UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
20–F
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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OR
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Date
of event requiring this shell company report
_______________________
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For
the transition period
from to
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Commission
file number 0-30070
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AUDIOCODES LTD.
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(Exact
name of Registrant as specified in its charter
and
translation of Registrant’s name into English)
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ISRAEL
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(Jurisdiction
of incorporation or organization)
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1 Hayarden Street, Airport City Lod 70151,
Israel
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(Address
of principal executive offices)
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Shabtai
Adlersberg, Chairman and CEO, Tel: 972-3-976-4105, Fax:
972-3-9764040, 1 Hayarden Street, Airport City, Lod 70151
Israel
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(Name,
Telephone, E-mail and/or Facsimile number and Address of
Company Contact Person)
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Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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Title of each class
Ordinary Shares, nominal value NIS 0.01 per
share
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Name of each exchange on which
registered
NASDAQ Global Select
Market
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Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
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None
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(Title
of Class)
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Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
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None
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(Title
of Class)
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Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
As of
December 31, 2009, the Registrant had outstanding 40,269,194 Ordinary Shares,
nominal value NIS 0.01 per share.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act:
Yes
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No
x
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934:
Yes
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No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
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Indicate
by check mark whether registrant has submitted electronically and posted omits
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files)
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
Accelerated filer
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Accelerated
filer
x
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Non-accelerated
filer
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Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S.
GAAP
x
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International
Financial Reporting Standards as issued by the International Accounting
Standards Board
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Other
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If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.
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Item
17
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Item 18
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act):
Yes
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No
x
PRELIMINARY
NOTE
This
Annual Report contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, or the Securities Act, and Section
21E of the Securities Exchange Act, or the Exchange Act. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as “may,” “will,” “intends,”
“plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,”
“potential,” “continue,” or “opportunity,” the negative of these words or words
of similar import. Similarly, statements that describe our business
outlook or future economic performance, anticipated revenues, expenses or other
financial items, introductions and advancements in development of products, and
plans and objectives related thereto, and statements concerning assumptions made
or expectations as to any future events, conditions, performance or other
matters, are also forward-looking statements. Forward-looking
statements are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those stated in such statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those set forth under Item 3.D, “Key Information – Risk Factors” of
this Annual Report.
Our
actual results of operations and execution of our business strategy could differ
materially from those expressed in, or implied by, the forward-looking
statements. In addition, past financial and/or operating performance
is not necessarily a reliable indicator of future performance and you should not
use our historical performance to anticipate results or future period
trends. We can give no assurances that any of the events anticipated
by the forward-looking statements will occur or, if any of them do, what impact
they will have on our results of operations and financial
condition. In evaluating our forward-looking statements, you should
specifically consider the risks and uncertainties set forth under Item 3.D, “Key
Information – Risk Factors” of this Annual Report.
Unless
the context otherwise requires, “AudioCodes,” “us,” “we” and “our” refer to
AudioCodes Ltd. and its subsidiaries.
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ITEM
1.
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IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
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Not
applicable.
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ITEM
2.
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OFFER
STATISTICS AND EXPECTED TIMETABLE
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Not
applicable.
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ITEM
3.
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KEY
INFORMATION
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1
A. SELECTED
FINANCIAL DATA
The
selected financial data, set forth in the table below, have been derived from
our audited historical financial statements for each of the years from
2005 through 2009. The selected consolidated statement of operations data
for the years ended December 31, 2007, 2008 and 2009, and the selected
consolidated balance sheet data as of December 31, 2008 and 2009, have been
derived from our audited consolidated financial statements set forth elsewhere
in this Annual Report. The selected consolidated statement of operations data
for the years ended December 31, 2005 and 2006, and the selected consolidated
balance sheet data as of December 31, 2005, 2006 and 2007, have been derived
from our previously published audited consolidated financial statements, which
are not included in this Annual Report. The selected financial data should be
read in conjunction with our consolidated financial statements, and are
qualified entirely by reference to these consolidated financial
statements.
2
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Year
Ended December 31,
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2005
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2006
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2007
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2008
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2009
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(In
thousands, except per share data)
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Statement of
Operations Data
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Revenues
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$ | 115,827 | $ | 147,353 | $ | 158,235 | $ | 174,744 | $ | 125,894 | ||||||||||
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Cost
of revenues
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46,993 | 61,242 | 69,185 | 77,455 | 56,194 | |||||||||||||||
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Gross
profit
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68,834 | 86,111 | 89,050 | 97,289 | 69,700 | |||||||||||||||
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Operating
expense:
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Research
and development, net
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24,415 | 35,416 | 40,706 | 37,833 | 29,952 | |||||||||||||||
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Selling
and marketing
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25,944 | 37,664 | 42,900 | 44,657 | 32,111 | |||||||||||||||
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General
and administrative
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6,004 | 8,766 | 9,637 | 9,219 | 7,821 | |||||||||||||||
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Impairment
of goodwill and intangible assets
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- | - | - | 85,015 | - | |||||||||||||||
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Total
operating expenses
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56,363 | 81,846 | 93,243 | 176,724 | 69,884 | |||||||||||||||
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Operating
income (loss)
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12,471 | 4,265 | (4,193 | ) | (79,435 | ) | (184 | ) | ||||||||||||
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Financial
expenses, net (*)
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1,769 | 700 | 2,167 | 3,268 | 2,744 | |||||||||||||||
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Income
(loss) before taxes on income (tax benefit)
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10,702 | 3,565 | (6,360 | ) | (82,703 | ) | (2,928 | ) | ||||||||||||
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Taxes
on income, net
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799 | 289 | 1,265 | 505 | 290 | |||||||||||||||
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Equity
in losses of affiliated companies
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693 | 916 | 1,097 | 2,582 | 76 | |||||||||||||||
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Net
income (loss)
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$ | 9,210 | $ | 2,360 | $ | (8,722 | ) | $ | (85,790 | ) | $ | (3,294 | ) | |||||||
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Net
loss attributable to a non-controlling interest
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- | - | - | - | $ | 472 | ||||||||||||||
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Net
income (loss) attributable to AudioCodes
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$ | 9,210 | $ | 2,360 | $ | (8,722 | ) | $ | (85,790 | ) | $ | (2,822 | ) | |||||||
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Basic
net earnings (loss) per share (*)
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$ | 0.23 | $ | 0.06 | $ | (0.20 | ) | $ | (2.08 | ) | $ | (0.07 | ) | |||||||
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Diluted
net earnings (loss) per share (*)
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$ | 0.21 | $ | 0.05 | $ | (0.20 | ) | $ | (2.08 | ) | $ | (0.07 | ) | |||||||
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Weighted
average number of ordinary shares used in computing basic net earnings
(loss) per share
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40,296 | 41,717 | 42,699 | 41,201 | 40,208 | |||||||||||||||
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Weighted
average number of ordinary shares used in computing diluted net earnings
per share
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43,086 | 43,689 | 42,699 | 41,201 | 40,208 | |||||||||||||||
(*)
Amounts adjusted due to implementation of ASC 470-20 (formerly FSP
APB 14-1).
3
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December
31,
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2005
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2006
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2007
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2008
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2009
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Balance Sheet
Data
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Cash
and cash equivalents
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$ | 70,957 | $ | 25,171 | $ | 75,063 | $ | 36,779 | $ | 38,969 | ||||||||||
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Short-term
bank deposits, structured notes, marketable securities and accrued
interest
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71,792 | 58,080 | 35,309 | 78,351 | 13,902 | |||||||||||||||
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Working
capital (*)
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150,798 | 97,454 | 124,676 | 57,370 | 54,357 | |||||||||||||||
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Long-term
bank deposits, structured notes and marketable
securities
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77,572 | 50,377 | 32,670 | - | - | |||||||||||||||
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Total
assets (*)
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292,149 | 336,912 | 344,267 | 230,304 | 147,533 | |||||||||||||||
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Bank
loans
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- | - | - | 27,750 | 21,750 | |||||||||||||||
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Senior
convertible notes (*)
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105,323 | 109,949 | 114,893 | 70,670 | 403 | |||||||||||||||
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AudioCodes
shareholders’ equity(*)
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154,545 | 175,607 | 180,577 | 83,860 | 84,129 | |||||||||||||||
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Non-controlling
interest(*)
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- | - | - | 228 | (244 | ) | ||||||||||||||
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Total
equity (*)
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154,545 | 175,607 | 180,577 | 84,088 | 83,885 | |||||||||||||||
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Capital
stock
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130,744 | 149,336 | 162,103 | 167,981 | 170,062 | |||||||||||||||
(*)
Amounts adjusted due to implementation of ASC 470.
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B.
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CAPITALIZATION
AND INDEBTEDNESS
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Not
applicable.
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C.
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REASONS
FOR THE OFFER AND USE OF PROCEEDS
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Not
applicable.
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D.
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RISK
FACTORS
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We are
subject to various risks and uncertainties relating to or arising out of the
nature of our business and general business, economic, financing, legal and
other factors or conditions that may affect us. We believe that the occurrence
of any one or some combination of the following factors could have a material
adverse effect on our business, financial condition, cash flows and results of
operations.
4
Risks
Related to Our Business and Industry
We
reported losses in 2007, 2008 and 2009. We may experience additional losses in
the future.
We reported a net loss of $8.7 million
in 2007, $85.8 million in 2008 and $2.8 million in 2009. The loss in 2008
included a non-cash impairment charge of $86.1 million taken in the fourth
quarter of 2008 with respect to goodwill, intangible assets and investment in an
affiliate. The majority of our expenses are directly and indirectly related to
the number of people we employ. We may increase our expenses based on
projections of revenue growth. If at any given time we do not meet our
expectations for growth in revenues our expenses incurred in anticipation of
projected revenues may cause us to incur a loss. We may not be able to
anticipate a loss in advance and adjust our variable costs accordingly. We will
need to increase revenues and reduce expenses in order to return to
profitability.
We
have depended, and expect to continue to depend, on a small number of large
customers. Our largest customer, Nortel Networks, filed for bankruptcy
protection in January 2009. Nortel
has sold a number of its
business units and is continuing to sell business units and liquidate assets in
the bankruptcy proceeding.
The loss of Nortel or one of our other
large customers or the reduction in purchases by a significant customer or
failure of such customer to pay for the products it purchases from us could have
a material adverse effect on our revenues.
Historically,
a substantial portion of our revenue has been derived from large purchases by a
small number of original equipment manufacturers, or OEMs, and network equipment
providers, or NEPs, systems integrators and distributors. For example, our top
three customers accounted for approximately 26.1% of our revenues in 2007 20.9%
of our revenues in 2008 and 25.7% of our revenues in 2009. Based on our
experience, we expect that our customer base may change from period to period.
If we lose a large customer and fail to add new customers, or if purchases made
by such customers are significantly reduced, there could be a material adverse
effect on our results of operations.
Sales to
Nortel Networks, our largest customer, accounted for 15.6% of our revenues in
2009 compared to 14.4% of our revenues in 2008 and 17.0% of our revenues in 2007
. Nortel filed for bankruptcy protection in January 2009. As a result
of this bankruptcy filing, $1.7 million of sales to Nortel in the fourth quarter
of 2008 were recorded as unpaid deferred revenues which also reduced trade
receivables on our balance sheet. During 2009, Nortel returned to us products
with a sales price of $706,000, which reduced our unpaid deferred revenues by
this amount. Nortel has sold a number of its business units and is continuing to
sell business units and liquidate assets in the bankruptcy proceeding. Some of
the business units sold by Nortel were customers of ours. We cannot be sure if
Nortel or business units sold by Nortel that were customers of ours will
continue to purchase products from us or, if Nortel sells additional business
units that deal with us, any purchaser of those business units will continue to
do business with us. Any significant reduction in sales to Nortel and those
business units sold by Nortel that were customers of ours, or the inability to
collect a significant portion of amounts owed to us by Nortel, could have a
material adverse effect on our results of operations.
5
Recent and future economic
conditions, including turmoil in the financial and credit markets, may adversely
affect our business
.
The
general economic downturn, including disruptions in the world credit and equity
markets, has had and continues to have a significant negative impact on business
around the world. The impact of the current economic environment on
the technology industry and our major customers has been
significant. Conditions may continue to be depressed or may be
subject to further deterioration which could lead to a further reduction in
consumer and customer spending overall, which could have an adverse impact on
sales of our products. A disruption in the ability of our significant
customers to access liquidity could cause serious disruptions or an overall
deterioration of their businesses which could lead to a significant reduction in
their orders of our products and the inability or failure on their part to meet
their payment obligations to us, any of which could have a material adverse
effect on our results of operations and liquidity. A significant
adverse change in a customer’s financial and/or credit position could also
require us to assume greater credit risk relating to that customer’s receivables
or could limit our ability to collect receivables related to previous purchases
by that customer. As a result, our reserves for doubtful accounts and
write-offs of accounts receivable may increase.
We
may need additional financing to operate or grow our business. We may not be
able to raise additional financing for our capital needs on favorable terms, or
at all, which could limit our ability to grow and to continue our longer term
expansion plans.
We may
need additional financing to operate our business or continue our longer term
expansion plans. To the extent that we cannot fund our activities and
acquisitions through our existing cash resources and any cash we generate from
operations, we may need to raise equity or debt funds through additional public
or private financings. In November 2009, we were required to use $73.1 million
to repurchase almost all of our outstanding senior convertible notes in
accordance with the terms of the notes. We borrowed $30 million in 2008 that is
repayable in 20 equal quarterly payments of $1.5 million from August, 2008
through July 2013. We will need to pay these installments and could also be
required to repay all or portion of these bank loans if we do not comply with
covenants in our loan agreements with respect to maintaining shareholders'
equity at specified levels or achieving certain levels of operating
income. We cannot be certain that we will be able to obtain
additional financing on commercially reasonable terms, or at all. This could
inhibit our growth, increase our financing costs or cause us severe financial
difficulties.
We
are party to an agreement for the construction and long-term lease of a new
building in Israel. We do not currently need all of the space that will be
contained in this building. If we are unable to sublease the property under
reasonable commercial terms, we may incur increased operating expenses which
could adversely affect our results of operations.
In May,
2007, we entered into an agreement with respect to property adjacent to our
headquarters in Israel, pursuant to which a building of approximately 145,000
square feet is being erected and will be leased to us for a period of eleven
years. This new building was substantially completed on a structural level in
May 2010. The landlord claims that we should have taken delivery of the building
at that time and started paying rent. We have disagreed with the landlord’s
interpretation of the relevant agreement. This dispute may be referred to
arbitration. We cannot predict the outcome of any arbitration proceeding or the
effect on us if we were to lose an arbitration proceeding. We estimate the
annual lease payments (including management fees) to be in the range of $2.0
million to $3.2 million, depending on the amount expended on improvements made
to the building.
6
At the
time we entered into the agreement in 2007, the leased property was intended to
serve our expanding needs. However, in view of current economic conditions and
our reduction in personnel undertaken since 2008, we do not need to occupy the
entire building and may seek to sublease all or a portion of the new building to
third parties. If we are unable to enter into a sublease or enter into a
sublease for an amount that is less than our obligations under the lease, we may
incur significant additional operating expenses which could adversely affect our
results of operations.
We
are dependent on the development of the VoIP market to increase our
sales.
We are
dependent on the development of the Voice over Internet Protocol, or VoIP,
market to increase our sales. Most existing networks are still not based on
Voice over Packet technology which we use in our products designed for the VoIP
market. We cannot be sure that the delivery of telephone and other
communications services over packet networks will expand or that there will be a
need to interconnect to other networks utilizing the type of technology
contained in our products. For example, the need for our media gateway products
depends on the need to interconnect VoIP networks with traditional non-packet
based networks. Our session border control products depend on growth in the need
to interconnect Voice over Packet networks with each other. The adaptation
process of connecting packet networks and telephone networks can be time
consuming and costly. Sales of our VoIP products will depend on the development
of packet networks and the commercialization of VoIP services. If
this market develops more slowly than we expect, we may not be able to sell our
products in a significant enough volume to be profitable.
We
may expand our business through acquisitions that could result in diversion of
resources and extra expenses. This could disrupt our business and affect our
results of operations.
Part of
our strategy is to pursue acquisitions of, or investments in, businesses and
technologies or to establish joint ventures to expand our business. For example,
in April 2003, we purchased a product group from Nortel Networks and in May 2004
we purchased Ai-Logix Inc., now known as AudioCodes Inc. In 2005, we
invested in two Israeli-based companies, MailVision Ltd. and CTI Squared Ltd.,
and continued investing in Natural Speech Communication Ltd. We have
recognized losses from our equity investment in Natural Speech Communication in
our results of operations in each of the past three years. In December 2008, we
began consolidating the financial results of Natural Speech Communication in our
financial results and in May 2010 we acquired the remaining shares of Natural
Speech Communications that were not previously owned by us. In July 2006,
we acquired Nuera Communications, Inc. (which merged into AudioCodes Inc.), in
August 2006, we acquired Netrake Corporation (which merged into AudioCodes
Inc.), and in April 2007, we completed our acquisition of CTI Squared
Ltd.
7
The
negotiation of acquisitions, investments or joint ventures, as well as the
integration of acquired or jointly developed businesses or technologies, could
divert our management’s time and resources. Acquired businesses,
technologies or joint ventures may not be successfully integrated with our
products and operations. The markets for the products produced by the companies
we acquire may take longer than we anticipated to develop and to result in
increased sales and profits for us. We may not realize the intended benefits of
any acquisition, investment or joint venture and we may incur losses from any
acquisition, investment or joint venture.
The
future valuation of acquired businesses may be less than the purchase price we
paid and result in impairment charges related to goodwill or intangible
assets. During the fourth quarter of 2008, we recognized non-cash
impairment charges of $86.1 million with respect to goodwill and intangible
assets related to our acquisitions and an investment in an affiliated
company.
In
addition, acquisitions could result in:
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·
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substantial
cash expenditures;
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·
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potentially
dilutive issuances of equity
securities;
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·
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the
incurrence of debt and contingent
liabilities;
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·
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a
decrease in our profit margins;
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·
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amortization
of intangibles and potential impairment of goodwill and intangible assets,
such as occurred during 2008;
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·
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reduction
of management attention to other parts of the
business;
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·
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failure
to invest in different areas or alternative
investments;
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·
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failure
to generate expected financial results or reach business goals;
and
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·
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increased
expenditures on human resources and related
costs.
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If
acquisitions disrupt our sales or marketing efforts or operations, our business
may suffer.
We
recorded significant charges for the impairment of goodwill and intangible
assets during the fourth quarter of 2008 which caused us to report a net loss
for 2008. If our goodwill and other intangible assets become further
impaired, we may be required to record additional charges to
earnings.
We recorded aggregate charges of $86.1
million in the fourth quarter of 2008 for impairment charges with respect to
goodwill and intangible assets related to our acquisitions and an investment in
an affiliated company. As a result, we reported a net loss for 2008. As of
December 31, 2009, we had goodwill and other intangible assets in an aggregate
amount of $38.9 million, or approximately 26.4% of our total assets and 46.5% of
our shareholders’ equity. Under accounting principles generally accepted in the
United States, we review our goodwill and other intangible assets for impairment
annually during the fourth quarter of each fiscal year and when events or
changes in circumstances indicate the carrying value may not be
recoverable. The carrying value of our goodwill and other intangible
assets may not be recoverable due to factors such as a decline in our stock
price and market capitalization, reduced estimates of future cash flows and
profitability and slower growth rates in our industry. Our impairment
charges in 2008 were primarily the result of a decrease in our market
capitalization. Estimates of future cash flows and profitability are
based on an updated long-term financial outlook of our operations. However,
actual performance in the near-term or long-term could be materially different
from these forecasts, which could impact future estimates. A further
significant decline in our market capitalization or deterioration in our
projected results could result in additional impairment of goodwill and/or
intangible assets. We may be required in the future to record a
significant charge to earnings in our financial statements during a period in
which an impairment of our goodwill is determined to exist, as happened in 2008,
which would negatively impact our results of operations and could negatively
impact our stock price
.
8
If
new products we recently introduced or expect to introduce in the future fail to
generate the level of demand we anticipated, we will realize a lower than
expected return from our investment in research and development with respect to
those products, and our results of operations may suffer.
Our
success is dependent, in part, on the willingness of our customers to transition
or migrate to new products, such as our expanded offering of Mediant and IPmedia
products, our session border controller products, the multi service business
gateways (MSBGs), our software application products or expected future products.
We are involved in a continuous process of evaluating changing market demands
and customer requirements in order to develop and introduce new products,
features and applications to meet changing demands and requirements. We need to
be able to interpret market trends and the advancement of technology in order to
successfully develop and introduce new products, features and applications. If
potential customers defer transition or migration to new products, our return on
our investment in research and development with respect to products recently
introduced or expected to be introduced in the near future will be lower than we
originally anticipated and our results of our operations may
suffer.
Because
of the rapid technological development in the communications equipment market
and the intense competition we face, our products can become outmoded or
obsolete in a relatively short period of time, which requires us to provide
frequent updates and/or replacements to existing products. If we do
not successfully manage the transition process to the next generation of our
products, our operating results may be harmed.
The
communications equipment market is characterized by rapid technological
innovation and intense competition. Accordingly, our success depends in part on
our ability to develop next generation products in a timely and cost-effective
manner. The development of new products is expensive, complex and time
consuming. If we do not rapidly develop our next generation products ahead of
our competitors, we may lose both existing and potential customers to our
competitors. Further, if a competitor develops a new, less expensive product
using a different technological approach to delivering informational services
over existing networks, our products would no longer be competitive. Conversely,
even if we are successful in rapidly developing new products ahead of our
competitors and we do not cost-effectively manage our inventory levels of
existing products when making the transition to the new products, our financial
results could be negatively affected by high levels of obsolete inventory. If
any of the foregoing were to occur, then our operating results would be
harmed.
9
Our
industry is rapidly evolving and we may not be able to keep pace with
technological changes, which could adversely affect our business.
The
transmission of multimedia over data networks is rapidly evolving. Short product
life cycles place a premium on our ability to manage the transition from current
products to new products. Our future success in generating revenues
will depend on our ability to enhance our existing products and to develop and
introduce new products and product features. These products and features must
keep pace with technological developments and address the increasingly
sophisticated needs of our customers. The development of new technologies and
products is increasingly complex and uncertain. This increases the difficulty in
coordinating the planning and production process and can result in delay in the
introduction of new technologies and products.
The
increase in the number of IP networks may adversely affect the demand for media
gateway products.
Media
gateway products are primarily intended to transcode voice from traditional
telephony networks to IP networks and vise versa. Along with the growth in the
number of IP networks, there has been an increase in the amount of information
that is sent directly from one IP network to another IP network. This direct
network communication potentially obviates the need to use a media gateway or
transcoding. A reduction in the demand for media gateways may adversely affect
the demand for our media gateway products and, in turn, adversely affect our
results of operations.
New
industry standards, the modification of our products to meet additional existing
standards or the addition of features to our products may delay the introduction
of our products or increase our costs.
The
industry standards that apply to our products are continually evolving. In
addition, since our products are integrated into networks consisting of elements
manufactured by various companies, they must comply with a number of industry
standards and practices established by various international bodies and industry
forums. Should new standards gain broad acceptance, we will be
required to adopt those standards in our products. We may also decide to modify
our products to meet additional existing standards or add features to our
products. Standards may be adopted by various industry interest groups or may be
proprietary and nonetheless accepted broadly in the industry. It may take us a
significant amount of time to develop and design products incorporating these
new standards. We may also have to pay additional fees to the developers of the
technologies which constitute the newly adopted standards.
Our
OEM customers or potential customers may develop or prefer to develop their own
technical solutions, and as a result, would not buy our products.
Our
products are sold also as components or building blocks to large OEMs and NEPs.
These customers incorporate our products into their product offerings, usually
in conjunction with value-added services of their own or of third parties. OEM
or NEP customers or potential customers may prefer to develop their own
technology or purchase third party technology. They could also manufacture their
own components or building blocks that are similar to the ones we offer. Large
customers have already committed significant resources in developing integrated
product offerings. Customers may decide that this gives them better
profitability and/or greater control over supplies, specifications and
performance. Customers may therefore not buy components or products from an
external manufacturer such as us. This could have an adverse impact on our
ability to sell our products and our revenues.
10
We
have a limited order backlog. If revenue levels for any quarter fall below our
expectations, our results of operations will be adversely affected.
We have a
limited order backlog, which makes revenues in any quarter substantially
dependent on orders received and delivered in that quarter. A delay in the
recognition of revenue, even from one customer, may have a significant negative
impact on our results of operations for a given period. We base our decisions
regarding our operating expenses on anticipated revenue trends, and our expense
levels are relatively fixed, or require some time for adjustment. Because only a
small portion of our expenses varies with our revenues, if revenue levels fall
below our expectations, our results of operations will be adversely
affected.
Generally,
we sell to original equipment manufacturers, or OEMs, network equipment
providers or system integrator customers, as well as to
distributors. As a result, we have less information with respect to
the actual requirements of end-users and their utilization of equipment. We also
have less influence over the choice of equipment by these
end-users.
We
typically sell to OEM customers, network equipment providers, and system
integrators, as well as to distributors. Our customers usually purchase
equipment from several suppliers and may be trying to fulfill one of their
customers’ specific technical specifications. We rely heavily on our customers
for sales of our products and to inform us about market trends and the needs of
their customers. We cannot be certain that this information is accurate. If the
information we receive is not accurate, we may be manufacturing products that do
not have a customer or fail to manufacture products that end-users want. Because
we are selling products to OEMs, system integrators and distributors rather than
directly to end-users, we have less control over the ultimate selection of
products by end-users.
The
markets we serve are highly competitive and many of our competitors have much
greater resources, which may make it difficult for us to maintain
profitability.
Competition
in our industry is intense and we expect competition to increase in the future.
Our competitors currently sell products that provide similar benefits to those
that we sell. There has been a significant amount of merger and acquisition
activity and strategic alliances, frequently involving major telecommunications
equipment manufacturers acquiring smaller companies, and we expect that this
will result in an increasing concentration of market share among these
companies, many of whom are our customers.
11
Our
principal competitors in the area of analog media gateways (2 to 24 ports) for
access and enterprise are Linksys (a division of Cisco Systems, Inc.), Mediatrix
Telecom, Inc., Vega Stream Limited, Samsung, Innovaphone AG, Net.com/Quintum
Technologies, Tainet Communication System Corp., Welltech, Ascii Corp., D-Link
Systems, Inc., Multitech Inc., Inomedia, OKI and LG. In the area of low density
digital gateway and multi-service business gateways we face competition from
companies such as Cisco, Adtran, Oneaccess, and more specifically in the
enterprise class Session Border Controller technology with ACME Packet
(Convergence), SIPera, Ingate and Edwater. In addition we face competition in
low, mid and high density gateways from companies such as Nortel,
Alcatel-Lucent, Nokia-Siemens, Huawei, Ericsson, UTstarcom, ZTE and from Cisco
Systems, Inc., Veraz Networks, Sonus Networks, General Bandwidth,
Dialogic/Cantat Technologies and Commatch (Telrad), some of which are also
customers of our products and technology.
Our
principal competitors in the media server market segment are Dialogic/Cantata
Technology, NMS Communications, Convedia/Radisys, Movius (IP Unity Glenayre),
Cognitronics and Aculab. In addition, we face competition in
software-based and hardware-based media servers from internal development at
companies such as Hewlett-Packard, Comverse-NetCentrex, Nortel, Alcatel -
Lucent, Nokia – Siemens and Ericsson.
Our
principal competitors in the sale of signal processing chips are Texas
Instruments, Broadcom, Infineon, Centillium, Surf and Mindspeed. Several large
manufacturers of generic signal processors, such as Motorola, Agere Systems,
which merged with LSI Corporation in April 2007, and Intel have begun, or are
expected to begin, marketing competing processors. Our principal competitors in
the communications board market are Dialogic/NMS
Communications, Cantata, Aculab, PIKA Technologies, Inc., Intel and
Motorola.
Our
principal competitors in the area of IP Phones are comprised of “best-of-breed”
IP phone vendors and end-to-end IP telephony vendors. “Best of breed” IP phone
vendors sell standard-based SIP phones that can be integrated into any
standards-based IP-PBX or hosted IP telephony system. These competitors include
Polycom, Mediatrix and SNOM. End-to-end IP telephony vendors sell IP
phones that only work in their proprietary systems and include IP telephony
vendors such as Cisco, Avaya/Nortel, Alcatel-Lucent, Siemens and
Asstra.
Many of
our competitors have the ability to offer complete network solutions and
vendor-sponsored financing programs to prospective customers. Some of our
competitors with broad product portfolios may also be able to offer lower prices
on products that compete with ours because of their ability to recoup a loss of
margin through sales of other products or services. Additionally, voice, audio
and other communications alternatives that compete with our products are being
continually introduced.
In the
future, we may also develop and introduce other products with new or additional
telecommunications capabilities or services. As a result, we may compete
directly with VoIP companies and other telecommunications and solution
infrastructure providers, some of which may be our customers. Additional
competitors may include companies that currently provide communication software
products and services. The ability of some of our competitors to bundle other
enhanced services or complete solutions with VoIP products could give these
competitors an advantage over us.
12
Offering
to sell system level products that compete with the products manufactured by our
customers could negatively affect our business.
Our
product offerings range from media gateway building blocks, such as chips and
boards, to media gateways, media servers and session border control products
(systems). These products could compete with products offered by our
customers. These customers could decide to decrease purchases from us because of
this competition. This could result in a material adverse effect on our results
of operations.
Offering
to sell directly to carriers or service providers may expose us to requirements
for service which we may not be able to meet.
We also
sell our products directly to telecommunications carriers, service providers or
other end-users. We have traditionally relied on third party
distributors and OEMs to test and/or sell our products and to inform us about
the requirements of end-users. We have limited experience selling our products
directly to end-user customers. Telecommunications carriers and other service
providers have great bargaining power in negotiating
contracts. Generally, contracts with end-users tend to be more
complex and impose more obligations on us than contracts with third party
distributors. We may be unable to meet the requirements of these
contracts. If we are unable to meet the conditions of a contract with
an end-user customer, we may be subject to liquidated damages or liabilities
that could result in a material adverse effect on our results of
operations.
Selling
directly to end-users may adversely affect our relationship with our current
third party distributors upon whom we will continue to rely for a significant
portion of our sales. Loss of third party distributors and OEMs, or a
decreased commitment by them to sell our products as a result of direct sales by
us, could adversely affect our sales and results of operations.
We
rely on third-party subcontractors to assemble our products and therefore do not
directly control manufacturing costs, product delivery schedules or
manufacturing quality.
Our
products are assembled and tested by third-party subcontractors. As a result of
our reliance on third-party subcontractors, we cannot directly control product
delivery schedules. We have in the past experienced delays in delivery
schedules. Any problems that occur and persist in connection with the delivery,
quality or cost of the assembly and testing of our products could have a
material adverse effect on our business, financial condition and results of
operations. This reliance could also lead to product shortages or quality
assurance problems, which, in turn, could lead to an increase in the costs of
manufacturing or assembling our products.
In
addition, we have recently engaged three original design manufacturers, or ODMs,
based in Asia to design and manufacture some of our products. Any problems that
occur and persist in connection with the delivery, quality, cost of the assembly
or testing of our products, as well as the termination of our commercial
relationship with an ODM or the discontinuance of the manufacturing of the
respective products could have a material adverse effect on our business,
financial condition and results of operations.
13
We
may not be able to deliver our products to our customers, and substantial
reengineering costs may be incurred if a small number of third-party suppliers
do not provide us with key components on a timely basis.
Texas
Instruments Incorporated supplies all of the chips for our signal processor
product line. Our signal processor line is used both as a product line in its
own right and as a key component in our other product lines. Motorola
manufactures all of the communications processors currently used on our
communications boards.
We have
not entered into any long-term supply agreements or alternate source agreements
with our suppliers and, while we maintain an inventory of critical components,
our inventory of chips would likely not be sufficient in the event that we had
to engage an alternate supplier for these components.
Texas
Instruments is also one of our major competitors in providing signal processing
solutions. An unexpected termination of the supply of the chips provided by
Texas Instruments or Motorola or disruption in their timely delivery would
require us to make a large investment in capital and personnel to shift to using
signal processors manufactured by other companies and may cause a delay in
introducing replacement products. Customers may not accept an alternative
product design. Supporting old products or redesigning products may make it more
difficult for us to support our products.
We
utilize other sole source suppliers upon whom we depend without having long-term
supply agreements.
Some of
our sole source suppliers custom produce components for us based upon our
specifications and designs while other of our sole source suppliers are the only
manufacturers of certain components required by our products. We have not
entered into any long-term supply agreements or alternative source agreements
with our suppliers and while we maintain an inventory of components from single
source providers, our inventory would likely not be sufficient in the event that
we had to engage an alternate supplier of these single source components. In the
event of any interruption in the supply of components from any of our sole
source suppliers, we may have to expend significant time, effort and other
resources in order to locate a suitable alternative manufacturer and secure
replacement components. If no replacement components are available, we may be
forced to redesign certain of our products. Any such new design may
not be accepted by our customers. A prolonged disruption in supply
may force us to redesign and retest our products. Any interruption in supply
from any of these sources or an unexpected technical failure or termination of
the manufacture of components could disrupt production, thereby adversely
affecting our ability to deliver products and to support products previously
sold to our customers.
In
addition, if demand for telecommunications equipment increases, we may face a
shortage of components from our suppliers. This could result in
longer lead times, increases in the price of components and a reduction in our
margins, all of which could adversely affect the results of our
operations.
14
Our
customers may require us to produce products or systems to hold in inventory in
order to meet their “just in time”, or short lead time, delivery
requirements. If we are unable to sell this inventory on a timely
basis, we could incur charges for excess and obsolete inventory which would
adversely affect our results of operations.
Our
customers expect us to maintain an inventory of products available for purchase
off the shelf subsequent to the initial sales cycle for these
products. This may require us to incur the costs of manufacturing
inventory without having a purchase order for the products. The VoIP
industry is subject to rapid technological change and volatile customer demands,
which result in a short product commercial life before a product becomes
obsolete. If we are unable to sell products that are produced to hold
in inventory, we may incur write-offs as a result of slow moving items,
technological obsolescence, excess inventories, discontinued products and
products with market prices lower than cost. Write-offs could adversely affect
our operating results and financial condition. We wrote off inventory in a total
amount of $973,000 in 2007, $2.4 million in 2008 and $3.4 million in
2009.
The
right of our customers to return products and their right to exchange products
may affect our ability to recognize revenues which could adversely affect the
results of our operations.
Some of
our customers expect us to permit them to return some or all of the products
they purchase from us. If we contractually agree to allow a customer to return
products, the customer may be entitled to a refund for the returned products or
to receive a credit for the purchase of replacement products. If we
agree to this type of contractual obligations, it could affect our ability to
recognize revenues. In addition, if we are not able to resell any products that
are returned and we would have to write off this inventory. This
could adversely affect our results of operations.
Our
products generally have long sales cycles and implementation periods, which
increase our costs in obtaining orders and reduce the predictability of our
revenues.
Our
products are technologically complex and are typically intended for use in
applications that may be critical to the business of our customers. Prospective
customers generally must make a significant commitment of resources to test and
evaluate our products and to integrate them into larger systems. As a result,
our sales process is often subject to delays associated with lengthy approval
processes that typically accompany the design and testing of new communications
equipment. The sales cycles of our products to new customers are approximately
six to twelve months after a design win, depending on the type of customer and
complexity of the product. This time period may be further extended because of
internal testing, field trials and requests for the addition or customization of
features. This delays the time until we realize revenue and results in
significant investment of resources in attempting to make sales.
Long
sales cycles also subject us to risks not usually encountered in a short sales
span, including customers’ budgetary constraints, internal acceptance reviews
and cancellation. In addition, orders expected in one quarter could shift to
another because of the timing of customers’ procurement decisions. The time
required to implement our products can vary significantly with the needs of our
customers and generally exceeds several months; larger implementations can take
multiple calendar quarters. This complicates our planning processes and reduces
the predictability of our revenues.
15
Our
proprietary technology is difficult to protect, and our products may infringe on
the intellectual property rights of third parties. Our business may suffer if we
are unable to protect our intellectual property or if we are sued for infringing
the intellectual property rights of third parties.
Our
success and ability to compete depend in part upon protecting our proprietary
technology. We rely on a combination of patent, trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect our proprietary rights. These agreements and measures may
not be sufficient to protect our technology from third-party infringement, or to
protect us from the claims of others.
Enforcement
of intellectual property rights may be expensive and may divert attention of
management and of research and development personnel away from our
business. Intellectual property litigation could also call into
question the ownership or scope of rights owned by us. We believe that at least
one of our patents may cover technology related to the ITU G.723.1 standard.
Because of our involvement in the standard setting process, we may be required
to license certain of our patents on a reasonable and non-discriminatory basis
to a current or future competitor, to the extent required to carry out the
G.723.1 standard. Additionally, our products may be manufactured,
sold, or used in countries that provide less protection to intellectual property
than that provided under U.S. or Israeli laws or where we do not hold relevant
intellectual property rights.
We
believe that the frequency of third party intellectual claims is increasing, as
patent holders, including entities that are not in our industry and that
purchase patents as an investment or to monetize such rights by obtaining
royalties, use infringement assertions as a competitive tactic and a source of
additional revenue. Any intellectual property claims against us, even
without merit, could cost us a significant amount of money to defend and divert
management’s attention away from our business. We may not be able to secure a
license for technology that is used in our products and we may face injunctive
proceedings that prevent distribution and sale of our products even prior to any
dispute being concluded. These proceedings may also have a deterrent effect on
purchases by customers, who may be unsure about our ability to continue to
supply their requirements. We may be forced to repurchase our products and
compensate customers that have purchased such infringing products. We may be
forced to redesign the product so that it becomes non-infringing, which may have
an adverse impact on the results of our operations.
In
addition, claims alleging that the development, use, or sale of our products
infringes third parties’ intellectual property rights may be directed either at
us or at our direct or indirect customers. We may be required to indemnify such
customers against claims made against them. We may be required to indemnify them
even if we believe that the claim of infringement is without
merit.
16
Multiple
patent holders in our industry may result in increased licensing
costs.
There are
a number of companies besides us that hold patents for various aspects of the
technology incorporated in our industry’s standards and our products. We expect
that patent enforcement will be given high priority by companies seeking to gain
competitive advantages or additional revenues. The holders of patents from which
we have not obtained licenses may take the position that we are required to
obtain a license from them. We cannot be certain that we would be able to
negotiate a license agreement at an acceptable price or at all. Our results of
operations could be adversely affected by the payment of any additional
licensing costs or if we are prevented from manufacturing or selling a
product.
Changes
in governmental regulations in the United States or other countries could slow
the growth of the VoIP telephony market and reduce the demand for our customers’
products, which, in turn, could reduce the demand for our products.
VoIP and
other services are not currently subject to all of the same regulations that
apply to traditional telephony. Nevertheless, it is possible that foreign or
U.S. federal or state legislatures may seek to impose increased fees and
administrative burdens on VoIP, data, and video providers. The FCC
has already required VoIP service providers to meet various emergency service
requirements relating to delivery of 911 calls, known as E911, and to
accommodate law enforcement interception or wiretapping requirements, such as
the Communications Assistance for Law Enforcement Act, or CALEA. In addition,
the FCC may seek to impose other traditional telephony requirements such as
disability access requirements, consumer protection requirements, number
assignment and portability requirements, and other obligations, including
additional obligations regarding E911 and CALEA.
The cost
of complying with FCC regulations could increase the cost of providing Internet
phone service which could result in slower growth and decreased profitability
for this industry, which would adversely affect our business.
The
enactment of any additional regulation or taxation of communications over the
Internet in the United States or elsewhere in the world could have a material
adverse effect on our customers’ (and their customers’) businesses and could
therefore adversely affect sales of our products. We do not know what effect, if
any, possible legislation or regulatory actions in the United States or
elsewhere in the world may have on private telecommunication networks, the
provision of VoIP services and purchases of our products.
Use
of encryption technology in our products is regulated by governmental
authorities and may require special development, export or import
licenses. Delays in the issuance of required licenses, or the
inability to secure these licenses, could adversely affect our revenues and
results of operations.
Growth in
the demand for security features may increase the use of encryption technology
in our products. The use of encryption technology is generally
regulated by governmental authorities and may require specific development,
export or import licenses. Encryption standards may be based on proprietary
technologies. We may be unable to incorporate encryption standards
into our products in a manner that will insure interoperability. We
also may be unable to secure licenses for proprietary technology on reasonable
terms. If we cannot meet encryption standards, or secure required
licenses for proprietary encryption technology, our revenues and results of
operations could be adversely affected.
17
We
are subject to regulations that require us to use components based on
environmentally friendly materials. We may be subject to various regulations
relating to management and disposal of waste with respect to electronic
equipment. Compliance with these regulations may increase our costs. Failure to
comply with these regulations could materially adversely affect our results of
operations.
We are
subject to telecommunications industry regulations requiring the use of
environmentally-friendly materials in telecommunications
equipment. For example, pursuant to a European Community directive,
telecom equipment suppliers were required to stop using specified materials that
are not “environmentally friendly” by July 1, 2006. In addition, telecom
equipment suppliers that take advantage of an exemption with respect to the use
of lead in solders are required by this directive to eliminate the lead in
solders from their products by the time set forth by the European Community
regulations. Some of our customers may also require products that
meet higher standards than those required by the directive, such as complete
removal of additional harmful substances from our products. We will be dependent
on our suppliers for components and sub-system modules, such as semiconductors
and purchased assemblies and goods, to comply with these
requirements. This may harm our ability to sell our products in
regions or to customers that may adopt such directives.
Compliance
with these directives, especially with respect to the requirement that products
eliminate lead solders, requires us to undertake significant expenses with
respect to the re-design of our products. In addition, we may be
required to pay higher prices for components that comply with this directive. We
may not be able to pass these higher component costs on to our customers. We
cannot at this point estimate the expense that will be required to redesign our
products in order to include “environmentally friendly” components. We cannot be
sure that we will be able to timely comply with these regulations, that we will
be able to comply on a cost-effective basis or that a sufficient supply of
compliant components will be available to us. Compliance with these regulations
could increase our product design costs. New designs may also require
qualification testing with both customers and government certification
boards. We cannot be certain of the reliability of any new designs
that utilize non-lead components, in part, due to the lack of experience with
the replacement materials and assembly technologies. In addition, the
incorporation of new components may adversely affect equipment reliability and
durability.
Some of
our operations use substances regulated under various federal, state, local and
international laws governing the environment, including laws governing the
management and disposal of waste with respect to electronic equipment. We could
incur substantial costs, including fines and civil or criminal sanctions, if we
were to violate or become liable under environmental laws or if our products
become non-compliant with environmental laws. We also face increasing complexity
in our product design and procurement operations as we adjust to new and future
requirements relating to the materials that compose our products. The EU has
enacted the Waste Electrical and Electronic Equipment Directive, which makes
producers of electrical goods financially responsible for specified collection,
recycling, treatment and disposal of past and future covered products. Similar
legislation has been or may be enacted in other jurisdictions, including the
United States, Canada, Mexico, China and Japan.
18
Our
inability or failure to comply with these regulations could have a material
adverse effect on our results of operations. In addition, manufacturers of
components that use lead solders may decide to stop manufacturing those
components prior to the required compliance date. These actions by manufacturers
of components could result in a shortage of components that could adversely
affect our business and results of operations.
A
significant portion of our revenues is generated outside of the United States
and Israel. We intend to continue to expand our operations internationally and,
as a result, our results of operations could suffer if we are unable to manage
our international operations effectively.
We
generated 37% of our revenues in 2007, 40% of our revenues in 2008 and 36% of
our revenues in 2009 outside of the United States and Israel. Part of our
strategy is to expand our penetration in existing foreign markets and to enter
new foreign markets. Our ability to penetrate some international markets may be
limited due to different technical standards, protocols or product requirements
in different markets. Expansion of our international business will require
significant management attention and financial resources. Our international
sales and operations are subject to numerous risks inherent in international
business activities, including:
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economic
and political instability in foreign
countries;
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compliance
with foreign laws and regulations;
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different
technical standards or product
requirements;
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staffing
and managing foreign operations;
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foreign
currency fluctuations;
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export
control issues;
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governmental
controls;
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import
or currency control restrictions;
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local
taxation;
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increased
risk of collection; and
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burdens
that may be imposed by tariffs and other trade
barriers.
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If we are
unable to address these risks, our foreign operations may be unprofitable or the
value of our investment in our foreign operations may decrease.
Currently,
our international sales are denominated primarily in U.S. dollars. Therefore,
any devaluation in the local currencies of our customers relative to the U.S.
dollar could cause customers to decrease or cancel orders or default on
payment.
19
The
prices of our products may become less competitive due to foreign exchange
fluctuations.
Although we have operations throughout
the world, the majority of our revenues and our operating costs in 2009 were
denominated in, or linked to, the U.S. dollar. Accordingly, we consider the U.S.
dollar to be our functional currency. However, a significant portion of our
operating costs in 2009 were incurred in New Israeli Shekels (NIS). During 2009
the NIS appreciated against the U.S. dollar, which resulted in an increase in
the U.S. dollar cost of our operations in Israel. As a result of this
differential, from time to time we may experience increases in the costs of our
operations outside the United States, as expressed in U.S. dollars. If there is
a significant increase in our expenses, we may be required to increase the
prices of our products and may be less competitive. We cannot be sure that our
international customers will continue to place orders denominated in U.S.
dollars.
Our sales to European customers
denominated in Euros are increasing. Sales denominated in Euros could
make our revenues subject to fluctuation in the Euro/U.S. dollar exchange rate.
If the U.S. dollar appreciates against the Euro, we may be required to increase
the prices of our products that are denominated in Euros.
We
may be unable to attract sales representatives who will market our products
effectively.
A
significant portion of our marketing and sales involves the aid of independent
sales representatives that are not under our direct control. We cannot be
certain that our current independent sales representatives will continue to
distribute our products or that, even if they continue to distribute our
products, they will do so successfully. These representatives are not subject to
any minimum purchase requirements and can discontinue marketing our products at
any time. In addition, these representatives often market products of our
competitors. Accordingly, we must compete for the attention and sales efforts of
our independent sales representatives.
Our
products could contain defects, which would reduce sales of those products or
result in claims against us.
We
develop complex and evolving products. Despite testing by us and our customers,
undetected errors or defects may be found in existing or new products. The
introduction of products with reliability, quality or compatibility problems
could result in reduced revenues, additional costs, increased product returns
and difficulty or delays in collecting accounts receivable. The risk is higher
with products still in the development stage, where full testing or
certification is not yet completed. This could result in, among other things, a
delay in recognition or loss of revenues, loss of market share or failure to
achieve market acceptance. We could also be subject to material claims by
customers that are not covered by our insurance.
20
Obtaining
certification of our products by national regulators may be time-consuming and
expensive. We may be unable to sell our products in markets in which we are
unable to obtain certification.
Our
customers may expect us to obtain certificates of compliance with safety and
technical standards set by national regulators, especially standards set by U.S.
or European regulators. There is no uniform set of standards, and each national
regulator may impose and change its own standards. National regulators may also
prohibit us from importing products that do not conform to their standards. If
we make any change in the design of a product, we are usually required to obtain
recertification of the product. The process of certification may be
time-consuming and expensive and may affect the length of the sales cycle for a
product. If we are unable to obtain certification of a product in a market, we
may be unable to sell the product in that market.
We
depend on a limited number of key personnel who would be difficult to
replace.
Because
our products are complex and our market is evolving, the success of our business
depends in large part upon the continuing contributions of our management and
key personnel. Specifically, we rely heavily on the services of Shabtai
Adlersberg, our Chief Executive Officer, Chairman of our Board of Directors and
Interim Chief Financial Officer. If Shabtai Adlersberg is unable or unwilling to
continue with us, our results of operations could be materially and adversely
affected. We do not carry key person insurance for Mr. Adlersberg. We
are currently searching for a new chief financial officer to replace our former
chief financial officer who left us in April 2010 to pursue another opportunity.
Mr. Adlersberg will be acting as our Interim Chief Financial Officer until a
replacement is appointed.
