used the Binomial model for options granted with the following weighted-average assumptions for 2005: risk-free interest rates of 3.36%-5.13% which is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term; dividend yield of 0%, volatility of price of the Company’s shares of 36.06%-61.73% based upon actual historical stock price movements over the most recent periods ending on the date of grant equal to the expected option term, and early exercise multiples of 2.36 and 3.10 in 2005 based on actual historical data. Based on the assumptions used, the weighted average expected term of the stock options granted in 2005 was 5 years. |
F - 16
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Company estimates the fair value of stock options granted under SFAS No. 123R using the Binominal model with the following weighted-average assumptions for 2006 and 2007: |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Dividend yield | 0% | 0% |
| Volatility | 35.07%-53.19% | 35.97%-62.75% |
| Risk free interest | 4.28%-5.41% | 2.77%-5.20% |
| Expected life of option (years) | 5.2 | 4.49 |
| | Risk-free interest rates is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term; Volatility of price of the Company’s shares based upon actual historical stock price movements over the most recent periods ending on the date of grant equal to the expected option term, and early exercise multiples of 2.36 and 3.10 in 2006 and 2007, respectively based on actual historical data. |
| | The Company recognizes compensation expense based on awards ultimately expected to vest. Estimated forfeitures are based on historical pre-vesting forfeitures and on management’s estimates. SFAS 123(R) requires forfeitures to be estimated and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. |
| | The total equity-based compensation expense related to all of the Company’s equity-based awards, recognized for the years ended December 31, 2006 and 2007, was comprised as follows: |
| | Year ended
December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Cost of revenues | | | $ | 164 | | $ | 126 | |
| Research and development, net | | | | 310 | | | 293 | |
| Selling and marketing | | | | 471 | | | 748 | |
| General and administrative | | | | 767 | | | 591 | |
| |
| |
| |
| | | |
| Total stock-based compensation expenses | | | $ | 1,712 | | $ | 1,758 | |
| |
| |
| |
| | | |
| Effect of stock-based compensation expenses, on | | |
| basic earnings (loss) per share | | | $ | 0.06 | | $ | 0.06 | |
| |
| |
| |
| Effect of stock-based compensation expenses, on | | |
| diluted earnings (loss) per share | | | $ | 0.06 | | $ | 0.05 | |
| |
| |
| |
F - 17
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Company’s severance pay liability for its 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 Company’s liability for all of its employees in Israel is fully covered by monthly deposits with pension funds, insurance policies and an accrual. The value of the funds deposited into pension funds and insurance policies is recorded as an asset –severance pay fund – in the Company’s balance sheet. |
| | The severance pay fund includes the deposited funds and accumulated adjustments to the Israeli Consumer Price Index 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 in insurance policies, is based on the cash surrendered value of these policies, and includes profits. |
| | Severance expense for the years ended December 31, 2005, 2006 and 2007, amounted to approximately $ 824, $ 1,281 and $ 1,168, respectively. |
| | s. | Fair value of financial instruments: |
| | The following methods and assumptions were used by the Company and its subsidiaries in estimating their fair value disclosures for financial instruments: |
| | The carrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables, other accounts receivable, trade payables and other accounts payable approximate their fair values due to the short-term maturities of such instruments. |
| | The fair value of the Company’s long-term bank deposits is estimated by discounting the future cash flows using the current interest rates for long-term bank deposit of similar terms and maturities. The carrying amount of the long-term bank deposit does not significantly differ from its fair value. |
| | The fair value of marketable securities is based on quoted market prices and does not differ significantly from the carrying amount. |
| | t. | Comprehensive income (loss): |
| | The Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, “Reporting Comprehensive Income”. This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive income (loss) relates to gain and loss on hedging derivative instruments and unrealized gains and losses on available for sale securities. |
F - 18
