UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 20-F
(Mark One)
o
x
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report………………………………
For the transition period from ______ to ______
Commission File Number 001-33129
ALLOT COMMUNICATIONS LTD.
(Exact Name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
22 Hanagar Street
Neve Ne’eman Industrial Zone B
Hod-Hasharon 4501317
Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, par value NIS 0.10 per share
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2012: 32,547,151 ordinary shares,
NIS 0.10 par value 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 o
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 o
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark basis of accounting the registrant has used to prepare the financial statements included in this filing:
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
U.S. GAAP x
International Financial
Reporting Standards as issued
by the International Accounting
Standards Board o
Other o
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.
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):
Item 17 o
Item 18 o
Yes o
No x
2
Terms
PRELIMINARY NOTES
As used herein, and unless the context suggests otherwise, the terms “Allot,” “Company,” “we,” “us” or “ours” refer to Allot Communications Ltd.
Forward-Looking Statements
In addition to historical facts, this annual report on Form 20-F contains forward-looking statements within the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events.
These statements include but are not limited to:
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statements regarding projections of capital expenditures;
statements regarding competitive pressures;
statements regarding expected revenue growth;
statements regarding the expected growth demand for video caching and optimization;
statements regarding trends in mobile networks, including the development of a digital lifestyle, over-the-top applications, the need to manage
mobile network traffic and cloud computing, among others;
statements regarding our ability to develop technologies to meet our customer demands and expand our product and service offerings;
statements regarding the acceptance and growth of our value-added services by our customers;
statements regarding the expected growth in the use of particular broadband applications;
statements as to our ability to meet anticipated cash needs based on our current business plan;
statements as to the impact of the rate of inflation and the political and security situation on our business;
statements regarding the price and market liquidity of our ordinary shares;
statements as to our ability to retain our current suppliers and subcontractors; and
statements regarding our future performance, sales, gross margins, expenses (including stock-based compensation expenses) and cost of revenues.
These statements may be found in the sections of this annual report on Form 20-F entitled “ITEM 3: Key Information—Risk Factors,” “ITEM 4: Information
on Allot,” “ITEM 5: Operating and Financial Review and Prospects,” “ITEM 10: Additional Information—Taxation—United States Federal Income Taxation
—Passive Foreign Investment Company Considerations” and elsewhere in this annual report, including the section of this annual report entitled “ITEM 4:
Information on Allot—Business Overview—Overview” and “ITEM 4: Information on Allot—Business Overview—Industry Background,” which contain
information obtained from independent industry sources. Actual results could differ materially from those anticipated in these forward-looking statements due
to various factors, including all the risks discussed in “ITEM 3: Key Information—Risk Factors” and elsewhere in this annual report.
In addition, statements that use the terms “may,” “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” “predict,” “potential” and similar expressions
are intended to identify forward-looking statements. All forward-looking statements in this annual report reflect our current views about future events and are
based on assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from future results expressed or implied
by the forward-looking statements. Many of these factors are beyond our ability to control or predict. You should not put undue reliance on any forward-
looking statements. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any
forward-looking statements.
3
TABLE OF CONTENTS
PART I
ITEM 1: Identity of Directors, Senior Management and Advisers
ITEM 2: Offer Statistics and Expected Timetable
ITEM 3: Key Information
Selected Financial Data
Capitalization and Indebtedness
Reasons for Offer and Use of Proceeds
Risk Factors
ITEM 4: Information on Allot
History and Development of Allot
Business Overview
Organizational Structure
Property, Plants and Equipment
ITEM 4A: Unresolved Staff Comments
ITEM 5: Operating and Financial Review and Prospects
Operating Results
Liquidity and Capital Resources
Research and Development, Patents and Licenses
Trend Information
Off-Balance Sheet Arrangements
Contractual Obligations
ITEM 6: Directors, Senior Management and Employees
Directors and Senior Management
Compensation of Officers and Directors
Board Practices
Employees
Share Ownership
ITEM 7: Major Shareholders and Related Party Transactions
Major Shareholders
Related Party Transactions
Interests of Experts and Counsel
ITEM 8: Financial Information
Consolidated Financial Statements and Other Financial Information
Significant Changes
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ITEM 9: The Offer and Listing
Stock Price History
Markets
ITEM 10: Additional Information
Share Capital
Memorandum and Articles of Association
Material Contracts
Exchange Controls
Taxation
Documents on Display
Subsidiary Information
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
ITEM 12: Description of Securities Other Than Equity Securities
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceed
ITEM 15: Controls and Procedures
ITEM 16: Reserved
ITEM 16A: Audit Committee Financial Expert
ITEM 16B: Code of Ethics
ITEM 16C: Principal Accountant Fees and Services
ITEM 16D: Exemptions from the Listing Standards for Audit Committees
ITEM 16E: Purchase of Equity Securities by the Company and Affiliated Purchasers
ITEM 16F: Change in Registrant’s Certifying Accountant
ITEM 16G: Corporate Governance
PART III
ITEM 17: Financial Statements
ITEM 18: Financial Statements
ITEM 19: Exhibits
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PART I
ITEM 1: Identity of Directors, Senior Management and Advisers
Not applicable.
ITEM 2: Offer Statistics and Expected Timetable
Not applicable.
ITEM 3: Key Information
A. Selected Financial Data
You should read the following selected consolidated financial data in conjunction with “ITEM 5: Operating and Financial Review and Prospects” and our
consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. The consolidated statements of operations data
for the years ended December 31, 2010, 2011 and 2012 the consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited
consolidated financial statements included in “ITEM 18: Financial Statements,” which have been prepared in accordance with generally accepted accounting
principles in the United States. The consolidated statements of operations for the years ended December 31, 2008 and 2009 and the consolidated balance sheet
data as of December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements which are not included in this annual
report.
2008
Year ended December 31,
2010
(in thousands of U.S. dollars, except per share and share data)
2009
2011
2012
Consolidated Statements of Operations:
Revenues:
Products
Services
Total revenues
Cost of revenues(1):
Products
Services
Expenses related to the settlement of the Office of the
Chief Scientist grants(2)
Total cost of revenues
Gross profit
Operating expenses:
Research and development, gross
Less royalty-bearing grant participation
Research and development, net(1)
Sales and marketing(1)
General and administrative(1)
In process research and development
Total operating expenses
Operating income (loss)
Financing income (expenses), net
Income (loss) before income tax expenses (benefit)
Income tax expenses (benefit)
Net income (loss)
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
$
$
27,121
9,980
37,101
$
29,641
12,110
41,751
$
40,852
16,120
56,972
$
56,810
20,943
77,753
77,127
27,625
104,752
8,198
1,498
-
9,696
27,405
14,635
2,671
11,964
19,781
6,174
244
38,163
(10,758)
(5,517)
(16,275)
220
10,094
1,741
-
11,835
29,916
11,705
2,440
9,265
20,408
5,541
-
35,214
(5,298)
(2,311)
(7,609)
63
14,015
1,970
-
15,985
40,987
14,038
2,774
11,264
22,021
5,473
-
38,758
2,229
(7,907)
(5,678)
84
$
$
$
(16,495) $
(7,672) $
(5,762) $
(0.75) $
(0.75) $
(0.35) $
(0.35) $
(0.25) $
(0.25) $
19,540
2,635
-
22,175
55,578
16,896
3,674
13,222
26,543
7,474
-
47,239
8,339
415
8,754
(55)
8,809 $
0.35 $
0.33 $
26,857
4,180
15,886
46,923
57,829
24,915
2,855
22,060
34,127
10,664
-
66,851
(9,022)
1,358
(7,664)
(926)
(6,738)
(0.21)
(0.21)
Weighted average number of shares used in computing basic
net earnings (loss) per share
Weighted average number of shares used in computing diluted
net earnings (loss) per share
22,054,211
22,185,702
22,831,014
25,047,771
31,959,921
22,054,211
22,185,702
22,831,014
27,071,872
31,959,921
___________________
(1) Includes stock-based compensation expense related to options granted to employees and others as follows:
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Cost of revenues
Research and development expenses, net
Sales and marketing expenses
General and administrative expenses
Total
2008
2009
Year ended December 31,
2010
(in thousands of U.S. dollars)
2011
2012
$
$
$
50
321
465
866
1,702 $
$
104
357
775
1,062
2,298 $
$
95
352
851
692
1,990 $
$
103
442
1,001
710
2,256 $
222
1,186
2,060
1,349
4,817
(2) Represents the full balance of the contingent liability related to grants received, which will be paid in 2013.
Consolidated balance sheet data:
Cash and cash equivalents
Short-term deposits and restricted deposits
Marketable securities
Working capital
Total assets
Total liabilities
Accumulated deficit
Share capital
Total shareholders’ equity
B. Capitalization and Indebtedness
Not applicable.
2008
2009
At December 31,
2010
(in thousands of U.S. dollars)
2011
2012
$
$
40,029
2,121
15,319
40,688
82,851
19,672
(63,703)
482
63,179
$
36,470
2,324
14,490
38,179
82,943
22,531
(63,694)
492
60,412
$
42,858
1,060
15,531
59,841
95,187
30,199
(69,456)
527
64,988
$
116,682
25,138
17,580
158,937
197,058
34,489
(60,647)
720
162,569
50,026
78,188
14,841
131,598
221,791
52,670
(67,385)
761
169,121
7
C. Reasons for Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Investing in our ordinary shares involves a high degree of risk. You should consider carefully the risks described below, together with the financial and other
information contained in this annual report, before deciding to invest in our ordinary shares. If any of the following risks actually occurs, our business,
financial condition and results of operations would suffer. In this case, the trading price of our ordinary shares would likely decline and you might lose all or
part of your investment. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently
believe to be immaterial may also impair our business operations.
Risks Relating to Our Business
We have a history of losses and may not be able to achieve or maintain profitability in the future.
In 2012, we had a net loss of $6.7million. We have had a history of net losses in all prior fiscal years, other than in 2006 and 2011. Our net losses in 2012
were a result of expenses related to the settlement of approximately $15.9 million in grants from Office of the Chief Scientist of the Ministry of Industry,
Trade and Labor, or the Office of the Chief Scientist. Our net losses in 2010 were caused or exacerbated by losses resulting from our realized losses and
impairment charges related to auction-rate securities, which we have subsequently sold. We can provide no assurance that we will be able to achieve or
maintain profitability, and we may incur losses in the future if we do not generate sufficient revenues.
We may be unable to compete effectively with other companies in our market who offer, or may in the future offer, competing technologies.
We compete in a rapidly evolving and highly competitive sector of the networking technology market, with large incumbent companies having significant
market share and established relationships with service providers. We face significant competition from router and switch infrastructure companies, such as
Cisco Systems, Inc., Telefonaktiebolager LM Erricson and Huawei Technologies Co., Ltd., which integrate functionalities into their platforms addressing
some of the problems that our products address. Our competitors have also identified the potential market opportunity offered by the largest service providers,
referred to as Tier 1 operators, and we therefore face intense competition in this portion of our market. Our principal competitors in the field of standalone
intelligent policy enforcement and traffic management products enabled by DPI technology are Sandvine Inc. and Procera Networks, Inc. We also face
competition from companies that offer partial or alternative solutions addressing limited aspects of the challenges facing broadband providers, such as
network monitoring or security.
Our competitors may announce new products, services or enhancements that better meet the needs of customers or changing industry requirements,
or may offer alternative methods to achieve customer objectives. One of our direct competitors, Cisco Systems, is substantially larger than we are and has
significantly greater financial, sales and marketing, technical, manufacturing and other resources. As the mobile DPI market has grown, new competitors have
entered and may continue to enter the market. The entry of new competitors into our market (for example F5 Networks) and acquisitions of our existing
competitors by companies with significant resources and established relationships with our potential customers could result in increased competition and
harm to our business. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material
adverse effect on our business, financial condition or result of operations.
8
We depend on one or more significant customers and the loss of any such significant customer could harm our results of operations.
The loss of any significant customer or a significant decrease in business from any such customer could harm our results of operations and financial
condition. In addition, revenues from individual customers may fluctuate from time to time based on the timing and the terms under which further orders are
received and the duration of the delivery and implementation of such orders. We derived 30%, 15% and 14% of our total revenues in 2010, 2011 and 2012,
respectively, from one global Tier 1 mobile operator group.
Industry consolidation may lead to increased competition and may harm our operating results.
Our market may be subject to industry consolidation, as companies attempt to maintain or strengthen their positions in an evolving industry, are unable to
continue their operations or are acquired. For example, some of our current and potential competitors have made, or have been reported as considering
making, acquisitions or have announced new strategic alliances designed to position them with the ability to provide many of the same services that we
provide, to both the service provider and enterprise markets. We believe that industry consolidation may result in stronger competitors that are better able to
compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our
financial condition or results of operations.
Demand for our products may be impacted by government regulation of the telecommunications industry.
Service providers are subject to government regulation in a number of jurisdictions in which we sell our products. There are several proposals in the United
States, Europe and elsewhere for regulating service providers’ ability to prioritize applications in their networks. Advocates for regulating this industry claim
that collecting premium fees from certain “preferred” applications would distort the market for Internet applications in favor of larger and better-funded
content providers. They also claim that this would impact end-users who already purchased broadband access only to experience response times that differ
based on content provider. Opponents believe that content providers who support bandwidth-intensive applications should be required to pay service
providers a premium in order to support further network investments. In August 2008, the United States Federal Communications Commission (the “FCC”)
issued a ruling prohibiting Comcast, the second-largest broadband provider in the United States, from delaying certain peer-to-peer traffic on its network.
Comcast filed an appeal of the ruling in September 2008. In April 2010, a federal appeals court ruled that under current law the FCC had limited power over
Web traffic. In December 2010, the FCC adopted rules which would give it regulatory power over Internet service providers in order to prevent them from
blocking or unreasonably discriminating against Web content, services or applications. In 2011, Verizon and other broadband companies challenged the
FCC’s regulations in the United States Court of Appeals for the District of Columbia Circuit, and the case is pending appeal. It is difficult to predict when the
Court will issue its decision and the impact the decision will have on our business. Demand from service providers for the traffic management and subscriber
management features of our products could be adversely affected if regulations prohibit or limit service providers from managing traffic on their networks. A
decrease in demand for these features could adversely impact sales of our products and could have a material adverse effect on our business, financial
condition or result of operations.
9
Demand for our value-added services, such as video caching and optimization and parental control, may be lower than anticipated.
Our value-added services offer customers additional tools to increase the efficiency of their networks or help them derive additional revenues from their end
customers. With our acquisition of Ortiva Wireless Inc. (“Ortiva”) and Oversi Networks Ltd. (“Oversi”) in 2012, we enhanced our value-added services by
introducing video caching services and optimization services, among other value-added services. The industry and market for such services is still developing.
We cannot provide any assurance that demand for such services will continue or grow, or that we will be able to generate revenues from such sales at the
levels we anticipate or at all. Any inability to sell or maintain our value-added services may lead to commercial disputes with our customers and to lengthy
implementation processes and increased spending on technical solutions, all of which may negatively impact our results of operations.
Our revenues and business will be harmed if we do not keep pace with changes in broadband applications and with advances in technology, including
through significant investment.
We will need to invest heavily in the continued development of our technology in order to keep pace with rapid changes in applications and increased
broadband network speeds and with our competitors’ efforts to advance their technology. Our ability to develop and deliver effective product offerings
depends on many factors, including identifying our customers’ needs, technical implementation of new services and integration of our value-added services
with our customers’ existing network infrastructure. While we will continue to introduce innovative value-added services, we cannot provide any assurance
that any new products we introduce will achieve the same degree of success that we have with our existing products. Designers of broadband applications that
our products identify and manage are using increasingly sophisticated methods to avoid detection and management by network operators. Even if our
products successfully identify a particular application, it is sometimes necessary to distinguish between different types of traffic belonging to a single
application. Accordingly, we face significant challenges in ensuring that we identify new applications and new versions of current applications as they are
introduced without impacting network performance, especially as networks become faster. This challenge is increased as we seek to expand sales of our
products in new geographic territories because the applications vary from country to country and region to region. Our business and revenues will be
adversely affected if we fail to address our customers’ needs in particular geographic markets or if we fail to develop enhancements to our products in order
to keep pace with advances in technology.
The network equipment market is subject to rapid technological progress and to compete, we need to achieve widespread market acceptance.
The network equipment market is characterized by rapid technological progress, frequent new product introductions, changes in customer requirements and
evolving industry standards. To compete, we need to achieve widespread market acceptance. Developments in routers and routing software could also
significantly reduce demand for and sales of our products and could cause our products to become obsolete, which may result in inventory write downs.
Alternative technologies could achieve widespread market acceptance and displace the technology on which we have based our product architecture. We can
give no assurance that our technological approach will achieve broad market acceptance or that other technology or devices will not supplant our technology
and products.
We need to increase the functionality of our products and offer additional features and value-added services in order to maintain or increase our
profitability.
The market in which we operate is highly competitive and unless we continue to enhance the functionality of our products and add additional features, our
competitiveness may be harmed and the average sale prices for our products may decrease. Decreases in sale prices generally result from the introduction by
competitors of competing products and from the commoditization and increasing popularity of DPI technology. To counter this trend, we endeavor to enhance
our products by offering higher system speeds, additional features and value-added services such as additional security, video functions, support for additional
applications and enhanced reporting tools. We may also need to reduce our per unit manufacturing costs at a rate equal to or greater than the rate at which
selling prices decline. If we are unable to reduce costs or offer increased functionally and features, our profitability may be adversely affected.
10
Sales of our products to large service providers can involve a lengthy sales cycle, which may impact the timing of our revenues and result in us expending
significant resources without making any sales.
Our sales cycles to large service providers, including carriers, mobile operators and cable operators, are generally lengthy because these end-customers
consider our products to be capital equipment and undertake significant testing to assess the performance of our products within their networks. Furthermore,
many of our product and service arrangements with our customers provide that the final acceptance of a product or service may be specified by the customer.
In such instances, we do not recognize the revenue until all acceptance criteria have been met. As a result, we often invest significant time from initial contact
with a large service provider until it decides to incorporate our products in its network, and we may not be able to recognize the revenue from a customer until
all acceptance criteria have been satisfied. We may also expend significant resources in attempting to persuade large service providers to incorporate our
products into their networks without success. Even after deciding to purchase our products, the initial network deployment of our products by a large service
provider may last up to one year. We have also experienced longer sales cycles as a result of the global economic downturn and uncertainty, particularly in
Europe. If a competitor succeeds in convincing a large service provider to adopt that competitor’s product, it may be difficult for us to displace the competitor
because of the cost, time, effort and perceived risk to network stability involved in changing solutions. As a result, we may incur significant expenses without
generating any sales, which could adversely affect our profitability.
The complexity and scope of the solutions and services we provide to larger service providers is increasing. Larger projects entail greater operational risk
and an increased chance of failure.
The complexity and scope of the solutions and services we provide to larger service providers is increasing. The larger and more complex such projects are,
the greater the operational risks associated with them. These risks include failure to fully integrate our products into the service provider’s network or with
third-party products, our dependence on subcontractors and partners and on effective cooperation with third-party vendors for the successful and timely
completion of such projects. If we encounter any of these risks, we may incur higher costs in order to complete the project and may be subject to contractual
penalties resulting in lower profitability. In addition, the project may demand more of our management’s time than was originally planned, and our reputation
may be adversely impacted.
We depend on third parties to market, sell, install and provide initial technical support for our products for a material portion of our business.
We depend on third-party channel partners, such as distributors, resellers, OEMs and system integrators, to market and sell a material portion of our products
to end-customers. In 2012, approximately one-third of our revenues were derived from channel partners. Our channel partners are also responsible for
installing our products and providing initial customer support for them. As a result, we depend on the ability of our channel partners to successfully market
and sell our products to these end-customers. We also depend on our ability to maintain our relationships with existing channel partners and to develop
relationships with new channel partners in key markets. We cannot assure you that our channel partners will market our products effectively, receive and
fulfill customer orders for our products on a timely basis or continue to devote the resources necessary to provide us with effective sales, marketing and
technical support. In addition, any failure by our channel partners to provide adequate initial support to end-customers could result in customer dissatisfaction
with us or our products, which could result in a loss of customers, harm our reputation and delay or limit market acceptance of our products. Our products are
complex and it takes time for a new channel partner to gain experience in the operation and installation of these products. Therefore, it may take a period of
time before a new channel partner can successfully market, sell and support our products if an existing channel partner ceases to sell our products.
Additionally, our agreements with channel partners are generally not exclusive and our channel partners may market and sell products that compete with our
products. Our agreements with our distributors and resellers are usually for an initial one-year term and following the expiration of this term, can be
terminated by either party. We can give no assurance that these agreements will remain in effect and any termination of one or more of the agreements may
adversely affect our profitability and results of operations.
11
We are subject to certain regulatory regimes that may affect the way that we conduct business internationally, and our failure to comply with applicable
laws and regulations could adversely affect our reputation and result in penalties and increased costs.
We are subject to a complex system of laws and regulations related to international trade, including economic sanctions and export control laws and
regulations. It is our policy not to make direct or indirect prohibited sales of our products, including into countries sanctioned under laws to which we are
subject, and to contractually limit the territories into which our channel partners may sell our products. Nevertheless, we recently learned that one of our
channel partners had sold certain of our products (designed for the enterprise market) outside of its contractually designated territory, including into a
sanctioned country, and we subsequently determined that our contract management protocol for authorizing channel partner sales was not adequately
followed in that instance.
We are also subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and may be subject to similar worldwide anti-bribery laws that generally
prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining
business. Some of the countries in which we operate have experienced governmental corruption to some degree and, in certain circumstances, strict
compliance with anti-bribery laws may conflict with local customs and practices.
Despite our compliance and training programs, we cannot be certain that our procedures will be sufficient to ensure consistent compliance with all
applicable international trade and anti-corruption laws, or that our employees or channel partners will strictly follow all policies and requirements to which we
subject them. Any alleged or actual violations of these laws may subject us to government scrutiny, investigation, debarment, and civil and criminal penalties,
which may have an adverse effect on our results of operations, financial condition and reputation.
We are dependent on our traffic management systems and network management application suites for the substantial majority of our revenues.
In the past three years, we increased sales of our Service Gateway platforms and our network management application suite. However, sales of our
NetEnforcer traffic management system and NetXplorer network management system continued to account for a significant portion of our revenues in 2011
and 2012. While we currently expect that these systems will continue to account for a considerable portion of our revenues in the immediate future, the
growth rate of sales from the these systems has declined from 37% in 2011 to 29% in 2012. If we are unable to increase these sales our business will suffer. In
addition, service providers may choose embedded or integrated solutions using routers and switches from larger networking vendors over a standalone
solutions we offer. Any factor adversely affecting our ability to sell, or the pricing of or demand for, our NetEnforcer traffic management system and
NetXplorer network management system would severely harm our ability to generate revenues and could have a material adverse effect on our business.
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We integrate various third-party solutions into our products and may integrate or offer additional third-party solutions in the future. If we lose the right to
use such solutions, our sales could be disrupted and we would have to spend additional capital to replace such components.
We integrate various third-party solutions into our products and may integrate or offer additional third-party solutions in the future. Sales of our products
could be disrupted if such third-party solutions were either no longer available to us or no longer offered to us on commercially reasonable terms. In either
case, we would be required to spend additional capital to either redesign our products to function with alternate third-party solutions or develop substitute
components ourselves. We might, as a result, be forced to limit the features available in our current or future product offerings, which could have a material
adverse effect on our business.
Our products are highly technical and any undetected software or hardware errors in our products could have a material adverse effect on our operating
results.
Our products are complex and are incorporated into broadband networks, which are a major source of revenue for service providers and support critical
applications for subscribers and enterprises. Due to the highly technical nature of our products and variations among customers’ network environments, we
may not detect product defects until our products have been fully deployed in our customers’ networks. Regardless of whether warranty coverage exists for a
product, we may be required to dedicate significant technical resources to repair any defects. If we encounter significant product problems, we could
experience, among other things, loss of major customers, cancellation of product orders, increased costs, delay in recognizing revenues and damage to our
reputation. We could also face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert
management’s attention. In addition, if our business liability insurance is inadequate or future coverage is unavailable on acceptable terms or at all, our
financial condition could be harmed.
Demand for our products depends in part on the rate of adoption of bandwidth-intensive broadband applications, such as Internet video and online video
gaming applications, and the impact multiple applications may have on network speed.
Our products are used by service providers and enterprises to monitor and manage bandwidth-intensive applications that cause congestion in broadband
networks and impact the quality of experience of users. Demand for our products is driven particularly by growth in applications, which are highly sensitive
to network delays and therefore require efficient network management, such as Voice over IP (VoIP), Internet video and television and online video gaming
applications. If the rapid growth in the adoption of VoIP and in the popularity of Internet video and online video gaming applications does not continue, the
demand for our products may be adversely impacted.
We currently depend on a single subcontractor to manufacture and provide hardware warranty support for our Service Gateway platforms, NetEnforcer
traffic management systems and Video Optimization platforms. If this subcontractor experiences delays, disruptions, quality control problems or a loss in
capacity, it could materially and adversely affect our operating results.
We currently depend on a single subcontractor, Flextronics (Israel) Ltd., a subsidiary of Flextronics, a global electronics manufacturing services company, to
manufacture, assemble, test, package and provide hardware warranty support for our Service Gateway platforms, NetEnforcer traffic management systems
and Video Optimization platforms. In addition, our agreement with Flextronics (Israel) requires it to procure and store key components for our products at its
facilities. If Flextronics (Israel) experiences delays, disruptions or quality control problems in manufacturing our products, or if we fail to effectively manage
our relationship with Flextronics (Israel), product shipments may be delayed and our ability to deliver products to customers could be materially and
adversely affected. Flextronics (Israel) may terminate our agreement at any time during the term upon 180-days prior notice. We expect that it would take
approximately six months to transition the manufacturing of our products to an alternate manufacturer and our inventory of completed products may not be
sufficient for us to continue delivering products to our customers on a timely basis during any such transition period. Therefore, the loss of Flextronics (Israel)
could adversely affect our sales and operating results and harm our reputation.
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Certain hardware components for our products come from single or limited sources and we could lose sales if these sources fail to satisfy our supply
requirements.
We obtain certain hardware components used in our products from single or limited sources. Although these are off-the-shelf items, because our systems have
been designed to incorporate these specific components, any change to these components due to an interruption in supply or our inability to obtain such
components on a timely basis would require engineering changes to our products before substitute components could be incorporated. Such changes could be
costly and result in lost sales particularly to the central processing unit for our Service Gateway platforms, our NetEnforcer AC-6000, AC-1400, AC-3000,
AC-500 and the video optimization platforms VDC. The agreements with our suppliers do not contain any minimum supply commitments. If we or our
contract manufacturer fail to obtain components in sufficient quantities when required, our business could be harmed. Our suppliers also sell products to our
competitors and may enter into exclusive arrangements with our competitors, stop selling their products or components to us at commercially reasonable
prices or refuse to sell their products or components to us at any price. Our inability to obtain sufficient quantities of single-source or limited-sourced
components or to develop alternative sources for components or products would harm our ability to maintain and expand our business.
We may expand our business or enhance our technology through acquisitions that could result in diversion of resources and extra expenses. This could
disrupt our business and adversely affect our financial condition.
Part of our strategy is to selectively pursue partnerships and acquisitions. In 2008, we acquired the business of Esphion, a developer of video optimization and
protection solutions for telecommunications operators and internet service providers, which increased the scope of our product offerings. In 2012, we
acquired Ortiva, a developer of solutions for mobile and Internet networks, and Oversi, a developer of products and systems for caching Internet content. 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. As of the end of 2012, we consolidated the operations of Ortiva and Oversi with ours, and they no longer operate on a
standalone basis. Acquired businesses, technologies or joint ventures may not be successfully integrated with our products and operations and we may not
realize the intended benefits of these acquisitions. We may also incur future losses from any acquisition, investment or joint venture. In addition, acquisitions
could result in:
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substantial cash expenditures;
potentially dilutive issuances of equity securities;
the incurrence of debt and contingent liabilities;
a decrease in our profit margins; and
amortization of intangibles and potential impairment of goodwill.
If acquisitions disrupt our operations or result in significant expenditures or liabilities, our business, operating results or financial conditions may suffer.
If we fail to attract and retain skilled employees, we may not be able to timely develop, sell or support our products.
Our success depends, in large part, on the continued contribution of our research and development, sales and marketing and managerial personnel. If our
business continues to grow, we will need to hire additional qualified research and development, sales and marketing and managerial personnel to succeed. The
process of hiring, training and successfully integrating qualified personnel into our operation is a lengthy and expensive one. The market for qualified
personnel is very competitive because of the limited number of people available with the necessary technical skills, sales skills and understanding of our
products and technology. This is particularly true in Israel, where competition for qualified personnel is intense. Our failure to hire and retain qualified
personnel could cause our revenues to decline and impair our ability to meet our research and development and sales objectives.
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We may not be able to enforce employees’ covenants not to compete under the current laws of some jurisdictions in which we operate and therefore may
be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
It is our practice to have our employees sign appropriate non-compete agreements when permitted under applicable law. These agreements prohibit our
employees who cease working for us from competing directly with us or working for our competitors for a limited period of time. The enforceability of non-
compete clauses in certain jurisdictions in which we operate may be limited. Under the current laws of some jurisdictions in which we operate, we may be
unable to enforce these agreements and it may thereby be difficult for us to restrict our competitors from gaining the expertise our former employees gained
while working for us.
If we are unable to successfully protect the intellectual property embodied in our technology, our business could be harmed significantly.
Know-how relating to networking protocols, building carrier-grade systems and identifying applications is an important aspect of our intellectual property. To
protect our know-how, we customarily require our employees, distributors, resellers, software testers and contractors to execute confidentiality agreements or
agree to confidentiality undertakings when their relationship with us begins. Typically, our employment contracts also include the following clauses:
assignment of intellectual property rights for all inventions developed by employees and non-disclosure of all confidential information. We cannot provide
any assurance that the terms of these agreements are being observed and will be observed in the future. Because our product designs and software are stored
electronically and thus are highly portable, we attempt to reduce the portability of our designs and software by physically protecting our servers through the
use of closed networks, which prevent external access to our servers. We cannot be certain, however, that such protection will adequately deter individuals or
groups from wrongfully accessing our technology. Monitoring unauthorized use of intellectual property is difficult and some foreign laws do not protect
proprietary rights to the same extent as the laws of the United States. We cannot be certain that the steps we have taken to protect our proprietary information
will be sufficient. In addition, to protect our intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the
attention of management, cause significant delays, materially disrupt the conduct of our business or adversely affect our revenue, financial condition and
results of operations.
As of December 31, 2012, we had a limited patent portfolio. We had six issued U.S. patents and several pending patent applications. While we plan
to protect our intellectual property with, among other things, patent protection, there can be no assurance that:
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current or future U.S. or foreign patents applications will be approved;
our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third-parties;
we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate;
the patents of others will not have an adverse effect on our ability to do business; or
others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.
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The failure to obtain patents, inability to obtain patents with claims of a scope necessary to cover our technology or the invalidation of our patents may
weaken our competitive position and may adversely affect our revenues.
We may be subject to claims of intellectual property infringement by third parties that, regardless of merit, could result in litigation and our business,
operating results or financial condition could be materially adversely affected.
There can be no assurance that we will not receive communications from third parties asserting that our products and other intellectual property
infringe, or may infringe their proprietary rights. We are not currently subject to any proceedings for infringement of patents or other intellectual property
rights and are not aware of any parties that intend to pursue such claims against us. Any such claim, regardless of merit, could result in litigation, which could
result in substantial expenses, divert the attention of management, cause significant delays and materially disrupt the conduct of our business. As a
consequence of such claims, we could be required to pay substantial damage awards, develop non-infringing technology, enter into royalty-bearing licensing
agreements, stop selling our products or re-brand our products. If it appears necessary, we may seek to license intellectual property that we are alleged to
infringe. Such licensing agreements may not be available on terms acceptable to us or at all. Litigation is inherently uncertain and any adverse decision could
result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others and otherwise negatively affect our
business. In the event of a successful claim of infringement against us and our failure or inability to develop non-infringing technology or license the
infringed or similar technology, our business, operating results or financial condition could be materially adversely affected.
We use certain “open source” software tools that may be subject to intellectual property infringement claims, the assertion of which could impair our
product development plans, interfere with our ability to support our clients or require us to pay licensing fees.
Certain of our products contain open source code, and we may use more open source code in the future. Open source code is code that is covered by a license
agreement that permits the user to liberally copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing
requirements. The original developers of the open source code provide no warranties on such code. As a result of our use of open source software, we could
be subject to suits by parties claiming ownership of what we believe to be open source code, and we may incur expenses in defending claims that we did not
abide by the open source code license. If we are not successful in defending against such claims, we may be subject to monetary damages or be required to
remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our
revenues and cash flow. In addition, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting
derivative code available to others at no cost. If we are required to publicly disclose the source code for such derivative products or to license our derivative
products that use an open source license, our previously proprietary software products would be available to others, including our customers and competitors
without charge. We monitor our use of such open source code to avoid subjecting our products to conditions that we do not intend. The use of such open
source code, however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert
resources away from our development efforts.
Unfavorable global economic conditions could have a material adverse effect on our business, financial condition or operating results.
The 2008 and 2009 crisis in the financial and credit markets in the United States, Europe and Asia led to a global economic slowdown that is ongoing, with
economies in those territories continuing to show significant weakness and there is continuing economic uncertainty. If the economies of any part of the world
remain uncertain or further deteriorate, many enterprises, telecommunication carriers and service providers may significantly reduce or postpone capital
investments. This could result in reductions in the sales of our products or services, longer sales cycles, slower adoption of new technologies and increased
price competition. As a result of the most recent downturn in the European economies, we have experienced longer sales cycles than in the past.
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We continuously monitor market trends and intend to take such steps as we deem appropriate to adjust our operations. Because a substantial portion
of our operating expenses consist of salaries, we may not be able to reduce our operating expenses in line with any reduction in revenues or may elect not to
do so for business reasons. We will need to continue to generate increased revenues and manage our costs to maintain profitability. If global economic and
market conditions do not improve, or continue to remain uncertain, this may increase our inventories, decrease our revenues, result in additional pressure on
the price of our products, prolong payment terms or increase the risk of our incurrence of bad debts. Such circumstances would have a material adverse effect
on our results of operations and cash flow from operations.
Our international operations expose us to the risk of fluctuations in currency exchange rates.
Our revenues are generated primarily in U.S. dollars and a major portion of our expenses are denominated in U.S. dollars. As a result, we consider the U.S.
dollar to be our functional currency. Other significant portions of our expenses are denominated in shekels and to a lesser extent in Euros and other currencies.
Our shekel-denominated expenses consist principally of salaries and related personnel expenses. We anticipate that a material portion of our expenses will
continue to be denominated in shekels. In 2012, the shekel continued to fluctuate against the U.S. dollar. The shekel devaluated by approximately 3% against
the U.S. dollar in the first half of the year and then appreciated by approximately 5% in the second half of the year. In total, during 2012, the shekel
appreciated by approximately 2% against the U.S. dollar. If the U.S. dollar weakens against the shekel or other currencies we are exposed to, there will be a
negative impact on our results of operations. We use derivative financial instruments, such as foreign exchange forward contracts, to mitigate the risk of
changes in foreign exchange rates on balance sheet accounts and forecast cash flows. We may not purchase derivative instruments adequately to insulate
ourselves from foreign currency exchange risks. The volatility in the foreign currency markets may make hedging our foreign currency exposures
challenging. In addition, because a portion of our revenue is not earned in U.S. dollars, fluctuations in exchange rates between the U.S. dollar and the
currencies in which such revenue is earned may have a material adverse effect on our results of operations and financial condition. 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 could
cause our customers to cancel or decrease orders or default on payment.
Compliance with new regulations regarding the use of conflict minerals may disrupt our operations, result in additional cost and expense and could
result in other significant adverse effects.