The
success of our business also depends upon our continuing ability to attract and
retain other highly-qualified management, technical, sales and marketing
personnel. We need highly-qualified technical personnel who are capable of
developing technologies and products and providing the technical support
required by our customers. We experience competitive pressure with respect to
retaining and hiring employees in the high technology sector in Israel. If we
fail to hire and retain skilled employees, our business may be adversely
affected.
If
we do not manage our operations effectively, our results of operations could be
adversely affected.
We have
actively expanded our operations in the past and may continue to expand them in
the future. This expansion has required, and may continue to require, the
application of managerial, operational and financial resources. We cannot be
sure that we will continue to expand, or that we will be able to expand our
operations successfully. In particular, our business requires us to focus on
multiple markets, including the VoIP, wireline, cable and wireless markets. In
addition, we work simultaneously with a number of large OEMs and network
equipment providers each of which may have different requirements for the
products that we sell to them. We may not have sufficient personnel, or may be
unable to devote this personnel when needed, to address the requirements of
these markets and customers. If we are unable to manage our operations
effectively, our revenues may not increase, our cost of operations may rise and
our results of operations may be adversely affected.
21
As we
grow we may need new or enhanced systems, procedures or controls. The transition
to such systems, procedures or controls, as well as any delay in transitioning
to new or enhanced systems, procedures or controls, may seriously harm our
ability to accurately forecast sales demand, manage our product inventory and
record and report financial and management information on a timely and accurate
basis.
Our
gross profit percentage could be negatively impacted by amortization expenses in
connection with acquisitions, increased manufacturing costs and other
factors. This could adversely affect our results of
operations.
Our gross
profit percentage decreased in 2007, 2008 and 2009. The decrease in our gross
profit percentage was primarily attributable to amortization expenses related to
the acquisitions of Nuera and Netrake beginning in the third quarter of 2006 and
CTI Squared beginning in the second quarter of 2007, as well as expenses related
to equity-based compensation resulting from the adoption of ASC 718 beginning in
2006. During the fourth quarter of 2008, we recognized non-cash impairment
charges of $86.1 million with respect to goodwill, intangible assets and
investment in an affiliate. As a result of these impairment charges, non-cash
amortization expense included in cost of revenues declined in 2009.
Our gross profit percentage has also
been negatively affected in the past and could continue to be negatively
affected by an increase in manufacturing costs, a shift in our sales mix towards
our less profitable products, increased customer demand for longer product
warranties and increased cost pressures as a result of increased competition.
Acquisitions of new businesses could also negatively affect our gross profit
percentage, which could cause an adverse effect on our results of
operations.
The
growth in our product portfolio means that we have to service and support more
products. This may result in an increase in our expenses and an adverse effect
on our results of operations.
The size
of our product portfolio has increased and continues to increase. As
a result, we are required to provide to our customers sales support. Customers
have requested that we provide a contractual commitment to support a product for
a specified period of time. This period of time may exceed the working life of
the product or extend past the period of time that we may intend to manufacture
or support a product. We are dependent on our suppliers for the components
(hardware and software) needed to provide support and may be unable to secure
the components necessary to satisfy our service commitments. We do not have
long-term contracts with our suppliers, and they may not be obligated to provide
us with products or services for any specified period of time. We may
need to purchase an inventory of replacement components and parts in advance in
order to try to provide for their availability when needed. This
could result in increased risk of write-offs with respect to our replacement
component inventory to the extent that we cannot accurately predict our future
requirements under our customer service contracts. If any of our
component suppliers cease production, cease operations or refuse or fail to make
timely delivery of orders, we may not be able to meet our contractual
commitments for product support. We may be required to supply
enhanced components or parts as substitutes if the original versions are no
longer available. Product support may be costly and any extra service revenues
may not cover the hardware and software costs associated with providing
long-term support.
22
Terrorist
attacks, or the threat of such attacks, may negatively impact the global economy
which may materially adversely affect our business, financial condition and
results of operation and may cause our share price to decline.
The
financial, political, economic and other uncertainties following terrorist
attacks throughout the world have led to a worsening of the global economy. As a
result, many of our customers and potential customers have become much more
cautious in setting their capital expenditure budgets, thereby restricting their
telecommunications procurement. Uncertainties related to the threat of terrorism
have had a negative effect on global economy, causing businesses to continue
slowing spending on telecommunications products and services and further
lengthen already long sales cycles. Any escalation of these threats
or similar future events may disrupt our operations or those of our customers,
distributors and suppliers, which could adversely affect our business, financial
condition and results of operations.
We
are subject to taxation in several countries.
Because
we operate in several countries, mainly in the United States, Israel, United
Kingdom and Singapore, we are subject to taxation in multiple jurisdictions. We
are required to report to and are subject to local tax authorities in the
countries in which we operate. In addition, our income that is derived from
sales to customers in one country might also be subject to taxation in other
countries. We cannot be sure of the amount of tax we may become
obligated to pay in the countries in which we operate. The tax authorities in
the countries in which we operate may not agree with our tax position. Our tax
benefits from carry forward losses and other tax planning benefits such as
Israeli approved enterprise programs, may prove to be insufficient due to
Israeli tax limitations, or may prove to be insufficient to offset tax
liabilities from foreign tax authorities. Foreign tax authorities may also use
our gross profit or our revenues in each territory as the basis for determining
our income tax, and our operating expenses might not be considered for related
tax calculations adversely affect our results of operations.
Risks
Relating to Operations in Israel
Conditions
in Israel affect our operations and may limit our ability to produce and sell
our products.
We are
incorporated under the laws of the State of Israel, and our principal executive
offices and principal research and development facilities are located
in the State of Israel. Political, economic and military conditions in Israel
directly affect our operations. There has been an increase in unrest and
terrorist activity in Israel, which has continued with varying levels of
severity for many years through the current period of time. This has led to
ongoing hostilities between Israel, the Palestinian Authority, other groups in
the West Bank and Gaza Strip, and the northern border of Lebanon. The future
effect of this violence on the Israeli economy and our operations is unclear.
The Israeli-Palestinian conflict may also lead to political instability between
Israel and its neighboring countries. Ongoing violence between Israel and the
Palestinians, as well as tension between Israel and the neighboring countries,
may have a material adverse effect on our business, financial conditions and
results of operations.
23
We cannot
predict the effect on us of an increase in these hostilities or any future armed
conflict, political instability or violence in the region. Additionally, some of
our officers and employees in Israel are obligated to perform annual military
reserve duty and are subject to being called for additional active duty under
emergency circumstances, such as the military confrontation in the Gaza Strip at
the end of 2008. Some of our employees live within conflict area territories and
may be forced to stay at home instead of reporting to work. We cannot predict
the full impact of these conditions on us in the future, particularly if
emergency circumstances or an escalation in the political situation occur. If
many of our employees are called for active duty, or forced to stay at home, our
operations in Israel and our business may be adversely
affected. Additionally, a number of countries continue to restrict or
ban business with Israel or Israeli companies, which may limit our ability to
make sales in those countries.
We
are adversely affected by the devaluation of the U.S. dollar against the New
Israeli Shekel and could be adversely affected by the rate of inflation in
Israel.
We
generate substantially all of our revenues in U.S. dollars and, in 2009, a
significant portion of our expenses, primarily salaries, related personnel
expenses and the leases of our buildings in Israel, were incurred in
NIS. We anticipate that a significant portion of our expenses will
continue to be denominated in NIS.
Our NIS
related costs, as expressed in U.S. dollars, are influenced by the exchange rate
between the U.S. dollar and the NIS. During 2008 and 2009, the NIS appreciated
against the U.S. dollar, which resulted in a significant increase in the U.S.
dollar cost of our operations in Israel. To the extent the U.S. dollar weakens
against the NIS, we could experience an increase in the cost of our operations,
which are measured in U.S. dollars in our financial statements, which could
adversely affect our results of operations. In addition, in periods in which the
U.S. dollar appreciates against the NIS, we bear the risk that the rate of
inflation in Israel will exceed the rate of such devaluation of the NIS in
relation to the U.S. dollar or that the timing of such devaluations were to lag
considerably behind inflation, which will increase our costs as expressed in
U.S. dollars.
The
devaluation of the U.S. dollar in relation to the NIS has and may continue to
have the effect of increasing the cost in U.S. dollars of these expenses. Our
U.S. dollar-measured results of operations were adversely affected in 2008 and
2009. This could happen again if the U.S. dollar were to devalue against the
NIS.
In order
to manage the risks imposed by foreign currency exchange rate fluctuations, from
time to time, we enter into currency forward contracts and put and call options
to hedge some of our foreign currency exposure. We can provide no
assurance that our hedging arrangements will be effective. In
addition, if we wish to maintain the U.S. dollar-denominated value of our
products in non-U.S. markets, devaluation in the local currencies of our
customers relative to the U.S. dollar may cause our customers to cancel or
decrease orders or default on payment.
24
Because
exchange rates between the NIS and the U.S. dollar fluctuate continuously,
exchange rate fluctuations have an impact on our profitability and
period-to-period comparisons of our results of operations. In 2009, the value of
the U.S. dollar decreased in relation to the NIS by 0.7%, and the inflation rate
in Israel was 3.9% and, as a result, adversely affected our results of
operations in 2009. If this trend continues, it will continue to adversely
affect our result of operations.
The
Israeli government programs in which we currently participate, and the tax
benefits we currently receive require us to meet several conditions and may be
terminated or reduced in the future, which would increase our
costs.
We
benefit from certain government programs and tax benefits, particularly as a
result of exemptions and reductions resulting from the “approved enterprise”
status of our existing production facilities and programs in Israel. In the
past, the designation required advance approval from the Investment Center of
the Israel Ministry of Industry, Trade and Labor (the Investment Center). To be
eligible for these programs and tax benefits, we must continue to meet
conditions relating principally to adherence to the approved programs and to
periodic reporting obligations. We believe that we are currently in compliance
with these requirements. However, if we fail to meet these conditions, we will
be subject to corporate tax at the rate then in effect under Israeli law for
such tax year.
In April
2005, an amendment to the law came into effect (the “Amendment”) which
significantly changed the provisions of the law. The Amendment limited the scope
of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Privileged Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprise’s
income be derived from export. Additionally, the Amendment enacted major changes
in the manner in which tax benefits are awarded under the law so that companies
no longer require Investment Center approval in order to qualify for tax
benefits.
The law
provides that terms and benefits included in any certificate of approval granted
prior to December 31, 2004 remain subject to the provisions of the law as they
were on the date of such approval. Therefore, our existing “Approved
Enterprises” are generally not subject to the provisions of the Amendment. As a
result of the Amendment, tax-exempt income generated under the provisions of the
law as amended, will subject us to taxes upon distribution or liquidation and we
may be required to record a deferred tax liability with respect to such
tax-exempt income. The Company has elected the year 2008 as the year of election
for “Privileged Enterprise” under the Amendment.
25
The
government grants we have received for research and development expenditures
limit our ability to manufacture products and transfer technologies outside of
Israel and require us to satisfy specified conditions. If we fail to
satisfy these conditions, we may be required to refund grants previously
received together with interest and penalties.
In
connection with research and development grants we received from the OCS, we
must pay royalties to the OCS on the revenue derived from the sale of products,
technologies and services developed with the grants from the OCS. The terms of
the OCS grants and the law pursuant to which grants are made restrict our
ability to manufacture products or transfer technologies developed outside of
Israel if OCS grants funded the development of the products or technology. An
amendment to the relevant law facilitates the transfer of technology or know-how
developed with the funding of the OCS to third parties outside of Israel, but
any future transfer would still require the approval of the OCS, which may not
be granted, and is likely to involve a material payment to the OCS. This
restriction may limit our ability to enter into agreements for those products or
technologies without OCS approval. We cannot be certain that any approval of the
OCS will be obtained on terms that are acceptable to us, or at all.
In order
to meet specified conditions in connection with the grants and programs of the
OCS, we have made representations to the Government of Israel concerning our
Israeli operations. If we fail to meet the conditions
related to the grants, including the maintenance of a material presence in
Israel, or if there is any material deviation from the representations made by
us to the Israeli government, we could be required to refund the grants
previously received (together with an adjustment based on the Israeli consumer
price index and an interest factor) and would likely be ineligible to receive
OCS grants in the future. Any inability to receive these grants would result in
an increase in our research and development expenses.
In 2009,
we recognized a royalty-bearing grant of $2,417,000 from the Government of
Israel, through the Office of the Chief Scientist, or the OCS, for the financing
of a portion of our research and development expenditures in Israel. The OCS
budget has been subject to reductions, which may affect the availability of
funds for these prospective grants and other grants in the future. As a result,
we cannot be certain that we will continue to receive grants at the same rate,
or at all. In addition, the terms of any future OCS grants may be less favorable
than our past grant.
It
may be difficult to enforce a U.S. judgment against us, our officers and
directors, assert U.S. securities law claims in Israel or serve process on
substantially all of our officers and directors.
We are
incorporated in Israel. Substantially all of our executive officers and
directors are nonresidents of the United States, and a majority of our assets
and the assets of these persons are located outside the United States.
Therefore, it may be difficult to enforce a judgment obtained in the United
States against us or any such persons or to effect service of process upon these
persons in the United States. Israeli courts may refuse to hear a claim based on
a violation of U.S. securities laws because Israel is not the most appropriate
forum to bring such a claim. In addition, even if an Israeli court agrees to
hear a claim, it may determine that Israeli law and not U.S. law is applicable
to the claim. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact which can be a time-consuming and costly
process. Certain matters of procedure will also be governed by Israeli law.
There is little binding case law in Israel addressing these matters.
Additionally, there is doubt as to the enforceability of civil liabilities under
the Securities Act and the Securities Exchange Act in original actions
instituted in Israel.
26
Israeli
law may delay, prevent or make difficult a merger with or an acquisition of us,
which could prevent a change of control and therefore depress the price of our
shares.
Provisions
of Israeli law may delay, prevent or make undesirable a merger or an acquisition
of all or a significant portion of our shares or assets. Israeli corporate law
regulates acquisitions of shares through tender offers and mergers, requires
special approvals for transactions involving significant shareholders and
regulates other matters that may be relevant to these types of transactions.
These provisions of Israeli law could have the effect of delaying or preventing
a change in control and may make it more difficult for a third party to acquire
us, even if doing so would be beneficial to our shareholders. These provisions
may limit the price that investors may be willing to pay in the future for our
ordinary shares. In addition, our articles of association contain certain
provisions that may make it more difficult to acquire us, such as a staggered
board, the ability of our board of directors to issue preferred stock and
limitations on business combinations with interested shareholders. Furthermore,
Israel tax considerations may make potential transactions undesirable to us or
to some of our shareholders.
Risks
Relating to the Ownership of our Ordinary Shares
The
price of our ordinary shares may fluctuate significantly.
The
market price for our ordinary shares, as well as the prices of shares of other
technology companies, has been volatile. Between January 1, 2008 and June 15,
2010, our share price has fluctuated from a high of $5.26 to a low of $0.92. The
following factors may cause significant fluctuations in the market price of our
ordinary shares:
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fluctuations
in our quarterly revenues and earnings or those of our
competitors;
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shortfalls
in our operating results compared to levels forecast by securities
analysts;
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announcements
concerning us, our competitors or telephone
companies;
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announcements
of technological innovations;
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the
introduction of new products;
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changes
in product price policies involving us or our
competitors;
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market
conditions in the industry;
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integration
of acquired businesses, technologies or joint ventures with our products
and operations;
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the
conditions of the securities markets, particularly in the technology and
Israeli sectors; and
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political,
economic and other developments in the State of Israel and
worldwide.
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In
addition, stock prices of many technology companies fluctuate significantly for
reasons that may be unrelated or disproportionate to operating results. The
factors discussed above may depress or cause volatility of our share price,
regardless of our actual operating results.
27
Our
quarterly results of operations have fluctuated in the past and we expect these
fluctuations to continue. Fluctuations in our results of operations may
disappoint investors and result in a decline in our share price.
We have
experienced and expect to continue to experience significant fluctuations in our
quarterly results of operations. In some periods, our operating results may be
below public expectations or below revenue levels and operating results reached
in prior quarters or in the corresponding quarters of the previous year. If this
occurs, the market price of our ordinary shares could decline.
The
following factors have affected our quarterly results of operations in the past
and are likely to affect our quarterly results of operations in the
future:
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size,
timing and pricing of orders, including order deferrals and delayed
shipments;
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launching
of new product generations;
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length
of approval processes or market
testing;
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technological
changes in the telecommunications
industry;
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competitive
pricing pressures;
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the
timing and approval of government research and development
grants;
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accuracy
of telecommunication company, distributor and original equipment
manufacturer forecasts of their customers’
demands;
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changes
in our operating expenses;
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disruption
in our sources of supply; and
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general
economic conditions.
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Therefore,
the results of any past periods may not be relied upon as an indication of our
future performance.
Our
actual financial results might vary from our publicly disclosed financial
forecasts.
From time
to time, we publicly disclose financial forecasts. Our forecasts reflect
numerous assumptions concerning our expected performance, as well as other
factors which are beyond our control and which might not turn out to be correct.
As a result, variations from our forecasts could be material. Our financial
results are subject to numerous risks and uncertainties, including those
identified throughout this “Risk Factors” section and elsewhere in this Annual
Report. If our actual financial results are worse than our financial forecasts,
the price of our ordinary shares may decline.
It
is our policy that we will not provide quarterly forecasts of the results of our
operations. This policy could affect the willingness of analysts to provide
research with respect to our ordinary shares which could affect the trading
market for our ordinary shares.
It is our
policy that we will not provide quarterly forecasts of the results of our
operations. This could result in the reduction of research analysts who cover
our ordinary shares. Any reduction in research coverage could affect the
willingness of investors, particularly institutional investors, to invest in our
shares which could affect the trading market for our ordinary shares and the
price at which our ordinary shares are traded.
28
As
a foreign private issuer whose shares are listed on the Nasdaq Global Select
Market, we follow certain home country corporate governance practices instead of
certain Nasdaq requirements.
As a foreign private issuer whose
shares are listed on the Nasdaq Global Select Market, we are permitted to follow
certain home country corporate governance practices instead of certain
requirements of the Nasdaq Marketplace Rules.
We do not
comply with the Nasdaq requirement that we obtain shareholder approval for
certain dilutive events, such as for the establishment or amendment of certain
equity based compensation plans. Instead, we follow Israeli law and
practice which permits the establishment or amendment of certain equity based
compensation plans to be approved by our board of directors without the need for
a shareholder vote, unless such arrangements are for the compensation of
directors, in which case they also require audit committee and shareholder
approval.
As a foreign private issuer listed on
the Nasdaq Global Select Market, we may also elect in the future to
follow home country practice with regard to, among other things, executive
officer compensation, director nomination, composition of the board of directors
and quorum at shareholders’ meetings, as well as not obtain shareholder approval
for certain dilutive events.
Accordingly, our shareholders may not
be afforded the same protection as provided under Nasdaq’s corporate governance
rules.
Our
ordinary shares are listed for trading in more than one market and this may
result in price variations.
Our
ordinary shares are listed for trading on the Nasdaq Global Select Market, or
Nasdaq, and on The Tel-Aviv Stock Exchange, or TASE. Trading in our ordinary
shares on these markets is made in different currencies (U.S. dollars on Nasdaq
and New Israeli Shekels on TASE), and at different times (resulting from
different time zones, different trading days and different public holidays in
the United States and Israel). Actual trading volume on the TASE is generally
lower than trading volume on Nasdaq, and as such could be subject to higher
volatility. The trading prices of our ordinary shares on these two markets often
differ resulting from the factors described above, as well as differences in
exchange rates. Any decrease in the trading price of our ordinary shares on one
of these markets could cause a decrease in the trading price of our ordinary
shares on the other market.
We
do not anticipate declaring any cash dividends on our ordinary
shares.
We have
never declared or paid cash dividends on our ordinary shares and do not plan to
pay any cash dividends in the near future. Our current policy is to retain all
funds and earnings for use in the operation and expansion of our
business.
29
U.S.
shareholders face certain income tax risks in connection with their acquisition,
ownership and disposition of our ordinary shares. In any tax year, we could be
deemed a passive foreign investment company, which could result in adverse U.S.
federal income tax consequences for U.S. shareholders.
Based on
the composition of our gross income, the composition and value of our gross
assets and the amounts of our liabilities during 2004, 2005, 2006, 2007, 2008
and 2009, we do not believe that we were a passive foreign investment company,
or PFIC, for U.S. federal income tax purposes during any of such tax years. It
is likely, however, that we would be deemed to have been a PFIC in 2001, 2002
and 2003. There can be no assurance that we will not be deemed a PFIC for any
future tax year in which, for example, the value of our assets, as measured by
the public market valuation of our ordinary shares, declines in relation to the
value of our passive assets (generally, cash, cash equivalents and marketable
securities). If we are a PFIC for any tax year, U.S. shareholders who own our
ordinary shares during such year may be subject to increased U.S. federal income
tax liabilities and reporting requirements for such year and succeeding years,
even if we are no longer a PFIC in such succeeding years. Under new legislation
recently enacted by the U.S., a U.S. holder of our ordinary shares will be
required to file an information return containing certain information required
by the U.S. Internal Revenue Service for each year in which we are treated as a
PFIC.
We urge
U.S. holders of our ordinary shares to carefully review Item 10E. – “Taxation –
United States Tax Considerations – United States Federal Income Taxes” in this
Annual Report and to consult their own tax advisors with respect to the U.S.
federal income tax risks related to owning and disposing of our ordinary shares
and the consequences of PFIC status.
We
are subject to ongoing costs and risks associated with complying with extensive
corporate governance and disclosure requirements.
As a
foreign private issuer subject to U.S. federal securities laws, we spend a
significant amount of management time and resources to comply with laws,
regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq
rules. Section 404 of the Sarbanes-Oxley Act requires management’s annual review
and evaluation of our internal control over financial reporting and attestations
of the effectiveness of these controls by our management and by our independent
registered public accounting firm. There is no guarantee that these
efforts will result in management assurance or an attestation by our independent
registered public accounting firm that our internal control over financial
reporting is adequate in future periods. In connection with our compliance with
Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our
management and other personnel devote a substantial amount of time, and may need
to hire additional accounting and financial staff, to assure that we comply with
these requirements. The additional management attention and costs relating to
compliance with the Sarbanes-Oxley Act and other corporate governance
requirements could materially and adversely affect our financial
results.
30
A. HISTORY
AND DEVELOPMENT OF THE COMPANY
AudioCodes
Ltd. was incorporated in 1992 under the laws of the State of Israel. Our
principal executive offices are located at 1 Hayarden Street, Airport City, Lod,
70151 Israel. Our telephone number is 972-3-976-4000. Our agent in the United
States is AudioCodes Inc.,. 27 World’s Fair Drive, Somerset, New Jersey
08873.
Major
Developments since January 1, 2009
Since
January 1, 2009, we have increased our focus on sales to the enterprise segment
of the market, which includes medium and large sized businesses. As part of this
increased focus, we have supplemented and increased our North American sales
team who sell to this segment of the market. We have also added products for the
residential market segment, which include integrated access device, or IAD, that
provides integrated functionality for VoIP, data and access to the
Internet.
Through
December 31, 2009, we had invested an aggregate of $8.4 million in Natural
Speech Communication Ltd. (“NSC”), a privately-held development stage company
engaged in speech recognition. This investment was intended to assist that
company in achieving substantive technological milestones. As of December 1,
2008, we began consolidating the financial results of NSC into AudioCodes’
financial results. As of December 31, 2009, we owned 59.74% of the
outstanding share capital of NSC and 53.74% of the share capital of NSC on a
fully diluted basis.
In
January 2010, we entered into an agreement to acquire all of the outstanding
equity of NSC that we did not currently own. The closing of the transaction
occurred in May 2010. Pursuant to the agreement, we will pay an aggregate of
approximately $1.2 million for the remaining interest in NSC, payable in three
annual installments commencing on the first anniversary of the closing. We will
also be required to pay an additional purchase price of up to $500,000 in 2013
if certain aggregate revenue milestones are met for 2010, 2011 and
2012
In July
2005, we invested $707,000 in MailVision Ltd., a privately-held company engaged
in developing and marketing enhanced services platforms for wireless service
providers. Through December 31, 2009, we provided loans including accrued
interest in the aggregate amount of $642,000 to MailVision. The loans bear
interest at the rate of 4%-9% per annum and may be converted into shares of
MailVision. As of December 31, 2009, we owned 20.21% of the outstanding
share capital of this company.
Principal
Capital Expenditures
We have made and expect to continue to
make capital expenditures in connection with expansion of our production
capacity. The table below sets forth our principal capital expenditures incurred
for the periods indicated (amounts in thousands).
31
|
2007
|
2008
|
2009
|
||||||||||
|
Computers
and peripheral equipment
|
$ | 2,023 | $ | 2,466 | $ | 1,195 | ||||||
|
Office
furniture and equipment
|
436 | 166 | 76 | |||||||||
|
Leasehold
improvements
|
170 | 526 | - | |||||||||
|
Total
|
$ | 2,629 | $ | 3,158 | $ | 1,271 | ||||||
B. BUSINESS
OVERVIEW
Introduction
We
design, develop and sell products for voice and data over packet networks. In
broad terms, voice over packet, or VoP, networks consist of key network elements
such as software switches, application servers, Internet protocol, or IP phones
and media gateways. Our products primarily provide the media gateway element in
the network, as well as voice over Internet protocol, or VoIP, end-points such
as IP Phones and VoIP mobile clients. Multi-service business gateways integrate
media gateway functionality with data routing and network access. The media
gateways connect legacy and IP networks. They essentially receive the legacy
format of communication and convert it to an IP communication and vice versa.
Typically, media gateways utilize compression algorithms to compress the amount
of information and reduce the amount of bandwidth required to convey the
information (for example, a voice communication). With the industry migration to
an end-to-end IP network, gateways now also connect between different VoIP
networks, providing session border controller, or SBC,
functionality.
Voice
over IP gateway equipment can be generally segmented into three classes: carrier
class gateways for use in central office facilities, enterprise gateways for use
by corporations and in small offices, and residential gateways for use in homes.
In addition to the gateway element, which connects legacy voice equipment to an
IP network, there is growth in native VoIP end user equipment, primarily
including IP phones, soft phones and VoIP mobile clients, running on desktop PCs
or portable devices such as PDAs, cellular phones, smart phones, and other
devices that have wireless IP connectivity (e.g., WiFi, UMTS and
CDMA.).
The need
to re-route voice and fax traffic from the traditional circuit-switched networks
onto the new packet networks has led to the development of interface equipment
between the two networks, generally referred to as media gateways. The
processing of voice and fax signals in gateway and access equipment is done
according to industry-wide standards. These standards are needed to ensure that
all traditional telephony traffic is seamlessly switched and routed over the
packet network and vice versa. The industry migration into a network that is
utilizing IP end-to-end has also added a new functionality into the media
gateways that now also translates between different implementations of VoIP.
This includes protocol translation as well as security services and is provided
by stand-alone SBCs as well as SBC functionality integrated into the
gateway.
32
Packet
networks differ fundamentally from circuit-switched networks in that the packet
network’s resources and infrastructure can be shared simultaneously by several
users and bandwidth can be flexibly allocated. Packet-based communications
systems format the information to be transmitted, such as e-mail, voice, fax and
data, into a series of smaller digital packages of information called “packets.”
Each of these packets is then transmitted over the network and is reassembled as
a complete communication at the receiving end. The various packet networks
employ different network protocols for different applications, priority schemes
and addressing formats to ensure reliable communication.
Packet
networks offer a number of advantages over circuit-switched networks. Rather
than requiring a dedicated circuit for each individual call, packet networks
commingle packets of voice, fax and data from several communications sources on
a single physical link. This provides superior utilization of network resources,
especially in dealing with information sources with bursts of information
followed by periods of silence. This superior utilization means that more
traffic can be carried over the same amount of network resources.
The
integration of voice and data communications makes possible an enrichment of
services and an entire range of new, value-added applications, such as unified
messaging and voice-enabled web sites. In addition, voice traffic over packet
networks is usually compressed to provide a further reduction in the use of or
demand for bandwidth. Another recent trend in the VoIP environment, referred to
as High Definition VoIP, or HD VoIP, now enables the improvement of voice
quality. The adoption of both VoIP technology and broadband networks has enabled
the development and deployment of high-quality voice coding algorithms that make
communication more efficient, effective and natural. HD VoIP allows carriers to
differentiate their services with an improved audio experience, with the goal of
creating customer loyalty and affinity. It also enables enterprises to provide
better, clearer voice services for their employees, which we believe makes them
more productive and makes it easier to work across different cultures and
accents.
As
customers integrate more services into their IP network, they tend to use
integrated products that provide all the services they need in one box. Multi
service business gateways, or MSBGs, combine all the capabilities of media
gateways with the support of native data routing and switching. The MSBGs
enables enterprise customers to connect their branch office networks into the
corporate headquarters, and service providers to connect their customers into
their network core. Some MSBGs also include integrated hosts, which can run
off-the-shelf unified communications applications. This combination enables
system integrators to provide a fully integrated solution for small/medium
businesses, or SMB/E, and enterprise branches, including the voice and data
infrastructure and the application in one device.
Moving
into the VoIP world, enterprise and service provider have started to use a new
breed of phone devices that inherently produce packets instead of legacy voice,
called IP phones. The IP phone is an advanced telephone that connect into the
network using VoIP over Ethernet instead of using analog TDM interfaces. Most
enterprise telephony systems sold today are using IP phones, as well as service
providers managed services such as IP Centrex.
In
addition to wireline IP telephony, mobile networks have started to use VoIP as
well. Mobile VoIP clients, running on smart-phones, enable cost effective mobile
roaming and allow Internet telephony service providers to enter the mobile
space. These include mobile VoIP clients for leading smartphones operating
systems, such as iPhone OS, Symbian, Windows mobile and
Android.
33
We
typically categorize our products into two main business lines: network and
technology. Sales of network products accounted for approximately 67% of our
revenues in 2008 and approximately 72% of our revenues in 2009 and sales of
technology products accounted for approximately 33% of our revenues in 2008 and
approximately 28% of our revenues in 2009.
Network
products consist of customer premises equipment, or CPE, gateways for the
enterprise and service provider (or carrier) markets and of
carrier-grade-oriented low- and mid-density media gateways for service
providers. Complementing our media gateways as network products are our
multi-service business gateways, IP phones, media server, and value added
application products.
Technology
products are enabling in nature and consist of our chips and boards business
products. These are sold primarily to original equipment manufacturers, or OEMs,
through distribution channels. Our chips and boards serve as building blocks
that our customers incorporate in their products. In contrast, our networking
products are used by our customers as part of a broader technological solution
and are a box level product that interacts directly with other third party
products.
Our
Products
We offer two categories of products,
networking products and technology products.
Networking
Products
Networking
products are deployed in enterprise unified communications networks, service
providers residential and access networks, trunking applications in carrier
networks, and fixed-mobile convergence applications.
|
|
·
|
Our
media gateways enable voice, data and fax to be transmitted over Internet
and other protocols, and interface with third party equipment to
facilitate enhanced voice and data
services.
|
|
|
·
|
Our
multi-service business gateways integrate multiple data, telephony and
security services into a single device. Building on our media gateway CPE
line, we have added the support of new functions such as a LAN switch, a
data router, a firewall and a session border controller, providing service
providers with an integrated demarcation point and the enterprise with an
all-in-one solution for its communications needs. Our IP phones include a
family of high definition IP phones, suitable for integration with third
party IP-PBX platforms for the enterprise IP telephony market, as well as
into IP-Centrex service provider
solutions.
|
|
|
·
|
Our
mobile VoIP clients include a family of soft clients for leading
smartphones operating systems and a client management system, providing
mobile roaming solutions for mobile and voice over IP and voice over
broadband service providers.
|
34
|
|
·
|
Media
servers enable conferencing, multi-language announcement functionality,
and other applications for voice over packet
networks.
|
|
|
·
|
Unified
communication applications offer solutions that enable the integration of
voice, data, fax and messaging.
|
Technology
Products
Our
technology products are enabling products that are part of our own or our
customers’ products.
|
|
·
|
Our
signal processor chips process and compress voice, data and fax and enable
connectivity between traditional telephone networks and packet
networks.
|
|
|
·
|
Our
communication boards and modules for communication system products are
integrated into third-party communications systems and deployed on both
access networks and enterprise
networks.
|
Industry
Background
Market
Trends
The
networking and telecommunications industries have experienced rapid change over
the last few years. The primary factors driving this change include the
following:
|
|
·
|
New
technologies.
The increase of speed and the
proliferation of broadband access technologies alongside related
technologies, such as new high definition voice compression algorithms,
quality of service mechanisms and security and encryption algorithms and
protocols, have enabled delivery of voice over packet to residential and
enterprise customers with more reliability, higher quality and greater
security. Examples of these broadband access technologies include: third
generation cellular, WiMax, WiFi, data over cable, digital subscriber line
technologies and fiber networks (FTTx). Packet technologies enable
delivery of real time and non-real time services by different service
providers that do not necessarily own the access network or the part of
the network through which the subscriber accesses the network. This allows
for the growth of alternative or virtual service providers that do not own
an access network.
|
|
|
·
|
Competition by alternative
service providers with incumbent and traditional service providers.
Competition by alternative service providers is causing incumbents to
deploy advanced broadband access technologies and increase their
competitiveness by offering bundled services to their subscribers, such as
voice, video and data, and online gaming. In addition, the emergence of
wide band vocoders that use a higher sampling rate than used in legacy
time domain multiplexing, or TDM, networks allows service providers to
offer higher quality voice and music over their newly established IP
network.
|
35
|
|
·
|
New services enabled by
broadband access.
Changes in the regulatory environment affecting
service providers and the availability of new technologies or standards
allow service providers to compete with one another in the provision of
additional services over and above the traditional telephony service of
voice, fax and dial-up modem internet connectivity. New services that
could be offered include internet connectivity over broadband access or
access to rich multimedia content such as music, video and
games.
|
|
|
·
|
Increasing need for peering
between VoIP networks.
Service providers and enterprises
are increasingly building out VoIP networks. As a result, there
is an increasing need to connect between two VoIP networks. In
order to interconnect between two VoIP networks, service providers and
enterprises need session border controllers to provide connectivity and
security.
|
|
|
·
|
Increased use of open source
codes for enterprise telephony
. Similar to the trend experienced
with respect to Linux in the IT world, open source has started to gain
momentum in the VoIP space as well. Open source based IP telephony
solutions, led by Asterisk, a well known IP-PBX implementation, is
starting to penetrate the enterprise space as a low cost alternative to
the proprietary IP-PBX solutions from the large vendors. The adoption of
open source IP telephony solutions is gaining momentum mainly in the
SMB/SME space, as well as with service providers and developers that add
their own code on top of the open source basic code to enable special
services and features.
|
|
|
·
|
Unified Communications in the
Enterprise
. With the move to VoIP and the network integration
between voice and data based on Ethernet and IP, enterprises can easily
move into a unified communications network. Unified communications
networks integrate all means of communications into a single experience,
providing on line (voice, data, instant messaging) and off line (voice
mail, email and fax) integration into the same device. The devices can be
PCs, desktop phones or mobile smartphones and
PDAs.
|
|
|
·
|
Mobility.
Mobile
smartphones have become popular among business professionals as well as
the general public. Smartphones, running advanced operating systems such
as Symbian, Windows Mobile, Android and iPhone OS, include high CPU power,
large storage space, integrated WiFi and 3G data, as well as the ability
to run high performance multimedia applications. Mobile VoIP is one of
these applications, allowing cost-effective roaming for a service
provider’s customers and enterprise mobility
services.
|
The
Challenges
Despite
the inherent advantages and the economic attractiveness of packet voice
networking, the transmission of packet voice and fax poses a variety of
technological challenges. These challenges relate to quality of service,
reliability of equipment, functionality and features, and ability to provide a
good return on investment.
36
|
|
·
|
Quality of Service
. The
most critical issues leading to poor quality of service in the
transmission of voice and fax over packet networks are packet loss, packet
delay and packet delay jitter. For real time signals like voice, the
slightest delay in the arrival of a packet may render that packet unusable
and, in a voice transmission, the delayed packet is considered a lost
packet. Delay is usually caused by traffic hitting congestion or a
bottleneck in the network. The ability to address delay is compounded by
the varying arrival times of packets, called packet-jitter, which results
from the different routes taken by different packets. This “jitter” can be
eliminated by holding the faster arriving packets until the slower
arriving packets can catch up, but this introduces further delay. These
idiosyncrasies of packet networks do not noticeably detract from the
quality of data transmission since data delivery is relatively insensitive
to time delay. However, even the slightest delay or packet loss in voice
and fax transmission can have severe ramifications such as voice quality
degradation or, in the case of a fax transmission, call interruption.
Therefore, the need to compensate for lost or delayed packets without
degradation of voice and fax quality is a critical
issue.
|
|
|
·
|
Gateway Reliability
. In
order for a packet network to be efficient for voice or fax transmission,
the VoIP gateway equipment that is installed in core networks must be able
to deliver a higher level of performance than existing switching equipment
located at central offices. The telecommunications providers’ central
offices contain circuit-switching equipment that typically handles tens of
thousands of lines and is built to meet severe performance criteria
relating to reliability, capacity, size, power consumption and
cost.
|
|
|
·
|
Connectivity and
Security
. In contrast with legacy circuit switched voice and video
communications, IP-based communications are more susceptible to attacks,
interceptions and fraud by unauthorized entities. In addition, the
complexity and relative immaturity of IP networks and protocols pose
significant quality of service and connectivity challenges when sessions
cross between separate IP networks.
|
|
|
·
|
Functionality
. In order
to effectively replace legacy circuit-switching equipment, packet network
equipment must be able to deliver equivalent and improved functionality
and features for the service providers and network
users.
|
|
|
·
|
Return on Investment
.
With the reduction in profitability of service providers there is an even
greater need for them to achieve better returns on investment from capital
expenditures on new equipment. Given the evolving nature of packet
technologies and capabilities, there is greater pressure to provide
cost-effective technological
solutions.
|
In order
to maximize the benefits of using packet networks for the transmission of voice,
data and fax, products must be able to address and solve these inherent problems
and challenges. These products must also be standards-based to support
interoperability among different equipment manufacturers and to allow operation
over various networks.
37
AudioCodes’
Solution
Using our
voice compression algorithms, industry standards, advanced digital signal
processing techniques, VoIP control protocol expertise, and voice communications
system design expertise, our products address quality of service problems,
security problems and reliability problems facing the VoIP industry. As a
result, we enable our customers to build packet networks that provide
communication quality comparable to traditional telephone networks. Using
HDVoIP, voice quality can even surpass the quality of traditional TDM networks.
We work closely with our customers in order to tailor our products to meet their
specific needs, assist them in integrating our products within their networks
and help them bring their systems into operation on a timely basis. We also work
with our customers in deploying their systems in various network
environments.
Utilizing
our investment in developing standards-based VoIP protocol support for our
products, customers can integrate our products with a large number of industry
leading IP-PBXs and carrier soft switches. Our interoperability teams test our
products against a variety of other products for interoperability, focusing on
the leading standard VoIP protocols: Session Initiation Protocol, or SIP, and
MEGACO/H.248.
We
believe that the following strengths have enabled us to develop our products and
provide services to our customers:
|
|
·
|
Leadership in voice
compression technology.
We are a leader in voice
compression technology. Voice compression exploits redundancies within a
voice signal to reduce the bit rate of data required to digitally
represent the voice signal while still maintaining acceptable voice
quality. Our key development personnel have significant experience in
developing voice compression technology. We were involved in the
development of the ITU G.723.1 voice coding standard that was adopted by
the VoIP Forum and the International Telecommunications Union as the
recommended standard for use in voice over IP gateways. We implement
industry voice compression standards and work directly with our customers
to design state-of-the-art proprietary voice compression algorithms that
satisfy specific network requirements. We believe that our significant
knowledge of the basic technology permits us to optimize its key elements
and positions us to address further technological advances in the
industry. We also believe that our technological expertise has resulted in
us being sought out by leading equipment manufacturers to work with them
in designing their systems and provision of solutions to their
customers.
|
|
|
·
|
Digital signal processing
design expertise.
Our extensive experience and expertise
in designing advanced digital signal processing algorithms enables us to
implement them efficiently in real time systems. Digital signal algorithms
are computerized methods used to extract information out of signals. In
designing our signal processors, we use minimal digital signal processing
memory and processing power resources. This allows us to develop higher
density solutions than our competitors. Our expertise is comprehensive and
extends to all of the functions required to perform voice compression, fax
and modem transmission over packet networks and telephone signaling
processing.
|
38
|
|
·
|
Compressed voice
communications systems design expertise.
We have the
expertise to design and develop the various building blocks and the
products required for complete voice over packet systems. In building
these systems, we develop hardware architectures, voice packetization
software and signaling software, and integrate them with our signal
processors to develop a complete, high performance compressed voice
communications system. We assist our customers in integrating our signal
processors into their hardware and software systems to ensure high voice
quality, high completion rate of fax and data transmissions and telephone
signaling processing accuracy. Further, we are able to customize our
off-the-shelf products to meet our customers’ specific needs, thereby
providing them with a complete, integrated
solution.
|
|
|
·
|
Real time embedded software
design and implementation expertise.
We have the
expertise to design and develop voice and data network elements using
embedded real time software to achieve more competitive pricing. The
development and integration of VoIP signaling protocols, routing
protocols, management and provisioning into a more cost-effective solution
uses our expertise and investment in research and development resources.
We believe that the benefits we can deliver are better price performance,
smaller footprint, reduced power consumption and more attractive
products.
|
|
|
·
|
Media gateway protocols design
expertise.
Our extensive experience in developing media gateway
standard protocols, keeping ourselves up to date with new request for
comments, or RFCs, and adjusting our features according to customers
requirements and interoperability testing allows us to provide our
customers with a single gateway that can interface with most of the
leading solution providers in the VoIP
market.
|
|
|
·
|
Close technology relationships
with market leaders.
Our continuing effort of testing and
certifying our systems against other vendors’ complimentary solutions,
positions us as a provider of VoIP products that can interoperate with
most of the world’s leading VoIP products. It also helps to create for us
an extensive feature list that can be used by different customers for
their own networks and solutions.
|
We
believe that our products possess the following advantages:
|
|
·
|
Voice over Packet signal
processors.
Our multi-channel signal processors enable our
customers and us to create products that meet the reliability, capacity,
size, power consumption and cost requirements needed for building high
capacity VoIP products.
|
39
|
|
·
|
Multiple and comprehensive
product lines.
We address both the standards-based open
telecommunications architecture market and the proprietary system market.
We can do this because we enable our customers to use multiple
applications in different market segments. For example, our VoIP
communications boards target the open telecommunications architecture
market, while our signal processors, modules and voice packetization
software target the proprietary system market. Our analog and digital
media gateways and multi-service business gateways target residential,
hosted, access, trunking and enterprise applications and our digital media
gateways target wireless, wire line, cable and fixed-mobile convergence
networks. Our IP phones and VoIP mobile clients target the enterprise and
service provider hosted solutions
markets.
|
|
|
·
|
Extensive feature set.
Our products incorporate an extensive set of signal processing
functions and features (such as coders, fax processing and echo
cancellation), functionalities (such as session initiation protocol, or
SIP, H.248 or Megaco, H.323, and media gateway control
protocol, or MGCP) and implement a complete system. We offer the ability
to manage multiple channels of communications working independently of
each other, with each channel capable of performing all of the functions
required for voice compression, fax and modem transmission, telephone
signaling processing and other functions. These functions include voice,
fax or data detection, echo cancellation, telephone tone signal detection,
generation and other telephony signaling processing. Our gateway products,
media server and multi-service business gateways also offer
wireless/mobile features to enable fixed mobile
convergence.
|
|
|
·
|
Cost-effective
solutions.
We are able to address different market segments and
applications with the same hardware platforms thus providing our customers
with efficient and cost-effective
solutions.
|
|
|
·
|
Open architecture.
Our
networking products utilize industry standard control protocols that
enable them to interoperate with other vendors and easily
integrate into enterprise IP telephony systems as well as carrier
networks. Our voice over packet communications boards target the open
architecture gateway market segment, which enables our customers to use
hardware and software products widely available for standards-based open
telecommunications platforms. We believe that this provides our customers
the benefits of scalability, upgradeability and enhanced functionality
without the need to replace their systems for evolving
applications.
|
|
|
·
|
Various entry level products.
Our wide product range (chips to media gateways, multi-service
business gateway, IP phones and media servers) provides our customers with
a range of entry level products. We believe that these building blocks
enable our customers to significantly shorten their time to market by
adding their value added solution.
|
40
|
|
·
|
VoIPerfect™
architecture.
Our VoIPerfect architecture serves as the underlying
technology platform common to all of our products since 1998.
VoIPerfect
TM
is regularly updated and upgraded with features and functionalities
required to comply with evolving standards and protocols. VoIPerfect
TM
architecture comprises VoIP digital signal processing, or DSP, software
and media streaming embedded software, integrated public telephone
switched network, or PTSN, signaling protocols and VoIP standard control
protocols, provisioning and management engines. Additional features enable
carrier-grade quality and high availability. VoIPerfect
TM
architecture components are available in AudioCodes’ products at various
levels of integration, from the chip level, through blades, to
high-availability and non-high-availability analog and digital gateway
platforms.
|
Business
Strategy
AudioCodes'
vision is to become a leading strategic supplier of VoIP and converged VoIP and
data solutions for service providers and enterprises worldwide. The following
are key elements of our strategy:
|
|
·
|
Maintain and extend
technological leadership
. We intend to capitalize on our
expertise in voice compression technology and voice signaling protocols
and proficiency in designing voice communications systems. We continually
upgrade our product lines with additional functionalities, interfaces and
densities. We have invested heavily and are committed to continued
investment in developing technologies that are key to providing high
performance voice, data and fax transmission over packet networks and to
be at the forefront of technological evolution in our
industry.
|
|
|
·
|
Strengthen and expand
strategic relationships with key partners and
customers.
We sell our products to leading enterprise
channels, regional system integrators, global equipment manufacturers and
value-added resellers, or VARs, in the telecommunications and networking
industries and establish and maintain long-term working relationships with
them. We work closely with our customers to engineer products and
subsystems that meet each customer’s particular needs. The long
development cycles usually required to build equipment incorporating our
products frequently results in close working relationships with our
customers. By focusing on leading equipment manufacturers with large
volume potential, we believe that we reach a substantial segment of our
potential customer base while minimizing the cost and complexity of our
marketing efforts.
|
|
|
·
|
Expand and enhance the
development of highly-integrated products.
We plan to continue
designing, developing and introducing new product lines and product
features that address the increasingly sophisticated needs of our
customers. We believe that our knowledge of core technologies and system
design expertise enable us to offer better solutions that are more
complete and contain more features than competitive alternatives. We
believe that the best opportunities for our growth and profitability will
come from offering a broad range of highly-integrated network product
lines and product features, the integration of data services into our VoIP
products, and the expansion into the unified communications applications
market.
|
41
|
|
·
|
Build upon existing
technologies to penetrate new markets.
The technology we developed
originally for the OEM market has served us in building products that now
sell into the service provider and enterprise markets. The same products
and technology can also be used to create vertical-specific products and
solutions. Two vertical markets that we focus on are the military and
government markets which have been adopting service-provider scale VoIP
solutions.
|
|
|
·
|
Develop a network of strategic
partners.
We sell our products through or in cooperation with
customers that can offer or certify our products as part of a full-service
solution to their customers. We expect to further develop our strategic
partner relationships with solution providers, system integrators and
other service providers in order to increase our customer
base.
|
|
|
·
|
Acquire complementary
businesses and technologies.
We may pursue the
acquisition of complementary businesses and technologies or the
establishment of joint ventures to broaden our product offerings, enhance
the features and functionality of our systems, increase our penetration in
targeted markets and expand our marketing and distribution capabilities.
As part of this strategy, we acquired the UAS business from Nortel in
April 2003 and Ai-Logix (now part of AudioCodes Inc.), in May 2004. We
also acquired Nuera (now part of AudioCodes Inc.) in July 2006, Netrake
(now part of AudioCodes Inc.) in August 2006, CTI Squared in April 2007
and Natural Speech Communication in
2010.
|
Products
Our
products facilitate the transmission of voice, data and fax over packet
networks. we have incorporated our algorithms, technologies and systems design
expertise in both our networking and technology product lines.