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | The Company generally offers a standard limited warranty, including parts and labor for periods of 12 to 36 months for its products. The Company 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 Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty expenses for the years ended December 31, 2005, 2006 and 2007 were approximately $ 267, $ 352 and $ 530, respectively. |
| | v. | Basic and diluted net earnings (loss) per share: |
| | Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with Statement of Financial Accounting Standard No. 128, “Earnings Per Share”(“SFAS 128”). |
| | The total weighted average number of shares related to the outstanding options excluded from the calculations of diluted net earnings (loss) per share due to their anti-dilutive effect was 4,514,433, 3,364,631 and 345,014 for the years ended December 31, 2005, 2006 and 2007, respectively. |
| | Certain amounts from prior year have been reclassified to conform to the current year’s presentation. |
| | x. | Impact of recently issued Accounting Standards: |
| | In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis, and should be applied prospectively. The adoption of the provisions of SFAS 157 related to financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis is not anticipated to materially impact the Company’s consolidated financial position and results of operations. Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. The Company does not expect the adoption will have material impact on its consolidated financial statements. |
F - 19
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). Under this Standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met. SFAS 159 is effective for years beginning after November 15, 2007. 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) “Business Combinations”. SFAS 141 (Revised) replaces SFAS 141 “Business Combination” and establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for the fiscal year beginning after December 15, 2008. The Company does not expect that SFAS 141 (Revised) will have any impact on the Company’s historical financial statements upon adoption. |
| | In December 2007, the FASB issued SFAS 160,Noncontrolling Interests in ConsolidatedFinancial Statements. SFAS 160 amends Accounting Research Bulletin 51,ConsolidatedFinancial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not expect that SFAS 160 will have any impact on the Company’s historical financial statements upon adoption. |
| NOTE 3: | – | MARKETABLE SECURITIES |
| | The following is a summary of held-to-maturity securities: |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | Amortized
cost
| Gross
unrealized
gains
| Gross
unrealized
losses
| Estimated
fair
market
value
| Amortized
cost
| Gross
unrealized
gains
| Gross
unrealized
losses
| Estimated
fair
market
value
|
|---|
| | | | | | | | | |
|---|
| | | | | | | | | |
|---|
| Held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| U.S. government | | |
| and agencies | | |
| debts | | | $ | 4,788 | | $ | - | | $ | (89 | ) | $ | 4,699 | | $ | 1,999 | | $ | 4 | | $ | - | | $ | 2,003 | |
| Corporate | | |
| debentures | | | | 6,290 | | | - | | | (153 | ) | | 6,137 | | | 23,065 | | | - | | | (426 | ) | | 22,639 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | |
| | | | $ | 11,078 | | $ | - | | $ | (242 | ) | $ | 10,836 | | $ | 25,064 | | $ | 4 | | $ | (426 | ) | $ | 24,642 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
F - 20
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 3: | – | MARKETABLE SECURITIES (Cont.) |
| | The unrealized losses and gains in the Company’s investments in held-to-maturity marketable securities were mainly caused by interest rate changes. 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 and other governments. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Out of the unrealized loss as of December 31, 2006 and 2007, $ 126 and $ 312, respectively, of losses are outstanding over 12 month period. |
| | Based on the ability and intent of the Company to hold these investments until maturity, the bonds were not considered to be other than temporarily impaired at December 31, 2007. |
| | Aggregate maturities of held-to-maturity securities for years subsequent to December 31, 2007 are: |
| | Amortized cost
| Estimated fair
market value
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Held-to-maturity: | | | | | | | | |
| | | |
| 2008 (short-term marketable securities) | | | $ | 6,399 | | $ | 6,003 | |
| 2009 | | | | 3,244 | | | 3,240 | |
| 2010 | | | | 15,421 | | | 15,399 | |
| |
| |
| |
| | | |
| | | | $ | 25,064 | | $ | 24,642 | |
| |
| |
| |
| NOTE 4: | – | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Government authorities | | | $ | 1,661 | | $ | 2,273 | |