In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. Securities and Exchange Commission
(the “SEC”) adopted new requirements for companies that use certain minerals and derivative metals (referred to as "conflict minerals" regardless of their
actual country of origin) in their products. Metals, such as tantalum, tin, gold and tungsten may be present in our products as component parts. We will be
required to implement procedures to investigate and disclose whether any conflict minerals that are used in our products originated from the Democratic
Republic of the Congo or adjoining countries. There will be costs associated with these investigations, and the implementation of these rules could adversely
affect the sourcing, supply and pricing of the raw materials used in our products. Also, we may face potential reputational challenges if we are unable to
sufficiently verify the origins of all conflict minerals used in our component parts or if we are unable to replace any conflict minerals sourced from the
Democratic Republic of the Congo or adjoining countries with acceptable alternatives. We may also encounter challenges to satisfy customers that require
that all of the components of our products be certified as conflict-free. If we are not able to meet customer requirements, customers may choose an alternative
service provider. These changes could also have an adverse impact in our ability to market our products.
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Risks Related to Our Ordinary Shares
The share price of our ordinary shares has been and may continue to be volatile.
Our quarterly financial performance is likely to vary in the future, and may not meet our expectations or the expectations of analysts or investors, which may
lead to additional volatility in our share price. The market price of our ordinary shares may be volatile and could fluctuate substantially due to many factors,
including, but not limited to:
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announcements or introductions of technological innovations, new products, product enhancements or pricing policies by us or our competitors;
winning or losing contracts with service providers;
disputes or other developments with respect to our or our competitors’ intellectual property rights;
announcements of strategic partnerships, joint ventures or other agreements by us or our competitors;
recruitment or departure of key personnel;
regulatory developments in the markets in which we sell our products;
our sale of ordinary shares or other securities in the future;
changes in the estimation of the future size and growth of our markets; or
· market conditions in our industry, the industries of our customers and the economy as a whole.
Share price fluctuations may be exaggerated if the trading volume of our ordinary shares is too low. The lack of a trading market may result in the loss of
research coverage by securities analysts. Moreover, we cannot assure you that any securities analysts will initiate or maintain research coverage of our
company and our ordinary shares. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our
ordinary shares would likely decline. Securities class action litigation has often been brought against companies following periods of volatility.
Our shareholders do not have the same protections afforded to shareholders of a U.S. company because we have elected to use certain exemptions
available to foreign private issuers from certain NASDAQ corporate governance requirements.
As a foreign private issuer, we are permitted under NASDAQ Marketplace Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the
NASDAQ Stock Market requirements that apply to U.S. companies. As a condition to following Israeli corporate governance practices, we must disclose
which requirements we are not following and the equivalent Israeli law requirement. We must also provide NASDAQ with a letter from our Israeli outside
counsel, certifying that our corporate governance practices are not prohibited by Israeli law. As a result of these exemptions, our shareholders do not have the
same protections as are afforded to shareholders of a U.S. company. We may also in the future choose to follow Israeli law and practices in lieu of other
requirements of NASDAQ Rule 5600.
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Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.
Although we did not use the market capitalization method to value our assets in 2009, as noted in our prior Form 20-Fs, we relied on the market capitalization
method to determine the fair market value of our assets for the taxable year ended December 31, 2012. Based on certain estimates of our gross income and
gross assets, the nature of our business and the anticipated amount of goodwill (which is determined in large part by the price of our stock), we believe that
we were not a PFIC for our taxable year ended December 31, 2012 and do not expect to become a PFIC for our taxable year ending December 31, 2013. A
non-U.S. company will generally be characterized as a PFIC for any taxable year in which 75% or more of its gross income is passive income or in which
50% or more of the average value of its gross assets produce passive income or are held for the production of passive income.
If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary
shares treated as ordinary income, rather than capital gains income, and having potentially punitive interest charges apply to the proceeds of share sales.
Similar rules apply to distributions that are “excess distributions.”
The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets, activities and market
capitalization, including fluctuations in the price of our ordinary shares, which are relevant to this determination. Accordingly, there can be no assurance that
we will not become a PFIC in 2013 or in subsequent years.
If the price of our ordinary shares declines, we may be more vulnerable to an unsolicited or hostile acquisition bid.
We do not have a controlling shareholder. Notwithstanding provisions of our articles of association and Israeli law, a decline in the price of our ordinary
shares may result in us becoming subject to an unsolicited or hostile acquisition bid. In the event that such a bid is publicly disclosed, it may result in
increased speculation regarding our company and volatility in our share price even if our board of directors decides not to pursue a transaction. If our board of
directors does pursue a transaction, there can be no assurance that it will be consummated successfully or that the price paid will represent a premium above
the original price paid for our shares by all of our shareholders.
Risks Relating to our Location in Israel
Conditions in Israel could adversely affect our business.
We are incorporated under Israeli law and our principal offices, research and development division and manufacturing facilities are located in
Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a
number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and
the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and continued with varying levels of
severity into 2012. An armed conflict between Israel and Hamas in the Gaza Strip occurred in November 2012 and is ongoing. These conflicts involved
missile strikes against civilian targets in various parts of Israel including most recently, central Israel, and negatively affected business conditions in Israel.
Any armed conflicts, terrorist activities or political instability in the region may limit materially our ability to obtain raw materials from these countries or sell
our products to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading
partners, or significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development and
manufacturing, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us.
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Our operations may be disrupted by the obligations of personnel to perform military service.
As of December 31, 2012, we employed 442 people, of whom 305 were based in Israel. Some of our employees in Israel are obligated to perform annual
military reserve duty in the Israel Defense Forces, depending on their age and position in the army. Additionally, they may be called to active reserve duty at
any time under emergency circumstances for extended periods of time. Our operations could be disrupted by the absence of one or more of our executive
officers or key employees for a significant period due to military service and any significant disruption in our operations could harm our business. The full
impact on our workforce or business if some of our executive officers and employees are called upon to perform military service, especially in times of
national emergency, is difficult to predict. Additionally, the absence of a significant number of employees at our manufacturing subcontractor, Flextronix, as a
result of military service obligations may disrupt their operations and could have a material adverse effect on our ability to timely deliver products to
customers may be materially adversely affected.
The tax benefits that are available to us require us to meet several conditions and may be terminated or reduced in the future, which would increase our
costs and taxes.
Our investment program in equipment at our facility in Hod-Hasharon, Israel, has been granted approved enterprise status and we are therefore eligible for tax
benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investments Law. We expect to utilize these tax benefits
after we utilize our net operating loss carry forwards. As of December 31, 2012, our net operating loss carry forwards for Israeli tax purposes amounted to
approximately $40 million (including losses related to our acquisition of Oversi, the operations of which were merged with ours in 2012). To remain eligible
for these tax benefits, we must continue to meet certain conditions stipulated in the Investments Law and its regulations and the criteria set forth in the
specific certificate of approval, including, among other conditions, that the approved enterprise be operated over a seven-year period and that at least 30% of
our investment in fixed assets of the approved enterprise be funded by additional paid-up ordinary share capital. If we do not meet these requirements, the tax
benefits would be canceled and we could be required to refund any tax benefits and investment grants that we received in the past. Further, in the future these
tax benefits may be reduced or discontinued. If these tax benefits are cancelled, our Israeli taxable income would be subject to regular Israeli corporate tax
rates. The standard corporate tax rate for Israeli companies in 2011 was 24% of their taxable income and was increased to 25% in 2012. In December 2011,
the Israeli Parliament passed the Law for Tax Burden Reform (Legislative Amendments), 2011 which, among other provisions, canceled the scheduled
progressive reduction in the corporate tax rate.. This law entered into effect as of December 31, 2011, and has had no material effect on our financial
statements.
Effective January 1, 2011, the Investment Law was amended. Under the amended Investment Law, the criteria for receiving tax benefits were revised. Under
the transition provisions of the new legislation, a company may decide to irrevocably implement the new amendment while waiving benefits provided under
the current law or to remain subject to the current law. In the future, we may not be eligible to receive additional tax benefits under this law. Our Company
did not file a request to apply the new benefits under the 2011 Amendment. We intend to apply for benefits under the 2011 Amendment beginning in 2015.
The termination or reduction of these tax benefits would increase our tax liability, which would reduce our profits. Additionally, if we increase our activities
outside of Israel through acquisitions, for example, our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. Finally,
in the event of a distribution of a dividend from the abovementioned tax-exempt income, in addition to withholding tax at a rate of 15% (or a reduced rate
under an applicable double tax treaty), we will be subject to tax at the corporate tax rate applicable to our Approved Enterprise’s and Beneficiary Enterprise’s
income on the amount distributed in accordance with the effective corporate tax rate which would have been applied had we not enjoyed the exemption. See
“ITEM 10: Additional Information—Taxation—Israeli Tax Considerations and Government Programs.”
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No assurance can be given that we will be eligible to receive additional tax benefits under the Investments Law in the future. The termination or
reduction of these tax benefits would increase our tax liability in the future, which would reduce our profits or increase our losses. Additionally, if we increase
our activities outside of Israel, for example, by future acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs.
The government grants we have received for research and development expenditures require us to satisfy specified conditions and restrict our ability to
manufacture products and transfer technologies outside of Israel. If we fail to comply with these conditions or such restrictions, we may be required to
refund grants previously received together with interest and penalties and may be subject to criminal charges.
We have received royalty-bearing grants from the government of Israel through the Office of the Chief Scientist, for the financing of a portion of our
research and development expenditures in Israel, pursuant to the provisions of The Encouragement of Industrial Research and Development Law, 1984,
referred to as the Research and Development Law. In 2010, 2011 and 2012, we received and accrued grants totaling $2.8 million, $3.7 million and $2.9
million from the Office of the Chief Scientist, representing 19.8%, 21.7% and 11.5%, respectively, of our gross research and development expenditures in
these periods. We may not receive future grants or may receive significantly smaller grants from the Office of the Chief Scientist, and our failure to receive
grants in the future could adversely affect our profitability. In December 2012, we recorded a liability for the early payment of approximately $15.9 million
due to a settlement with the Office of the Chief Scientist, representing the full balance of the contingent liability related to grants. The settlement will be paid
in 2013. Upon making this payment, we will eliminate all future royalty obligations related to our anticipated revenues and will not incur the expense
associated with future interest payments related to such obligations.
The terms of the grants prohibit us from manufacturing products outside of Israel or transferring intellectual property rights in technologies developed using
these grants inside or outside of Israel without special approvals.
Even if we receive approval to manufacture our products outside of Israel, we may be required to pay an increased total amount of royalties, which may be up
to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability
to outsource manufacturing or engage in similar arrangements for those products or technologies. Know-how developed under an approved research and
development program may not be transferred to any third-parties, except in certain circumstances and subject to prior approval. In addition, if we fail to
comply with any of the conditions and restrictions imposed by the Research and Development Law or by the specific terms under which we received the
grants, we may be required to refund any grants previously received together with interest and penalties, and may be subject to criminal charges. In recent
years, the government of Israel has accelerated the rate of repayment of the Office of Chief Scientist grants and may further accelerate them in the future.
It may be difficult to enforce a U.S. judgment against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims
in Israel or serve process on our officers and directors.
We are incorporated in Israel. The majority of our executive officers and directors are not residents of the United States, and the majority of our assets and the
assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court
judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect
service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S.
securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the
grounds that Israel is not the most appropriate forum in which to bring such a claim. 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 the matters described above.
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Provisions of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares
or assets.
Our articles of association contain certain provisions that may delay or prevent a change of control, including a classified board of directors. In addition,
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 delay or prevent a change in
control and may make it more difficult for third-parties to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that
investors may be willing to pay for our ordinary shares in the future. Furthermore, Israeli tax considerations may make potential transactions undesirable to us
or to some of our shareholders. See “ITEM 10: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli Law” and “—
Anti-Takeover Measures.”
ITEM 4: Information on Allot
A. History and Development of Allot
Our History
Our legal and commercial name is Allot Communications Ltd. We are a company limited by shares organized under the laws of the State of Israel. Our
principal executive offices are located at 22 Hanagar Street, Neve Ne’eman Industrial Zone B, Hod-Hasharon 4501317, Israel, and our telephone number is
+972 (9) 761-9200. We have irrevocably appointed Allot Communications, Inc. as our agent to receive service of process in any action against us in any
United States federal or state court. The address of Allot Communications, Inc. is 300 TradeCenter, Suite 4680, Woburn, MA 01801-7422.
We were incorporated on November 12, 1996 as “Ariadne Ltd.” and commenced operations in 1997. In September 1997, we changed our name to “Allot
Communications Ltd.” In November 2006, we listed our shares on NASDAQ. In 2007, we introduced our Service Gateway platform that enables broadband
providers to build efficient, secure, manageable and profitable intelligent networks that are optimized to deliver Internet-based content and services. In
January 2008, we completed the acquisition of the business of Esphion Limited, a developer of network protection solutions for carriers and internet service
providers. In November 2010, we listed our shares on the Tel Aviv Stock Exchange, or TASE, and began applying the reporting reliefs afforded under the
Israeli Securities Law to companies whose securities are dually listed on NASDAQ and the TASE, In May 2012, we acquired the business of Ortiva Wireless
Inc., a developer of video optimization solutions for mobile and Internet networks. In September 2012, we acquired the business of Oversi Networks Ltd., a
developer of products and systems for caching Internet content.
We had capital expenditures of $3.8 million in 2012, $2.9 million in 2011 and $2.3 million in 2010. We have financed our capital expenditures with cash
generated from operations and through net proceeds from sales of our equity securities.
Our capital expenditures during 2010, 2011 and 2012 consisted primarily of investments in lab equipment for research and development.
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B. Business Overview
Overview
We are a leading global provider of intelligent broadband solutions, focused on developing mobile, fixed and enterprise networks to support the “digital
lifestyle.” The digital lifestyle describes the way people rely on broadband connectivity, Internet-connected devices and Internet applications in their everyday
lives – at work, at home and at play. Our solutions, which are based on our deep packet inspection (DPI) technology, identify and leverage the business
intelligence in data networks, empowering network operators to shape users’ digital lifestyle experiences and to capitalize on the network traffic they
generate.
We have a global and diverse end-customer base composed of mobile and fixed broadband service providers, cable operators, private networks, data centers,
governments and enterprises, such as financial and educational institutions. Our scalable, carrier-grade solutions integrate capabilities that allow our
customers to optimize the delivery and performance of over-the-top applications and services, monetize network utilization through value-added service
deployment, real-time metering and application-aware charging models and personalize the user experience through service tiering and differentiation.
Through our combination of innovative technology, proven know-how and collaborative approach to industry standards and partnerships with
broadband service providers and enterprises, we deliver broadband solutions that equip our customers with the capabilities to elevate their role in the digital
lifestyle ecosystem and to expand into new business opportunities. We offer our customers proprietary technologies that are seamlessly woven into carrier-
class products and solutions. In addition, we have developed significant industry know-how and expertise through our experience designing and
implementing use cases with our diverse customer base. Beginning from the proposal stage of a new project through the testing, acceptance and
implementation of our products, we collaborate closely with our customers and other industry participants to create innovative solutions to create the digital
lifestyle ecosystems our customers require.
Industry Background
The rapid proliferation of broadband networks in recent years has been largely driven by demand from users for faster and more reliable access to the
Internet and by the proliferation in the number and complexity of broadband applications, as well as the proliferation of mobile smartphones, tablets and other
Internet-connected devices.
Rising Network Operational Costs Due to the Rapid Adoption of Broadband Applications
Advances in broadband access (such as the introduction of long-term evolution, or LTE, technology) combined with the advanced data capabilities of
end-user devices (such as smartphones and tablets) have promoted a growing number of applications and content delivered over broadband networks. The
vast majority of these applications run over-the-top (OTT) of the network, which means they are not originated, controlled or charged by the network
operator. The use of OTT applications, such as streaming video, peer-to-peer (P2P), Voice over IP (VoIP), social networks, interactive gaming and online
content, requires large and increasing amounts of bandwidth. Moreover, many of these applications are highly sensitive to network delays caused by
congestion. In response to these challenges, service providers have been forced to invest heavily in network infrastructure upgrades and customer support
services in order to maintain the quality of experience for subscribers.
Rising Data Traffic in Mobile Networks
The mobile data market continues to grow rapidly, fueled by the proliferation of smartphones and tablets, mobile-enabled laptops that use mobile
modems or tethered smartphones to connect to the Internet. On average, the data traffic generated by an Internet user with a smartphone is multiple times that
of an Internet user without a smartphone.
23
The cost of increasing the bandwidth in mobile networks is significantly higher than that in wireline networks. As a result, mobile operators are
experiencing economic and infrastructure challenges in meeting the rising tide of data traffic over their networks. In addition, as capacity increases in mobile
networks, smartphone users are likely to have increased expectations with respect to speed and performance.
It is becoming increasingly apparent that unmanaged 3G and 4G/LTE mobile networks, will not be able to cope with the rising tide of data traffic,
without implementing intelligent bandwidth management solutions. Moreover, network providers may need to develop new pricing models if they are not
able to monetize the OTT traffic carried by their networks.
Service Providers Demand the Ability to Offer Services that can be Monetized at Different Rates
Some service providers still offer flat-rate broadband access, regardless of the type of applications and data used by subscribers. These operators
provide the same level of service to all subscribers and do not guarantee access quality, regardless of a subscriber’s willingness to pay for premium services
and network performance. However, with the increasing amount of data used, the flat-rate pricing model may not be profitable, especially for mobile
broadband operators, unless they can charge subscribers high rates. As a result, both mobile and fixed operators have begun to offer service plans based on
gigabytes of data used. However, this pricing model is also subject to competition from other service providers offering lower rates, contributing to downward
pricing pressure and high subscriber turnover rates.
To address these issues and increase the average revenue per user (ARPU), a significantly increased number of service providers have begun to offer
premium, differentiated services, such as improved quality for VoIP and Internet video, off-peak usage incentives and parental control over access to content,
among others. By offering such tiered services and charging subscribers according to the value of these services, as well as based on the gigabyte usage,
service providers can capitalize on the revenue opportunities enabled by OTT Internet applications. To offer premium services and to guarantee high-quality
delivery of content and user experience, service providers need enhanced visibility into and control of network traffic, including visibility into the type of
applications used on the network and levels of traffic generated by different subscribers.
The Challenge of Elevating the Role of Fixed and Mobile Broadband Networks
In the evolving digital lifestyle, consumers recognize the importance of the devices they use to access the Internet and choose the Internet content
and services they use based on quality. However, the network that connects them to the Internet is not as “visible”, and is therefore not as highly valued, even
though it plays a critical role in the service chain. In order to generate revenue through various pricing models and encourage consumers and content
providers to seek higher quality network services, service providers are seeking to elevate the role of network connectivity and services. To do so, service
providers must be able to identify and leverage the business intelligence in their data networks and capitalize on the network traffic that they generate.
The ability to identify, distinguish and prioritize different applications plays a major role in intelligent management of network resources and service
delivery, allowing service providers to optimize bandwidth utilization and reduce operational costs, while maintaining high quality of service for tiered and
premium services. Application designers are employing increasingly sophisticated methods to avoid detection by network operators who desire to manage
network use. Traditional network infrastructure devices, such as routers and switches, do not generally have sufficient computing resources or the required
algorithms to distinguish between different and rapidly evolving applications.
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Enterprise Demand for Visibility and Delivery of Mission-Critical Applications and Services in the Cloud
The proliferation of network applications, bring your own device (BYOD) and cloud computing presents significant challenges for enterprises that
operate data centers, wide-area networks, virtual private networks (VPN) and Internet connectivity for organizations of all sizes. Enterprises depend on
network infrastructure to ensure the delivery of business-critical applications to an increasingly mobile and often global workforce, and as such, face may of
the same issues as service providers. At the same time, Internet access has introduced a wide variety of recreational and non-business applications to
enterprise networks, resulting in network congestion and negatively impacting employee productivity. As a result, there is an increasing need for enterprises
to be able to monitor and control the traffic on their business networks.
Network Security Threats
As reliance on the Internet has grown, service providers and subscribers have become increasingly vulnerable to a wide range of security threats,
including denial of service (DOS) attacks, spambots and malware. These attacks are designed to flood the network with traffic that consumes all the available
bandwidth and hinder the ability to provide high quality broadband access to subscribers or to prevent enterprises from using mission-critical applications.
These threats also compromise network and data integrity. We believe service providers and enterprises must protect against such attacks by detecting and
neutralizing malicious traffic at very early stages before such threats can compromise network integrity and services.
Integrated Solutions
Our integrated broadband solutions allow mobile, fixed and enterprise operators to elevate their role in the digital lifestyle ecosystem and expand
into new business opportunities. Our solutions enable our customers to increase revenues by monetizing network usage through value-added services, value-
based charging and revenue-sharing models, reduce costs by optimizing the delivery and performance of OTT content and cloud computing services and
improve customer loyalty by personalizing operator offerings with various choices of service tiers and digital lifestyle options.
Our Integrated Solutions include:
·
·
·
·
·
Analytics solutions deliver accurate and meaningful network business intelligence to drive capacity planning, congestion management, service planning
and marketing decisions.
Traffic Management solutions prioritize existing network capacity, control congestion and optimize service delivery. Dynamic Quality of Service (QoS)
enforcement enables effective traffic management strategies that minimize infrastructure and operating costs.
Video Caching and Optimization solutions improve the quality and efficiency of OTT video delivery. New revenue opportunities are created through
service packages designed especially for video consumers and revenue-sharing possibilities with content providers.
Policy Control and Charging solutions drive personalized service plans and pay-for-use pricing models based on real-time consumption of bandwidth
and OTT applications. We provide a single point of integration with provisioning and pricing systems.
Service Enablement solutions facilitate a wide variety of cost-saving and revenue-generating use cases to create personalized customer experiences
demanded by today’s sophisticated consumers.
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Allot’s Products (Our Platforms)
The Allot Service Gateway and Allot NetEnforcer platforms are based on leading technology and high performance, designed for in-line deployment
in a wide range of networks. Within each platform, our Dynamic Actionable Recognition Technology (DART) engine employs multiple deep packet
inspection and analytical methods to identify network traffic by subscriber, application, device and network topology. Our technology is able to identify more
OTT applications than any other solution on the market with frequent and custom updates to our extensive signature library. These granular elements may be
mapped directly into dynamic traffic management, charging and service enablement policies.
High-Performance Platforms
·
·
Allot Service Gateway integrates network intelligence, policy enforcement and revenue-generating services in a scalable, carrier-class platform designed
for fixed, mobile (3G/4G/LTE) and converged broadband networks. The Allot Service Gateway accurately identifies subscriber traffic in real time at
speeds up to 160 gigabits per second (Gbps), optimizes bandwidth utilization based on usage, enforces QoS policy, and steers traffic to digital lifestyle
services deployed within or outside the platform. As the focal point for service enablement, The Allot Service Gateway allows service providers to
reduce operating costs and drive new revenue by delivering the personalized service and quality of experience that the digital lifestyle demands.
Allot NetEnforcer bandwidth management devices monitor and manage network traffic per application and per subscriber, enabling intelligent
optimization of broadband and wide area network (WAN) services. With full duplex speeds ranging from 10 megabits per second (Mbps) to 8 Gbps,
these devices provide essential visibility policy enforcement and traffic steering to added-value services in a wide range of service provider and enterprise
networks.
Digital Lifestyle Services
Our growing portfolio of digital lifestyle services operate seamlessly with our in-line platforms and centralized management system, providing new
business opportunities for service providers and enterprises.
Subscriber Management Platform
The Allot Subscriber Management Platform (SMP) drives the centralized creation, provisioning and pricing of subscriber services, including tiered
and usage-based data plans, which we believe are key to personalizing digital lifestyle offerings and maximizing average revenue per user. The Allot SMP
allows subscriber traffic to be managed across converged access networks and when offloading to Wi-Fi hotspots. Modular licensing provides flexible and
scalable management for any number of subscribers.
·
·
·
Allot TierManager: Provisions and manages differentiated services and tiered service plans that are tailored to subscriber preferences.
Allot QuotaManager: Provisions and manages usage allowances and caps, with real-time metering of service consumption and dynamic enforcement of
quota limits and overage policy.
Allot ChargeSmart: Enables real-time, pay-for-use pricing, based on a user’s consumption of data and applications. It also integrates seamlessly in 3G
and 4G mobile networks and implements the pricing model via standard telecommunication interfaces, such as Diameter Gx, Sd, Gy and Gz.
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Analytics Services
Our analytics services analyze traffic data to drive smart business decisions.
·
·
·
·
Allot Data Mediator: Provides high-performance collection, storage, aggregation and export of usage data, session and pricing records to the Allot
Proactive Analytics system or to any other analytics systems. Provides a rich data source for further analysis of user behavior.
Allot Proactive Analytics: Performs in-depth analyses of Internet and subscriber usage records collected by Allot in-line platforms, together with
individual demographics and profile data supplied by operator systems to better understand consumer preferences and user behavior.
Video Services
Our media caching and video optimization platforms enable operators to capitalize on the increasing volume of OTT video traffic.
Allot MediaSwift E: Comprehensive caching and content delivery system for OTT video, P2P and other applications. Relieves network congestion
caused by videos and improves quality of experience for users.
Allot VideoClass: Optimizes OTT video content and delivery to ensure efficient utilization of mobile radio access network (RAN) resources and
consistently high quality video to enhance viewer experience.
Security Services
Our security services protect network service integrity and brand reputation.
·
·
Allot WebSafe: URL filtering service that blocks blacklisted content and enables access control to objectionable content on the Internet.
Allot ServiceProtector: Attack detection and mitigation services that protect commercial networks against Denial of Service (DoS/DDoS) attacks, Zero
Day attacks, worms, zombie and spambot behavior.
Centralized Management
The Allot NetXplorer is the management umbrella for our devices, platforms and services, providing a central access point for network-wide
monitoring, reporting, analytics, troubleshooting, accounting and QoS policy provisioning. Its user-friendly interface provides our customers with a
comprehensive overview of the application, user, device and network topology traffic, while its wide variety of reports provide accessible, detailed analyses
of granular traffic data.
·
·
NetXplorer Analytics and Reporting: Real-time reporting provides 30-second accuracy for timely troubleshooting and resolution of customer care
issues, while historical traffic statistics facilitate analyses of usage trends and user behavior.
NetXplorer Data Collector: Provides distributed data collection and storage at different points in the network in order to support growing and large-
scale deployments with large volumes of network traffic.
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·
·
NetAccounting Server: Aggregates network-wide usage statistics and exports the data to external accounting systems in standard formats.
NetPolicy Provisioner: Provides a virtual “bandwidth management device” for self-monitoring and self-provisioning by a networks operator’s VPN, ISP
and managed services customers
Customers
We have a global, diversified end-customer base consisting primarily of mobile and fixed service providers, cable operators, private networks, data
centers, governments and enterprises. We derive a significant and growing portion of our revenue from direct sales to large mobile and fixed-line service
providers. We generate the remainder of our revenue through a select and well-developed network of channel partners, generally consisting of distributors,
resellers, original equipment manufacturers (“OEMs”) and system integrators. In 2012, we derived 38% of our revenues from Europe, 24% from United
States, 21% from Asia and Oceania, 10% from the Middle East and Africa and 7% from the Americas (excluding United States).
Channel Partners
We market and sell our products to end-customers both by direct sales and through channel partners, which include distributors, resellers, OEMs and
system integrators. A significant portion of our sales occur through our channel partners. In 2012, approximately one-third of our revenues were derived from
channel partners. Our channel partners generally purchase our products from us upon receiving orders from end-customers and are responsible for installing
and providing initial customer support for our products. Our channel partners are located around the world and address most major markets. Our channel
partners target a range of end-users, including carriers, alternative carriers, cable operators, private networks, data centers and enterprises in a wide range of
industries, including government, financial institutions and education. Our agreements with channel partners that are distributors or resellers are generally
non-exclusive, for an initial term of one year and automatically renew for successive one-year terms unless terminated. After the first year, such agreements
may typically be terminated by either party upon ninety days prior notice.
We offer support to our channel partners. This support includes the generation of leads through marketing events, seminars and web-based leads and
incentive programs as well as technical and sales training.
Sales and Marketing
Our product sales and deployment cycle varies based on the intended use by the end-customer. The sales cycle for initial network deployment may
generally last between twelve and eighteen months for large and medium service providers, six to twelve months for small service providers, and one to six
months for enterprises. Follow-on orders and additional deployment of our products usually require shorter cycles. Large and medium service providers
generally take longer to plan the integration of our solutions into their existing networks and to set goals for the implementation of the technology.
We focus our marketing efforts on product positioning, increasing brand awareness, communicating product advantages and generating qualified
leads for our sales organization. We rely on a variety of marketing communications channels, including our website, trade shows, industry research and
professional publications, the press and special events to gain wider market exposure.
We have organized our worldwide sales efforts into the following three territories: North and South America, Europe the Middle East and Africa,
and Asia and Oceania. We have regional offices in the United States, Israel, France, United Kingdom, Singapore, Japan, New Zealand and China, and a
regional presence in Germany, Italy, Spain, Mexico, Brazil, India, Hong Kong, South Korea, South Africa and Australia.
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As of December 31, 2012, our sales and marketing staff, including product management and business development functions, consisted of 84
employees.
Service and Technical Support
We believe our technical support and professional services capabilities are a key element of our sales strategy. Our technical staff assists in presales activities
and advises channel partners on the integration of our solutions into end-customer networks. Our basic warranty extended to end-customers (directly or
through our channel partners) is three months for software and twelve months for hardware. Generally, end-customers are also offered a choice of one year or
three-year customer support programs when they purchase our products. These customer support programs can be renewed at the end of their terms. Our end-
customer support plans generally offer the following features:
·
·
·
·
unlimited 24/7 access to Allot’s support organization, via phone, emails and online support system;
expedited replacement units in the event of a warranty claim;
software updates and upgrades offering new features and addressing new and changing network applications; and
periodic updates of solution documentation and technical information.
Our support plans are designed to maximize network up-time and minimize operating costs. Our customers, including channel partners and their end-
customers, are entitled to take advantage of our around-the-clock technical support which we provide through our four help desks, primarily located in
France, Israel, Singapore and the United States. We also offer our customers 24-hour access to an external web-based technical knowledge base, which
provides technical support information and, in the case of our channel partners, enables them to support their customers independently and obtain follow up
and support from us.
The expenditures associated with the technical support staff are allocated in our statements of operations between sale and marketing expenses and cost of
goods sold, based on the roles of and tasks performed by personnel.
As of December 31, 2012, our technical staff consisted of 115 employees.
Research and Development
Our research and development activities take place primarily in Israel. As of December 31, 2012, 178 of our employees were engaged primarily in research
and development. We devote a significant amount of our resources towards research and development to introduce and continuously enhance products to
support our growth strategy. We have assembled a core team of experienced engineers, many of whom are leaders in their particular field or discipline and
have technical degrees from top universities and experience working for leading Israeli networking companies. These engineers are involved in advancing our
core technologies, as well as in applying these core technologies to our product development activities. Our research and development efforts have benefited
from royalty-bearing grants from the Office of the Chief Scientist. The State of Israel does not own any proprietary rights in technology developed with the
Office of the Chief Scientist funding and there is no restriction related to the Office of the Chief Scientist on the export of products manufactured using
technology developed with Office of the Chief Scientist funding (other limitations on export apply under applicable law). For a description of restrictions on
the transfer of the technology and with respect to manufacturing rights, please see “ITEM 3: Key Information—Risk Factors—The government grants we
have received for research and development expenditures require us to satisfy specified conditions and restrict our ability to manufacture products and
transfer technologies outside of Israel. If we fail to comply with these conditions or such restrictions, we may be required to refund grants previously received
together with interest and penalties and may be subject to criminal charges.”
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Manufacturing
We subcontract the manufacture and repair of our Service Gateway platforms and our NetEnforcer traffic management systems to Flextronics (Israel) Ltd., a
subsidiary of Flextronics, a global electronics manufacturing services company. This strategy enables us to reduce our fixed costs, focus on our core research
and development competencies and provide flexibility in meeting market demand. Flextronics (Israel) is contractually obligated to provide us with
manufacturing services based on agreed specifications, including manufacturing, assembling, testing, packaging and procuring the raw materials for our
devices. We are not required to provide any minimum orders. Our agreement with Flextronics (Israel) is automatically renewed annually for additional one-
year terms. Flextronics (Israel) may terminate our agreement with them at any time during the term upon 180 days prior notice. We retain the right to procure
independently any of the components used in our products. Flextronics (Israel) has a U.S. affiliate to which it can, with the prior consent of the Office of the
Chief Scientist, transfer manufacturing of our products if necessary, in which event we may be required to pay increased royalties to the Office of the Chief
Scientist. We expect that it would take approximately six months to transition manufacturing of our products to an alternate manufacturer.
We design and develop internally a number of the key components for our products, including printed circuit boards and software. Some of the hardware
components of our products are obtained from single or limited sources. Since our products have been designed to incorporate these specific components, any
change in these components due to an interruption in supply or our inability to obtain such components on a timely basis would require engineering changes
to our products before we could incorporate substitute components. In particular, we purchase the central processing unit for our Service Gateway platforms
and for our NetEnforcer products from NetLogic Microsystems, Inc. (now part of Broadcom Corporation). We carry approximately three to six months of
inventory of key components. We also work closely with our suppliers to monitor the end-of-life of the product cycle for integral components, and believe
that in the event that they announce end of life, we will be able to increase our inventory to allow enough time for replacing such components. The
agreements with our suppliers do not contain any minimum purchase or supply commitments. Product testing and quality assurance is performed by our
contract manufacturer using tests and automated testing equipment and according to controlled test documentation we specify. We also use inspection testing
and statistical process controls to assure the quality and reliability of our products.
Competition
We compete in a rapidly evolving and highly competitive sector of the networking technology market. We face significant competition from router
and switch infrastructure companies, such as Cisco Systems, Inc., Telefonaktiebolager LM Erricson and Huawei Technologies Co., Ltd. that integrate
functionalities into their platforms addressing some of the problems that our products address. Our competitors have also identified the potential market
opportunity offered by the largest service providers, referred to as Tier 1 operators, and we therefore expect intense competition in this portion of our market
in the future. Our principal competitors in the field of DPI technology are Sandvine Inc. and Procera Networks, Inc. We also face competition from companies
that offer partial or alternative solutions addressing limited aspects of the challenges facing broadband providers, such as network monitoring or security. We
compete on the basis of product performance, such as speed and number of applications identified, ease of use and installation, and customer support. Price is
also an important, although not the principal, basis on which we compete. See “ITEM 3: Key Information—Risk Factors—We may be unable to compete
effectively with other companies in our market who offer, or may in the future offer, competing technologies.”
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Intellectual Property
Our intellectual property rights are very important to our business. We believe that the complexity of our products and the know-how incorporated in them
makes it difficult to copy them or replicate their features. We rely on a combination of confidentiality and other protective clauses in our agreements,
copyright and trade secrets to protect our know-how. We also restrict access to our servers physically and through closed networks since our product designs
and software are stored electronically and thus are highly portable.
We customarily require our employees, customers, distributors, resellers, software testers, technology partners and contractors to execute confidentiality
agreements or agree to confidentiality undertakings when their relationship with us begins. Typically, our employment contracts also include the following
clauses: assignment of intellectual property rights for all inventions developed by employees, non-disclosure of all confidential information, and non-compete
clauses, which generally restrict the employee for six months following termination of employment. The enforceability of non-compete clauses in certain
jurisdictions in which we operate may be limited. See “ITEM 3: Key Information—Risk Factors—We may not be able to enforce employees’ covenants not
to compete under the current laws of some jurisdictions in which we operate and therefore may be unable to prevent our competitors from benefiting from the
expertise of some of our former employees.” Because our product designs and software are stored electronically and thus are highly portable, we attempt to
reduce the portability of our designs and software by physically protecting our servers through the use of closed networks, which prevent external access to
our servers.
The communications equipment industry is characterized by constant product changes resulting from new technological developments, performance
improvements and lower hardware costs. We believe that our future growth depends to a large extent on our ability to be an innovator in the development and
application of hardware and software technology. As we develop the next generation products, we intend to pursue patent protection for our core technologies
in the telecommunications segment. We plan to seek patent protection in our largest markets and our competitors’ markets, for example in the United States
and Europe. As we continue to move into markets, such as Japan, Korea and China, we will evaluate how best to protect our technologies in those markets.
We intend to vigorously prosecute and defend the rights of our intellectual property.
As of December 31, 2012, we had two U.S. patents and four pending patent applications in the United States. We expect to formalize our evaluation process
for determining which inventions to protect by patents or other means. We cannot be certain that patents will be issued as a result of the patent applications we
have filed.