Networking
products
This line
of products includes products that are network level products. Our networking
products include:
|
|
·
|
analog
media gateways for toll bypass, residential gateways, hosted, access and
enterprise applications;
|
|
|
·
|
digital
media gateways with various capacities for wireless, wireline, cable,
enterprise, fixed mobile convergence, and unified
communications;
|
|
|
·
|
multi-service
business gateways for integrated voice, data and security access for
service providers connecting enterprise customers to their network and for
the enterprise branch office;
|
|
|
·
|
IP
phones for enterprise and managed services service
providers;
|
|
|
·
|
mobile
VoIP access solutions;
|
|
|
·
|
media
servers for enhanced voice and video services and functionalities such as
conferencing, video sharing and messaging (IPmedia™ Media Servers);
and
|
|
|
·
|
value-added
applications for unified
communications.
|
42
In
addition, we continue to offer customers our professional services, which
usually involve customization and development projects for
customers.
Technology
products
This line
of products serves as a building block for network level products. Our
technology products include:
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voice
over packet processors;
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VoIP
communication boards;
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media
processing boards for enhanced services and functionalities;
and
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voice
and data logging hardware integration board
products.
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Our
products are designed to build on our core technologies and competencies
extending them both vertically (chips inserted into boards, boards inserted into
digital media gateways) and horizontally into different applications for
different market segments, such as enterprise, call centers, wireline, cable and
wireless.
Our
Product Families – Networking Products
Analog
Media Gateways for Toll Bypass, Service Provider Access and Enterprise
Applications
MediaPack
TM
, our
analog and basic rate interface, or BRI, media gateways for toll bypass, service
provider access and enterprise applications, are designed to empower the
next-generation network by providing cost-effective, cutting-edge technology
solutions that deliver voice and fax services to the corporate market, small
businesses and home offices. Our analog media gateways for access and enterprise
applications provide media streaming functionality while being either controlled
by a centralized call agent or used in box VoIP control protocols (SIP, H.323,
and MGCP). Convergence of data, voice and fax is achieved by a combination of
the media gateway with any IP access technology, eliminating the cost of
multiple access circuits. This product family utilizes our experience and
digital signal processing, or DSP, technology for echo cancellation, voice
compression, silence suppression and comfort noise generation. Part of this line
is composed of our analog residential gateways whose primary target market is
the large volume residential service providers, or SP, market.
The
MediaPack
TM
family
represents a feature rich product for streaming voice quality with a powerful
analog interface supporting all major control protocols, such as H323, SIP and
MGCP, and is also capable of supporting unified communication and FMC
applications.
The
Mediant™ Family of Products-Digital and Mixed Media Access Media Gateways and
Multi-Service Business Gateways for Service Provider Access and Enterprise
Applications (Mediant
TM
600,
1000, 2000 and Mediant 1000
TM
MSBG)
and Digital Media Gateways and Various Capacities for Wireless, Wireline and
Cable (Mediant™ 3000, 5000, 8000)
43
Mediant
TM
is our
family of access gateways. We have Mediant™ products for service provider access
enterprise networks. We also provide converged media gateways for wireline,
cable, wireless (GSM and CDMA), fixed-mobile-convergence and large enterprise
networks. The Mediant
TM
product
family offers scalability and functionality, providing a full suite of standards
compliant control protocols and public switched telephone network, or PSTN,
signaling interfaces for a variety of applications in most IP-PBX and softswitch
controlled environments, as well as for a variety of large enterprise, wireline,
cable and wireless media gateway applications in most softswitch controlled
environments. This product family is compatible with popular wireline, cable and
wireless voice coders and protocols, including code-division multiple access, or
CDMA, global system for mobile communications, or GSM, CDMA2000 and universal
mobile telecommunications service, or UMTS. It builds on our TrunkPack®
architecture, which is installed in millions of lines worldwide. It is also
interoperable with most of the world’s leading vendors.
The Mediant
TM
family
provides carriers with a comprehensive line of different sized gateways. Small
or medium-sized gateways enable cost-effective solutions for enterprise or small
points of presence, as well as entry into fast growing new and emerging markets.
The large gateways scale to central office capacities and are designed to meet
carriers’ operational requirements. The Mediant™ family of media gateways is
capable of supporting unified communication and fixed mobile convergence
applications which may be of increased interest to enterprises and service
providers. The Mediant™ gateway family shares our VoIP perfect architecture,
designed to provide mature, field-proven solutions.
The Mediant™ family of products
consists of a number of models that offer different capacity, that is the number
of concurrent calls that the gateway can handle. The capacity of our Mediant
products range from approximately 30 concurrent calls to 8,000 concurrent calls
for the wireless and wireline markets.
Our
Mediant™ 1000 has two different models. One model is a modular media
gateway.
The other
model includes multi-service business gateways, or MSBGs, which are networking
devices that combine multiple multiservice functions such as a media gateway,
session border controller, data router and firewall, LAN switch, WAN access,
and stand alone survivability, or SAS. The MSBG concept is designed
to address the needs of service providers and cable operators that offer
IP-Centrex and SIP trunking services and of distributed
enterprises.
We offer
the Mediant 1000 MSBG, which is an all-in-one multi-service access solution
designed to provide converged voice and data services for business customers at
wire speed, while maintaining service level agreement, or SLA, parameters for
superior voice quality. The Mediant 1000 MSBG is based on AudioCodes’ VoIPerfect
best-of-breed media gateway technology, combined with enterprise class session
border controller, data and voice security elements, data routing, LAN switching
and WAN access.
The
session border controller, or SBC, technology integrated into the Mediant 1000
MSBG, offers secure VoIP and multimedia traversal of firewall, or FW, and
network address translation, or NAT, systems, as well as denial of service, or
DoS, attack prevention at both the signaling and media layers. NAT and FW
traversal are necessary to allow VoIP and multimedia session to pass from the
Service Provider (“SP”) network to the residential or enterprise networks. DoS
attack prevention protects the SP network from attacks that load the network
until it crashes. It also provides comprehensive Quality of Service, or QoS,
mechanisms and protocol mediation (translation between two variants of same VoIP
protocol to enable two VoIP systems to communicate with each
other).
44
The
Mediant 1000 MSBG can also include a general purpose CPU and hard disk, allowing
to host any third-party off-the-shelf application. Positioned as MSBG PLUS, this
solution enables system integrators and software vendors to use the MSBG
platform for integrated unified communications solutions.
For the
cable market, the Mediant
TM
gateway
family complies with packet telephony standards and is designed for either
hybrid or all IP cable network architecture. The Mediant gateway enables
deployment of advanced packet-based cable telephony at multiple service
operators own pace, without costly hardware changes. The Mediant
TM
gateway
can be initially deployed as a V5.2 IP access terminal and then easily migrated
by software upgrade to a cable telephony media gateway with external call
management provided by a softswitch and an SS7 interface to the
PSTN.
IPmedia
TM
Servers
for Enhanced Services and Functionalities
IPmedia
TM
platforms are designed to answer the growing market demand for enhanced voice
services over packet networks, particularly network-based applications like
unified communications, call recording, and conferencing by carriers and
application service providers. IPmedia
TM
enables
our customers to develop and market applications such as unified communications,
interactive voice response, call-centers, conferencing and voice-activated
personal assistants.
350HD
Series of High Definition IP Phones
AudioCodes
300 Series of HD VoIP-enabled IP phones offers a new dimension of voice call
quality and clarity for the Enterprise and Service Provider markets. This
product line enables us to provide an end-to-end solution which relies heavily
on the technological infrastructure and proven track record in providing
state-of-the art high quality VoIP products for Enterprise, Wireline, Wireless
and Cable applications.
The 300 Series of IP phones meet the
demand for High Definition VoIP solutions in end-user phones and terminals,
providing high voice fidelity, advanced security and features and enhanced user
interface. The 300 Series of IP phones is widely interoperable with numerous
IP-PBXs, softswitches and IP-Centrex solutions.
VoIP
Mobile Access Solution (VMAS)
The VMAS™
is a mobile VoIP solution from AudioCodes comprised of a Client Management
System (CMS) and a variety of Mobile Soft Clients for leading Mobile Operating
Systems and Smartphones. VMAS is currently available for leading smartphones
such as iPhone™/iPod touch®, Nokia®, Samsung®™, HTC™ and
others.
45
CTI2
Value Added Services Applications (InTouch)
The
InTouch platform is an enhanced value added services, or VAS, platform for
service providers, such as cable, class 5, class 4, fixed-line, mobile,
multiservice virtual network operator, or MVNO, and operators. InTouch provides
a suite of next generation VAS. InTouch is an IP-based, email-centric and
telco-grade platform conforming to ultimate service providers’ requirements for
high-availability, reliability, scalability, and security. InTouch is designed
to smoothly scale from a very small system to a system with millions of
subscribers based on the same software and architecture, while enabling a rich
suite of applications at all sizes. InTouch’s open architecture is based on
industry-standard protocols, facilitating interoperability and integration with
best of breed, third-party applications. InTouch acts as a mediator between
InTouch services and a large selection of clients and devices enabling service
providers to offer attractive packages.
Element
Management System
Our
element management system, or EMS, is an advanced solution for centralized,
standards-based management of our VoP gateways, covering all areas vital to the
efficient operations, administration, management and provisioning of our
Mediant
TM
and
MediaPack
TM
VoP
gateways.
Our EMS
offers network equipment providers and system integrators fast setup of medium
and large VoP networks with the advantage of a single centralized management
system that configures, provisions and monitors all of AudioCodes gateways
deployed, either as customer premises equipment, access or core network
platforms.
Our
Product Families – Technology Products
Voice
Over Packet Processors
Our
signal processor chips compress and decompress voice, data and fax
communications. This enables these communications to be sent from
circuit-switched telephone networks to packet networks. Our chips are digital
signal processors on which we have embedded our algorithms. These signal
processor chips are the basic building blocks used by our customers and us to
enable their products to transmit voice, fax and data over packet networks.
These chips may be incorporated into our communications boards, media gateway
modules and analog media gateways for access and enterprise applications or they
may be purchased separately and incorporated into other boards or customer
products.
TrunkPack
TM
VoIP
Communication Boards
Our
communications boards are designed to operate in gateways connecting the
circuit-switched telephone network to packet networks based on Internet
protocols. Our boards comply with VoIP industry standards and allow for
interoperability with other gateways. Our boards support standards-based open
telecommunications architecture systems and combine our signal processor chips
with communications software, signaling software and proprietary hardware
architecture to provide a cost efficient interoperable solution for high
capacity gateways. We believe that using open architecture permits our customers
to bring their systems to market quickly and to integrate our products more
easily within their systems.
46
IPmedia
TM
Boards
for Enhanced Services and Functionalities
The
IPmedia
TM
product
family is designed to allow OEMs and application partners to provide
sophisticated content and services that create revenue streams and customer
loyalty through the ability to provide additional services. The IPmedia
TM
boards
provides voice and fax processing capabilities to enable, together with our
partners, an architecture for development and deployment of enhanced
services.
Voice
and Data Logging Hardware Integration Board Products
The
SmartWORKS
TM
family
of products is our voice and data logging hardware integration board product
line. SmartWORKS
TM
boards
for the call recording and voice voice/data logging industry are compatible with
a multitude of private branch exchange, or PBX, telephone system
integrations.
Core
Technologies
We
believe that one of our key competitive advantages is our broad base of core
technologies ranging from advanced voice compression algorithms to complex
architecture system design. We have developed and continue to build on a number
of key technology areas. We have named our cross platform core technology
VoIPerfect™. It essentially allows us to leverage the same feature set and
interoperability with other products across our product lines.
Narrowband
and Wideband (HDVoIP) Voice Compression Algorithms
Voice
compression techniques are essential for the transmission of voice over packet
networks. Voice compression exploits redundancies within a voice signal to
reduce the bit rate required to digitally represent the voice signal, from 64
kilobits per second, or kbps, down to low bit rates ranging from 5.3 kbps to 8
kbps, while still maintaining acceptable voice quality. A bit is a unit of data.
Different voice compression algorithms, or coders, make certain tradeoffs
between voice quality, bit rate, delay and complexity to satisfy various network
requirements. Use of voice activity detection techniques and silence removal
techniques further reduce the transmission rate by detecting the silence periods
embedded in the voice flow and discarding the information packets which do not
contribute to voice intelligibility.
We are
one of the innovators in developing low bit rate voice compression technologies.
Our patented MP-MLQTM coder was adopted in 1995 by the ITU as the basis for the
G.723.1 voice coding standard for audio/visual applications over
circuit-switched telephone networks. By adhering to this standard, system
manufacturers guarantee the interoperability of their equipment with the
equipment of other vendors.
We also
provide wideband compression techniques that provide high definition VoIP
quality, which expands the sampled frequency range from the traditional
narrowband frequency range of 3.3Khz to over 7Khz, providing better voice
quality and intelligibility, and a better user expertise. This technology is
expanding and is expected to become a de-facto standard for future VoIP
communications.
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Advanced
Digital Signal Processing Algorithms
To
provide a complete voice over packet communications solution, we have developed
a library of digital signal processing functions designed to complement voice
compression coders with additional functionality, including: echo cancellation;
voice activity detection; facsimile and data modem processing; and telephony
signaling processing. Our extensive experience and expertise in designing
advanced digital signal processing solutions allows us to implement algorithms
using minimal processing memory and power resources.
Our
algorithms include:
Echo cancellation
. Low bit
rate voice compression techniques introduce considerable delay, necessitating
the use of echo cancellation algorithms. The key performance criterion of an
echo canceller is its ability to deal with large echo reflections, long echo
delays, fast changing echo characteristics, diverse telecommunications equipment
and network effects. Our technology achieves low residual echo and fast response
time to render echo effects virtually unnoticeable.
Fax transmission.
There are
two widely used techniques for real time transmission of fax over networks based
on Internet protocols: fax relay and fax spoofing. Fax relay takes place when a
fax is sent from a fax machine through a gateway over networks based on Internet
protocols in real time to a fax machine at the other end of the network. At the
gateway, the analog fax signals are demodulated back into digital data,
converted into packets, routed over the packet network and reassembled at the
receiving end. Fax relay is used when the round trip network delay is small
(typically below one second). When the round trip network delay increases, one
of the fax machines may time out while waiting for a response from the other fax
machine to arrive.
Data modem technology.
We
have developed data modem technologies that facilitate data relay over packet
networks. Our data modem relay software algorithms support all existing data
modem standards up to a bit rate of 14.4 kbps.
Telephony signaling
processing
. Various telephony signaling standards and protocols are
employed to route calls over the traditional telephone network, some of which
use “in-band” methods, which means that the signaling tones are sent over the
telephone line just like the voice signal. As a result, in-band signaling tones
may have to undergo the compression process just like the voice signal. Most low
bit-rate voice coders, however, are optimized for speech signals and exhibit
poor tone transfer performance. To overcome this, our processors are equipped
with tone detection and tone generation algorithms. To provide seamless
transparency between the traditional telephone network and packet networks for
signaling, we employ various digital signal processing techniques for efficient
tone processing.
48
Voice
Communications Software
To
transmit the compressed voice and fax over packet networks, voice packetization
processes are required to construct and deconstruct each packet of data for
transmission. The processing involves breaking up information into packets and
adding address and control fields information according to the specifications of
the appropriate packet network protocol. In addition, the software provides the
interface with the signal processors and addresses packet delay and packet loss
issues.
Media
Processing
Our media
processing products provide the enabling technology and platforms for developing
enhanced voice service applications for legacy and next generation networks. We
have developed media processing technologies such as message recording/playback,
announcements, voice coding and mixing and call progress tone detection that
enable our customers to develop and offer advanced revenue generating services
such as conferencing, network announcements, voice mail and interactive voice
response.
Our media
processing technology is integrated into our enabling technology platforms like
Voice over Packet processors and VoIP blades, as well as into our network
platforms like the Mediant media gateways and the IPMedia media servers. The
same technology is also integrated into our multi-service business gateways,
enabling the use of these platforms to run third party VoIP software, offloading
media processing from the host CPU.
Addressing
Multiple Networks and Standards Concurrently
Convergence
of wireline and wireless networks is becoming a key driver for deployment of
voice over packet networks, enabling operators to use common equipment for both
networks, thus lowering capital expenditures and operating expenses, while
offering enriched services.
Our voice
over packet products provide a cost-effective solution for these convergence
needs, complying with the requirements of broadband Wireline operators using
xDSL technologies, Cable operators, mobile operators, FTTx operators, Internet
telephony service providers, or ITSPs, and virtual network Operators (VNOs).
This includes support for relevant vocoders (wireline and wireless
concurrently), interfaces and protocols.
Our
products are also positioned to support the requirement of all types of
enterprise customers. From SOHO, SMB all the way up to large enterprises, our
products can provide integrated VoIP services and service provider access to
enterprises in multiple vertical markets.
Hardware
Architectures for Dense Multi-Trunk Voice over Packet Systems
Our voice
over packet product offerings include high density, multi-trunk voice over
packet systems for standards-based open telecommunications platforms in access
equipment. Multi-trunk processing is centered around a design encompassing two
key processing elements, signal processors performing voice, fax and data
processing and a communications processor. Overall system performance,
reliability, capacity, size, cost and power consumption are optimized, based on
our hardware architecture, which supports high throughput rates for multi-trunk
processing. On-board efficient network and system interfaces relieve the system
controller from extensive real time data transfer and processing of data
streams.
49
Carrier
Grade System Expertise
To
provide state of the art carrier grade media gateways, we have developed a wide
expertise in a number of fields essential to such a product line. We have
developed or integrated the various components required to implement a full
digital media gateway solution that behaves as a unified entity to the external
world. This required a major investment in adapting standard cPCI and MicroTCA
(AMC) platforms to our needs. Such adaptation included optimizing power supply
and cooling requirements, adding centralized shelf controllers, fabric switches
and alarm cards to the chassis. Another aspect of the expertise we developed
relates to high availability software and hardware design. High availability is
a required feature in any carrier grade media gateway platform. We have also
developed a sophisticated EMS to complete our offering. Our EMS enables the user
to provision and monitor a number of media gateways from a centralized
location.
Customers
Our
customers consist of service providers and enterprises, primarily via channels
(such as distributors), OEMs, network equipment providers and systems
integrators. Historically, we have derived the majority of our revenues from
sales to a small number of customers. The identities of our principal customers
have changed and we expect that they will continue to change, from year to year.
We expect that a small number of customers will continue to account for a large
percentage of our sales. Sales to Nortel Networks accounted for 17.0% of our
revenues in 2007, 14.4% of our revenues in 2008 and 15.6% of our revenues in
2009. No other customer accounted for more than 10.0% of our revenues in 2007,
2008 or 2009. As a result of the continued operation of Nortel’s business in
bankruptcy and the continued attempt by Nortel to sell its business units, we
cannot be sure as to the amount of revenues we will receive in 2010 from Nortel
or any entity that purchases a Nortel business that is one of our
customers.
Sales
and Marketing
Our sales
and marketing strategy is to secure the leading channels and system integrators
in each region, partner with leading application companies and achieve design
wins with network equipment providers in our targeted markets. Prospective
customers and channels generally must make a significant commitment of resources
to test and evaluate our products and to integrate them into larger systems,
networks, and applications. As a result, our sales process is often subject to
delays associated with lengthy approval processes that typically accompany the
design and testing of new communications equipment. For these reasons, the sales
cycles of our products to new customers are often lengthy, averaging
approximately six to twelve months after achieving a design win. This time may
be further extended because of internal testing, field trials and requests for
the addition or customization of features.
We also
provide our customers with reference platform designs, which enable them to
achieve easier and faster transitions from the initial prototype designs we use
in the test trials through final production releases. We believe this
significantly enhances our customers’ confidence that our products will meet
their market requirements and product introduction schedules.
50
We market
our products in the United States, Europe, Asia, Latin America and Israel
primarily through a direct sales force. We have invested significant resources
in setting up local sales forces giving us a presence in relevant markets. We
have given particular emphasis to emerging markets such as Latin America and
Eastern Europe in addition to continuing to sell our products in developed
countries.
Marketing
managers are dedicated to principal customers to promote close cooperation and
communication. Additionally, we market our products in these areas through
independent sales representatives and system integrators. We select these
independent entities based on their ability to provide effective field sales,
marketing communications and technical support to our customers. We have
generally entered into a combination of exclusive and non-exclusive sales
representation agreements with these representatives in each of the major
countries in which we do business. These agreements are typically for renewable
12-month terms, are terminable at will by us upon 90 days notice, and do not
commit the sales representative to any minimum sales of our products to third
parties. Some of our representatives have the ability to return some of the
products they have previously purchased and purchase more up to date
models.
Manufacturing
Texas
Instruments Incorporated supplies all of the signal processor chips used for our
signal processors. Other components are generic in nature and we believe they
can be obtained from multiple suppliers.
We have
not entered into any long-term supply agreements. However, we have worked for
years in several countries with established global manufacturing leaders such as
Flextronics and have a good experience with their level of commitment and
ability to deliver. To date, we have been able to obtain sufficient amounts of
these components to meet our needs and do not foresee any supply difficulty in
obtaining timely delivery of any parts or components. However, an interruption
in supply from any of these sources, especially with regard to signal processors
from Texas Instruments Incorporated, or an unexpected termination of the
manufacture of certain electronic components, could disrupt production, thereby
adversely affecting our results. We generally maintain an inventory of critical
components used in the manufacture and assembly of our products although our
inventory of signal processor chips would likely not be sufficient in the event
that we had to engage an alternate supplier for these components.
We
utilize contract manufacturing for substantially all of our manufacturing
processes. Most of our manufacturing is carried out by third-party
subcontractors in Israel and China. We have extended our manufacturing
capabilities through third party subcontractors in the United States and Mexico.
Our internal manufacturing activities consist primarily of the production of
prototypes, test engineering, materials purchasing and inspection, final product
configuration and quality control and assurance.
In
addition, we have engaged three original design manufacturers, or
ODM, based in Asia to design and manufacture some of our products. Termination
of our commercial relationship with an ODM or the discontinuance of
manufacturing of products by an ODM would negatively affect our business
operations.
51
We are
obligated under certain agreements with our suppliers to purchase goods and
under an agreement with one of our manufacturing subcontractors to purchase
excess inventory. Aggregate non-cancellable obligations under these
agreements as of December 31, 2009 were approximately $930,000.
Industry
Standards and Government Regulations
Our
products must comply with industry standards relating to telecommunications
equipment. Before completing sales in a country, our products must
comply with local telecommunications standards, recommendations of
quasi-regulatory authorities and recommendations of standards-setting
committees. In addition, public carriers require that equipment connected to
their networks comply with their own standards. Telecommunication-related
policies and regulations are continuously reviewed by governmental and industry
standards-setting organizations and are always subject to amendment or change.
Although we believe that our products currently meet applicable industry and
government standards, we cannot be sure that our products will comply with
future standards.
We are
subject to telecommunication industry regulations and requirements set by
telecommunication carriers that address a wide range of areas including quality,
final testing, safety, packaging and use of environmentally friendly
components. We comply with the European Union’s Restriction of
Hazardous Substances Directive (under certain exemptions) that requires
telecommunication equipment suppliers to not use some materials that are not
environmentally friendly. These materials include cadmium, hexavalent
chromium, lead, mercury, polybrominated biphenyls and polybrominatel diphenyl
ethers. Under the directive, an extension for compliance was granted until July,
2010_(and it is expected that this deadline will be further extended) with
respect to the usage of lead in solders in network infrastructure equipment. We
expect that other countries, including countries we operate in, will adopt
similar directives or other additional regulations.
Competition
Competition
in our industry is intense and we expect competition to increase in the future.
Our competitors currently sell products that provide similar benefits to those
that we sell. There has been a significant amount of merger and acquisition
activity and strategic alliances frequently involving major telecommunications
equipment manufacturers acquiring smaller companies, and we expect that this
will result in an increasing concentration of market share among these
companies, many of whom are our customers.
Our
principal competitors in the area of analog media gateways (2 to 24 ports) for
access and enterprise are Linksys (a division of Cisco Systems, Inc.), Mediatrix
Telecom, Inc., Vega Stream Limited, Samsung, Innovaphone AG, Net.com/Quintum
Technologies, Tainet Communication System Corp., Welltech, Ascii Corp., D-Link
Systems, Inc., Multitech Inc., Inomedia, OKI and LG.
52
In the
area of low density digital gateways and multi-service business gateways we face
competition from companies such as Cisco, Adtran, Oneaccess, and more
specifically in the enterprise class Session Border Controller technology with
ACME Packets (Covergence), SIPera, Ingate and Edwater. In addition we face
competition in low, mid and high density gateways from companies such as Nortel,
Alcatel-Lucent, Nokia-Siemens, Huawei, Ericsson, UTstarcom, ZTE and from Cisco,
Veraz Networks, Sonus Networks, General Bandwidth, Dialogic/Cantata Technologies
and Commatch (Telrad). Some of these competitors are also customers of our
products and technologies.
Our
principal competitors in the media server market segment are Dialogic/Cantata
Technology/NMS Communications, Convedia/Radisys, Movius(IP Unity/Glenayre),
Cognitronics and Aculab. In addition, we face competition in
software-based and hardware-based media servers from internal development at
companies such as Hewlett-Packard, Comverse-NetCentrex, Nortel, Alcatel -
Lucent, Nokia-Siemens and Ericsson.
Our
principal competitors in the sale of signal processing chips are Texas
Instruments, Broadcom, Infineon, Centillium, Surf and Mindspeed. Several large
manufacturers of generic signal processors, such as Motorola, Agere Systems,
which merged with LSI Corporation in April 2007, and Intel have begun, or are
expected to begin marketing competing processors. Our principal competitors in
the communications board market are Dialgic/NMS Communications/Cantata, Aculab,
PIKA Technologies, Inc, Intel, and Motorola.
Our
principal competitors in the area of IP phones are comprised of “best–of-breed”
IP phone vendors and end-to-end IP telephony vendors. “Best-of-breed”
IP phone vendors sell standard-based SIP phones that can be integrated into any
standards-based IP-PBX or hosted IP telephony systems. These competitors include
Polycom, Mediatrix and SNOM. End-to-end IP telephony vendors sell IP
phones that only work in their proprietary systems. These competitors include
Cisco, Avaya/Nortel, Alcatel-Lucent, Siemens and Asstra.
Many of
our competitors have the ability to offer vendor-sponsored financing programs to
prospective customers. Some of our competitors with broad product portfolios may
also be able to offer lower prices on products that compete with ours because of
their ability to recoup a loss of margin through sales of other products or
services. Additionally, voice, audio and other communications alternatives that
compete with our products are being continually introduced.
In the
future, we may also develop and introduce other products with new or additional
telecommunications capabilities or services. As a result, we may compete
directly with VoIP companies and other telecommunications infrastructure and
solution providers, some of which may be our current customers.
Additional competitors may include companies that currently provide
communication software products and services. The ability of some of our
competitors to bundle other enhanced services or complete solutions with VoIP
products could give these competitors an advantage over us.
Intellectual
Property and Proprietary Rights
Our
success is dependent in part upon proprietary technology. We rely primarily on a
combination of patent, copyright and trade secret laws, as well as
confidentiality procedures and contractual provisions, to protect our
proprietary rights. We also rely on trademark protection concerning various
names and marks that serve to identify it and our products. While our ability to
compete may be affected by our ability to protect our intellectual property, we
believe that because of the rapid pace of technological change in our industry
maintaining our technological leadership and our comprehensive familiarity with
all aspects of the technology contained in our signal processors and
communication boards is also of primary importance.
53
We own
U.S. patents that relate to our voice compression and session border control
technologies. We also actively pursue patent protection in selected other
countries of interest to us. In addition to patent protection, we seek to
protect our proprietary rights through copyright protection and through
restrictions on access to our trade secrets and other proprietary information
which we impose through confidentiality agreements with our customers,
suppliers, employees and consultants.
There are
a number of companies besides us who hold or may acquire patents for various
aspects of the technology incorporated in the ITU’s standards or other industry
standards or proprietary standards, for example, in the fields of wireless and
cable. While we have obtained cross-licenses from some of the holders of these
other patents, we have not obtained a license from all of the holders. The
holders of these other patents from whom we have not obtained licenses may take
the position that we are required to obtain a license from them. Companies that
have submitted their technology to the ITU (and generally other industry
standards making bodies) for adoption as an industry standard are required by
the ITU to undertake to agree to provide licenses to that technology on
reasonable terms. Accordingly, we believe that even if we were required to
negotiate a license for the use of such technology, we would be able to do so at
an acceptable price. Similarly, however, third parties who also participate with
respect to the same standards-setting organizations as do we may be able to
negotiate a license for use of our proprietary technology at a price acceptable
to them, but which may be lower than the price we would otherwise prefer to
demand.
Under a
pooling agreement dated March 3, 1995, as amended, between AudioCodes and DSP
Group, Inc., on the one hand, and France Telecom, Université de Sherbrooke and
their agent, Sipro Lab Telecom, on the other hand, we and DSP Group, Inc.
granted to France Telecom and Université de Sherbrooke the right to use certain
of our specified patents, and any other of our and DSP Group, Inc. intellectual
property rights incorporated in the ITU G.723.1 standard. Likewise France
Telecom and Université de Sherbrooke granted AudioCodes and DSP Group, Inc. the
right to use certain of their patents and any other intellectual property rights
incorporated in the G.723.1 standard. In each case, the rights granted are to
design, make and use products developed or manufactured for joint contribution
to the G.723.1 standard without any payment by any party to the other
parties.
In
addition, each of the parties to the agreement granted to the other parties the
right to license to third parties the patents of any party included in the
intellectual property required to meet the G.723.1 standard, in accordance with
each licensing party’s standard patent licensing agreement. The agreement
provides for the fee structure for licensing to third parties. The agreement
provides that certain technical information be shared among the parties, and
each of the groups agreed not to assert any patent rights against the other with
respect of the authorized use of voice compression products based upon the
technical information transferred. Licensing by any of the parties of the
parties’ intellectual property incorporated in the G.723.1 standard to third
parties is subject to royalties that are specified under the
agreement.
54
Each of
the parties to the agreement is free to develop and sell products embodying the
intellectual property incorporated into the G.723.1 standard without payment of
royalties to other parties, so long as the G.723.1 standard is implemented as
is, without modification. The agreement expires upon the last expiration date of
any of the AudioCodes, DSP Group, Inc., France Telecom or Université de
Sherbrooke patents incorporated in the G.723.1 standard. The parties
to the agreement are not the only claimants to technology underlying the G.723.1
standard.
We are
aware of parties who may be infringing our technology that is part of the
G.723.1 standard. We evaluate these matters on a case by case basis,
directly or through our licensing partner. Although we have not yet determined
whether to pursue legal action, we may do so in the future. There can be no
assurance that any legal action will be successful.
Third
parties have claimed, and from time to time in the future may claim, that our
past, current or future products infringe their intellectual property rights.
Intellectual property litigation is complex and there can be no assurance of a
favorable outcome of any litigation. Any future intellectual property
litigation, regardless of outcome, could result in substantial expense to us and
significant diversion of the efforts of our technical and management personnel.
Litigation could also disrupt or otherwise severely impact our relationships
with current and potential customers as well as our manufacturing, distribution
and sales operations in countries where relevant third party rights are held and
where we may be subject to jurisdiction. An adverse determination in any
proceeding could subject us to significant liabilities to third parties, require
disputed rights to be licensed from such parties, assuming licenses to such
rights could be obtained, or require us to cease using such technology and
expend significant resources to develop non-infringing technology. We may not be
able to obtain a license at an acceptable price.
We have entered into technology
licensing fee agreements with third parties. Under these agreements, we agreed
to pay the third parties royalties, based on sales of relevant products.
Legal
Proceedings
We are
not a party to any material legal proceedings, except for the proceedings
referred to below.
In
September 2009, Network Gateway Solutions LLC filed a complaint in the United
States District Court for the District of Delaware against AudioCodes Ltd. and
AudioCodes Inc. and 19 other defendants alleging the infringement of certain
patents owned by Network Gateway, although Network Gateway has not served
AudioCodes Ltd. and, therefore, it is not a party to this proceeding. Patton
Electronics, Inc., a customer of ours, is also a defendant in this litigation.
We have agreed to defend Patton in this litigation. The plaintiff filed an
amended complaint in January 2010. The amended complaint does not indicate the
amount of monetary relief sought.
Prior to
the acquisition of Nuera by us in 2006, one of Nuera’s customers had been named
as a defendant in a patent infringement suit involving technology the customer
purchased from Nuera. In the suit, the plaintiff alleged that the customer used
devices to offer services that infringe upon a patent the plaintiff owns. The
customer has sought indemnification from Nuera pursuant to the terms of a
purchase agreement between Nuera and the customer relating to the allegedly
infringing technology at issue.
55
C. ORGANIZATIONAL
STRUCTURE
List
of Significant Subsidiaries
AudioCodes Inc., our wholly-owned
subsidiary, is a Delaware corporation.
AudioCodes UK Limited and AudioCodes
Europe Limited, our wholly-owned subsidiaries, are incorporated in
England.
D. PROPERTY,
PLANTS AND EQUIPMENT
We lease
our main facilities, located in Airport City, Lod, Israel, which occupy
approximately 128,000 square feet for annual lease payments (including
management fees) of approximately $2.6 million. In January 2008, we
increased the amount of space we leased by approximately 74,000 square feet for
annual lease payments (including management fees) of approximately $1.4 million.
In addition, we have entered into an agreement with Airport City, Ltd. regarding
the neighboring property pursuant to which a building of approximately 145,000
square feet is being erected and will be leased to us for period of eleven
years. This new building was substantially completed in May 2010. We are
currently engaged in a dispute with the landlord as to when we are required to
take possession of this building. We estimate the annual lease payments
(including management fees) to be in the range of $2.0 million to $3.2 million
depending on the amount expended by the lessor on improvements to the building.
In view of current economic conditions and our reduction in personnel undertaken
since 2008, we may not need to occupy the entire building and may seek to
sublease all or a portion of the new building to third parties. We cannot be
sure we will be able to sublease this building or a portion of it.
Our U.S.
subsidiary, AudioCodes Inc., leases a 7,000 square foot facility in San Jose,
California, and has additional offices with aggregate leased space of 16,000
square feet in Raleigh, Boston and Dallas. AudioCodes Inc. also leases a 32,000
square foot facility in Somerset, New Jersey, and a 20,000 square foot facility
in Plano, Texas. The annual lease payments (including management fees) for all
our offices in the United States is approximately $1 million.
We
believe that these properties are sufficient to meet our current
needs. However, we may need to increase the size of our current
facilities, seek new facilities, close certain facilities or sublease portions
of our existing facilities in order to address our needs in the
future.
None.
56
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP. These accounting principles
require management to make certain estimates, judgments and assumptions based
upon information available at the time that they are made, historical experience
and various other factors that are believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
periods presented.
On an
on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition and allowance for sales returns, allowance
for doubtful accounts, inventories, marketable securities, business
combinations, goodwill and intangible assets, income taxes and valuation
allowance, and stock-based compensation. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.
Our
management has reviewed these critical accounting policies and related
disclosures with our Audit Committee. See Note 2 to the Consolidated Financial
Statements, which contain additional information regarding our accounting
policies and other disclosures required by US GAAP.
Management
believes the significant accounting policies that affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements and are the most critical to aid in fully understanding and
evaluating AudioCodes’ reported financial results include the
following:
|
|
·
|
Revenue
recognition and allowance for sales
returns;
|
|
|
·
|
Allowance
for doubtful accounts;
|
|
|
·
|
Inventories;
|
|
|
·
|
Intangible
assets;
|
|
|
·
|
Goodwill;
|
|
|
·
|
Income
taxes and valuation allowance; and
|
|
|
·
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Stock-based
compensation.
|
Revenue
Recognition and Allowance for Sales Returns
We
generate our revenues primarily from the sale of products. We sell our products
through a direct sales force and sales representatives. Our customers include
original equipment manufacturers, network equipment providers, systems
integrators and distributors in the telecommunications and networking
industries, all of whom are considered end-users.
57
Revenues
from products are recognized in accordance with Staff Accounting Bulleting
(“SAB”) 104, “Revenue Recognition in Financial Statements” when the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery of the product has occurred, (iii) the fee is fixed or determinable and
(iv) collectability is probable. We have no obligation to customers after the
date on which products are delivered, other than pursuant to warranty
obligations and any applicable right of return. We grant to some of
our customers the right of return or the ability to exchange a specific
percentage of the total price paid for products they have purchased over a
limited period for other products.
We
maintain a provision for product returns and exchanges. This provision is based
on historical sales returns, analysis of credit memo data and other known
factors. This provision amounted to $559,000 in 2007, $754,000 in 2008 and
$656,000 in 2009.
Revenues
from the sale of products which were not yet determined to be final sales due to
market acceptance or technological compatibility were deferred and included in
deferred revenues. In cases where collectability is not probable, revenues are
deferred and recognized upon collection. Revenues from services are recognized
ratably over the time of the service agreement, usually one year.
Allowance
for Doubtful Accounts
Our trade
receivables are derived from sales to customers located primarily in the
Americas, the Far East, Israel and Europe. We perform ongoing credit evaluations
of our customers and to date have not experienced any material losses from
uncollected receivables. An allowance for doubtful accounts is determined with
respect to those amounts that we have recognized as revenue and determined to be
doubtful of collection. We usually do not require collateral on trade
receivables because most of our sales are to large and well-established
companies. On occasion we may purchase credit insurance to cover credit exposure
for a portion of our sales and this may mitigate the amount we need to write off
as a result of doubtful collections.
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined using the
“weighted average cost” method for raw materials and on the basis of direct
manufacturing costs for finished products. We periodically evaluate the
quantities on hand relative to current and historical selling prices and
historical and projected sales volume and technological obsolescence. Based on
these evaluations, inventory write-offs are provided to cover risks arising from
slow moving items, technological obsolescence, excess inventories, discontinued
products and for market prices lower than cost. We wrote-off
inventory in a total amount of $700,000 in 2007, $1.2 million in 2008 and
$730,000 in 2009.
Intangible
assets
As a
result of our acquisitions, our balance sheet included acquired intangible
assets, in the aggregate amount of approximately $19.0 million as of December
31, 2007, $8.7 million as of December 31, 2008 and $6.8 million as of December
31, 2009.
58
We
allocated the purchase price of the companies we have acquired to the tangible
and intangible assets acquired and liabilities assumed, based on their estimated
fair values. These valuations require management to make significant estimations
and assumptions, especially with respect to intangible assets. Critical
estimates in valuing intangible assets include future expected cash flows from
technology acquired, trade names, backlog and customer relationships. In
addition, other factors considered are the brand awareness and market position
of the products sold by the acquired companies and assumptions about the period
of time the brand will continue to be used in the combined company’s product
portfolio. Management’s estimates of fair value are based on assumptions
believed to be reasonable, but which are inherently uncertain and
unpredictable.
If we did
not appropriately allocate these components or we incorrectly estimate the
useful lives of these components, our computation of amortization expense may
not appropriately reflect the actual impact of these costs over future periods,
which will affect our net income.
Intangible
assets are reviewed for impairment in accordance with ASC
360-10-35 (formerly FAS 144), “Property, Plant, and Equipment-
Subsequent Measurement”, 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 such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. The loss is allocated to the intangible
assets on a pro rata basis using the relative carrying amounts of those assets,
except that the loss allocated to an individual intangible asset shall not
reduce the carrying amount of that asset below its fair value whenever that fair
value is determinable.
Our
intangible assets are comprised of acquired technology, customer relations,
trade names, existing contracts for maintenance and backlog. All intangible
assets are amortized using the straight-line method over their estimated useful
life.
During
2007 and 2009, no impairment charges were identified. During 2008, we recorded
an impairment charge for intangible assets in the amount of $5.9 million
(relating to the acquisition of Nuera).
Goodwill
As a
result of our acquisitions, our balance sheet included acquired goodwill, in the
aggregate amount of approximately $111.2 millions as of December 31, 2007 and
$32.1 million as of December 31, 2008 and 2009.
ASC 350
(formerly FAS 142), “Intangible, Goodwill and Other” requires that goodwill be
tested for impairment at least annually. Goodwill is tested for
impairment by comparing the fair value of the reporting unit with its carrying
value. Fair value is generally determined using discounted cash flows, market
multiples and market capitalization. Significant estimates used in the fair
value methodologies include estimates of future cash flows, future short-term
and long-term growth rates, weighted average cost of capital and estimates of
market multiples of the reportable unit. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for our goodwill and intangible assets with an indefinite life. Our
annual impairment test is performed in the fourth quarter each
year.
59
The
process of evaluating the potential impairment of goodwill is subjective and
requires significant judgment at many points during the analysis. In estimating
the fair value of a reporting unit for the purposes of our annual or periodic
analyses, we make estimates and judgments about the future cash flows of that
reporting unit. Although our cash flow forecasts are based on assumptions that
are consistent with our plans and estimates we are using to manage the
underlying businesses, there is significant exercise of judgment involved in
determining the cash flows attributable to a reporting unit over its estimated
remaining useful life. In addition, we make certain judgments about allocating
shared assets to the estimated balance sheets of our reporting units. We also
consider our and our competitor's market capitalizations on the date we perform
the analysis. Changes in judgment on these assumptions and estimates could
result in a goodwill impairment charge.
Goodwill
represents the excess of the purchase price and related costs over the value
assigned to net tangible and identifiable intangible assets of businesses
acquired and accounted for under the purchase method. We review and test our
goodwill for impairment at the reporting unit level at least annually, or more
frequently if events or changes in circumstances indicate that the carrying
amount of such assets may be impaired. We operate in one operating segment, and
this segment comprises our only reporting unit. We perform our test in the
fourth quarter of each year using discounted cash flows, market multiples and
market capitalization. Significant estimates used in the
methodologies include estimates of future cash-flows, future short-term and
long-term growth rates, weighted average cost of capital and market multiples
for the reporting unit. The fair value derived from these methodologies is then
compared to the carrying value of the operating segment.
During
2007 and 2009, no impairment charges were identified. As a result of the
impairment analysis for 2008, we determined that the goodwill balance was
impaired as a result of adverse equity market conditions which caused a decline
in industry market multiples and reduced fair values from our projected cash
flows. Accordingly, we recorded non-cash impairment charges of $79.1
million in 2008.
Income
Taxes and Valuation Allowance
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income tax expense in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure, which is accrued as taxes payable, together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets, which are included
within our consolidated balance sheet. We may record a valuation allowance to
reduce our deferred tax assets to the amount of future tax benefit that is more
likely than not to be realized.
60
Although
we believe that our estimates are reasonable, there is no assurance that the
final tax outcome and the valuation allowance will not be different than those
which are reflected in our historical income tax provisions and
accruals.
We have
filed or are in the process of filing U.S. federal, state and foreign tax
returns that are subject to audit by the respective tax authorities. Although
the ultimate outcome is unknown, we believe that adequate amounts have been
provided for and any adjustments that may result from tax return audits are not
likely to materially adversely affect our consolidated results of operations,
financial condition or cash flows.
Stock-based
compensation
We
account for stock-based compensation in accordance with ASC
718 (formerly FAS 123R) ”Compensation-Stock Compensation”. We utilize
the Black-Scholes option pricing model to estimate the fair value of stock-based
compensation at the date of grant. The Black-Scholes model requires subjective
assumptions regarding dividend yields, expected volatility, expected life of
options and risk-free interest rates. These assumptions reflect management’s
best estimates. Changes in these inputs and assumptions can materially affect
the estimate of fair value and the amount of our stock-based compensation
expenses. We recognized stock-based compensation expense of $8.0 million in
2007, $4.3 million in 2008 and $2.0 million in 2009. As of December 31, 2009,
there was approximately $1.8 million of total unrecognized stock-based
compensation expense related to non-vested stock-based compensation arrangements
granted by us. As of December 31, 2009, that expense is expected to be
recognized over a weighted-average period of 0.96 years.
|
A.
|
OPERATING
RESULTS
|
You
should read this discussion with the consolidated financial statements and other
financial information included in this Annual Report.
Overview
We
design, develop and sell advanced voice over IP, or VoIP, and converged VoIP and
data networking products and applications to service providers and enterprises.
We are a VoIP technology leader focused on VoIP communications, applications and
networking elements, and its products are deployed globally in broadband,
mobile, cable, and enterprise networks. We provide a range of innovative,
cost-effective products including media gateways, multi-service business
gateways, residential gateways, IP phones, media servers, session border
controllers, s and value-added applications. Our underlying technology,
VoIPerfectHD™, relies primarily on our leadership in DSP, voice coding and voice
processing technologies. Our high definition (HD) VoIP technologies and products
provide enhanced intelligibility, and a better end user communication experience
in emerging Voice networks.
Our
products enable our customers to build high-quality packet networking equipment
and network solutions and provide the building blocks to connect traditional
telephone networks to the VoIP networks, as well as connecting and securing
multimedia communication between different packet-based networks. Our products
are sold primarily to leading original equipment manufacturers, or OEMs, system
integrators and network equipment providers in the telecommunications and
networking industries. We have continued to broaden our offerings,
both from internal and external development and through acquisitions, as we have
expanded in the last few years from selling chips to boards, subsystems, media
gateway systems, media servers, session border controllers and messaging
platforms. We have also increased our product portfolio to enhance our position
in the market and serve our channels better as a “one stop shop” for Voice over
IP hardware.
61
Our
headquarters and research and development facilities are located in Israel with
research and development extensions in the U.S. and U.K. We have other offices
located in Europe, the Far East, and Latin America.
Nortel
Networks, our largest customer, accounted for 17.0% of our revenues in 2007,
14.4% of our revenues in 2008 and 15.6% of our revenues in 2009. Nortel filed
for bankruptcy protection in January 2009. Nortel has operated in bankruptcy
since then while also selling a number of its business units and seeking to sell
additional business units. As a result of Nortel’s bankruptcy filing, we could
not recognize $1.7 million of sales to Nortel in the fourth quarter of 2008.
During 2009, Nortel returned to us products with a sales price of $706,000. This
amount reduced the $1.7 million of unpaid deferred revenues on our balance
sheet. The remaining approximately $1.0 million of these deferred revenues
represent an unsecured claim in Nortel’s bankruptcy proceeding. We do not know
if we will recover any amount in the bankruptcy proceeding.
Our top
five customers accounted for 32.8% of our revenues in 2007, 26.3% of our
revenues in 2008 and 29.8% of our revenues in 2009. Based on our experience, we
expect that our largest customers may change from period to period. If we lose a
large customer and fail to add new customers to replace lost revenue, our
operating results may be materially adversely affected.
Revenues
based on the location of our customers for the last three fiscal years are as
follows:
|
2007
|
200
8
|
2009
|
||||||||||
|
Americas
|
56.6 | % | 52.4 | % | 55. 6 | % | ||||||
|
Far
East
|
11.2 | 16.4 | 14.6 | |||||||||
|
Europe
|
25.5 | 23.4 | 21.5 | |||||||||
|
Israel
|
6.7 | 7.8 | 8.3 | |||||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Part of
our strategy over the past few years has involved the acquisition of
complementary businesses and technologies. We continued implementation of this
strategy with three additional acquisitions in the past three years. In July,
2006, we completed the acquisition of Nuera (merged into AudioCodes Inc. as of
December 31, 2007). Nuera provides Voice over Internet Protocol
infrastructure solutions for broadband and long distance
networks.
62
In August
2006, we acquired Netrake (merged into AudioCodes Inc. as of December 31, 2007),
a provider of session border controller, or SBC, and security gateway solutions.
SBCs enable connectivity, policies and security for real-time media sessions,
such as VoIP, video or fax, between public or private IP networks. Security
gateways enable secure real-time sessions across wifi, broadband and wireless
networks in field mobile convergence deployments.
In April
2007, we completed the acquisition of CTI Squared. CTI Squared is a
provider of enhanced messaging and communications platforms deployed globally by
service providers and enterprises. CTI Squared’s platforms integrate
data and voice messaging services over internet, intranet, PSTN, cellular, cable
and enterprise networks.
In May
2010, we acquired all of the remaining outstanding equity of Natural Speech
Communication Ltd. that we did not own. NSC is based in Israel and is engaged in
speech analytics and speech recognition technologies and products.
We
believe that prospective customers generally are required to make a significant
commitment of resources to test and evaluate our products and to integrate them
into their larger systems. As a result, our sales process is often subject to
delays associated with lengthy approval processes that typically accompany the
design and testing of new communications equipment. For these reasons, the sales
cycles of our products to new customers are often lengthy, averaging
approximately six to twelve months. As a result, we may incur
significant selling and product development expenses prior to generating
revenues from sales.