| Prepaid expenses | | | | 1,213 | | | 4,447 | |
| Receivables related to unrecognized sold inventory | | | | 3,892 | | | 3,353 | |
| Other | | | | 159 | | | 815 | |
| |
| |
| |
| | | |
| | | | $ | 6,925 | | $ | 10,888 | |
| |
| |
| |
F - 21
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Raw materials | | | $ | 6,573 | | $ | 3,872 | |
| Work in progress | | | | 2,257 | | | 4,712 | |
| Finished products | | | | 18,481 | | | 28,179 | |
| |
| |
| |
| | | |
| | | | $ | 27,311 | | $ | 36,763 | |
| |
| |
| |
| | Finished products include products shipped to customers for which revenues were not recognized during the year in the aggregate amount of $ 7,452 at December 31, 2006 and $ 10,254 at December 31, 2007. |
| | During 2005, 2006 and 2007, the Company recorded inventory write-offs for excess inventory in a total amount of $ 7,082, $ 716 and $ 2,353, respectively. |
| | During the fourth quarter of 2005, the Company terminated its legacy product line, closed its in-house production facilities and transferred production activities to its contract manufacturers. As a result of the Company’s assessment of the expected sales from such product line and the use of associated inventory, the Company wrote off excess inventory in a total amount of $ 7,082 in 2005. The Company has been utilizing part of the products related to the components written-off in prior years. During the years 2005 through 2007, inventory previously written-off was used as components in products in the Company’s ordinary course of production and was sold as finished products to customers. The sales of these related manufactured products were reflected in the Company’s revenues without additional cost to the cost of sales in the period in which the inventory was utilized. The Company has been utilizing written-off inventory of approximately $ 954, $ 426 and $ 208 in the years 2005, 2006 and 2007, respectively. |
| NOTE 6: | – | PROPERTY AND EQUIPMENT, NET |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Cost: | | | | | | | | |
| Computers, manufacturing and peripheral equipment | | | $ | 9,807 | | $ | 12,489 | |
| Office furniture and equipment | | | | 1,109 | | | 1,368 | |
| Leasehold improvements | | | | 577 | | | 661 | |
| |
| |
| |
| | | |
| | | | | 11,493 | | | 14,518 | |
| |
| |
| |
| Accumulated depreciation: | | |
| Computers, manufacturing and peripheral equipment | | | | 7,789 | | | 8,903 | |
| Office furniture and equipment | | | | 663 | | | 782 | |
| Leasehold improvements | | | | 381 | | | 386 | |
| |
| |
| |
| | | |
| | | | | 8,833 | | | 10,071 | |
| |
| |
| |
| | | |
| Depreciated cost | | | $ | 2,660 | | $ | 4,447 | |
| |
| |
| |
| | Depreciation expenses for the years ended December 31, 2005, 2006 and 2007 were $ 972, $ 1,194 and $ 1,342 respectively. |
F - 22
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 7: | – | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Employees and payroll accruals | | | $ | 4,098 | | $ | 6,780 | |
| Accrued expenses | | | | 1,401 | | | 1,983 | |
| Royalties to Government authorities (Note 8a) | | | | 3,962 | | | 4,341 | |
| Provision for warranty costs | | | | 1,135 | | | 1,665 | |
| Other | | | | 31 | | | 166 | |
| |
| |
| |
| | | |
| | | | $ | 10,627 | | $ | 14,935 | |
| |
| |
| |
| NOTE 8: | – | COMMITMENTS AND CONTINGENT LIABILITIES |
| | a. | Royalties to the Office of the Chief Scientist: |
| | The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. Through December 31, 2006, the Company had obtained grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor (“the OCS”) aggregating to $ 18,542 for certain of the Company’s research and development projects. The Company was obligated to pay royalties to the OCS, amounting to 3%-3.5% of the sales of the products and other related revenues generated from such projects, equal to 100% of the grants received, linked to the U.S. dollar and for grants received after January 1, 1999 also bearing interest at the rate of LIBOR. The obligation to pay these royalties was contingent on actual sales of the products and in the absence of such sales, no payment is required. |
| | In December 2006, the Company entered into an agreement with the OCS to conclude its research and development grant programs sponsored by the OCS. Under the agreement and as of December 31, 2006, the Company is obligated to repay the OCS approximately $ 11,887, of which, $ 3,962 was recorded at December 31, 2006 in short term liabilities and $ 7,925 in long-term liabilities. The payment will be in six semiannual installments from 2007 through 2009. The outstanding obligation is linked to the change in Israel’s Consumer Price Index and bears interest. In addition, the Company is required to continue reporting to the OCS regarding its sales each quarter until the obligation is fully paid. At each report, the Company is required to calculate the amount which the Company would have been obligated to pay the OCS, had the Company paid a royalty of 3.15% on all its sales for such period. If the resulting amount is more than one-sixth of the $ 11,887, the Company will be required to pay the difference in the same payment cycle. However, any such payments will be applied to the last semiannual installments such that the total obligation will not be increased and the period for paying the obligation may be accelerated. |