We have obtained a U.S. trademark registration for one of our key marks that we use to identify our products or services: “NetEnforcer.”
Government Regulation
See “ITEM 5: Overview—Government Grants” for a description of grants received from the Office of the Chief Scientist of the Ministry of Industry, Trade
and Labor.
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C. Organizational Structure
As of December 31, 2012, we held directly and indirectly the percentage indicated of the outstanding capital stock of the following subsidiaries:
Jurisdiction of Incorporation
United States
France
Company
Allot Communications, Inc.
Allot Communication Europe SARL
Allot Communications (Asia Pacific) Pte. Limited Singapore
Allot Communications (UK) Limited
Allot Communications Japan K.K.
Allot Communications (New Zealand) Limited
Ortiva Wireless Inc.
Oversi Networks Ltd.
United Kingdom
Japan
New Zealand
United States
Israel
Percentage Ownership
100%
100%
100%
100%
100%
100%
100%
100%
D. Property, Plants and Equipment
Our principal administrative and research and development activities are located in approximately 72,000 square foot (6,700 square meter) facilities in Hod-
Hasharon, Israel. The leases for our facilities vary in dates and terms, with the main facility’s lease commencing in July 2006 and expiring in July 2013.
We also lease a 5,862 square foot (545 square meter) facility in Woburn, Massachusetts, for the purposes of our U.S. sales and marketing operations pursuant
to a lease that expires in August 2014 and a 15,119 square foot (1,400 square meter) facility in San Diego, California for the purposes of our U.S research and
development activities, which expires in April 2018. We lease other smaller facilities for the purpose of our development, sales and marketing and support
activities in France, the United Kingdom, Italy, Germany, Singapore, Spain, China, Japan and New Zealand.
ITEM 4A: Unresolved Staff Comments
Not applicable.
ITEM 5: Operating and Financial Review and Prospects
A. Operating Results
Overview
We are a leading provider of intelligent Internet Protocol (“IP”) service optimization, monetization and personalization solutions for mobile, fixed and
wireless broadband service providers and enterprises. Our portfolio of hardware platforms and software applications uses our proprietary deep packet
inspection (“DPI”) technology, which we refer to as Dynamic Actionable Recognition Technology, or DART, to transform broadband connections or pipes
into smart networks that can manage data traffic efficiently and rapidly deploy value-added services. End-customers use our solutions to create sophisticated
policies to monitor network applications, enforce quality of service policies that guarantee mission-critical application performance, mitigate security risks
and leverage network infrastructure investments. Demand from users for faster and more reliable access to the Internet, an increase in the number and
complexity of broadband applications, and growth in mobile data-enhanced smartphones have resulted in the rapid proliferation of broadband access
networks in recent years. Our carrier-class products are used by service providers to offer subscriber-based and application-based tiered services that enable
them to optimize their service offerings, reduce churn rates and increase ARPU.
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We market and sell our products through a variety of channels, including direct sales and through our channel partners, which include distributors, resellers,
OEMs and system integrators. End customers of our products include carriers, mobile operators, cable operators, wireless, wireline and satellite Internet
service providers, educational institutions, governments and enterprises. The resulting intelligent, content-aware broadband networks enable our customers to
accurately monitor and manage IP traffic per application, subscriber, network topology and device.
In 2012, the primary driver of our growth was the mobile market, which was highlighted by our ongoing relationship with a global Tier 1 mobile operator
group. Revenues from this customer in 2012 accounted for 14% of our total revenues.
Acquisition of Ortiva and Oversi
In 2012, we acquired the business of Ortiva Wireless Inc. (“Ortiva”), a developer of solutions for mobile and Internet networks and Oversi Networks
Ltd. (“Oversi”), a developer of products and systems for caching Internet content. See note 1(b) to our consolidated financial statements for further
information.
Revenues
We generate revenues from two sources: (1) sales of our network traffic management systems and our network management application suites, and (2)
maintenance and support services, including installation and training. We generally provide maintenance and support services pursuant to a one- or three-year
maintenance and support program, which may be purchased by customers at the time of product purchase or on a renewal basis.
We recognize revenues from product sales when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations
with respect to implementation remain, the fee is fixed or determinable and collection is probable. We typically grant a one-year hardware and three month
software warranty on all of our products, or one-year hardware and software extended warranty to customers which purchase annual maintenance and
support, and record a provision for warranty at the time the product’s revenue is recognized. We estimate the liability of possible warranty claims based on
our historical experience. Warranty claims have to date been immaterial to our results of operations. Maintenance and support revenues are recognized on a
straight-line basis over the term of the applicable maintenance and support agreement. See “—Critical Accounting Policies and Estimates—Revenue
Recognition” below.
Customer concentration. We derived 14%, 15% and 30% of our total revenues in 2012, 2011 and 2010, respectively, from one global Tier 1 mobile operator
group. The decrease in 2011 and 2012 is primarily attributable to an increase of the total revenues and to the timing of revenue recognition.
Geographical breakdown. The following table sets forth the geographic breakdown of our revenues by percentage for the periods indicated:
United States
Europe
Asia and Oceania
Middle East and Africa
Americas (excluding United States)
Total
Year Ended December 31,
2011
2010
2012
14%
53
22
7
4
100%
12%
50
17
12
9
100%
24%
38
21
10
7
100%
33
Cost of revenues and gross margins
Our products’ cost of revenues consists primarily of costs of materials, manufacturing services and overhead, warehousing, product testing and royalties paid
primarily to the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist. Our services’ cost of
revenues consists primarily of salaries and related personnel costs for our customer support staff as well as the royalty payments mentioned above. We expect
cost of revenues to increase as a result of an increase in our product and service revenues, an increase in sales of our higher end products, primarily our
Service Gateway platforms, and sales of extended service suites to large customers that we expect will require additional personnel hiring and other
operational expenditures related to such sales. Such increases may be partially offset by increased sales of our network management application suites as their
related cost of revenues is generally lower. In addition, we are no longer obligated to make royalty payments to the Office of the Chief Scientist, as we
reached a settlement with them in December 2012. The balance of the liability related to the grants received from the Office of Chief Scientist was
approximately $15.9 million, which was recorded as cost of revenues for the year ended December 31, 2012. As a result, our gross margins as a percentage of
revenues may decrease in the future.
Operating expenses
Research and development. Our research and development expenses consist primarily of salaries and related personnel costs, costs for subcontractor services,
depreciation, rent and costs of materials consumed in connection with the design and development of our products. We expense all of our research and
development costs as they are incurred. Our net research and development expenses are comprised of gross research and development expenses offset by
financing through royalty-bearing grants from the Office of the Chief Scientist. Such participation grants are recognized at the time at which we are entitled to
such grants on the basis of the costs incurred and included as a deduction of research and development expenses (see “—Government Grants” below). We
believe that significant investment in research and development, including hiring high quality research and development personnel, is essential to our future
success and expect that in future periods our research and development expenses will increase on an absolute basis.
Sales and marketing. Our sales and marketing expenses consist primarily of salaries and related personnel costs, travel expenses, costs associated with
promotional activities such as public relations, conventions and exhibitions, rental expenses, depreciation and commissions paid to third parties. We intend to
continue expanding our activities in the service provider market, and therefore we expect that sales and marketing expenses will increase on an absolute basis
in the future as we hire additional sales, marketing and presale support personnel to continue to promote our brand, establish new marketing channels and
expand our presence worldwide.
General and administrative. Our general and administrative expenses consist of salaries and related personnel costs, rental expenses, costs for professional
services and depreciation. We expect these expenses to increase on an absolute basis as we hire additional personnel and incur additional costs related to the
growth of our business as we increase our global presence. General and administrative expenses also include costs associated with corporate governance, tax
and regulatory compliance, compliance with the rules implemented by the U.S. Securities and Exchange Commission (the “SEC”), NASDAQ and the Tel-
Aviv Stock Exchange (“TASE”) and premiums for our director and officer liability insurance.
34
Financial income (expenses), net
Financial income (expenses), net consists primarily of interest earned on our cash balances and other financial investments, foreign currency exchange gains
or losses, gains or losses resulting from the sale of marketable securities and bank fees.
In 2012, we had $1.4 million financial income, net compared to $0.4 million financial income, net in 2011. The change is primarily attributed to
interest income derived from the increase in our short-term bank deposits as a result of our investment of the cash received from our offering of ordinary
shares completed in November 2011.
In addition, financial and other income (expenses), net, may fluctuate due to foreign currency exchange gains or losses, as well as interest rate
changes. See “—Factors Affecting Our Performance.”
Approved and Privileged Enterprise
Our facilities in Hod-Hasharon, Israel have been granted Approved Enterprise status under the Encouragement of Capital Investments Law, 1959 and enjoy
certain tax benefits under this program. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2012,
our net operating loss carry forwards for Israeli tax purposes totaled approximately $40.0million, which includes losses related to our acquisition of Oversi.
As a result of our acquisition of Oversi, operating losses may be offset against taxable income annually with a limitation of up to 20% of the total
accumulated loss but no more than 50% of our taxable income. Income derived from other sources, other than through our “Approved Enterprise” status,
during the benefit period will be subject to the regular corporate tax rate.
Government Grants
Our research and development efforts have been financed, in part, through grants from the Office of the Chief Scientist under our approved plans in
accordance with the Research and Development Law. Through December 31, 2012, we had received approval and recorded in our books grants totaling $30.8
million from the Office of the Chief Scientist, including $4.1 million attributed to NetReality products. Because the NetReality products will no longer be
sold, the $4.1 million was cancelled, and we will not be obligated to repay this amount. Under Israeli law and the approved plans, royalties on the revenues
derived from sales of all of our products are payable to the Israeli government, generally at the rate of 3.0% during the first three years and 3.5% beginning in
the fourth year, up to the amount of the received grants as adjusted for fluctuation in the U.S. dollar/shekel exchange rate. The amounts received after January
1, 1999 bear interest at the twelve-month LIBOR as at the beginning of the year in which a grant is approved. Our obligation to pay these royalties is
contingent upon actual sales of our products and no payment is required if no sales are made. In December 2012, we recorded a liability of $15.9 million due
to a settlement with the Office of the Chief Scientist, representing the full balance of the contingent liability related to grants received. This settlement will be
paid in 2013. Upon making this payment, we will eliminate all future royalty obligations related to our anticipated revenues and will not incur the expense
associated future interest payments related to such obligations.
Factors Affecting Our Performance
Our business, financial position and results of operations, as well as the period-to-period comparability of our financial results, are significantly affected by a
number of factors, some of which are beyond our control, including:
Customer concentration. We derived 14% of our total revenues in 2012 from one global Tier 1 mobile operator group. While we have some visibility into the
likely scope of the customer’s projects, our relationship is conducted solely on a purchase order basis and we do not have any commitment for future purchase
orders from this customer. The loss of such significant customer could harm our results of operations and financial condition.
35
Size of end-customers and sales cycles. We have a global, diversified end-customer base consisting primarily of service providers and enterprises. The
deployment of our products by small and midsize enterprises and service providers can be completed relatively quickly with a limited number of NetEnforcer
and/or Service Gateway systems compared to the number required by large service providers. In 2012, we have increased the portion of our sales to large
service providers. Large service providers take longer to plan the integration of our solutions into their existing networks and to set goals for the
implementation of the technology. Sales to large service providers are therefore more complicated as they involve a relatively larger number of network
elements and solutions, as well as NetEnforcer and/or Service Gateway systems. We are seeking to achieve further significant customer wins in the large
service provider market that would positively impact our future performance. The longer sales cycles associated with the increased sales to large service
providers of our platforms may increase the unpredictability of the timing of our sales and may cause our quarterly and annual operating results to fluctuate if
a significant customer delays its purchasing decision and/or defers an order. Furthermore, longer sales cycles may result in delays from the time we increase
our operating expenses and make investments in inventory to the time that we generate revenue from related product sales.
Average selling prices. Our performance is affected by the selling prices of our products. We price our products based on several factors, including
manufacturing costs, the stage of the product’s life cycle, competition, technical complexity of the product, discounts given to channel partners in certain
territories, customization and other special considerations in connection with larger projects. We typically are able to charge the highest price for a product
when it is first introduced to the market. We expect that the average selling prices for our products will decrease over the product’s life cycle as our
competitors introduce new products and DPI technology becomes more standardized. In order to maintain or increase our current prices, we expect that we
will need to enhance the functionality of our existing products by offering higher system speeds, additional value-added services and features, such as
additional security functions, supporting additional applications and providing enhanced reporting tools. We also from time to time introduce enhanced
products, typically higher-end models that include new architecture and design and new capabilities. Such enhanced products typically increase our average
selling price. To further offset such declines, we sell maintenance and support programs for our products, and as our customer base and number of field
installations grow, our related service revenues are expected to increase.
Cost of revenues and cost reductions. Our cost of revenues as a percentage of total revenues was 28.1% for 2010, 28.5% for 2011and 44.8% in 2012 (29.6%
excluding the impact of the $15.9 million expenses related to settlement of Office of Chief Scientist grants). Our products use off-the-shelf components and
typically the prices of such components decline over time. However, the introduction and sale of new or enhanced products and services may result in an
increase in our cost of revenues. We make a continuous effort to identify cheaper components of comparable performance and quality. We also seek
improvements in engineering and manufacturing efficiency that will reduce costs. Our products incorporate features that require the payment of royalties to
third parties. In addition, new products usually have higher costs during the initial introduction period. We generally expect such costs to decline as the
product matures and sales volume increases. The introduction of new products may also involve a significant decrease in demand for older products. Such a
decrease may result in a devaluation or write-off of such older products and their respective components. In 2012, we recorded a write-off of $1.4 million of
inventory to our cost of revenues for products and components. The growth of our customer base is usually coupled with increased service revenues primarily
resulting from increased maintenance and support. In addition, the growth of our installed base with large service providers may result in increased demand
for professional services, such as training and installation services. An increase in demand for such services may require us to hire additional personnel and
incur other expenditures. However, these additional expenses, handled efficiently, may be utilized to further support the growth of our customer base and
increase service revenues.
36
Currency exposure. A majority of our revenues and a substantial portion of our expenses are denominated in the U.S. dollar. However, a significant portion of
the expenses associated with our global operations, including personnel and facilities-related expenses, are incurred in currencies other than the U.S. dollar.
This is the case primarily in Israel and to a lesser extent in other countries in Europe and Asia. Consequently, a decrease in the value of the U.S. dollar relative
to local currencies will increase the dollar cost of our operations in these countries. A relative decrease in the value of the U.S. dollar would be partially offset
to the extent that we generate revenues in such currencies. In order to partially mitigate this exposure we have decided in the past and may decide from time
to time in the future to enter into hedging transactions. We may discontinue hedging activities at any time. As such decisions involve substantial judgment and
assessments primarily regarding future trends in foreign exchange markets, which are very volatile, as well as our future level and timing of cash flows of
these currencies, we cannot provide any assurance that such hedging transactions will not affect our results of operations when they are realized. See Note 5
to our consolidated financial statements included elsewhere in this annual report for further information.
Interest rate exposure. We have a significant amount of cash that is currently invested primarily in interest bearing vehicles, such as bank time
deposits and available for sale marketable securities. These investments expose us to risks associated with interest rate fluctuations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and judgments are subject to
an inherent degree of uncertainty and actual results may differ. Our significant accounting policies are more fully described in Note 2 to our consolidated
financial statements included elsewhere in this annual report. Certain of our accounting policies are particularly important to the portrayal of our financial
position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions
to be used in making certain estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observance of trends in our
industry, information provided by our customers and information available from other outside sources, as appropriate. With respect to our policies on revenue
recognition and warranty costs, our historical experience is based principally on our operations since we commenced selling our products in 1998. Our
estimates are primarily guided by observing the following critical accounting policies:
·
Revenue recognition;
· Warranty costs;
·
·
·
Allowance for doubtful accounts;
Accounting for stock-based compensation;
Inventories;
· Marketable securities;
·
·
·
Impairment of goodwill and long lived assets;
Income taxes; and
Contingencies.
Because each of the accounting policies listed above requires the exercise of certain judgments and the use of estimates, actual results may differ from our
estimations and as a result would increase or decrease our future revenues and net income.
37
Revenue recognition. We generate revenues mainly from the sale of our products along with related maintenance and support services. At times,
these arrangements may also include professional services, such as installation services or training. We sell our products through resellers, distributors, OEMs
and system integrators, all of whom are considered end-customers from our perspective.
Revenues from product sales are recognized when persuasive evidence of an agreement exists, title and risk of loss have transferred to the customer,
no significant performance obligations remain, payment for products is not contingent upon performance of installation or service obligations, the fee is fixed
or determinable and collectability is probable. In instances where final acceptance of the product or service is specified by the customer, we do not recognize
the revenue until all acceptance criteria have been met.
Maintenance and support-related revenues included in multiple element arrangements are deferred and recognized on a straight-line basis over the
term of the applicable maintenance and support agreement. Revenues from other services are recognized upon the completion of installation or when the
respective service is provided. In instances where the services provided in a multiple element arrangement are considered essential to the functionality of the
product and payment for the product is contingent upon performance of the services, the sales of the products and services are considered one unit of
accounting. Deferred revenues are classified as short and long term and recognized as revenues at the time respective elements are provided.
Under historical accounting principles, we were required to account for sales of its products in accordance with ASC 985-605. ASC 985-605
generally required revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative objective fair
value of the elements. Accordingly, revenues were allocated to the different elements in the arrangement under “the residual method” when Vendor Specific
Objective Evidence (“VSOE”) of fair value exists for all undelivered elements and no VSOE exists for the delivered elements.
Under the residual method, at the outset of the arrangement with a customer, we deferred revenues for the VSOE of its undelivered elements
(maintenance and support) and recognized revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement
(hardware and software products).
In October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include Software Elements, (amendments to ASC Topic 985, Software)” (ASU
2009-14), which changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products
containing software components and non-software components that function together to deliver the tangible product’s essential functionality is no longer
within the scope of the software revenue guidance in Subtopic 985-605 of the Codification. Accordingly, we are outside of the scope of Subtopic 985-605.
Since 2011, pursuant to the guidance of ASU 2009-13, “Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue
Recognition)” (ASU 2009-13) and ASU 2009- 14, when a sales arrangement contains multiple elements, such as products and services, we allocate revenues
to each element based on a selling price hierarchy. The selling price for a deliverable is based on: (1) VSOE, if available, (2) third party evidence (‘‘TPE’’) if
VSOE is not available or (3) the estimated selling price (‘‘ESP’’) if neither VSOE nor TPE is available. In multiple element arrangements, revenues are
allocated to each separate unit of accounting for each of the deliverables using the relative selling prices of each of the deliverables in the arrangement based
on the aforementioned selling price hierarchy.
As of January 1, 2011, we changed our pricing policy in respect of the sale of maintenance and support services in new, multiple-element arrangements. For
maintenance and support services under the new pricing policy, we determined the ESP for the year ended December 31, 2011 in multiple-element
arrangements based on our review of historical transactions and considering several other external and internal factors including, but not limited to, pricing
practices such as discounting and competition. For maintenance and support services in the year ended December 31, 2012, we determined the selling price
based on VSOE of the price charged based on standalone sales of such elements using a consistent percentage of our product price lists (renewals) in the same
territories. The selling price of products was determined based on the ESP, as neither VSOE nor TPE was available. The ESP was determined by reviewing
historical transactions and considering multiple other factors, including but not limited to, pricing practices including discounting and competition.
38
We provide a provision for product returns and stock rotation based on its experience with historical sales returns, stock rotations and other known factors.
Such provisions amounted to $4.1 million and $2.6 million as of December 31, 2012 and 2011, respectively.
Warranty costs. We typically grant a one-year hardware and three month software warranty on all of our products, or one-year hardware and software
extended warranty to customers which purchase annual maintenance and support, and record a provision for warranty at the time the product’s revenue is
recognized. We estimate the liability of possible warranty claims based on our historical experience. We estimate the costs that may be incurred under our
warranty arrangements and record a liability in the amount of such costs at the time product revenue is recognized. We periodically assess the adequacy of the
recorded warranty liabilities and adjust the amounts as necessary.
Allowance for doubtful accounts. We evaluate the collectability of our accounts receivable on a specific basis. We estimate this allowance based on our
judgment as to our ability to collect outstanding receivables. We primarily base this judgment on an analysis of significant outstanding invoices, the age of the
receivables, our historical collection experience and current economic trends. In circumstances where we are aware of a specific customer’s inability to meet
its financial obligations to us, we record a specific allowance against amounts due to reduce the net recognized receivable to the amount we reasonably
believe will be collected.
Accounting for stock-based compensation. We account for stock-based compensation in accordance with Accounting Standards Codification No. 718,
“Compensation - Stock Compensation” (“ASC No. 718”) that 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 our consolidated statement of operations. We recognize compensation expense for the value of its awards granted based on the straight-line
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 the
grant and revised in subsequent periods if actual forfeitures differ from those estimates.
In connection with the grant of options, we recorded total stock-based compensation expense of $2.0 million in 2010, $2.3 million in 2011and $4.8 million in
2012. In 2012, $0.2. million, $1.2 million, $2.1 million and $1.3 million of our stock-based compensation expense resulted from cost of revenue, research and
development expenses, net, sales and marketing expenses and general and administrative expenses, respectively, based on the department in which the
recipient of the option grant was employed. As of December 31, 2012, we had an aggregate of $19.0 million of deferred unrecognized stock-based
compensation remaining to be recognized over a weighted average vesting period of 2.13 years.
Inventories. We value our inventories at the lower of cost or estimated market value. Cost is determined based on the First In, First Out (“FIFO”)
cost method for raw materials and out-of-pocket manufacturing costs. Indirect costs are allocated on an average basis. We estimate market value based on our
current pricing, market conditions and specific customer information. We write off inventory for slow-moving items or technological obsolescence. We also
assess our inventories for obsolescence based upon assumptions about future demand and market conditions. Actual future results may differ from our
assessments and result in further devaluations or write-downs that will affect our future results of operations. Once inventory is written off, a new cost basis
for these assets is established for future periods. Inventory write-offs totaled $1.1 million in 2010, $0.5 million in 2011 and $1.4 million in 2012.
39
Marketable securities. We account for our investments in marketable securities using Accounting Standards Codification No. 320, “Investments – Debt and
Equity Securities” (“ASC No. 320”).
We determine the appropriate classification of marketable securities at the time of purchase and evaluate such designation as of each balance sheet date. We
classify all of our investments in marketable securities as available for sale. Available for sale securities are carried at fair value, with unrealized gains and
losses reported in “accumulated other comprehensive income (loss)” in shareholders’ equity. Realized gains and losses on sales of investments are included in
earnings and are derived using the specific identification method for determining the cost of securities. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in financial
income, net, if any.
As of December 31, 2012, we held available for sale marketable securities of $14.8 million. As of December 31, 2012, the unrealized gain recorded to other
comprehensive income was 15 million.
Impairment of goodwill and long lived assets. Goodwill represents the excess of the purchase price over the fair value of net assets of purchased
businesses. Under Accounting Standards Codification No. 350, “Intangibles-Goodwill and Other” (“ASC No. 350”), goodwill and intangible assets deemed
to have indefinite lives are tested for impairment annually, or more often if there are indicators of impairment present.
We perform an annual impairment analysis of goodwill at December 31 of each year, or more often as applicable. We operate in one operating
segment, and this segment comprises only reporting unit. 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, we compare 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 we 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 we would record an impairment loss equal to the difference.
We believe that our business activity and management structure meet the criterion of being a single reporting unit for accounting purposes. We performed an
annual impairment analysis as of December 31, 2012 and determined that the carrying value of the reporting unit was less than the fair value of the reporting
unit. Fair value is determined using market capitalization. During the years ended 2010, 2011 and 2012, no impairment losses were recorded.
Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2012, no impairment losses have been identified.
40
Intangible assets acquired in a business combination are recorded at fair value at the date of the acquisition. Following initial recognition, intangible assets are
carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite
or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives. Some of the acquired
intangible assets are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated
amortization of such customer relationships and backlog as compared to the straight-line method. All other intangible assets are amortized over their
estimated useful lives on a straight-line basis.
During 2010, 2011 and 2012, no impairment losses were recorded.
Income taxes. We account for income taxes in accordance with Accounting Standards Codification No. 740, “Income Taxes” (“ASC No. 740”). ASC
No. 740 prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
We have accumulated operating loss carry forwards of approximately $40.0 million and capital losses of approximately $27.3 million for tax
purposes as of December 31, 2012, which may be carried forward and offset against taxable capital gains in the future for an indefinite period. In the United
States, the accumulated losses for U.S. federal income tax return purposes were approximately $7.3 million as of December 31, 2012, which expire between
2026 and 2031. In France, we had approximately $3.5 million in net operating loss carry forwards as of December 31, 2012, which may be carried forward
and offset against taxable capital gains in the future for an indefinite period. We believe that because of our history of losses, and uncertainty with respect to
future taxable income, it is more likely than not that some of the deferred tax assets regarding the loss carry forwards will not be utilized in the foreseeable
future, and therefore, a valuation allowance was provided to reduce deferred tax assets to their realizable value. The valuation allowance for the year ended
December 31, 2012 was $8.7 million.
ASC No. 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We recognize interest and
penalties related to unrecognized tax benefits in our provision for income tax.
Contingencies. From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to
assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of
reserves required for these contingencies, if any, which would impact our results of operations, is made after considered analysis of each individual action
together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances and
estimations. A change in the required reserves would impact our results of operations in the period the change is made.
41
Results of Operations
The following table sets forth our statements of operations as a percentage of revenues for the periods indicated:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Sales and marketing
General and administrative
Total operating expenses
Operating profit ( loss)
Financing income (expenses), net
Profit (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net profit (loss)
Year Ended December 31,
2011
2010
2012
71.7%
28.3
100.0
73.1%
26.9
100.0
73.6%
26.4
100.0
24.6
3.5
28.1
71.9
19.8
38.7
9.6
68.1
3.8
(13.8)
(10.0)
0.1
(10.1)%
25.1
3.4
28.5
71.5
17.1
34.1
9.6
60.8
10.7
0.5
11.2
(0.1)
11.3%
25.6
4.0
44.8
55.2
21.1
32.5
10.2
63.8
(8.6)
(1.3)
(7.3)
(0.9)
(6.4)%
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
Products. Product revenues increased by $20.3 million, or 35.8%, to $77.1million in 2012 from $56.8 million in 2011. The increase is primarily
attributable to increased sales of our high-end products, primarily the Service Gateway platforms and value added products (such as Service Protector and
MediaSwift), driven by orders placed by Tier 1 operator group and leading operators in North America, Latin America, Africa and East Asia. Video
optimization and caching products sales, driven from the acquisitions of Ortiva and Oversi contributed to the increased sales in the second half of 2012.
Services. Services revenues increased by $6.7 million, or 31.9%, to $27.6 million in 2012 from $20.9 million in 2011. The increase in service
revenues is primarily attributable to an increase in our installed base in 2012 and services revenues related to video optimization and caching products, driven
from the acquisitions.
Product revenues comprised 73.6% of our total revenues in 2012, an increase of 0.6% compared to 2011 while services revenues’ portion of total
revenues decreased by the same percentage.
During 2012, revenues in Europe increased by $1.2 million, or 3.2%, compared to 2011. Revenues in the Americas (excluding the United States)
increased by $1.0 million, or 13.9%, in 2012 compared to 2011, and revenues in Asia and Oceania increased by $8.6 million, or 64.0%, in 2012 compared to
2011. Revenues in the Middle East and Africa increased by $1.0 million, or 10.9%, compared to 2011. Revenues in the United States increased by $15.2
million, or 160.2%, compared to 2011, which was primarily attributable to orders placed by a leading operator.
42
Cost of revenues and gross margin
Products. Cost of product revenues increased by $7.3 million, or 37.4%, to $26.9 million in 2012 from $19.5 million in 2011. In December 31, 2012
we recorded a liability related to settlement of the Office of Chief Scientist grants of approximately $15.9 million to be paid in 2013. Excluding the non-
recurring payment to the Office of Chief Scientist, the increase in cost of revenues is consistent with the increase in product revenues. Product gross margin,
decreased to 65.2% in 2012 from 65.6% in 2011.
Services. Cost of service revenues increased by $1.5 million, or 58.6 %, to $4.2 million in 2012 from $2.6 million in 2011. This increase is primarily
attributable to higher support personnel expenses associated with deployment of our products with large service providers. In 2012, services gross margin
decreased to 84.9% from 87.4% in 2011.
Total gross margin, excluding the impact of the settlement, decreased to 70.4% in 2012 from 71.4% in 2011.
Operating expenses
Research and development. Gross research and development expenses increased by $8.0 million, or 47.5%, to $24.9 million in 2012 from $16.9
million in 2011. This increase is primarily attributable to an increase in salaries and labor costs of approximately $5.4 million, which principally resulted from
an increase in head count derived mainly from the acquisition of Ortiva and Oversi, which have significant research and development departments. In
addition, other overhead expenses increased by $1.0 million, costs of contractors increased by $0.8 million and stock-based compensation increased by $0.8
million and depreciation.
Research and development expenses, net of received and accrued grants from the Office of the Chief Scientist, increased by $8.8 million, or 66.8%,
to $22.1 million in 2012 from $13.2 million in 2011. Grants received from the Office of the Chief Scientist totaled $2.9 million in 2012 compared to $3.7
million in 2011. The decrease in grants received is attributable to a decrease in the approved grants from the Office of the Chief Scientist due to the settlement
reached with them. We did not receive grants from the Office of Chief Scientist during the fourth quarter of 2012, and accordingly did not record accrued
grants for this period. Research and development expenses, net, as a percentage of revenues increased to 21.1% in 2012 from 17.0% in 2011.
Sales and marketing. Sales and marketing expenses increased by $7.6 million, or 28.6%, to $34.1 million in 2012 from $26.5 million in 2011. This
increase is primarily attributable to increased salaries and related expenses of approximately $5.3 million due to increased head count from the acquisitions of
Ortiva and Oversi and new recruitments of sales and pre sales personnel. Stock-based compensation increased by $1.0 million, commission expense increased
by $0.8 million, and travel and other expenses increased by $0.5 million.
Sales and marketing expenses, as a percentage of total revenues decreased to 32.6% in 2012 from 34.1% in 2011.
General and administrative. General and administrative expenses increased by $3.2 million, or 42.7%, to $10.7 million in 2012 from $7.5 million in
2011. This increase is attributable to increased professional services of approximately $1.0 million resulted from non-recurring legal and finance expenses
related to acquisition activity. Wage expenses increased by approximately $1.0 million due to increased head count. Stock-based compensation increase
approximately $0.6 million. Travel and other overhead expenses increased by $0.6 million.
General and administrative expenses as a percentage of revenues increased to 10.2% in 2012 from 9.6% 2011.
43
Financial expenses (income), net. Financial and other income, net in 2012 was $1.4 million income compared to $0.4 million in 2011. The increase
is primarily attributable to interest income received from increased investments in short-term bank deposits as a result of the cash received from our offering
of ordinary shares in November 2011.
Income tax benefit. Income tax benefit in 2012 was $1.0 million, compared to income tax benefit of $0.1 million in 2011. The change is primarily
due to an increase in deferred tax assets related to our net operating losses expected to be utilized in the future.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Products. Product revenues increased by $15.9 million, or 38.9%, to $56.8 million in 2011 from $40.9 million in 2010. The increase is primarily
attributable to increased sales of our high-end products, primarily the Service Gateway platforms and value added services (such as Service Protector and
MediaSwift), driven by orders placed by Tier 1 operator group and leading operators in EMEA, the Americas and the United States.
Services. Services revenues increased by $4.8 million, or 29.8%, to $20.9 million in 2011 from $16.1 million in 2010. The increase in services
revenues is primarily attributable to an increase in our installed base in 2011.
Product revenues comprised 73.1% of our total revenues in 2011, an increase of 1.4% compared to 2010 while services revenues’ portion of total
revenues decreased by the same percentage.
During 2011, revenues in Europe increased by $8 million, or 26.3%, compared to 2010, which was primarily attributable to orders placed by a Tier 1
operator group. Revenues in the Americas (excluding the United States) increased by $4.4 million, or 176%, in 2011 compared to 2010, which was primarily
attributable to orders from a leading operator, and revenues in Asia and Oceania increased by $0.9 million, or 7.2%, in 2011 compared to 2010. Revenues in
the Middle East and Africa increased by $5.6 million, or 144%, compared to 2010 due to increased orders in the region. Revenues in the United States
increased by $1.8 million, or 23.4%, compared to 2010, which was primarily attributable to orders placed by a leading operator.
Cost of revenues and gross margin
Products. Products cost of revenues increased by $5.5 million, or 39.3%, to $19.5 million in 2011 from $14.0 million in 2010. This increase is
consistent with the increase in product revenues. Product gross margin slightly decreased to 65.7% in 2011 from 65.8% in 2010.
Services. Services cost of revenues increased by $0.6 million, or 30 %, to $2.6 million in 2011 from $2.0 million in 2010. This increase is primarily
attributable to higher support personnel expenses associated with deployment of our products with large service providers. In 2011 services gross margin was
87.6%, the same level as in 2010.
Total gross margin slightly decreased to 71.5% in 2011 from 71.9% in 2010. This decrease is primarily attributable to the decrease in products gross
margin as described above.
Operating expenses
Research and development. Gross research and development expenses increased by $2.9 million, or 20.7%, to $16.9 million in 2011 from $14.0
million in 2010. This increase is primarily attributable to an increase in salaries and labor costs of approximately $1.5 million, which principally resulted from
an increase in head count. In addition, costs of materials and contractors increased by $0.6 million and depreciation and other overhead expenses increased by
$0.8 million.
44
Research and development expenses, net of received and accrued grants from the Office of the Chief Scientist, increased by $1.9 million, or 16.8%,
to $13.2 million in 2011 from $11.3 million in 2010. Grants received from the Office of the Chief Scientist totaled $3.7 million in 2011 compared to $2.8
million in 2010. The increase in grants received is attributable to an increase in the approved grants from the Office of the Chief Scientist. Research and
development expenses, net, as a percentage of revenues decreased to 17.1% in 2011 from 19.8% in 2010.
Sales and marketing. Sales and marketing expenses increased by $4.5 million, or 20.5%, to $26.5 million in 2011 from $22.0 million in 2010. This
increase is primarily attributable to increased salaries and related expenses due to increased head count as a result from revenue increase during 2011 of
approximately $3.6 million. Travel expenses increased by approximately $0.7 million resulting from increased personnel. Marketing expenses increased by
approximately $0.2 million.
Sales and marketing expenses, as a percentage of total revenues decreased to 34.1% in 2011 from 38.7% in 2010.
General and administrative. General and administrative expenses increased by $2.0 million, or 36.6%, to $7.5 million in 2011 from $5.5 million in
2010. This increase is primarily attributable to increased professional services of approximately $1.5 million resulted from non-recurring legal and finance
expenses related to acquisition activity and our secondary public offering completed in 2011. Wage expenses increased by approximately $0.2 million due to
increased head count. Travel and other overhead expenses increased by $0.3 million.
General and administrative expenses as a percentage of revenues was 9.6% in 2011, the same rate as in 2010.
Financial expenses (income), net. Financial expenses (income), net in 2011 is $0.4 million income vs. $7.9 million expense in 2010. The decrease is
primarily attributable to a loss in the amount of $7.7 million related to our investment in ARS in 2010, and an increase of $0.6 million in interest on deposits,
foreign currency transaction differences and other related financial income.
Income tax expense (benefit). Income tax benefit in 2011 is $0.1 million, compared to income tax expenses of $0.1 million in 2010. The change is
primary as a result of change in deferred taxes, offset by deduction of withholding tax asset.
B. Liquidity and Capital Resources
In November 2011, we completed a public offering which resulted in net proceeds of approximately $85.0 million, net of issuance costs.
As of December 31, 2012, we had $50.0 million in cash and cash equivalents, $14.8 million available for sale marketable securities, $0.1 million in
restricted cash and $78.0 million short-term deposits. As of December 31, 2012, our working capital, which we calculate by subtracting our current liabilities
from our current assets, was $131.6 million.