The
currency of the primary economic environment in which our operations are
conducted is the U.S. dollar, and as such, we use the U.S. dollar as our
functional currency. Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts. All transaction gains and
losses from the remeasurement of monetary balance sheet items denominated in
non-U.S. dollar currencies are reflected in the statement of operations as
financial income or expenses, as appropriate.
The
demand for Voice over IP, or VoIP, technology has increased during recent years.
In recent years, the shift from traditional circuit-switched networks to next
generation packet-switched networks continued to gain momentum. As data traffic
becomes the dominant factor in communications, service providers are building
and maintaining converged networks for integrated voice and data services. In
developed countries, traditional and alternative service providers adopt bundled
triple play (voice, video and data) and quadruple play (voice, video, data and
mobile) offerings. This trend, enabled by voice and multimedia over IP, has
fueled competition among cable, wireline, ISP and mobile operators, increasing
the pressure for adopting and deploying VoIP networks. In addition,
underdeveloped markets without basic wire line service in countries such as
China and India and certain countries in Eastern Europe are adopting the use of
VoIP technology to deliver voice and data services that were previously
unavailable.
63
The
general economic downturn, including disruptions in the world credit and equity
markets, has had and continues to have a significant negative impact on business
around the world. The impact of this economic
environment on the technology industry and our major customers has
been severe. Conditions may continue to be depressed or may be subject to
further deterioration which could lead to a further reduction in consumer and
customer spending overall, which could have an adverse impact on sales of our
products. A disruption in the ability of our significant customers to
access liquidity could cause serious disruptions or an overall deterioration of
their businesses which could lead to a significant reduction in their orders of
our products and the inability or failure on their part to meet their payment
obligations to us, any of which could have a material adverse effect on our
results of operations and liquidity. In addition, any disruption in the ability
of customers to access liquidity could lead customers to request longer payment
terms from us or long-term financing of their purchases from
us. Granting extended payment terms or a significant adverse change
in a customer’s financial and/or credit position could also require us to assume
greater credit risk relating to that customer’s receivables or could limit our
ability to collect receivables related to purchases by that
customer. As a result, our reserves for doubtful accounts and
write-offs of accounts receivable could increase.
Results
of Operations
The
following table sets forth the percentage relationships of certain items from
our consolidated statements of operations, as a percentage of total revenues for
the periods indicated:
|
Year Ended December 31
,
|
||||||||||||
|
Statement of Operations
Data
:
|
2007
|
2008
|
2009
|
|||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of revenues
|
43.7 | 44.3 | 44.6 | |||||||||
|
Gross
profit
|
56.3 | 55.7 | 55.4 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development, net
|
25.7 | 21.6 | 23.8 | |||||||||
|
Selling
and marketing
|
27.1 | 25.5 | 25.5 | |||||||||
|
General
and administrative
|
6.1 | 5.3 | 6.2 | |||||||||
|
Impairment
of goodwill and intangible assets
|
- | 48.7 | - | |||||||||
|
Total
operating expenses
|
58.9 | 101.1 | 55.5 | |||||||||
|
Operating
loss
|
(2.6 | ) | (45.4 | ) | (0.1 | ) | ||||||
|
Financial
expenses, net
|
1.4 | 1.9 | 2.2 | |||||||||
|
Loss
before taxes on income
|
(4.3 | ) | (47.3 | ) | (2.3 | ) | ||||||
|
Taxes
on income
|
0.8 | 0.3 | 0.2 | |||||||||
|
Equity
in losses of affiliated companies, net
|
0.7 | 1.5 | 0.1 | |||||||||
|
Net
loss
|
(5.5 | )% | (49.1 | )% | (2.6 | )% | ||||||
64
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
. Revenues
decreased 28.0% to $125.9 million in 2009 from $174.7 million in 2008. The
decrease in revenues was primarily due to the downturn in the global economy and
the challenging business environment in the market for telecommunications
products.
Gross Profit
. Cost
of revenues includes the manufacturing cost of hardware, quality assurance,
overhead related to manufacturing activity and technology licensing fees payable
to third parties. Gross profit decreased to $69.7 million in 2009 from $97.3
million in 2008. Gross profit as a percentage of revenues decreased to 55.4% in
2009 from 55.7% in 2008. The decrease in our gross profit percentage
was primarily attributable to a decline in average selling prices of our
products. The decrease in gross profit was partially offset by the results of
our cost reduction plan implemented in the first quarter of 2009. In addition,
the decrease in gross profit was partially offset by a reduction in
manufacturing costs.
Research and Development Expenses,
net
. Research and development expenses, net consist primarily
of compensation and related costs of employees engaged in ongoing research and
development activities, development-related raw materials and the cost of
subcontractors less grants from the OCS. Research and development expenses
decreased 20.8% to $30.0 million in 2009, from $37.8 million in 2008 and
increased as a percentage of revenues to 23.8% in 2009 from 21.6% in 2008. The
decrease in net research and development expenses on an absolute dollar basis
was primarily due to our cost reduction plans implemented during 2008 and 2009
that reduced the number of research and development personnel and due to a
decrease in stock-based compensation expense to $642,000 in 2009 from $1.5
million in 2008. We expect that research and development expenses will increase
in an absolute dollar basis in 2010 as a result of our continued development of
new products.
Selling and Marketing
Expenses
. Selling and marketing expenses consist primarily of
compensation for selling and marketing personnel, as well as exhibition, travel
and related expenses. Selling and marketing expenses decreased 28.2% in 2009 to
$32.1 million from $44.7 million in 2008. These expenses decreased primarily as
a result of our cost reduction plans implemented during 2008 and 2009 which
reduced the number of personnel in this area and a decrease in the stock-based
compensation expense included in selling and marketing expenses to $913,000 in
2009 compared to $2.0 million in 2008, as well as a $718,000 decrease in
amortization expenses. The decrease in amortization expenses was mainly due to
an intangible asset impairment charge recorded in the fourth quarter of 2008. As
a percentage of revenues, selling and marketing expenses were 25.5% in both 2008
and 2009. We expect that selling and marketing expenses will
increase on an absolute dollar basis in 2010 as a result of an expected increase
in our sales force and marketing activities.
General and Administrative
Expenses
. General and administrative expenses consist
primarily of compensation for finance, human resources, general management,
rent, network and bad debt reserve, as well as insurance and professional
services expenses. General and administrative expenses decreased 15.2% to $7.8
million in 2009 from $9.2 million in 2008. As a percentage of revenues, general
and administrative expenses increased to 6.2% in 2009 from 5.3% in 2008. The
decrease in general and administrative expenses on an absolute dollar basis, was
primarily due to our cost reduction plans implemented during 2008 and 2009 which
reduced the number of our general and administrative personnel. We expect that
general and administrative expenses will increase in absolute dollar terms to
support our expected growth.
65
Impairment of Goodwill and
Intangible Assets
. We review goodwill for impairment annually during the
fourth quarter of the fiscal year or more frequently if events or circumstances
indicate that an impairment loss may have occurred. In the fourth quarter of
fiscal 2008, in connection with the impact of weakening market conditions on our
forecasts and a sustained, significant decline in the market capitalization to a
level lower than our net book value, it was concluded that triggering events
existed and we were required to test intangible assets and goodwill for
impairment, in accordance with ASC 360-10-35 (formerly SFAS 144) "Property,
Plant, and Equipment- Subsequent Measurement" and ASC 350 (formerly FAS 142)
"Intangible, Goodwill and Other". As a result, in the fourth quarter of 2008, we
recorded a goodwill impairment charge of approximately $79.1 million and an
intangible assets impairment charge of $5.9 million. These impairment charges
did not impact our business operations, cash flows or compliance with the
financial covenants in our loan agreements. In 2009, there was no impairment
charge.
Financial Expenses,
Net
. Financial expenses, net consist primarily of interest
derived on cash and cash equivalents, marketable securities, bank deposits and
structured notes, net of interest accrued in connection with our senior
convertible notes and bank loans and bank charges. Financial expenses, net, in
2009 were $2.7 million compared to $3.3 million in 2008. The decrease in
financial expenses, net in 2009 was primarily due to lower interest expense
recorded with respect to our senior convertible notes following the repurchase
of notes in the fourth quarters of 2008 and 2009.
Taxes on
Income
. Income taxes, net, were $290,000 in 2009 compared to
$505,000 in 2008. The decrease is principally attributable to previous year’s
tax refund received in 2009.
Equity in Losses of Affiliated
Companies, Net
. Equity in losses of affiliated companies, net
was $76,000 in 2009 compared to $2.6 million in 2008. The decrease in
these expenses is attributable to consolidating the financial results of NSC
into our operating results starting December 1, 2008. Also, in 2008, these
expenses included an impairment charge of $1.1 million related to an investment
in an affiliate.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues
. Revenues
increased 10.4% to $174.7 million in 2008 from $158.2 million in 2007. The
increase in revenues was primarily due to an increase in revenues from our
networking business.
Gross Profit
. Cost
of revenues includes the manufacturing cost of hardware, quality assurance,
overhead related to manufacturing activity and technology licensing fees payable
to third parties. Gross profit increased to $97.3 million in 2008 from $89.1
million in 2007. Gross profit as a percentage of revenues decreased to 55.7% in
2008 from 56.3% in 2007. The decrease in our gross profit percentage
was primarily attributable to a less favorable product mix in 2008 and a decline
in average selling prices of our products. The decrease in gross profit
percentage was partially offset by the higher sales volume that allowed us to
leverage our manufacturing overhead over a larger sales base as well as a
reduction in manufacturing costs due to a reduction in our raw material costs
and our cost reduction plan implemented in 2008.
66
Research and Development Expenses,
net
. Research and development expenses, net consist primarily
of compensation and related costs of employees engaged in ongoing research and
development activities, development-related raw materials and the cost of
subcontractors less grants from the OCS. Research and development expenses
decreased 7.1% to $37.8 million in 2008, from $40.7 million in 2007 and
decreased as a percentage of revenues to 21.6% in 2008 from 25.7% in 2007. The
decrease in net research and development expenses, both on an absolute and a
percentage basis, was primarily due to our cost reduction plans implemented
during 2007 and 2008 and due to a decrease in stock-based compensation expense
which amounted to $1.5 million in 2008 and $3.0 million in 2007.
Selling and Marketing
Expenses
. Selling and marketing expenses consist primarily of
compensation for selling and marketing personnel, as well as exhibition, travel
and related expenses. Selling and marketing expenses increased 4.1% in 2008 to
$44.7 million from $42.9 million in 2007. These expenses increased because the
effect of the higher value of the NIS compared to the U.S. dollar increased the
cost of expenses denominated in NIS and higher commissions on sales were greater
than the decrease in expenses as a result of our reduction in personnel. As a
percentage of revenues, selling and marketing expenses decreased to 25.5% in
2008 from 27.1% in 2007. The decrease in selling and marketing expenses on a
percentage basis was primarily a result of our revenues increasing at a faster
rate than these expenses and due to a decrease in the stock-based compensation
expense included in selling and marketing expenses which was $2.0 million in
2008 compared to $3.5 million in 2007.
General and Administrative
Expenses
. General and administrative expenses consist
primarily of compensation for finance, human resources, general management,
rent, network and bad debt reserve, as well as insurance and professional
services expenses. General and administrative expenses decreased 4.3% to $9.2
million in 2008 from $9.6 million in 2007. As a percentage of revenues, general
and administrative expenses decreased to 5.3% in 2008 from 6.1% in 2007. The
decrease in general and administrative expenses was primarily due to our cost
reduction plans implemented during 2007 and 2008.
Impairment of Goodwill and
Intangible Assets
. We review goodwill for impairment annually during the
fourth quarter of the fiscal year or more frequently if events or circumstances
indicate that an impairment loss may have occurred. In the fourth quarter of
fiscal 2008, in connection with the impact of weakening market conditions on our
forecasts and a sustained, significant decline in the market capitalization to a
level lower than our net book value, it was concluded that triggering events
existed and we were required to test intangible assets and goodwill for
impairment, in accordance with ASC 360-10-35 (formerly SFAS 144) "Property,
Plant and Equipment- Subsequent Measurement" and ASC 350 (formerly SFAS 142)
"Intangible, Goodwill and Other". As a result, in the fourth quarter of 2008, we
recorded a goodwill impairment charge of approximately $79.1 million and an
intangible assets impairment charge of $5.9 million. These impairment charges do
not impact our business operations, cash flows or compliance with the financial
covenants in our loan agreements. There was no impairment charge in
2007.
67
Financial Expenses,
Net
. Financial expenses, net consist primarily of interest
accrued in connection with our senior convertible notes and bank loans and bank
charges, net of interest derived on cash and cash equivalents, short-term and
long-term marketable securities, short-term and long-term bank deposits and
structured notes, . Financial expenses, net, in 2008 were $3.3 million compared
to $2.2 million in 2007. The increase in financial expenses, net in 2008 was
primarily due to lower interest rates and interest income, net, on the remaining
net proceeds from our sale of senior convertible notes in November 2004 and due
to interest expenses related to bank borrowings in the aggregate amount of $30
million during the second and third quarters of 2008, offset in part by reduced
interest expense as the result of the repurchase of senior convertible notes in
the fourth quarter of 2008.
Taxes on
Income
. Taxes on income were $505,000 in 2008 compared to $1.3
million in 2007. The decrease was principally attributable to a reduction in the
deferred tax liability.
Equity in Losses of Affiliated
Companies, Net
. Equity in losses of affiliated companies, net
was $2.6 million in 2008 compared to $1.1 million in 2007. The
increase in 2008 was primarily due to an impairment charge of $1.1 million
related to an investment in an affiliate.
Impact
of Inflation, Devaluation and Fluctuation of Currencies on Results of
Operations, Liabilities and Assets
Since the
majority of our revenues are paid in or linked to the U.S. dollar, we believe
that inflation and fluctuations in the NIS/U.S. dollar exchange rate have no
material effect on our revenues. However, a majority of the cost of our Israeli
operations, mainly personnel and facility-related, is incurred in
NIS. Inflation in Israel and U.S. dollar exchange rate fluctuations
have some influence on our expenses and, as a result, on our net income. Our NIS
costs, as expressed in U.S. dollars, are influenced by the extent to which any
increase in the rate of inflation in Israel is not offset (or is offset on a
lagging basis) by a devaluation of the NIS in relation to the U.S.
dollar.
To
protect against the changes in value of forecasted foreign currency cash flows
resulting from payments in NIS, we maintain a foreign currency cash flow hedging
program. We hedge portions of our forecasted expenses denominated in foreign
currencies with forward contracts. These measures may not adequately protect us
from material adverse effects due to the impact of inflation in
Israel.
The
following table presents information about the rate of inflation in Israel, the
rate of devaluation of the NIS against the U.S. dollar, and the rate of
inflation in Israel adjusted for the devaluation:
|
Year ended
December 31,
|
Israeli
inflation
rate
%
|
NIS
Devaluation
Rate
%
|
Israeli inflation
adjusted for
devaluation
%
|
|||||||||
|
2007
|
3.4 | (9.0 | ) | 12.4 | ||||||||
|
2008
|
3.8 | (1.1 | ) | 4.9 | ||||||||
|
2009
|
3.9 | (0.7 | ) | 4.6 | ||||||||
|
Five
months ended May 31,
2010
|
0.0 | 1.4 | (1.4 | ) | ||||||||
68
Recent
Accounting Pronouncements
Effective in
2009:
On
January 1, 2009, we adopted an amendment to ASC 810, "Consolidation"
(originally issued as FAS 160). According to the amendment, non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as a separate component of equity in the consolidated
financial statements. As such, changes in the parent's ownership interest with
no change of control are treated as equity transactions, rather than step
acquisitions or dilution gains or losses. The amendment clarifies that losses of
partially owned consolidated subsidiaries shall continue to be allocated to the
non-controlling interests even when their investment was already reduced to
zero.
The
amendment applies prospectively, except for the presentation and disclosure
requirements, which are applied retrospectively to all periods presented. As a
result, upon adoption, we retroactively reclassified the "Minority interests"
balance to be presented in a new caption in total shareholders' equity,
"Non-controlling interest". The adoption also impacted certain captions
previously used in the consolidated statement of operations, largely identifying
net loss including the portion attributable to non-controlling interest and net
loss attributable to AudioCodes' shareholders. This amendment required us to
include the accumulated amount of non-controlling interest as part of
shareholders' equity ($228 at December 31, 2008).
The net
loss amounts we have previously reported are now presented as "Net loss
attributable to AudioCodes' shareholders," and, as required, net loss per share
continue to reflect amounts attributable only to AudioCodes' shareholders.
Similarly, in the statements of changes in shareholders' equity, we
distinguished between equity amounts attributable to AudioCodes' shareholders
and amounts attributable to the non-controlling interest.
In
June 2009, the Financial Accounting Standards Board ("FASB") issued a
standard that established the FASB Accounting Standards
Codification ("ASC") and amended the hierarchy of generally accepted
accounting principles ("GAAP") such that the ASC became the single source of
authoritative U.S. GAAP. Rules and interpretive releases issued by the SEC under
authority of federal securities law are also sources of the authoritative GAAP
for SEC registrants. All other literature is considered non-authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by
the FASB through Accounting Standards Updates ("ASUs"). The ASC is effective
from September 1, 2009. Throughout the notes to the consolidated financial
statements references that were previously made to former authoritative U.S.
GAAP pronouncements have been changed to coincide with the appropriate section
of the ASC.
69
Effective
January 1, 2009, we applied an amendment to ASC 470-20, “Debt with Conversion
and Other Options” (formerly FSP APB 14-1 "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement))". The amended ASC stipulates that issuers of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) should separately account for the liability and equity components of
those instruments by allocating the proceeds from issuance of the instrument
between the liability component (the “Liability Component”) and the embedded
conversion option (the “Equity Component”). This allocation is done by first
determining the carrying amount of the Liability Component based on the fair
value of a similar liability excluding the Equity Component, and then allocating
to the Equity Component the excess of the initial proceeds ascribed to the
convertible debt instrument over the amount allocated to the Liability
Component. That excess is reported as a debt discount and subsequently amortized
as interest cost over the instrument's expected life using the interest method.
The cumulative effect of the change in accounting principle on periods prior to
these presented in the amount of $9,329 is recognized as of January 1, 2007, as
an offsetting adjustment to the opening balance of retained earnings for that
period.
We used
the income approach in order to estimate the value of the Liability Component.
Under the income approach, the fair value of the liability component is
determined based on the present value of the future cash flows using a discount
rate that reflects the required rate of return for the liability. We used the
following assumptions in order to estimate the required rate of return on the
liability component: (1) time to maturity was determined to be 5 years, based on
the assumption that the notes would be redeemed by the investors at their
earliest contractual redemption date, (2) average yeild to maturity was derived
from traded bonds with similar default risk and time to maturity as the
convertible notes, and (3) the default risk was determined by comparing the
Company’s historical financial ratios to those of other companies rated by
Standard & Poor.
Still not
effective:
In
October 2009, the FASB issued an update to ASC 605-25, "Revenue recognition
– Multiple-Element Arrangements", that provides amendments to the criteria for
separating consideration in multiple-deliverable arrangements to:
1) Provide
updated guidance on whether multiple deliverables exist, how the deliverables in
an arrangement should be separated, and how the consideration should be
allocated;
2) Require
an entity to allocate revenue in an arrangement using estimated selling prices
("ESP") of deliverables if a vendor does not have vendor-specific objective
evidence of selling price ("VSOE") or third-party evidence of selling price
("TPE");
70
3) Eliminate
the use of the residual method and require an entity to allocate revenue using
the relative selling price method; and
4) Require
expanded disclosures of qualitative and quantitative information regarding
application of the multiple-deliverable revenue arrangement
guidance.
71
The
mandatory adoption date is January 1, 2011. We may elect to adopt the update
prospectively, to new or materially modified arrangements beginning on the
adoption date, or retrospectively, for all periods presented. We are currently
evaluating the impact of this update on our consolidated results of operations
and financial condition.
In
January 2010, the FASB updated the "Fair Value Measurements Disclosures". More
specifically, this update will require (a) an entity to disclose separately
the amounts of significant transfers in and out of Levels 1 and 2 fair value
measurements and to describe the reasons for the transfers; and
(b) information about purchases, sales, issuances and settlements to be
presented separately (i.e. present the activity on a gross basis rather than
net) in the reconciliation of fair value measurements using significant
unobservable inputs (Level 3 inputs). This update clarifies existing disclosure
requirements for the level of disaggregation used for classes of assets and
liabilities measured at fair value, and requires disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements using Level 2 and Level 3 inputs. As
applicable to us, this update will become effective as of the first interim or
annual reporting period beginning after December 15, 2009, except for the
gross presentation of the Level 3 roll forward information, which is required
for annual reporting periods beginning after December 15, 2010 and for
interim reporting periods within those years. We do not expect that the adoption
of this update will have a material impact on our consolidated financial
statements.
|
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
We have
financed our operations for the last three years, from the remaining proceeds of
our sale of convertible notes, as well as with cash from operations in those
years.
In
November 2004, we raised net proceeds of approximately $120.2 million in a
private placement of $125.0 million aggregate principal amount of our 2.00%
Senior Convertible Notes due 2024. Holders of the notes are entitled
to convert the notes into our ordinary shares at a conversion rate of 53.4474
ordinary shares per $1,000 principal amount of notes, which is the equivalent to
a conversion price of approximately $18.71 per share. The conversion
rate is subject to adjustment in certain circumstances, such as changes in our
capital structure or upon the issuance by us of share dividends or certain cash
distributions. During 2008, we repurchased $51.5 million in principal amount of
our 2% Senior Convertible Notes for a total cost, including accrued interest, of
$50.2 million. In November 2009, we repurchased approximately $73.1 million in
principal amount of the Notes. As of December 31, 2009, there was a
total of $403,000 in principal amount of the Notes outstanding. The remaining
outstanding Notes may be redeemed by us, in whole or in part at any
time. The holders of these outstanding Notes may require us to redeem
the Notes on November 9, 2014 or November 9, 2019, or upon certain fundamental
changes.
In April
and July 2008, we entered into loan agreements with banks in Israel that provide
for borrowings of an aggregate of $30 million. The loans bear interest at an
annual rate equal to LIBOR plus 1.3%-1.5% with respect to $23 million of
borrowings and LIBOR plus 0.5%-0.65% with respect to $7 million of
borrowings. The principal amount borrowed is repayable in 20
equal quarterly payments from August 2008 through July 2013. The banks have a
lien on our assets and we are required to maintain $7 million of compensating
balances with the banks. The agreements require us, among other
things, to maintain shareholders' equity at specified levels and to achieve
certain levels of operating income. The agreements also restrict us from paying
dividends. As of December 31, 2009 and March 31, 2010, we were in compliance
with the covenants contained in the loan agreements.
72
As of
December 31, 2009, we had $52.9 million in cash and cash equivalents, marketable
securities and bank deposits, a decrease of approximately $62.2 million from
$115.1 million at December 31, 2008. The decline in this amount was
primarily attributable to the repurchase of approximately $73.1 million in
principal amount of our Senior Convertible Notes in the fourth quarter of 2009,
offset, in part, by cash provided by operating activities.
In
January 2008, our Board approved a program to repurchase up to 4,000,000 of our
ordinary shares. Purchases would be made from time-to-time at the discretion of
management subject, among other things, to our share price and market
conditions. If management elects to have us purchase our shares, we will use a
portion of our cash to effect these purchases. In 2008, we repurchased a
total of approximately 3.5 million ordinary shares at a total cost of $13.7
million. We did not repurchase any of our ordinary shares in
2009.
Cash
from Operating Activities
Our
operating activities provided cash in the amount of $21.0 million in 2009,
primarily due to a decrease in trade receivables, net, of $11.0 million, a
decrease in inventories of $7.1 million, non-cash depreciation and amortization
expenses of $5.0 million and non-cash amortization of discount and deferred
charges on our senior convertible notes of $2.9 million, offset, in part, by our
net loss, a decrease of $3.5 million in other payables and accrued expenses and
a decrease of $3.1 million in trade payables. Our trade receivables and our
inventories decreased primarily because of our lower sales volume in 2009 than
in 2008. Our trade receivables also decreased because of increased
collection efforts. Our trade payables, other payables and accrued expenses
decreased primarily because of our lower cost of goods sold in 2009 than in 2008
and
implementation
of cost reduction steps and a wage cut in January 2009.
Our
operating activities provided cash in the amount of $16.4 million in 2008,
primarily due to non-cash expenses in the amount of $86.1 million for impairment
charges, $7.4 million for depreciation and amortization, $4.3 million for
stock-based compensation and $1.5 million of equity in losses of affiliated
companies, as well as an increase of $3.1 million in trade and other payables,
offset, in part, by our net loss and a decrease of $3.5 million in trade and
other receivables and an increase of $1.8 million in inventories. Our
trade and other payables increased because of extended payment terms granted to
us by suppliers. Our trade and other receivables decreased because we
had lower revenues in the fourth quarter of 2008 than in the same period in 2007
and because of increased year-end collection efforts. Inventory increased
primarily because of lower than expected revenues in the fourth quarter of
2008.
Our
operating activities provided cash in the amount of $12.4 million in 2007,
primarily due to a decrease of $5.0 million in trade receivables and non-cash
charges of $8.0 million for stock-based compensation and $7.8 million for
depreciation and amortization, offset, in part, by our net loss and a decrease
of $5.1 million in trade and other payables and an increase of $2.6 million in
inventories.
73
Cash
from Investing Activities
In 2009,
our investing activities provided cash in the amount of $60.3 million, primarily
due to the net proceeds from bank deposits and from redemption of marketable
securities on maturity.
In 2008,
our investing activities used cash in the amount of $20.0 million, primarily due
to the excess of our investment in marketable securities and short-term and
long-term bank deposits and payments in connection with the acquisition of CTI
Squared over proceeds from bank deposits and sale and maturity of marketable
securities.
In 2007,
our investing activities provided cash in the amount of $32.7 million, primarily
due to our proceeds from the maturity of marketable securities and structured
notes.
Cash
from Financing Activities
In 2009,
we used cash in financing activities of $79.1 million as a result of $73.1
million used to repurchase our Senior Convertible Notes and $6.0 million used
for repayment of bank loans.
In 2008,
our financing activities used $34.7 million due to $50.2 million used to
repurchase our Senior Convertible Notes and $13.7 million used to
repurchase our ordinary shares offset, in part, by bank borrowings in the
aggregate amount of $30 million.
In 2007,
financing activities provided $4.8 million due to proceeds from issuance of our
shares upon exercise of options and from purchases of our shares under our
Employee Stock Purchase Plans.
Financing
Needs
We
anticipate that our operating expenses will be a material use of our cash
resources for the foreseeable future. We believe that our current
working capital is sufficient to meet our operating cash requirements for at
least the next twelve months, including payments required under our existing
bank loans. Part of our strategy is to pursue acquisition
opportunities. If we do not have available sufficient cash to finance our
operations and the completion of additional acquisitions, we may be required to
obtain additional debt or equity financing. We cannot be certain that we will be
able to obtain, if required, additional financing on acceptable terms or at
all.
|
C.
|
RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES,
ETC.
|
Research
and Development
In order
to accommodate the rapidly changing needs of our markets, we place considerable
emphasis on research and development projects designed to improve our existing
products and to develop new ones. We are developing more advanced communications
boards, analog and digital media gateways for carrier and enterprise
applications, media servers and session border controllers. Our platforms will
feature increased trunk capacity, new functionalities, enhanced signaling
software and compliance with new control protocols. As of December 31, 2009, 248
of our employees were engaged primarily in research and development on a
full-time basis. We also employed 2 employees on a part-time basis.
74
Our
research and development expenses were $30.0 million in 2009 compared to $37.8
million in 2008 and $40.7 million in 2007 . From time to time we have received
royalty-bearing grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the OCS. As a recipient of grants from
the OCS, we are obligated to perform all manufacturing activities for projects
subject to the grants in Israel unless we receive an exemption. Know-how from
the research and development which is used to produce products may not be
transferred to third parties without the approval of the OCS and may further
require significant payments. The OCS approval is not required for the export of
any products resulting from such research or development. Through December 31,
2009, we had obtained grants from the OCS aggregating $8.5 million for certain
of our research and development projects. We are obligated to pay royalties to
the OCS, amounting to 3%-4.5% of the sales of the products and other related
revenues generated from such projects, up to 100% of the grants received, linked
to the U.S. dollar and bearing interest at the rate of LIBOR at the time of
grant. The obligation to pay these royalties is contingent on actual sales of
the products and in the absence of such sales no payment is
required.
|
D.
|
TREND
INFORMATION
|
The
accelerated demand for VoIP technology has impacted our business during the last
few years. Over the past few years, the shift from traditional circuit-switched
networks to next generation packet-switched networks has continued to gain
momentum. As data traffic becomes the dominant factor in communications, service
providers are building and maintaining converged networks for integrated voice
and data services. In addition, underdeveloped markets without basic wire line
service in countries such as China and India and certain countries in Eastern
Europe are beginning to use VoIP technology to deliver voice and data services
that were previously unavailable. In addition, the growth in broadband access
and related technologies has driven the emergence of alternative service
providers. This in turn stimulates competition with incumbent providers,
encouraging them to adopt voice over packet technologies. The entry of new
industry players and the demand for new equipment have impacted our business in
the last few years.
In 2009,
we continued to experience pressure to shorten our lead times in supplying
products to customers. Some of our customers are implementing “demand pull”
programs by which they only purchase our product very close to the time, if not
simultaneously with the time, they plan to sell their product. We are increasing
our sales efforts in new markets, such as Latin America, Eastern Europe and Far
East. We have introduced new system level products, and applications in our
product lines. We are still experiencing low visibility into customer
demand for our products and our ability to predict our level of
sales.
|
E.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
We do not
have any “off-balance sheet arrangements” as this term is defined in Item 5E of
Form 20-F.
75
|
F.
|
TABULAR
DISCLOSURE OF CONTRACTUAL
OBLIGATIONS
|
As of
December 31, 2009, our contractual obligations were as follows (in
thousands):
|
PAYMENTS
DUE BY PERIOD
|
||||||||||||||||||||
|
LESS THAN
1 YEAR
|
1-3
YEARS
|
3-5
YEARS
|
MORE
THAN 5
YEARS
|
TOTAL
|
||||||||||||||||
|
Senior
convertible notes
|
403 | 403 | ||||||||||||||||||
|
Bank
loans
|
6,000 | 15,750 | 21,750 | |||||||||||||||||
|
Rent
and lease commitments
|
4,686 | 11,770 | 4,813 | 12,901 | 34,170 | |||||||||||||||
|
Severance
pay fund (1)
|
1,101 | |||||||||||||||||||
|
Uncertain
tax positions (2)
|
322 | |||||||||||||||||||
|
Office
of the Chief Scientist
|
8,715 | 8,715 | ||||||||||||||||||
|
Other
commitments
|
930 | – | – | – | 930 | |||||||||||||||
(1) Our
obligation for accrued severance pay under Israel’s Severance Pay Law as of
December 31, 2009 was $13.3 million. This obligation is payable only upon
termination, retirement or death of the respective employee. We have funded
$12.2 million through deposits into severance pay funds, leaving a net
obligation of approximately $1.1 million.
(2)
Uncertain income tax position under ASC 740 (formerly FASB Interpretation No
48), “Income Taxes”, are due upon settlement and we are unable to reasonably
estimate the ultimate amount of timing of settlement. See also Note 14f in our
Consolidated Financial Statements for further information regarding our
liability under ASC 740.
|
|
ITEM
6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
The
following table sets forth certain information with respect to our directors,
senior executive officers and key employees at June 15, 2010:
|
Name
|
Age
|
Position
|
||
|
Shabtai
Adlersberg
|
57
|
Chairman
of the Board, President, Chief Executive Officer and Interim Chief
Financial Officer
|
||
|
Lior
Aldema
|
44
|
Chief
Operating Officer
|
||
|
Jeffrey
Kahn
|
52
|
Chief
Strategy Officer
|
||
|
Eyal
Frishberg
|
52
|
Vice
President, Operations
|
||
|
Eli
Nir
|
44
|
Vice
President, Research and Development
|
||
|
Yehuda
Hershkovici
|
43
|
Vice
President, Systems
|
||
|
Tal
Dor
|
41
|
Vice
President, Human Resources
|
||
|
Gary
Drutin
|
49
|
Vice
President, Global Sales
|
||
|
Joseph
Tenne(1)(2)(3)
|
54
|
Director
|
||
|
Dr.
Eyal Kishon(1)(2)(3)
|
49
|
Director
|
||
|
Doron
Nevo(1)(2)(3)
|
54
|
Director
|
||
|
Osnat
Ronen(1)(2)
|
48
|
Director
|
(1)
Member of Audit Committee
(2)
Member of Nominating Committee
(3)
Member of Compensation Committee
76
Shabtai Adlersberg
co-founded
AudioCodes in 1993, and has served as our Chairman of the Board, President and
Chief Executive Officer since inception. He has also acted as our Interim Chief
Financial Officer since May 1, 2010. Mr. Adlersberg co-founded DSP Group, a
semiconductor company, in 1987. From 1987 to 1990, Mr. Adlersberg served as the
Vice President of Engineering of DSP Group, and from 1990 to 1992, he served as
Vice President of Advanced Technology. As Vice President of Engineering, Mr.
Adlersberg established a research and development team for digital cellular
communication which was spun-off in 1992 as DSP Communications. Mr. Adlersberg
also serves as Chairman of the Board of Directors of Natural Speech
Communication Ltd. and as a director of MailVision Ltd and CTI Squared Ltd. Mr.
Adlersberg holds an M.Sc. in Electronics and Computer Engineering from Tel Aviv
University and a B.Sc. in Electrical Engineering from the Technion-Israel
Institute of Technology, or the Technion.
Lior Aldema
has served as
Chief Operating Officer since January 2010 and previously served as our Vice
President, Product Management from 2002 until 2009, as well as our Vice
President Marketing from February 2003 until 2009. He has been employed by us
since 1998, when he was team leader and later headed our System Software Group
in our research and development department. Prior to 1998, Mr. Aldema served as
an officer in the Technical Unit of the Intelligence Corps of the Israeli
Defense Forces (Major), heading both operational units and large development
groups related to various technologies. Mr. Aldema holds an M.B.A. from Tel Aviv
University and a B.Sc. from the Technion.
Jeffrey Kahn
has served as
our Chief Strategy Officer since January 2010. Prior to joining us, Mr. Kahn
served as Founder and Managing Director of Strategy3i, a global consultancy that
he established in 2007 to provide counseling to leading global companies,
including Pfizer, Unicredit and Renova, among others. From 2005 to 2007, Mr.
Kahn served as a director of investment banking at Maxim Group LLC, and from
1995 to 2005 he served as the Chief Strategic Officer of Ruder Finn
International, one of the world’s largest and oldest independent global
communications firms. Mr. Kahn holds a B.A. in international
relations and psychology from Brooklyn College and has done graduate studies in
international relations and psychology at Tel Aviv University.
77
Eyal Frishberg
has served as
our Vice President, Operations since October 2000. From 1997 to 2000, Mr.
Frishberg served as Associate Vice President, SDH Operations in ECI Telecom
Ltd., a major telecommunication company. From 1987 to 1997, Mr. Frishberg worked
in various operational positions in ECI Telecom including as manager of ECI
production facility and production control. Mr. Frishberg worked from 1994 until
1997 for ELTA company, part of Israeli Aircraft Industries in the planning and
control department. Mr. Frishberg holds a B.Sc. in Industrial Engineering from
Tel Aviv University and an M.B.A. from Ben-Gurion University of the
Negev.
Eli Nir
has served as our
Vice President, Research and Development since April 2001. He has been employed
by us since 1996, when he founded and headed our System Software Group in our
research and development department. Prior to 1996, Mr. Nir served as an officer
in the Technical Unit of the Intelligence Corps of the Israeli Defense Forces
(Major), heading both operational units and large development groups mostly
related to digital processing. Mr. Nir holds an M.B.A. and an M.Sc. from Tel
Aviv University in Digital Speech Processing and a B.Sc. from the
Technion.
Yehuda Hershkovici
has served
as our Vice President, Systems Group since 2003. From 2001 to 2003, Mr.
Hershkovici served as our Vice President, Advanced Products. From 2000 to 2001,
Mr. Hershkovici served as our Director of Advanced Technologies. From 1994 to
1998 and during 1999, Mr. Hershkovici held a variety of research and development
positions at Advanced Recognition Technologies, Ltd., a voice and handwriting
recognition company, heading its research and development from 1999 to 2000 as
Vice President, Research and Development. From 1998 to 1999, Mr. Hershkovici was
engaged in developing various wireless communication algorithms at Comsys, a
telecommunications company. Mr. Hershkovici holds an M.Sc. and a B.Sc., from the
Technion both in the area of telecommunications.
Tal Dor
has served as our
Vice President of Human Resources since March 2000. Prior to March 2000, Ms. Dor
acted for several years as a consultant in Israel to, among others, telephone
and cable businesses, as well as health and social service organizations. Ms.
Dor holds a B.A. in psychology, from Ben-Gurion University of the Negev and an
M.A. in psychology from Tel Aviv University.
Gary Drutin
currently serves
as our Vice President of Global Sales. Mr. Drutin was the Vice
President of Sales for Europe, Middle East and Latin America from 2005 until
2007 and Vice President of Channel Operations and Marketing from 2004 until
2005. From 2001 until 2004, Mr. Drutin was Country Manager and
General Manager for Cisco Israel, Cyprus and Malta and from 1997 until 2001
served as regional sales manager for service providers and enterprises for Cisco
Israel. From 1990 until 1997, he served in sales management roles at Digital
Equipment Corporation Israel. Mr. Drutin holds an M.B.A degree from Tel-Aviv
University in Information Systems and Marketing and a B.Sc. degree in Computer
Engineering from the Technion.
Joseph Tenne
has served as
one of our directors since June 2003. Mr. Tenne is currently the Chief Financial
Officer of Ormat Technologies, Inc., a company listed on the New York Stock
Exchange, which is engaged in the geothermal and recovered energy business.
Since January 2006, Mr. Tenne has also served as the Chief Financial Officer of
Ormat Industries Ltd., an Israeli holding company listed on the Tel-Aviv Stock
Exchange and the parent company of Ormat Technologies, Inc. From 2003
to 2004, Mr. Tenne was the Chief Financial Officer of Treofan Germany GmbH &
Co. KG, a German company, which is engaged in the development, production and
marketing of oriented polypropylene films, which are mainly used in the food
packaging industry. From 1997 until 2003, Mr. Tenne was a partner in Kesselman
& Kesselman, Certified Public Accountants in Israel and a member of
PricewaterhouseCoopers International Limited. Mr. Tenne holds a B.A. in
Accounting and Economics and an M.B.A. from Tel Aviv University. Mr. Tenne is
also a Certified Public Accountant in Israel.
78
Dr. Eyal Kishon
has served as
one of our directors since 1997. Since 1996, Dr. Kishon has been
Managing Partner of Genesis Partners, an Israel-based venture capital
fund. From 1993 to 1996, Dr. Kishon served as Associate Director of
Dovrat-Shrem/Yozma-Polaris Fund Limited Partnership. Prior to that,
Dr. Kishon served as Chief Technology Officer at Yozma Venture Capital from 1992
to 1993. Dr. Kishon serves as a director of Allot Communications Ltd
and Celtro Inc. From 1991 to 1992, Dr. Kishon was a Research Fellow
in the Multimedia Department of IBM Science & Technology. From
1989 to 1991, Dr. Kishon worked in the Robotics Research Department of AT&T
Bell Laboratories. Dr. Kishon holds a B.A. in Computer Science from
the Technion – Israel Institute of Technology and an M.Sc. and a Ph.D. in
Computer Science from New York University.
Doron Nevo
has served as one
of our directors since 2000. Mr. Nevo is President and CEO of
KiloLambda Technologies Ltd., an optical subsystems company, which he co-founded
in 2001. From 1999 to 2001, Mr. Nevo was involved in fund raising
activities for Israeli-based startup companies. From 1996 to 1999,
Mr. Nevo served as President and CEO of NKO, Inc. Mr. Nevo
established NKO in early 1995 as a startup subsidiary of Clalcom,
Ltd. NKO designed and developed a full scale, carrier grade, IP
telephony system platform and established its own IP network. From
1992 to 1996, Mr. Nevo was President and CEO of Clalcom Ltd. Mr. Nevo
established Clalcom in 1992 as a telecom service provider in
Israel. He also serves on the board of a number of companies,
including Utility Wireless Corp. (a manufacturer of radio frequency
sub-systems), Elcom Technologies (manufacturer of Satcom and digital radio
synthesizers), Notox, Ltd. (a biotech company), BioCancell, Inc. and Bank
Adanim. Mr. Nevo holds a B.Sc. in Electrical Engineering from the
Technion – Israel Institute of Technology and an M.Sc. in Telecommunications
Management from Brooklyn Polytechnic.
Osnat Ronen
has served as one
of our directors since December 2007. Ms. Ronen has served as General Partner of
Viola Private Equity since January 2008. From 2001 until 2007, Ms.
Ronen was the Deputy Chief Executive Officer of Leumi & Co. Investment
House, the private equity investment arm and investment banking services arm of
the Leumi Group. Prior to this position, she was Deputy Head of the
Subsidiaries Division of Leumi Group from 1999 until 2001. Ms. Ronen
serves as a director of Leumi Leasing and Investments Ltd., National Consultants
(Netconsultant) Ltd., Fox-Wizel Ltd., Paz Oil Company Ltd. and Keshet
Broadcasting Ltd. Ms. Ronen received an M.B.A. degree and a BSc
degree in mathematics and computer science from the Tel Aviv
University.
|
B.
|
COMPENSATION
|
The
aggregate direct remuneration paid during the year ended December 31, 2009 to
the 14 persons who served in the capacity of director, senior executive officer
or key employee during 2009 was approximately $2.6 million, including
approximately $308,000 which was set aside for pension and retirement benefits.
Two of the persons who were officers in 2009 are no longer employed by us. The
compensation amounts do not include amounts expended by us for automobiles made
available to our officers, expenses (including business, travel, professional
and business association dues and expenses) reimbursed to officers and other
fringe benefits commonly reimbursed or paid by companies in Israel.
79
Stock
options to purchase our ordinary shares granted to persons who served in the
capacity of director or executive officer under our 1997, 1999 and 2008 Stock
Option Plans are generally exercisable at the fair market value at the date of
grant, and expire ten years (under the 1997 Plan) and seven years (under the
1999 Plan and the 2008 Plan), respectively, from the date of grant. The options
are generally exercisable in four equal annual installments, commencing one year
from the date of grant.
As of
December 31, 2009, both the 1997 and 1999 Stock Option Plans had expired
and no options are available for future grants under these plans.
A summary
of our stock option activity and related information for the years ended
December 31, 2007, 2008 and 2009 for the 14 persons who served in the capacity
of director, senior executive or key employee officer during 2009 is as
follows:
|
2007
|
2008
|
2009
|
||||||||||||||||||||||
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
|
Outstanding
at the beginning of the year
|
1,842,269 | $ | 9.72 | 2,002,269 | $ | 7.54 | 1,778,269 | $ | 7.66 | |||||||||||||||
|
Granted
|
352,500 | $ | 6.42 | 85,000 | $ | 3.25 | 483,577 | $ | 1.42 | |||||||||||||||
|
Cancelled
|
(176,000 | ) | (225,000 | ) | (358,418 | ) | ||||||||||||||||||
|
Exercised
|
(16,500 | ) | $ | 2.31 | (84,000 | ) | $ | 2.23 | (37,500 | ) | $ | 0 | ||||||||||||
|
Outstanding
at the end of the year
|
2,002,269 | $ | 7.54 | 1,778,269 | $ | 7.66 | 1,865,928 | $ | 6.44 | |||||||||||||||
As of
December 31, 2009, options to purchase 1,262,351 ordinary shares were
exercisable by the 14 persons who served as an officer or director during 2009
at an average exercise price of $8.21 per share.
Under the
Israeli Companies Law, the compensation arrangements for officers who are not
directors require the approval of the board of directors, unless the articles of
association provide otherwise. Our articles of association do not
provide otherwise. Arrangements regarding the compensation of directors require
the approval of the audit committee, the board and the shareholders, in that
order.
80
|
C.
|
BOARD
PRACTICES
|
Corporate
Governance Practices
We are
incorporated in Israel and therefore are subject to various corporate governance
practices under the Israeli Companies Law, 1999, or the Companies Law, relating
to such matters as outside directors, the audit committee, the internal auditor
and approvals of interested party transactions. These matters are in
addition to the ongoing listing conditions of the Nasdaq Global Select
Market and other
relevant provisions of U.S. securities laws. Under the Nasdaq rules,
a foreign private issuer may generally follow its home country rules of
corporate governance in lieu of the comparable Nasdaq requirements, except for
certain matters such as composition and responsibilities of the audit committee
and the independence of its members. For further information, see
“Item 16G – Corporate Governance.”
Independent
Directors
Under the
Israeli Companies Law, Israeli companies that have offered securities to the
public in or outside of Israel are required to appoint at least two “outside”
directors. Doron Nevo, Dr. Eyal Kishon and Osnat Ronen currently serve as our
outside directors. Under the requirements for listing on the Nasdaq Global
Select Market, a majority of our directors are required to be independent as
defined by Nasdaq rules. Doron Nevo, Dr. Eyal Kishon, Osnat Ronen and
Joseph Tenne qualify as independent directors under the applicable Securities
and Exchange Commission and Nasdaq rules.
To
qualify as an outside director under Israeli law, an individual or his or her
relatives, partners, employers or entities under the person's control may not
have, and may not have had at any time during the previous two years, any
affiliation, as such term is defined in the Companies Law, with the company or
any entity controlling, controlled by or under common control with the company.
In addition, no individual may serve as an outside director if the individual’s
position or other activities create or may create a conflict of interest with
his or her role as an outside director or are likely to interfere with his or
her ability to serve as a director. For a period of two years from termination
from office, a former outside director may not serve as a director or employee
of the company or provide professional services to the company for
consideration. Pursuant to the Israeli Companies Law, at least one of the
outside directors appointed by a publicly-traded company must have “financial
and accounting expertise.” The other outside directors are required to possess
“financial and accounting expertise” or “professional expertise,” as these terms
are defined in regulations promulgated under the Companies Law. Joseph Tenne is
designated as the audit committee’s financial expert.
The
outside directors must be elected by the shareholders, including at least
one-third of the shares of non-controlling shareholders voted on the matter.
However, the outside directors can be elected by shareholders without this
one-third approval if the total shares of non-controlling shareholders voted
against the election do not represent more than one percent of the voting rights
in the company. The term of an outside director is three years and may be
extended for additional three-year terms. An outside director can be removed
from office only under very limited circumstances. All of the outside directors
must serve on a company’s statutory audit committee and each other committee of
a company’s board of directors is required to include at least one outside
director. If, at the time an outside director is elected, all current members of
the board of directors are of the same gender, then the elected outside director
must be of the other gender.
81
Pursuant
to an amendment to the Israeli Companies Law, an Israeli company whose shares
are publicly traded may elect to adopt a provision in its articles of
association pursuant to which a majority of its board of directors will
constitute individuals complying with certain independence criteria prescribed
by the Israeli Companies Law. We have not included such a provision
in our articles of association since our board of directors complies with the
independence requirements of the Nasdaq and Securities and Exchange Commission
regulations described above.
Audit
Committee
Under the
Companies Law and the requirements for listing on the Nasdaq Global Select
Market, our board of directors is required to appoint an audit committee. Our
audit committee must be comprised of at least three directors, including all of
the outside directors. The audit committee consists of: Dr. Eyal Kishon, Doron
Nevo, Joseph Tenne and Osnat Ronen. Our board of directors has determined that
Joseph Tenne is an “audit committee financial expert” and that all members of
the Audit Committee are independent under the applicable Securities and Exchange
Commission and Nasdaq rules.
The audit
committee may not include the chairman of the board of directors, a controlling
shareholder and the members of his immediate family, or any director who is
employed by the company or provides services to the company on a regular basis.