| | The total outstanding obligation as of December 31, 2007 was $ 8,991, of which, $ 4,341 was recorded in short term liabilities and $ 4,650 in long-term liabilities. |
F - 23
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 8: | – | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | The Company and its subsidiaries lease their facilities and motor vehicles under various operating lease agreements that expire on various dates. Aggregate minimum rental commitments under non-cancelable leases at December 31, 2007, are as follows: |
| Year ended December 31,
| Facilities
| Motor
vehicles
| Total
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| 2008 | | | $ | 1,246 | | $ | 828 | | $ | 2,074 | |
| 2009 | | | | 1,162 | | | 396 | | | 1,558 | |
| 2010 | | | | 1,140 | | | 277 | | | 1,417 | |
| 2011 and thereafter | | | | 911 | | | 96 | | | 1,007 | |
| |
| |
| |
| |
| | | |
| | | | $ | 4,459 | | $ | 1,597 | | $ | 6,056 | |
| |
| |
| |
| |
| | Expenses for lease of facilities for the years ended December 31, 2005, 2006 and 2007 were approximately $ 997, $ 1,115 and $ 1,166 respectively (see also Note 13). |
| | Expenses for the lease of motor vehicles for the years ended December 31, 2005, 2006 and 2007 were approximately $ 928, $ 781 and $ 905 respectively. |
| | c. | Charges and guarantees: |
| | As of December 31, 2007, the Company provided bank guarantees in an aggregate amount of $ 5,226 with respect to tender offer guarantees and performance guarantees to its customers. |
| | 1. | NEC Corporation, or NEC, has asserted that the Company has been using its intellectual property in certain of the Company’s products. The Company entered into discussions with NEC with respect to NEC’s allegation. On August 8, 2007, in the framework of this discussion, the Company made a settlement offer to NEC in order to fully resolve NEC’s allegations. This settlement offer included a lump sum payment of $ 450 and certain cross-licensing arrangements in consideration for a release of any potential claim of infringement relating to NEC’s allegations. |
| | The Company believes, based on its legal counselor’s opinion, that the Company does not infringe any valid claim of the NEC patents at issue, and if any of these patents were to be tried, a competent judge or jury would not find the Company liable to NEC for patent infringement damages. However, in the light of the Company’s offer made to NEC a provision of $ 450 was accrued in the consolidated financial statements as of December 31, 2007. |
| | 2. | In November 2007, the Manufacturers’ Association in Israel (the “Plaintiff”) filed a claim in the Regional Labor Court in Tel Aviv, Israel against the Company. The Plaintiff alleges that it is entitled to receive from the Company organizational fees for the years 2001 through 2007 in the amount of approximately $ 120 as of December 31, 2007. On January 20, 2008, the Company filed a statement of defense denying any liability for such fees, and a preliminary hearing is scheduled on May 6, 2008. The Company is not able to estimate the outcome of the claim at this stage. Accordingly, no provision was accrued in the financial statements as of December 31, 2007. |
F - 24
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 9: | – | SHAREHOLDERS’ EQUITY |
| | The ordinary shares of the Company are traded on Nasdaq Global Market and on the Tel Aviv Stock Exchange, under the symbol “CRNT”. |
| | The ordinary shares entitle their holders to receive notice to participate and vote in general meetings of the Company, the right to share in distributions upon liquidation of the Company, and to receive dividends, if declared. |
| | In November 2007, the Company issued 6,990,000 ordinary shares in a follow-on equity offering on Nasdaq Global Market. The offering included 6,000,000 ordinary shares issued to public at price of $ 13.5 per share and additional 990,000 ordinary shares issued to the underwriters. Total proceeds net of issuance costs of approximately $ 6,101, were $ 88,264. |