Based on our current business plan, we believe that our existing cash balances, will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next twelve months. If our estimates of revenues, expense or capital or liquidity requirements change or are inaccurate and
are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. In addition, we may seek to
sell additional equity or arrange debt financing to give us financial flexibility to pursue attractive acquisitions or investment opportunities that may arise in the
future.
45
Operating activities.
During 2012, we generated $8.7 million in cash and cash equivalents from operating activities. Net cash provided by operating activities consisted of
a net loss of $6.7 million, an increase of $15.9 million in liability related to settlement of the Office of Chief Scientist grants, depreciation and amortization of
intangible assets of $5.1 million, $4.8 million of stock-based compensation expense, a decrease of $3.2 million in inventory and an increase of $2.4 million in
employees and payroll accruals. This was partially offset by an increase of $8.1 million in trade receivables, a decrease of $7.1 million in deferred revenues
attributed to sales which revenue recognition criteria were met while cash was collected in the previous years and a decrease of $1.3 million in trade payables.
During 2011, we generated $15.2 million in cash and cash equivalents from operating activities. Net cash provided by operating activities consisted
of a net income of $8.8 million, depreciation and amortization of fixed and intangible assets of $2.9 million, $2.3 million of stock-based compensation
expense and an increase of $7.4 million in deferred revenues attributable to sales for which we received cash but the revenue recognition criteria has not been
met. This was partially offset by an increase of $1.1 million in other receivables and prepaid expenses, a decrease of $2.5 million in trade payable, an increase
of $1.2 million in trade receivables and a decrease of $1.2 million in other payables and accrued expenses.
Investing activities.
Net cash used in investing activities in 2012 was $79.3 million, primarily attributable to the investment in short-term bank deposits of $54.0 million,
cost of acquiring Ortiva and Oversi of $24.9 million, an investment in available-for sale marketable securities of $8.2 million and the purchase of property
and equipment of $3.8 million. The above changes were partially offset by redemption of marketable securities of $10.7 million.
Net cash used in investing activities in 2011 was $29.1 million, primarily attributable to the investment in short-term deposits of $24.0 million, purchase of
property and equipment of $3.0 million, and an investment in available for sale marketable securities of $4.7 million. The above changes were partially offset
by redemption of marketable securities of $2.6 million.
We expect that our capital expenditures will total approximately $3.0 million in 2013. We anticipate that these capital expenditures will be primarily related to
further investments in lab equipment for research and development, as well as customer support and demo units.
Financing activities.
Net cash provided by financing activities in 2012 was $4.0 million, which was attributable to issuance of share capital through the exercise of stock
options of $5.9 million partially offset by a $2.0 million redemption of bank loan in connection with our acquisition of Oversi.
Net cash provided by financing activities in 2011 was $87.8 million, which was attributable to the issuance proceedings from the issuance of share
capital related to the secondary public offering of $85.0 million and to issuance of share capital through the exercise of stock options of $2.8 million.
46
C. Research and Development, Patents and Licenses
Our research and development activities take place in Israel, the United States and New Zealand. As of December 31, 2012, 178 of our employees were
engaged primarily in research and development. We devote a significant amount of our resources towards research and development to introduce and
continuously enhance products to support our growth strategy.
Our research and development efforts have benefited from royalty-bearing grants from the Office of the Chief Scientist. The government grants we have
received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to
satisfy specified conditions. If we fail to comply with such restrictions or these conditions, we may be required to refund grants previously received together
with interest and penalties, and may be subject to criminal charges.
Total research and development expenses, before royalty bearing grants, were approximately $14.0 million, $16.9 million and $24.9 million in the years
ended December 31, 2010, 2011and 2012, respectively. Royalty bearing grants amounted to $2.8million, $3.7 million and $2.9 million in 2010, 2011 and
2012, respectively.
D. Trend Information
See “ITEM 5: Operating and Financial Review and Prospects” above.
E. Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities
that are likely to create material contingent obligations.
F. Contractual Obligations
The following table of our material contractual and other obligations known to us as of December 31, 2012, summarizes the aggregate effect that these
obligations are expected to have on our cash flows in the periods indicated.
Payments due by period
Contractual Obligations
Total
Less than 1
year
1– 3 years
(in thousands of U.S. dollars)
3-5 years
Over 5 years
Operating leases — offices(1)
Operating leases — vehicles
Purchase obligations
Accrued severance pay(2)
Total
$
$
3,452 $
616
846
254
5,168 $
1,471 $
343
846
-
2,660 $
1,073 $
273
-
-
1,346 $
908 $
-
-
-
908 $
-
-
-
254
254
_____________________
(1) Consists primarily of an operating lease for our facilities in Hod Hasharon, Israel, as well as operating leases for facilities leased by our subsidiaries.
(2) Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor law. These obligations are payable only
upon termination, retirement or death of the respective employee and there is no obligation if the employee voluntarily resigns. Of this amount, $41,000
is unfunded.
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ITEM 6: Directors, Senior Management and Employees
A. Directors and Senior Management
Our directors and executive officers, their ages and positions as of March 10, 2013 are as follows:
Age
Position
60
49
64
46
56
52
Name
Directors
Shraga Katz
Rami Hadar
Itzhak Danziger(1)
Nurit Benjamini(1)(2)
Steven D. Levy(2)
Yigal Jacoby
Executive Officers
Nachum Falek
Amir Hochbaum
Anat Shenig
Andrei Elefant
Gary Drutin
Itamar Rosen
Jay Klein
Lior Moyal
Marc Zionts
Pini Gvili
Ramy Moriah
Vin Costello
_______________________
(1) Member of our compensation and nomination committee.
(2) Member of our audit committee.
41
53
43
39
51
48
49
41
51
47
57
56
Chairman of the Board
Director, Chief Executive Officer and President
Director
Director
Director
Director
Chief Financial Officer
Vice President — Research and Development
Vice President — Human Resources
Vice President — Product Management and Marketing
Vice President — International Sales
Vice President — Legal Affairs, General Counsel and Company Secretary
Vice President — Chief Technology Officer
Vice President — Business Development
Vice President — Strategic Mobile Service Providers
Vice President — Operations
Vice President — Customer Care and Information Technology
Vice President and General Manager — The Americas
Directors
Shraga Katz has served as our chairman of the board of directors since 2008. Mr. Katz is a Venture Partner of Magma Venture Partners, a leading venture
capital firm specializing in early-stage investments in communication, semiconductors, internet and media. Mr. Katz has over 30 years of experience in the
technology sector and has specialized for over 20 years in the communications industry. In 1996, Mr. Katz founded Ceragon Networks Ltd. (NASDAQ:
CRNT), a global provider of high capacity wireless networking solutions for mobile and fixed operators and private networks, and served as its President and
Chief Executive Officer until mid-2005. Prior to founding Ceragon, Mr. Katz served in the Israeli Defense Forces for 17 years. Mr. Katz was head of the
Electronic Research and Development Department of the Israeli Ministry of Defense. Mr. Katz serves as director on the Board of Siverge Networks,
GreenSQL and Corephotonics. Mr. Katz holds a B.Sc. from the Technion — Israel Institute of Technology and an M.B.A. from Tel Aviv University.
Rami Hadar has served as our Chief Executive Officer and President since 2006 and is a member of our board of directors. Prior to joining us, Mr. Hadar
founded CTP Systems, a developer of cordless telephony systems in 1989 and served as Chief Executive Officer until its acquisition by DSP Communications
in 1995. Mr. Hadar continued with DSP Communication’s executive management team for two years, and thereafter, in 1999, the company was acquired by
Intel. In 1997, Mr. Hadar co-founded Ensemble Communications, a pioneer in the broadband wireless space and the WiMax standard, where he served as
Executive Vice President of Sales and Marketing until 2002. Mr. Hadar also served as Chief Executive Officer of Native Networks from 2002 to 2005, which
was successfully sold and integrated to Alcatel. Mr. Hadar holds a B.Sc. in Electrical Engineering from Technion — Israel Institute of Technology.
48
Itzhak Danziger has served as a director since 2011. Prior to his appointment as a director, Mr. Danziger served as an observer to our Board since 2010.
Itzhak Danziger serves as chairman of the board of Galil Software, an Israeli software services company, and as a director of Jinni Media, a privately held
technology company. From 1985 to 2007, Mr. Danziger held various executive positions at Comverse, a technology companies group that develops and
markets telecommunications systems, including as president of Comverse Technology Group, as president of Comverse Network Systems and as chairman of
Comverse subsidiary - Starhome. Prior to joining Comverse, Mr. Danziger held various R&D and management positions in Tadiran Telecom Division, which
was later acquired by ECI Telecom. Further, Mr. Danziger serves as a director in Israel Venture Network, a venture philanthropy NGO, in Avney Rosha, the
Israel Institute for School Leadership, and in other non-governmental organizations. Mr. Danziger was also a member of the National Task Force for the
Advancement of Education in Israel (Dovrat Committee) and was chairman of two of its subcommittees. Mr. Danziger holds B.Sc. cum laude and M.Sc. in
electrical engineering from the Technion - Israel Institute of Technology and M.A. cum laude in philosophy and digital culture from Tel Aviv University.
Nurit Benjamini has served as an outside director since 2007. Ms. Benjamini serves as the Chief Financial Officer of Wixpress Ltd., an internet company
that offers web technology that enables online users to create HTML5 websites regardless of technical skill or previous knowledge, since May 2011.
Previously, from 2007 to 2011, Ms. Benjamini has served as the Chief Financial Officer of CopperGate Communications Ltd., a leading fabless
semiconductor company in home entertainment networking, that was acquired by Sigma Designs Inc. (NASDAQ:SIGM) in November 2009. Prior to her
position with CopperGate Communications Ltd., Ms. Benjamini served as the Chief Financial Officer of Compugen Ltd. (NASDAQ: CGEN) from 2000 to
2007. Prior to her position with Compugen Ltd., from 1998 to 2000, Ms. Benjamini served as the Chief Financial Officer of Phone-Or Ltd. Between 1993 and
1998, Ms. Benjamini served as the Chief Financial Officer of Aladdin Knowledge Systems Ltd. (formerly NASDAQ: ALDN). Ms. Benjamini serves as an
outside director of BiolineRX Ltd., a member of its compensation committee, and as a chairman of its audit committee. Ms. Benjamini holds a B.A. in
Economics and Business and an M.B.A. in Finance, both from Bar Ilan University, Israel.
Steven D. Levy has served as an outside director since 2007. Mr. Levy served as a Managing Director and Global Head of Communications Technology
Research at Lehman Brothers from 1998 to 2005. Before joining Lehman Brothers, Mr. Levy was a Director of Telecommunications Research at Salomon
Brothers from 1997 to 1998, Managing Director and Head of the Communications Research Team at Oppenheimer & Co. from 1994 to 1997 and a senior
communications analyst at Hambrecht & Quist from 1986 to 1994. Mr. Levy has served as a director of PCTEL, a broadband wireless technology company
since January 2006 and of privately held GENBAND Inc., a U.S. provider of telecommunications equipment, since August 2007. Mr. Levy holds a B.Sc. in
Materials Engineering and an M.B.A., both from the Rensselaer Polytechnic Institute.
Yigal Jacoby co-founded our company in 1996 and served as our CEO until 2006 and as a Chairman of our board of directors until 2008. Prior to co-
founding Allot, Mr. Jacoby founded Armon Networking, a manufacturer of network management solutions in 1992, and managed it until it was acquired by
Bay Networks, where he served as the General Manager of its Network Management Division. From 1985 to 1992, Mr. Jacoby held various engineering and
marketing management positions at Tekelec, a manufacturer of Telecommunication monitoring and diagnostic equipment. Currently, Mr. Jacoby is an active
investor and director of several Israeli start-up companies, including Chairman at LiveU Ltd., a provider of live cellular video transmission solutions and
Chairman at Appforma Ltd., a provider of SMB marketing platforms. Mr. Jacoby has a B.A., cum laude, in Computer Science from Technion — Israel
Institute of Technology and an M.Sc. in Computer Science from University of Southern California.
49
Executive Officers
Nachum Falek has served as Chief Financial Officer since 2010. Prior to joining Allot, Mr. Falek served from 2003 as the CFO of AudioCodes (NASDAQ:
AUDC), a leading provider of Voice over IP (VoIP) technologies and Voice Network products. From 2000 to 2003, Mr. Falek was the Director of Finance of
AudioCodes. Earlier in his career, Mr. Falek served as a Controller at ScanVec-Amiable Ltd., and as a Manager at Ernst & Young Israel. Mr. Falek is a
Certified Public Accountant (CPA) and holds a B.A. in Accounting and Economics from Haifa University and a M.B.A. from Tel Aviv University.
Amir Hochbaum has served as our Vice President — Research and Development since 2008. Before joining Allot, Mr. Hochbaum served as the Chief
Operating Officer of Axerra Networks. From 2005 to 2007, Mr. Hochbaum was Senior Vice President, Research, Development and Operations of Vyyo Israel
(NASDAQ: VYYO) where he also served as a member of Vyyo’s executive management team. Prior to Vyyo, between 1994 and 2005, Mr. Hochbaum held a
succession of management positions at Avaya (formerly Lucent, Madge and Lannet) including Managing Director and Vice President of R&D. Between 1984
and 1994, Mr. Hochbaum held a succession of management positions at ServiceSoft, including management of engineering, product development, product
management and customer service . Mr. Hochbaum holds a B.S. in Mathematics and Computer Science and an M.S. in Computer Science from the Hebrew
University of Jerusalem.
Marc Zionts joined our company in 2012, following our acquisition of Ortiva Wireless Inc. and serves as our Vice President — Strategic Mobile Service
Providers. Mr. Zionts has been a telecom executive and entrepreneur for almost three decades and has focused on developing emerging technology in high
growth markets. From 2008 to 2012, Mr. Zionts served as the chief executive officer of Ortiva Wireless Inc., which we acquired in May 2012. Ortiva focused
on the emerging video optimization market. Prior to Ortiva, Mr. Zionts was the chief executive officer of FastMobile (sold to RIM) from April 2007 until
November 2007, chief executive officer of Cantata Technology (sold to Dialogic) from 2001 to 2007, chief executive officer of Westell Technologies
(Nasdaq: WSTL) from 1999 to 2001, and founder and EVP of Communicate Direct, Inc. (sold to Softnet) from 1987 to 1998. Mr. Zionts is also an outside
director in Pivot3, a private company based in Austin, Texas. Pivot3 is a pioneer in unified storage and purpose-built compute appliances. Mr. Zionts began
his career with GTE and Fujitsu/GTE Business Systems, serving in various sales and marketing capacities. Mr. Zionts has a B.A. in Industrial Design and an
M.B.A. from Georgia Institute of Technology.
Gary Drutin joined our company in 2012 and serves as our Vice President — International Sales. Mr. Drutin oversees the international development,
implementation and management of direct and channel sales in EMEA and Asia-Pacific markets. Before joining Allot, Mr. Drutin served as the business
development director of the microWave LOB at Broadcom (after the Provigent acquisition) from 2011 to 2012. Prior to the acquisition he was Senior VP
worldwide Sales at Provigent from 2010 to 2011. From 2004 to 2010 he was VP Global Sales at AudioCodes Ltd. From 1997 to 2004, he served as Country
Manager and General Manager for Cisco Israel, Cyprus and Malta. From 1990 to 1997, he served in sales management roles at Digital Equipment
Corporation Israel. Mr. Drutin holds an M.B.A from Tel-Aviv University in Information Systems and Marketing and a B.Sc. degree in Computer Engineering
from the Technion — Israel Institute of Technology.
Itamar Rosen joined our company in 2012 and has served as our Vice President — Legal Affairs, General Counsel and Company Secretary. Prior to joining
Allot, Mr. Rosen served as Vice President Legal Affairs and General Counsel of AudioCodes Ltd. between 2000 and 2012, and in various positions at four
different major law firms in England and Israel prior to that. Mr. Rosen is a qualified arbitrator and admitted to practice as a lawyer in New York, England
and Wales and Israel. Mr. Rosen received a LL.B (Hons.) degree from University of Essex in 1989 (England), an M.B.A from the Open Business School in
1995 (England) and a LL.M, magna cum laude from Tel-Aviv University as part of an executive program in collaboration with University of California
Berkeley in 2005.
50
Anat Shenig joined our company in 2000 and has served as our Vice President — Human Resources since 2007. Ms. Shenig is responsible for human
resources recruiting, welfare policy and employees’ training. Prior to joining us, Ms. Shenig served as Human Resource Manager for Davidoff insurance
company and as an organizational consultant for Aman Consulting. Ms. Shenig holds bachelor degrees in Psychology and Economics from Tel Aviv
University and an M.B.A. in organizational behavior from Tel Aviv University.
Andrei Elefant joined our company in 2000 and has served as our Vice President — Product Management since 2007. Mr. Elefant assumed responsibility
over our marketing activities in 2008. Mr. Elefant is responsible for product management, product marketing and strategic project management. Prior to
joining us, Mr. Elefant served as officer in the Israeli air force. Mr. Elefant holds a B.Sc. in Mechanical Engineering from the Technion — Israel Institute of
Technology and an M.B.A. from Tel-Aviv University.
Jay Klein joined our company in 2006 and has served as our Vice President — Chief Technology Officer since 2007. Mr. Klein is responsible for driving our
technology strategy, expanding our core algorithmic competence and driving intellectual property development, industry standards involvement and academic
cooperation. Prior to joining us, between 2004 and 2006, Mr. Klein served as VP at DSPG (VoIP and multimedia silicon solutions) where he was responsible
for strategic technology acquisitions. Between 1997 and 2003, Mr. Klein was Co-Founder and CTO of Ensemble Communications, a wireless access systems
manufacturer and was one of the founders and creators of WiMAX and IEEE 802.16. Prior to that, between 1993 and 1997, he served as CTO and VP of
R&D at CPT Systems, a cellular systems manufacturer, which was acquired by DSP Communications and later by Intel. Mr. Klein holds a B.Sc. in Electrical
and Electronic Engineering from Tel-Aviv University.
Lior Moyal has served as Vice President Business Development since 2009. Mr. Moyal is responsible for driving the company’s global business development
strategy including developing partnerships with global system integrators, creating alliances with value added network and subscriber services partners, and
recruiting and managing worldwide OEM partners. Prior to joining us, from 2008 to 2009, Mr. Moyal was VP of Business Development of AudioCodes
(NASDAQ: AUDC). Previously, from 2005 to 2007, Mr. Moyal was AudioCodes’ VP of Marketing. Before that, from 2004 to 2005, Mr. Moyal was VP of
Business Development at BridgeWave Communications. Prior to that, Mr. Moyal held variety of management positions in Orckit (NASDAQ: ORCT),
including VP of Product Management and VP of Business Development. Mr. Moyal holds a B.Sc. in Physics from the Hebrew University of Jerusalem and
an M.B.A. from Tel Aviv University.
Pini Gvili has served as our Vice President — Operations since 2006. Prior to joining us, from 2004 to 2006, he served as Vice President Operations for
Celerica, a start-up company specializing in solutions for cellular network optimization. From 2001 to 2004, Mr. Gvili was the Vice President — Operations
and IT at Terayon Communication Systems, and from 1998 to 2000, held the position of Manager of Integration and Final Testing at Telegate. Mr. Gvili was
also a hardware/software engineer at Comverse/Efrat, a world leader of voice mail and digital recording systems, from 1994 to 1997. Mr. Gvili has a B.Sc. in
Computer Science from Champlain University and was awarded a practical electronics degree from ORT Technical College.
Ramy Moriah has served as our Vice President — Customer Care & IT since 2005. Prior to joining us, Mr. Moriah was a founding member of Daisy
System’s Design Center in Israel, in 1984. From 1991 to 1994, Mr. Moriah held the position of Manager of Software Development at Orbot Instruments, a
world leader of Automatic Optical Inspection manufacturer for the VLSI Chip Industry. Mr. Moriah was also the acting General Manager at ACA, 3D
CAD/solid modeling software for architecture from 1995 to 1997, and served there as Vice President — Research and Development from 1995 to 1997. Mr.
Moriah holds a B.Sc., cum laude , in Computer Engineering from the Technion — Israel Institute of Technology and an M.Sc. in Management and
Information Systems from the Tel Aviv University School of Business Administration.
51
Vin Costello has served as our Vice President and General Manager — The Americas since 2006. Mr. Costello began his career with NYNEX and rapidly
rose through the ranks achieving the title of Vice President, Business Network Solutions and Vice President Global Sales. Mr. Costello founded and headed
NYNEX Network Integration and upon the merger with Bell Atlantic, was named President and CEO of Bell Atlantic Network Integration. Mr. Costello
departed Verizon for an optical networking start-up where he served as VP of Sales and assisted Corvis Corporation, in their successful initial public
offering. Mr. Costello was subsequently named VP and General Manager of the Managed Storage Division after Corvis purchased Broadwing and reinvented
itself as a service provider. Mr. Costello holds a B.Sc. in Computer Applications and Information Systems as well as Business Management (double major)
from New York University and earned an M.Sc. in Telecommunications and Computing Management from Polytechnic University.
B. Compensation of Officers and Directors
The aggregate compensation paid to or accrued on behalf of our directors and executive officers as a group during 2012 consisted of approximately
$3.2 million in salary, fees, bonus, commissions and directors’ fees and approximately $0.4 in amounts set aside or accrued to provide pension, retirement or
similar benefits, but excluding amounts we expended for automobiles made available to our officers, expenses, including dues for professional and business
associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel.
In 2012, we paid the chairman of the board of directors, Mr. Shraga Katz, an annual fee of NIS 270,000 (approximately $70,000). Mr. Katz is also
entitled to customary benefits for a senior executive officer at an Israeli company. In the first three quarters of 2012, we paid each of our directors, Itzhak
Danziger and Yigal Jacoby, an annual fee of NIS 45,000 (approximately $12,000) and a per meeting attendance fee of NIS 3,750 (approximately $1,000),
linked to the Israeli consumer price index. During such time, we paid each of our outside directors, Nurit Benjamini and Steven Levy, fees as permitted by the
Israeli Companies Law (the “Companies Law”). In the fourth quarter of 2012, we paid each of our directors (except for Shraga Katz and Rami Hadar) a per
meeting attendance fee of NIS 3,750 (approximately $1000) for any meeting he or she attended in person, NIS 2,250 (approximately $600) for any meeting
he or she attended by conference call or similar means, and NIS 1,875 (approximately $500) for any written resolution of the Board executed by such director.
Our directors are also typically granted upon election an agreed amount of options and upon reelection options to purchase 30,000 of our ordinary shares,
which vest on a quarterly basis over a period of three years.
In 2012, we paid our President and Chief Executive Officer, Mr. Rami Hadar, an annual salary of NIS 860,000 (approximately $223,000) and a
bonus of NIS 187,500 (approximately $49,000) in connection with his performance in 2011. In 2012, Mr. Hadar was granted options to purchase 100,000
Ordinary Shares, which vest on a quarterly basis over a period of four years, such that 1/16 of the options vest and become exercisable at the end of each
three-month period from the date of their grant. Options to purchase 60,000 of the Ordinary Shares have an exercise price equal to the closing sale price of the
our Ordinary Shares as quoted on NASDAQ on the date of their grant, and options to purchase 40,000 Ordinary Shares have an exercise price equal to NIS
0.10 per share (par value). Mr. Hadar is also entitled to customary benefits for a senior executive officer at an Israeli company.
During 2012, our officers and directors received, in the aggregate, options to purchase 536,860 ordinary shares under our equity based compensation
plan. These options have a weighted average exercise price of approximately $14.75 and the options will expire ten years after the date the options were
granted.
52
C. Board Practices
Corporate Governance Practices
As a foreign private issuer, we are permitted under NASDAQ Marketplace Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the
NASDAQ Stock Market requirements, provided we disclose which requirements we are not following and the equivalent Israeli requirement. See “ITEM
16G: Corporate Governance Requirements” for a discussion of those ways in which our corporate governance practices differ from those required by
NASDAQ for domestic companies.
Board of Directors
Terms of Directors
Our articles of association provide that we may have not less than five directors and up to nine directors.
Under our articles of association, our directors (other than the outside directors, whose appointment is required under the Companies Law; see “—Outside
Directors”) are divided into three classes. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the
entire board of directors (other than the outside directors). At each annual general meeting of our shareholders, the election or re-election of directors
following the expiration of the term of office of that class of directors is for a term of office that expires on the third annual general meeting following such
election or re-election, such that each year the term of office of only one class of directors will expire.
Shraga Katz, who is a Class I director and our Chairman of the board of directors, will hold office until our annual meeting of shareholders to be held
in 2013. Our Class II director, Itzhak Danziger, will hold office until our annual meeting of shareholders to be held in 2014. Our Class III directors, Yigal
Jacoby and Rami Hadar, will hold office until our annual meeting of shareholders to be held in 2015. The directors (other than the outside directors) are
elected by a vote of the holders of a majority of the voting power present and voting at the meeting. Each director will hold office until the annual general
meeting of our shareholders for the year in which his or her term expires and until his or her successor is elected and qualified, unless the tenure of such
director expires earlier pursuant to the Companies Law or unless he or she resigns or is removed from office.
Under the Companies Law, a director (including an outside director) must declare in writing that he or she has the required skills and the ability to dedicate
the time required to serve as a director in addition to other statutory requirements. A director who ceases to meet the statutory requirements for his or her
appointment must immediately notify us of the same and his or her office will become vacated upon such notice.
Under our articles of association the approval of a special majority of the holders of at least 75% of the voting rights present and voting at a general meeting is
generally required to remove any of our directors (other than the outside directors) from office. The holders of a majority of the voting power present and
voting at a meeting may elect directors in their stead or fill any vacancy, however created, in our board of directors. In addition, vacancies on our board of
directors, other than a vacancy in the office of an outside director, may be filled by a vote of a simple majority of the directors then in office. A director so
chosen or appointed will hold office until the next annual general meeting of our shareholders, unless earlier removed by the vote of a majority of the
directors then in office prior to such annual meeting. See “—Outside Directors” for a description of the procedure for election of outside directors.
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Outside Directors
Qualifications of Outside Directors
The Companies Law requires companies incorporated under the laws of the State of Israel with shares listed on a stock exchange, including the NASDAQ
Global Market, to appoint at least two outside directors. Our outside directors are Ms. Benjamini and Mr. Levy.
Outside directors are required to meet standards of independence and qualifications set forth in the Companies Law and related regulations. Among other
independence qualifications, a person may not serve as an outside director if he is a relative of a controlling shareholder of a company, or if he or his affiliate
(as defined in the Companies Law) has an employment, business or professional relationship or other affiliation (as defined in the Companies Law) with us.
In addition, the Companies Law requires every outside director appointed to the board of directors of an Israeli company to qualify as a “financial and
accounting expert” or as “professionally competent,” as such terms are defined in the applicable regulations under the Companies Law, and at least one
outside director must qualify as a “financial and accounting expert.” If at least one of our directors meets the independence requirements of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and the standards of the NASDAQ Stock Market rules for membership on the audit committee and
also has financial and accounting expertise as defined in the Companies Law, then the other outside directors are only required to meet the professional
qualifications requirement. Under applicable regulations, a director with financial and accounting expertise is a director who, through his or her education,
professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. He or she must
be able to thoroughly comprehend the financial statements of the company and initiate debate regarding the manner in which financial information is
presented.
Election of Outside Directors
Outside directors are elected by a majority vote at a shareholders’ meeting, provided that either:
·
·
the majority of shares voted at the meeting, including at least a majority of the shares of non-controlling shareholder(s) and shareholders who do
not have a personal interest in the election of the outside director (other than a personal interest that does not result from the shareholder's
relationship with a controlling shareholder), voted at the meeting, excluding abstentions, vote in favor of the election of the outside director; or
the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the election of the outside
director (excluding a personal interest that does not result from the shareholder's relationship with a controlling shareholder) voted against the
election of the outside director does not exceed two percent of the aggregate voting rights in the company.
The initial term of an outside director is three years, and he or she may be reelected to up to two additional terms of three years each at a shareholders’
meeting, subject to the voting threshold set forth above. Thereafter, an outside director may be reelected for additional periods of up to three years each, only
if the company's audit committee and board of directors confirm that, in light of the outside director’s expertise and special contribution to the work of the
board of directors and its committees, the reelection for such additional period is beneficial to the company. Outside directors may be removed by the same
voting threshold as is required for their election, or by a court, and only if the outside directors cease to meet the statutory qualifications for their appointment
or if they violate their duty of loyalty to the company. The tenure of outside directors, like all directors, may also be terminated by a court under limited
circumstances. If the vacancy of an outside director position causes the company to have fewer than two outside directors, a company’s board of directors is
required under the Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint a new outside director. Each
committee of a company’s board of directors which is authorized to exercise the board of directors’ authorities is required to include at least one outside
director, except for the audit committee and the compensation committee, which are required to include all outside directors.
54
An outside director is entitled to compensation and reimbursement of expenses as provided in regulations promulgated under the Companies Law, and is
otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an outside director, other than
indemnification, exculpation and insurance as permitted pursuant to the Companies Law.
NASDAQ Requirements
Under the NASDAQ Stock Market rules, a majority of directors must meet the independence requirements specified in those rules. Our board of directors has
determined that our directors Ms. Nurit Benjamini and Mr. Steven Levy meet the independence standards contained in the NASDAQ Stock Market rules, and
we do not believe that any of these directors have a relationship that would preclude a finding of independence and, in reaching its determination, our board
of directors determined that the other relationships that these directors have with us do not impair their independence. As stated above under “– Corporate
Governance Practices,” as a foreign private issuer we are permitted under NASDAQ Marketplace Rule 5615(a)(3) to follow Israeli corporate governance
practices instead of the NASDAQ Stock Market requirements, provided we disclose which requirements we are not following and the equivalent Israeli
requirement. We must also provide NASDAQ with a letter from outside counsel in our home country, Israel, certifying that our corporate governance
practices are not prohibited by Israeli law. We rely on this “foreign private issuer exemption” with respect to the requirement that a majority of our board
consist of independent directors as required by NASDAQ Rule 5605(b). See “ITEM 16G. Corporate Governance” for additional information.
Audit Committee
Companies Law Requirements
Under the Companies Law, the board of directors of any public company must appoint an audit committee comprised of at least three directors, including all
of the outside directors. The following persons may not be appointed as members of the audit committee:
·
·
·
the chairperson of the board of directors;
a controlling shareholder or a relative of a controlling shareholder (as defined in the Companies Law); or
any director who is engaged by, or provides services on a regular basis to the company, the company’s controlling shareholder or an entity controlled
by a controlling shareholder or any director who generally relies on a controlling shareholder for his or her livelihood.
The Companies Law requires the majority of the audit committee members to be independent directors (as defined in the Companies Law), and the chairman
of the audit committee is required to be an outside director. Any person disqualified from serving as a member of the audit committee may not be present at
the audit committee meetings, unless the chairperson of the audit committee has determined that this person is required to be present for a particular matter.
The Companies Law provides for certain other exclusions to this provision.
55
NASDAQ Requirements
Under the NASDAQ Stock Market rules, companies are required to maintain an audit committee consisting of at least three independent directors, all of
whom are financially literate and one of whom has accounting or related financial management expertise. Our audit committee members are required to meet
additional independence standards, including minimum standards set forth in rules of the SEC and adopted by the NASDAQ Stock Market.
NASDAQ Rule 5605(c)(2)(B), under exceptional and limited circumstances, permits one director who is not independent as defined in the
NASDAQ rules to serve for up to two years on the audit committee, but not as the chairperson, provided that such director (i) does not receive directly or
indirectly any consulting, advisory, or other compensatory fee from the company or its subsidiaries except compensation received solely for service on the
board; (ii) is not an affiliate of the company, and (iii) is not a current officer or employee or a family member of such officer or employee of the Corporation.
During 2011, our board determined that Mr. Danziger qualified to serve under this exception, and he was therefore eligible to serve as a non-independent
director on the audit committee. See “—Audit Committee Role.”
Approval of Transactions with Related Parties
The approval of the audit committee is required to effect specified actions and transactions with office holders and controlling shareholders. The term “office
holder” means a general manager, chief business manager, deputy general manager, vice general manager, or any other person assuming the responsibilities of
any of the foregoing positions, without regard to such person’s title, as well as any director or manager directly subordinate to the general manager. The term
“controlling shareholder” means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A
shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the
majority of the directors of the company or its general manager. For the purpose of approving transactions with controlling shareholders, the term also
includes any shareholder that holds 25% or more of the voting rights of the company, if the company has no shareholder that owns more than 50% of its
voting rights. For purposes of determining the holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is
brought for the company’s approval are deemed as joint holders. The audit committee may not approve an action or a transaction with a controlling
shareholder or with an office holder unless all the requirements of the Companies Law regarding the structure of the committee and the persons entitled to be
present at meetings are met at the time of approval.
Audit Committee Role
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and
the NASDAQ Global Market, which include:
·
·
·
retaining and terminating the company’s independent auditors, subject to shareholder ratification;
pre-approval of audit and non-audit services provided by the independent auditors; and
approval of transactions with office holders and controlling shareholders, as described above, and other related-party transactions.
56
Additionally, under the Companies Law, the audit committee is responsible for: (a) identifying deficiencies in the management of a company’s business and
making recommendations to the board of directors as to how to correct them; (b) reviewing and deciding whether to approve certain related party transactions
and certain transactions involving conflicts of interest; (c) deciding whether certain actions involving conflicts of interest are material actions and whether
certain related party transactions are extraordinary transactions; (d) reviewing the internal auditor’s work program; (e) examining the company’s internal
control structure and processes, the performance of the internal auditor and whether the internal auditor has the tools and resources required to perform his or
her duties; and (f) examining the independent auditor’s scope of work as well as the independent auditor’s fees, and providing the corporate body responsible
for determining the independent auditor’s fees with its recommendations. In addition the audit committee is also be responsible for implementing procedures
concerning employee complaints on improprieties in the administration of the company’s business and the protection to be provided to such employees.
Furthermore, in accordance with regulations promulgated under the Companies Law, the audit committee discusses the draft financial statements and presents
to the board its recommendations with respect to the draft financial statements. The audit committee charter states that in fulfilling this role the committee is
entitled to rely on interviews and consultations with our management, our internal auditor and our independent auditor, and is not obligated to conduct any
independent investigation or verification.
Our audit committee consists of Ms. Nurit Benjamini, Mr. Steven Levy and Mr. Itzhak Danziger. The financial expert on the audit committee pursuant to the
definition of the SEC is Ms. Benjamini, who is also the chairperson of the committee.
During 2011, our board determined that Mr. Danziger qualified to serve under the NASDAQ Rule 5605(c)(2)(B) exception, which under exceptional
and limited circumstances, permits one director who is not independent as defined in the NASDAQ rules to serve for up to two years on the audit committee,
but not as the chairperson. Mr. Danziger is therefore eligible to serve as a non-independent director on the audit committee until November 2013. Mr.
Danziger was a board observer before becoming a director and, in order to grant Mr. Danziger options with certain related tax benefits under Israeli law, Mr.
Danziger was considered an employee of the company during that period. Mr. Danziger’s sole role at that time was to serve as an observer to the board
pending his election to the board. Accordingly, the board does not believe that relationship should prevent Mr. Danziger from serving on the board of the
company pursuant to the exception provided under NASDAQ rules. As a result of Mr. Danziger’s non-independence under NASDAQ rules, our board of
directors no longer consists of a majority of independent directors. See “ITEM 16G. Corporate Governance Requirements” for a discussion regarding our
compliance with the NASDAQ’s majority independence requirements.
Compensation and Nominating Committee
We have established a compensation and nominating committee consisting of Ms. Nurit Benjamini, Mr. Steven Levy and Mr. Itzhak Danziger. The
chairperson is Mr. Levy. This committee oversees matters related to our corporate governance practices. Our board of directors has adopted a compensation
and nominating committee charter setting forth the responsibilities of the committee consistent with the NASDAQ Stock Market rules, which include:
·
·
·
·
approving, and recommending to the board of directors and the shareholders for their approval, the compensation of our Chief Executive Officer and
other executive officers;
granting options to our employees and the employees of our subsidiaries;
recommending candidates for nomination as members of our board of directors; and
developing and recommending to the board corporate governance guidelines and a code of business ethics and conduct in accordance with applicable
laws.