Under Israeli law, the role of the audit committee is to examine flaws in our
business management, in consultation with the internal auditor and the
independent accountants, and to propose remedial measures to the board. The
audit committee also reviews for approval transactions between us and office
holders or interested parties, as described below.
We have
adopted an audit committee charter as required by Nasdaq rules. Our audit
committee assists the board of directors in fulfilling its responsibility for
oversight of the quality and integrity of our accounting, auditing and financial
reporting practices and financial statements and the independence qualifications
and performance of our independent auditors. The audit committee also has the
authority and responsibility to oversee our independent auditors, to recommend
for shareholder approval the appointment and, where appropriate, replacement of
our independent auditors and to pre-approve audit fees and all permitted
non-audit services and fees.
Nominating
Committee
Nasdaq
rules require that director nominees be selected or recommended for the board’s
selection either by a committee composed solely of independent directors or by a
majority of independent directors. Our Nominating Committee assists
the board of directors in its selection of individuals as nominees for election
to the board of directors and/or to fill any vacancies or newly created
directorships on the board of directors. The Nominating Committee
consists of Dr. Eyal Kishon, Doron Nevo, Joseph Tenne and Osnat
Ronen. All members of the Nominating Committee are independent under
the applicable Nasdaq rules.
82
Compensation
Committee
Nasdaq
rules also provide that the compensation of a company’s chief executive officer
and other executive officers is required to be approved either by a majority of
the independent directors on the board of directors or a committee comprised
solely of independent directors. Our board of directors has appointed Dr. Eyal
Kishon, Doron Nevo and Joseph Tenne to serve on our Compensation Committee of
the board of directors. All members of the Compensation Committee are
independent under the applicable Nasdaq rules
.
Internal
Auditor
Under the
Companies Law, our board of directors is also required to appoint an internal
auditor proposed by the audit committee. The internal auditor may be our
employee, but may not be an interested party or office holder, or a relative of
any interested party or office holder, and may not be a member of our
independent accounting firm. The role of the internal auditor is to examine,
among other things, whether our activities comply with the law and orderly
business procedure. Brightman, Almagor Zohar & Co. (a member firm of
Deloitte & Touche in Israel) was appointed as our internal auditor in
November 2008. Previously, Eitan Hashachar CPA had been our internal auditor
since January 2001.
Board
Classes
Pursuant
to our articles of association, our directors, other than our outside directors,
are classified into three classes (classes I, II and III). The members of each
class of directors and the expiration of the term of office is as
follows:
|
Vacant
|
Class
I
|
2010
|
|
Joseph
Tenne
|
Class
II
|
2011
|
|
Shabtai
Adlersberg
|
Class
III
|
2012
|
We
currently do not have a Class I director.
Our
outside directors under the Companies Law, Doron Nevo, Dr. Eyal Kishon and Osnat
Ronen, are not members of any class and serve in accordance with the provisions
of the Companies Law. Mr. Nevo’s term ends in 2012, Dr. Kishon’s term ends in
2011, and Ms. Ronen’s term ends in 2010.
|
D.
|
EMPLOYEES
|
We had
the following number of employees as of December 31, 2007, 2008 and 2009 in the
areas set forth in the table below:
83
|
As of December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Research
and development
|
296 | 249 | 248 | |||||||||
|
Sales
& marketing, technical service & support
|
249 | 209 | 201 | |||||||||
|
Operations
|
99 | 92 | 88 | |||||||||
|
Management
and administration
|
44 | 45 | 41 | |||||||||
| 688 | 595 | 578 | ||||||||||
Our
employees were located in the following areas as of December 31, 2007, 2008 and
2009.
|
As of December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Israel
|
425 | 382 | 384 | |||||||||
|
United
States
|
197 | 151 | 125 | |||||||||
|
Europe
|
29 | 27 | 26 | |||||||||
|
Far
East
|
31 | 28 | 36 | |||||||||
|
Latin
America
|
6 | 7 | 7 | |||||||||
| 688 | 595 | 578 | ||||||||||
The
decrease in the number of employees in 2008 and 2009 was primarily attributable
to our cost reduction plans implemented in 2007 and 2008. In 2009, salary
reduction measures were taken with respect to our employees
worldwide.
Israeli
labor laws and regulations are applicable to our employees in Israel. These laws
principally concern matters such as paid annual vacation, paid sick days, length
of the workday, pay for overtime, insurance for work-related accidents,
severance pay and other conditions of employment. Israeli law generally requires
severance pay, which may be funded by Manager’s Insurance, described below, upon
the retirement or death of an employee or termination of employment without
cause (as defined under Israeli law). Furthermore, Israeli employees and
employers are required to pay predetermined sums to the National Insurance
Institute, which include payments for national health insurance. The payments to
the National Insurance Institute currently range from approximately 5% to 17% of
wages up to specified wage levels, of which the employee contributes
approximately 65% and the employer contributes approximately 35%.
Our
employees are subject to certain provisions of the collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and the
Coordination Bureau of Economic Organizations (including the Industrialists
Associations) by order of the Israeli Minister of Industry, Trade and Labor.
These provisions principally concern cost of living increases, recreation pay
and other conditions of employment. We generally provide our employees with
benefits and working conditions above the required minimums. Our employees, as a
group, are not currently represented by a labor union. To date, we have not
experienced any work stoppages.
84
Pursuant
to an order issued in December 2007 by the Israeli Minister of Industry, Trade
and Labor, new provisions relating to pension arrangements in the collective
bargaining agreements between the Histadrut and the Coordination Bureau of
Economic Organizations will apply to all employees in Israel, including our
employees in Israel. We regularly contribute to a “Manager’s Insurance Fund” or
to a privately managed pension fund on behalf of our employees located in
Israel. These funds provide employees with a lump sum payment upon retirement
(or a pension, in case of a pension fund) and severance pay, if legally entitled
thereto, upon termination of employment. We provide for payments to a Manager’s
Insurance Fund and pension fund contributions in the amount of 13.3% of an
employee’s salary on account of severance pay and provident payment or pension,
with the employee contributing 5.0% of his salary. We also pay an additional
amount of up to 2.5% of certain of our employees’ salaries in connection with
disability payments. In addition, we administer an Education Fund for our
Israeli employees and pay 7.5% of these employees’ salaries thereto, with the
employees contributing 2.5% of their salary.
|
|
E.
|
SHARE
OWNERSHIP
|
The
following table sets forth the share ownership and outstanding number of options
of our directors and officers as of June 15, 2010.
|
Name
|
Total Shares
Beneficially
Owned
|
Percentage of
Ordinary Shares
|
Number of
Options
|
|||||||||
|
Shabtai
Adlersberg
|
5,572,576 | 13.8 | % | 277,514 | ||||||||
|
Eyal
Frishberg
|
* | * | ||||||||||
|
Eli
Nir
|
* | * | ||||||||||
|
Lior
Aldema
|
* | * | ||||||||||
|
Yehuda
Hershkovici
|
* | * | ||||||||||
|
Tal
Dor
|
* | * | ||||||||||
|
Gary
Drutin
|
* | * | ||||||||||
|
Jeff
Kahn
|
* | * | ||||||||||
|
Joseph
Tenne
|
* | * | ||||||||||
|
Dr.
Eyal Kishon
|
* | * | ||||||||||
|
Doron
Nevo
|
* | * | ||||||||||
|
Osnat
Ronen
|
* | * | ||||||||||
|
*Less
than one percent.
|
||||||||||||
Our
officers and directors have the same voting rights as our other
shareholders.
85
The
following tables sets forth information with respect to the options to purchase
our ordinary shares held by Mr. Adlersberg as of June 15, 2010. In addition, on
December 14, 2009, we granted to Mr. Adlersberg restricted share units that will
enable him to receive 40,269 of our ordinary shares subject to his continuing
service to us. These shares vest quarterly over a four-year period from the date
of grant. As of June 15, 2010, 5,031 of these shares had vested.
|
Number of
Options
|
Grant Date
|
Exercise
Price
|
Exercised
|
Cancelled
|
Vesting
|
Expiration Date
|
|||||||||
|
275,000
|
September
23, 2004
|
$ | 12.84 | - | - |
5
years
|
September
23, 2011
|
||||||||
|
120,808
|
December
14, 2009
|
$ | 2.57 | - | - |
4
years
|
December
14, 2016
|
||||||||
Employee Share Plans
We have Employee Share Purchase Plans
for the sale of shares to our employees and Employee Share Option Plans for the
granting of options to our employees, officers, directors and consultants. Most
of these plans are pursuant to the Israeli Income Tax Ordinance, entitling the
beneficiaries who are our employees to tax benefits under Israeli law. There are
various conditions that must be met in order to qualify for these benefits,
including registration of the options in the name of a trustee for each of the
beneficiaries who is granted options. For tax benefits each option,
and any ordinary shares acquired upon the exercise of the option, must be held
by the trustee at least for a period commencing on the date of grant and ending
no later than 24 months after the date of grant, in accordance with the period
of time specified by Section 102 of Israel’s Income Tax Ordinance, and deposited
in trust with the trustee.
Employee
Share Purchase Plans
We implemented two
Employee Share Purchase Plans in May 2001. One plan, the global plan, was for
our non-U.S., employees and the other our U.S. employees. We amended
and restated the global plan in July 2007 and adopted an additional plan for
U.S. employees in July 2007. Under these Plans, a maximum of 6,500,000 of our
ordinary shares were reserved for sale to our employees at a price equal to 85%
of the lesser of fair market value on the first day or last day of each offering
period under the Plans. As of December 31, 2008, we had issued
2,259,776 of our ordinary shares pursuant to purchases under these
plans.
During 2008, our Board of Directors
decided to suspend operation of the Employee Share Purchase Plans.
Employee
Share Option Plans
2008
Equity Incentive Plan.
We have adopted an equity incentive
plan under Section 102 of the Israeli Income Tax Ordinance, or
Section 102, which provides certain tax benefits in connection with
share-based compensation to employees, officers and directors. This
plan, our 2008 Equity Incentive Plan, was approved by the Israeli Tax
Authority
.
86
Under our
equity incentive plan, we may grant our directors, officers and employees
restricted shares, restricted share units and options to purchase our ordinary
shares under Section 102. We may also grant other persons awards
under our equity incentive plan. However, such other persons
(controlling shareholders and consultants) will not enjoy the tax benefits
provided by Section 102. The total number of ordinary shares
that were originally available for grant under the 2008 Plan was
2,009,122. This number is reduced by one share for each option we grant
under the 2008 Plan. During 2009, options to purchase 1,054,308 ordinary
shares and 40,269 restricted share units were granted under the 2008 Plan. As a
result, as of December 31, 2009, 914,545 ordinary shares remained available for
grant under the 2008 Plan.
The
Israeli Tax Authority approved the 2008 Plan under the capital gains tax track
of Section 102. Based on Israeli law currently in effect and the
election of the capital gains tax track, and provided that options, restricted
shares and restricted shares units granted or, upon their exercise or vesting,
the underlying shares, issued under the plan are held by a trustee for the two
years following the date in which such awards are granted, our employees,
officers and directors will be (i) entitled to defer any taxable event with
respect to the awards until the underlying ordinary shares are sold, and
(ii) subject to capital gains tax of 25% on the sale of the
shares. However, if we grant awards at a value below the underlying
shares' market value at the date of grant, the 25% capital gains tax rate will
apply only with respect to capital gains in excess of the underlying shares'
market value at the date of grant and the remaining capital gains will be taxed
at the grantee's regular tax rate. We may not recognize a tax benefit
pertaining to the employees' restricted shares, restricted share units and
options for tax purposes except in the events described above under which the
gain is taxed at the grantee's regular tax rate.
Restricted
shares, restricted share units and options granted under the 2008 Plan will
generally vest over four years from the grant date. If the employment
of an employee is terminated for any reason, the employee (or in the case of
death, the designated beneficiary) may exercise his or her vested options within
ninety days of the date of termination (or within twelve months of the date of
termination in the case of death or disability) and shall be entitled to any
rights upon vested restricted shares and vested restricted share units to be
delivered to the employee to the extent that they were vested prior to the date
his or her employment terminates. Directors are generally eligible to exercise
his or her vested options within twelve months from the date the director ceases
to serve on the board of directors.
1999 Option
Plans
. In 1999, our board restated three 1997 Employee Share Option Plans
for our Israeli employees, officers, directors and consultants and two 1997
Share Option Plans for our U.S. employees, officers, directors and consultants.
Additionally, in 1999 our board adopted an Employee Share Option Plan for our
Israeli employees, officers, directors and consultants, and an Employee Share
Option Plan for our U.S. employees, officers, directors and consultants. The
terms of the 1999 Plans are substantially the same as those of the 1997 Plans,
but have reduced the exercise period of options from 10 to 7 years. The board
has the ability to grant options with longer or shorter terms. The terms of the
1999 Plans have been modified slightly since they were adopted and, in 2003, the
Israeli Plan was changed to conform to amendments to the Israeli Income Tax law.
As of December 31, 2008, options to purchase a total of 4,976,067 shares are
outstanding under the 1997 and 1999 Israeli Plans and options to purchase a
total of 1,380,470 shares are outstanding under the 1997 U.S. Plan. As of
December 31, 2008, the 1997 and 1999 Israeli Plans and the 1997 U.S. Plans have
expired and we will no longer make any grants under these plans.
87
The
holders of options under all of the plans are responsible for all personal tax
consequences relating to the options. The exercise prices of the options are
based on the fair value of the ordinary shares at the time of grant as
determined by our board of directors. The current practice of our board of
directors is to grant options with exercise prices that equal 100% of the
closing price of our ordinary shares on the applicable date of
grant.
|
|
ITEM
7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
|
|
A.
|
MAJOR
SHAREHOLDERS
|
To our
knowledge, (A) we are not directly or indirectly owned or controlled (i) by
another corporation or (ii) by any foreign government and (B) there are no
arrangements, the operation of which may at a subsequent date result in a change
in control of AudioCodes. The following table sets forth, as of June 15, 2010,
the number of our ordinary shares, which constitute our only outstanding voting
securities, beneficially owned by (i) all shareholders known to us to own more
than 5% of our outstanding ordinary shares, and (ii) all of our directors and
senior executive officers as a group.
|
Identity of Person or Group
|
Amount Owned
|
Percent of Class
|
||||||
|
Shabtai
Adlersberg
(1)
|
5,850,090 | 14.4 | % | |||||
|
Leon
Bialik
(2
)
|
4,079,322 | 10.1 | % | |||||
|
Rima
Management, LLC
(3)
|
2,978,592 | 7.4 | % | |||||
|
All
directors and senior executive officers as a group (11 persons)
(4)
|
6,669,024 | 16.4 | % | |||||
|
(1)
|
Includes
options to purchase 275,000 shares, exercisable within sixty days of June
15, 2010 and 2,514 restricted shares units that vest within sixty days of
June 15, 2010.
|
|
(2)
|
The
information is derived from a statement on Schedule 13G/A, dated February
8, 2010 of Leon Bialik filed with the Securities and Exchange
Commission.
|
|
(3)
|
The
information is derived from a statement on Schedule 13G, dated February
16, 2010, of Rima Management, LLC and Richard Mashaal filed with the
Securities and Exchange Commission.
|
|
(4)
|
Includes
1,096,448 ordinary shares which may be purchased pursuant to options
exercisable within sixty days following June 15, 2010 and
restricted shares units that vest within 60 days of June 15,
2010.
|
Mr.
Adlersberg held 14.4% of our ordinary shares as of December 31, 2009, as
compared to 14.3% of our ordinary shares as of December 31, 2008 and 13.9% of
our ordinary shares as of December 31, 2007.
88
Mr.
Bialik held 10.1% of our ordinary shares as of December 31, 2009 as compared to
10.2% of our ordinary shares as of December 31, 2008 and 9.8% of our ordinary
shares as of December 31, 2007.
Rima
Management, LLC held 7.4% of our ordinary shares as of December 31, 2009 as
compared to 7.2% of our ordinary shares as of December 31, 2008 and less than
5.0% of our ordinary shares as of December 31, 2007.
As of
June 15, 2010, there were approximately 21 holders of record of our ordinary
shares in the United States, although we believe that the number of beneficial
owners of the ordinary shares is significantly greater. The number of record
holders in the United States is not representative of the number of beneficial
holders nor is it representative of where such beneficial holders are resident
since many of these ordinary shares were held of record by brokers or other
nominees.
The major
shareholders have the same voting rights as the other shareholders.
|
B.
|
RELATED
PARTY TRANSACTIONS
|
None.
|
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
|
|
ITEM
8.
|
FINANCIAL
INFORMATION
|
|
A.
|
Consolidated
Statements and Other Financial
Information
|
See Item 18.
Legal
Proceedings
For a
discussion of our legal proceedings, please see “Item 4B-Information on the
Company-Business Overview-Legal Proceedings.”
Dividend
Policy
For a
discussion of our dividend policy, please see “Item 10B-Additional
Information-Memorandum and Articles of Association-Dividends.”
|
B.
|
Significant
Changes
|
No significant change has occurred
since December 31, 2009, except as otherwise disclosed in this Annual
Report.
89
|
|
ITEM
9.
|
THE
OFFER AND LISTING
|
|
A.
|
OFFER
AND LISTING DETAILS
|
Our
ordinary shares are listed on the Nasdaq Global Select Market and The Tel Aviv
Stock Exchange under the symbol “AUDC.”
The
following table sets forth, for the periods indicated, the high and low sales
prices of our ordinary shares as reported by the Nasdaq Global Select
Market.
|
Calendar Year
|
Price Per Share
|
|||||||
|
High
|
Low
|
|||||||
|
2009
|
$ | 3.06 | $ | 0.92 | ||||
|
2008
|
$ | 5.26 | $ | 1.47 | ||||
|
2007
|
$ | 10.40 | $ | 4.55 | ||||
|
2006
|
$ | 14.64 | $ | 8.77 | ||||
|
2005
|
$ | 17.00 | $ | 8.67 | ||||
|
Calendar Period
|
Price Per Share
|
|||||||
|
High
|
Low
|
|||||||
|
2010
|
||||||||
|
Second
quarter (through June 15, 2010)
|
$ | 4.39 | $ | 2.43 | ||||
|
First
quarter
|
$ | 4.17 | $ | 2.65 | ||||
|
2009
|
||||||||
|
Fourth
quarter
|
$ | 3.06 | $ | 1.94 | ||||
|
Third
quarter
|
$ | 2.40 | $ | 1.37 | ||||
|
Second
quarter
|
$ | 1.60 | $ | 1.16 | ||||
|
First
quarter
|
$ | 1.90 | $ | 0.92 | ||||
|
2008
|
||||||||
|
Fourth
quarter
|
$ | 2.63 | $ | 1.47 | ||||
|
Third
quarter
|
$ | 4.42 | $ | 2.31 | ||||
|
Second
quarter
|
$ | 4.73 | $ | 3.62 | ||||
|
First
quarter
|
$ | 5.26 | $ | 2.50 | ||||
90
|
Calendar Month
|
Price Per Share
|
|||||||
|
High
|
Low
|
|||||||
|
2010
|
||||||||
|
May
|
$ | 3.80 | $ | 2.43 | ||||
|
April
|
$ | 4.39 | $ | 3.80 | ||||
|
March
|
$ | 4.17 | $ | 3.50 | ||||
|
February
|
$ | 3.58 | $ | 3.04 | ||||
|
January
|
$ | 3.50 | $ | 2.65 | ||||
|
2009
|
||||||||
|
December
|
$ | 2.90 | $ | 2.38 | ||||
The
following table sets forth, for the periods indicated, the high and low sales
prices of our ordinary shares as reported by The Tel Aviv Stock Exchange. All
share prices shown in the following table are in NIS. As of December 31, 2009,
the exchange rate was equal to approximately NIS 3.775 per U.S.
$1.00.
|
Calendar
Year
|
Price
Per Share
|
|||||||
|
High
|
Low
|
|||||||
| 2009 |
NIS
11.55
|
NIS 4.26 | ||||||
|
2008
|
NIS
20.20
|
NIS
5.71
|
||||||
|
2007
|
NIS
44.00
|
|
NIS
18.90
|
|||||
|
2006
|
NIS
66.27
|
NIS
38.10
|
||||||
|
2005
|
NIS
73.80
|
NIS
40.20
|
||||||
|
Calendar Period
|
Price Per Share
|
|||||||
|
2010
|
||||||||
|
Second
quarter (through June 15, 2010)
|
NIS
16.05
|
NIS
9.20
|
||||||
|
First
quarter
|
NIS
15.25
|
NIS
9.50
|
||||||
|
2009
|
||||||||
|
Fourth
quarter
|
NIS
11.55
|
NIS
7.61
|
||||||
|
Third
quarter
|
NIS
8.30
|
NIS
5.50
|
||||||
|
Second
quarter
|
NIS
6.64
|
NIS
4.70
|
||||||
|
First
quarter
|
NIS
7.33
|
NIS
4.26
|
||||||
|
2008
|
||||||||
|
Fourth
quarter
|
NIS
9.20
|
NIS
5.72
|
||||||
|
Third
quarter
|
NIS
15.22
|
NIS
8.46
|
||||||
|
Second
quarter
|
NIS
15.62
|
NIS
12.14
|
||||||
|
First
quarter
|
NIS
20.20
|
NIS
10.81
|
||||||
91
|
Calendar Month
|
Price Per Share
|
|||||||
|
High
|
Low
|
|||||||
|
2010
|
||||||||
|
May
|
NIS
14.65
|
NIS 9.20
|
||||||
|
April
|
NIS
16.05
|
NIS
14.30
|
||||||
|
March
|
NIS
15.25
|
NIS
13.01
|
||||||
|
February
|
NIS
13.60
|
NIS
11.40
|
||||||
|
January
|
NIS
12.88
|
NIS
9.50
|
||||||
|
2009
|
||||||||
|
December
|
NIS
10.74
|
NIS
8.93
|
||||||
|
B.
|
PLAN
OF DISTRIBUTION
|
Not
applicable.
|
C.
|
MARKETS
|
Our
ordinary shares are listed for trading on the Nasdaq Global Select Market under
the symbol “AUDC”. Our ordinary shares are also listed for trading on The
Tel-Aviv Stock Exchange under the symbol “AUDC”. In addition, we are aware of
our ordinary shares being traded on the following markets: Frankfurt Stock
Exchange, Berlin Stock Exchange, Munich Stock Exchange and XETRA.
|
D.
|
SELLING
SHAREHOLDERS
|
Not
applicable.
|
E.
|
DILUTION
|
Not
applicable.
92
|
F.
|
EXPENSES
OF THE ISSUE
|
Not
applicable.
|
ITEM
10.
|
ADDITIONAL
INFORMATION
|
|
A.
|
SHARE
CAPITAL
|
Not
applicable.
|
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
Objects
and Purposes
We were
incorporated in 1992 under the laws of the State of Israel. Our registration
number with the Israeli Registrar of Companies is 520044132. Our objects and
purposes, set forth in Section 2 of our memorandum of association,
are:
|
|
·
|
to
plan, develop and market voice signal
systems;
|
|
|
·
|
to
purchase, import, market and wholesale and retail distribute, in Israel
and abroad, consumption goods and accompanying
products;
|
|
|
·
|
to
serve as representatives of bodies, entrepreneurs and companies from
Israel and abroad with respect to their activities in Israel and abroad;
and
|
|
|
·
|
to
carry out any activity as determined by the lawful
management.
|
Share
Capital
Our authorized share capital consists
of NIS 1,025,000 divided into 100,000,000 ordinary shares, nominal value NIS
0.01 per share, and 2,500,000 preferred shares, nominal value NIS 0.01 per
share. As of June 15, 2010, we had 40,492,225 ordinary shares
outstanding and no preferred shares outstanding.
Borrowing
Powers
The board
of directors has the power to cause us to borrow money and to secure the payment
of borrowed money. The board of directors specifically has the power to issue
bonds or debentures, and to impose mortgages or other security interests on all
or any part of our property.
Amendment
of Articles of Association
Shareholders
may amend our articles of association by a resolution adopted at a shareholders
meeting by the holders of 50% of voting power represented at the meeting in
person or by proxy and voting thereon.
93
Dividends
Under the
Israeli Companies Law, we may pay dividends only out of our profits. The amount
of any dividend to be distributed among shareholders is based on the nominal
value of their shares. Our board of directors has determined that we will not
distribute any amounts of our undistributed tax exempt income as dividend. We
intend to reinvest our tax-exempt income and not to distribute such income as a
dividend. Accordingly, no deferred income taxes have been provided on
income attributable to our Approved Enterprise program as the undistributed tax
exempt income is essentially permanent in duration.
Voting
Rights and Powers
Unless
any shares have special rights as to voting, every shareholder has one vote for
each share held of record. A shareholder is not entitled to vote at any
shareholders meeting unless all calls then payable by him in respect of his
shares have been paid (this does not apply to separate meetings of the holders
of a particular class of shares with respect to the modification or abrogation
of their rights).
Under our
articles of association, we may issue preferred shares from time to time, in one
or more series. However, in connection with our listing on The Tel-Aviv Stock
Exchange in 2001, we agreed that for such time as our ordinary shares are traded
on The Tel-Aviv Stock Exchange, we will not issue any of the 2,500,000 preferred
shares, nominal value NIS 0.01, authorized in our articles of association.
Notwithstanding the foregoing, we may issue preferred shares if the preference
of those shares is limited to a preference in the distribution of dividends and
such preferred shares have no voting rights.
Business
Combinations
Our
articles of association impose restrictions on our ability to engage in any
merger, asset or share sale or other similar transaction with a shareholder
holding 15% or more of our voting shares.
Winding
Up
Upon our
liquidation, our assets available for distribution to shareholders will be
distributed to them in proportion to the nominal value of their
shares.
Redeemable
Shares
Subject
to our undertaking to the Tel-Aviv Stock Exchange as described above, we may
issue and redeem redeemable shares.
Modification
of Rights
Subject
to the provisions of our memorandum of association, and without prejudice to any
special rights previously conferred upon the holders of our existing shares, we
may, from time to time, by a resolution approved by the holders of 75% voting
power represented at the meeting in person or by proxy and voting thereon,
provide for shares with such preferred or deferred rights or rights of
redemption, or other special rights and/or such restrictions, whether in regard
to dividends, voting repayment of share capital or otherwise, as may be
stipulated in such resolution.
94
If at any
time our share capital is divided into different classes of shares, we may
modify or abrogate the rights attached to any class, unless otherwise provided
by the articles of association, by a resolution approved by the holders of 75%
voting power represented at the meeting in person or by proxy and voting
thereon, subject to the consent in writing of the holders of 75% of the issued
shares of that class.
The
provisions of our articles of association relating to general meetings also
apply to any separate general meeting of the holders of the shares of a
particular class, except that two or more members holding not less than 75% of
the issued shares of that class must be present in person or by proxy at that
separate general meeting for a quorum to exist.
Unless
otherwise provided by our articles of association, the increase of an authorized
class of shares, or the issuance of additional shares thereof out of the
authorized and unissued share capital, shall not be deemed to modify or abrogate
the rights attached to previously issued shares of that class or of any other
class.
Shareholders
Meetings
An annual
meeting of shareholders is to be held once a year, within 15 months after the
previous annual meeting. The annual meeting may be held in Israel or outside of
Israel, as determined by the board of directors.
The board
of directors may, whenever it thinks fit, convene a special shareholders
meeting. The board of directors must convene a special shareholders meeting at
the request of:
|
|
·
|
at
least two directors;
|
|
|
·
|
at
least one-quarter of the directors in office;
or
|
|
|
·
|
one
or more shareholders who hold at least 5% of the outstanding share capital
and at least 1% of the voting rights, or one or more shareholders who hold
at least 5% of the outstanding voting
rights.
|
A special
shareholders meeting may be held in Israel or outside of Israel, as determined
by the board of directors.
Notice
of General Meetings; Omission to Give Notice
The
provisions of the Companies Law and the related regulations override the
provisions of our articles of association, and provide for notice of a meeting
of shareholders to be sent to each registered shareholder at least 21 days or 35
days in advance of the meeting depending on the items included in the meeting
agenda. Notice of a meeting of shareholders must also be published in
two Israeli newspapers at least five days prior to the record date for the
meeting.
Notice of
a meeting of shareholders must specify the type of meeting, the place and time
of the meeting, the agenda, a summary of the proposed resolutions, the majority
required to adopt the proposed resolutions, and the record date for the meeting.
The notice must also include the address and telephone number of our registered
office, and a list of times at which the full text of the proposed resolutions
may be examined at the registered office.
95
The
accidental omission to give notice of a meeting to any shareholder, or the
non-receipt of notice sent to such shareholder, does not invalidate the
proceedings at the meeting.
Limitations
on Foreign Shareholders to Hold or Exercise Voting Rights
There are
no limitations on foreign shareholders in our articles of association. Israeli
law restricts the ability of citizens of countries that are in a state of war
with Israel to hold shares of Israeli companies.
Fiduciary
Duties; Approval of Transactions under Israeli Law
The
Companies Law imposes fiduciary duties that “office holders,” including
directors and executive officers, owe to their company. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty.
Duty of care.
The duty of
care generally requires an office holder to act with the level of care which a
reasonable office holder in the same position would have acted under the same
circumstances. This includes the duty to use reasonable means to obtain
information regarding the advisability of a given action submitted for his or
her approval or performed by virtue of his or her position and all other
relevant information material to these actions.
Duty of loyalty.
The duty of
loyalty generally requires an office holder to act in good faith and for the
benefit of the company. Specifically, an office holder must avoid any conflict
of interest between the office holder’s position in the company and his or her
other positions or personal affairs. In addition, an office holder must avoid
competing against the company or exploiting any business opportunity of the
company for his or her own benefit or the benefit of others. An office holder
must also disclose to the company any information or documents relating to the
company’s affairs that the office holder has received due to his or her position
in the company. A company may approve any of the acts mentioned above provided
that all the following conditions apply: the office holder acted in good faith
and neither the act nor the approval of the act prejudices the good of the
company, and the office holder disclosed the essence of his or her personal
interest in the act, including any substantial fact or document, a reasonable
time before the date for discussion of the approval.
The term
“office holder” includes any person who, either formally or in substance, serves
as a director, general manager or chief executive officer, or who reports
directly to the general manager or chief executive officer. Each person listed
in the table under “Item 6. Directors, Senior Management and Employees—A.
Directors and Senior Management” above is an “office holder” of
AudioCodes.
Compensation.
Under the
Companies Law, all arrangements as to compensation of office holders who are not
directors require approval of the board of directors and, in certain cases, the
prior approval of the audit committee. Arrangements as to compensation of
directors also require audit committee and shareholder approval.
96
Disclosure of personal interest.
The Companies Law requires that an office holder promptly disclose any
personal interest that he or she may have, and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company. A “personal interest” of an office holder, as defined in the
Companies Law, includes a personal interest of the office holder’s relative or a
corporation in which the office holder or the office holder’s relative is a 5%
or greater shareholder, director or general manager or has the right to appoint
at least one director or the general manager. “Personal interest” does not apply
to a personal interest stemming merely from holding shares in the
company.
The
office holder must make the disclosure of his personal interest no later than
the first meeting of the company’s board of directors that discusses the
particular transaction. The office holder’s duty to disclose shall not apply in
the event that the personal interest only results from a personal interest of
the office holder’s relative in a transaction that is not an “extraordinary
transaction”. The Companies Law defines an “extraordinary transaction” as a
transaction not in the ordinary course of business, not on market terms, or
likely to have a material impact on the company’s profitability, assets or
liabilities, and a "relative" as a spouse, sibling, parent, grandparent,
descendent, spouse's descendant and the spouse of any of the
foregoing.
Approvals.
For a transaction
that is not an extraordinary transaction, under the Companies Law, once the
office holder complies with the above disclosure requirement, the board of
directors is authorized to approve the transaction, unless the articles of
association provide otherwise. Our articles of association do not provide
otherwise. Such approval must determine that the transaction is not adverse to
the company’s interest. If the transaction is an extraordinary transaction, or
if it concerns exculpation, indemnification or insurance of an office holder,
then it also must be approved by the company’s audit committee and board of
directors, and, under certain circumstances, by the shareholders of the company.
An office holder who has a personal interest in a matter that is considered at a
meeting of the board of directors or the audit committee generally may not be
present at this meeting or vote on this matter unless a majority of the board of
directors or the audit committee has a personal interest in the
matter. If a majority of the board of directors or the audit
committee has a personal interest in the transaction, shareholder approval also
would be required.
Duties
of Shareholders
Under the
Companies Law, the disclosure requirements that apply to an office holder also
apply to a controlling shareholder of a public company. A controlling
shareholder is a shareholder who has the ability to direct the activities of a
company, including a shareholder that owns 25% or more of the voting rights if
no other shareholder owns more than 50% of the voting rights, but excluding a
shareholder whose power derives solely from his or her position on the board of
directors or any other position with the company. Two or more shareholders with
a personal interest in the approval of the same transaction are deemed to be one
shareholder for the purpose of being a “controlling shareholder.”
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Approval
of the audit committee, the board of directors and our shareholders, in that
order, is required for:
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extraordinary
transactions, including a private placement, with a controlling
shareholder or in which a controlling shareholder has a personal interest;
and
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the
terms of compensation or employment of a controlling shareholder or his or
her relative, as an officer holder or employee of our
company.
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The
shareholders approval must include the majority of shares voted at the
meeting. In addition to the majority vote, the shareholder approval
must satisfy either of two additional tests:
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the
majority includes at least one-third of the shares voted by shareholders
who have no personal interest in the transaction;
or
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the
total number of shares, other than shares held by the disinterested
shareholders, that voted against the approval of the transaction does not
exceed 1% of the aggregate voting rights of our
company.
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Under the
Companies Law, a shareholder has a duty to act in good faith and in a customary
manner towards the company and other shareholders, and to refrain from abusing
his or her power in the company, including when voting in a shareholders meeting
or in a class meeting on matters such as the following:
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an
amendment to our articles of
association;
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an
increase in our authorized share
capital;
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a
merger; or
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approval
of related party transactions that require shareholder
approval.
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In
addition, any controlling shareholder, any shareholder who knows that he or she
possesses the power to determine the outcome of a shareholders meeting or a
shareholders class meeting and any shareholder who has the power to prevent the
appointment of an office holder, is under a duty to act with fairness towards
the company. The Companies Law does not define the substance of this
duty of fairness, except to state that the remedies generally available upon a
breach of contract will also apply in the event of a breach of the duty to act
with fairness, taking into account the position in the company of those who
breached the duty of fairness.
Anti-Takeover
Provisions Under Israeli Law
The
Companies Law provides that an acquisition of shares in a public company must be
made by means of a tender offer if as a result of the acquisition the purchaser
would hold 25% or more of the voting rights in the company, unless there is
already another shareholder of the company with 25% or more of the voting
rights. Similarly, the Companies Law provides that an acquisition of
shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would hold more than 45% of the voting
rights in the company, unless there is a shareholder with more than 45% of the
voting rights in the company.
The
Companies Law requires the parties to a proposed merger to file a merger
proposal with the Israeli Registrar of Companies, specifying certain terms of
the transaction. Each merging company's board of directors and
shareholders must approve the merger. Shares in one of the merging
companies held by the other merging company or certain of its affiliates are
disenfranchised for purposes of voting on the merger. A merging
company must inform its creditors of the proposed merger. Any
creditor of a party to the merger may seek a court order blocking the merger, if
there is a reasonable concern that the surviving company will not be able to
satisfy all of the obligations of the parties to the
merger. Moreover, a merger may not be completed until at least
50 days have passed from the time that the merger proposal was filed with
the Israeli Registrar of Companies and at least 30 days have passed from
the approval of the shareholders of each of the merging companies.
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Finally,
in general, Israeli tax law treats stock-for-stock acquisitions less favorably
than does U.S. tax law. Israeli tax law has been amended to provide
for tax deferral in specified acquisitions, including transactions where the
consideration for the sale of shares is the receipt of shares of the acquiring
company. Nevertheless, Israeli tax law may subject a shareholder who
exchanges his ordinary shares for shares in a foreign corporation to immediate
taxation or to taxation before his investment in the foreign corporation becomes
liquid, although in the case of shares of a foreign corporation that are traded
on a stock exchange, the tax may be postponed subject to certain
conditions.
Insurance,
Indemnification and Exculpation of Directors and Officers; Limitations on
Liability
Insurance
of Office Holders
The
Companies Law permits a company, if permitted by its articles of association, to
insure an office holder in respect of liabilities incurred by the office holder
as a result of:
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the
breach of his or her duty of care to the company or to another person,
or
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the
breach of his or her duty of loyalty to the company, to the extent that
the office holder acted in good faith and had reasonable cause to believe
that the act would not prejudice the
company.
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A company
can also insure an office holder against monetary liabilities imposed on the
office holder in favor of a third party as a result of an act or omission that
the office holder committed in connection with his or her serving as an office
holder.
Indemnification
of Office Holders
Under the
Companies Law, a company can, if permitted by its articles of association,
indemnify an office holder for any of the following obligations or expenses
incurred in connection with his or her acts or omissions as an office
holder:
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monetary
liability imposed upon the office holder in favor of other persons
pursuant to a court judgment, including a settlement or an arbitrator’s
decision approved by a court;
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reasonable
litigation expenses, including attorney’s fees, incurred by the office
holder as a result of an investigation or proceeding instituted against
the office holder by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment
against the office holder; and
either:
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no
financial liability was imposed on the office holder in lieu of criminal
proceedings, or
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financial
liability was imposed on the office holder in lieu of criminal proceedings
but the alleged criminal offense does not require proof of criminal
intent, and
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reasonable
litigation expenses, including attorneys’ fees, actually incurred by the
office holder or imposed upon the office holder by a
court:
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in
an action brought against the office holder by the company, on behalf of
the company or on behalf of a third
party;
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in
a criminal action in which the office holder is found innocent;
or
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in
a criminal action in which the office holder is convicted but in which
proof of criminal intent is not
required.
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A company
may indemnify an office holder in respect of these liabilities either in advance
of an event or following an event. If a company undertakes to
indemnify an office holder in advance of an event, the indemnification, other
than legal costs, must be limited to foreseeable events in light of the
company’s actual activities when the company undertook such indemnification, and
reasonable amounts or standards, as determined by the board of
directors.
Exculpation
of Office Holders
Under the
Companies Law, a company may, if permitted by its articles of association, also
exculpate an office holder in advance, in whole or in part, from liability for
damages sustained by a breach of duty of care to the company, other than in
connection with distributions.
Limitations
on Exculpation, Insurance and Indemnification
Under the
Companies Law, a company may indemnify or insure an office holder against a
breach of duty of loyalty only to the extent that the office holder acted in
good faith and had reasonable grounds to assume that the action would not
prejudice the company. In addition, a company may not indemnify,
insure or exculpate an office holder against a breach of duty of care if
committed intentionally or recklessly (excluding mere negligence), or committed
with the intent to derive an unlawful personal gain, or for a fine or forfeit
levied against the office holder in connection with a criminal
offense.
Our
articles of association allow us to insure, indemnify and exculpate office
holders to the fullest extent permitted by law, provided such insurance or
indemnification is approved in accordance with law. Pursuant to the
Companies Law, exculpation of, procurement of insurance coverage for, and an
undertaking to indemnify or indemnification of, our office holders must be
approved by our audit committee and our board of directors and, if the office
holder is a director, also by our shareholders.
We have
entered into agreements with each of our directors and senior officers to
insure, indemnify and exculpate them to the full extent permitted by law against
some types of claims, subject to dollar limits and other limitations. These
agreements have been ratified by our audit committee, board of directors and
shareholders. We have acquired directors’ and officers’ liability insurance
covering our officers and directors and the officers and directors of our
subsidiaries against certain claims.
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C.
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MATERIAL
CONTRACTS
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In April
2008, we entered into a loan agreement with First International Bank of Israel
that provides for borrowings in the aggregate amount of $15 million. The loan
bears interest at LIBOR plus 1.5% with respect to $11.5 million of the loan and
LIBOR plus 0.65% with respect to the remaining amount of $3.5 million of the
loan. The principal amount borrowed is repayable in 20 equal quarterly payments
through April 2013. The bank has a lien on our assets and we are required to
maintain $3.5 million of compensating balances with the bank. The
agreement requires us, among other things, to maintain shareholders' equity at
specified levels and to achieve certain levels of operating income. The
agreement also restricts us from paying dividends.
In July
2008, we entered into a loan agreement with Mizrachi Tfachot Bank that provides
for borrowings in the aggregate amount of $15 million. The loan bears interest
at LIBOR plus 1.3% with respect to $11.5 million of the loan and LIBOR plus
0.50% with respect to the remaining amount of $3.5 million of the loan. The bank
has a lien on our assets and we are required to maintain $3.5 million of
compensating balances with the bank. The other terms of the loan with Mizrachi
Tfachot Bank are the same as the loan agreement with First International Bank
described in the preceding paragraph. Mizrachi and First International share the
lien on our assets.
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EXCHANGE
CONTROLS
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Non-residents
of Israel who own our ordinary shares may freely convert all amounts received in
Israeli currency in respect of such ordinary shares, whether as a dividend,
liquidation distribution or as proceeds from the sale of the ordinary shares,
into freely-repatriable non-Israeli currencies at the rate of exchange
prevailing at the time of conversion (provided in each case that the applicable
Israeli income tax, if any, is paid or withheld).
Since
January 1, 2003, all exchange control restrictions on transactions in foreign
currency in Israel have been eliminated, although there are still reporting
requirements for foreign currency transactions. Legislation remains
in effect, however, pursuant to which currency controls may be imposed by
administrative action at any time.
The State
of Israel does not restrict in any way the ownership or voting of our ordinary
shares by non-residents of Israel, except with respect to subjects of countries
that are in a state of war with Israel.
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E
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TAXATION
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The
following is a summary of the material Israeli and United States federal tax
consequences, Israeli foreign exchange regulations and certain Israeli
government programs affecting us. To the extent that the discussion is based on
new tax or other legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed in the discussion will be accepted by the tax or other authorities in
question. The discussion is not intended, and should not be construed, as legal
or professional tax advice, is not exhaustive of all possible tax considerations
and should not be relied upon for tax planning purposes. Potential investors are
urged to consult their own tax advisors as to the Israeli tax, United States
federal income tax and other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any
foreign, state or local taxes.
101
Israeli
Tax Considerations
General
Corporate Tax Structure
Generally, Israeli companies are
subject to corporate tax on taxable income at the rate of 26% for the 2009 tax
year. Following an amendment to the Israeli Income Tax Ordinance (new
version) 1961 (the “Tax ordinance”), which came into effect on January 1, 2006,
the corporate tax rate in Israel is scheduled to decrease as
follows: 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 the gains deriving from the sale of listed securities) derived after
January 1, 2003. In July 2009, Israel's Parliament (the Knesset) passed the
Economic Efficiency Law (Amended Legislation for Implementing the Economic Plan
for 2009 and 2010), 2009, which prescribes, among other things, an additional
gradual reduction in the Israeli corporate tax rate and real capital gains tax
rate starting from 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013
- 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%. However, the effective
tax rate payable by us that derives income from an approved or privileged
enterprise may be considerably less.
Following an Ordinance, which came into
effect on January 1, 2009, an Israeli corporation may elect a 5% rate of
corporate tax (instead of 25%) for dividend distributions received from a
foreign subsidiary which is used in Israel in 2009, or within one year after
actual receipt of the dividend, whichever is later. The 5% tax rate is subject
to various conditions, which include conditions with regard to the identity of
the corporation that distributes the dividends, the source of the dividend, the
nature of the use of the dividend income, and the period during which the
dividend income will be used in Israel.
Tax
Benefits Under the Law for the Encouragement of Capital Investments,
1959
Our
facilities have been granted approved enterprise status pursuant to the Law for
the Encouragement of Capital Investments, 1959 or the Investment Law, which
provides certain tax and financial benefits to investment programs that have
been granted such status.
The
Investment Law provides that a proposed capital investment in eligible
facilities may be designated as an “approved enterprise.” Until 2005, the
designation required advance approval from the Investment Center of the Israel
Ministry of Industry, Trade and Labor (the Investment Center). Each certificate
of approval for an approved enterprise relates to a specific investment program
delineated both by its financial scope, including its capital sources, and by
its physical characteristics, such as the equipment to be purchased and utilized
pursuant to the program. The tax benefits under the Investment Law are not
available for income derived from products manufactured outside of
Israel.
102
A company
owning an approved enterprise may elect to receive either governmental grants or
an alternative package of tax benefits. Under the alternative package, a
company’s undistributed income derived from an approved enterprise will be
exempt from corporate tax for a period of two to ten years (depending on the
geographic location of the approved enterprise within Israel). The
exemption commences in the first year of taxable income, and the company is
taxed at a reduced corporate rate of 10% to 25% for the following five to eight
years, depending on the extent of foreign shareholders’ ownership of the
company’s ordinary shares. The benefits period is limited to twelve years from
completion of the investment under the approved plan or fourteen years from the
date of approval, whichever is earlier (these limits do not apply to the
exemption period). A Foreign Investors Company, or FIC, defined in
the Investment Law as a company of which more than 25% of its shareholders are
non-Israeli residents, may enjoy benefits for a period of up to ten years, or
twelve years if it complies with certain export criteria stipulated in the
Investment Law (the actual length of the benefits period is graduated based on
the percentage of foreign ownership).
We have
elected the alternative package of tax exemptions and reduced tax rates for our
production facilities that have received Approved Enterprise status.
Accordingly, income derived from these facilities is generally entitled to a
tax-exemption period of two years and a reduced corporate tax rate of 10% to 25%
for an additional period of five to eight years, based on our percentage of
foreign investment. The tax benefits for our existing Approved Enterprise
programs are scheduled to gradually expire by 2017. The period of tax benefits
for each capital investment plan expires upon the earlier of: (1) twelve years
from completion of the investment under the approved plan, or (2) fourteen years
from receipt of approval (these limits do not apply to the exemption
period).
Out of
our retained earnings as of December 31, 2009, approximately $540,000 are
tax-exempt. If we were to distribute this tax-exempt income before our complete
liquidation, it would be taxed at the reduced corporate tax rate applicable to
these profits (10% to 25%), and an income tax liability of up to approximately
$135,000 would be incurred. Our board of directors has currently determined that
we will not distribute any amounts of our undistributed tax exempt income as
dividend. We intend to reinvest our tax-exempt income and not to distribute such
income as a dividend. Accordingly, no deferred income taxes have been provided
on income attributable to our Approved Enterprise.
If we
fail to meet the requirements of an Approved Enterprise we would be subject to
corporate tax in Israel at the regular statutory rate. We could also be required
to refund tax benefits, with interest and adjustments for inflation based on the
Israeli consumer price index.
The tax
benefits derived from any certificate of approval relate only to taxable income
attributable to the specific approved enterprise. If a company has more than one
approval or only a portion of its capital investments are approved, its
effective tax rate is the result of a weighted combination of the applicable
rates.
103
Our
production facilities have been granted the status of approved enterprise.
Income arising from our approved enterprise facilities is tax-free under the
alternative package of benefits described above and entitled to reduced tax
rates based on the level of foreign ownership for specified periods. We have
derived, and expect to continue to derive, a substantial portion of our
operating income from our approved enterprise facilities. The tax benefits
attributable to our current approved enterprises are scheduled to expire
gradually until 2017.
Distribution
of earnings derived from approved enterprise which were previously taxed at
reduced tax rates, would not result in additional tax consequences to
us. However, if retained tax-exempt income is distributed in a
manner, we would be taxed at the reduced corporate tax rate applicable to such
profits (between 10%-25%). We are not obliged to distribute exempt
retained earnings under the alternative package of benefits, and may generally
decide from which source of income to declare dividends. We currently intend to
reinvest the amount of our tax-exempt income and not to distribute such income
as a dividend. Dividends from approved enterprises are generally
taxed at a rate of 15% (which is withheld and paid by the company paying the
dividend) if such dividend is distributed during the benefits period or within
twelve years thereafter. The twelve-year limitation does not apply to an
FIC.
In
addition, the benefits available to an approved enterprise are conditional upon
the fulfillment of conditions stipulated in the Investment Law and related
regulations and the criteria set forth in the specific certificate of approval.
In the event that a company does not meet these conditions, it will be subject
to corporate tax at the rate then in effect under Israeli law for such tax
year. As of December 31, 2009, management believes that we meet all
of the aforementioned conditions.