| | 1. | Under the Company’s 1996 key Employee Share Incentive Plan, the 1997 Affiliate Employees Stock Option Plan (“the Plans”), and the 2003 Share Option Plan (“the 2003 Plan”), options may be granted to officers, directors, employees and consultants of the Company or its subsidiaries. The options vest primarily over one to five years. The options expire ten years from the date of grant. |
| | In light of the adoption of the 2003 Plan, the Company ceased granting options under the 1996 Key Employee Share Incentive Plan as of December 31, 2002 and under the Affiliate Employee Share Option Plan as of February 2003 although options granted under the 1996 Key Employee Share Incentive Plan or 1997 Affiliate Share Option Plan before such dates are still valid, subject to the respective Plans. |
| | 2. | Upon adoption of its share option plans, the Company reserved for issuance 13,523,188 ordinary shares in accordance with the respective terms thereof. As of December 31, 2007, the Company still has 375,569 Ordinary shares available for future grant under the plans. Any options, which are canceled or forfeited before the expiration date, become available for future grants. |
F - 25
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 9: | – | SHAREHOLDERS’ EQUITY (Cont.) |
| | The following is a summary of the Company’s stock options granted among the various plans: |
| | Year ended December 31, 2007
|
|---|
| | Number
of options
| Weighted
average
exercise
price
| Weighted
average
remaining
contractual
term (in
years)
| Aggregate
intrinsic
value
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Outstanding at beginning of year | | | | 6,528,785 | | $ | 4.53 | | | | | | | |
| Granted | | | | 851,500 | | $ | 9.13 | | | | | | | |
| Exercised | | | | (2,492,106 | ) | $ | 3.99 | | | | | | | |
| Forfeited | | | | (264,457 | ) | $ | 5.99 | | | | | | | |
| |
| |
| | | | | |
| | | |
| Outstanding at end of the year | | | | 4,623,722 | | $ | 5.59 | | | 7.02 | | $ | 21,569 | |
| |
| |
| |
| |
| |
| | | |
| Options exercisable at end of the year | | | | 2,447,751 | | $ | 4.86 | | | 5.78 | | $ | 12,771 | |
| |
| |
| |
| |
| |
| | | |
| Vested and expected to vest | | | | 4,315,559 | | $ | 5.59 | | | 7.02 | | $ | 20,131 | |
| |
| |
| |
| |
| |
| | The Company’s options are generally granted at exercise prices which are equal to the market value of the Ordinary shares at the grant date. The weighted average grant date fair values of the options granted during 2005, 2006 and 2007 were $ 1.17, $ 1.31 and $ 4.02, respectively. |
| | 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 fiscal 2007 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 December 31, 2007. This amount is impacted by the changes, in the fair market value of the Company’s shares. Total intrinsic value of options exercised during the years ended December 31, 2006 and 2007 were $ 3,905 and $ 14,910, respectively. As of December 31, 2007, there was $ 2,806 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 one year. |
| | During the third quarter of 2005, he Company accelerated 104,791 options and recorded $ 115 as of stock-based compensation accordingly. |
| | The Company recorded compensation expenses of $ 162, $ 1,712 and $ 1,758 during the years ended December 31, 2005, 2006 and 2007, respectively. |
| | In the event that cash dividends are declared in the future, such dividends will be paid in NIS or in foreign currency subject to any statutory limitations. The Company does not intend to pay cash dividends in the foreseeable future. |
F - 26
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| | a. | Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969: |
| | The Company currently qualifies as an “industrial company” under the above law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, and the right to claim public issuance expenses, as a deduction for tax purposes. |
| | b. | Reduction in Israeli tax rates: |
| | On July 25, 2005, the Israeli Parliament passed the Law for the Amendment of the Income Tax Ordinance (No.147 and Temporary Order), 2005 (the “Amendment”). |
| | Inter alia, the Amendment provides for a gradual reduction in the statutory corporate tax rate in the following manner: 2007 – 29%, 2008 – 27%, 2009 – 26% and 2010 and thereafter – 25%. Furthermore, as from 2010, upon reduction of the corporate tax rate to 25%, real capital gains will be subject to tax of 25%. |
| | c. | Measurement of taxable income: |
| | Commencing with the year 2003, the Company has elected to file its tax return under the Israeli Income Tax Regulations 1986 (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income). Such an election obligates the Company for three years. Accordingly, commencing the year 2003, results for tax purposes are measured in terms of earnings in dollars. |
| | d. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959(“the Capital Investment Law”): |