Under a recent amendment to the Companies Law, the compensation committee of a public company must consist of at least three directors who
satisfy certain independence qualifications, and the chairman of the compensation committee is required to be an outside director. Under the Companies Law,
the role of the compensation committee is to recommend to the board of directors, for ultimate shareholder approval by a special majority, a policy governing
the compensation of office holders based on specified criteria, to review modifications to the compensation policy from time to time, to review its
implementation and to approve the actual compensation terms of office holders prior to approval by the board of directors.
57
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the
internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. The internal
auditor may be an employee of the company but not an interested party (as defined in the Companies Law), an office holder of the company, or a relative of
an interested party or an office holder, among other restrictions. The firm of Deloitte Brightman Almagor Zohar is the internal auditor of the Company.
Exculpation, Insurance and Indemnification of Office Holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. However, a company may provide
certain indemnification rights as detailed below and obtain insurance for an act performed in breach of the duty of loyalty of an office holder provided that the
office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses the nature of his or her personal interest in
the act and all material facts and documents a reasonable time before discussion of the approval. Our articles of association, in accordance with Israeli law,
allow us to exculpate an office holder, in advance, from liability to us, in whole or in part, for damages caused to us as a result of a breach of duty of care. We
may not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders or prohibited purchase of its securities.
In accordance with Israeli law, our articles of association allow us to indemnify an office holder in respect of certain liabilities either in advance of an
event or following an event. Under Israeli law, an undertaking provided in advance by an Israeli company to indemnify an office holder with respect to a
financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court must be
limited to events which in the opinion of the board of directors can be foreseen based on the company’s activities when the undertaking to indemnify is given,
and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking must detail the
above mentioned events and amount or criteria. Our articles of association allow us to undertake in advance to indemnify an office holder for, among other
costs, reasonable litigation expenses, including attorneys’ fees, and certain financial liabilities and obligations, subject to certain restrictions pursuant to the
Companies Law.
In accordance with Israeli law, our articles of association allow us to insure an office holder against certain liabilities incurred for acts performed as
an office holder, including certain breaches of duty of loyalty to the company, a breach of duty of care to the company or to another person and certain
financial liabilities and obligations imposed on the office holder.
We may not indemnify or insure an office holder against any of the following:
·
a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not
prejudice the company;
58
·
·
·
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
an act or omission committed with intent to derive illegal personal benefit; or
a fine, civil fine, monetary sanction or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our compensation committee and our board of
directors and, in respect of our directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder, by our
shareholders, provided that changes to existing arrangements may be approved by the audit committee if it approves that such changes are immaterial.
As of the date of this annual report, there are no claims for directors’ and officers’ liability insurance have been filed under our policies and we are not aware
of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought.
We have entered into agreements with each of our directors and with certain of our office holders exculpating them, to the fullest extent permitted by law,
from liability to us for damages caused to us as a result of a breach of duty of care, and undertaking to indemnify them to the fullest extent permitted by law.
This indemnification is limited to events determined as foreseeable by the board of directors based on our activities, and to an amount or according to criteria
determined by the board of directors as reasonable under the circumstances, and the insurance is subject to our discretion depending on its availability,
effectiveness and cost. The current maximum amount set forth in such agreements is the greater of (1) with respect to indemnification in connection with a
public offering of our securities, the gross proceeds raised by us and/or any selling shareholder in such public offering, and (2) with respect to all permitted
indemnification, including a public offering of our securities, an amount equal to 50% of the our shareholders’ equity on a consolidated basis, based on our
most recent financial statements made publicly available before the date on which the indemnity payment is made.
In the opinion of the SEC, indemnification of directors and office holders for liabilities arising under the Securities Act is against public policy and therefore
unenforceable.
D. Employees
As of December 31, 2012, we had 442 employees of whom 305 were based in Israel, 71 in the United States and the remainder in Europe, Asia and Oceania.
The breakdown of our employees by department is as follows:
Department
Manufacturing and operations
Research and development
Sales, marketing, service and support
Management and administration
Total
2010
December 31,
2011
2012
16
95
123
30
264
19
117
153
35
324
18
178
199
47
442
59
Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages,
minimum vacation, sick pay, severance pay and advance notice of termination of employment as well as equal opportunity and anti-discrimination laws.
Orders issued by the Israeli Ministry of Industry, Trade and Labor make certain industry-wide collective bargaining agreements applicable to us. These
agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation, travel expenses, and pension rights.
Our employees are not represented by a labor union. We provide our employees with benefits and working conditions which we believe are competitive with
benefits and working conditions provided by similar companies in Israel. We have never experienced labor-related work stoppages and believe that our
relations with our employees are good.
E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 8, 2013 by each of our directors and
executive officers.
Name of Beneficial Owner
Directors
Itzhak Danziger
Nurit Benjamini
Rami Hadar
Shraga Katz
Steven D. Levy
Yigal Jacoby
Executive Officers
Amir Hochbaum
Anat Shenig
Andrei Elefant
Gary Drutin
Itamar Rosen
Jay Klein
Lior Moyal
Marc Zionts
Nachum Falek
Pini Gvili
Ramy Moriah
Vin Costello
All directors and executive officers as a group
__________________________
*
Less than one percent of the outstanding ordinary shares.
Number of
Shares
Beneficially
Held(1)
Percent of
Class
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
538,386
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
2.34%
(1)
As used in this table, “beneficial ownership” means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any
security. For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired within 60 days from March 8,
2013 through the exercise of any option or warrant. Ordinary shares subject to options or warrants that are currently exercisable or exercisable within
60 days are deemed outstanding for computing the ownership percentage of the person holding such options or warrants, but are not deemed
outstanding for computing the ownership percentage of any other person. The amounts and percentages are based upon 32,566,697 ordinary shares
outstanding as of March 8, 2013.
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Our directors and executive officers hold, in the aggregate, outstanding options exercisable for 1,217,098 ordinary shares, as of March 8, 2013.
These options have a weighted average exercise price of $10.30 per share and have expiration dates until 2023.
Share Option Plans
We have adopted four share option plans and, as of March 8, 2013, we had 3,642,597 ordinary shares reserved for issuance under these plans. Under our share
option plans, as of March 8, 2013 options to purchase 3,032,515 ordinary shares at a weighted average exercise price of $11.15 per share were outstanding of
which options to purchase 982,619 ordinary shares were vested and exercisable.
We will only grant options or other equity incentive awards under the 2006 Incentive Compensation Plan, although previously-granted options will continue
to be governed by our other plans.
2006 Incentive Compensation Plan
The 2006 plan is intended to further our success by increasing the ownership interest of certain of our and our subsidiaries’ employees, directors and
consultants and to enhance our and our subsidiaries’ ability to attract and retain employees, directors and consultants.
The number of ordinary shares that we may issue under the 2006 plan will increase on the first day of each fiscal year during the term of the 2006 plan, in
each case in an amount equal to the lesser of (i) 1,000,000 shares, (ii) 3.5% of our outstanding ordinary shares on the last day of the immediately preceding
year, or (iii) an amount determined by our board of directors. The number of shares subject to the 2006 plan is also subject to adjustment if particular capital
changes affect our share capital. Ordinary shares subject to outstanding awards under the 2006 plan or our 2003 plan or 1997 plans that are subsequently
forfeited or terminated for any other reason before being exercised will again be available for grant under the 2006 plan. As of March 8, 2013, options or
other awards to purchase 2,982,212 ordinary shares were outstanding under the 2006 plan and 610,082 remained available for future options or other awards.
Israeli participants in the 2006 plan may be granted options and/or restricted stock units subject to Section 102 of the Israeli Income Tax Ordinance.
Section 102 of the Israeli Income Tax Ordinance, allows employees, directors and officers, who are not controlling shareholders and are considered Israeli
residents to receive favorable tax treatment for compensation in the form of shares or options. Our non-employees service providers and controlling
shareholders may only be granted options under another section of the Tax Ordinance, which does not provide for similar tax benefits. Section 102 includes
two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and also includes an additional
alternative for the issuance of options or shares directly to the grantee. The most favorable tax treatment for the grantees is under Section 102(b)(2) of the Tax
Ordinance, the issuance to a trustee under the “capital gain track.” However, under this track we are not allowed to deduct an expense with respect to the
issuance of the options or shares. Any stock options granted under the 2006 plan to participants in the United States will be either “incentive stock options,”
which may be eligible for special tax treatment under the U.S. Internal Revenue Code of 1986, or options other than incentive stock options (referred to as
“nonqualified stock options”), as determined by our compensation and nominating committee and stated in the option agreement.
Our compensation and nominating committee administers the 2006 plan and it selects which of our and our subsidiaries’ and affiliates’ eligible employees,
directors and/or consultants receive options or other awards under the 2006 plan and will determine the terms of the grant, including, exercise prices, method
of payment, vesting schedules, acceleration of vesting and the other matters necessary in the administration of the plan.
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If we undergo a change of control, as defined in the 2006 plan, subject to any contrary law or rule, or the terms of any award agreement in effect before the
change of control, (a) the compensation and nominating committee may, in its discretion, accelerate the vesting, exercisability and payment, as applicable, of
outstanding options and other awards; and (b) the compensation and nominating committee, in its discretion, may adjust outstanding awards by substituting
ordinary shares or other securities of any successor or another party to the change of control transaction, or cash out outstanding options and other awards, in
any such case, generally based on the consideration received by our shareholders in the transaction.
Allot Communications Ltd. Key Employee Share Incentive Plan (2003)
Our 2003 share option plan provides for the grant of options to our and our affiliates’ employees, directors, officers, consultants, advisers and service
providers. As of March 8, 2013, there were outstanding options to purchase 50,303 ordinary shares under the plan, all of which were vested and exercisable.
We no longer grant options under this plan, and ordinary shares underlying any option granted under this plan that terminates without exercise become
available for future issuance under our 2006 plan.
The terms of the 2003 plan are in compliance with Section 102 of the Israeli Income Tax Ordinance, which allows employees, directors and officers, who are
not controlling shareholders and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options. Our non-
employees service providers and controlling shareholders may only be granted options under another section of the Tax Ordinance, which does not provide
for similar tax benefits.
We have elected to issue our options under the capital gain track and, accordingly, all options granted under this plan to Israeli residents have been granted
under the capital gain track. Section 102 also provides for an income tax track, under which, among other things, the benefits to the employees would be
taxed as ordinary income, we would be allowed to recognize expenses for tax purposes and the minimum holding period for the trustee will be twelve months
from the end of the calendar year in which such options are granted, and if granted after January 1, 2006, twelve months after the date of grant. In order to
comply with the terms of the capital gain track, all options, as well as the ordinary shares issued upon exercise of these options and other shares received
subsequently following any realization of rights with respect to such options, such as stock dividends and stock splits are granted to a trustee and should be
held by the trustee for the lesser of thirty months from the date of grant, or two years following the end of the tax year in which the options were granted and
if granted after January 1, 2006 only two years after the date of grant. Under this plan, all options, whether or not granted pursuant to said Section 102, the
ordinary shares issued upon their exercise and other shares received subsequently following any realization of rights are issued to a trustee.
The plan is administered by our board of directors which has delegated certain responsibilities to our compensation and nomination committee.
In the event of our being acquired by means of merger with or into another entity, in which our outstanding shares are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring company or its subsidiary, or in the event of the sale of all or substantially all of our assets, to
the extent it has not been previously exercised, each vested or unvested option will terminate immediately prior to the consummation of such transaction. The
plan further provides that, in the event of our consolidation or merger with or into another corporation, the compensation committee may, in its absolute
discretion and without obligation, agree that instead of termination: (i) each unexercised option, if possible, will be assumed or an equivalent option will be
substituted by our successor corporation or a parent or subsidiary of our successor corporation; or (ii) we will pay to the grantee an amount equivalent to the
valuation of the grantee’s unexercised options on an as converted basis at that time.
The plans are administered by our compensation and nominating committee.
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We no longer grant options under the 2003 plan, and ordinary shares underlying any options granted under the 2009 plan that terminated without
exercise became available for issuance under our 2006 plan.
ITEM 7: Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of March 8, 2013, by each person
who we know beneficially owns 5.0% or more of the outstanding ordinary shares. Each of our shareholders has identical voting rights with respect to its
shares. All of the information with respect to beneficial ownership of the ordinary shares is given to the best of our knowledge.
Ordinary
Shares
Beneficially
Owned(1)
Percentage of
Ordinary
Shares
Beneficially
Owned
FMR LLC(2)
Zohar Zisapel(3)
Alydar Group(4)
Turner Investments, LP(5)
______________
(1) As used in this table, “beneficial ownership” means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any
security. For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired within 60 days from March 8, 2013
through the exercise of any option or warrant. Ordinary shares subject to options or warrants that are currently exercisable or exercisable within 60 days
are deemed outstanding for computing the ownership percentage of the person holding such options or warrants, but are not deemed outstanding for
computing the ownership percentage of any other person. The amounts and percentages are based upon 32,566,697 ordinary shares outstanding as of
March 8, 2013.
3,250,691
2,842,378
1,708,860
1,611,239
10.0%
8.7%
5.3%
5.0%
(2) Based on a Schedule 13G/A filed on February 14, 2013. Consists of 2,920,191 shares beneficially owned by Fidelity Management & Research Company,
a wholly-owned subsidiary of FMR LLC; 11,900 shares beneficially owned by Pyramis Global Advisors, LLC, an indirect wholly-owned subsidiary of
FMR LLC; and 318,600 shares beneficially owned by Edward C. Johnson 3d, chairman of FMR LLC. The address of the FMR entities is 82 Devonshire
St., Boston MA 02109.
(3) Based on a Schedule 13G/A filed on January 13, 2011. Consists of 2,777,487 shares are held by Zohar Zisapel and 64,891 shares are held by Lomsha
Ltd., an Israeli company controlled by Zohar Zisapel. The address of Mr. Zisapel and Lomsha Ltd. is 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel.
(4) Based on a Schedule 13G/A filed on February 14, 2013. Consists of 620,025 shares held by Alydar Capital, LLC and 1,708,860 shares held by Alydar
Partners, LLC. The address of the Alydar entities is 222 Berkeley Street, 17th Floor, Boston Massachusetts 02116.
(5) Based on a Schedule 13G filed on February 1, 2013. The address of Turner Investments is 1205 Westlakes Drive, Suite 100, Berwyn PA 19312.
Significant Changes in the Ownership of Major Shareholders
As of February 14, 2013, FMR LLC was the beneficial owner of 3,250,691, or 10.0%, of our ordinary shares.
As of February 14, 2013, Alydar Group was the beneficial owner of 1,708,860, or 5.3%, of our ordinary shares.
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As of February 14, 2013, Zohar Zisapel was the beneficial owners of 2,842,378, or 8.7%, of our ordinary shares. As of June 1, 2011, Zohar Zisapel
was the beneficial owner of 2,842,378, or 11.7%, of our ordinary shares. As of April 1, 2010 Zohar Zisapel was the beneficial owner of 2,292,319, or 10.2%,
of our ordinary shares.
As of February 1, 2013, Turner Investments was the beneficial owner of 1,661,239, or 5.0%, of our ordinary shares.
As of November 15, 2011, Tamir Fishman Ventures were no longer major shareholders. As of February 14, 2011, Tamir Fishman Ventures were the
beneficial owner of 2,354,093, or 9.7%, of our ordinary shares.
As of December 31, 2011, Diker Management was no longer a major shareholder. As of June 1, 2011, Diker Management was the beneficial owner
of 2,400,040, or 9.9%, of our ordinary shares. As of April 1, 2010 and December 31, 2009, Diker Management was the beneficial owner of 2,160,061, or
9.6%, of our ordinary shares.
As of June 1, 2011, the Gemini Group and Yigal Jacoby were no longer major shareholders. As of April 1, 2010 and December 31, 2009, the Gemini
Group was the beneficial owner of 1,702,679, or 7.6%, of our ordinary shares and Yigal Jacoby was the beneficial owner of 1,524,431, or 6.6%, of our
ordinary shares.
As of December 31, 2012, Brookside Capital Partners Fund, L.P. was no longer a major shareholder. As of December 31, 2011 Brookside Capital
Partners Fund, L.P. was the beneficial owner of 3,081,549, or 9.7%, of our ordinary shares. As of December 31, 2010, Brookside Capital Partners Fund, L.P.
was the beneficial owner of 3,426,638, or 14.2%, of our ordinary shares.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of March 1, 2013, there were 18 record holders of ordinary shares, of which 9
consisted of United States record holders holding approximately 99.40% of our outstanding ordinary shares. The United States record holders included Cede
& Co., the nominee of the Depositary Trust Company.
B. Related Party Transactions
Our policy is to enter into transactions with related parties on terms that, on the whole, are no more favorable, or no less favorable, than those available from
unaffiliated third parties. Based on our experience in the business sectors in which we operate and the terms of our transactions with unaffiliated third parties,
we believe that all of the transactions described below met this policy standard at the time they occurred.
Agreements with Directors and Officers
Employment of Shraga Katz. In June 2008, we entered into an agreement with Shraga Katz governing the terms of his employment with us for the provision
of advisory services. Under the terms of the agreement, Mr. Katz is required to devote 20% of his time to his position with us. In November 2008, Mr. Katz
was elected as the chairman of our board of directors and his monthly compensation was increased. The agreement contains standard employment provisions,
including provisions relating to confidentiality and assignment of inventions. We may terminate Mr. Katz’s employment on a prior notice pursuant to
applicable law, or we may terminate Mr. Katz’s employment without notice if we give a pay in lieu of notice.
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Engagement of Officers. We have entered into employment or consulting agreements with each of our officers, who work for us as employees or as
consultants. These agreements all contain provisions standard for a company in our industry regarding noncompetition, confidentiality of information and
assignment of inventions. The enforceability of covenants not to compete in Israel may be limited. In connection with the engagement of our officers, we
have granted them options pursuant to our 2006 Incentive Compensation Plan.
Exculpation, Indemnification and Insurance. Our articles of association permit us to exculpate, indemnify and insure our office holders, in accordance with
the provisions of the Companies Law. We have entered into agreements with each of our directors and certain office holders, exculpating them from a breach
of their duty of care to us to the fullest extent permitted by law and undertaking to indemnify them to the fullest extent permitted by law, to the extent that
these liabilities are not covered by insurance. See “ITEM 6: Directors, Senior Management and Employees—Board Practices—Exculpation, Insurance and
Indemnification of Office Holders.”
Agreement with Galil Software
Our director, Itzhak Danziger, is Chairman of the board of directors of Galil Software Ltd. We have engaged Galil Software since 2010 to provide us with
certain quality assurance services in the ordinary course of our business. We paid Galil Software approximately $275,000 in 2011, approximately $305,000
in 2012 and approximately $80,000 in 2013 through March 8, 2013.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8: Financial Information
A. Consolidated Financial Statements and Other Financial Information.
Consolidated Financial Statements
For our audited consolidated financial statements for the year ended December 31, 2012, please see pages F-2 to F-45 of this report.
Export Sales
See “ITEM 5: Operating and Financial Review and Prospects” under the caption “Geographic Breakdown of Revenues” for certain details of export sales for
the last three fiscal years.
Legal Proceedings
On May 1, 2007, a securities class action complaint, Brickman Investment Inc. v. Allot Communications Ltd. et al., was filed in the United States District
Court for the Southern District of New York. At least three substantially similar complaints were filed in the same court after the original action was filed. We
and certain of our directors and officers are named as defendants. The securities class action complaints allege that the defendants violated Sections 11 and 15
of the Securities Act of 1933 by making false and misleading statements and omissions in our registration statement for our initial public offering in
November 2006. The claims are purportedly brought on behalf of persons who purchased our stock pursuant to and/or traceable to the initial public offering
on or about November 15, 2006 through April 2, 2007. The plaintiffs seek unspecified compensatory damages against the defendants, as well as attorney’s
fees and costs. Motions for consolidation and for appointment of lead plaintiff were filed on July 2, 2007 and were decided on March 27, 2011, with an order
granting consolidation and appointing co-lead plaintiffs. The Consolidated Amended Compliant was served on June 9, 2011. The defendants moved to
dismiss the Consolidated Amended Compliant on August 8, 2011. While the defendants’ motion to dismiss was still pending, the parties reached on March
31, 2012 an agreement in principle to settle this litigation. Pursuant to the terms of the agreement, the Company will pay to the plaintiffs, for the benefit of the
class members, $1.3 million in cash, which amount is to be funded by our insurance carrier. The Court held the final approval hearing on April 29, 2012. At
the hearing, the Court granted final approval of the settlement. Under the terms of the Stipulation of Settlement, the agreement’s Effective Date was May 31,
2012. The Company has recorded a liability in its financial statements for the proposed amount of the settlement. In addition, because the insurance carrier
has agreed to pay the entire settlement amount and recovery from the insurance carrier is probable, a receivable has also been recorded for the same amount.
Accordingly, there is no impact to the Company’s statements of operations or cash flows because the amounts of the settlement and the insurance recovery
fully offset each other.
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We may, from time to time in the future be involved in legal proceedings in the ordinary course of business.
Dividends
We have never declared or paid any cash dividends on our ordinary shares and we do not anticipate paying any cash dividends on our ordinary shares in the
future. We currently intend to retain all future earnings to finance our operations and to expand our business. Any future determination relating to our
dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital
requirements, financial condition and future prospects and other factors our board of directors may deem relevant.
B. Significant Changes
Since the date of our audited financial statements included elsewhere in this annual report, there have not been any significant changes in our financial
position.
ITEM 9: The Offer and Listing
Not applicable, except for Items 9.A.4 and 9.C, which are detailed below.
Stock Price History
The following table sets forth the high and low sales prices for our ordinary shares as reported by the NASDAQ Global Market, in U.S. dollars, and as
reported by the Tel Aviv Stock Exchange (since December 2010), in NIS, for each of the last five years:
Year
2009
2010
2011
2012
2013 (through March 15, 2013)
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
High
Low
4.25 $
11.64
19.05
28.03
14.42
1.42 NIS
4.00
9.45
15.55
13.05
— NIS
42.57
71.22
111.60
52.55
—
37.20
35.74
58.56
48.00
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
High
Low
16.16 $
18.29
19.05
18.47
10.84 NIS
13.31
9.75
9.45
58.50 NIS
63.31
65.28
71.22
38.49
45.16
35.74
36.57
$
$
66
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Most Recent Six Months
March 2013 (through March 15, 2013)
February 2013
January 2013
December 2012
November 2012
October 2012
Markets
$
$
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
High
Low
23.25 $
28.03
27.82
25.50
15.55 NIS
21.87
21.32
17.12
86.17 NIS
110.00
111.60
99.72
58.56
83.07
88.58
63.60
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
High
Low
14.42 $
15.23
18.28
21.82
24.01
25.50
13.05 NIS
13.73
13.36
17.12
19.17
22.78
52.55 NIS
55.40
68.12
84.18
93.50
99.72
48.00
50.59
49.56
63.60
75.37
85.89
Our ordinary shares have been quoted under the symbol “ALLT” on the NASDAQ Stock Market since November 16, 2006 and on the Tel Aviv
Stock Exchange since December 21, 2010.
ITEM 10: Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Memorandum and Articles of Association
Incorporation
We are registered as a public company with the Israeli Registrar of Companies. Our registration number is 51-239477-6.
Objective
Our objectives under our memorandum of association are to engage in the business of computers, hardware and software, including without
limitation research and development, marketing, consulting and the selling of knowledge, and any other activity which our board of directors shall determine.
Ordinary Shares
Our authorized share capital consists of 200,000,000 ordinary shares, par value NIS 0.10 per share. As of March 8, 2013, we had 32,566,697
ordinary shares outstanding. All outstanding ordinary shares are validly issued, fully paid and non-assessable. The rights attached to the Ordinary Shares are
as follows:
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Voting
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting.
Shareholders may vote at shareholder meeting either in person, by proxy or by written ballot. Shareholder voting rights may be affected by the grant of any
special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Transfer of Shares
Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted
or prohibited by another instrument, Israeli law or the rules of a stock exchange on which the shares are traded.
Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. Rather, under our articles of association our directors are
elected by the holders of a simple majority of our ordinary shares at a general shareholder meeting. As a result, the holders of our ordinary shares that
represent more than 50% of the voting power represented at a shareholder meeting have the power to elect any or all of our directors whose positions are
being filled at that meeting, subject to the special approval requirements for outside directors. See “ITEM 6: Directors, Senior Management and Employees—
Board Practices—Outside Directors.”
Dividend and Liquidation Rights
Under the Companies Law, shareholder approval is not required for the declaration of a dividend, unless the company’s articles of association
provide otherwise. Our articles of association provide that our board of directors may declare and distribute a dividend to be paid to the holders of ordinary
shares without shareholder approval in proportion to the paid up capital attributable to the shares that they hold. Dividends may be paid only out of profits
legally available for distribution, as defined in the Companies Law, provided that there is no reasonable concern that the payment of a dividend will prevent
us from satisfying our existing and foreseeable obligations as they become due. If we do not have profits legally available for distribution, we may seek the
approval of the court to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that a payment of a
dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion
to the paid up capital attributable to the shares that they hold. Dividend and liquidation rights may be affected by the grant of preferential dividend or
distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Shareholder Meetings
We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months
following the preceding annual general meeting. Our board of directors may convene a special general meeting of our shareholders and is required to do so at
the request of two directors or one quarter of the members of our board of directors or at the request of one or more holders of 5.0% or more of our share
capital and 1.0% of our voting power or the holder or holders of 5.0% or more of our voting power. All shareholder meetings require prior notice of at least
21 days. The chairperson of our board of directors, or any other person appointed by the board of directors, presides over our general meetings. In the absence
of the chairperson of the board of directors or such other person, one of the members of the board designated by a majority of the directors presides over the
meeting. If no director is designated to preside as chairperson, then the shareholders present will choose one of the shareholders present to be chairperson.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings
are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting.
68
Quorum
The quorum required for a meeting of shareholders consists of at least two shareholders present in person, by proxy or by written ballot, who hold or
represent between them at least 25% of our voting power. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following
week at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting, the required
quorum consists of at least two shareholders present, in person, by proxy or by written ballot, who hold or represent between them at least 10% of our voting
power, provided that if the meeting was initially called pursuant to a request by our shareholders, then the quorum required must include at least the number
of shareholders entitled to call the meeting. See “— Shareholder Meetings.”
Resolutions
An ordinary resolution requires approval by the holders of a simple majority of the voting rights represented at the meeting, in person, by proxy or
by written ballot, and voting on the resolution.
Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a
simple majority. A resolution for the voluntary winding up of the company requires the approval by holders of 75.0% of the voting rights represented at the
meeting, in person, by proxy or by written ballot, and voting on the resolution. Under our articles of association (1) certain shareholders’ resolutions require
the approval of a special majority of the holders of at least 75.0% of the voting rights represented at the meeting, in person, by proxy or by written ballot, and
voting on the resolution, and (2) certain shareholders’ resolutions require the approval of a special majority of the holders of at least two-thirds of the voting
securities of the company then outstanding.
Access to Corporate Records
Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register, including
with respect to material shareholders, our articles of association, our financial statements and any document we are required by law to file publicly with the
Israeli Companies Registrar. Any shareholder who specifies the purpose of its request may request to review any document in our possession that relates to
any action or transaction with a related party which requires shareholder approval under the Companies Law. We may deny a request to review a document if
we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may
otherwise impair our interests.
Fiduciary duties and approval of specified related party transactions under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care of an office holder is based on the duty of care set forth in connection with the tort of negligence under the Israeli Torts Ordinance
(New Version), 5728-1968. This duty of care requires an office holder to act with the degree of proficiency with which a reasonable office holder in the same
position would have acted under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the
circumstances, to obtain certain information pertaining to the proposed action before the board of directors.
69
The duty of loyalty incumbent on an office holder requires him or her to act in good faith and for the benefit of the company, and includes, among
other things, the duty to avoid conflicts of interest with the company, to refrain from competing with the company, and to disclose to the company information
disclosed to him or her as a result of being an office holder.
We may approve an act specified above which would otherwise constitute a breach of the office holder’s duty of loyalty, provided that the office
holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest a sufficient time
before the approval of such act. Any such approval is subject to the terms of the Companies Law, setting forth, among other things, the organs of the company
entitled to provide such approval, and the methods of obtaining such approval.
Disclosure of personal interests of an office holder and approval of acts and transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have relating to any
existing or proposed transaction by the company (as well as certain information or documents). Once an office holder has disclosed his or her personal
interest in a transaction, the approval of the appropriate organ(s) in the company is required in order to effect the transaction. However, a company may not
approve a transaction or action that is not to the company’s benefit.
Disclosure of personal interests of a controlling shareholder and approval of transactions
Under the Companies Law, a controlling shareholder must also disclose any personal interest it may have in an existing or proposed transaction by
the company. Transactions with controlling shareholders that are material, that are not in the ordinary course of business or that are not on market terms
require approval by the audit committee, the board of directors and the shareholders of the company, and the Companies Law provides for certain quantitative
requirements in respect of the voting of shareholders not having a personal interest in the applicable transaction.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power, to act in good faith and to act in an acceptable manner in
exercising its rights and performing its obligations to the company and other shareholders. A shareholder also has a general duty to refrain from acting to the
detriment of other shareholders.
In addition, any controlling shareholder or any shareholder having specific power with respect to a company (the power to appoint an office holder,
or specific influence over a certain vote) is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of
this duty 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 the shareholder’s position in the company into account.
Approval of private placements
Under the Companies Law and the regulations promulgated thereunder, certain private placements of securities may require approval at a general
meeting of the shareholders of a company. These include, for example, certain private placements completed in lieu of a special tender offer (See
“Memorandum and Articles of Association—Acquisition under Israeli law”) or a private placement which qualifies as a related party transaction (See
“Corporate governance practices—Fiduciary duties and approval of specified related party transactions under Israeli law”).
70
Acquisitions under Israeli Law
Full Tender Offer. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the target company’s issued
and outstanding share capital is required by the Companies Law to make a tender offer for the purchase of all of the issued and outstanding shares of the
company. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding share capital of the company, and more than half of
the offerees who do not have a personal interest in the tender offer accept the tender offer, all of the shares that the acquirer offered to purchase will be
transferred to the acquirer by operation of law. Notwithstanding the above, if the shareholders who do not accept the offer hold less than 2% of the issued and
outstanding share capital of the company or of the applicable class, the offer will nonetheless be accepted. However, a shareholder that had its shares so
transferred may, within six months from the date of acceptance of the tender offer, petition the court to determine that the tender offer was for less than fair
value and that the fair value should be paid as determined by the court. The bidder may provide in its tender offer that any accepting shareholder may not
petition the court for fair value, but such condition will not be valid unless all of the information required under the Companies Law was provided prior to the
acceptance date. The description above regarding a full tender offer also applies, with certain limitations, when a full tender offer for the purchase of all of the
company’s securities is accepted.
Special Tender Offer. The Companies Law provides, subject to certain exceptions, that an acquisition of shares of a public Israeli company must be made by
means of a “special tender offer” if, as a result of the acquisition, the purchaser would become a holder of at least 25% of the voting rights in the company.
This rule does not apply if there is already another holder of at least 25% of the voting rights in the company. 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 become a holder of
more than 45% of the voting rights in the company, and there is no other shareholder of the company who holds more than 45% of the voting rights in the
company. The special tender offer may be consummated subject to certain majority requirements set forth in the Companies Law, and provided further that at
least 5% of the voting rights attached to the company’s outstanding shares will be acquired by the party making the offer.
Merger. The Companies Law permits merger transactions if approved by each party’s board of directors and a certain percentage of each party’s shareholders.
Following the approval of the board of directors of each of the merging companies, the boards must jointly prepare a merger proposal for submission to the
Israeli Registrar of Companies.
Under the Companies Law, if the approval of a general meeting of the shareholders is required, merger transactions may be approved by the holders
of a simple majority of our shares present, in person, by proxy or by written ballot, at a general meeting of the shareholders and voting on the transaction. In
determining whether the required majority has approved the merger, if shares of the company are held by the other party to the merger, by any person holding
at least 25% of the voting rights, or 25% of the means of appointing directors or the general manager of the other party to the merger, then a vote against the
merger by holders of the majority of the shares present and voting, excluding shares held by the other party or by such person, or any person or entity acting
on behalf of, related to or controlled by either of them, is sufficient to reject the merger transaction. In certain circumstances, a court may still approve the
merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into
account the value of the parties to the merger and the consideration offered to the shareholders.
The Companies Law provides for certain requirements and procedures that each of the merging companies is to fulfill. In addition, a merger may not be
completed unless at least fifty days have passed from the date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies and
thirty days from the date that shareholder approval of both merging companies was obtained.
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Anti-Takeover Measures
Undesignated preferred shares. The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares,
including shares providing certain preferred or additional rights with respect to voting, distributions or other matters and shares having preemptive rights. We
do not have any authorized or issued shares other than ordinary shares. In the future, if we do create and issue a class of shares other than ordinary shares,
such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders
from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our
articles of association which requires the prior approval of a simple majority of our shares represented and voted at a general meeting. In addition, we
undertook towards the TASE that, as long as our shares are registered for trading with the TASE we will not issue or authorize shares of any class other than
the class currently registered with the TASE, unless such issuance is in accordance with certain provisions of the Israeli Securities Law determining that a
company registering its shares for trade on the TASE may not have more than one class of shares for a period of one year following registration with the
TASE, and following such period the company is permitted to issue preferred shares if the preference of those shares is limited to a preference in the
distribution of dividends and the preferred shares have no voting rights.
Supermajority voting. Our articles of association require the approval of the holders of at least two-thirds of our combined voting power to effect certain
amendments to our articles of association.
Classified board of directors. Our articles of association provide for a classified board of directors. See “ITEM 6: Directors, Senior Management and
Employees—Board Practices—Term of Directors.”
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company. Its address is 59 Maiden Lane, New York,
New York 10038 and its telephone number is (718) 921-8200.
C. Material Contracts
Summaries of the following material contracts and amendments to these contracts are included in this annual report in the places indicated:
Material Contract
Agreement with Flextronics (Israel) Ltd.
D. Exchange Controls
Location
“ITEM 4.B:
Manufacturing.”
Information on
the Company–Business Overview–
In 1998, Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign
assets, and non-residents may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of
dividends on the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in
effect pursuant to which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities. Neither our memorandum of association nor our articles of association nor the laws of the
State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents, except that such restrictions may exist with respect to citizens
of countries which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares.
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E. Taxation
Israeli Tax Considerations and Government Programs
The following is a general discussion only and is not exhaustive of all possible tax considerations. It is not intended, and should not be construed, as legal or
professional tax advice and should not be relied upon for tax planning purposes. In addition, this discussion does not address all of the tax consequences that
may be relevant to purchasers of our ordinary shares in light of their particular circumstances, or certain types of purchasers of our ordinary shares subject to
special tax treatment. Examples of this kind of investor include residents of Israel and traders in securities who are subject to special tax regimes not covered
in this discussion. Each individual/entity should consult its own tax or legal advisor as to the Israeli tax consequences of the purchase, ownership and
disposition of our ordinary shares.
To the extent that part of the discussion is based on new tax legislation, which has not been subject to judicial or administrative interpretation, we cannot
assure that the tax authorities or the courts will accept the views expressed in this section.
The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also
contains a discussion of the material Israeli tax consequences to holders of our ordinary shares.
General Corporate Tax Structure in Israel
Taxable income of Israeli companies is subject to tax at the rate of 26% in 2009, 25% in 2010 and 24% in 2011, and was scheduled to gradually decline to
18% by 2016. However, this scheduled decline in corporate tax rates was repealed with the enactment of the Law for Tax Burden Reform (Legislative
Amendments), 2011 in Israel in late 2011 and instead the corporate tax rate will revert to 25% in 2012 and thereafter.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred.
Expenditures are deemed related to scientific research and development projects, if:
·
·
·
The expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
The research and development must be for the promotion of the company; and
The research and development is carried out by or on behalf of the company seeking such tax deduction.
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research
and development projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested
in an asset depreciable under the general depreciation rules of the income Tax Ordinance, 1961. Expenditures not so approved are deductible in equal amounts
over three years.
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From time to time we may apply the Office of the Chief Scientist for approval to allow a tax deduction for all research and development expenses during the
year incurred. There can be no assurance that such application will be accepted.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for
industrial companies. We believe that we currently qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. The Industry
Encouragement Law defines “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than of income
from defense loans, capital gains, interest and dividend, 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.