On April
1, 2005, an amendment to the law came into effect (the “Amendment”) and has
significantly changed the provisions of the law. The Amendment limits the scope
of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Beneficiary Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprise’s
income will be derived from export. Additionally, the Amendment enacted major
changes in the manner in which tax benefits are awarded under the law so that
companies no longer require Investment Center approval in order to qualify for
tax benefits.
Tax
benefits are available under the 2005 Amendment to production facilities (or
other eligible facilities), which are generally required to derive more than 25%
of their business income from export. In order to receive the tax benefits, the
2005 Amendment states that a company must make an investment in the Beneficiary
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 Beneficiary Enterprise, or the Year of Election. Where
the company requests to have the tax benefits apply to an expansion of existing
facilities, then only the expansion will be considered a Beneficiary Enterprise
and the company’s effective tax rate will be the result of a weighted average of
the applicable rates. In this case, the minimum investment required in order to
qualify as a Beneficiary Enterprise is required to exceed a certain percentage
or a minimum amount of the company’s production assets at the end of the year
before the expansion.
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The
duration of tax benefits is subject to a limitation of the earlier of seven to
ten years from the Commencement Year, or twelve years from the first day of the
Year of Election. The Commencement Year is defined as the later of (a) the first
tax year in which a company had derived income for tax purposes from the
Beneficiary Enterprise or (b) the year in which a company requested to have the
tax benefits apply to the Beneficiary Enterprise – Year of Election. The tax
benefits granted to a Beneficiary 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:
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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 Beneficiary 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 Beneficiary
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 be distributed. The company is required
to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Beneficiary Enterprise;
and
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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 Beneficiary 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.
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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 as defined in the Investments Law) 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 2005
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
aforementioned definition will take effect retroactively from 2003.
The 2005
Amendment will apply to approved enterprise programs in which the year of
election under the Investments Law is 2004 or later, unless such programs
received approval from the Investment Center on or prior to December 31, 2004,
in which case the 2005 Amendment provides that terms and benefits included in
any certificate of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval.
105
In
addition, the law provides that terms and benefits included in any certificate
of approval granted prior to December 31, 2004 will remain subject to the
provisions of the law as they were on the date of such approval. Therefore, our
existing “Approved Enterprises” will generally not be subject to the provisions
of the Amendment. As a result of the Amendment, tax-exempt income generated
under the provisions of the law as amended, will subject us to taxes upon
distribution or liquidation and we may be required to record a deferred tax
liability with respect to such tax-exempt income. We elected 2008 as "year of
election" under the Investments Law after the Amendment. We expect that a
substantial portion of any taxable operating income that we may realize in the
future will be derived from our approved enterprise status.
Law
for the Encouragement of Industrial Research and Development, 1984
Under the
Law for the Encouragement of Industrial Research and Development, 1984 and the
related regulations, or the Research Law, research, development and
pre-manufacturing programs that meet specified criteria and are approved by a
governmental committee (the Research Committee) of the Office of Chief Scientist
(OCS) are eligible for grants of up to 50% of the expenditures on the
program. Each application to the OCS is reviewed separately, and
grants are based on the program approved by the Research
Committee. Expenditures supported under other incentive programs of
the State of Israel are not eligible for OCS grants. As a result, we cannot be
sure that applications to the OCS will be approved or, if approved, that we will
receive the amounts for which we apply.
Recipients
of these grants are required to pay royalties on the revenues derived from the
sale of product developed in accordance with the program. The
royalties are payable at the rate of 3% of revenues during the first three
years, 4% of revenues during the following three years, and 5% of revenues in
the seventh year and thereafter, with the total royalties not to exceed 100% of
the dollar value of the OCS grant.
The terms
of the Israeli government participation require that products developed with OCS
grants must generally be manufactured in Israel. If we receive OCS
approval for any portion of this manufacturing to be performed outside of
Israel, the royalty rate would be increased and the repayment schedule would be
accelerated, based on the extent of the manufacturing conducted outside of
Israel. Depending upon the extent of the manufacturing volume that is
performed outside of Israel, the ceiling on royalties would increase to 120%,
150% or 300% of the grant. Under an amendment to the Research Law effective
since 2005, the authority of the Research Committee to approve the transfer of
manufacture outside of Israel was expanded.
The
technology developed pursuant to the terms of these grants may not be
transferred to third parties without the prior approval of the Research
Committee. This approval is required only for the export of the technology, and
not for the export of any products that incorporate the sponsored
technology. Approval of the transfer of technology may be granted
only if the recipient agrees to abide by all the provisions of the Research Law,
including the restrictions on the transfer of know-how and the obligation to pay
royalties in an amount that may be increased. The 2005 amendment to
the Research Law granted authority to the Research Committee to approve the
transfer of sponsored technology outside of Israel, subject to various
conditions.
106
We have
received grants from the OCS, and therefore we are subject to various
restrictions under the Research Law on the transfer of technology or
manufacturing. These restrictions do not terminate upon the full
payment of royalties.
In order
to meet specified conditions in connection with the grants and programs of the
OCS, we have made representations to the Government of Israel about our Israeli
operations. From time to time the conduct of our Israeli operations
has deviated from our representations. If we fail to meet the
conditions to grants, including the maintenance of a material presence in
Israel, or if there is any material deviation from the representations made by
us to the Israeli government, we could be required to refund the grants
previously received (together with an adjustment based on the Israeli consumer
price index and an interest factor) and would likely be ineligible to receive
OCS grants in the future.
Tax
Benefits Under the Law for the Encouragement of Industry (Taxation),
1969
According
to the Law for the Encouragement of Industry (Taxation), 1969, or the Industry
Encouragement Law, an “industrial company” is a company resident in Israel, that
at least 90% of its income, in any tax year (determined in Israeli currency,
exclusive of income from certain government loans, capital gains, interest and
dividends) is derived from an industrial enterprise owned by it. An industrial
enterprise is defined as an enterprise whose major activity in a given tax year
is industrial production activity. We currently believe that we qualify as an
industrial company within the definition of the Industry Encouragement Law.
Under the Industry Encouragement Law, industrial companies are entitled to the
following preferred corporate tax benefits:
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deduction
of purchases of know-how and patents over an eight-year period for tax
purposes;
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the
right to elect, under specified conditions, to file a consolidated tax
return with related Israeli industrial companies;
and
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accelerated
depreciation rates on equipment and buildings;
and
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deductions
over a three-year period of expenses involved with the issuance and
listing of shares on the Tel Aviv Stock Exchange or, on or after January
1, 2003, on a recognized stock market outside of
Israel.
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Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. The Israeli tax authorities
may determine that we do not qualify as an industrial company, which would
entail our loss of the benefits that relate to this status. In
addition, no assurance can be given that we will continue to qualify as an
industrial company, in which case the benefits described above will not be
available in the future.
107
Israeli
Transfer Pricing Regulations
On
November 29, 2006, Income tax regulation (Determination of Market Terms), 2006,
promulgated under Section 85A of the tax ordinance, came into force (the
“Transfer Pricing Regulations”). Section 85A of the tax Ordinance and the
Transfer Pricing Regulations generally require that all cross-border
transactions carried out between related parties will be conducted on an arm’s
length basis and will be taxed accordingly. As the Transfer Pricing Regulations
are broadly similar to transfer pricing regimes already in place in other
jurisdictions in which we operate outside of Israel, we do not expect the
Transfer Pricing Regulations to have a material impact on us.
Special
Provisions Relating to Measurement of Taxable Income
We
elected to measure our taxable income and file our tax return under the Israeli
Income Tax Regulations (Principles Regarding the Management of Books of Account
of Foreign Invested Companies and Certain Partnerships and the Determination of
Their Taxable Income), 1986. Accordingly, commencing taxable year 2003, results
for tax purposes are measured in terms of earnings in dollars.
Capital
Gains Tax
Israeli
law generally imposes a capital gains tax on the sale of publicly traded
securities. Pursuant to changes made to the Israeli Income Tax
Ordinance in January 2006, capital gains on the sale of our ordinary shares will
be subject to Israeli capital gains tax, generally at a rate of 20% unless the
holder holds 10% or more of our voting power during the 12 months preceding the
sale, in which case it will be subject to a 25% capital gains tax.
However,
as of January 1, 2003, non-Israeli residents are exempt from Israeli capital
gains tax on any gains derived from the sale of shares publicly traded on the
TASE, provided such gains do not derive from a permanent establishment of such
shareholders in Israel. Non-Israeli residents are also exempt from
Israeli capital gains tax on any gains derived from the sale of shares of
Israeli companies publicly traded on a recognized stock exchange or regulated
market outside of Israel, provided that such capital gains are not derived from
a permanent establishment in Israel and that such shareholders did not acquire
their shares prior to the issuer’s initial public offering. However, non-Israeli
corporations will not be entitled to the exemption with respect to gains derived
from the sale of shares of Israeli companies publicly traded on the TASE, if an
Israeli resident (i) has a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or
more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
In some
instances where our shareholders may be subject to Israeli tax on the sale of
their ordinary shares, the payment of the consideration may be subject to the
withholding of Israeli tax at the source.
108
United
States-Israel Tax Treaty
Pursuant
to the Convention Between the Government of the United States of America and the
Government of Israel with respect to Taxes on Income, as amended, or the United
States-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares
by a person who holds the ordinary shares as a capital asset and who qualifies
as a resident of the United States within the meaning of the United States-
Israel Tax Treaty and who is entitled to claim the benefits afforded to such
person by the United States-Israel Tax Treaty, or a Treaty United States
Resident, generally will not be subject to the Israeli capital gains tax unless
such Treaty United States Resident holds, directly or indirectly, shares
representing 10% or more of the voting power of our company during any part of
the twelve-month period preceding such sale, exchange or disposition, subject to
certain conditions. A sale, exchange or disposition of shares by a
Treaty United States Resident who holds, directly or indirectly, shares
representing 10% or more of the voting power of our company at any time during
such preceding twelve-month period would be subject to such Israeli tax, to the
extent applicable; however, under the United States-Israel Tax Treaty, such
Treaty United States Resident would be permitted to claim a credit for such
taxes against the United States federal income tax imposed with respect to such
sale, exchange or disposition, subject to the limitations in United States laws
applicable to foreign tax credits. The United States-Israel Tax Treaty does not
relate to state or local taxes.
Tax
on Dividends
Non-residents
of Israel are subject to Israeli income tax on income accrued or derived from
sources in Israel or received in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as
non-passive income from services rendered in Israel. Generally, on
distributions of dividends, other than bonus shares and stock dividends, income
tax at the rate of 25% is withheld at the source (except that dividends
distributed on or after January 1, 2006 to an individual who is deemed “a
non-substantial shareholder” are subject to tax at the rate of 20%), unless a
different rate is provided in a treaty between Israel and the shareholder’s
country of residence. Under the U.S.-Israel Tax Treaty, the maximum
tax on dividends paid to a holder of ordinary shares who is a Treaty United
States Resident will be 25%, however that tax rate is reduced to 12.5% for
dividends not generated by an approved enterprise to a corporation which holds
10% or more of the voting power of our company during a certain period preceding
distribution of the dividend. Dividends derived from an approved
enterprise will still be subject to 15% tax withholding.
Foreign
Exchange Regulations
Dividends,
if any, paid to the holders of the ordinary shares, and any amounts payable upon
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli
currency or, if paid in Israeli currency, may be converted into freely
repatriable dollars at the rate of exchange prevailing at the time of
conversion, provided that Israeli income tax has been paid or withheld on such
amounts.
109
United
States Tax Considerations
United
States Federal Income Taxes
The
following summary describes the material U.S. federal income tax consequences to
“U.S. Holders” (as defined below) arising from the acquisition, ownership and
disposition of our ordinary shares. This summary is based on the Internal
Revenue Code of 1986, as amended, or the “Code,” the final, temporary and
proposed U.S. Treasury Regulations promulgated thereunder and administrative and
judicial interpretations thereof, all as of the date hereof and all of which are
subject to change (possibly with retroactive effect) or different
interpretations. For purposes of this summary, a “U.S. Holder” will be deemed to
refer only to any of the following holders of our ordinary shares:
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an
individual who is either a U.S. citizen or a resident of the U.S. for U.S.
federal income tax purposes;
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a
corporation or other entity taxable as a corporation for U.S. federal
income tax purposes created or organized in or under the laws of the U.S.
or any political subdivision
thereof;
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an
estate the income of which is subject to U.S. federal income tax
regardless of the source of its income;
and
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a
trust, if (a) a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust, or (b) the
trust has a valid election in effect under applicable U.S. Treasury
Regulations to be treated as a U.S.
person.
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This
summary does not consider all aspects of U.S. federal income taxation that may
be relevant to particular U.S. Holders by reason of their particular
circumstances, including potential application of the U.S. federal alternative
minimum tax, or any aspect of state, local or non-U.S. federal tax laws or U.S.
federal tax laws other than U.S. federal income tax laws. In addition, this
summary is directed only to U.S. Holders that hold our ordinary shares as
“capital assets” within the meaning of Section 1221 of the Code and does not
address the considerations that may be applicable to particular classes of U.S.
Holders, including financial institutions, regulated investment companies, real
estate investment trusts, pension funds, insurance companies, broker-dealers,
tax-exempt organizations, grantor trusts, partnerships or other pass-through
entities and partners or other equity holders in such partnerships or other
pass-through entities, holders whose functional currency is not the U.S. dollar,
holders who have elected mark-to-market accounting, holders who acquired our
ordinary shares through the exercise of options or otherwise as compensation,
holders who hold our ordinary shares as part of a “straddle,” “hedge” or
“conversion transaction,” holders selling our ordinary shares short, holders
deemed to have sold our ordinary shares in a “constructive sale,” and holders,
directly, indirectly or through attribution, of 10% or more (by vote or value)
of our outstanding ordinary shares.
Each
U.S. Holder should consult with its own tax advisor as to the particular tax
consequences to it of the acquisition, ownership and disposition of our ordinary
shares, including the effects of applicable tax treaties, state, local, foreign
or other tax laws and possible changes in the tax laws.
110
Distributions
With Respect to Our Ordinary Shares
For U.S
federal income tax purposes, the amount of a distribution with respect to our
ordinary shares will equal the amount of cash distributed, the fair market value
of any property distributed and the amount of any Israeli taxes withheld on such
distribution as described above under “Israeli Tax Considerations – Tax on
Dividends.” Other than distributions in liquidation or in redemption of our
ordinary shares that are treated as exchanges, a distribution with respect to
our ordinary shares to a U.S. Holder generally will be treated as a dividend to
the extent of our current and accumulated earnings and profits, as determined
for U.S. federal income tax purposes. The amount of any distribution that
exceeds these earnings and profits will be treated first as a non-taxable return
of capital, reducing the U.S. Holder’s tax basis in its ordinary shares (but not
below zero), and then generally as capital gain from a deemed sale or exchange
of such ordinary shares. Corporate U.S. Holders generally will not be allowed a
deduction under Section 243 of the Code for dividends received on our ordinary
shares and thus will be subject to tax at the rate applicable to their taxable
income. Currently, a noncorporate U.S. Holder’s “qualified dividend income”
generally is subject to tax at a reduced rate of 15%, although the rate
applicable to dividend income is scheduled to return to the rate applicable to
ordinary income after December 31, 2010. For this purpose, “qualified dividend
income” generally includes dividends paid by a foreign corporation if, among
other things, the noncorporate U.S. Holder meets certain minimum holding period
requirements and either (a) the stock of such corporation is readily tradable on
an established securities market in the U.S., including the Nasdaq Global Select
Market, or (b) such corporation is eligible for the benefits of a comprehensive
income tax treaty with the U.S. which includes an information exchange program
and is determined to be satisfactory by the U.S. Secretary of the Treasury. The
U.S. Secretary of the Treasury has indicated that the income tax treaty between
the U.S. and Israel is satisfactory for this purpose. Dividends paid by us will
not qualify for the 15% U.S. federal income tax rate, however, if we are
treated, for the tax year in which the dividends are paid or the preceding tax
year, as a “passive foreign investment company” for U.S. federal income tax
purposes. See the discussion below under the heading “Passive Foreign Investment
Company Status.” U.S. Holders are urged to consult their own tax advisors
regarding the U.S. federal income tax consequences of their receipt of any
distributions with respect to our ordinary shares.
A
dividend paid by us in NIS will be included in the income of U.S. Holders at the
U.S. dollar amount of the dividend, based on the “spot rate” of exchange in
effect on the date of receipt or deemed receipt of the dividend, regardless of
whether the payment is in fact converted into U.S. dollars. U.S. Holders will
have a tax basis in the NIS for U.S. federal income tax purposes equal to that
U.S. dollar value. Any gain or loss upon the subsequent conversion of the NIS
into U.S. dollars or other disposition of the NIS will constitute foreign
currency gain or loss taxable as ordinary income or loss and will be treated as
U.S.-source income or loss for U.S. foreign tax credit purposes.
Dividends
received with respect to our ordinary shares will constitute “portfolio income”
for purposes of the limitation on the use of passive activity losses and,
therefore, generally may not be offset by passive activity losses. Dividends
received with respect to our ordinary shares also generally will be treated as
“investment income” for purposes of the investment interest deduction limitation
contained in Section 163(d) of the Code, and as foreign-source passive income
for U.S. foreign tax credit purposes or, in the case of a U.S. Holder that is a
financial services entity, financial services income. Subject to certain
limitations, U.S. Holders may elect to claim as a foreign tax credit against
their U.S. federal income tax liability any Israeli income tax withheld from
distributions with respect to our ordinary shares which constitute dividends
under U.S. income tax law. A U.S. Holder that does not elect to claim a foreign
tax credit may instead claim a deduction for Israeli income tax withheld, but
only if the U.S. Holder elects to do so with respect to all foreign income taxes
in such year. In addition, special rules may apply to the computation of foreign
tax credits relating to “qualified dividend income,” as defined above. The
calculation of foreign tax credits and, in the case of a U.S. Holder that elects
to deduct foreign income taxes, the availability of deductions are complex and
involve the application of rules that depend on a U.S. Holder’s particular
circumstances. U.S. Holders are urged to consult their own tax advisors
regarding the availability to them of foreign tax credits or deductions in
respect of any Israeli tax withheld or paid with respect to any dividends which
may be paid with respect to our ordinary shares.
111
Disposition
of Our Ordinary Shares
Subject
to the discussion below under “Passive Foreign Investment Company Status,” a
U.S. Holder’s sale, exchange or other taxable disposition of our ordinary shares
generally will result in the recognition by such U.S. Holder of capital gain or
loss in an amount equal to the difference between the U.S. dollar value of the
amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed
of (measured in U.S. dollars). This gain or loss will be long-term capital gain
or loss if such ordinary shares have been held or are deemed to have been held
for more than one year at the time of the disposition. Individual U.S. Holders
currently are subject to a maximum tax rate of 15% on long-term capital gains
recognized during tax years beginning on or before December 31, 2010. If the
U.S. Holder’s holding period on the date of the taxable disposition is one year
or less, such gain or loss will be a short-term capital gain or loss. Short-term
capital gains generally are taxed at the same rates applicable to ordinary
income. See “Israeli Tax Considerations – Capital Gains Tax” for a discussion of
taxation by Israel of capital gains realized on sales of our ordinary shares.
Any capital loss realized upon the taxable disposition of our ordinary shares
generally will be deductible only against capital gains and not against ordinary
income, except that noncorporate U.S. Holders generally may deduct annually from
ordinary income up to $3,000 of net capital losses. In general, any capital gain
or loss recognized by a U.S. Holder upon the taxable disposition of our ordinary
shares will be treated as U.S.-source income or loss for U.S. foreign tax credit
purposes. However, under the tax treaty between the United States and Israel,
gain derived from the taxable disposition of ordinary shares by a U.S. Holder
who is a resident of the U.S. for purposes of the treaty and who sells the
ordinary shares within Israel may be treated as foreign-source income for U.S.
foreign tax credit purposes.
A U.S.
Holder’s tax basis in its ordinary shares generally will be the U.S. dollar
purchase price paid by such U.S. Holder to acquire such ordinary shares. The
U.S. dollar cost of ordinary shares purchased with foreign currency generally
will be the U.S. dollar value of the purchase price on the date of purchase or,
in the case of our ordinary shares that are purchased by a cash basis U.S.
Holder (or an accrual basis U.S. Holder that so elects), on the settlement date
for the purchase. Such an election by an accrual basis U.S. Holder must be
applied consistently from year to year and cannot be revoked without the consent
of the U.S. Internal Revenue Service. The holding period of each ordinary share
owned by a U.S. Holder will commence on the day following the date of the U.S.
Holder’s purchase of such ordinary share and will include the day on which the
ordinary share is sold by such U.S. Holder.
112
In the
case of a U.S. Holder who uses the cash basis method of accounting and who
receives NIS in connection with a taxable disposition of our ordinary shares,
the amount realized will be based on the “spot rate” of exchange on the
settlement date of such taxable disposition. If such U.S. Holder
subsequently converts NIS into U.S. dollars at a conversion rate other than the
spot rate in effect on the settlement date, such U.S. Holder may have a foreign
currency exchange gain or loss treated as ordinary income or loss for U.S.
federal income tax purposes. A U.S. Holder who uses the accrual method of
accounting may elect the same treatment required of cash method taxpayers with
respect to a taxable disposition of ordinary shares, provided that the election
is applied consistently from year to year. Such election may not be changed
without the consent of the U.S. Internal Revenue Service. If an accrual method
U.S. Holder does not elect to be treated as a cash method taxpayer (pursuant to
U.S. Treasury Regulations applicable to foreign currency transactions), such
U.S. Holder may be deemed to have realized an immediate foreign currency gain or
loss for U.S. federal income tax purposes in the event of any difference between
the U.S. dollar value of the NIS on the date of the taxable disposition and the
settlement date. Any such currency gain or loss generally would be treated as
U.S.-source ordinary income or loss and would be subject to tax in addition to
any gain or loss recognized by such U.S. Holder on the taxable disposition of
ordinary shares.
Passive
Foreign Investment Company Status
Generally,
a foreign corporation is treated as a passive foreign investment company
(“PFIC”) for U.S. federal income tax purposes for any tax year if, in such tax
year, either (i) 75% or more of its gross income (including its pro rata share
of the gross income of any company in which it is considered to own 25% or more
of the shares by value) is passive in nature (the “Income Test”), or (ii) the
average percentage of its assets during such tax year (including its pro rata
share of the assets of any company in which it is considered to own 25% or more
of the shares by value) which produce, or are held for the production of,
passive income (determined by averaging the percentage of the fair market value
of its total assets which are passive assets as of the end of each quarter of
such year) is 50% or more (the “Asset Test”). Passive income for this purpose
generally includes dividends, interest, rents, royalties and gains from
securities and commodities transactions.
There is
no definitive method prescribed in the Code, U.S. Treasury Regulations or
relevant administrative or judicial interpretations for determining the value of
a foreign corporation’s assets for purposes of the Asset Test. While the
legislative history of the U.S. Taxpayer Relief Act of 1997 (the “1997 Act”)
indicates that for purposes of the Asset Test, “the total value of a
publicly-traded foreign corporation’s assets generally will be treated as equal
to the sum of the aggregate value of its outstanding stock plus its
liabilities,” it is unclear whether other valuation methods could be employed to
determine the value of a publicly-traded foreign corporation’s assets for
purposes of the Asset Test.
Based on
the composition of our gross income and the composition and value of our gross
assets during 2004, 2005, 2006, 2007, 2008 and 2009, we do not believe that we
were a PFIC during any of such tax years. It should be noted that in determining
whether we were a PFIC during 2009, we did not characterize as a passive asset
the amount reflected on our consolidated balance sheet as accrued interest with
respect to short-term marketable securities because such accrued interest does
not itself bear interest and thus does not produce passive interest income. It
is likely, however, that under the asset valuation method described in the
legislative history of the 1997 Act, we would have been classified as a PFIC in
2001, 2002 and 2003 primarily because (a) a significant portion of our assets
consisted of the remaining proceeds of our two public offerings of ordinary
shares in 1999, and (b) the public market valuation of our ordinary shares
during such years was relatively low. There can be no assurance that we will not
be deemed a PFIC in any future tax year.
113
U.S. Holders are urged to consult
their own tax advisors for guidance as to our status as a PFIC in any tax
year.
In particular, U.S. Holders should note that under legislation
recently enacted by the U.S., they will be required to file an information
return containing certain information required by the U.S. Internal Revenue
Service for each year in which we are treated as a PFIC. The U.S. Internal
Revenue Service has announced that it is developing guidance for filing these
annual information returns, but until further guidance is issued, a U.S. Holder
that was required to file Internal Revenue Service Form 8621 (Return by a
Shareholder of a Passive Foreign Investment Company or a Qualified Electing
Fund) before March 18, 2010 (because such U.S. Holder had recognized gain upon
the disposition of our ordinary shares or had made a QEF Election, as described
below) must continue to file Form 8621
. A U.S. Holder
that was not otherwise required to file Form 8621 annually before March 18, 2010
will not be required to file the new annual information return for tax years
beginning before March 18, 2010.
If we are
treated as a PFIC for U.S. federal income tax purposes for any year during a
U.S. Holder’s holding period of our ordinary shares and the U.S. Holder does not
make a QEF Election or a “mark-to-market” election (both as described
below):
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“Excess
distributions” by us to the U.S. Holder would be taxed in a special way.
“Excess distributions” with respect to any U.S. Holder are amounts
received by such U.S. Holder with respect to our ordinary shares in any
tax year that exceed 125% of the average distributions received by such
U.S. Holder from us during the shorter of (i) the three previous years, or
(ii) such U.S. Holder’s holding period of our ordinary shares before the
then-current tax year. Excess distributions must be allocated ratably to
each day that a U.S. Holder has held our ordinary shares. Thus, the U.S.
Holder would be required to include in its gross income amounts allocated
to the current tax year as ordinary income for that year, pay tax on
amounts allocated to each prior tax year in which we were a PFIC at the
highest rate on ordinary income in effect for such prior year and pay an
interest charge on the resulting tax at the rate applicable to
deficiencies of U.S. federal income
tax.
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The
entire amount of any gain realized by the U.S. Holder upon the sale or
other disposition of our ordinary shares also would be treated as an
“excess distribution” subject to tax as described
above.
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The
tax basis in ordinary shares acquired from a decedent who was a U.S.
Holder would not receive a step-up to fair market value as of the date of
the decedent’s death, but instead would be equal to the decedent’s basis,
if lower.
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Although
we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC
for any year during the U.S. Holder’s holding period, if we cease to be a PFIC,
the U.S. Holder may avoid the consequences of PFIC classification for subsequent
years by electing to recognize gain based on the unrealized appreciation in its
ordinary shares through the close of the tax year in which we cease to be a
PFIC.
114
A U.S.
Holder who beneficially owns shares of a PFIC must file U.S. Internal Revenue
Service Form 8621 (Return by a Shareholder of a Passive Foreign Investment
Company or Qualified Electing Fund) with the U.S. Internal Revenue Service for
each tax year in which such U.S. Holder recognizes gain upon a disposition of
our ordinary shares, receives certain distributions from us or makes the QEF
Election or mark-to-market election described below.
For any
tax year in which we are treated as a PFIC, a U.S. Holder may elect to treat its
ordinary shares as an interest in a qualified electing fund (a “QEF Election”),
in which case the U.S. Holder would be required to include in income currently
its proportionate share of our earnings and profits in years in which we are a
PFIC regardless of whether distributions of our earnings and profits are
actually made to the U.S. Holder. Any gain subsequently recognized by the U.S.
Holder upon the sale or other disposition of its ordinary shares, however,
generally would be taxed as capital gain and the denial of the basis step-up at
death described above would not apply.
A U.S.
Holder may make a QEF Election with respect to a PFIC for any tax
year. A QEF Election is effective for the tax year in which the
election is made and all subsequent tax years of the U.S. Holder. Procedures
exist for both retroactive elections and the filing of protective statements. A
U.S. Holder making the QEF Election must make the election on or before the due
date, as extended, for the filing of its U.S. federal income tax return for the
first tax year to which the election will apply. A U.S. Holder must make a QEF
Election by completing U.S. Internal Revenue Service Form 8621 and attaching it
to its U.S. federal income tax return, and must satisfy additional filing
requirements each year the election remains in effect. Upon a U.S. Holder’s
request, we will provide to such U.S. Holder the information required to make a
QEF Election and to make subsequent annual filings.
As an
alternative to a QEF Election, a U.S. Holder generally may elect to mark its
ordinary shares to market annually, recognizing ordinary income or loss (subject
to certain limitations) equal to the difference, as of the close of the tax
year, between the fair market value of its ordinary shares and the adjusted tax
basis of such shares. If a mark-to-market election with respect to ordinary
shares is in effect on the date of a U.S. Holder’s death, the normally available
step-up in tax basis to fair market value will not be available. Rather, the tax
basis of the ordinary shares in the hands of a U.S. Holder who acquired them
from a decedent will be the lesser of the decedent’s tax basis or the fair
market value of the ordinary shares. Once made, a mark-to-market election
generally continues unless revoked with the consent of the U.S. Internal Revenue
Service.
The
implementation of many aspects of the Code’s PFIC rules requires the issuance of
Treasury Regulations which in many instances have yet to be promulgated and
which may have retroactive effect when promulgated. We cannot be sure that any
of these regulations will be promulgated or, if so, what form they will take or
what effect they will have on the foregoing discussion.
Accordingly, and due to the
complexity of the PFIC rules, U.S. Holders should consult their own tax advisors
regarding our status as a PFIC and the eligibility, manner and advisability of
making a QEF Election or a mark-to-market election if we are treated as a
PFIC.
115
Information
Reporting and Backup Withholding
Payments
in respect of our ordinary shares that are made in the U.S. or by certain
U.S.-related financial intermediaries may be subject to information reporting
requirements and U.S. backup withholding tax at rates equal to 28% through 2010
and 31% after 2010. The information reporting requirements will not apply,
however, to payments to certain U.S. Holders, including corporations and
tax-exempt organizations. In addition, the backup withholding tax will not apply
to a U.S. Holder that furnishes a correct taxpayer identification number on U.S.
Internal Revenue Service Form W-9 (or substitute form). The backup withholding
tax is not an additional tax. Amounts withheld under the backup withholding tax
rules may be credited against a U.S. Holder’s U.S. federal income tax liability,
and a U.S. Holder may obtain a refund of any excess amounts withheld under the
backup withholding tax rules by filing the appropriate claim for refund with the
U.S. Internal Revenue Service. U.S. Holders should consult their own tax
advisors regarding their qualification for an exemption from the backup
withholding tax and the procedures for obtaining such an exemption, if
applicable.
The
foregoing discussion of certain U.S. federal income tax considerations is a
general summary only and should not be considered as income tax advice or relied
upon for tax planning purposes. Accordingly, each U.S. Holder should consult
with its own tax advisor regarding U.S. federal, state, local and non-U.S.
income and other tax consequences of the acquisition, ownership and disposition
of our ordinary shares.
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F
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DIVIDENDS
AND PAYING AGENTS
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Not
applicable.
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G.
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STATEMENT
BY EXPERTS
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Not
applicable.
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H.
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DOCUMENTS
ON DISPLAY
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We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission, or SEC. You may read and copy any
document we file, including any exhibits, with the SEC without charge at the
SEC’s public reference room at 100 F Street, N.E., Washington, D.C.
20549. Copies of such material may be obtained by mail from the
Public Reference Branch of the SEC at such address, at prescribed
rates. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference room. Certain of our SEC filings are also
available to the public at the SEC’s website at
http://www.sec.gov
.
As a
foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the SEC as frequently or as
promptly as United States companies whose securities are registered under the
Exchange Act. However, we file with the Securities and Exchange
Commission an annual report on Form 20-F containing consolidated financial
statements audited by an independent accounting firm. We also furnish
reports on Form 6-K containing unaudited financial information after the end of
each of the first three quarters. We intend to post our Annual Report
on Form 20-F on our website (www.audiocodes.com) promptly following the filing
of our Annual Report with the Securities and Exchange Commission.
116
|
I.
|
SUBSIDIARY
INFORMATION
|
Not
applicable.
|
ITEM
11.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We are
exposed to financial market risk associated with changes in foreign currency
exchange rates. To mitigate these risks, we use derivative financial
instruments. The majority of our revenues and expenses are generated
in U.S. dollars. A portion of our expenses, however, is denominated
in NIS. In order to protect ourselves against the volatility of
future cash flows caused by changes in foreign exchange rates, we use currency
forward contracts and currency options. We hedge the part of our forecasted
expenses denominated in NIS. If our currency forward contracts and currency
options meet the definition of a hedge, and are so designated, changes in the
fair value of the contracts will be offset against changes in the fair value of
the hedged assets or liabilities through earnings. For derivative instruments
not designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change. Our hedging program reduces, but does not
eliminate, the impact of foreign currency rate movements and due to the general
economic slowdown along with the devaluation of the dollar, our results of
operations may be adversely affected. Without taking into account the mitigating
effect of our hedging activity, a 10% decrease in the U.S. dollar exchange rates
in effect for the year ended December 31, 2009 would cause a decrease in
net income of approximately $4 million.
We are
subject to market risk from exposure to changes in interest rates relating to
borrowings under our loan agreements. The interest rate on these borrowings is
based on LIBOR. Based on our the scheduled amount of these borrowings
to be outstanding in 2010, we estimate that each 100 basis point increase in our
borrowing rates would result in additional interest expense to us of
approximately $250,000.
|
ITEM
12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY
SECURITIES
|
Not
applicable.
117
|
ITEM
13.
|
DEFAULTS,
DIVIDEND ARREARAGES AND
DELINQUENCIES
|
Not
applicable.
|
ITEM
14.
|
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
|
Not
applicable.
|
ITEM
15.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Our
management, with the participation of our Chief Executive Officer, who is also
our Interim Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures (as defined in 13a-15(e) under the Securities
Exchange Act) as of December 31, 2009. Based on this evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were (i) designed to ensure
that material information relating to us, including our consolidated
subsidiaries, is made known to our management, including our chief executive
officer and chief financial officer, by others within those entities, as
appropriate to allow timely decisions regarding required disclosure,
particularly during the period in which this report was being prepared and (ii)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management, under the supervision of our Chief Executive Officer, who is also
our Interim Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over our financial reporting, as defined
in Rules 13a-15(f) of the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance to our management and
board of directors regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over financial
reporting includes policies and procedures that:
|
|
·
|
pertain
to the maintenance of our records that in reasonable detail accurately and
fairly reflect our transactions and asset
dispositions;
|
|
|
·
|
provide
reasonable assurance that our transactions are recorded as necessary to
permit the preparation of our financial statements in accordance with
generally accepted accounting
principles;
|
|
|
·
|
provide
reasonable assurance that our receipts and expenditures are made only in
accordance with authorizations of our management and board of directors
(as appropriate); and
|
118
|
|
·
|
provide
reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial
statements.
|
Due to
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the
supervision and with the participation of our management, including our
principal executive officer, who is also our interim principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2009 based on the framework for
Internal Control - Integrated Framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment under
that framework and the criteria established therein, our management concluded
that the Company’s internal control over financial reporting were effective as
of December 31, 2009.
Attestation
Report of the Registered Public Accounting Firm
This
annual report includes an attestation report of our registered public accounting
firm regarding internal control over financial reporting on page F-3 of our
audited consolidated financial statements set forth in “Item 18 - Financial
Statements”, and is incorporated herein by reference.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting identified
with the evaluation thereof that occurred during the period covered by this
annual report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting
|
ITEM
16.
|
[RESERVED]
|
|
ITEM
16A.
|
AUDIT
COMMITTEE FINANCIAL EXPERT
|
Our Board
of Directors has determined that Joseph Tenne is an “audit committee financial
expert” as defined in Item 16A of Form 20-F and is “independent” as defined in
the applicable regulations.
|
ITEM
16B.
|
CODE
OF ETHICS
|
We have
adopted a Code of Conduct and Business Ethics that applies to our chief
executive officer, chief financial officer and other senior financial
officers. This Code has been posted on our website,
www.audiocodes.com
.
119
|
ITEM
16C.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served as
our independent public accountants for each of the years in the three-year
period ended December 31, 2009. The following table presents the aggregate
fees for professional audit services and other services rendered by Kost Forer
Gabbay & Kasierer in 2008 and 2009.
|
Year
Ended December 31
(
Amounts in thousands
)
|
||||||||
|
2008
|
2009
|
|||||||
|
Audit
Fees
|
$ | 397 | $ | 315 | ||||
|
Audit
Related Fees
|
55 | 50 | ||||||
|
Tax
Fees
|
30 | 32 | ||||||
|
Total
|
$ | 482 | $ | 397 | ||||
Audit
Fees consist of fees billed for the annual audit of the company’s consolidated
financial statements and the statutory financial statements of the company. They
also include fees billed for other audit services, which are those services that
only the external auditor reasonably can provide, and include services rendered
for the integrated audit over internal controls as required under Section 404 of
the Sarbanes-Oxley Act applicable in 2008 and 2009, the provision of consents
and the review of documents filed with the SEC.
Audit
Related Fees consist of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the company’s
financial statements and include operational effectiveness of systems. They also
include fees billed for other services in connection with merger and acquisition
due diligence.
Tax Fees
include fees billed for tax compliance services, including the preparation of
tax returns and claims for refund; tax consultations, such as assistance and
representation in connection with tax audits and appeals, transfer pricing, and
requests for rulings or technical advice from taxing authorities; tax planning
services; and expatriate tax compliance, consultation and planning
services.
Audit
Committee Pre-approval Policies and Procedures
The Audit
Committee of AudioCodes’ Board of Directors is responsible, among other matters,
for the oversight of the external auditor subject to the requirements of Israeli
law. The Audit Committee has adopted a policy regarding pre-approval of audit
and permissible non-audit services provided by our independent auditors (the
“Policy”).
Under the
Policy, proposed services either (i) may be pre-approved by the Audit Committee
without consideration of specific case-by-case services as “general
pre-approval”; or (ii) require the specific pre-approval of the Audit
Committee as “specific pre-approval”. The Audit Committee
may delegate either type of pre-approval authority to one or more of its
members. The appendices to the Policy set out the audit, audit-related, tax and
other services that have received the general pre-approval of the Audit
Committee, including those described in the footnotes to the table, above; these
services are subject to annual review by the Audit Committee. All other audit,
audit-related, tax and other services must receive a specific pre-approval from
the Audit Committee.
120
The Audit
Committee pre-approves fee levels annually for the audit services. Non-audited
services are pre-approved as required. The Chairman of the audit committee may
approve non-audit services of up to $25,000 and then request the audit committee
to ratify his decision.
During
2009, no services provided to AudioCodes by Kost Forer Gabbay & Kasierer
were approved by the Audit Committee pursuant to the de minimis exception to the
pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
|
ITEM
16D.
|
EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
|
Not
applicable.
ITEM
16E.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM
16F.
CHANGE
IN REGISTRANT’S CERTIFIED ACCOUNTANT
Not
applicable.
ITEM
16G.
CORPORATE
GOVERNANCE
As a
foreign private issuer whose shares are listed on the Nasdaq Global Select
Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the Nasdaq Marketplace
Rules.
We do not
comply with the Nasdaq requirement that we obtain shareholder approval for
certain dilutive events, such as for the establishment or amendment of certain
equity based compensation plans. Instead, we follow Israeli law and
practice which permits the establishment or amendment of certain equity based
compensation plans approved by our board of directors without the need for a
shareholder vote, unless such arrangements are for the compensation of
directors, in which case they also require audit committee and shareholder
approval.
We may elect in the future to follow
Israeli practice with regard to, among other things, executive officer
compensation, director nomination, composition of the board of directors and
quorum at shareholders’ meetings. In addition, we may follow Israeli
law, instead of the Nasdaq Marketplace Rules, which require that we obtain
shareholder approval for an issuance that will result in a change of control of
the company, certain transactions other than a public offering involving
issuances of a 20% or more interest in the company and certain acquisitions of
the stock or assets of another company.
121
A foreign private issuer that elects to
follow a home country practice instead of Nasdaq requirements, must submit to
Nasdaq in advance a written statement from an independent counsel in its home
country certifying that its practices are not prohibited by the home country’s
laws. In addition, a foreign private issuer must disclose in its
annual reports filed with the Securities and Exchange Commission or on its
website each such requirement that it does not follow and describe the home
country practice followed by the issuer instead of any such
requirement. Accordingly, our shareholders may not be afforded the
same protection as provided under Nasdaq’s corporate governance
rules.
For a
discussion of the requirements of Israeli law with respect to these matters, see
Item 6.C. "Directors, Senior Management and Employees –Board Practices," and
Item 10.B. "Additional Information – Memorandum and Articles of
Association."
|
ITEM
17.
|
FINANCIAL
STATEMENTS
|
Not
applicable.
|
ITEM
18.
|
FINANCIAL
STATEMENTS
|
Reference
is made to pages F-1 to F-43 hereto.
|
ITEM
19.
|
EXHIBITS
|
The
following exhibits are filed as part of this Annual Report:
|
Exhibit
No.
|
Exhibit
|
|
|
1.1
|
Memorandum
of Association of Registrant. (1) †
|
|
|
1.2
|
Articles
of Association of Registrant, as amended. (3)
|
|
|
2.1
|
Indenture,
dated November 9, 2004, between AudioCodes Ltd. and U.S. Bank National
Association, as Trustee, with respect to the 2.00% Senior Convertible
Notes due 2024. (5)
|
|
|
4.1
|
AudioCodes
Ltd. 1997 Key Employee Option Plan (C). (1)
|
|
|
4.2
|
AudioCodes
Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S.
Employees (D). (1)
|
|
|
4.3
|
Founder’s
Agreement between Shabtai Adlersberg and Leon Bialik, dated January 1,
1993. (1) †
|
|
|
4.4
|
License
Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as of May 6,
1999. (1) †
|
122
|
Exhibit
No.
|
Exhibit
|
|
|
4.5
|
Lease
Agreement between AudioCodes Inc. and Spieker Properties, L.P., dated
January 26, 2000. (3)
|
|
|
4.6
|
Shareholders
Agreement by and among DSP Group, Inc., Shabtai Adlersberg, Leon Bialik,
Genesis Partners I, L.P., Genesis Partners I (Cayman) L.P., Polaris Fund
II (Tax Exempt Investors) L.L.C., Polaris Fund II L.L.C., Polaris Fund II
L.P., DS Polaris Trust Company (Foreign Residents) (1997) Ltd., DS Polaris
Ltd., Dovrat, Shrem Trust Company (Foreign Funds) Ltd., Dovrat Shrem-Skies
92 Fund L.P. and Chase Equity Securities CEA, dated as of May 6, 1999.
(1)
|
|
|
4.7
|
AudioCodes
Ltd. 1997 Key Employee Option Plan (D). (1)
|
|
|
4.8
|
AudioCodes
Ltd. 1997 Key Employee Option Plan (E). (1)
|
|
|
4.9
|
AudioCodes
Ltd. 1999 Key Employee Option Plan (F), as amended. (4)
|
|
|
4.10
|
AudioCodes
Ltd. 1997 Key Employee Option Plan, Qualified Stock Option Plan—U.S.
Employees (E). (1)
|
|
|
4.11
|
AudioCodes
Ltd. 1999 Key Employee Option Plan, Qualified Stock Option Plan—U.S.
Employees (F). (4)
|
|
|
4.12
|
AudioCodes
Ltd. 2001 Employee Stock Purchase Plan—Global Non U.S., as
amended. (2)
|
|
|
4.13
|
AudioCodes
Ltd. 2001 U.S. Employee Stock Purchase Plan, as amended.
(2)
|
|
|
4.13a
|
AudioCodes
Ltd. 2007 U.S. Employee Stock Purchase Plan. (10)
|
|
|
4.15
|
Sublease
Agreement between AudioCodes USA, Inc. and Continental Resources, Inc.,
dated December 30, 2003. (6)
|
|
|
4.16
|
Employment
Agreement between AudioCodes Ltd. and Shabtai Adlersberg.
(13)
|
|
|
4.17
|
OEM
Purchase and Sale Agreement No. 011449 between AudioCodes Ltd and Nortel
Networks Ltd., dated as of April 28, 2003. (6)§
|
|
|
4.18
|
Amendment
No. 1 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of May 1, 2003. (6)§
|
|
|
4.19
|
Purchase
and Sale Agreement by and among Nortel Networks, Ltd., AudioCodes Inc. and
AudioCodes Ltd., dated as of April 7, 2003.
(6)
|
123
|
Exhibit
No.
|
Exhibit
|
|
|
4.20
|
Purchase
Agreement, dated as of November 9, 2004, between AudioCodes
Ltd. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Lehman Brothers Inc., as representatives of the
initial purchasers of AudioCodes’ 2.00% Senior Convertible Notes due 2024.
(5)
|
|
|
4.21
|
Amendment
No. 2 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of January 1, 2005. (7)
§
|
|
|
4.22
|
Amendment
No. 3 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of February 15, 2005. (7)
§
|
|
|
4.23
|
Amendment
No. 5 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of January 1, 2005. (7)
§
|
|
|
4.24
|
Amendment
No. 6 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of April 1, 2005. (7)
|
|
|
4.26
|
Amendment
No. 4 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd and
Nortel Networks Ltd., dated as of April 28, 2005. (8) §
|
|
|
4.27
|
Agreement
and Plan of Merger, dated as of May 16, 2006, among AudioCodes Ltd.,
AudioCodes, Inc., Green Acquisition Corp., Nuera Communications, Inc. and
Robert Wadsworth, as Sellers’ Representative. (8)
|
|
|
4.28
|
Building
and Tenancy Lease Agreement, dated May 11, 2007, by and between Airport
City Ltd. and AudioCodes Ltd. (9) †
|
|
|
4.29
|
Agreement
and Plan of Merger, dated as of July 6, 2006, by and among AudioCodes
Ltd., AudioCodes, Inc., Violet Acquisition Corp., Netrake Corporation and
Will Kohler, as Sellers’ Representative. (9)
|
|
|
4.30
|
Series
E Preferred Share Purchase Agreement, dated as of November 13, 2005, by
and between CTI Squared Ltd. and AudioCodes Ltd. (9)
|
|
|
4.31
|
Amended
and Restated Second Option Agreement, dated as of October 6, 2006, by and
among CTI Squared Ltd., AudioCodes Ltd. and each of the other parties
thereto. (9)
|
|
|
4.32
|
Amendment
No. 7 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd. and
Nortel Networks Ltd., dated as of December 15, 2006.
(9)
|
|
|
4.33
|
Endorsement
and Transfer of Rights Agreement, dated March 29, 2007, by and between
Nortel Networks (Sales and Marketing) Ltd. Israel and AudioCodes Ltd.
(9)†
|
124
|
Exhibit
No.
|
Exhibit
|
|
|
4.34
|
Amendment
No. 9 to OEM Purchase and Sale No. 011449 between AudioCodes Ltd. and
Nortel Networks Ltd., dated as of October 30, 2007. (11)
§
|
|
|
4.35
|
Letter
Agreements, dated April 30, 2008 between First International Bank of
Israel, as lender, and AudioCodes Ltd., as borrower. (11)
†
|
|
|
4.36
|
Waiver
dated November 24, 2008 to Letter Agreement, dated April 30, 2008, between
First International Bank of Israel, as lender, and AudioCodes Ltd., as
borrower. (12) †
|
|
|
4.37
|
Amendment
dated February 16, 2009 to Letter Agreements, dated April 30, 2008,
between First International Bank of Israel, as lender, and AudioCodes
Ltd., as borrower. (12) †
|
|
|
4.38
|
Letter
Agreements, dated July 14, 2008, between Bank Mizrahi Tefahot Ltd., as
lender, and AudioCodes Ltd., as borrower. (12) †
|
|
|
4.39
|
Amendment
dated November 2, 2008 to Letter Agreement, dated July 14, 2008, between
Bank Mizrahi Tefahot Ltd., as lender, and AudioCodes Ltd., as borrower.