| | The Company’s production facilities have been granted an “Approved Enterprise”status under the Capital Investments Law currently under three separate investment programs. Pursuant to the Capital Investments Law, the Company has elected the “alternative benefits” track and has waived Government grants in return for a tax exemption. |
F - 27
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 10: | – | TAXES ON INCOME (Cont.) |
| | The Company is also a “foreign investors’ company”, as defined by the Capital Investments Law, and, as such, is entitled to a 10-year period of benefits and may be entitled to reduced tax rates of between 10% and 25% (depending on the percentage of foreign ownership in each tax year). |
| | For the Company’s three investment programs, the tax benefits are as follows: income derived from investment programs is tax exempt for the first two years of the 10-year tax benefit period, and is entitled to a reduced tax rate of 10%-25% during the remaining benefit period. The benefit period commences in the first year the Company reports taxable income after utilization of all net operating losses. The period of benefits for all these investment programs has not yet commenced, since the Company has not yet reported taxable income. |
| | The period of tax benefits, detailed above (except for the first two years in which the Company is tax exempt), is subject to a limit of 12 years from the commencement of production, or 14 years from the approval date, whichever is earlier. |
| | The entitlement to the above benefits is subject to the Company’s fulfilling the conditions stipulated by the Encouragement of Investments Law, regulations published thereunder and the letters 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, linked to the CPI and including interest. |
| | In the event of a distribution of such tax-exempt income including, among other things, a cash dividend, the Company will be required to pay tax at the rate of 10%-25% on the amount of the dividend distributed. In addition, these dividends will be subject to a 15% withholding tax. |
| | The Company’s Board of Directors has determined that such tax-exempt income will not be distributed as dividends. Accordingly, no deferred taxes will be required on tax exempt income attributable to the Company’s “Approved Enterprise”. |
| | The Capital Investments Law also grants entitlement to claim accelerated depreciation on equipment used by the “Approved Enterprise” during the first five tax years during which the equipment is used. |
| | Income from sources other than the “Approved Enterprise” during the benefit period will be subject to the tax at the regular tax rate. |
| | On April 1, 2005, an amendment to the Capital Investments Law came into effect (the “CIL Amendment”) and has significantly changed the provisions of the Capital Investments Law. The CIL Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Beneficiary Enterprise’s income will be derived from export. Additionally, the CIL Amendment enacted major changes in the manner in which tax benefits are awarded under the Capital Investments Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. |
F - 28
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 10: | – | TAXES ON INCOME (Cont.) |
| | However, the Capital Investments Law provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company’s existing Approved Enterprises will generally not be subject to the provisions of the Amendment. |
| | As a result of the CIL Amendment, among others, tax-exempt income generated under the provisions of the new law, 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, the Company did not generate income under the provisions of the Capital Investment Law and the CIL Amendment. |
| | The Company has had no taxable income since inception. |
| | 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 Company’s deferred tax assets and liabilities are as follows: |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Deferred tax assets: | | | | | | | | |
| Net operating loss carryforward *) | | | $ | 28,024 | | $ | 20,705 | |
| Temporary differences relating to reserve and allowances | | | | 3,511 | | | 6,207 | |
| |
| |
| |
| | | |
| Total net deferred tax asset before valuation allowance | | | | 31,535 | | | 26,912 | |
| Valuation allowance | | | | (31,535 | ) | | (26,912 | ) |
| |
| |
| |
| | | |
| Net deferred tax asset | | | $ | - | | $ | - | |
| |
| |
| |
| | *) | Including deferred taxes on losses for Israeli income tax purposes as of December 31, 2006 and 2007, derived from the exercise of employee stock options in the amount of $ 4,573 and $ 6,246, respectively. The benefit derived from the exercise of employee stock options was not recorded through additional paid-in capital as required under FAS 123(R) since a full valuation allowance was provided in this respect. As a result, there is no impact on the Company’s shareholders’ equity and on the deferred taxes for each of the years presented. |