The following corporate tax benefits, among others, are available to Industrial Companies:
·
·
·
Amortization of the cost of purchased know-how and patents and of rights to use a patent and know-how which are used for the development or
advancement of the company, over an eight-year period;
Under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and
Expenses related to a public offering in Israel and in recognized stock markets outside Israel, are deductible in equal amounts over three years.
Under certain tax laws and regulations, an “Industrial Enterprise” may be eligible for special depreciation rates for machinery, equipment and buildings.
These rates differ based on various factors, including the date the operations begin and the number of work shifts. An “Industrial Company” owning an
approved enterprise may choose between these special depreciation rates and the depreciation rates available to the approved enterprise.
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We can give no
assurance that we qualify or will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.
Special Provisions Relating to Taxation Under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law, represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid inflation.
According to the Inflationary Adjustments Law, until 2007, the results for tax purposes were adjusted for the changes in the Israeli CPI. In February 2008, the
“Knesset,” the Israeli parliament, passed an amendment to the Inflationary Adjustments Law, which limits the scope of the law starting 2008 and thereafter.
Starting 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the
period up to December 31, 2007. The amendment to the Inflationary Adjustments Law includes, inter alia, the elimination of the inflationary additions and
deductions and the additional deduction for depreciation starting 2008.
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Israeli Transfer Pricing Regulations
On November 29, 2006, the Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came
into effect (the “TP Regulations”). Section 85A of the Tax Ordinance and the TP Regulations generally require that all cross-border transactions carried out
between related parties be conducted on an arm’s length basis and be taxed accordingly. The TP Regulations are not expected to have a material effect on us.
Tax Benefits Under the Law for Encouragement of Capital Investments, 1959
Tax benefits prior the 2005 amendment
The Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April 1, 2005), generally referred to as the Investments Law,
provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Commerce of
the State of Israel, be designated as an “Approved Enterprise.” The Investment Center bases its decision as to whether or not to approve an application,
among other things, on the criteria set forth in the Investments Law and regulations, the policy of the Investment Center, and the specific objectives and
financial criteria of the applicant. 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 Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs. The
tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by
the Approved Enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided
that such income is generated within the Approved Enterprise’s ordinary course of business. 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 average of the applicable rates. The tax benefits under the Investments Law
are not, generally, available with respect to income derived from products manufactured outside of Israel. In addition, the tax benefits available to an
Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of
tax benefits, plus a consumer price index linkage adjustment and interest.
The Investments Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an
Approved Enterprise program in the first five years of using the equipment.
Taxable income of a company derived from an Approved Enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate
tax rate, for the benefit period. This period is ordinarily seven years commencing with the year in which the approved enterprise first generates taxable
income after the commencement of production, and is limited to twelve years from commencement of production or fourteen years from the date of approval,
whichever is earlier. This time limitation does not apply to the exemption period described below.
Should we derive income from sources other than the Approved Enterprise during the relevant period of benefits, such income will be taxable at the regular
corporate tax rates.
Under certain circumstances (as further detailed below), the benefit period may extend to a maximum of ten years from the commencement of the benefit
period.
A company may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from
the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year the company derives taxable income
under the program, after the commencement of production, depending on the geographic location of the Approved Enterprise within Israel, and such company
will be eligible for a reduced tax rate for the remainder of the benefits period. The year’s limitation does not apply to the exemption period.
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A company that has elected the alternative package of benefits, such as us, that subsequently pays a dividend out of income derived from the
approved enterprise(s) during the tax exemption period will be subject to corporate tax in the year the dividend is distributed in respect of the gross amount
distributed, at the rate which would have been applicable had the company not elected the alternative package of benefits, (generally 10%-25%, depending
on the percentage of the company’s ordinary shares held by foreign shareholders). The dividend recipient is subject to withholding tax at the reduced rate of
15% applicable to dividends from approved enterprises, if the dividend is distributed during the tax exemption period or within twelve years thereafter. In the
event, however, that the company is qualifies as a foreign investors’ company, there is no such time limitation.
As of December 31, 2012, we believe that we are meeting the aforementioned conditions.
Foreign Investor’s Company (“FIC”)
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a foreign investors’ company. A foreign investors’
company is a company of which, among other criteria, more than 25% of its share capital and combined share and loan capital is owned by non-Israeli
residents. A company that qualifies as a foreign investors’ company and has an approved enterprise program is eligible for tax benefits for a ten-year benefit
period. As specified above, depending on the geographic location of the approved enterprise within Israel, income derived from the approved enterprise
program may be entitled to the following:
·
·
Extension of the benefit period to up to ten years.
An additional period of reduced corporate tax liability at rates ranging between 10% and 25%, depending on the level of foreign (that is, non-Israeli)
ownership of our shares. Those tax rates and the related levels of foreign investment are as set forth in the following table:
Region A
Rate of Reduced Tax
25
25
20
15
10
Region B
Rate of Reduced Tax
25
25
20
15
10
Reduced Tax Period
0 years
0 years
0 years
0 years
0 years
Reduced Tax Period
1 years
4 years
4 years
4 years
4 years
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Tax Exemption Period
10 years
10 years
10 years
10 years
10 years
Percent of Foreign Ownership
0-25%
25-48.99%
49-73.99%
74-89.99%
90-100%
Tax Exemption Period
6 years
6 years
6 years
6 years
6 years
Percent of Foreign Ownership
0-25%
25-48.99%
49-73.99%
74-89.99%
90-100%
Other Regions
Rate of Reduced Tax
25
25
20
15
10
Reduced Tax Period
5 years
8 years
8 years
8 years
8 years
Tax Exemption Period
2 years
2 years
2 years
2 years
2 years
Percent of Foreign Ownership
0-25%
25-48.99%
49-73.99%
74-89.99%
90-100%
The twelve years limitation period for reduced tax rate of 15% on dividend from the approved enterprise will not apply.
Subject to applicable provisions concerning income under the alternative package of benefits, dividends paid by a company are considered to be
attributable to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax
rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the alternative package of benefits is not obliged to
distribute retained profits, and may generally decide from which year’s profits to declare dividends.
In 1998, the production facilities of the Company related to its computational technologies were granted the status of an “Approved Enterprise”
under the Law. In 2004, an expansion program was granted the status of “Approved Enterprise.” According to the provisions of the Law, the Company has
elected the alternative package of benefits and has waived Government grants in return for tax benefits.
Tax Benefits under the 2005 Amendment
An amendment to the Investments Law, generally referred as the 2005 Amendment, effective as of April 1, 2005 has significantly changed the provisions of
the Investments Law. The amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise. The 2005
Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved
prior to December 31, 2004, and therefore to benefits included in any certificate of approval that was granted before the 2005 Amendment came into effect,
which will remain subject to the provisions of the Investments Law as they were on the date of such approval.
However, a company that was granted benefits according to Section 51 of the Investments Law (prior the 2005 Amendment) will not be allowed to choose
new tax year as a “Year of Election,” referred to below, under the 2005 Amendment, for a period of two years from the company’s previous Commencement
Year (referred to below) under the old Investments Law.
The 2005 Amendment simplifies the approval process for the approved enterprise. According to the 2005 Amendment, only approved enterprises receiving
cash grants require the approval of the Investment Center.
As a result of the 2005 Amendment, it is no longer necessary for a company to acquire Approved Enterprise status in order to receive the tax benefits
previously available under the Alternative Route, and therefore such companies need not apply to the Investment Center for this purpose. Rather, a company
may claim the tax benefits offered by the Investments Law directly in its tax returns or by notifying the Israeli Tax Authority within twelve months of the end
of that year, provided that its facilities meet the criteria for tax benefits set out by the 2005 Amendment. Such enterprise is referred to as the Benefited
Enterprise. Companies are also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the 2005
Amendment. The 2005 Amendment includes provisions attempting to ensure that a company will not enjoy both Government grants and tax benefits for the
same investment program.
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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
Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of
no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise, 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
Benefited 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 Benefited 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.
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 Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax
routes, which may be applicable to us:
·
·
Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on
the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period,
depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign
investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such
income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the dividend that we may 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 Benefited Enterprise;
and
A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on
income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a
rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
Generally, a company that is Abundant in Foreign Investment (owned by at least 74% foreign shareholders and has undertaken to invest a minimum sum of
$20 million in the Beneficiary Enterprise 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.
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As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon
distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.
We elected the years of 2006 and 2009 as “year of election” under the Investments Law after the 2005 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.
We currently intend to reinvest any income derived from our Approved Enterprise program and not to distribute such income as a dividend. As of December
31, 2012, we did not generate income under the provisions of the Investments Law.
Tax benefits under the 2010 Amendment
In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among
others, amendments to the Investment Law. The amendment became effective as of January 1, 2011. According to the amendment, the benefit tracks in the
Investments Law were modified and a flat tax rate applies to our entire preferred income. Under the new law, the uniform tax rate will be 10% in areas in
Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%,
respectively thereafter.
Under the transition provisions of the new legislation, a company may decide to irrevocably implement the new law while waiving benefits provided under
the current law or to remain subject to the current law. We intend to implement the new legislation in 2015.
Tax benefits under the 2012 Amendment
A recent amendment to the Investment Law became effective on November 12, 2012 (the “2012 Amendment”). The 2012 Amendment provides temporary
tax relief on the amount of tax payable on tax exempt earnings in order to encourage companies to pay the reduced taxes during the following 12 months.
Pursuant to the 2012 Amendment, companies may elect by November 11, 2013 to pay a reduced corporate tax rate with respect to certain exempt income,
accumulated through December 31, 2011. An election to release a greater amount of the total accumulated exempt earnings will result in a higher relief from
the corporate income tax, reflecting a tax rate ranging from 6% to 17.5%.
The reduced corporate tax is payable within 30 days of making the election. Following the payment of the reduced corporate taxes, companies that elect to
adopt the 2012 Amendment will be entitled to distribute dividends from such income, without being required to pay any further corporate taxes with respect
to such dividends. The 2012 Amendment does not require an actual distribution of the retained earnings, nor does it provide any relief from the dividend
withholding tax. Companies that have made this election must make certain qualified investments in Israel over a five-year period, commencing in 2013.
Companies that have elected to apply the amendment cannot withdraw from the election.
The Investment Law treats certain payments made by a company from cash resources derived from tax exempt income, as a deemed dividend distribution
event, triggering a corporate tax liability, at the regular Approved or Privileged income tax rates. Such payments include, but are not limited to, repurchase of
shares and payments made to substantial shareholders as defined in the Law. The above amendment to the Law stipulate that investments in subsidiaries,
including in the form of acquiring subsidiaries from unrelated party, may be also considered as a deemed dividend distribution event, thus increasing the risk
of triggering a deemed dividend distribution event and therefore a potential tax exposure. The Israeli Tax Authority’s interpretation is that this provision
applies retroactively to investments and acquisitions made prior to the 2012 Amendment.
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Special Provisions Relating to Taxation Under Inflationary Conditions
Under the Income Tax (Inflationary Adjustments) Law, 1985 (the “Israeli law”), results for tax purposes are measured in real terms, in accordance
with the changes in the Israeli Consumer Price Index ("Israeli CPI"). Accordingly, until 2002, results for tax purposes were measured in terms of earnings in
NIS after certain adjustments for increases in the Israeli CPI. Commencing in the taxable year 2003, we have elected to measure our taxable income and file
our tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and
Certain Partnerships and the Determination of Their Taxable Income), 1986. This election is for a three-year period. Accordingly, commencing in the taxable
year 2003, results for tax purposes are measured in terms of earnings in the dollar. This election was extended in 2006.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the
sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or
a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus.
The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to
the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of
sale. The real gain is the excess of the total capital gain over the inflationary surplus.
Generally, until the 2006 tax year, capital gains tax was imposed on individuals who are Israeli residents at a rate of 15% on real gains derived on or
after January 1, 2003 from the sale of shares in Israeli companies publicly traded on NASDAQ or another recognized stock exchange or regulated market in a
country that has a treaty for the prevention of double taxation with Israel. This tax rate was contingent upon the shareholder not claiming a deduction for
financing expenses in connection with such shares (in which case the gain was generally taxed at a rate of 25%), and did not apply to: (i) the sale of shares to
a relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares by dealers in securities; (iii) the sale of shares by shareholders that report in
accordance with the Inflationary Adjustments Law (that were taxed at corporate tax rates for corporations and at marginal tax rates for individuals); or (iv) the
sale of shares by shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).
As of January 1, 2006, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for
Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain is generally
taxed at a rate of 25%. Additionally, if such shareholder is considered a “material shareholder” at any time during the 12-month period preceding such sale,
i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in a company, the tax rate is 25%. Israeli
companies are subject to the Corporate Tax rate on capital gains derived from the sale of shares, unless such companies were not subject to the Adjustments
Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance that came into effect on January 1, 2006, in
which case the applicable tax rate is 25%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their
shares prior to an initial public offering (that may be subject to a different tax arrangement).
The tax basis of shares acquired prior to January 1, 2003 is determined in accordance with the average closing share price in the three trading days
preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is
higher than such average price.
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Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a
recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel, the
shareholders are not subject to the Adjustments Law, and the shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli
corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is
the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
Pursuant to the Convention between the government of the United States and the government of Israel with respect to taxes on income, as amended
(the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii)
qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by
the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such U.S. resident holds, directly
or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition,
subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such
case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty,
such U.S. resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
United States Federal Income Taxation
The following is a description of the material United States federal income tax consequences of the ownership and disposition of our ordinary shares. This
description addresses only the United States federal income tax considerations of holders that hold such ordinary shares as capital assets. This description
does not address tax considerations applicable to holders that may be subject to special tax rules, including:
·
·
·
·
·
·
·
financial institutions or insurance companies;
real estate investment trusts, regulated investment companies or grantor trusts;
dealers or traders in securities or currencies;
tax-exempt entities;
certain former citizens or long-term residents of the United States;
persons that will hold our shares through a partnership or other pass-through entity;
persons that received our shares as compensation for the performance of services;
81
·
·
·
persons that will hold our shares as part of a “hedging” or “conversion” transaction or as a position in a “straddle” for United States federal income
tax purposes;
persons whose “functional currency” is not the United States dollar; or
holders that own directly, indirectly or through attribution 10.0% or more of the voting power or value of our shares.
Moreover, this description does not address the United States federal estate and gift or alternative minimum tax consequences of the ownership and
disposition of our ordinary shares.
This description is based on the U.S. Internal Revenue Code of 1986, as amended, existing, proposed and temporary United States Treasury Regulations and
judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All of the foregoing are subject to change, which
change could apply retroactively and could affect the tax consequences described below.
For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for United States federal income tax purposes, is:
·
·
·
·
a citizen or resident of the United States;
corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United
States or any state thereof, including the District of Columbia;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or if (1) a court within the
United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control
all of the substantial decisions of such trust.
A “Non-U.S. Holder” is a beneficial owner of our ordinary shares that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership
for United States federal income tax purposes).
If a partnership (or any other entity treated as a partnership for United States federal income tax purposes) holds our ordinary shares, the tax treatment of a
partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult
its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to the United States federal, state, local and foreign tax consequences of owning and disposing of
our ordinary shares.
Distributions
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, for United States federal income tax
purposes, the gross amount of any distribution made to you, with respect to our ordinary shares before reduction of any Israeli taxes withheld therefrom, other
than certain distributions, if any, of our ordinary shares distribute pro rata to all our shareholders, will be includible in your income as dividend income to the
extent such distribution is paid out of our current or accumulated earnings and profits as determined under United States federal income tax principles.
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” non-corporate U.S. Holders may qualify for the lower rates of
taxation with respect to dividends on ordinary shares applicable to long-term capital gains (that is, gains from the sale of capital assets held for more than one
year), provided that certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. However,
such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion below under
“Passive Foreign Investment Company Considerations,” to the extent, if any, that the amount of any distribution by us exceeds our current and accumulated
earnings and profits as determined under United States federal income tax principles, it will be treated first as a tax-free return of your adjusted tax basis in
our ordinary shares and thereafter as capital gain. We do not expect to maintain calculations of our earnings and profits under United States federal income tax
principles and, therefore, if you are a U.S. Holder you should expect that the entire amount of any distribution generally will be reported as dividend income
to you.
82
If you are a U.S. Holder, dividends paid to you with respect to your ordinary shares will be treated as foreign source income, which may be relevant in
calculating your foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from your
taxable income or credited against your United States federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case
of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied when you do not satisfy
certain minimum holding period requirements. The rules relating to the determination of the foreign tax credit are complex, and you should consult your
personal tax advisors to determine whether and to what extent you would be entitled to this credit.
Subject to the discussion below under “Backup Withholding Tax and Information Reporting Requirements,” if you are a Non-U.S. Holder, you generally will
not be subject to United States federal income or withholding tax on dividends received by you on your ordinary shares, unless you conduct a trade or
business in the United States and such income is effectively connected with that trade or business.
Sales Exchange or other Disposition of Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, you generally will recognize gain or
loss on the sale, exchange or other disposition of our ordinary shares equal to the difference between the amount realized on such sale, exchange or other
disposition and your adjusted tax basis in our ordinary shares. Such gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, capital
gain from the sale, exchange or other disposition of ordinary shares is eligible for the preferential rate of taxation applicable to long-term capital gains if your
holding period for such ordinary shares exceeds one year (that is, such gain is long-term capital gain). Gain or loss, if any, recognized by you generally will be
treated as United States source income or loss for United States foreign tax credit purposes. The deductibility of capital losses for U.S. federal income tax
purposes is subject to limitations.
Subject to the discussion below under “Backup Withholding Tax and Information Reporting Requirements,” if you are a Non-U.S. Holder, you generally will
not be subject to United States federal income or withholding tax on any gain realized on the sale or exchange of our ordinary shares unless:
·
·
such gain is effectively connected with your conduct of a trade or business in the United States; or
you are an individual and have been present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other
conditions are met.
83
Passive Foreign Investment Company Considerations
A non-U.S. corporation will be classified as a “passive foreign investment company,” or a PFIC, for United States federal income tax purposes in any taxable
year in which, after applying certain look-through rules, either:
·
·
at least 75 percent of its gross income is "passive income"; or
at least 50 percent of the average value of its gross assets (based on the quarterly value of such gross assets) is attributable to assets that produce
“passive income” or are held for the production of passive income.
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions and the excess
of gains over losses from the disposition of assets which produce passive income.
PFIC status is an annual determination that is based on tests which are factual in nature and our status for any year will depend on our income, assets and
activities for such year. Therefore there can be no assurance that we will not be considered a PFIC for any taxable year. Although we did not use the market
capitalization method to value our assets in 2009 as noted in our prior Form 20-Fs, we are relying on the market capitalization method to determine the fair
market value of our assets for the taxable year ended December 31, 2012. Based on certain estimates of our gross income and gross assets, the nature of our
business and the anticipated amount of goodwill (which is determined in large part by the market price of our stock), we believe that we were not a PFIC for
our taxable year ended December 31, 2012. There can be no certainty, however, that the IRS will agree with our position. If we were a PFIC, and you are a
U.S. Holder, as further described below, you generally would be subject to ordinary income tax rates, imputed interest charges and other disadvantageous tax
treatment (including the denial of the taxation of such dividends at the lower rates applicable to long-term capital gains, as discussed above under “—
Distributions”) with respect to any gain from the sale, exchange or other disposition of, and certain distributions with respect to, your ordinary shares. We are
not providing any U.S. tax opinion to any U.S. Holder concerning our status as a PFIC for 2012, or any other tax year. A U.S. Holder should consult his, her
or its own tax advisor with respect to the potential application of the PFIC rules in his, her or its particular circumstances.
Because the market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been especially volatile,
and because that market price may affect the determination of whether we will be considered a PFIC, we cannot assure you that we will not be considered a
PFIC for any taxable year.
Under the PFIC rules, unless a U.S. Holder makes one of the elections described in the next paragraphs, a special tax regime will apply to both (a) any
“excess distribution” by us (generally, the U.S. Holder’s ratable portion of distributions in any year which are greater than 125% of the average annual
distribution received by such U.S. Holder in the shorter of the three preceding years or the U.S. Holder’s holding period) and (b) any gain realized on the sale
or other disposition of the ordinary shares. Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject
to tax as if (a) the excess distribution or gain had been realized ratably over the U.S. Holder’s holding period, (b) the amount deemed realized had been
subject to tax in each year of that holding period, and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes
deemed to have been payable in those years. In addition, dividend distributions made to you will not qualify for the lower rates of taxation applicable to long
term capital gains discussed above under “Distributions.”
84
Certain elections are available to U.S. Holders of shares that may serve to alleviate some of the adverse tax consequences of PFIC status. If we agreed to
provide the necessary information, you could avoid the interest charge imposed by the PFIC rules by making a qualified electing fund, or a QEF election,
which election may be made retroactively under certain circumstances, in which case you generally would be required to include in income on a current basis
your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gains as long-term capital gain. We do not expect to
provide to U.S. Holders the information needed to report income and gain pursuant to a QEF election, and we make no undertaking to provide such
information in the event that we are a PFIC.
Under an alternative tax regime, you may also avoid certain adverse tax consequences relating to PFIC status discussed above by making a mark-to-market
election with respect to our ordinary shares annually, provided that the shares are “marketable.” Shares will be marketable if they are regularly traded on
certain U.S. stock exchanges (including NASDAQ) or on certain non-U.S. stock exchanges. For these purposes, the shares will generally be considered
regularly traded during any calendar year during which they are traded, other than in negligible quantities, on at least fifteen days during each calendar
quarter.
If you choose to make a mark-to-market election, you would recognize as ordinary income or loss each year an amount equal to the difference as of the close
of the taxable year between the fair market value of the PFIC shares and your adjusted tax basis in the PFIC shares. Losses would be allowed only to the
extent of net mark-to-market gain previously included by you under the election for prior taxable years. If the mark-to-market election were made, then the
PFIC rules set forth above relating to excess distributions and realized gains would not apply for periods covered by the election. If you make a mark-to-
market election after the beginning of your holding period of our ordinary shares, you would be subject to interest charges with respect to the inclusion of
ordinary income attributable to the period before the effective date of such election.
Under certain circumstances, ordinary shares owned by a Non-U.S. Holder may be attributed to a U.S. person owning an interest, directly or indirectly, in the
Non-U.S. Holder. In this event, distributions and other transactions in respect of such ordinary shares may be treated as excess distributions with respect to
such U.S. person, and a QEF election may be made by such U.S. person with respect to its indirect interest in us, subject to the discussion in the preceding
paragraphs.
We may invest in stock of non-U.S. corporations that are PFICs. In such a case, provided that we are classified as a PFIC, a U.S. Holder would be treated as
owning its pro rata share of the stock of the PFIC owned by us. Such a U.S. Holder would be subject to the rules generally applicable to shareholders of
PFICs discussed above with respect to distributions received by us from such a PFIC and dispositions by us of the stock of such a PFIC (even though the U.S.
Holder may not have received the proceeds of such distribution or disposition). Assuming we receive the necessary information from the PFIC in which we
own stock, certain U.S. Holders may make the QEF election discussed above with respect to the stock of the PFIC owned by us, with the consequences
discussed above. However, no assurance can be given that we will be able to provide U.S. Holders with such information. A. U.S. Holder generally would
not be able to make the mark-to-market election described above with respect to the stock of any PFIC owned by us.
If we were a PFIC, a holder of ordinary shares that is a U.S. Holder must file United States Internal Revenue Service Form 8621 for each tax year in which
the U.S. Holder owns the ordinary shares.
You should consult your own tax advisor regarding our potential status as a PFIC and the tax consequences and filing requirements that would arise
if we were treated as a PFIC.
85
Foreign Asset Reporting
Certain U.S. Holders who are individuals (and certain specified entities) are required to report information relating to an interest in ordinary shares,
subject to certain exceptions (including an exception for securities held in certain accounts maintained by financial institutions). U.S. Holders are encouraged
to consult their own tax advisers regarding the effect of this reporting requirement on their ownership and disposition of ordinary shares.
3.8% Medicare Tax on “Net Investment Income”
Certain U.S. Holders who are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends and capital
gains from the sale or other disposition of ordinary shares. U.S. Holders are encouraged to consult their own tax advisers regarding the effect of this
additional tax on their ownership and disposition of ordinary shares.
Backup Withholding Tax and Information Reporting Requirements
United States backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock.
Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, ordinary shares made within the
United States, or by a United States payor or United States middleman, to a holder of ordinary shares, other than an exempt recipient (including a corporation,
a payee that is not a United States person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup
withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a United
States payor or United States middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number
or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate currently is
28.0%.
Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the beneficial owner’s United States federal income
tax liability, if any, provided that the required information is furnished to the IRS.
The above description is not intended to constitute a complete analysis of all tax consequences relating to ownership and disposition of our ordinary
shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are currently subject to the information and periodic reporting requirements of the Exchange Act, and file periodic reports and other information with the
SEC through its electronic data gathering, analysis and retrieval (EDGAR) system. Our securities filings, including this annual report and the exhibits thereto,
are available for inspection and copying at the public reference facilities of the SEC located at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. You
may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC
20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The Commission also maintains a website at
http://www.sec.gov from which certain filings may be accessed. As of November 2010, our filings are also available at the TASE’s website at
http://maya.tase.co.il and at the Israeli Securities Authority’s website at http://www.magna.isa.gov.il.
86
As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers,
directors and principal shareholders will be 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.
I. Subsidiary Information
Not applicable.
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may
adversely impact our consolidated financial position, results of operations or cash flows.
Risk of Interest Rate Fluctuation
We do not have any long-term borrowings. We have a significant amount of cash that is currently invested primarily in interest bearing investment such as
bank time deposits, money market funds, U.S. government treasury bills and available for sale marketable securities. These investments expose us to the
changes in interest rates. If interest rates further decline, our results of operations may be adversely affected due to lower interest income from these
investments. The primary objective of our investment activities is to preserve principal while maximizing the income that we receive from our investments
without significantly increasing risk and loss. Our investments are exposed to market risk due to fluctuation in interest rates, which may affect our interest
income and the fair market value of our investments. We manage this exposure by performing ongoing evaluations of our investments. Due to the short and
medium-term maturities nature of our investments to date, their carrying value approximates the fair value. We generally hold investments to maturity in
order to limit our exposure to interest rate fluctuations.
Foreign Currency Exchange Risk
Our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency,
mainly against the shekel. In 2012, we derived our revenues primarily in U.S. dollars and a portion in Euros and other currencies. Although a substantial part
of our expenses were denominated in U.S. dollars, a significant portion of our expenses were denominated in shekels and to a lesser extent in Euros and other
currencies. Our shekel-denominated expenses consist principally of salaries and related personnel expenses. We monitor foreign currency exposure and, from
time to time, may use various instruments to preserve the value of sales transactions and commitments; however, this cannot assure our protection against
risks of currency fluctuations. For more information regarding foreign currency related risks, see “ITEM 3: Key Information—Risk Factors—Our
international operations expose us to the risk of fluctuations in currency exchange rates.”
We use currency forward contracts together with currency options primarily to hedge payments in NIS. These transactions constitute a future cash flow
hedge. As of December 31, 2012, we had outstanding forward and option contracts in the amounts of $11.5 million and $1.7 million, respectively. These
transactions were for a period of up to twelve months. As of December 31, 2012, the fair value of the above mentioned foreign currency derivative contracts
was $(0.6) million.
87
ITEM 12: Description of Securities Other Than Equity Securities
Not applicable.
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceed
A. Material Modifications to the Rights of Security Holders
None.
E. Use of Proceeds
The effective date of the registration statement (file no. 333-138313) for our initial public offering of ordinary shares, par value NIS 0.10, was November 15,
2006. The offering commenced on November 15, 2006 and terminated after the sale of all the securities registered. Lehman Brothers Inc. acted as the sole
book-running manager for the offering, Deutsche Bank Securities Inc. acted as co-lead manager and, CIBC World Markets Corp. and RBC Capital Markets
Corporation acted as co-managers. We registered 6,500,000 ordinary shares in the offering. We sold 6,500,000 ordinary shares at an aggregate offering price
of $78 million at a price per share of $12.00. Under the terms of the offering, we incurred aggregate underwriting discounts of $5.5 million. We also incurred
expenses of $2 million in connection with the offering. The net proceeds that we received as a result of the offering were $70.5 million.
From the effective date of the registration statement and until December 31, 2012, the net proceeds had been invested in cash equivalents, marketable
securities, capital expenditure and other corporate purposes. None of the net proceeds of the offering was paid directly or indirectly to any director, officer,
general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates.
We conducted a subsequent public offering of our ordinary shares on November 15, 2011 raising net proceeds of $85 million.
ITEM 15: Controls and Procedures
(a) Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December
31, 2012. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2012, our disclosures
controls and procedures were effective at the reasonable assurance level.
88
(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process 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. Our internal control over financial reporting includes those policies and procedures
that:
·
·
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
directors;
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the
possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financial reporting can
provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further, because of
changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, our
management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Our management has concluded, based on its assessment, that our internal control over financial reporting was effective as of
December 31, 2012.
Our independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, have issued an audit report on the effectiveness of our
internal control over financial reporting. The report is included with our consolidated financial statements included elsewhere in this annual report.
(c) Changes in Internal Control over Financial Reporting. During the period covered by this report, no changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred 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
The board of directors has determined that Nurit Benjamini is the financial expert serving on its audit committee and that Ms. Benjamini is independent under
the rules of The NASDAQ Stock Market.
ITEM 16B: Code of Ethics
We have adopted a code of ethics applicable to our Chief Executive Officer, Chief Financial Officer, controller and persons performing similar functions. This
code has been posted on our website, www.allot.com.
89
ITEM 16C: Principal Accountant Fees and Services Fees paid to the Auditors
The following table sets forth, for each of the years indicated, the fees expensed by our independent registered public accounting firm.
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
Total
Year ended December, 31,
2011
2012
(in thousands of U.S. dollars)
510 $
70
20
50
650 $
285
105
73
41
504
$
$
(1) “Audit fees” include fees for services performed by our independent public accounting firm in connection with our annual audit for 2011 and 2012,
certain procedures regarding our quarterly financial results submitted on Form 6-K, the filing of our Form F-3, fees related to public offering, and
consultation concerning financial accounting and reporting standards.
(2) “Audit-Related fees” relate to assurance and associated services that are traditionally performed by the independent auditor, including: accounting
consultation and consultation concerning financial accounting, reporting standards and due diligence investigations.
(3) “Tax fees” include fees for professional services rendered by our independent registered public accounting firm for tax compliance, transfer pricing and
tax advice on actual or contemplated transactions.
(4) “Other fees” include fees for services rendered by our independent registered public accounting firm with respect to government incentives and other
matters.
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee pre-approved all audit and non-audit services provided to us and to our subsidiaries during the periods listed above.
ITEM 16D: Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM 16E: Purchase of Equity Securities by the Company and Affiliated Purchasers
Not applicable.
ITEM 16F: Change in Registrant’s Certifying Accountant
None.
ITEM 16G: Corporate Governance
As a foreign private issuer, we are permitted under NASDAQ Marketplace Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the
NASDAQ Stock Market requirements, provided we disclose which requirements we are not following and the equivalent Israeli requirement. We must also
provide NASDAQ with a letter from outside counsel in our home country, Israel, certifying that our corporate governance practices are not prohibited by
Israeli law.
90
We rely on this “foreign private issuer exemption” with respect to the following items:
· We follow the requirements of Israeli law with respect to the quorum requirement for meetings of our shareholders, which are different from the
requirements of Rule 5620(c). Under our articles of association, the quorum required for an ordinary meeting of shareholders consists of at least two
shareholders present in person, by proxy or by written ballot, who hold or represent between them at least 25% of the voting power of our shares,
instead of 33 1/3% of the issued share capital provided by under the NASDAQ Global Market requirements. This quorum requirement is based on
the default requirement set forth in the Companies Law, 1999, or the Companies Law. We submitted a letter from our outside counsel in connection
with this item prior to our initial public offering in November 2006.
· We do not seek shareholder approval for equity compensation plans in accordance with the requirements of the Companies Law, which does not
fully reflect the requirements of Rule 5635(c). Under Israeli law, we may amend our 2006 Incentive Compensation Plan by the approval of our
board of directors, and without shareholder approval as is generally required under Rule 5635(c). Under Israeli law, the adoption and amendment of
equity compensation plans, including changes to the reserved shares, do not require shareholder approval. We submitted a letter from our outside
counsel in connection with this item in June 2008.
· We do not comply with the requirement that a majority of our board consist of independent directors as required by Rule 5605(b). Israeli law
requires that an Israeli company whose securities are listed for trading on a stock exchange outside of Israel have two members of its board of
directors that are “external directors” (as defined under the Companies Law) with qualifications (including financial, accounting and professional
capabilities as required by the Companies Law) and additional directors with financial, accounting and professional capabilities as determined by the
board of directors. The Companies Law also requires that at least three members be appointed to the audit committee, including all of the “external
directors,” that a majority of the members of such committee should be “independent directors” (as defined under the Companies Law) and that
certain persons (e.g., the chairperson or any controlling shareholders) not be appointed as members of such committee. We submitted a letter from
our outside counsel in connection with this item in December 2011.
We are subject to additional Israeli corporate governance requirements applicable to companies incorporated in Israel whose securities are listed for
trading on a stock exchange outside of Israel.
We may in the future provide NASDAQ with an additional letter or letters notifying NASDAQ that we are following our home country practices, consistent
with the Companies Law and practices, in lieu of other requirements of Rule 5600.
ITEM 17: Financial Statements
Not applicable.
ITEM 18: Financial Statements
See Financial Statements included at the end of this report.
ITEM 19: Exhibits
See exhibit index incorporated herein by reference.
PART III
91
The registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 21, 2013
Allot Communications Ltd.
By: /s/ Rami Hadar
Rami Hadar
Chief Executive Officer and President
92
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
Number
1.1
1.2
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
8.1
11.1
12.1
12.2
13.1
Description
Articles of Association of the Registrant
Certificate of Name Change (1)
Specimen share certificate (1)
Non-Stabilized Lease Agreement, dated February 13, 2006, by and among, Aderet Hod Hasharon Ltd., Miritz, Inc., Leah and Israel Ruben
Assets Ltd., Tamar and Moshe Cohen Assets Ltd., Drish Assets Ltd., S. L. A. A. Assets and Consulting Ltd., Iris Katz Ltd., Y. A. Groder
Investments Ltd., Ginotel Hod Hasharon 2000 Ltd. and Allot Communications Ltd. (1)
Key Employees of Subsidiaries and Consultants Share Incentive Plan (1997) (1)
Key Employees Share Incentive Plan (1997) (1)
Key Employees Share Incentive Plan (2003) (1)
2006 Incentive Compensation Plan
Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd. and the Registrant* (2)
Amendment No. 1, dated September 1, 2012, to the Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd.
and the Registrant*
List of Subsidiaries of the Registrant
Code of Ethics (3)
Certification of Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications)
Certification of Principal Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications)
Certification of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(b) and Rule 15d-14(b) (Section 906
Certifications)
Consent of Kost Forer Gabbay & Kasierer
14.1
__________________________
(1)
Previously filed with the Securities and Exchange Commission on October 31, 2006 pursuant to a registration statement on Form F-1 (File No. 333-
138313) and incorporated by reference herein.
(2)
(3)
(4)
*
Previously filled with the Securities and Exchange Commission on June 27, 2008 as Exhibit 4.11 to Form 20-F for the year ended December 31,
2007 and incorporated by reference herein.
Previously filled with the Securities and Exchange Commission on June 28, 2007 as Exhibit 4 to Form 20-F for the year ended December 31, 2006
and incorporated by reference herein.
This document was furnished in accordance with SEC Release Nos. 33-8212 and 34-47551.
Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to the
Registrant’s application requesting confidential treatment under Rule 24b-2 of the Exchange Act.
93
ALLOT COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2012
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-3 - F-5
F-6 - F-7
F-8
F-9 - F-10
F-11 - F-12
F-13 - F-49
Kost Forer Gabbay &
Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ALLOT COMMUNICATIONS LTD.
We have audited the accompanying consolidated balance sheets of Allot Communications Ltd. ("the Company") as of December 31, 2012 and 2011,
and the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2012. 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 at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 21, 2013 expressed an unqualified opinion thereon.