(12) †
|
|
|
4.40
|
Amendment
dated April 1, 2009 to Letter Agreement, dated July 14, 2008, between Bank
Mizrahi Tefahot Ltd., as lender, and AudioCodes Ltd., as borrower. (12)
†
|
|
|
4.41
|
AudioCodes
Ltd. 2008 Equity Incentive Plan. (12)
|
|
|
8.1
|
Subsidiaries
of the Registrant. (11)
|
|
|
12.1
|
Certification
of Shabtai Adlersberg, President, Chief Executive Officer and Interim
Chief Financial Officer , pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
13.1
|
Certification
by Chief Executive Officer and Interim Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
15.1
|
Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global.
|
|
†
|
English
summary of Hebrew original.
|
|
§
|
Confidential
treatment has been granted for certain portions of the indicated
document. The confidential portions have been omitted and filed
separately with the Securities and Exchange Commission as required by Rule
24b-2 promulgated under the Securities Exchange Act of
1934.
|
125
|
(1)
|
Incorporated
herein by reference to Registrant’s Registration Statement on Form F-1
(File No. 333-10352).
|
|
(2)
|
Incorporated
herein by reference to Registrant’s Registration Statement on
Form
|
|
(3)
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31, 2000.
|
|
(4)
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31, 2002.
|
|
(5)
|
Incorporated
by reference herein to Registrant’s Registration Statement on Form F-3
(File No. 333-123859).
|
|
(6)
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31, 2003.
|
|
(7)
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31, 2004.
|
|
(8)
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31, 2005.
|
|
(9)
|
Incorporated
herein by reference to Registrant’s Form 20-F for the fiscal year ended
December 31, 2006.
|
|
(10)
|
Incorporated
by reference to Registrant’s Registration Statement on Form S-8 (File No.
333-144825).
|
|
(11)
|
Incorporated
by reference to Registrant’s Form 20-F for the fiscal year ended December
31, 2007.
|
|
(12)
|
Incorporated
by reference to Registrant’s Form 20-F for the fiscal year ended December
31, 2008
|
|
(13)
|
Incorporated
by reference to Exhibit 1 to Registrant’s Form 6-K filed on November 12,
2009.
|
126
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to
sign this Annual Report on Form 20-F on its behalf.
|
AUDIOCODES
LTD.
|
|
|
By:
|
/s/ SHABTAI ADLERSBERG
|
|
Shabtai
Adlersberg
|
|
|
President,
Chief Executive Officer and
|
|
|
Interim
Chief Financial
Officer
|
|
Date:
June 29, 2010
127
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
IN
U.S. DOLLARS
INDEX
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
- F-3
|
|
|
Consolidated
Balance Sheets
|
F-4
- F- 5
|
|
|
Consolidated
Statements of Operations
|
F-6
|
|
|
Statements
of Changes in Shareholders' Equity
|
F-7
|
|
|
Consolidated
Statements of Cash Flows
|
F-8
- F-9
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-10
- F-44
|
-
- - - - - - - - - -
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
AudioCodes
LTD.
We have
audited the accompanying consolidated balance sheets of AudioCodes Ltd.
("AudioCodes" or "the Company") and its subsidiaries as of December 31, 2008 and
2009, and the related consolidated statements of operations, changes in equity
and cash flows for each of the three years in the period ended December 31,
2009. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
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 consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries at December 31, 2008 and 2009, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States.
As
discussed in Note 2s and Note 10, the Company has changed its method of
accounting for convertible debt instruments effective January 1, 2009, due
to the adoption of FSP APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)”, as codified in ASC 470-20, “Debt with Conversion and Other
Options”. The consolidated financial statements have been retrospectively
adjusted to reflect the adoption of the FSP. Additionally as discussed in Note
2aa to the consolidated financial statements, effective January 1 2009 the
Company changed its manner of accounting for the acquisition of non-controlling
interest, due to the adoption of ASC 810 (formerly FAS 160,
"Non-controlling Interest in Consolidation Financial Statements").
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company and subsidiaries' internal control
over financial reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated June
28, 2010 expressed an unqualified opinion thereon.
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
June
28, 2010
|
A
Member of Ernst & Young
Global
|
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
AudioCodes
LTD.
We have
audited AudioCodes Ltd's ("AudioCodes" or "the Company") internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). AudioCodes'
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting included
in the accompanying Management's Annual 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, AudioCodes maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of AudioCodes
and its subsidiaries as of December 31, 2008 and 2009 and the related
consolidated statements of operations, changes in equity and cash flows for each
of the three years in the period ended December 31, 2009 and our report dated
June 28, 2010 expressed an unqualified opinion thereon.
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
June
28, 2010
|
A
Member of Ernst & Young
Global
|
F-3
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED BALANCE
SHEETS
|
|
U.S.
dollars in thousands
|
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 36,779 | $ | 38,969 | ||||
|
Short-term
bank deposits
|
61,870 | 13,902 | ||||||
|
Short-term
marketable securities and accrued interest
|
16,481 | - | ||||||
|
Trade
receivables (net of allowance for doubtful accounts of $ 519 and
$ 723 at December 31, 2008 and 2009, respectively)
|
29,564 | 18,522 | ||||||
|
Other
receivables and prepaid expenses
|
3,573 | 2,754 | ||||||
|
Deferred
tax assets
|
972 | 1,053 | ||||||
|
Inventories
|
20,623 | 13,516 | ||||||
|
Total
current assets
|
169,862 | 88,716 | ||||||
|
LONG-TERM
ASSETS:
|
||||||||
|
Investment
in companies
|
1,245 | 1,510 | ||||||
|
Deferred
tax assets
|
1,255 | 1,174 | ||||||
|
Severance
pay funds
|
10,297 | 12,235 | ||||||
|
Total
long-term
assets
|
12,797 | 14,919 | ||||||
|
PROPERTY
AND EQUIPMENT, NET
|
6,844 | 4,956 | ||||||
|
INTANGIBLE
ASSETS, DEFERRED CHARGES, NET (1)
|
8,706 | 6,847 | ||||||
|
GOODWILL
|
32,095 | 32,095 | ||||||
|
Total
assets
|
$ | 230,304 | $ | 147,533 | ||||
|
(1)
|
See
Note 2s and Note 10.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Current
maturities of long-term bank loans
|
$ | 6,000 | $ | 6,000 | ||||
|
Trade
payables
|
11,661 | 8,609 | ||||||
|
Other
payables and accrued expenses
|
23,961 | 19,550 | ||||||
|
Senior
convertible notes (1)
|
70,670 | - | ||||||
|
Total
current
liabilities
|
112,292 | 34,159 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Accrued
severance pay
|
12,174 | 13,336 | ||||||
|
Senior
convertible notes
|
- | 403 | ||||||
|
Long-term
banks loans
|
21,750 | 15,750 | ||||||
|
Total
long-term
liabilities
|
33,924 | 29,489 | ||||||
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
||||||||
|
EQUITY:
|
||||||||
|
AudioCodes
equity:
|
||||||||
|
Share
capital -
|
||||||||
|
Ordinary
shares of NIS 0.01 par value -
|
||||||||
|
Authorized:
100,000,000 at December 31, 2008 and 2009; Issued: 47,574,800 shares at
December 31, 2008 and 47,661,550 shares at December 31, 2009;
Outstanding: 40,182,444 shares at December 31, 2008 and 40,269,194 shares
at December 31, 2009
|
125 | 125 | ||||||
|
Additional
paid-in capital (1)
|
186,998 | 189,079 | ||||||
|
Treasury
stock
|
(25,057 | ) | (25,057 | ) | ||||
|
Accumulated
other comprehensive income (loss)
|
(912 | ) | 98 | |||||
|
Accumulated
deficit (1)
|
(77,294 | ) | (80,116 | ) | ||||
| 83,860 | 84,129 | |||||||
|
Non
controlling interest (2)
|
228 | (244 | ) | |||||
|
Total
equity
(1) (2)
|
84,088 | 83,885 | ||||||
|
Total
liabilities and equity
|
$ | 230,304 | $ | 147,533 | ||||
|
(1)
|
See
Note 2s and Note 10.
|
|
(2)
|
See
Note 2aa.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
U.S.
dollars in thousands, except per share
data
|
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Revenues
|
$ | 158,235 | $ | 174,744 | $ | 125,894 | ||||||
|
Cost
of revenues
|
69,185 | 77,455 | 56,194 | |||||||||
|
Gross
profit
|
89,050 | 97,289 | 69,700 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development, net
|
40,706 | 37,833 | 29,952 | |||||||||
|
Selling
and marketing
|
42,900 | 44,657 | 32,111 | |||||||||
|
General
and administrative
|
9,637 | 9,219 | 7,821 | |||||||||
|
Impairment
of goodwill and other intangible assets
|
- | 85,015 | - | |||||||||
|
Total
operating
expenses
|
93,243 | 176,724 | 69,884 | |||||||||
|
Operating
loss
|
(4,193 | ) | (79,435 | ) | (184 | ) | ||||||
|
Financial
expenses, net (1)
|
2,167 | 3,268 | 2,744 | |||||||||
|
Loss
before taxes on income
|
(6,360 | ) | (82,703 | ) | (2,928 | ) | ||||||
|
Taxes
on income, net
|
1,265 | 505 | 290 | |||||||||
|
Equity
in losses of affiliated companies, net
|
1,097 | 2,582 | 76 | |||||||||
|
Net
loss
|
(8,722 | ) | (85,790 | ) | (3,294 | ) | ||||||
|
Net
loss attributable to non-controlling interest
|
- | - | 472 | |||||||||
|
Net
loss attributable to AudioCodes' shareholders
|
$ | (8,722 | ) | $ | (85,790 | ) | $ | (2,822 | ) | |||
|
Basic
and diluted net loss per share attributable to AudioCodes' shareholders
(1)
|
$ | (0.20 | ) | $ | (2.08 | ) | $ | (0.07 | ) | |||
|
(1)
|
See
Note 2s and Note 10.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-6
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
STATEMENTS
OF CHANGES IN EQUITY
|
|
U.S.
dollars in thousands
|
|
Accumulated
|
Retained
|
|||||||||||||||||||||||||||||||
|
Additional
|
other
|
earnings
|
Non-
|
Total
|
||||||||||||||||||||||||||||
|
Share
|
paid-in
|
Treasury
|
comprehensive
|
(accumulated
|
controlling
|
comprehensive
|
Total
|
|||||||||||||||||||||||||
|
capital
|
capital
|
stock
|
income
|
deficit)
|
interests
|
income
(loss)
|
equity
|
|||||||||||||||||||||||||
|
Balance
as of January 1, 2007
|
$ | 131 | $ | 169,456 | $ | (11,320 | ) | $ | 122 | $ | 17,218 | $ | - | $ | 175,607 | |||||||||||||||||
|
Issuance
of shares upon exercise of options and employee stock purchase
plan
|
2 | 4,798 | - | - | - | - | 4,800 | |||||||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | 7,967 | - | - | - | - | 7,967 | |||||||||||||||||||||||||
|
Comprehensive
loss, net:
|
||||||||||||||||||||||||||||||||
|
Unrealized
gains on foreign currency cash flow hedges
|
- | - | - | 925 | - | - | $ | 925 | 925 | |||||||||||||||||||||||
|
Net
loss (1)
|
- | - | - | - | (8,722 | ) | (8,722 | ) | (8,722 | ) | ||||||||||||||||||||||
|
Total
comprehensive loss, net
|
$ | (7,797 | ) | |||||||||||||||||||||||||||||
|
Balance
as of December 31, 2007
|
133 | 182,221 | (11,320 | ) | 1,047 | 8,496 | - | 180,577 | ||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(10 | ) | - | (13,737 | ) | - | - | - | (13,747 | ) | ||||||||||||||||||||||
|
Issuance
of shares upon exercise of options and employee stock purchase
plan
|
2 | 1,545 | - | - | - | - | 1,547 | |||||||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | 4,341 | - | - | - | - | 4,341 | |||||||||||||||||||||||||
|
Early
redemption of Senior Convertible Note
|
(1,109 | ) | (1,109 | ) | ||||||||||||||||||||||||||||
|
Acquisition
of NSC (2)
|
- | - | - | - | - | 228 | - | 228 | ||||||||||||||||||||||||
|
Comprehensive
loss, net:
|
||||||||||||||||||||||||||||||||
|
Unrealized
losses on foreign currency cash flow hedges
|
- | - | - | (1,959 | ) | - | - | $ | (1,959 | ) | (1,959 | ) | ||||||||||||||||||||
|
Net
loss (1)
|
- | - | - | - | (85,790 | ) | (85,790 | ) | (85,790 | ) | ||||||||||||||||||||||
|
Total
comprehensive loss, net
|
$ | (87,749 | ) | |||||||||||||||||||||||||||||
|
Balance
as of December 31, 2008
|
125 | 186,998 | (25,057 | ) | (912 | ) | (77,294 | ) | 228 | 84,088 | ||||||||||||||||||||||
|
Issuance
of shares upon exercise of options and employee stock purchase
plan
|
- | 90 | - | - | - | - | 90 | |||||||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | 1,991 | - | - | - | - | 1,991 | |||||||||||||||||||||||||
|
Comprehensive
loss, net:
|
||||||||||||||||||||||||||||||||
|
Unrealized
profit on foreign currency cash flow hedges
|
- | - | - | 1,010 | - | $ | 1,010 | 1,010 | ||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (2,822 | ) | (472 | ) | (3,294 | ) | (3,294 | ) | ||||||||||||||||||||
|
Total
comprehensive loss, net
|
$ | (2,284 | ) | |||||||||||||||||||||||||||||
|
Balance
as of December 31, 2009
|
$ | 125 | $ | 189,079 | $ | (25,057 | ) | $ | 98 | $ | (80,116 | ) | $ | (244 | ) | $ | 83,885 | |||||||||||||||
|
(1)
|
See
Note 2s and Note 10.
|
|
(2)
|
See
Note 2aa.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-7
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
U.S.
dollars in thousands
|
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Cash flows from operating
activities:
|
||||||||||||
|
Net
loss (1)
|
$ | (8,722 | ) | $ | (85,790 | ) | $ | (3,294 | ) | |||
|
Adjustments
required to reconcile net loss to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
7,789 | 7,441 | 4,969 | |||||||||
|
Impairment
of goodwill, other intangible assets and investment in
affiliate
|
- | 86,111 | - | |||||||||
|
Amortization
of marketable securities premiums and accretion of discounts,
net
|
39 | 112 | 252 | |||||||||
|
Equity
in losses of affiliated companies, ne
t
|
1,097 | 1,486 | 76 | |||||||||
|
Stock-based
compensation expenses
|
7,967 | 4,341 | 1,991 | |||||||||
|
Amortization
of senior convertible notes discount and deferred charges and gain from
redemption (1)
|
5,040 | 4,592 | 2,930 | |||||||||
|
Decrease
(increase) in accrued interest on marketable securities, bank deposits and
structured notes
|
(611 | ) | 125 | 2,312 | ||||||||
|
Decrease
(increase) in deferred tax assets, net
|
2,390 | (169 | ) | - | ||||||||
|
Decrease
(increase) in trade receivables, net
|
5,014 | (3,960 | ) | 11,042 | ||||||||
|
Decrease
(increase) in other receivables and prepaid expenses
|
(1,412 | ) | 450 | 908 | ||||||||
|
Decrease
(increase) in inventories
|
(2,643 | ) | (1,840 | ) | 7,107 | |||||||
|
Increase
(decrease) in trade payables
|
1,263 | 2,728 | (3,052 | ) | ||||||||
|
Increase
(decrease) in other payables and accrued expenses (2)
|
(5,181 | ) | 333 | (3,491 | ) | |||||||
|
Increase
(decrease) in accrued severance pay, net
|
356 | 451 | (776 | ) | ||||||||
|
Net
cash provided by operating activities
|
12,386 | 16,411 | 20,974 | |||||||||
|
Cash flows from investing
activities:
|
||||||||||||
|
Investments
in affiliated companies
|
(1,003 | ) | (6,330 | ) | (341 | ) | ||||||
|
Purchase
of property and equipment
|
(2,629 | ) | (3,158 | ) | (1,271 | ) | ||||||
|
Purchase
of marketable securities
|
- | (16,795 | ) | |||||||||
|
Investment
in short-term and long-term bank deposits
|
(29,065 | ) | (100,864 | ) | (49,318 | ) | ||||||
|
Proceeds
from short-term bank deposits
|
28,700 | 90,142 | 95,203 | |||||||||
|
Proceeds
from structured notes called by the issuer
|
10,000 | - | - | |||||||||
|
Proceeds
from redemption of marketable securities upon maturity
|
31,600 | 17,000 | 16,000 | |||||||||
|
Payment
for acquisition of CTI
Squared
Ltd ("CTI
2
")
(3)
|
(4,897 | ) | - | - | ||||||||
|
Net
cash provided by (used in) investing activities
|
32,706 | (20,005 | ) | 60,273 | ||||||||
|
Cash flows from financing
activities:
|
||||||||||||
|
Purchase
of treasury stock
|
- | (13,747 | ) | - | ||||||||
|
Redemption
of senior convertible notes
|
- | (50,240 | ) | (73,147 | ) | |||||||
|
Proceeds
from long-term bank loans
|
- | 30,000 | - | |||||||||
|
Repayment
of long-term bank loans
|
- | (2,250 | ) | (6,000 | ) | |||||||
|
Proceeds
from issuance of shares upon exercise of options and employee stock
purchase plan
|
4,800 | 1,547 | 90 | |||||||||
|
Net
cash provided by (used in) financing activities
|
4,800 | (34,690 | ) | (79,057 | ) | |||||||
|
Increase
(decrease) in cash and cash equivalents
|
49,892 | (38,284 | ) | 2,190 | ||||||||
|
Cash
and cash equivalents at the beginning of the year
|
25,171 | 75,063 | 36,779 | |||||||||
|
Cash
and cash equivalents at the end of the year
|
$ | 75,063 | $ | 36,779 | $ | 38,969 | ||||||
|
(1)
|
See
Note 2s and Note 10.
|
|
(2)
|
See
Note 2aa.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-8
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
U.S.
dollars in thousands
|
|
Year
ended December 31,
|
|||||||||||||
|
2007
|
2008
|
2009
|
|||||||||||
|
(3)
|
Payment for acquisition of CTI Squared
Ltd.
|
||||||||||||
|
Net
fair value of assets acquired and liabilities assumed of CTI
2
at
the date of acquisition (see also Note 1b):
|
|||||||||||||
|
Working
capital, net (excluding cash and cash equivalents)
|
$ | (7,519 | ) | $ | - | $ | - | ||||||
|
Technology
|
1,530 | - | - | ||||||||||
|
Backlog
|
41 | - | - | ||||||||||
|
Goodwill
|
10,845 | - | - | ||||||||||
| $ | 4,897 | $ | - | $ | - | ||||||||
|
(4)
|
Supplemental disclosure of cash flow
activities
:
|
||||||||||||
|
Cash
paid during the year for income taxes
|
$ | 403 | $ | 646 | $ | 363 | |||||||
|
Cash
paid during the year for interest
|
$ | 2,500 | $ | 2,455 | $ | 2,238 | |||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-9
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
1:-
|
GENERAL
|
|
a.
|
Business
overview:
|
AudioCodes
Ltd. ("the Company") and its subsidiaries (together "the Group") design, develop
and market products for voice, data and video over IP networks to service
providers and channels (such as distributors), OEMs, network equipment providers
and systems integrators.
The
Company operates through its wholly-owned subsidiaries in the United States,
Europe, Asia, Latin America and Israel.
During
2008, the Group faced an adverse change in its business as a result of the
global economic slowdown and credit crisis. During the fourth quarter of 2008,
the Company recorded a non-cash impairment charge with respect to goodwill and
intangible assets as follows:
Goodwill
- $ 79,117 (see also Note 2k).
Intangible
assets – $ 5,898 (see also Notes 2k and 7).
|
b.
|
Acquisition
of CTI Squared Ltd.:
|
On April
1, 2007, the Group acquired the remaining outstanding common stock of CTI
Squared Ltd ("CTI
2
"), a
leading provider of enhanced messaging and communications platforms deployed
globally by service providers and enterprises. CTI
2
's
platforms integrate data and voice messaging services over internet, intranet,
PSTN, cellular, cable and enterprise networks. Prior to this acquisition, the
Group had an investment in CTI
2
in the
amount of $ 1,565.
In
consideration for the acquisition, the Group paid $ 4,897 in cash at the
closing of the transaction in April 2007 and committed to pay an additional
$ 5,000 by April, 2008. In February 2008, the Group paid the additional
amount of $ 5,000.
CTI
2
became a
wholly-owned subsidiary of the Company and, accordingly, its results of
operations have been included in the consolidated financial statements of the
Group since the acquisition date.
This
acquisition was accounted for under the purchase method of accounting in
accordance with FAS 141, "Business Combination".
F-10
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
1:-
|
GENERAL
(Cont.)
|
Based
upon an independent valuation of tangible and intangible assets acquired, the
Group has allocated the total acquisition cost of CTI
2
's assets
and liabilities as follows:
|
April
2,
2007
|
||||
|
Trade
receivables
|
$ | 117 | ||
|
Other
receivables and prepaid expenses
|
134 | |||
|
Property
and equipment
|
10 | |||
|
Total
tangible
assets acquired
|
261 | |||
|
Technology
(six years useful life)
|
1,530 | |||
|
Backlog
(one year useful life)
|
41 | |||
|
Goodwill
|
10,845 | |||
|
Total
intangible assets acquired
|
12,416 | |||
|
Total
tangible
and intangible assets acquired
|
12,677 | |||
|
Trade
payables
|
(64 | ) | ||
|
Other
current liabilities and accrued expenses
|
(822 | ) | ||
|
Accrued
severance pay, net
|
(329 | ) | ||
|
Total
liabilities assumed
|
(1,215 | ) | ||
|
Net
assets acquired
|
$ | 11,462 | ||
Goodwill
includes, but is not limited to, the synergistic value and potential competitive
benefits that could be realized by the Company from the acquisition. Goodwill is
not deductible for tax purposes.
The value
assigned to tangible and intangible assets acquired and liabilities assumed was
determined as follows:
Current
assets and liabilities are recorded at their carrying amounts. The carrying
amounts of current assets and liabilities were reasonable proxies for their fair
value due to their short-term maturity. Property and equipment are presented at
current replacement cost. The fair value of intangible assets was determined
using the income approach.
|
c.
|
Acquisition
of Natural Speech Communication
Ltd.:
|
Through
December 31, 2009, the Group had invested an aggregate of $ 8,418 in
Natural Speech Communication Ltd. ("NSC"), a privately-held company engaged in
speech recognition. As of December 1, 2008, the Company began consolidating the
financial results of NSC into AudioCodes' financial results since it became the
primary beneficiary in accordance with FIN No. 46R, "Consolidation of Variable
Interest Entities in interpretation of ARB No. 51".
As of
December 31, 2009, the Group owned 59.74% of the outstanding share capital
of NSC. (See also Note 19).
F-11
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
1:-
|
GENERAL
(Cont.)
|
This
acquisition was accounted for in accordance with the measurement guidance in FIN
46R.
|
December
1,
2008
|
||||
|
Other
receivables and prepaid expenses
|
$ | 152 | ||
|
Inventory
|
47 | |||
|
Property
and equipment
|
194 | |||
|
Total
tangible assets acquired
|
393 | |||
|
Trade
payables
|
(84 | ) | ||
|
Other
current liabilities and accrued expenses
|
(305 | ) | ||
|
Accrued
severance pay, net
|
(57 | ) | ||
|
Minority
interest
|
(228 | ) | ||
|
Total
liabilities assumed
|
(674 | ) | ||
|
Net
assets acquired
|
$ | (281 | ) | |
Based
upon an independent valuation of tangible and intangible assets acquired, the
reported amount of NSC (plus the fair value of any consideration paid) was less
than the fair value of the net assets of NSC. Therefore, the excess was
allocated and reported as a pro-rata adjustment to all of the consolidated
assets.
The
following unaudited pro forma information does not purport to represent what the
Group's results of operations would have been had the acquisition of NSC been
consummated on January 1, 2007, nor does it purport to represent the results of
operations of the Group for any future period.
|
Year
ended December 31,
|
||||||||
|
2007
|
2008
|
|||||||
|
Revenues
|
$ | 159,358 | $ | 175,489 | ||||
|
Net
loss
|
$ | (5,621 | ) | $ | (83,604 | ) | ||
|
Basic
and diluted net loss per share
|
$ | (0.13 | ) | $ | (2.03 | ) | ||
|
d.
|
The
Group is dependent upon sole source suppliers for certain key components
used in its products, including certain digital signal processing chips.
Although there are a limited number of manufacturers of these particular
components, management believes that other suppliers could provide similar
components at comparable terms. A change in suppliers, however, could
cause a delay in manufacturing and a possible loss of sales, which could
adversely affect the operating results of the Group and its financial
position.
|
|
e.
|
In
January 2009, the Group's largest customer announced that it would seek
creditor protection for itself and some of its subsidiaries. As a result
from the loss of the this customer, a significant reduction of the amount
of products purchased by this customer or the Group's inability to obtain
a satisfactory replacement of this customer in a timely manner may have a
significant impact on the Group's future revenues and the results of
operations. For the years ended December 31, 2007, 2008 and 2009, this
customer accounted for 17.0%, 14.4% and 15.6%, respectively, of the
Group's revenues.
|
F-12
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S.
GAAP").
|
a.
|
Use
of estimates:
|
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates, judgments and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The Company's management believes that the estimates,
judgment and assumptions used are reasonable based upon information available at
the time they are made. As applicable to these consolidated financial
statements, the most significant estimates and assumptions relate to sales
reserves and allowances, income taxes, valuation of goodwill and intangible
assets, purchase price allocation on acquisitions, inventories, and assumptions
related to the application of the amended ASC 470-20, with regards to
convertible notes issues by the Company and which may be settled in cash upon
conversion. Actual results could differ from those estimates.
|
b.
|
Financial
statements in U.S. dollars:
|
A
majority of the group's revenues is generated in U.S. dollars. In addition, most
of the group's costs are denominated and determined in U.S. dollars and in new
Israeli shekels. The Company's management believes that the U.S. dollar is the
currency in the primary economic environment in which the group operates. Thus,
the functional and reporting currency of the group is the U.S.
dollar.
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured
into U.S. dollars in accordance with ASC 830 (formerly: FAS 52), "Foreign
Currency Matters". All transaction gains and losses of the remeasured monetary
balance sheet items are reflected in the statements of operations as financial
income or expenses, as appropriate.
|
c.
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. Intercompany transactions and balances, including
profits from intercompany sales not yet realized outside the Group, have been
eliminated upon consolidation.
|
d.
|
Cash
equivalents:
|
Cash
equivalents are short-term highly liquid investments that are readily
convertible into cash with original maturities of three months or less, at the
date acquired.
|
e.
|
Short-term
bank deposits:
|
Short-term
bank deposits are deposits with maturities of more than three months but less
than one year. The deposits are mainly in U.S. dollars and bear interest at an
average rate of 4.00% and 0.35% for 2008 and 2009, respectively. Short-term
deposits are presented at their cost, including accrued interest. The banks have
a lien on the Company's assets and the Company is required to maintain $ 7,000
of compensating balances with the banks which are included in short-term bank
deposits (see also Note 11.)
F-13
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
f.
|
Marketable
securities:
|
The
Company accounts for investments in debt securities in accordance with ASC 320
(formerly FAS 115), "Investments-Debt and Equity Securities".
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 debt securities are classified as
held-to-maturity since the Company has the intent and ability to hold the
securities to maturity and, accordingly, debt securities are stated at amortized
cost.
For the
year ended December 31, 2008, all securities covered by ASC No. 320 were
designated by the Company's management as held-to-maturity. As of December 31,
2009, the Group does not hold any marketable securities.
The
amortized cost of held-to-maturity securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in the consolidated statement of operations as financial income or
expenses, as appropriate. The accrued interest on short-term and long-term
marketable securities is included in the balance of short-term marketable
securities.
Effective
January 1, 2009, the Company adopted an amendment to ASC 320 which changed the
impairment and presentation model for its debt securities. The amendment had no
effect on the Company.
For the
years ended December 31, 2007, 2008 and 2009, no other than temporary
impairment losses have been identified.
|
g.
|
Inventories:
|
Inventories
are stated at the lower of cost or market value. Cost is determined as
follows:
Raw
materials - using the "weighted average cost" method.
Finished
products - using the "weighted average cost" method with the addition of direct
manufacturing costs.
The Group
periodically evaluates the quantities on hand relative to current and historical
selling prices and historical and projected sales volume and technological
obsolescence. Based on these evaluations, inventory write-offs are taken based
on slow moving items, technological obsolescence, excess inventories,
discontinued products and for market prices lower than cost.
|
h.
|
Investment
in companies:
|
The
Company accounts for investments in companies in which it has the ability to
exercise significant influence over the operating and financial policies using
the equity method of accounting in accordance with the requirements of ASC 323
(formerly Accounting Principle Board ("APB") No. 18), "Investments-Equity method
and Joint Ventures". If the Company does not have the ability to exercise
significant influence over operating and financial policies of a company, the
investment is stated at cost.
F-14
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Investment
in companies represents investments in ordinary shares, preferred shares and
convertible loans. According to ASC 323, losses of such companies are recognized
based on the ownership level of the particular security held by the
Company.
The
Company's investments are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investment may not be
recoverable in accordance with ASC 323. As of December 31, 2007 and 2009,
no impairment losses had been identified. During 2008, based on management's
most recent analyses, the Company recognized an impairment loss of $ 1,096
relating to its investment in NSC.
|
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
and peripheral equipment
|
33
|
||
|
Office
furniture and equipment
|
6 -
20 (mainly 15%)
|
||
|
Leasehold
improvements
|
Over
the shorter of the term of the lease or the life of the
asset
|
|
j.
|
Deferred
charges:
|
Costs
incurred in respect of issuance of senior convertible notes are deferred and
amortized using the effective interest method and classified as a component of
interest expense over the five-year-period from issuance to expected maturity in
November 2009, in accordance ASC No. 470. See also Note 2s, Note 7 and Note
10.
|
k.
|
Impairment
of long-lived assets:
|
The
Group's long-lived assets are reviewed for impairment in accordance with
ASC 360-10-35 (formerly FAS 144), "Property, Plant and Equipment -
Subsequent Measurement", 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 such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. The loss is allocated to the long-lived
assets of the Group on a pro rata basis using the relative carrying amounts of
those assets, except that the loss allocated to an individual long-lived asset
of the Group shall not reduce the carrying amount of that asset below its fair
value whenever that fair value is determinable As of December 31, 2007, 2008 and
2009, no impairment losses have been identified for property and equipment since
the fair value of those assets was higher than its carrying
amounts.
Intangible
assets are comprised of acquired technology, customer relations, trade names,
existing contracts for maintenance and backlog. All intangible assets are
amortized using the straight-line method over their estimated useful
life.
F-15
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Intangible
assets that are not considered to have an indefinite useful life are amortized
using the straight-line basis over their estimated useful lives, which range
from one to ten years. Recoverability of these assets is measured by a
comparison of the carrying amount of the asset to the undiscounted future cash
flows expected to be generated by the assets. If the assets are considered to be
impaired, the amount of any impairment is measured as the difference between the
carrying value and the fair value of the impaired assets.
During
2007 and 2009, no impairment charges were identified. During 2008, the Company
recorded an impairment charge for intangible assets in the amount of
$ 5,898 (See also Note 1).
|
l.
|
Goodwill:
|
Goodwill
and certain other purchased intangible assets have been recorded in the
Company's financial statements as a result of acquisitions. Goodwill represents
the excess of the purchase price in a business combination over the fair value
of net tangible and intangible assets acquired under ASC 350 (formerly FAS 142),
"Intangible, Goodwill and Other", Goodwill is not amortized, but rather is
subject to an annual impairment test. ASC 350 requires goodwill to be tested for
impairment at least annually or between annual tests in certain circumstances,
and written down when impaired.
The
Company performs annual impairment analysis of goodwill at December 31 of each
year, or more often as applicable. The provisions of ASC No. 350 require that a
two-step impairment test be performed on goodwill at the level of the reporting
units. In the first step, the Company compares the fair value of each reporting
unit to its carrying value. If the fair value exceeds the carrying value of the
net assets, goodwill is considered not impaired, and no further testing is
required to be performed. If the carrying value of the net assets exceeds the
fair value, then the Company must perform the second step of the impairment test
in order to determine the implied fair value of goodwill. If the carrying value
of goodwill exceeds its implied fair value, then the Company would record an
impairment loss equal to the difference.
The
Company believes that its business activity and management structure meet the
criterion of being a single reporting unit for accounting purposes. The Company
has performed an annual impairment analysis as of December 31, 2007, 2008 and
2009 using discounted cash flows, market multiples and market capitalization.
Significant estimates used in the methodologies include estimates of future
cash-flows, future short-term and long-term growth rates, weighted average cost
of capital and market multiples for the reporting unit.
During
2007 and 2009, no impairment charges were identified. In 2008, as the fair value
of the net assets of the reporting unit was lower than the carrying value as of
the valuation date, the goodwill was deemed to be impaired and step 2 analysis
was required. During 2008, an impairment charge to goodwill in the amount of
$ 79,117 was recorded. (See also Note 1).
F-16
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
m.
|
Revenue
recognition:
|
The Group
generates its revenues primarily from the sale of products through a direct
sales force and sales representatives. The Group's products are delivered to its
customers, which include original equipment manufacturers, network equipment
providers, systems integrators and distributors in the telecommunications and
networking industries, all of whom are considered end-users.
Revenues
from products are recognized in accordance with Staff Accounting Bulletin
("SAB") No. 104), "Revenue Recognition", when the following criteria are met:
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable, and collectability is probable. The
Group has no remaining obligation to customers after the date on which products
are delivered other than pursuant to warranty obligations and right of
return.
The Group
grants to certain customers a right of return or the ability to exchange a
specific percentage of the total price paid for products they have purchased
over a limited period for other products. The Group maintains a provision for
product returns and exchanges based on its experience with historical sales
returns, analysis of credit memo data and other known factors, in accordance
with ASC No. 605. The provision was deducted from revenues and amounted to
$
559
,
$ 754 and $ 656, as of December 31, 2007, 2008 and 2009,
respectively.
Revenues
from the sale of products which were not yet determined to be final sales due to
market acceptance were deferred and included in deferred revenues. In cases
where collectability is not probable, revenues are deferred and recognized upon
collection.
|
n.
|
Warranty
costs:
|
The Group
generally provides a warranty period of 12 months at no extra charge. The Group
estimates the costs that may be incurred under its basic limited warranty and
records a liability in the amount of such costs at the time product revenue is
recognized. Factors that affect the Group's warranty liability include the
number of installed units, historical and anticipated rates of warranty claims,
and cost per claim. The Group periodically assesses the adequacy of its recorded
warranty liability and adjusts the amount as necessary.
|
o.
|
Research
and development costs:
|
Research
and development costs, net of government grants received, are charged to the
statement of operations as incurred.
|
p.
|
Income
taxes:
|
The Group
accounts for income taxes in accordance with ASC 740 (formerly FAS 109), "Income
Taxes". ASC 740 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
Group provides 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.
F-17
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
ASC 740
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return and also provides guidance on various related matters such
as derecognition, interest and penalties, and disclosure. On January 1,
2007, the Company adopted an amendment to ASC 740. The initial application of
the amendment did not have a material effect on the Company's shareholders'
equity. The Company recognizes interest and penalties, if any, related to
unrecognized tax benefits in tax expenses.
|
q.
|
Comprehensive
income (loss)
|
The
Company accounts for comprehensive income (loss) in accordance with ASC 220
(formerly FAS 130) "Comprehensive Income". ASC 220 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income generally
represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders. The Company
determined that its items of comprehensive income (loss) relates to gains and
losses on hedging derivatives instruments.
|
r.
|
Concentrations
of credit risk:
|
Financial
instruments that potentially subject the Group to concentrations of credit risk
consist principally of cash and cash equivalents, bank deposits, marketable
securities, trade receivables and foreign currency derivative
contracts.
The
majority of the Group's cash and cash equivalents and bank deposits are invested
in U.S. dollar instruments with major banks in Israel and the United States.
Such investments in the United States may be in excess of insured limits and are
not insured in other jurisdictions. Management believes that the financial
institutions that hold the Group's investments are in corporations with high
credit standing. Accordingly, management believes that minimal credit risk
exists with respect to these financial investments.
The trade
receivables of the Group are derived from sales to customers located primarily
in the Americas, the Far East, Israel and Europe. However, under certain
circumstances, the Group may require letters of credit, other collateral,
additional guarantees or advance payments. Regarding certain credit balances,
the Group is covered by foreign trade risk insurance. The Group performs ongoing
credit evaluations of its customers and establishes an allowance for doubtful
accounts based upon a specific review.
|
s.
|
Senior
convertible notes:
|
Effective
January 1, 2009, the Company adopted an amendment to ASC 470-20, "Debt with
Conversion and Other Options" (originally issued as FSP APB 14-1,
"Accounting for Convertible debt Instruments that may be settled in cash upon
conversion"). FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components on the issuance day
in a manner that will reflect the entity's nonconvertible debt borrowing rate
when interest cost is recognized in subsequent periods. The amended ASC 470-20
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The Company
applied this amendment to ASC 470-20 retrospectively to all periods presented
and comparative figures have been adjusted accordingly. See also Note
10.
F-18
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company presents the outstanding principal amount of its senior convertible
notes as a long-term liability, in accordance with ASC 210-10-45. The debt is
classified as a long-term liability until the date of conversion on which it
would be reclassified to equity, or within one year of the first contractual
redemption date, on which it would be reclassified as a short-term liability.
Accrued interest on the senior convertible notes is included in "other payables
and accrued expenses".
The
initial purchasers discount on the debt is amortized according to the interest
method over the expected five-year term of the senior convertible notes in
accordance with ASC 470,-20 This five-years-period ended in November 2009.
Please refer also to Note 10.
According
to ASC 470-20, if an instrument within the scope of this ASC is repurchased, an
issuer shall allocate the consideration transferred and related transaction
costs incurred, to the extinguishment of the liability component and the
reacquisition of the equity component.
|
t.
|
Basic
and diluted net earnings per share:
|
Basic net
earnings per share are computed based on the weighted average number of ordinary
shares outstanding during each year. Diluted net earnings per share are computed
based on the weighted average number of ordinary shares outstanding during each
year, plus potential dilutive ordinary shares considered outstanding during the
year, in accordance with ASC No. 260 (formerly FAS 128), "Earnings Per
Share".
Senior
convertible notes and certain outstanding stock options and warrants have been
excluded from the calculation of the diluted net earnings per ordinary share
since such securities are anti-dilutive for all years presented. The total
weighted average number of shares related to the senior convertible notes and
outstanding options and warrants that have been excluded from the calculations
of diluted net income per share was 11,765,438, 12,156,728 and 8,768,909
for
the years ended December 31, 2007, 2008 and 2009, respectively.
|
u.
|
Accounting
for stock-based compensation:
|
The
Company accounts for stock-based compensation in accordance with ASC 718
formerly FAS 123(R)) "Compensation-Stock Compensation" requires companies to
estimate the fair value of equity-based payment awards on the date of grant
using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite
service periods in the Company's consolidated statement of
operations.
The
Company recognizes compensation expenses for the value of its awards based on
the accelerated method over the requisite service period of each of the awards,
net of estimated forfeitures. ASC No. 718 requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Estimated forfeitures are based on
actual historical pre-vesting forfeitures.
The
Company applies ASC 718 and ASC 505-50 (formerly, EITF 96-18), "Equity-Based
Payments to Non-Employees" with respect to options and warrants issued to
non-employees. Accordingly, the Company uses option valuation models to measure
the fair value of the options and warrants at the measurement date as defined in
ASC 505-50.
During
2008 and 2009, the Company decided on an exceptional and ex-gratia basis to
extend the validity of certain options granted to employees by a period of 1-2
years and re-priced the exercise price to certain employees.
F-19
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company accounted for these changes as modification in accordance with ASC 718.
A modification to the terms of an award should be treated as an exchange of the
original award for a new award with total compensation cost equal to the
grant-date fair value of the original award plus the incremental value measured
at the same date. Under ASC 718, the calculation of the incremental value is
based on the excess of the fair value of the new (modified) award based on
current circumstances over the fair value of the original option measured
immediately before its terms are modified based on current
circumstances.
The
weighted-average estimated fair value of employee stock options granted during
the years ended December 31, 2007, 2008 and 2009, was $ 3.23, $ 1.89
and $ 1.22 per share, respectively, using the Black-Scholes option pricing
formula. Fair values were estimated using the following weighted-average
assumptions (annualized percentages):
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected
volatility
|
54.7 | % | 52.0 | % | 48.7 | % | ||||||
|
Risk-free
interest
|
4.6 | % | 2.6 | % | 2.3 | % | ||||||
|
Expected
life
|
4.8
years
|
4.8
years
|
5.0
years
|
|||||||||
|
Forfeiture
rate
|
7.0 | % | 11.0 | % | 7.0 | % | ||||||
The
Company used its historical volatility in accordance with ASC 718. The
computation of volatility uses historical volatility derived from the Company's
exchange traded shares. In 2009, the expected term of options granted is
estimated based on historical experience and represents the period of time that
options granted are expected to be outstanding. In 2006 and 2008, the expected
term was determined based on the simplified method in accordance with SAB 107
and SAB 110. The risk free interest rate assumption is the implied yield
currently available on United States treasury zero-coupon issues with a
remaining term equal to the expected life of the Company's options. The dividend
yield assumption is based on the Company's historical experience and expectation
of no future dividend payouts and may be subject to substantial change in the
future. The Company has historically not paid cash dividends and has no
foreseeable plans to pay cash dividends in the future.
The total
equity-based compensation expense relating to all of the Company's equity-based
awards recognized for the twelve months ended December 31, 2007, 2008 and 2009
was included in items of the consolidated statements of income as
follows:
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Cost
of revenues
|
$ | 613 | $ | 318 | $ | 117 | ||||||
|
Research
and development, net
|
3,011 | 1,467 | 642 | |||||||||
|
Selling
and marketing expenses
|
3,476 | 2,026 | 913 | |||||||||
|
General
and administrative expenses
|
867 | 530 | 319 | |||||||||
|
Total
equity-based compensation expenses
|
$ | 7,967 | $ | 4,341 | $ | 1,991 | ||||||
F-20
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
v.
|
Treasury
stock:
|
The
Company has repurchased its ordinary shares from time to time in the open market
and holds such shares as treasury stock. The Company presents the cost to
repurchase treasury stock as a reduction of shareholders'
equity.
|
w.
|
Severance
pay:
|
The
liability for severance pay for Israeli employees is calculated pursuant to
Israel's Severance Pay Law, based on the most recent salary of the employees
multiplied by the number of years of employment as of the balance sheet date for
all employees in Israel. Employees are entitled to one month's salary for each
year of employment, or a portion thereof. The Group's liability for all of its
Israeli employees is fully provided for by monthly deposits with severance pay
funds, insurance policies and by an accrual. The value of these deposits is
recorded as an asset in the Company's balance sheet.
The
deposited funds include profits accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israel's Severance Pay Law or labor agreements.
Severance
pay expenses for the years ended December 31, 2007, 2008 and 2009, amounted to
approximately $ 2,409, $ 2,701 and $1,136, respectively.
|
x.
|
Employee
benefit plan:
|
During 2007, the Group merged its
separate 401(k) defined contribution plans into one plan covering employees in
the U.S. All eligible employees may elect to contribute a portion of their
annual compensation to the plan through salary deferrals, subject to the IRS
limit of $ 16.5 during 2009 ($ 22 including catch-up contributions for
participants age 50 or over). The Group matches employee contributions to the
plan up to a limit of 3.75% of their eligible compensation, subject to IRS
limits. In 2007, 2008 and 2009, the Group matched contributions in the amount of
$ 361, $ 380 and $ 280, respectively
.
|
y.
|
Advertising
expenses:
|
Advertising
expenses are charged to the statements of operations as incurred. Advertising
expenses for the years ended December 31, 2007, 2008 and 2009, amounted to
$ 350, $ 407 and $139, respectively.
|
z.
|
Fair
value of financial instruments:
|
The
estimated fair value of financial instruments has been determined by the Group
using available market information and valuation methodologies. Considerable
judgment is required in estimating fair values. Accordingly, the estimates may
not be indicative of the amounts the Company could realize in a current market
exchange.
The
following methods and assumptions were used by the Group in estimating its fair
value disclosures for financial instruments:
F-21
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
carrying amounts of cash and cash equivalents, short-term bank deposits, trade
receivables and trade payables approximate their fair value due to the
short-term maturity of such instruments. The fair value of long-term bank loans
and senior convertible loans also approximates their carrying value, since they
bear interest at rates close to the prevailing market rates.
The fair
value of foreign currency contracts (used for hedging purposes) is estimated by
obtaining current quotes from banks.
Fair
value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or a liability. As a basis for considering such assumptions,
ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs
used in the valuation methodologies in measuring fair value:
|
|
Level 1
|
-
|
Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
|
|
|
Level 2
|
-
|
Observable
inputs, other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data
|
|
|
Level 3
|
-
|
Unobservable
inputs which are supported by little or no market activity and that are
significant to the fair value of the assets and liabilities. This includes
certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable
inputs
|
The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. (see also
Notes 3 and 8).
The
Company adopted the provisions of ASC 820-10, "Fair Value Measurements and
Disclosures" (formerly FAS 157, "Fair Value Measurements")
,
with respect to
non-financial assets and liabilities effective January 1, 2009. The
adoption of ASC 820-10 did not have a material impact on the Company’s
consolidated financial statements.
In April
2009, the Company adopted the FASB's updated guidance ASC 820-10 (formerly, FSP
FAS 157-4), related to fair value measurements and disclosures, which provides
additional guidance for estimating fair value in accordance with the guidance
related to fair value measurements when the volume and level of activity for an
asset or liability have significantly decreased. The amended ASC 820-10 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. The adoption of this guidance did not have a material effect on the
consolidated financial statements.
|
|
aa.
|
Consolidation
|
On
January 1, 2009, the Company adopted an amendment to ASC 810,
"Consolidation" (originally issued as FAS 160). According to the amendment,
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as a separate component of equity in
the consolidated financial statements. As such, changes in the parent's
ownership interest with no change of control are treated as equity transactions,
rather than step acquisitions or dilution gains or losses. The amendment
clarifies that losses of partially owned consolidated subsidiaries shall
continue to be allocated to the non-controlling interests even when their
investment was already reduced to zero.
F-22
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
amendment applies prospectively, except for the presentation and disclosure
requirements, which are applied retrospectively to all periods presented. As a
result, upon adoption, the Company retroactively reclassified the "Minority
interests" balance to be presented in a new caption in total shareholders'
equity, "Non-controlling interest". The adoption also impacted certain captions
previously used in the consolidated statement of operations, largely identifying
net loss including the portion attributable to non-controlling interest and net
loss attributable to AudioCodes' shareholders. This amendment required the
Company to include the accumulated amount of non-controlling interest as part of
shareholders' equity ($ 228 at December 31, 2008).
The net
loss amounts the Company has previously reported are now presented as "Net loss
attributable to AudioCodes' shareholders," and, as required, net loss per share
continue to reflect amounts attributable only to AudioCodes' shareholders.
Similarly, in the statements of changes in shareholders' equity, the Company
distinguished between equity amounts attributable to AudioCodes' shareholders
and amounts attributable to the non-controlling interest.
|
ab.
|
Variable
interest entities
|
ASC
810-10, "Consolidation" provides a framework for identifying Variable Interest
Entities ("VIEs") and determining when a company should include the assets,
liabilities, non-controlling interests and results of activities of a VIE in its
consolidated financial statements.
The
Company’s assessment of whether an entity is a VIE and the determination of the
primary beneficiary is judgmental in nature and involves the use of estimates
and assumptions. Those include, among others, forecasted cash flows, their
respective probabilities and the economic value of certain preference rights. In
addition, such assessment also involves estimates of whether a group entity can
finance its current activities, until it reaches profitability, without
additional subordinated financial support.
|
|
ac.
|
Derivatives
and hedging:
|
The
Company accounts for derivatives and hedging based on ASC 815 (formerly FAS
133), "Derivatives and Hedging" ("ASC No. 815").
The
Company accounts for its derivative instruments as either assets or liabilities
and carries them at fair value. Derivative instruments that are not designated
and qualified as hedging instruments must be adjusted to fair value through
earnings.