| | As of December 31, 2007, the Company has provided valuation allowances of $ 26,912 in respect of deferred tax assets resulting from tax loss carryforward and other temporary differences. The net change in the valuation allowance in the year 2007 amounted to $ 4,623. Management currently believes that since the Company has a history of losses, it is more likely than not that the deferred tax regarding the loss carryforward and other temporary differences will not be realized in the foreseeable future. |
F - 29
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 10: | – | TAXES ON INCOME (Cont.) |
| | g. | Net operating loss carryforward: |
| | The Company has accumulated losses for Israeli income tax purposes as of December 31, 2006 and 2007, in the amount of approximately $ 81,477 and $ 64,409, respectively. These losses may be carried forward and offset against taxable income in the future for an indefinite period. |
| | As of December 31, 2007, the Company’s U.S. subsidiary had a U.S. federal net operating loss carryforward of approximately $ 10,754 that can be carried forward and offset against taxable income and that expires during the years 2019 to 2025. 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 law provisions. The annual limitations may result in the expiration of net operating losses before utilization. |
| | h. | Pre-tax income (loss) is comprised as follows: |
| | Year ended December 31,
|
|---|
| | 2005
| 2006
| 2007
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Domestic | | | $ | (2,067 | ) | $ | (2,000 | ) | $ | 11,621 | |
| Foreign | | | | (1,760 | ) | | (3,460 | ) | | 1,515 | |
| |
| |
| |
| |
| | | |
| | | | $ | (3,827 | ) | $ | (5,460 | ) | $ | 13,136 | |
| |
| |
| |
| |
| | i. | Reconciliation of the theoretical tax expense to the actual tax expense: |
| | A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the statement of operations, is as follows: |
| | Year ended December 31,
|
|---|
| | 2005
| 2006
| 2007
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Pre-tax income (loss) as reported in the consolidated | | | | | | | | | | | |
| statements of operations | | | $ | (3,827 | ) | $ | (5,460 | ) | $ | 13,136 | |
| |
| |
| |
| |
| | | |
| Statutory tax rate | | | | 34 | % | | 31 | % | | 29 | % |
| |
| |
| |
| |
| | | |
| Theoretical tax expenses on the above amount at the | | |
| Israeli statutory tax rate | | | $ | (1,301 | ) | $ | (1,693 | ) | $ | 3,809 | |
| Non-deductible expenses | | | | 78 | | | 132 | | | 142 | |
| Non-deductible expenses related to employee stock | | |
| options | | | | 55 | | | 531 | | | 510 | |
| Deferred taxes on losses (utilization of losses) and | | |
| temporary differences for which a valuation | | |
| allowance was provided | | | | 1,060 | �� | | 939 | | | (4,287 | ) |
| Tax adjustment due to Approved Enterprise | | |
| tax rate | | | | 186 | | | 120 | | | - | |
| Other | | | | (78 | ) | | (29 | ) | | (174 | ) |
| |
| |
| |
| |
| | | |
| Actual tax expense | | | $ | - | | $ | - | | $ | - | |
| |
| |
| |
| |
F - 30
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 11: | – | SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION |
| | The Company applies SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). The total revenues are attributed to geographic areas based on the location of the end customer. |
| | 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: |
| | Year ended December 31,
|
|---|
| | 2005
| 2006
| 2007
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Revenues from sales to external customers: | | | | | | | | | | | |
| | | |
| North America | | | $ | 19,738 | | $ | 28,162 | | $ | 34,438 | |
| Europe, Middle East and Africa | | | | 36,048 | | | 41,149 | | | 52,121 | |
| Asia-Pacific | | | | 9,877 | | | 32,358 | | | 68,387 | |
| Latin America | | | | 8,114 | | | 6,746 | | | 6,942 | |
| |
| |
| |
| |
| | | |
| | | | $ | 73,777 | | $ | 108,415 | | $ | 161,888 | |
| |
| |
| |
| |
| Property and equipment, net, by geographic areas: | | |
| | | |
| Israel | | | $ | 2,202 | | $ | 2,339 | | $ | 4,094 | |
| | | |
| Others | | | | 262 | | | 321 | | | 353 | |
| |
| |
| |
| |
| | | |
| | | | $ | 2,464 | | $ | 2,660 | | $ | 4,447 | |
| |
| |
| |
| |
| | Major customer data as a percentage of total revenues: |
| | Year ended December 31,
|
|---|
| | 2005
| 2006
| 2007
|
|---|
| | %
|
|---|
| | | | |
|---|
| | | | |
|---|
| Customer A | | | | *) - | | | 17 | | | 10 | |
| Customer B | | | | 13 | | | *) - | | | *) - | |
| | *) | Less than 10% of total revenues. |