Tel Aviv, Israel
March 21, 2013
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 3
Kost Forer Gabbay &
Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
ALLOT COMMUNICATIONS LTD.
We have audited Allot Communications Ltd. ("the Company") and its subsidiaries internal control over financial reporting as of December 31, 2012,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting. 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.
F - 4
Kost Forer Gabbay &
Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of the Company and its subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2012 and our report dated March 21, 2013
expressed an unqualified opinion thereon.
Tel Aviv, Israel
March 21 , 2013
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 5
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash and deposits
Short-term bank deposits
Available-for-sale marketable securities
Trade receivables (net of allowance for doubtful accounts of $ 280 and $ 511 at December 31, 2012 and 2011
$
respectively)
Other receivables and prepaid expenses
Inventories
Total current assets
NON-CURRENT ASSETS:
Severance pay fund
Deferred taxes
Other assets
Total non-current assets
PROPERTY AND EQUIPMENT, NET
INTANGIBLE ASSETS, NET
GOODWILL
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
ALLOT COMMUNICATIONS LTD.
December 31,
2012
2011
50,026 $
146
78,042
14,841
20,236
6,815
9,963
116,682
1,138
24,000
17,580
11,926
5,950
10,501
180,069
187,777
213
1,525
239
1,977
178
210
146
534
6,609
5,352
12,322
20,814
244
3,151
$
221,791 $
197,058
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables
Employees and payroll accruals
Deferred revenues
Liability related to settlement of OCS grants (See note 11a)
Other payables and accrued expenses
Total current liabilities
LONG-TERM LIABILITIES:
Deferred revenues
Accrued severance pay
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.1 par value - Authorized: 200,000,000 shares at
December 31, 2012 and 2011; Issued and outstanding: 32,547,151 and
30,950,234 shares at December 31, 2012 and 2011, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
ALLOT COMMUNICATIONS LTD.
December 31,
2012
2011
$
4,809 $
8,182
13,829
15,886
5,765
2,684
5,050
16,694
-
4,412
48,471
28,840
3,945
254
5,430
219
4,199
5,649
761
233,985
1,760
(67,385)
720
223,306
(810)
(60,647)
169,121
162,569
$
221,791 $
197,058
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands, except share and per share data
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Expenses related to settlement of OCS grants (See note 11a)
Total cost of revenues
Gross profit
Operating expenses:
Research and development (net of grant participations of $
2,855, $ 3,674 and $ 2,774 for the years ended December 31,
2012, 2011 and 2010, respectively)
Sales and marketing
General and administrative
Total operating expenses
Operating income (loss)
Financial expenses (income), net
Income (loss) before income tax expenses (benefit)
Income tax expenses (benefit)
Net income (loss)
Unrealized gain (loss) on available-for-sale marketable securities
Unrealized gain (loss) on foreign currency cash flow hedges
transactions
Total comprehensive income (loss)
Net earnings (loss) per share:
Basic
Diluted
Weighted average number of shares used in per share computations
of net earnings (loss):
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2011
2012
2010
$
77,127 $
27,625
104,752
56,810 $
20,943
77,753
26,857
4,180
15,886
46,923
19,540
2,635
-
22,175
40,852
16,120
56,972
14,015
1,970
-
15,985
57,829
55,578
40,987
22,060
34,127
10,664
13,222
26,543
7,474
11,264
22,021
5,473
66,851
47,239
38,758
(9,022)
(1,358)
(7,664)
(926)
8,339
(415)
8,754
(55)
2,229
7,907
(5,678)
84
(6,738) $
8,809 $
(5,762)
15
68
(155)
2,555
(4,168) $
(1,312)
7,565 $
(23)
(5,940)
(0.21) $
(0.21) $
0.35 $
0.33 $
(0.25)
(0.25)
$
$
$
$
31,959,921
25,047,771
22,831,014
31,959,921
27,071,872
22,831,014
ALLOT COMMUNICATIONS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data
Ordinary shares
Outstanding
shares
Amount
Additional
paid-in capital
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
shareholders'
equity
Balance at January 1, 2010
22,397,062 $
492 $
128,476 $
(4,862) $
(63,694) $
60,412
Exercise of stock options
Cashless exercise of options
Compensation related to options granted to
1,244,051
165,200
non-employees
Stock-based compensation
Other comprehensive loss
Realized loss on available-for-sale
marketable securities
Net loss
-
-
-
-
-
35
*)
-
-
-
-
-
3,017
*)
115
1,875
-
-
-
-
-
-
-
(178)
5,474
-
-
-
-
-
-
-
(5,762)
3,052
-
115
1,875
(178)
5,474
(5,762)
Balance at December 31, 2010
23,806,313 $
527 $
133,483 $
434 $
(69,456) $
64,988
to
related
Issuance of shares capital
secondary offering, net of issuance costs **)
Exercise of stock options
Stock-based compensation
Other comprehensive loss
Net income
6,325,000
818,921
-
-
-
169
24
-
-
-
84,753
2,814
2,256
-
-
-
-
-
(1,244)
-
-
-
-
-
8,809
84,922
2,838
2,256
(1,244)
8,809
Balance at December 31, 2011
30,950,234 $
720 $
223,306 $
(810) $
(60,647) $
162,569
*)
**)
Represents an amount lower than $ 1.
$ 252 of issuance costs.
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
ALLOT COMMUNICATIONS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data
Ordinary shares
Outstanding
shares
Amount
Additional
paid-in capital
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
shareholders'
equity
Exercise of stock options
Stock-based compensation
Total comprehensive loss:
Other comprehensive gain
Net loss
1,596,917
-
-
-
41
-
-
-
5,862
4,817
-
-
-
-
-
-
2,570
-
-
(6,738)
5,903
4,817
2,570
(6,738)
Balance at December 31, 2012
32,547,171
761
233,985
1,760
(67,385)
169,121
Accumulated other comprehensive income (loss):
Year ended December 31,
2011
2012
2010
Accumulated unrealized gain (loss) on available-for-sale marketable securities
Accumulated unrealized gain (loss) on foreign currency cash flows hedges
$
61 $
1,699
45 $
(855)
Accumulated other comprehensive income (loss)
$
1,760 $
(810) $
(23)
457
434
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
ALLOT COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Capital loss
Realized loss related to sale of available-for-sale marketable securities
Decrease in accrued severance pay, net
Decrease in other assets
Decrease (increase) in accrued interest and amortization of premium on marketable securities
Increase in trade receivables
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories, net
Decrease (increase) in deferred taxes
Increase (decrease) in trade payables
Increase (decrease) in employees and payroll accruals
Increase (decrease) in deferred revenues
Increase (decrease) in other payables and accrued expenses
Liability related to settlement of OCS grants (See Note 11a)
Year ended December 31,
2011
2012
2010
$
(6,738) $
8,809 $
(5,762)
5,067
4,817
20
-
-
6
212
(8,139)
1,159
3,233
(931)
(1,287)
2,392
(7,089)
84
15,886
2,878
2,256
7
-
12
98
151
(1,187)
(970)
329
(227)
(2,456)
(748)
7,423
(1,178)
-
2,700
1,990
70
7,712
75
41
(189)
(2,897)
(1,454)
(5,784)
8
1,998
1,868
7,188
(213)
-
Net cash provided by operating activities
8,692
15,197
7,351
Cash flows from investing activities:
Decrease (increase) in restricted cash and deposits
Investments in short-term bank deposits
Redemption of short-term bank deposits
Purchase of property and equipment
Proceeds from sale of property and equipment
Investment in available-for sale marketable securities
Proceeds from redemption of available-for-sale marketable securities
Proceeds from maturity of available-for-sale marketable securities
Payments (and loan issued) for subsidiaries acquired, net of cash (see schedule A below)
913
(54,042)
-
(3,820)
-
(8,194)
750
9,986
(24,892)
(78)
(24,000)
-
(2,953)
30
(4,735)
803
1,800
-
-
-
1,264
(2,334)
168
(16,765)
13,652
-
-
Net cash used in investing activities
(79,299)
(29,133)
(4,015)
The accompanying notes are an integral part of the consolidated financial statements.
F - 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Issuance of shares related to secondary offering, net
Proceeds from exercise of stock options
Repayment of bank loan
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2011
2012
2010
-
5,903
(1,952)
84,922
2,838
-
-
3,052
-
3,951
87,760
3,052
(66,656)
116,682
73,824
42,858
6,388
36,470
Cash and cash equivalents at the end of the year
$
50,026 $
116,682 $
42,858
Supplementary cash flow information:
Cash paid (received) during the year for:
Taxes
Schedule A - Acquisitions of subsidiaries (see also Note 1b):
Estimated net fair value of assets acquired and liabilities assumed at the date of acquisition was as
follows:
Working capital, net (excluding cash and cash equivalents)
Equipment and other assets
Intangible assets
Goodwill
Deferred tax assets, net
Long-term liabilities
Total Consideration
Non cash - Contingent Consideration (See also note 1b)
Payments (and loan issued) for subsidiaries acquired, net of cash
The accompanying notes are an integral part of the consolidated financial statements.
F - 12
$
(48) $
100 $
168
$
$
$
(4,501) $
597
14,025
17,663
409
(1,952)
26,241 $
(1,349) $
24,892 $
- $
-
-
-
-
- $
- $
- $
-
-
-
-
-
-
-
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL
ALLOT COMMUNICATIONS LTD.
a. Allot Communications Ltd. ("the Company") was incorporated in November 1996 under the laws of the State of Israel. The Company is
engaged in developing, selling and marketing intelligent IP service optimization solutions for mobile, DSL and wireless broadband
carriers, cable operator service providers, and enterprises. The Company's portfolio of hardware platforms and software applications
utilizes advanced deep packet inspection technology to transform broadband pipes into smart networks that can rapidly and efficiently
manage data over mobile and wireline networks and deploy value added Internet services. The Company's products consist of the Service
Gateway and NetEnforcer traffic management systems, the NetXplorer and Subscribe Management Platform application management
suites and value added services such as the Service Protector network protection solution, the MediaSwift video caching solution and the
WebSafe network service.
The Company's Ordinary Shares are listed in the NASDAQ Global Select Market under the symbol "ALLT" from its initial public
offering in November 2006. Since November, 2010, the Company's Ordinary Shares have been listed for trading in the Tel Aviv Stock
Exchange as well. In November 2011, the Company completed a secondary public offering for a total amount of approximately $85,000
at an average price per share of $13.47.
The Company holds eight wholly-owned subsidiaries (the Company together with said subsidiaries shall collectively be referred to as
"Allot"): Allot Communications, Inc. in Woburn, Massachusetts, United-States ("the U.S. subsidiary"), which was incorporated in 1997
under the laws of the State of California, Allot Communication Europe SARL in Sophia, France ("the European subsidiary"), which was
incorporated in 1998 under the laws of France, Allot Communications Japan K.K. in Tokyo, Japan ("the Japanese subsidiary"), which was
incorporated in 2004 under the laws of Japan, Allot Communication (UK) Limited ("the UK subsidiary"), which was incorporated in
2006 under the laws of England and Wales, Allot Communications (Asia Pacific) Pte. Ltd. ("the Singaporean subsidiary"), which was
incorporated in 2006 under the laws of Singapore, Allot Communications (New Zealand) Limited. ("the NZ subsidiary"), which was
incorporated in 2007 under the laws of New Zealand, Ortiva Wireless Inc. ("Ortiva") in San Diego, California which was incorporated in
2004 under the laws of the state of Delaware and Oversi Networks Ltd. ("Oversi") in Petach Tikva, Israel, which was incorporated in
2004 under the laws of Israel.
As of December 31, 2012, Ortiva was merged into Allot Communications Inc and Oversi was merged into Allot Communications Ltd.
The U.S. subsidiary commenced operations in 1997. It is engaged in the sale, marketing and technical support and research and
development services in the Americas of products manufactured and imported by the Company. The European, Japanese, UK and
Singaporean subsidiaries are engaged in marketing and technical support services of the Company's products in Europe, Japan, UK and
Asia Pacific, respectively. The NZ subsidiary commenced its operations in 2008 and is engaged in the research and development
activities related to the Service Protector and technical support services for this product.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL (Cont.)
b. Acquisitions:
ALLOT COMMUNICATIONS LTD.
1.
On May 15, 2012 ("the Ortiva acquisition date"), the Company entered into a share purchase agreement (the "Ortiva SPA") with
the shareholders of Ortiva Wireless Inc. ("Ortiva") a private, California-based company that develops video optimization
solutions for mobile and internet networks. The Company paid $ 10,816 in cash as consideration for all the shares of Ortiva.
The acquisition was accounted for using the purchase method of accounting in accordance with ASC 805. Accordingly, the
purchase price was allocated according to the estimated fair values of the assets acquired and liabilities assumed and the excess
of the purchase price over the net tangible and identified intangible assets was assigned to goodwill. The fair value of intangible
assets was determined by management with the assistance of a third party valuation.
The results of Ortiva's operations have been included in the Company’s consolidated financial statements since the Ortiva
acquisition date. Revenues recognized from the Ortiva acquisition date to December 31, 2012 were $ 3,404.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Current assets
Equipment
Deferred revenues
Current and non-current liabilities
Deferred tax assets, net
Technology
Backlog
Goodwill
Net assets acquired
Fair value
$
1,967
459
(1,803)
(3,949)
409
3,899
910
8,924
$
10,816
Technology includes Ortiva’s internally developed proprietary technologies and platforms for video optimization. The
technology is being amortized over the estimated useful life of 9.6 years using the straight line method.
Backlog from customer orders is amortized over the estimated useful life of 1.6 years.
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL (Cont.)
ALLOT COMMUNICATIONS LTD.
2.
On September 4, 2012, (the "Oversi acquisition date") the Company entered into a share purchase agreement (the "Oversi SPA")
with the shareholders of Oversi Networks Ltd ("Oversi"), a private, Israeli-based company that develops and sells products and
systems for caching Internet content.
The total consideration for the acquisition was $ 17,349, which consisted of $ 16,000 in cash and contingent consideration
estimated at fair value of $ 1,349 at the Oversi acquisition date.
Pursuant to the Oversi SPA, the Company has a contingent liability to pay additional consideration if Oversi reaches a certain
threshold of bookings for the year ended December 31, 2012. As of December 31, 2012, the fair value of the contingent
consideration was determined to be $ 1,088, to be paid on April 15, 2013, and is presented in other payables and accrued
expenses. The change in fair value of the contingent consideration was recorded in general and administrative expenses.
The acquisition of Oversi was accounted for using the purchase method of accounting in accordance with ASC 805.
Accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities
assumed. The excess of the purchase price over the net tangible and identified intangible assets was assigned to goodwill. The
fair value of the intangible assets and the contingent consideration was determined by management with the assistance of a third
party valuation.
The results of Oversi's operations have been included in the Company consolidated financial statements since September 4,
2012. Revenues recognized from the Oversi acquisition date to December 31, 2012 were $ 1,954.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Current assets
Equipment and other assets
Deferred revenues
Other current liabilities
Bank loan
Technology
Backlog
Customer relationships
Goodwill
Net assets acquired
F - 15
Fair value
$
4,182
138
(936)
(2,038)
(1,952)
6,826
1,491
899
8,739
$
17,349
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL (Cont.)
ALLOT COMMUNICATIONS LTD.
Technology includes rich-media caching and content delivery solutions for peer to peer, Internet video and other media applications. The
technology is amortized over the estimated useful life of 6.3 years using the straight line method.
Backlog from customer orders is amortized over the estimated useful life of 1.4 years.
Customer relationships is derived from customer contracts and related customer relationships with existing customers. Customer
relationships is amortized based on the accelerated method over the estimated useful life of 4.3 years.
Unaudited pro forma condensed results of operations:
The following represents the unaudited consolidated pro forma revenue and net loss for the years ended December 31, 2012 and 2011, to
give effect to the acquisitions of Ortiva and Oversi as if they had occurred on January 1, 2011. The pro forma information is not
necessarily indicative of the results of operations that would have been had the acquisition actually occurred on January 1, 2011, nor does
it purport to represent the results of operations for future periods.
Revenues
Net loss
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
Year ended December 31,
2012
2011
Unaudited
$
$
107,598 $
(16,938) $
87,177
( 915)
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
a. Use of estimates:
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates,
judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable
based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates.
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
b. Financial statements in U.S. dollars:
ALLOT COMMUNICATIONS LTD.
The majority of the revenues of the Company and its subsidiaries are generated in U.S. dollars ("dollar") or linked to the dollar. In
addition, a major portion of the Company's and certain of its subsidiaries' costs are incurred or determined in dollars. The Company's
management believes that the dollar is the currency of the primary economic environment in which the Company and its subsidiaries
operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with
Accounting Standards Codification No. 830, "Foreign Currency Matters" ("ASC No. 830"). All transactions gains and losses from the
remeasurement of 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 subsidiaries. Intercompany balances and transactions
have been eliminated upon consolidation.
d. Cash and cash equivalents:
The Company considers all unrestricted highly liquid investments which are readily convertible into cash, with maturity of three months
or less at the date of acquisition, to be cash equivalents.
e. Restricted cash and deposits:
Restricted cash and deposits of $146 are held in favor of financial institutions towards fulfillments of forward contract and operating
obligations.
f.
Short-term bank deposits:
Short-term bank deposits are deposits with maturities of more than three months but less than one year. The deposits are in dollars, New
Israeli Shekels ("NIS") and Euros, and bear interest at annual weighted average rate of 1.1% at December 31, 2012. The short-term
deposits are presented at cost.
F - 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g. Marketable securities:
ALLOT COMMUNICATIONS LTD.
The Company accounts for its investments in marketable securities using Accounting Standards Codification No. 320, "Investments –
Debt and Equity Securities" ("ASC No. 320").
The Company's management determines the appropriate classification of marketable securities at the time of purchase and evaluates such
designation as of each balance sheet date. The Company classifies all of its investments in marketable securities as available for sale.
Available for sale securities are carried at fair value, with the unrealized gains and losses, reported in "accumulated other comprehensive
income (loss)" in shareholders' equity. Realized gains and losses on sale of investments are included in earnings and are derived using the
specific identification method for determining the cost of securities. The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in
financial income, net, if any.
h.
Inventories:
Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-moving
items or technological obsolescence for which recoverability is not probable. Inventory write-offs due to slow moving items and
technological obsolescence totaled $ 1,370, $ 480 and $ 1,100 in 2012, 2011 and 2010, respectively.
Cost is determined as follows:
Raw materials - using the "first in, first out" (FIFO) cost method.
Finished goods -using the "first in first out" (FIFO) cost method, manufacturing cost and allocable indirect costs.
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:
Lab equipment
Computers and peripheral equipment
Office furniture
Leasehold improvements
F - 18
%
25 - 33
15 - 33
6 - 15
By the shorter of term of the lease or the useful life of the
asset
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j. Goodwill impairment:
ALLOT COMMUNICATIONS LTD.
Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Under Accounting
Standards Codification No. 350, "Intangibles-Goodwill and Other" ("ASC No. 350"), goodwill and intangible assets deemed to have
indefinite lives are tested for impairment annually, or more often if there are indicators of impairment present.
In accordance with ASC No. 350 the Company performs an annual impairment test at December 31 each year. In determining a two-step
goodwill impairment test was necessary under the new authoritative guidance issued by the Financial Accounting Standards Board
("FASB"), the Company has elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value
of its reporting operating unit is less than its carrying amount. If the Company determines that it is more likely than not that its fair value
is less than its carrying amount, then the two-step goodwill impairment test would be performed. 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 criteria of being a single reporting unit for accounting
purposes. The Company has performed an annual impairment analysis as of December 31, 2012 and determined that the carrying value of
the reporting unit was less than the fair value of the reporting unit. Fair value is determined using market capitalization. During years
2012, 2011 and 2010 no impairment losses were recorded.
k.
Impairment of long lived assets and intangible assets subject to amortization:
Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360,
"Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. As of December 31, 2012 and 2011, no impairment losses have been identified.
F - 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition,
intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of
intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life are
amortized over their estimated useful lives. Some of the acquired intangible assets are amortized over their estimated useful lives in
proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer relationships as
compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line basis.
During 2010, 2011 and 2012, no impairment losses were recorded.
l. Revenue recognition:
The Company generates revenues mainly from the sale of hardware and software products along with related maintenance and support
services. At times, these arrangements may also include professional services, such as installation services or training. The Company
generally sells its products through resellers, distributors, OEMs and system integrators, all of whom are considered end-customers from
the Company's perspective.
Revenues from product sales are recognized when persuasive evidence of an agreement exists, title and risk of loss have transferred, no
significant performance obligations remain, product payment is not contingent upon performance of installation or service obligations,
the fee is fixed or determinable and collectability is probable. In instances where final acceptance of the product or service is specified by
the customer, revenue recognition is deferred until all acceptance criteria have been met.
Maintenance and support related revenues included in multiple element arrangements are deferred and recognized on a straight-line basis
over the term of the applicable maintenance and support agreement. Other services are recognized upon the completion of installation or
when the service is provided. In instances where the services provided in a multiple element arrangement are considered essential to the
functionality of the product and payment of the product is contingent upon performance of the services, the sales of the products and
services would be considered one unit of accounting. Deferred revenues are classified as short and long term and recognized as revenues
at the time the respective elements are provided.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
Under historical accounting principles, the Company was required to account for sales of its products in accordance with ASC 985-605.
ASC 985-605 generally required revenue earned on software arrangements involving multiple elements to be allocated to each element
based on the relative objective fair value of the elements. Accordingly, revenues were allocated to the different elements in the
arrangement under "the residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered
elements and no VSOE exists for the delivered elements.
Under the residual method, at the outset of the arrangement with a customer, the Company deferred revenues for the VSOE of its
undelivered elements (maintenance and support) and recognized revenue for the remainder of the arrangement fee attributable to the
elements initially delivered in the arrangement (hardware and software products).
In October 2009, the FASB issued ASU 2009-14, "Certain Arrangements That Include Software Elements, (amendments to ASC Topic
985, Software)" (ASU 2009-14), which changed the accounting model for revenue arrangements that include both tangible products and
software elements. Tangible products containing software components and non-software components that function together to deliver the
tangible product’s essential functionality is no longer within the scope of the software revenue guidance in Subtopic 985-605 of the
Codification. Accordingly, the Company was considered outside the scope of Subtopic 985-605. For 2011 and future periods, pursuant to
the guidance of ASU 2009-13, "Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition)"
(ASU 2009-13) and ASU 2009-14, when a sales arrangement contains multiple elements, such as products and services, the Company
allocates revenues to each element based on a selling price hierarchy. The selling price for a deliverable is based on VSOE if available,
third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. In
multiple element arrangements, revenues are allocated to each separate unit of accounting for each of the deliverables using the relative
selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.
The selling price of products was determined based on the ESP, as neither VSOE nor TPE was available. The ESP was determined by
reviewing historical transactions and considering multiple other factors, including but not limited to, pricing practices including
discounting, and competition.
As of January 1, 2011, the Company changed its pricing policy in respect of the sale of maintenance and support in new, multiple element
arrangements. For the maintenance and support under the new pricing policy, the Company determined the ESP for the year ended
December 31, 2011 in multiple-element arrangements based on reviewing historical transactions, and considering several other external
and internal factors including, but not limited to, pricing practices including discounting and competition.
For the year ended December 31, 2012, for maintenance and support, the Company determined the selling price based on VSOE of the
price charged based on standalone sales (renewals) of such elements using a consistent percentage of the Company's product price lists in
the same territories.
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
ALLOT COMMUNICATIONS LTD.
The Company adopted these standards on January 1, 2011 on a prospective basis for new and materially modified arrangements
originating after January 1, 2011.
The Company provides a provision for product returns and stock rotation based on its experience with historical sales returns, stock
rotations and other known factors. Such provisions amounted to $ 785 and $ 725 as of December 31, 2012 and 2011, respectively.
m. Advertising expenses:
Advertising expenses are charged to the statement of operations, as incurred. Advertising expenses for the years ended December 31,
2012, 2011 and 2010 amounted to $ 1,002, $ 885 and $ 635, respectively.
n. Research and development costs:
Accounting Standards Codification No. 985, "Software" ("ASC No. 985"), requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is established upon the completion of a working model.
The Company does not incur material costs between the completion of a working model and the point at which the products are ready for
general release. Therefore, research and development costs are charged to the consolidated statement of operations as incurred.
o. Severance pay:
The liability in Israel for substantially all of the Company`s employees in respect of severance pay liability is calculated in accordance
with Section 14 of the Severance Pay Law -1963 (herein- "Section 14"). Section 14 states that Company's contributions for severance pay
shall be in line of severance compensation and upon release of the policy to the employee, no additional obligations shall be conducted
between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee.
Furthermore, the related obligation and amounts deposited on behalf of such obligation under Section 14, are not stated on the balance
sheet, because pursuant to current ruling, they are legally released from obligation to employees once the deposits have been paid.
There are a limited number of employees in Israel, for whom the Company is liable for severance pay. The Company's liability for
severance pay for its Israeli employees was calculated pursuant to Section 14, based on the most recent monthly salary of its Israeli
employees multiplied by the number of years of employment as of the balance sheet date for such employees.
F - 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
ALLOT COMMUNICATIONS LTD.
The Company's liability was partly provided by monthly deposits with severance pay funds and insurance policies and the remainder by
an accrual.
Severance expense for the years ended December 31, 2012, 2011 and 2010, amounted to $ 1,486, $ 1,280 and $ 925, respectively.
p. Accounting for stock-based compensation:
The Company accounts for stock based compensation in accordance with Accounting Standards Codification No. 718, "Compensation -
Stock Compensation" ("ASC No. 718") that 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.
ASC No. 718 requires forfeitures to be estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from
those estimates.
The following table sets forth the total stock-based compensation expense resulting from stock options granted to employees included in
the consolidated statements of operations, for the years ended December 31, 2012, 2011 and 2010:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Year ended December 31,
2011
2012
2010
$
222 $
1,186
2,060
1,349
103 $
442
1,001
710
95
352
851
692
Total stock-based compensation expense
$
4,817 $
2,256 $
1,990
F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
The Company selected the binomial option pricing model as the most appropriate fair value method for its stock-based compensation
awards with the following assumptions for the years ended December 31, 2012, 2011 and 2010:
Suboptimal exercise multiple
Risk free interest rate
Volatility
Dividend yield
2012
2.5-3.5
0.15%-1.39%
51%-66%
0%
Year ended December 31,
2011
2010
2.5-3.5
0.11%-5.46%
50%-53%
0%
2.5-3.5
0.25%-5.54%
50%-52%
0%
The expected annual post-vesting and pre-vesting forfeiture rates affects the number of exercisable options. Based on the Company's
historical experience, the annual post-vesting and pre-vesting forfeiture rates are 0%-14%.
The computations of expected volatility and suboptimal exercise multiple are based on the average of the Company's realized historical
stock price volatility and certain peer companies that the Company considered to be comparable based on market capitalization and type
of technology platform. The computation of the suboptimal exercise multiple and the forfeiture rates are based on the grantees expected
exercise prior and post vesting termination behavior. The interest rate for period within the contractual life of the award is based on the
U.S. Treasury Bills yield curve in effect at the time of grant. The Company currently has no plans to distribute dividends and intends to
retain future earnings to finance the development of its business.
The expected life of the stock options represents the weighted-average period the stock options are expected to remain outstanding and is
a derived output of the binomial model. The expected life of the stock options is impacted by all of the underlying assumptions used in
the Company's model.
q. Concentration of credit risks:
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents,
restricted cash and deposits, marketable securities, short-term bank deposits, trade receivables and derivative instruments.
The majority of cash and cash equivalents, restricted cash and deposits, marketable securities and short-term deposits of the Company are
invested in dollar deposits in major U.S. and Israeli banks. Such deposits in the United States may be in excess of insured limits and are
not insured in other jurisdictions. Generally, the cash and cash equivalents and short-term bank deposits may be redeemed upon demand,
and therefore, bear minimal risk.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
The Company's trade receivables are primarily derived from sales to customers located mainly in the United States, as well as in Europe,
Asia and Latin America. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation
and account monitoring procedures. The Company performs ongoing credit evaluations of its customers and establishes an allowance for
doubtful accounts on a specific basis. Allowance for doubtful accounts amounted to $ 280 and $ 511 as of December 31, 2012 and 2011,
respectively.
The Company has no significant off balance sheet concentrations of credit risk, except for hedging arrangements to cover the currency
exposure of the NIS on identified cash flow items (see also Note 2w).
r. Royalty bearing grants:
Participation grants from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor in Israel ("OCS") for research and
development activity are recognized at the time the Company is entitled to such grants on the basis of the costs incurred and included as a
deduction of research and development costs. Research and development grants recognized amounted to $ 2,855, $ 3,674 and $ 2,774 in
2012, 2011 and 2010, respectively.
The Company is obligated to pay royalties to the OCS calculated at the rate of 3%-3.5% of sales of the products developed with the
OCS's participation up to 300% of the grants received linked to the U.S. dollar bearing annual interest at a rate of LIBOR. The Company's
obligation to pay these royalties is contingent upon actual consolidated sales of our products and no payment is required if no sales are
made. See also Note 11a.
s.
Income taxes:
The Company accounts for income taxes in accordance with Accounting Standards Codification No. 740, "Income Taxes" ("ASC No.
740"). ASC No. 740 prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. The Company 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 assets
will not be realized.
F - 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
ASC No. 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to
evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is
more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any
related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to
be realized upon ultimate settlement.
t. Basic and diluted net loss per share:
Basic net income per share is computed based on the weighted average number of Ordinary Shares outstanding during each year. Diluted
net income per share is computed based on the weighted average number of Ordinary Shares outstanding during each year, plus dilutive
potential Ordinary Shares considered outstanding during the year, in accordance with FASB ASC 260 "Earnings Per Share".
For the years ended December 31, 2012 and 2010, all outstanding options and warrants have been excluded from the calculation of the
diluted loss per share since their effect was anti-dilutive. For the year ended December 31, 2011, 577,750 outstanding options and
warrants have been excluded from the calculation of the diluted net income per share since their effect was anti-dilutive. See Note 16.
u. Comprehensive income (loss):
The Company accounts for comprehensive income (loss) in accordance with Accounting Standards Codification No. 220,
"Comprehensive Income"("ASC No. 220"). This statement establishes standards for the reporting and display of comprehensive income
(loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all
changes in 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) relate to unrealized gains and losses on hedging derivative
instruments and unrealized gains and losses on available-for-sale marketable securities.
In May 2011, the FASB issued guidance that changed the requirement for presenting "Comprehensive Income" in the consolidated
financial statements. The update requires an entity to present the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011 and should be applied retrospectively. The Company adopted this new
guidance on January 1, 2012 and elected to present the comprehensive income in a single continuous statement of comprehensive income.
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
v.
Fair value of financial instruments:
ALLOT COMMUNICATIONS LTD.
The Company measures its cash and cash equivalents, marketable securities, derivative instruments, restricted cash and deposits, short-
term bank deposits, trade receivables, other receivables, trade payables and other payables at fair value.
Fair value is an exit price, representing the amount that would be received if the Company were 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. The Company uses 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 -
Include other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in
Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable
(model-derived valuations in which significant inputs are observable), or can be derived principally from or
corroborated by observable market data; and
Level 3 -
Unobservable inputs which are supported by little or no market activity.
The Company categorized each of its fair value measurements in one of those three levels of hierarchy. 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.
w. Derivatives and hedging:
The Company accounts for derivatives and hedging based on Accounting Standards Codification No. 815, "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.
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
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 shareholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction
affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To apply hedge
accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged
transactions. (See Note 5).
x. Business combinations:
The Company accounts for business combinations in accordance with ASC No. 805, “Business Combinations”. ASC 805 requires
recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as
of that date. It also requires the fair value of acquired in-process research and development (“IPR&D”) to be recorded as an indefinite life
intangible asset (subject to impairment) until the research and developments efforts are either completed or abandoned, and restructuring
and acquisition-related costs to be expensed as incurred. Any excess of the fair value of net assets acquired over the purchase price and
any subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to
acquired deferred tax assets and acquired income tax positions are to be recognized in earnings.
y. Warranty costs:
The Company generally provides a three months software warranty and a one year hardware warranty for all of its products. A provision
is recorded for estimated warranty costs at the time revenues are recognized based on the Company's experience. Warranty expense for
the years ended December 31, 2010, 2011 and 2012 was immaterial.
F - 28
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:-
AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities:
December 31, 2012
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Fair
value
Amortized
cost
December 31, 2011
Gross
Gross
unrealized
unrealized
loss
gain
Fair
value
Available-for-sale - matures
within one year:
Governmental debentures $
Corporate debentures
Available-for-sale - matures
after one year through
three years:
Governmental debentures
Corporate debentures
200 $
3,701
1 $
12
- $
-
201 $
3,713
251 $
2,237
3,901
13
-
3,914
2,488
- $
2
2
- $
(1)
251
2,238
(1)
2,489
933
9,946
4
48
(4)
-
933
9,994
7,782
7,265
24
29
-
(9)
7,806
7,285
10,879
52
(4)
10,927
15,047
53
(9)
15,091
$
14,780 $
65 $
(4) $
14,841 $
17,535 $
55 $
(10) $
17,580
NOTE 4:-
FAIR VALUE MEASUREMENTS
In accordance with ASC No. 820, the Company measures its cash equivalents, restricted cash and deposit, short-term bank deposits,
marketable securities and foreign currency derivative instruments at fair value. Cash equivalents, restricted deposit, short-term bank deposits
and certain investments in marketable securities are classified within Level 1 or Level 2. This is because these assets are valued using quoted
market prices or alternative pricing sources and models utilizing market observable inputs.
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:-
FAIR VALUE MEASUREMENTS (Cont.)
The Company's financial assets measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following
types of instruments as of December 31, 2012 and 2011, respectively:
ALLOT COMMUNICATIONS LTD.
Available-for-sale marketable securities
Foreign currency derivative contracts
Total financial assets
Available-for-sale marketable securities
Foreign currency derivative contracts
Total financial assets
As of December 31, 2012
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
- $
-
14,841 $
1,624
- $
-
14,841
1,624
- $
16,465 $
- $
16,465
As of December 31, 2011
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
- $
-
17,580 $
(638)
- $
-
17,580
(638)
- $
16,942 $
- $
16,942
$
$
$
$
F - 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:-
DERIVATIVE INSTRUMENTS
ALLOT COMMUNICATIONS LTD.
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 related expenses) in currencies other than U.S. dollar, and forecasted revenues denominated in Euro. The net losses (income)
recognized in "Financial expenses (income), net" during the years ended December 31, 2012, 2011 and 2010 were $ (231), $ 230 and $ 471,
respectively.
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 on the consolidated balance sheets at fair value in accordance with ASC No. 820 at Level 2. 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.
The Company had a net unrealized gain (loss) associated with cash flow hedges of $ 1,699 and $ (855) recorded in other comprehensive
income (loss) as of December 31, 2012 and 2011, respectively.
As of December 31, 2012 and 2011, the Company had outstanding forward contracts in the amount of $ 33,938 and $ 11,478, respectively.
As of December 31, 2012 and 2011, the Company had outstanding foreign exchange option contracts in the amount of $ 0 and $ 1,747,
respectively.
F - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:-
DERIVATIVE INSTRUMENTS (Cont.)
ALLOT COMMUNICATIONS LTD.
The fair value of the open foreign exchange contracts recorded by the Company on its consolidated balance sheets as of December 31, 2012
and 2011, as an asset is as follows:
Foreign exchange forward and
options contracts
Balance sheet
December 31,
2012
2011
Fair value of foreign exchange option contracts
Other receivables and prepaid expenses
$
- $
25
Fair value of foreign exchange forward contracts, net
Other receivables and prepaid expenses
(Other payables and accrued expenses)
1,699
(880)
Total derivatives designated as hedging instrument
$
1,699 $
(855)
Total derivatives not designated as hedging instruments,
Other receivables and prepaid expenses
net
(Other payables and accrued expenses)
$
(75) $
217
Gain or loss on the derivative instruments, which partially offset the foreign currency impact from the underlying exposures, reclassified from
other comprehensive income to operating expenses for the years ended December 31, 2012 and 2011 were $ 748 and $ 643, respectively.