For
derivative instruments that hedge the exposure to variability in expected future
cash flows that are designated as cash flow hedges, the effective portion of the
gain or loss on the derivative instrument is reported as a component of
accumulated other comprehensive income (loss) in equity and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings and is classified as finance income (expense), net. The
ineffective portion of the gain or loss on the derivative instrument is
recognized in current earnings and classified as finance income. To receive
hedge accounting treatment, cash flow hedges must be highly effective in
offsetting changes to expected future cash flows on hedged
transactions.
During
2009, the Company recorded accumulated other comprehensive income in the amount
of $ 1,010 from its currency forward with respect to payroll and rent
expenses expected to be incurred during 2009. Such amount will be recorded into
earnings during 2010. See also Note 18.
F-23
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
ad.
|
Codification:
|
In
June 2009, the Financial Accounting Standards Board ("FASB") issued a
standard that established the FASB Accounting Standards
Codification ("ASC") and amended the hierarchy of generally accepted
accounting principles ("GAAP") such that the ASC became the single source of
authoritative U.S. GAAP. Rules and interpretive releases issued by the SEC under
authority of federal securities law are also sources of the authoritative GAAP
for SEC registrants. All other literature is considered non-authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by
the FASB through Accounting Standards Updates ("ASUs"). The ASC is effective for
the Company from September 1, 2009. Throughout the notes to the
consolidated financial statements references that were previously made to former
authoritative U.S. GAAP pronouncements have been changed to coincide with the
appropriate section of the ASC.
|
|
ae.
|
Impact
of recently issued accounting
pronouncements:
|
|
|
(
1)
|
In
October 2009, the FASB issued an update to ASC No. 605-25, "Revenue
recognition - Multiple-Element Arrangements", that provides amendments to
the criteria for separating consideration in multiple-deliverable
arrangements to:
|
|
|
a)
|
Provide
updated guidance on whether multiple deliverables exist, how the
deliverables in an arrangement should be separated, and how the
consideration should be allocated;
|
|
|
b)
|
Require
an entity to allocate revenue in an arrangement using estimated selling
prices ("ESP") of deliverables if a vendor does not have vendor-specific
objective evidence of selling price ("VSOE") or third-party evidence of
selling price ("TPE");
|
|
|
c)
|
Eliminate
the use of the residual method and require an entity to allocate revenue
using the relative selling price
method.
|
|
|
d)
|
Require
expanded disclosures of qualitative and quantitative information regarding
application of the multiple-deliverable revenue arrangement
guidance.
|
The
mandatory adoption date is January 1, 2011. The Company may elect to adopt the
update prospectively, to new or materially modified arrangements beginning on
the adoption date, or retrospectively, for all periods presented. The Company is
currently evaluating the impact of this update on its consolidated results of
operations and financial condition.
|
|
(2)
|
In
January 2010, the FASB updated the "Fair Value Measurements Disclosures".
More specifically, this update will require (a) an entity to disclose
separately the amounts of significant transfers in and out of Level 1 and
2 fair value measurements and to describe the reasons for the transfers;
and (b) information about purchases, sales, issuances and settlements
to be presented separately (i.e. present the activity on a gross basis
rather than net) in the reconciliation for fair value measurements using
significant unobservable inputs (Level 3 inputs). This update clarifies
existing disclosure requirements for the level of disaggregation used for
classes of assets and liabilities measured at fair value, and requires
disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements using
Level 2 and Level 3 inputs. As applicable to the Company, this will become
effective as of the first interim or annual reporting period beginning
after December 15, 2009, except for the gross presentation of the
Level 3 roll forward information, which is required for annual
reporting
periods beginning after December 15, 2010 and for interim
reporting periods within those years. The Company does not expect
that the adoption of the new guidance will have a material impact on its
consolidated financial
statements.
|
F-24
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
(3)
|
In
June 2009, the FASB issued an update to ASC 810, "Consolidation," which,
among other things, (i) requires ongoing reassessments of whether an
entity is the primary beneficiary of a variable interest entity and
eliminates the quantitative approach previously required for determining
the primary beneficiary of a variable interest entity; (ii) amends
certain guidance for determining whether an entity is a variable interest
entity; and (iii) requires enhanced disclosure that will provide
users of financial statements with more transparent information about an
entity’s involvement in a variable interest entity. The update is
effective for interim and annual periods beginning after November 15,
2009. The Company does not expect the adoption of the update to have a
material impact on its financial condition or results of
operations.
|
|
|
af.
|
Reclassification:
|
Certain
2008 figures have been reclassified to conform to the 2009 presentation. The
reclassification had no effect on previously reported net income (loss),
shareholders' equity or cash flows.
|
NOTE
3:-
|
MARKETABLE
SECURITIES AND ACCRUED INTEREST
|
The
following is a summary of held to maturity marketable securities.
|
December
31, 2008
|
||||||||||||
|
Net
|
||||||||||||
|
Amortized
|
unrealized
|
Fair
|
||||||||||
|
cost
|
losses
|
Value
|
||||||||||
|
Corporate
debentures:
|
||||||||||||
|
Maturing
within one year
|
$ | 16,253 | $ | 1 | $ | 16,252 | ||||||
| 16,253 | 1 | 16,252 | ||||||||||
|
Accrued
interest
|
228 | - | 228 | |||||||||
| $ | 16,481 | $ | 1 | $ | 16,480 | |||||||
The
unrealized losses on the Company's investments are due to interest rate
increases. The contractual cash flows of these investments were issued by highly
rated corporations. Accordingly, it was expected that the securities would not
be settled at a price less than the amortized cost of the Company's investment.
Since the Company had the ability and intent to hold these investments until a
recovery of fair value, the Company did not consider these investments to be
other-than-temporarily impaired as of December 31, 2008.
During
2009, all marketable securities were redeemed upon contractual
maturity.
F-25
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
4:-
|
INVENTORIES
|
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Raw
materials
|
$ | 9,346 | $ | 5,923 | ||||
|
Finished
products
|
11,277 | 7,593 | ||||||
| $ | 20,623 | $ | 13,516 | |||||
In the
years ended December 31, 2007, 2008 and 2009, the Group wrote-off inventories in
a total amount of $ 973, $ 2,356 and $ 3,421,
respectively.
|
NOTE
5:-
|
INVESTMENT
IN COMPANIES
|
|
|
a.
|
As
of December 31, 2009 the Company owns 20.21% of Mailvision's outstanding
share capital.
|
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Invested
in equity
|
$ | 993 | $ | 993 | ||||
|
Loans
|
301 | 642 | ||||||
|
Accumulated
net loss
|
(49 | ) | (125 | ) | ||||
|
Total
investment
|
$ | 1,245 | $ | 1,510 | ||||
|
|
b.
|
In
December 2006, the Company extended a convertible loan in the amount of $
1,000 to another unrelated privately held company. The loan bears interest
at LIBOR+2% per annum and was due and payable in December 2007. In
December, 2007, the Company requested repayment of this loan. During 2008,
the Company received back shares of another unrelated privately-held
company and $ 870 in cash. The remaining balance of the loan in the amount
of $ 130 and received shares were written
off.
|
|
NOTE
6:-
|
PROPERTY
AND EQUIPMENT
|
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Cost:
|
||||||||
|
Computers
and peripheral equipment
|
$ | 18,645 | $ | 19,852 | ||||
|
Office
furniture and equipment
|
9,466 | 9,458 | ||||||
|
Leasehold
improvements
|
2,437 | 2,354 | ||||||
| 30,548 | 31,664 | |||||||
|
Accumulated
depreciation:
|
||||||||
|
Computers
and peripheral equipment
|
15,507 | 17,359 | ||||||
|
Office
furniture and equipment
|
7,154 | 8,276 | ||||||
|
Leasehold
improvements
|
1,043 | 1,073 | ||||||
| 23,704 | 26,708 | |||||||
|
Depreciated
cost
|
$ | 6,844 | $ | 4,956 | ||||
Depreciation
expenses amounted to $ 3,392, $ 3,602 and $ 3,159 for the years
ended December 31, 2007, 2008 and 2009, respectively.
F-26
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
7:-
|
INTANGIBLE
ASSETS, DEFERRED CHARGES
|
|
Useful life
|
December
31,
|
||||||||||||
|
(years)
|
2008
|
2009
|
|||||||||||
|
a.
|
Cost:
|
||||||||||||
|
Acquired
technology
|
5-10
|
$ | 17,512 | $ | 17,512 | ||||||||
|
Customer
relationship
|
9
|
8,001 | 8,001 | ||||||||||
|
Trade
name
|
3
|
466 | 466 | ||||||||||
|
Existing
contracts for maintenance
|
3
|
204 | 204 | ||||||||||
|
Deferred
charges
|
5
|
478 | 478 | ||||||||||
| 26,661 | 26,661 | ||||||||||||
|
Accumulated
amortization:
|
|||||||||||||
|
Acquired
technology
|
8,847 | 10,321 | |||||||||||
|
Customer
relationship
|
2,222 | 2,521 | |||||||||||
|
Trade
name
|
389 | 415 | |||||||||||
|
Existing
contracts for maintenance
|
170 | 181 | |||||||||||
|
Deferred
charges
|
429 | 478 | |||||||||||
| 12,057 | 13,916 | ||||||||||||
|
Impairment:
|
|||||||||||||
|
Acquired
technology
|
1,995 | 1,995 | |||||||||||
|
Customer
relationship
|
3,829 | 3,829 | |||||||||||
|
Trade
name
|
51 | 51 | |||||||||||
|
Existing
contracts for maintenance
|
23 | 23 | |||||||||||
| 5,898 | 5,898 | ||||||||||||
|
Amortized
cost
|
$ | 8,706 | $ | 6,847 | |||||||||
|
|
b.
|
Amortization
expenses related to intangible assets amounted to $ 4,397,
$ 3,839 and $ 1,810 for the years ended December 31, 2007,
2008 and 2009, respectively.
|
|
|
c.
|
Amortization
expenses related to deferred charges amounted to $ 96, $ 94 and
$ 49 for the years ended December 31, 2007, 2008 and 2009,
respectively.
|
|
|
d.
|
Expected
amortization expenses for the years ended
December 31:
|
|
2010
|
$ | 1,530 | ||
|
2011
|
$ | 1,327 | ||
|
2012
|
$ | 1,124 | ||
|
2013
|
$ | 933 | ||
|
2014
|
$ | 869 | ||
|
2015
and thereafter
|
$ | 1,064 |
F-27
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
8:-
|
FAIR
VALUE MEASUREMENTS
|
In
accordance with ASC No. 820, the Company measures its foreign currency
derivative instruments at fair value. Investments in foreign currency derivative
instruments are classified within Level 2 value hierarchy. This is because these
assets are valued using alternative pricing sources and models utilizing market
observable inputs.
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Foreign
currency derivative instruments
|
(912 | ) | 98 | |||||
|
NOTE
9:-
|
OTHER
PAYABLES AND ACCRUED EXPENSES
|
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Employees
and payroll accruals
|
$ | 7,537 | $ | 6,947 | ||||
|
Royalties
provision
|
1,066 | 1,403 | ||||||
|
Government
authorities
|
184 | 594 | ||||||
|
Accrued
expenses
|
11,342 | 8,172 | ||||||
|
Deferred
revenues
|
3,695 | 1,964 | ||||||
|
Others
|
137 | 470 | ||||||
| $ | 23,961 | $ | 19,550 | |||||
|
NOTE
10:-
|
SENIOR
CONVERTIBLE NOTES
|
In
November 2004, the Company issued an aggregate of $ 125,000 (including the
exercise of the option as described below) principal amount of its 2% Senior
Convertible Notes due November 9, 2024 ("the Notes"). The Company is
obligated to pay interest on the Notes semi-annually on May 9 and November 9 of
each year.
The Notes
are convertible, at the option of the holders at any time before the maturity
date, into ordinary shares of the Company at a conversion rate of 53.4474
ordinary shares per $ 1 principal amount of Notes, representing a
conversion price of approximately $ 18.71 per share. Upon such conversion
in lieu of the delivering of ordinary shares, the Company may elect to pay the
holders cash or a combination of cash and ordinary shares. The Notes are subject
to redemption at any time on or after November 9, 2009, in whole or in part, at
the option of the Company, at a redemption price of 100% of the principal amount
plus accrued and unpaid interest. The Notes are subject to repurchase, at the
holders' option, on November 9, 2009, November 9, 2014 or November 9, 2019,
at a repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest, if any, on such repurchase date. The Company may choose to
settle in cash upon conversion.
F-28
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
10:-
|
SENIOR
CONVERTIBLE NOTES (Cont.)
|
Effective
January 1, 2009, the Company adopted the amendment to ASC 470-20 (formerly FSP
APB 14-1) "Debt with Conversion and Other Options". The amendment specifies
that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. As a
result, the Company recorded an additional $ 2,775 interest expense in
2009.
The
cumulative effect of the change in accounting principle on periods prior to
these presented in the amount of $ 9,329 is recognized as of the beginning
of the first period presented, as an offsetting adjustment to the opening
balance of retained earnings for that period. In addition, an increase
of $ 20,251 was recorded to
additional paid in capital as of January 1, 2007.
During
2008 and 2009, the Company repurchased $ 51,500 and $73,100, respectively,
in principal amount of its 2% Senior Convertible Notes for a total cost,
including accrued interest, of $ 50,200 and $ 73,147, respectively.
Based on the amended ASC-470-20 and as a result of the repurchase, the Company
recorded a gain in the amount of $ 372 related to the liability component
and a decrease of additional paid-in capital in the amount of $ 1,109
related to the equity component in its 2008 statements of operations. There was
no gain or loss in connection with the repurchase in 2009. As of December 31,
2009, $ 403 in the principal amount of the notes remained
outstanding.
The
following tables shows the financial statements line items affected by
retrospective application of an amendment to ASC 470-20 (formerly FSP APB 14-1),
"Debt with Conversion and Other Options" on the affected financial statement
line items for the periods indicated:
|
Year ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2008
|
|||||||||||||||||||||||
|
As
previously
reported
|
Effect of
change
|
As
adjusted
under the
amended
ASC
470-20
|
As
previously
reported
|
Effect of
change
|
As
adjusted
under the
amended
ASC
470-20
|
|||||||||||||||||||
|
Financial
income (loss)
|
2,670 | (4,837 | ) | (2,167 | ) | 1,182 | (4,450 | ) | (3,268 | ) | ||||||||||||||
|
Loss
before income taxes
|
(1,523 | ) | (4,837 | ) | (6,360 | ) | (78,253 | ) | (4,450 | ) | (82,703 | ) | ||||||||||||
|
Net
loss
|
(3,885 | ) | (4,837 | ) | (8,722 | ) | (81,340 | ) | (4,450 | ) | (85,790 | ) | ||||||||||||
|
Net
loss per share:
|
||||||||||||||||||||||||
|
Basic
and diluted
|
$ | (0.09 | ) | $ | (0.11 | ) | $ | (0.2 | ) | $ | (1.97 | ) | $ | (0.11 | ) | $ | (2.08 | ) | ||||||
F-29
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
10:-
|
SENIOR
CONVERTIBLE NOTES (Cont.)
|
|
December 31, 2008
|
||||||||||||
|
As
previously
reported
|
Effect of
change
|
As adjusted
under
the
amended
ASC
470-20
|
||||||||||
|
Intangible
assets, deferred charges and other, net
|
$ | 9,084 | $ | (178 | ) | $ | 8,906 | |||||
|
Total
assets
|
$ | 230,482 | $ | (178 | ) | $ | 230,304 | |||||
|
Senior
convertible note
|
$ | 71,374 | $ | (704 | ) | $ | 70,670 | |||||
|
Equity:
|
||||||||||||
|
Additional
paid-in capital
|
$ | 167,856 | $ | 19,142 | $ | 186,998 | ||||||
|
Accumulated
deficit
|
$ | (58,678 | ) | $ | (18,616 | ) | $ | (77,294 | ) | |||
|
Total
equity
|
$ | 83,334 | $ | 754 | $ | 84,088 | ||||||
|
Total
liabilities and equity
|
$ | 230,482 | $ | (178 | ) | $ | 230,304 | |||||
The table
below shows the components of the net carrying amount of the liability component
and the equity component of the Notes at December 31, 2008 and at December 31,
2009:
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Principal
amount of liability component
|
$ | 73,498 | $ | 403 | ||||
|
Unamortized
discount
|
2,828 | - | ||||||
|
Net
carrying amount of liability component
|
$ | 70,670 | $ | 403 | ||||
|
Equity
component
|
$ | 19,142 | $ | 19,142 | ||||
The
following represents the components of interest expense and effective interest
rates relating to the Notes:
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Contractual
interest expense
|
$ | 2,498 | $ | 2,308 | $ | 1,260 | ||||||
|
Amortization
of discount
|
4,945 | 4,868 | 2,828 | |||||||||
|
Total
interest expense
|
$ | 7,443 | $ | 7,176 | $ | 4,088 | ||||||
|
Effective
interest rate
|
3.35 | % | 3.35 | % | 3.35 | % | ||||||
F-30
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
11:-
|
LONG-TERM
BANK LOANS
|
In April
and July 2008, the Company entered into loan agreements with banks in Israel and
was provided with loans in the total amount of $ 30,000. The loans bear
interest at LIBOR plus 1.3%-1.5% with respect to $ 23,000 of the loans and
LIBOR plus 0.5%-0.65% with respect to the remaining principal amount of
$ 7,000 of the loans. The principal amount borrowed is repayable in 20
equal quarterly payments through July 2013. The banks have a lien of the
Company's assets and the Company is required to maintain $ 7,000 of
compensating balances with the banks which are included in short term bank
deposits. The agreement requires the Company, among other things, to maintain
equity at specified levels and to achieve certain levels of operating income.
The agreement also restricts the Company from paying dividends. As of
December 31, 2009, the Company was in compliance with its covenants to the
banks.
|
NOTE
12:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
a.
|
Lease
commitments:
|
The
Group's facilities are rented under several lease agreements in Israel and the
U.S. for periods ending in 2021.
Future
minimum rental commitments under non-cancelable operating leases for the years
ended December 31, are as follows:
|
2010
|
$ | 4,686 | ||
|
2011
|
6,146 | |||
|
2012
|
5,624 | |||
|
2013
|
2,399 | |||
|
2014
|
2,414 | |||
|
2015
and thereafter
|
12,901 | |||
| $ | 34,170 |
In
connection with the Company's offices lease agreement in Israel, the lessor has
a lien on $3,500 of short term bank deposits.
Rent
expenses for the years ended December 31, 2007, 2008 and 2009, were
approximately $ 4,471, $ 6,432 and $ 4,558,
respectively.
|
|
b.
|
Other
commitments:
|
The
Company is obligated under certain agreements with its suppliers to purchase
specified items of excess inventory. Non- cancelable obligations as of December
31, 2009, were approximately $ 930.
F-31
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
12:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|
|
|
c.
|
Royalty
commitment to the Office of the Chief Scientist of Israel
("OCS"):
|
Under the
research and development agreements of the Company with the OCS and pursuant to
applicable laws, the Company is required to pay royalties at the rate of 3%-4.5%
of sales of products developed with funds provided by the OCS, up to an amount
equal to 100% of the OCS research and development grants received, linked to the
U.S. dollar plus interest on the unpaid amount received based on the 12-month
LIBOR rate applicable to dollar deposits. The Company is obligated to repay the
Israeli Government for the grants received only to the extent that there are
sales of the funded products.
As of
December 31, 2009, the Company has a contingent obligation to pay royalties in
the amount of approximately $ 8,715.
As of
December 31, 2009, the Company has paid or accrued royalties to the OCS in the
amount of $ 360, which was recorded to cost of revenues.
|
|
d.
|
Royalty
commitments to third parties:
|
The Group
has entered into technology licensing fee agreements with third parties. Under
the agreements, the Group agreed to pay the third parties royalties, based on
sales of relevant products.
|
|
e.
|
Legal
proceedings:
|
In
September 2009, Network Gateway Solutions LLC filed a claim against AudioCodes
Ltd. and AudioCodes Inc. and 19 other defendants alleging infringement of
certain patents. The case is still at an early stage. The amount of monetary
demand or a settlement demand of any kind was not indicated. Due to the
preliminary stage of the claim, the Company and its legal advisors can not
currently assess the outcome or possible adverse effect on the Company's
consolidated financial position or results of operations. However, the Company
believes that it has substantial legal claims to oppose these
allegations.
Prior to
the acquisition of Nuera Communications Inc. by the Company in 2006, one of
Nuera’s customers had been named as a defendant in a patent infringement suit
involving technology the customer purchased from Nuera. In the suit, the
plaintiff alleged that the customer used devices to offer services that infringe
upon a patent the plaintiff owns. The customer has sought indemnification from
Nuera pursuant to the terms of a purchase agreement between Nuera and the
customer relating to the allegedly infringing technology at issue. There were no
additional developments and the Company and its legal advisors can
not currently assess the outcome or possible adverse effect on the Company's
financial position or results of operations. However, the Company believes that
it has substantial legal claims to oppose these allegations.
F-32
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
13:-
|
EQUITY
|
|
|
a.
|
Treasury
stock:
|
In
January 2008, the Company's Board of Directors approved a new share repurchase
program pursuant to which the Company was authorized to purchase up to an
aggregate amount of 4,000,000 of its outstanding ordinary shares. During 2008,
the Company purchased an additional 3,450,217 of its outstanding ordinary shares
under the new share repurchase plan, at a weighted average price per share of
$ 3.98.
|
|
b.
|
Warrants
issued to consultants:
|
During
2008, 10,000 warrants were granted to consultants at an exercise price of
$ 4.82 per share, expiring seven years from the date of grant. The Company
recorded compensation expenses in accordance with ASC 505. The amount recorded
is immaterial. As of December 31, 2009, 10,000 warrants to consultants are
outstanding and exercisable at an exercise price of $ 4.82 per
share.
|
|
c.
|
Employee
Stock Purchase Plan:
|
In May
2001, the Company's Board of Directors adopted the Employee Stock Purchase Plan
("the Purchase Plan"), and, in July 2007, amended the Purchase Plan. As amended,
the Purchase Plan provides for the issuance of a maximum of 6,500,000 ordinary
shares. As of December 31, 2008, 4,004,683 shares were still available for
future issuance under the Purchase Plan. Eligible employees can have up to 15%
of their wages, up to certain maximums, used to purchase ordinary shares. The
Purchase Plan is implemented with purchases every six months occurring on
January 31 and July 31 of each year. The price of the ordinary shares purchased
under the Purchase Plan is equal to 85% of the lower of the fair market value of
the ordinary shares on the commencement date of each offering period or on the
semi-annual purchase date. The Purchase Plan is considered a compensatory plan.
Therefore, the Company recorded compensation expense in accordance with ASC 718,
"Compensation - Stock Compensation", with respect to purchases under the
Purchase Plan.
During
the years ended December 31, 2007 and 2008, 649,853 and 319,453 shares,
respectively, were issued under the Purchase Plan for aggregate consideration of
$ 3,619 and $ 1,214, respectively. During 2008, the Company's Board of
Directors decided to suspend the Purchase Plan.
|
|
d.
|
Employee
Stock Option Plans:
|
Under the
Company's 1997 and 1999 Stock Option Plans, options to purchase ordinary shares
may be granted to officers, directors, employees and consultants of the Group.
As of December 31, 2009, both plans had expired and no options are
available for future grants under these plans.
During
2008, the Board of Directors approved the 2008 Equity Incentive Plan that is
effective starting January 2009. As of December 31, 2009, the total number of
shares authorized for grant under this Plan is 914,545.
Stock
options granted under the abovementioned plans are exercisable at the fair
market value of the ordinary shares at the date of grant and usually expire
seven or ten years from the date of grant. The options generally vest over four
years from the date of grant. Any options that are forfeited or cancelled before
expiration become available for future grants.
F-33
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
13:-
|
EQUITY
(Cont.)
|
The
following is a summary of the Group's stock option activity and related
information for the year ended December 31, 2009:
|
Year ended December 31, 2009
|
||||||||||||||||
|
Amount
of options
|
Weighted
average
exercise
price
|
Weighted
average
remaining
contractual
term (in
years)
|
Aggregate
intrinsic
value
|
|||||||||||||
|
Outstanding
at beginning of year
|
6,346,537 | $ | 7.81 | |||||||||||||
|
Changes
during the year:
|
||||||||||||||||
|
Granted
|
*) | 1,094,577 | $ | 1.82 | ||||||||||||
|
Exercised
|
(86,750 | ) | $ | 1.04 | ||||||||||||
|
Forfeited
|
(787,513 | ) | $ | 7.09 | ||||||||||||
|
Expired
|
(400,984 | ) | $ | 7.91 | ||||||||||||
|
Options
outstanding at end of year
|
*) | 6,165,867 | $ | 6.93 | 3.0 | $ | 192 | |||||||||
|
Vested
and expected to vest
|
5,734,256 | $ | 6.93 | 3.0 | $ | 178 | ||||||||||
|
Options
exercisable at end of year
|
4,419,161 | $ | 8.10 | 1.86 | $ | 192 | ||||||||||
*) Including
40,269 restricted share units ("RSU'S") granted in December 2009.
The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2007, 2008 and 2009 was $ 3.23, $ 1.80 and
$ 1.22, 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 the fiscal year and the exercise
price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on
the last trading day of the fiscal year. This amount changes based on the fair
market value of the Company's shares.
Total
intrinsic value of options exercised for the twelve months ended December 31,
2007, 2008 and 2009 was $ 613, $ 124 and $ 130, respectively. As
of December 31, 2009, there was $ 1,840 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 0.96 years.
The
options outstanding as of December 31, 2009, have been separated into ranges of
exercise prices, as follows:
|
Range of
exercise
price
|
Options
outstanding
as of
December 31,
2009
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Options
exercisable
as of
December 31,
2009
|
Weighted
average
exercise price
of exercisable
options
|
|||||||||||||||||
|
(Years)
|
||||||||||||||||||||||
| $ | 0-1.1 | 256,569 | 4.19 | $ | 0.44 | 103,800 | $ | 1.10 | ||||||||||||||
| $ | 1.50-2.51 | 1,027,400 | 5.09 | $ | 2.16 | 281,150 | $ | 2.38 | ||||||||||||||
| $ | 2.67-4.00 | 502,263 | 3.40 | $ | 2.89 | 278,391 | $ | 3.00 | ||||||||||||||
| $ | 4.10-6.49 | 1,258,525 | 2.78 | $ | 5.20 | 911,460 | $ | 5.00 | ||||||||||||||
| $ | 6.51-9.24 | 691,710 | 1.20 | $ | 7.68 | 637,210 | $ | 7.75 | ||||||||||||||
| $ | 9.32-14.76 | 2,399,400 | 2.46 | $ | 11.07 | 2,177,150 | $ | 11.11 | ||||||||||||||
| $ | 15.94 | 30,000 | 1.99 | $ | 15.94 | 30,000 | $ | 15.94 | ||||||||||||||
| 6,165,867 | 3.0 | $ | 6.93 | 4,419,161 | $ | 8.10 | ||||||||||||||||
F-34
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
13:-
|
EQUITY
(Cont.)
|
|
|
e.
|
During
2008 and 2009, the Company decided on an exceptional and ex-gratia basis
to extend the validity of 895,138 and 231,400 options, respectively,
granted to employees by a period of 1-2 years and re-priced the exercise
price to certain employees. Total options that were re-priced in 2008 and
2009, were 100,000 and 50,000, respectively. The exercise price was
adjusted in 2008 from a range of 5.7-6.7 to 4.17 and in 2009 from a range
4.17-14.76 to 0.
|
The
Company accounted for these changes as modifications in accordance with ASC 718.
The Company calculated the incremental value of these modifications and recorded
compensation cost in a total amount of $ 402 and $ 208 for the years ended
December 31, 2008 and 2009, respectively.
|
|
f.
|
Dividends:
|
In the
event that cash dividends are declared in the future, such dividends will be
paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future. (See also Note 14a.)
|
NOTE
14:-
|
TAXES
ON INCOME
|
|
|
a.
|
Israeli
taxation:
|
|
|
1.
|
Measurement
of taxable income:
|
The
Company has elected to measure its taxable income and file its tax return under
the Israeli Income Tax Regulations (Principles Regarding the Management of Books
of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income), 1986. Accordingly, results for tax
purposes are measured in terms of earnings in dollars.
|
|
2.
|
Tax
benefits under the Law for the Encouragement of Capital Investments, 1959
("the Investment Law"):
|
The
Company's production facilities have been granted the status of an "Approved
Enterprise" in accordance with the Investment Law under four separate investment
programs. According to the provisions of such Israeli Investment Law, the
Company has been granted the "Alternative Benefit Plan", under which the main
benefits are tax exemptions and reduced tax rates.
Therefore,
the Company's income derived from the Approved Enterprise will be entitled to a
tax exemption for a period of two years and to an additional period of five to
eight years of reduced tax rates of 10% - 25% (based on the percentage of
foreign ownership). The duration of tax benefits of reduced tax rates is subject
to a limitation of the earlier of 12 years from commencement of production, or
14 years from the approval date. The Company utilized tax benefits from the
first program in 1998 and has been no longer eligible for benefits since 2007.
Tax benefits from the remaining programs are scheduled to gradually expire
through 2013.
F-35
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
As of
December 31, 2009, retained earnings included approximately $ 540 in
tax-exempt income earned by the Company's "Approved Enterprise". The Company's
Board of Directors has decided not to declare dividends out of such tax-exempt
income. Accordingly, no deferred income taxes have been provided on income
attributable to the Company's "Approved Enterprise".
Tax-exempt
income attributable to the "Approved Enterprise" cannot be distributed to
shareholders without subjecting the Company to taxes except upon complete
liquidation of the Company. If such retained tax-exempt income is distributed in
a manner other than upon the complete liquidation of the Company, it would be
taxed at the corporate tax rate applicable to such profits as if the Company had
not elected the alternative tax benefits (currently between 10% - 25%) and an
income tax liability of approximately up to $ 135 would be incurred by the
Company.
The
entitlement to the above benefits is conditional upon the Company fulfilling the
conditions stipulated by the above Investment 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, including interest. As of December 31, 2009,
management believes that the Company is in compliance with all of the
aforementioned conditions.
Income
from sources other than the "Approved Enterprise" during the benefit period will
be subject to tax at the regular tax rate prevailing at that time.
On April
1, 2005, an amendment to the Investment Law came into effect ("the Amendment")
that significantly changed the provisions of the Investment Law. The Amendment
limits the scope of enterprises that may be approved by the Investment Center by
setting criteria for the approval of a facility as a Beneficiary Enterprise
including a provision generally requiring that at least 25% of the Beneficiary
Enterprise's income will be derived from export. Additionally, the Amendment
enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies no longer require Investment Center approval in
order to qualify for tax benefits.
However,
the Investment Law provides that terms and benefits included in any certificate
of approval already granted will remain subject to the provisions of the
Investment Law as they were on the date of such approval. Therefore, the
Company's existing "Approved Enterprises" will generally not be subject to the
provisions of the Amendment. As a result of the Amendment, tax-exempt income
generated under the provisions of the Investment Law, as amended, will subject
the Company to taxes upon distribution or liquidation and the Company may be
required to record a deferred tax liability with respect to such tax-exempt
income. As of December 31, 2009, there was no taxable income attributable to the
Beneficiary Enterprise.
F-36
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
|
3.
|
Net
operating loss carryforward:
|
As of
December 31, 2009, the Company has accumulated losses for tax purposes in the
amount of approximately $ 48,000, which can be carried forward and offset
against taxable income in the future for an indefinite period. As of December
31, 2009, the Company recorded a deferred tax asset of $ 1,447 relating to
the available net carry forward tax losses.
As of
December 31, 2009, the Company's Israeli subsidiaries have estimated total
available carry forward tax losses of approximately $ 60,000.
|
|
4.
|
Tax
benefits under the law for the Encouragement of Industry (taxes), 1969
("the Encouragement Law"):
|
The
Encouragement Law, provides several tax benefits for industrial companies. An
industrial company is defined as a company resident in Israel, at least 90% of
the income of which in a given tax year 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.
Management
believes that the Company is currently qualified as an "industrial company"
under the Encouragement Law and as such, enjoys tax benefits, including: (1)
Deduction of purchase of know-how and patents and/or right to use a patent over
an eight-year period; (2) The right to elect, under specified conditions, to
file a consolidated tax return with additional related Israeli industrial
companies and an industrial holding company; (3) Accelerated depreciation rates
on equipment and buildings; and (4) Expenses related to a public offering on the
Tel-Aviv Stock and on recognized stock markets outside of Israel, are deductible
in equal amounts over three years.
Eligibility
for benefits under the Encouragement Law is not subject to receipt of prior
approval from any Governmental authority. No assurance can be given that the
Israeli tax authorities will agree that the Company qualifies, or, if the
Company qualifies, then the Company will continue to qualify as an industrial
company or that the benefits described above will be available to the Company in
the future.
|
|
5.
|
Tax
rates:
|
Taxable
income of Israeli companies is subject to tax at the rate of 27% in 2008, 26% in
2009, and 25% in 2010 and thereafter. In July 2009, Israel's Parliament (the
Knesset) passed the Economic Efficiency Law (Amended Legislation for
Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among
other things, an additional gradual reduction in the Israeli corporate tax rate
and real capital gains tax rate starting from 2011 to the following tax rates:
2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter
- 18%. However, the effective tax rate payable by a company which derives income
from an "Approved Enterprise" may be considerably lower (see also Note 14
a2).
F-37
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
|
b.
|
Loss
before taxes on income comprised as
follows:
|
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Domestic
|
$ | (1,706 | ) | $ | (2,811 | ) | $ | (5,963 | ) | |||
|
Foreign
|
(4,654 | ) | (79,892 | ) | 3,035 | |||||||
| $ | (6,360 | ) | $ | (82,703 | ) | $ | (2,928 | ) | ||||
|
|
c.
|
Taxes
on income are comprised as follows:
|
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Current
taxes
|
$ | (1,125 | ) | $ | 674 | $ | 290 | |||||
|
Deferred
taxes
|
2,390 | (169 | ) | - | ||||||||
| $ | 1,265 | $ | 505 | $ | 290 | |||||||
|
Domestic
|
$ | (1,575 | ) | $ | (1,365 | ) | $ | 484 | ||||
|
Foreign
|
2,840 | 1,870 | (194 | ) | ||||||||
| $ | 1,265 | $ | 505 | $ | 290 | |||||||
F-38
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
|
d.
|
Deferred
income taxes:
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the Group's
deferred tax liabilities and assets are as follows:
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carry forward
|
$ | 61,093 | $ | 53,748 | ||||
|
Reserves
and allowances
|
3,822 | 8,291 | ||||||
| 64,915 | 62,039 | |||||||
|
Deferred
tax liabilities:
|
||||||||
|
Senior
convertible notes
|
735 | - | ||||||
|
Depreciation
|
736 | - | ||||||
| 1,471 | - | |||||||
|
Net
deferred tax assets before valuation allowance
|
63,444 | 62,039 | ||||||
|
Valuation
allowance
|
(61,217 | ) | (59,812 | ) | ||||
|
Deferred
tax asset
|
$ | 2,227 | $ | 2,227 | ||||
|
Domestic:
|
||||||||
|
Short-term
deferred tax asset
|
$ | 652 | $ | 678 | ||||
|
Long-term
deferred tax asset
|
795 | 765 | ||||||
| $ | 1,447 | $ | 1,443 | |||||
|
Foreign:
|
||||||||
|
Short-term
deferred tax asset
|
$ | 320 | $ | 375 | ||||
|
Long-term
deferred tax asset
|
460 | 409 | ||||||
| $ | 780 | $ | 784 | |||||
The
Company's U.S. subsidiaries have estimated total available carry forward tax
losses of approximately $ 83,000 to offset against future taxable income
that expire between 2020 and 2029. As of December 31, 2009, the Company recorded
a deferred tax asset of $ 784 relating to the available net carry forward
tax losses.
Utilization
of U.S. net operating losses may be subject to substantial annual limitations
due to the "change in ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
F-39
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
|
|
e.
|
Reconciliation
of the theoretical tax expenses:
|
A
reconciliation between the theoretical tax expense, assuming all income is taxed
at the statutory tax rate applicable to income of the Company, and the actual
tax expense as reported in the statement of operations is as
follows:
|
Year
ended December 31,
|
|||||||||||||
|
2007
|
2008
|
2009
|
|||||||||||
|
Loss
before taxes, as reported in the consolidated statements of
operations
|
$ | (6,360 | ) | $ | (82,703 | ) | $ | (2,928 | ) | ||||
|
Statutory
tax rate
|
29 | % | 27 | % | 26 | % | |||||||
|
Theoretical
tax benefits on the above amount at the Israeli statutory tax
rate
|
$ | (1,844 | ) | $ | (22,330 | ) | $ | (761 | ) | ||||
|
Income
tax at rate other than the Israeli statutory tax rate (1)
|
655 | 139 | 337 | ||||||||||
|
Non-deductible
expenses including equity based compensation expenses
|
3,834 | 2,172 | 1,425 | ||||||||||
|
Non-deductible
expenses which results from Impairment of goodwill, other intangible
assets and investment in affiliate
|
- | 23,250 | - | ||||||||||
|
Deferred
taxes on losses for which a valuation allowance was
provided
|
3,333 | 75 | 633 | ||||||||||
|
Utilization
of operation losses carry forward
|
(3,355 | ) | (3,231 | ) | (1,469 | ) | |||||||
|
Taxes
in respect to prior years
|
(1,588 | ) | 87 | 90 | |||||||||
|
State
and Federal taxes
|
689 | 177 | 21 | ||||||||||
|
Inter-company
charges
|
(430 | ) | 57 | - | |||||||||
|
Other
individually immaterial income tax item
|
(29 | ) | 109 | 14 | |||||||||
|
Actual
tax expense
|
$ | 1,265 | $ | 505 | $ | 290 | |||||||
| (1) |
Per
share amounts (basic) of the tax benefit resulting from the
exemption
|
$ | 0.02 | $ | 0.01 | $ | 0.01 | ||||||
|
Per
share amounts (diluted) of the tax benefit resulting from the
exemption
|
$ | 0.02 | $ | 0.01 | $ | 0.01 | |||||||
|
|
f.
|
The
Company adopted the provisions of amendment to ASC 740 on January 1, 2007.
Prior to 2007, the Company used the provisions of FAS 5 (as codified in
ASC 450) to determine tax contingencies. As of January 1, 2007, there was
no difference in the Company's tax contingencies under the provisions of
the amended ASC. As a result, there was no effect on the Company's
shareholders equity upon the Company's adoption of the amended
ASC.
|
F-40
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
14:-
|
TAXES
ON INCOME (Cont.)
|
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
Gross
unrecognized tax benefits as of January 1, 2009
|
$ | 158 | ||
|
Increase
in tax position for current year
|
- | |||
|
Gross
unrecognized tax benefits as of December 31, 2009
|
$ | 158 |
The
Company recognizes interest and penalties related to unrecognized tax benefits
in tax expenses. The liability for unrecognized tax benefits does not include
accrued interest and penalties of $ 153 and $ 164 at December 31,
2008 and 2009, respectively.
|
NOTE
15:-
|
BASIC
AND DILUTED NET LOSS PER SHARE
|
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
loss available to ordinary shareholders
|
$ | (8,722 | ) | $ | (85,790 | ) | $ | (2,822 | ) | |||
|
Denominator:
|
||||||||||||
|
Denominator
for basic earnings per share - weighted average number of ordinary shares,
net of treasury stock
|
42,699,307 | 41,200,523 | 40,207,923 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Employee
stock options and ESPP
|
*) | - | *) | - | *) | - | ||||||
|
Senior
convertible notes
|
*) | - | *) | - | *) | - | ||||||
|
Denominator
for diluted net earnings per share - adjusted weighted average number of
shares
|
42,699,307 | 41,200,523 | 40,207,923 | |||||||||
*) Antidilutive.
|
NOTE
16:-
|
FINANCIAL
EXPENSES, NET
|
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Financial
expenses:
|
||||||||||||
|
Interest
|
$ | (7,419 | ) | $ | (6,807 | ) | $ | (4,739 | ) | |||
|
Amortization
of marketable securities premiums and accretion of discounts,
net
|
(40 | ) | (110 | ) | (253 | ) | ||||||
|
Others
|
(617 | ) | (131 | ) | (232 | ) | ||||||
| (8,076 | ) | (7,048 | ) | (5,224 | ) | |||||||
|
Financial
income:
|
||||||||||||
|
Interest
and others
|
5,909 | 3,780 | 2,480 | |||||||||
| $ | (2,167 | ) | $ | (3,268 | ) | $ | (2,744 | ) | ||||
F-41
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
17:-
|
GEOGRAPHIC
INFORMATION
|
|
|
a.
|
Summary
information about geographic areas:
|
The Group
manages its business on a basis of one reportable segment (see Note 1 for a
brief description of the Group's business). The data is presented in accordance
with ASC 280 (formerly: SFAS No. 131), "Segment Reporting". Revenues in the
table below are attributed to geographical areas based on the location of the
end customers.
The
following presents total revenues for the years ended December 31, 2007, 2008
and 2009 and long-lived assets as of December 31, 2007, 2008 and
2009.
|
2007
|
2008
|
2009
|
||||||||||||||||||||||
|
Total
|
Long-
lived
|
Total
|
Long-
lived
|
Total
|
Long-
lived
|
|||||||||||||||||||
|
revenues
|
assets
|
revenues
|
assets
|
revenues
|
assets
|
|||||||||||||||||||
|
Israel
|
$ | 10,604 | $ | 23,261 | $ | 13,597 | $ | 21,599 | $ | 10,410 | $ | 21,138 | ||||||||||||
|
Americas
|
89,614 | 113,894 | 91,640 | 26,250 | 69,960 | 22,799 | ||||||||||||||||||
|
Europe
|
40,305 | 105 | 40,854 | 118 | 27,101 | 87 | ||||||||||||||||||
|
Far
East
|
17,712 | 53 | 28,653 | 56 | 18,423 | 74 | ||||||||||||||||||
| $ | 158,235 | $ | 137,313 | $ | 174,744 | $ | 48,023 | $ | 125,894 | $ | 44,098 | |||||||||||||
|
|
b.
|
Product
lines:
|
Total
revenues from external customers divided on the basis of the Company's product
lines are as follows:
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Technology
|
$ | 56,426 | $ | 58,484 | $ | 34,995 | ||||||
|
Networking
|
101,809 | 116,260 | 90,899 | |||||||||
| $ | 158,235 | $ | 174,744 | $ | 125,894 | |||||||
|
NOTE
18:-
|
DERIVATIVE
INSTRUMENTS
|
The
Company enters into hedge transactions with a major financial institution, using
derivative instruments, primarily forward contracts and options to purchase and
sell foreign currencies, in order to reduce the net currency exposure associated
with anticipated expenses (primarily salaries and rent expenses) in currencies
other than U.S. dollar. The Company currently hedges such future exposures for a
maximum period of one year. However, the Company may choose not to hedge certain
foreign currency exchange exposures for a variety of reasons, including but not
limited to immateriality, accounting considerations and the prohibitive economic
cost of hedging particular exposures. There can be no assurance the hedges will
offset more than a portion of the financial impact resulting from movements in
foreign currency exchange rates.
The
Company records all derivatives in the consolidated balance sheet at fair value.
The effective portions of cash flow hedges are recorded in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portions
of cash flow hedges are adjusted to fair value through earnings in financial
other income or expense. The Company does not enter into derivative transactions
for trading purposes.
F-42
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
18:-
|
DERIVATIVE
INSTRUMENTS (Cont.)
|
The
Company had a net deferred loss associated with cash flow hedges of $ 912 and a
net deferred gain associated with cash flow hedges of $ 98 recorded in other
comprehensive income as of December 31, 2008 and 2009, respectively. As of
December 31, 2009, the hedged transactions are expected to occur within
twelve months.
The
Company entered into forward contracts to hedge the fair value of assets
denominated in New Israeli Shekels that did not meet the requirement for hedge
accounting. The Company measured the fair value of the contracts in accordance
with ASC No. 820 at level 2. The net losses recognized in "financial and other
expenses, net" during 2009 were $ 81.
As of
December 31, 2008 and 2009, the Company had outstanding forward contracts in the
amount of $ 10,800 and $ 10,500, respectively.
The fair
value of the Company’s outstanding derivative instruments and the effect of
derivative instruments in cash flow hedging relationship on other comprehensive
income for the years ended December 31, 2008 and 2009, are summarized
below:
|
Foreign
exchange forward and
|
As
of December 31,
|
|||||||||
|
options
contracts
|
Balance
sheet
|
2008
|
2009
|
|||||||
|
Fair
value of foreign exchange forward contracts
|
"Other
receivables and prepaid expenses"
|
$ | $ | 98 | ||||||
|
"Other
payables
and
accrued expenses"
|
$ | (912 | ) | $ | ||||||
|
Increase
(decrease) in gains recognized in OCI (effective portion)
|
"Other
comprehensive income"
|
$ | (1,959 | ) | $ | 1,010 | ||||
The
effect of derivative instruments in cash flow hedging relationship on income for
the years ended December 31, 2009 and 2008 is summarized
below:
|
Foreign
exchange forward and
|
Statements
of
|
Year
ended December 31,
|
||||||||
|
options
contracts
|
operations
|
2009
|
2008
|
|||||||
|
Gain
(loss) on derivatives recognized in OCI
|
"Operating
expenses"
|
$ | 1,622 | $ | (3,467 | ) | ||||
|
Gain
(loss) recognized in income on derivatives (effective
portion)
|
"Operating
expenses"
|
$ | (612 | ) | $ | 1,508 | ||||
F-43
AUDIOCODES
LTD. AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S.
dollars in thousands, except share and per share
data
|
|
NOTE
19:-
|
SUBSEQUENT
EVENTS
|
In
January 2010, AudioCodes entered into an agreement to acquire all of the
outstanding equity of NSC that it had not owned as of December 31, 2009. The
closing of the transaction occurred in May 2010. Pursuant to the agreement,
AudioCodes will pay an aggregate of approximately $ 1,200 for the remaining
interest in NSC, payable in three annual installments commencing on the first
anniversary of the closing. AudioCodes will also be required to pay an
additional consolidation price of up to $ 500 in 2013 if certain aggregate
revenue milestones are met for 2010, 2011 and 2012.
In May
2007, the Company entered into an agreement pursuant to which a building of
approximately 145,000 square feet will be erected and leased to the Company for
period of eleven years. This new building is expected to be completed in 2010.
In May 2010, the constructor and owners of the building have notified the
Company that it has completed a certain milestone in the construction of the
building, and that in accordance with the agreement the tenure of the building
should be transferred to the Company effective May 2010. Under such scenario the
Company is required to pay lease starting that month. The Company rejected the
claim and believes it has valid legal defenses to oppose such claim since the
Company is not legally allowed to occupy the building. Due to the preliminary
stage of the claim and related discussions, the Company and its legal advisors
are unable currently to assess the outcome of the claim and its effect on the
Company.
- - - - -
- - - - - - - - - - - - - - - -
- - -
F-44
E
XHIBIT INDEX
|
Exhibit No.
|
Exhibit
|
|
|
12.1
|
Certification
of Shabtai Adlersberg, President, Chief Executive Officer and Interim
Chief Financial Officer , pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
13.1
|
Certification
by Chief Executive Officer and Interim Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
15.1
|
Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global.
|
128
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4 Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. [reserved]Item 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certified AccountantItem 16G. Corporate GovernancePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 1:- GeneralNote 1:- General (cont.)Note 2:- Significant Accounting PoliciesNote 2:- Significant Accounting Policies (cont.)Note 3:- Marketable Securities and Accrued InterestNote 4:- InventoriesNote 5:- Investment in CompaniesNote 6:- Property and EquipmentNote 7:- Intangible Assets, Deferred ChargesNote 8:- Fair Value MeasurementsNote 9:- Other Payables and Accrued ExpensesNote 10:- Senior Convertible NotesNote 10:- Senior Convertible Notes (cont.)Note 11:- Long-term Bank LoansNote 12:- Commitments and Contingent LiabilitiesNote 12:- Commitments and Contingent Liabilities (cont.)Note 13:- EquityNote 13:- Equity (cont.)Note 14:- Taxes on IncomeNote 14:- Taxes on Income (cont.)Note 15:- Basic and Diluted Net Loss Per ShareNote 16:- Financial Expenses, NetNote 17:- Geographic InformationNote 18:- Derivative InstrumentsNote 18:- Derivative Instruments (cont.)Note 19:- Subsequent Events