F - 31
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 12: | – | SELECTED STATEMENTS OF OPERATIONS DATA |
| | Year ended December 31,
|
|---|
| | 2005
| 2006
| 2007
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Financial income: | | | | | | | | | | | |
| Interest on marketable securities and bank | | |
| deposits | | | $ | 814 | | $ | 1,044 | | $ | 1,652 | |
| | | |
| Foreign currency translation differences | | | | - | | | 311 | | | 292 | |
| |
| |
| |
| |
| | | |
| | | | | 814 | | | 1,355 | | | 1,944 | |
| |
| |
| |
| |
| Financial expenses: | | |
| Bank charges | | | | (172 | ) | | (71 | ) | | (213 | ) |
| Interest in respect of the OCS (see also Note 8a) | | | | - | | | - | | | (518 | ) |
| Foreign currency translation differences | | | | (35 | ) | | - | | | - | |
| Other | | | | - | | | - | | | (31 | ) |
| |
| |
| |
| |
| | | |
| | | | | (207 | ) | | (71 | ) | | (762 | ) |
| |
| |
| |
| |
| | | |
| | | | $ | 607 | | $ | 1,284 | | $ | 1,182 | |
| |
| |
| |
| |
| | b. | Net earnings (loss) per share: |
| | The following table sets forth the computation of basic and diluted net earnings (loss) per share: |
| | Year ended December 31,
|
|---|
| | 2005
| 2006
| 2007
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Numerator: | | | | | | | | | | | |
| Numerator for basic and diluted net earnings | | |
| (loss) per share - income (loss) available | | |
| to shareholders of Ordinary shares | | | $ | (3,827 | ) | $ | (5,460 | ) | $ | 13,136 | |
| |
| |
| |
| |
| | | |
| Denominator: | | |
| Denominator for basic net earnings (loss) per | | |
| share - weighted average number of Ordinary | | |
| shares | | | | 26,137,121 | | | 26,728,053 | | | 29,692,670 | |
| |
| |
| |
| |
| | | |
| Effect of dilutive securities: | | |
| Employee stock options | | | | *) - | | | *) - | | | 2,408,723 | |
| |
| |
| |
| |
| | | |
| Denominator for diluted net earnings (loss) per | | |
| share - adjusted weighted average number of | | |
| shares | | | | 26,137,121 | | | 26,728,053 | | | 32,101,393 | |
| |
| |
| |
| |
F - 32
| CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| U.S. dollars in thousands |
| NOTE 13: | – | RELATED PARTY BALANCES AND TRANSACTIONS |
| | Most of the related party balances and transactions are with related companies and principal shareholders. |
| | Yehuda Zisapel is a principal shareholder and Zohar Zisapel is the Chairman of the Board of Directors and a principal shareholder of the Company. They are brothers who, as of December 31, 2006 and 2007, jointly own 21.6% and 14.4%, respectively of the Company’s Ordinary shares. Jointly or severally, they are also founders, directors and principal shareholders of several other companies that are known as the RAD-BYNET group. |
| | Members of the RAD-BYNET group provide the Company on an as-needed basis with legal, management, information systems, marketing, and administrative services, and the Company reimburses each company for its costs in providing these services. The aggregate amount of these expenses was approximately $ 335, $ 813 and $ 767 in 2005, 2006 and 2007, respectively. |
| | The Company leases its offices in Israel from real estate holding companies controlled by Yehuda and Zohar Zisapel. As of June 2008, the Company agreed to extend its facility lease agreement until December 31, 2010. Additionally, the Company leases the U.S. subsidiary office space from a real estate holding company controlled by Yehuda and Zohar Zisapel. The lease for this facility is valid until September 2008. The aggregate amount of rent and maintenance expenses related to these properties was approximately $ 800 in 2005, $ 758 in 2006 and $ 778 in 2007. |
| | The Company purchases certain inventory components from other members of the RAD-BYNET group, which are integrated into its products. The aggregate purchase price of these components was approximately $ 1,660, $ 3,009 and $ 3,389 for the years ended December 31, 2005, 2006 and 2007, respectively. |
| | Transactions with related parties: |
| | Year ended December 31,
|
|---|
| | 2005
| 2006
| 2007
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Cost of revenues | | | $ | 1,861 | | $ | 3,472 | | $ | 3,831 | |
| |
| |
| |
| |
| | | |
| Research and development expenses | | | $ | 445 | | $ | 637 | | $ | 579 | |
| |
| |
| |
| |
| | | |
| Selling and marketing expenses | | | $ | 356 | | $ | 350 | | $ | 418 | |
| |
| |
| |
| |
| | | |
| General and administrative expenses | | | $ | 160 | | $ | 118 | | $ | 105 | |
| |
| |
| |
| |
| | Balances with related parties: |
| | December 31,
|
|---|
| | 2006
| 2007
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| | | | Trade payables, other accounts payable and accrued expenses | | | $ | 62 | | $ | 115 | |
| |
| |
| |
F - 33