Non-designated hedges:
The Company also uses foreign currency forward contracts to mitigate variability in gains and losses generated from the re-measurement of
certain monetary assets and liabilities denominated in foreign currencies. These derivatives do not qualify for special hedge accounting
treatment. These derivatives are carried at fair value with changes recorded in financial income (expense),net. Changes in the fair value of
these derivatives are largely offset by re-measurement of the underlying assets and liabilities. Cash flows from such derivatives are classified
as operating activities. The derivatives have maturities of approximately twelve months.
F - 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:-
OTHER RECEIVABLES AND PREPAID EXPENSES
Prepaid expenses
Government authorities
Short-term lease deposits
Foreign currency derivative contracts
Grants receivable from the OCS
Others
NOTE 7:-
INVENTORIES
Raw materials
Finished products
ALLOT COMMUNICATIONS LTD.
December 31,
2012
2011
$
2,772 $
1,284
211
1,702
224
622
3,288
1,043
188
368
556
507
$
6,815 $
5,950
December 31,
2012
2011
$
$
2,371 $
7,592
1,155
9,346
9,963 $
10,501
For the years ended December 31, 2012, 2011 and 2010, the finished products line item above includes deferral of the cost of goods sold for
which revenue was not yet recognized in the amount of approximately $ 1,200, $ 4,039 and $ 4,622, respectively.
F - 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:-
PROPERTY AND EQUIPMENT, NET
Cost:
Lab equipment
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Accumulated depreciation:
Lab equipment
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
ALLOT COMMUNICATIONS LTD.
December 31,
2012
2011
$
8,134 $
16,910
606
703
10,841
7,604
439
596
26,353
19,480
5,093
13,770
358
523
7,814
5,687
241
386
19,744
14,128
Depreciated cost
$
6,609 $
5,352
Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was $ 3,120, $ 2,754 and $ 2,577, respectively.
NOTE 9:-
INTANGIBLE ASSETS, NET
a. The following table shows the Company's intangible assets for the periods presented:
Cost:
Technology
Backlog
Customer relationships
Accumulated amortization:
Technology
Backlog
Customer relationships
Amortized cost
F - 34
December 31,
2012
2011
$
$
$
$
$
11,451 $
2,401
899
14,751 $
1,217 $
1,168
44
2,429 $
12,322 $
726
-
-
726
482
-
-
482
244
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
INTANGIBLE ASSETS, NET (Cont.)
b. Amortization expense for the years ended December 31, 2012, 2011 and 2010 was $ 1,947, $ 124 and $ 123, respectively.
ALLOT COMMUNICATIONS LTD.
c. Estimated amortization expense for the years ending:
Year ending December 31,
2013
2014
2015
2016
2017 and on
Total
$
3,075
1,751
1,718
1,622
4,156
$ 12,322
NOTE 10:- OTHER PAYABLES AND ACCRUED EXPENSES
Accrued expenses
Accrued royalties to the OCS
Foreign currency derivative contracts
Contingent consideration payable
Others
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalties:
December 31,
2012
2011
$
3,887 $
-
78
1,088
712
1,701
1,364
1,006
-
341
$
5,765 $
4,412
The Company received research and development grants from the OCS. Until the end of 2012, the Company was participating in
programs sponsored by the Israeli Government for the support of research and development activities. As part of this program the
Company is obligated to pay royalties to the OCS, amounting to 3.5% of the sales of the sponsored products, up to 100% of the grants
received, linked to the U.S. dollar and for grants received after January 1, 1999 also bearing interest at the rate of LIBOR. The obligation
to pay these royalties is contingent upon actual sales of products of the Company and in the absence of such sales no payment is required.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
ALLOT COMMUNICATIONS LTD.
During December 2012, the Company recorded a liability for the early payment of $15,886 due to settlement with the Israeli Office of
Chief Scientist (OCS), representing the full balance of the contingent liability related to grants received (including interest), which will be
paid during 2013. Upon making this payment, the Company will eliminate all future royalty obligations related to its anticipated
revenues. These expenses are included in the cost of revenues in the consolidated statement of operations.
For the years ended December 31, 2012, 2011 and 2010, the royalties expense paid and accrued, as part of the Company's cost of
revenues, was $ 17,703 (including the settlement with the OCS), $ 2,746 and $ 2,015 respectively.
b. Lease commitments:
In February 2006, the Company signed an agreement to rent offices for a period of seven years, starting July 2006. The rental expenses
are $ 39 per month and a management fee of costs plus 15% of the expenses incurred by the building management company as stipulated
in the lease agreement.
The U.S. subsidiary has an operating lease for office facilities in Woburn, Massachusetts. The lease expires on August 31, 2014. The
Company's subsidiaries maintain smaller offices in China, Singapore, Japan, New Zealand, UK and various locations in Europe.
In addition, the Company has operating lease agreements for its motor vehicles, which terminate in 2013 through 2015.
Operating leases (offices and motor vehicles) expense for the years ended December 31, 2012, 2011 and 2010 was $ 2,345, $ 2,415 and
$ 1,676, respectively.
As of December 31, 2012, the aggregate future minimum lease obligations (offices and motor vehicles) under non-cancelable operating
leases agreements were as follows:
Year ending December 31,
2013
2014
2015
2016
2017
Total
$
1,814
828
517
452
456
$
4,067
F - 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
c. Lawsuit:
ALLOT COMMUNICATIONS LTD.
On May 1, 2007, a securities class action complaint, Brickman Investment Inc. v. Allot Communications Ltd. et al., was filed in the United
States District Court for the Southern District of New York. At least three substantially similar complaints were filed in the same court
after the original action was filed. We and certain of our directors and officers are named as defendants. The securities class action
complaints alleged that the defendants violated Sections 11 and 15 of the Securities Act of 1933 by making false and misleading
statements and omissions in our registration statement for our initial public offering in November 2006. The parties reached during 2010
an agreement in principle to settle this litigation. Pursuant to the terms of the agreement, the Company paid in 2011 to the plaintiffs, for
the benefit of the class members, $ 1.3 million in cash, which was wholly funded by the Company's insurance carrier. Before 2011, the
Company recorded a liability in its financial statements for the proposed amount of the settlement. In addition, because the insurance
carrier has agreed to pay the entire settlement amount and recovery from the insurance carrier is probable, a receivable has also been
recorded for the same amount. Accordingly, as of December 31, 2010, there was no impact to the Company's statements of operations or
cash flows because the amounts of the settlement and the insurance recovery fully offset each other. As of December 31, 2012 and 2011,
no liability or asset appears in the Company’s balance sheet.
d. Major subcontractor:
The Company currently depends on one subcontractor to manufacture and provide hardware warranty support for its traffic management
systems. If the subcontractor experiences delays, disruptions, quality control problems or a loss in capacity, shipments of products may be
delayed and the Company's ability to deliver products could be materially adversely affected. Certain hardware components for the
Company's products come from single or limited sources, and the Company could lose sales if these sources fail to satisfy its supply
requirements. In the event that the Company terminates its business connection with the subcontractor, it will have to compensate the
subcontractor for certain inventory costs, as specified in the agreement with the subcontractor.
e. Purchase commitments:
At December 31, 2012, the Company had approximately $ 846 off balance non-cancelable purchase commitments with its suppliers
F - 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
SHAREHOLDERS' EQUITY
a. Company's shares:
ALLOT COMMUNICATIONS LTD.
As of December 31, 2012, the Company's authorized share capital consists of NIS 20,000,000 divided into 200,000,000 Ordinary Shares,
par value NIS 0.1 per share. Ordinary Shares confer on their holders the right to receive notice to participate and vote in general meetings
of the Company, the right to a share in the excess of assets upon liquidation of the Company, and the right to receive dividends, if
declared.
b. Warrants:
In January 1998, the Company granted, to a founder and a member of the Board of Directors who also served as Chief Executive Officer
at the time of the grant 246,479 warrants to purchase ordinary shares at a purchase price of $ 2.43 per share. The underlying shares were
issued and held in trust for the benefit of the founder, pending his payment of the full purchase price of approximately $ 600. In
November 2010, the warrants were exercised through a cashless exercise, into 165,200 Ordinary Shares of the Company.
c. Stock option plan:
A summary of the Company's stock option activity, pertaining to its option plans for employees and related information is as follows:
2012
Year ended December 31,
2011
2010
Number
of shares upon
exercise
Weighted
average
exercise price
Number
of shares upon
exercise
Weighted
average
exercise price
Number
of shares upon
exercise
Weighted
average
exercise price
Outstanding at beginning of year
Granted
Forfeited
Exercised
3,164,090 $
1,301,455 $
(158,718) $
(1,596,917) $
5.90
8.11
12.15
3.72
3,427,870 $
649,000 $
(93,859) $
(818,921) $
3.81
14.31
8.57
3.46
4,081,683 $
906,850 $
(316,612) $
(1,244,051) $
Outstanding at end of year
2,709,910 $
11.03
3,164,090 $
5.90
3,427,870 $
Exercisable at end of year
819,869 $
6.62
1,592,432 $
3.66
1,638,086 $
Vested and Expected to Vest
1,686,435 $
9.86
2,324,031 $
4.80
3,019,542 $
3.07
5.36
3.89
2.50
3.81
3.46
3.7
F - 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
ALLOT COMMUNICATIONS LTD.
The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing stock price on the last
trading day of the fiscal year 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on December 31, 2012. This amount may change based on
the fair market value of the Company's stock. The total intrinsic value of options outstanding at December 31, 2012, was $ 22,136. The
total intrinsic value of exercisable options at December 31, 2012 was approximately $ 9,255. The total intrinsic value of options vested
and expected to vest at December 31, 2012 was approximately $ 15,312.
The total intrinsic value of options exercised during the year ended December 31, 2012 was approximately $ 88,310. The number of
options vested during the year ended December 31, 2012 was 824,354. The weighted-average remaining contractual life of the
outstanding options as of December 31, 2012 is 8.39 years. The weighted-average remaining contractual life of exercisable options as of
December 31, 2012 is 7.03 years.
As of December 31, 2012, $ 18,997 unrecognized compensation cost related to stock options is expected to be recognized over a
weighted average vesting period of 2.13 years.
F - 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
ALLOT COMMUNICATIONS LTD.
The options outstanding as of December 31, 2012, have been classified by exercise price, as follows:
Exercise price
Shares upon exercise of
options outstanding as of
December 31, 2012
Weighted average remaining
contractual life
Years
Shares upon exercise of
options exercisable as of
December 31, 2012
$ 27.58
$ 26.62
$ 25.83
$ 23.31-23.72
$ 17.07
$ 16.82
$ 15.20-15.43
$ 9.25-14.52
$ 7.25
$ 5.25-6.52
$ 4.00-4.95
$ 3.00-3.75
$ 2.05-2.97
$ 1.23-1.56
$ 0.03
90,000
67,000
50,000
290,000
338,000
15,000
271,086
191,807
246,598
44,560
234,780
244,327
180,686
6,801
439,265
2,709,910
F - 40
9.70
9.34
9.44
9.69
9.11
8.92
8.47
8.65
7.87
6.59
7.52
6.15
5.93
5.32
9.49
6,250
625
-
1,001
11,500
5,000
108,687
53,946
135,132
27,125
74,735
186,896
164,453
5,988
38,531
819,869
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
ALLOT COMMUNICATIONS LTD.
The Company has two option plans under which outstanding options as of December 31, 2012, are as follows: (i) under the 2003 option
plan, the outstanding options are exercisable for 50,303 Ordinary shares, and (ii) under the 2006 option plan, the outstanding options are
exercisable for 2,659,607 Ordinary shares.
Under the terms of the above option plans, options may be granted to employees, officers, directors and various service providers of the
Company and its subsidiaries. The options generally become exercisable quarterly over a four-year period, commencing one year after
date of the grant, subject to the continued employment of the employee. The options generally expire no later than ten years from the date
of the grant. The exercise price of the options at the date of grant under the plans may not be less than the nominal value of the shares into
which such options are exercised, any options, which are forfeited or cancelled before expiration, become available for future grants. As
of December 31, 2012, 142,403 Ordinary shares are available for future issuance under the option plans.
In addition to granting stock options, the Company granted in 2008 RSUs under the 2006 option plan. RSUs vest over a four year period
subject to the continued employment of the employee. RSUs that are cancelled or forfeited become available for future grants.
In 2012, and 2011 the Company granted 436,455 and 30,000 options respectively to Israeli employees with an exercise price of $ 0.03,
which was lower than the trading price of the Company's Ordinary Shares quoted on the NASDAQ Global Select Market on the date of
the grants.
NOTE 13:-
TAXES ON INCOME
a. Corporate tax rates: Amendment to the Israeli Income Tax Ordinance
The Israeli corporate tax rate was 25% in 2010, 24% in 2011 and 25% in 2012.
On December 5, 2011, the Israeli Parliament (the Knesset) passed the Law for Tax Burden Reform (Legislative Amendments), 2011
which, among others, cancels effective from 2012, the scheduled progressive reduction in the corporate tax rate, and increases the
corporate tax rate to 25% in 2012 and subsequent years.
b. Foreign Exchange Regulations:
Commencing in taxable year 2012, the Company has elected to measure its taxable income and file its tax return under the Israeli Income
Foreign Tax Regulations. Under the Foreign Exchange Regulations, an Israeli company must calculate its tax liability in U.S. Dollars
according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into NIS according to the exchange rate as of
December 31st of each year.
F - 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:-
TAXES ON INCOME (Cont.)
ALLOT COMMUNICATIONS LTD.
c. Tax benefits under Israel's law for the Encouragement of Capital Investments, 1959 ("the Law"):
In 1998, the production facilities of the Company related to its computational technologies were granted the status of an "Approved
Enterprise" under the Law. In 2004, expansion program was granted the status of "Approved Enterprise". According to the provisions of
the Law, the Company has elected the alternative package of benefits and has waived Government grants in return for tax benefits.
According to the provisions of the Law, the Company's income is tax-exempt for a period of two years commencing with the year it first
earns taxable income, and subject to corporate taxes at the reduced rate of 10% to 25%, for an additional period of five to eight years
depending upon the level of foreign ownership of the Company. As of December 31, 2012 the benefit period of tax benefit has not yet
commenced, since the Company has not yet utilized all its carry forward losses.
The period of tax benefits, detailed above, is limited to the earlier of 12 years from the commencement of production, or 14 years from
the approval date, (the year's limitation does not apply to the exemption period).
The Law was significantly amended effective April 1, 2005 ("the Amendment"). The Amendment includes revisions to the criteria for
investments qualified to receive tax benefits as a Beneficiary Enterprise and among other things, simplifies the approval process. The
Amendment applies to new investment programs. Therefore, investment programs commencing after December 31, 2004, do not affect
the approved programs of the Company.
In addition, the Law provides that terms and benefits included in any letter of approval already granted will remain subject to the
provisions of the Law as they were on the date of such approval. Therefore, the Company's existing Approved Enterprise will generally
not be subject to the provisions of the Amendment. The Company elected 2006 and 2009 as "year of election" under the amendment.
The entitlement to the above benefits is contingent upon the fulfillment of the conditions stipulated in the Law, regulations published
there under and the criteria set forth in the specific letters of approval. 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 and linked
to changes in the Israeli CPI. As of December 31, 2012, management believes that the Company is meeting the aforementioned
conditions.
F - 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:-
TAXES ON INCOME (Cont.)
ALLOT COMMUNICATIONS LTD.
If the Company pays a dividend out of income derived from the Approved and Beneficiary Enterprise during the tax exemption period, it
will be subject to corporate tax in respect of the gross amount distributed, including any taxes thereon, at the rate which would have been
applicable had it not enjoyed the alternative benefits, generally 10%-25%, depending on the percentage of the Company's Ordinary shares
held by foreign shareholders. The dividend recipient is subject to withholding tax at the rate of 15% applicable to dividends from
approved enterprises, if the dividend is distributed during the tax exemption period or within twelve years thereafter. The Company
currently has no plans to distribute dividends and intends to retain future earnings to finance the development of its business.
Income from sources other than the "Approved and Beneficiary Enterprise" during the benefit period will be subject to tax at the regular
corporate tax rate.
During 2010, new legislation amending the Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all
qualifying income of certain Industrial Companies, as opposed to the current law's incentives, which are limited to income from
Approved Enterprises during their benefits period. Under the new law, the uniform tax rate will be 10% in areas in Israel designated as
Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%,
respectively thereafter. Certain "Special Industrial Companies" that meet certain criteria will enjoy further reduced tax rates of 5% in
Zone A and 8% elsewhere. The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15%
withholding tax (or lower, under an applicable tax treaty).
Under the transition provisions of the new legislation, the Company may decide to irrevocably implement the new law while waiving
benefits provided under the current law or to remain subject to the current law. The Company intends to implement the new law in 2015.
d.
In November 2012, the Knesset passed Amendment No. 69 to the Investment Law (the “Trapped Earnings Law”) which provides a
temporary, partial, relief from taxation on a distribution from exempt income for companies which elect the relief through November
2013. The Trapped Earnings Law allows a company to qualify a portion of its exempt income (“Elected Earnings”) for a reduced tax rate
ranging between 17.5% and 6%. While the reduced tax is payable within 30 days of election, an electing company is not required to
actually distribute the Elected Earnings within a certain period of time. The applicable rate is based on a linear formula involving the
portion of Elected Earnings to exempt income and the applicable tax rate prescribed in the Investment Law. A company electing to
qualify its exempt income must undertake to make designated investments in productive fixed assets, research and development, or wages
of new employees (“Designated Investment”). The Designated Investment amount is defined by a formula which considers the portion of
Elected Earnings to the exempt income and the applicable tax rate prescribed by the Investment Law.
In addition to the reduced tax rate a distribution of Elected Earnings would be subject to a 15% withholding tax. The Trapped Earnings
Law provides an exemption from the 15% withholding tax for a distribution to an Israeli resident company from companies which have
elected the Privileged Enterprise status and waived their Approved Enterprise and privileged Enterprise Status through June 2015.
For the year end December 31, 2012, the Company does not believe the amendment has any possible effect on the financial statements.
F - 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:-
TAXES ON INCOME (Cont.)
ALLOT COMMUNICATIONS LTD.
e. 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.
f.
Pre-tax income (loss) is comprised as follows:
Domestic
Foreign
F - 44
Year ended December 31,
2011
2012
2010
$
(2,372) $
(5,292)
9,737 $
(983)
(6,637)
959
$
(7,664) $
8,754 $
(5,678)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:-
TAXES ON INCOME (Cont.)
ALLOT COMMUNICATIONS LTD.
g. A reconciliation of the theoretical tax expenses (benefit), assuming all income is taxed at the statutory tax rate applicable to the income of
the Company and the actual tax expenses (benefit), is as follows:
Year ended December 31,
2011
2012
2010
Income (loss) before taxes on income
$
(7,664) $
8,754 $
(5,678)
Theoretical tax expense (benefit) computed at the Israeli statutory tax rate (25%, 24%
and 25% for the years 2012, 2011 and 2010, respectively)
$
(1,916) $
2,101 $
(1,419)
Utilization of valuation allowance
Increase (decrease) in losses and temporary differences due to change in Israeli
corporate and "Approved Enterprise" tax rates
Increase (decrease) in valuation allowance related to losses and temporary differences
due to change in Israeli corporate and "Approved Enterprise" tax rates
Taxes with respect to prior years
Impairment (recording) of withholding tax asset
Non-deductible expenses and other
Non-deductible share-based compensation expenses
Exchange rate differences
(1,554)
(4,328)
(7,073)
5,419
7,073
2
-
1,699
833
10
(5,419)
(84)
221
(27)
541
1,521
Actual tax expenses (benefit)
$
(926) $
(55) $
728
-
-
35
(53)
294
499
-
84
F - 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:-
TAXES ON INCOME (Cont.)
h.
Income tax expense (tax benefit) is comprised as follows:
Current taxes (benefit)
Deferred taxes benefit
Taxes in respect of previous years
Impairment (recording) of withholding tax asset
i. Net operating losses carry forward:
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2011
2012
2010
$
(2) $
(926)
2
-
31 $
(223)
(84)
221
$
(926) $
(55) $
109
(7)
35
(53)
84
The Company has accumulated losses for tax purposes as of December 31, 2012, in the amount of approximately $ 40,000, which may be
carried forward and offset against taxable income in the future for an indefinite period. In light of the merger between the Company and
Oversi as of December 31, 2012, the net operating losses may be offset against taxable income annually with limitation of up to 20% of
the total accumulated losses but no more than 50% of the Company's taxable income. In addition, the Company has accumulated capital
losses for tax purposes as of December 31, 2012, in the amount of approximately $ 27,300, which may be carried forward and offset
against taxable capital gains in the future for an indefinite period. Management currently believes that since the Company has a history of
losses, and uncertainty with respect to future taxable income, it is more likely than not that some of the deferred tax assets regarding the
loss carry forwards will not be utilized in the foreseeable future. Thus, a valuation allowance was provided to reduce deferred tax assets
to their realizable value.
As of December 31, 2012, Ortiva was merged into the U.S. subsidiary. The U.S. subsidiary has accumulated losses for U.S. federal
income tax return purposes of approximately $ 7,300. The federal accumulated losses for tax purposes expire between 2026 and 2031.The
state accumulated losses for tax purposes begin to expire in 2016.
Such losses are subject to limitations of Internal Revenue Code, Section 382, which in general provides that utilization of net operating
losses is subject to an annual limitation if an ownership change results from transactions increasing the ownership of certain shareholders
or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The annual limitations may
result in the expiration of losses before utilization.
The European subsidiary is subject to French income taxes and has a net operating loss carry forward amounting as of December 31,
2012 to approximately $ 3,500, which may be carried forward and offset against taxable capital gains in the future for an indefinite
period.
F - 46
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:-
TAXES ON INCOME (Cont.)
j. 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 Company's deferred income
taxes are as follows:
Deferred tax assets:
Operating and capital loss carryforwards
Reserves and allowances
Deferred tax asset before valuation allowance
Valuation allowance
Net deferred tax asset
Deferred tax liability
Net deferred tax asset
December 31,
2012
2011
$
$
11,264 $
215
11,479
(8,749)
2,730
(1,006)
1,724 $
16,003
1,759
17,762
(17,378)
384
-
384
k. As of December 31, 2012 and 2011, the provision in respect of ASC 740 was immaterial. The Company accrues interest and penalties
related to the provision in income taxes in its statement of operations. Such interest and penalties were immaterial for all reported periods.
The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries file income tax returns in the
U.S. federal jurisdiction and various states and foreign jurisdictions. In the normal course of business, the Company is subject to
examination by taxing authorities throughout the world, including such major jurisdictions as Israel, France, and the United States. With
few exceptions, the Company is no longer subject to Israeli final tax assessment through the year 2007 and the European and U.S.
subsidiaries have final tax assessments through 2008.
F - 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- GEOGRAPHIC INFORMATION
Allot operates in a single reportable segment. Revenues are based on the location of the Company's channel partners which are considered as
end customers, as well as direct customers of the Company:
ALLOT COMMUNICATIONS LTD.
Europe
Asia and Oceania
United States of America
Middle East and Africa
Americas (excluding United States of America)
Year ended December 31,
2011
2012
2010
$
39,655 $
21,953
24,674
10,565
7,905
38,409 $
13,388
9,484
9,530
6,942
30,434
12,469
7,680
3,890
2,499
$
104,752 $
77,753 $
56,972
During the years ended December 2012, 2011 and 2010 approximately 14%, 15% and 30% of the Company's revenues are derived from a
single customer.
The following presents total long-lived assets as of December 31, 2012 and 2011:
Long-lived assets:
Israel
United States of America
Other
F - 48
December 31,
2012
2011
$
26,976 $
14,380
153
8,653
300
150
$
41,509 $
9,103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
FINANCIAL EXPENSES (INCOME), NET
Financial income:
Interest income
Financial expenses:
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2011
2012
2010
$
(1,746) $
(661) $
(492)
Exchange rate differences and other
Amortization/accretion of premium/discount on marketable securities , net
Foreign currency transaction differences
Impairment related to Auction-Rate Securities, net
407
212
(231)
-
(135)
151
230
-
405
(189)
471
7,712
$
(1,358) $
(415) $
7,907
NOTE 16:- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings (loss) per share:
Numerator:
Net income (loss)
Year ended December 31,
2011
2012
2010
$
(6,738) $
8,809 $
(5,678)
Denominator:
Weighted average number of shares outstanding used in computing basic net earnings per
share
Dilutive effect: stock options
Total weighted average number of shares used in computing diluted net earnings per share
31,959,921 25,047,771 22,831,014
-
31,959,921 27,071,872 22,831,014
2,024,101
-
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
$
$
(0.21) $
(0.21) $
0.35 $
0.33 $
(0.25)
(0.25)
F - 49
Exhibit 1.1
THE COMPANIES LAW, 5759-1999
A COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION OF
Allot Communications Ltd.
GENERAL PROVISIONS
1.
Interpretation.
1.1.
In these Articles, unless the context otherwise requires, the following terms shall have the meaning set forth below:
"Articles"
"Board of Directors"
"Company"
"Companies Law"
"Companies Ordinance"
"Director"
"Distribution"
"Office Holder"
"Ordinary Resolution"
"Special Resolution"
the Articles of Association of the Company, as shall be in force from time to time.
the Company's Board of Directors.
Allot Communications Ltd.
the Israeli Companies Law 5759 - 1999, as may be amended from time to time, and
the regulations promulgated thereunder.
the Israeli Companies Ordinance (New Version), 1983, as may be amended from
time to time, and the regulations promulgated thereunder.
A member of the Board of Directors.
As defined in the Companies Law.
As defined in the Companies Law ("Nose Misra").
A resolution in a General Meeting that is approved by more than fifty percent
(50%) of the voting power represented at the meeting and voted therein.
A resolution in a General Meeting that is approved by at least seventy five percent
(75%) of the voting power represented at the meeting and voted therein.
1.2.
Unless the subject or the context otherwise requires: words and expressions not specifically defined herein and defined in the Companies
Law or, if not defined in the Companies Law and if applicable, as defined in the Companies Ordinance, in force on the date when these
Articles or any amendment thereto, as the case may be, first became effective shall have the meanings therein; words and expressions
importing the singular shall include the plural and vice versa; words and expressions importing the masculine gender shall include the
feminine gender; and words and expressions importing persons shall include bodies corporate. The captions in these Articles are for
convenience only and shall not be deemed a part hereof or affect the construction of any provision hereof.
1.3.
The specific provisions of these Articles supersede the provisions of the Companies Law and the Companies Ordinance to the extent
permitted under the Companies Law and the Companies Ordinance.
2.
Public Company; Limitation of Liability.
2.1.
The Company is a public company as such term is defined in the Companies Law.
2.2.
The liability of the each of the Company's shareholders is limited to the payment of the nominal value of the shares in the Company held by
such shareholder and which remains unpaid, and only to that amount. If the Company's share capital shall include at any time shares without
a nominal value, the liability of a shareholder in respect of such shares shall be limited to the payment of up to NIS 0.10 for each such share
held by it and which remains unpaid, and only to that amount.
3.
Object and Purpose of the Company.
3.1.
3.2.
The object and purpose of the Company shall be as set forth in the Company's Memorandum of Association, as the same shall be amended
from time to time in accordance with applicable law.
The Company may make contributions of reasonable amounts to worthy causes, as the Board of Directors may determine in its discretion,
even if such contributions are not made on the basis of business considerations.
SHARE CAPITAL
4.
Share Capital.
The authorized share capital of the Company is 20,000,000 New Israeli Shekels divided into 200,000,000 Ordinary Shares, each having a nominal
value of NIS 0.10 (the "Ordinary Shares").
5.
Increase of Share Capital.
The Company may, from time to time, by an Ordinary Resolution, whether or not all the shares then authorized have been issued, and whether or not
all the shares theretofore issued have been called up for payment, increase its authorized share capital by the creation of new authorized shares. Any
such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and
preferences and be subject to such restrictions, as such resolution shall provide. Except to the extent otherwise provided in such resolution, such
newly-authorized shares shall be subject to all the provisions of these Articles applicable to the shares of such class included in the existing share
capital.
6.
Rights of the Ordinary Shares.
6.1.
The Ordinary Shares confer upon the holders thereof all rights accruing to a shareholder of a Company, as provided in these Articles,
including, inter alia, the right to receive notices of, and to attend meetings of shareholders; for each share held, the right to one vote at all
meetings of shareholders; and to share equally, on a per share basis, in such dividends as may be declared by the Board of Directors in
accordance with these Articles and the Companies Law, and upon liquidation or dissolution of the Company, in the assets of the Company
legally available for distribution to shareholders after payment of all debts and other liabilities of the Company, in accordance with the terms
of these Articles and applicable law. All Ordinary Shares rank pari passu in all respects with each other.
- 2 -
6.2.
(i)
If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise
provided by these Articles, may be modified or abrogated by the Company, by a resolution passed by the holders of a majority of
the voting power of shares of such class present and voting at a separate Class Meeting of the holders of the shares of such class;
and
(ii) Unless otherwise provided by these Articles, the rights attached to a class of shares shall not be deemed for purposes of this
Article 6 to be modified or abrogated by: (i) an increase or decrease of the authorized number of shares of such class of shares or of any
other existing class of shares; (ii) the issuance of additional shares of such class of shares or of any other existing class of shares; or (iii) the
creation of a new class of shares and the issuance of shares thereof.
7.
Consolidation, Subdivision, Cancellation and Reduction of Share Capital.
7.1.
Subject to the provisions of these Articles and applicable law, the Company may, from time to time, by an Ordinary Resolution:
7.1.1.
7.1.2.
consolidate all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares;
subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by these Articles,
and the resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from
such subdivision, one or more of the shares may, as compared with the others, have any such preferred or deferred rights or
rights of redemption or other special rights, or be subject to any such restrictions, as the Company has power to attach to
unissued or new shares;
7.1.3.
cancel any authorized shares not yet issued, provided that the Company has made no commitment, including a conditional
commitment, to issue such shares; or
7.1.4.
reduce its share capital in any manner, subject to any authorization or consent required by applicable law.
7.2.
With respect to any consolidation of shares and any other action which may result in fractional shares, the Board of Directors may settle any
difficulty which may arise with regard thereto, as it deems fit, including, inter alia, resort to one or more of the following actions:
7.2.1.
7.2.2.
7.2.3.
allot, in contemplation of or subsequent to such consolidation or other action, such shares or fractional shares sufficient to
preclude or remove fractional share holdings;
to the extent as may be permitted under the Companies Law, redeem or purchase such shares or fractional shares sufficient
to preclude or remove fractional shareholdings;
cause the transfer of fractional shares by certain shareholders of the Company to other shareholders thereof so as to most
expediently preclude or remove any fractional shareholdings, and cause the transferees to pay the transferors the fair value
of fractional shares so transferred, and the Board of Directors is hereby authorized to act as agent for the transferors and
transferees with power of substitution for purposes of implementing the provisions of this sub-Article 7.2.3.
- 3 -
SHARES
8.
Allotment of Shares and other Securities.
Subject to the Companies Law and these Articles: (a) the unissued shares from time to time shall be under the control of the Board of Directors,
which shall have the power to offer or allot such shares or otherwise dispose of them to such persons, for cash, or for such other consideration that is
not cash, with such restrictions and conditions, in excess of their nominal value, at their nominal value, or at a discount to their nominal value and/or
with payment of commission, and at such times, as the Board of Directors shall deem appropriate, and (b) the Board of Directors shall have the
power to cause the Company to grant to any person the option or right to acquire from the Company any shares, in each case on such terms as the
Board of Directors shall deem appropriate.
Subject to the Companies Law and these Articles, the Company may issue shares having the same rights as the existing shares, or having preferred
or deferred rights, or rights of redemption, or restricted rights, or any other special right in respect of dividend distributions, voting, appointment or
dismissal of directors, return of share capital, distribution of Company's property, or otherwise, all as determined by the Company from time to time,
provided that such issuance shall not infringe on any other provision of these Articles or any special right previously granted to a shareholder to the
extent such rights are still in effect.
9.
Issuance of Share Certificates; Replacement of Lost Certificates.
9.1.
9.2.
9.3.
9.4.
Share certificates, when issued, shall be issued under the seal, stamp or printed name of the Company and shall bear the signatures
(including by facsimile) of two Directors, or of any other person or persons authorized thereto by the Board of Directors.
Each shareholder shall be entitled to one or more numbered certificates for all shares of any class registered in his name. Each certificate
may specify the serial numbers of shares represented thereby.
A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Register of
Shareholders in respect of such co-ownership and the Company shall not be obligated to issue more than one certificate to all the joint
holders.
If a share certificate is defaced, lost or destroyed, it may be replaced, upon payment of such fee, and upon the furnishing of such evidence of
ownership and such indemnity, as the Board of Directors may deem fit.
10.
Registered Holder.
Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of any share as the absolute owner
thereof, and, accordingly, shall not, except as ordered by a court of competent jurisdiction, or as required by statute, be bound to recognize any
equitable or other claim to, or interest in such share on the part of any other person.
11.
Payment in Installments.
If by the terms of allotment of any share, the whole or any part of the price thereof shall by payable in installments, every such installment shall,
when due, be paid to the Company by the then registered holder(s) of the share or the person(s) then entitled thereto.
- 4 -
12.
Calls on Shares.
12.1.
12.2.
12.3.
12.4.
The Board of Directors may, from time to time, make such calls as it may deem fit upon holders of shares in respect of any sum unpaid in
respect of shares held by such holders which is not, by the terms of allotment thereof or otherwise, payable at a fixed time, and each of such
holders shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments), to the
person(s) and at the time(s) and place(s) designated by the Board of Directors in the notice referred to below, as any such time(s) may be
thereafter extended and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in
the notice hereafter referred to), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares
in respect of which such call was made.
Notice of any call shall be given in writing to the holder(s) in question not less than fourteen (14) days prior to the time of payment,
specifying the time and place of payment, and designating the person to whom such payment shall be made, provided, however, that before
the time for any such payment, the Board of Directors may, by notice in writing to such holder(s), revoke such call in whole or in part,
extend such time, or alter such person and/or place. In the event of a call payable in installments, only one notice thereof need be given.
If, by the terms of allotment of any share or otherwise, any amount is made payable at any fixed time, then such amount shall be payable at
such time as if it were a call duly made by the Board of Directors and of which due notice had been given, and all the provisions herein
contained with respect to such calls shall apply to each such amount.
Any amount unpaid in respect of a call shall bear interest from the date on which it is payable until actual payment thereof, at such rate as
the Board of Directors may prescribe (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel), and at
such time(s) as the Board of Directors may prescribe.
12.5.
The Board of Directors may provide for differences among the allottees of such shares as to the amount of calls and/or the times of payment
thereof.
12.6.
The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof and all interest payable thereon.
13.
Prepayment.
With the approval of the Board of Directors, any holder of shares may pay to the Company any amount not yet payable in respect of his shares, and
the Board of Directors may approve the payment of interest on any such amount until the same would be payable if it had not been paid in advance,
at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or
any part of the money so advanced, without premium or penalty. Nothing in this Article 13 shall derogate from the right of the Board of Directors to
make any call before or after receipt by the Company of any such advance.
14.
Forfeiture and Surrender.
14.1.
If any holder fails to pay any amount payable in respect of a call, or interest thereon as provided for in these Articles, on or before the day
fixed for payment of the same, the Company, by resolution of the Board of Directors, may at any time thereafter, so long as the said amount
or interest remains unpaid, forfeit all or any of the shares in respect of which said call had been made. Any expense incurred by the
Company in attempting to collect any such amount or interest, including, inter alia, attorneys' fees and costs of suit, shall be added to, and
shall, for all purposes (including the accrual of interest thereon), constitute a part of the amount payable to the Company in respect of such
call.
- 5 -
14.2.
Upon the adoption of a resolution of forfeiture, the Board of Directors shall cause notice thereof to be given to such holder, which notice
shall state that, in the event of the failure to pay the entire amount so payable within a period stipulated in the notice (which period shall not
be less than fourteen (14) days, unless otherwise stated in the terms of issuance of the forfeited shares) and which may be extended by the
Board of Directors), such shares shall be ipso facto forfeited, provided, however, that, prior to the expiration of such period, the Board of
Directors may nullify such resolution of forfeiture, but no such nullification shall estop the Board of Directors from adopting a further
resolution of forfeiture in respect of the non-payment of the same amount.
14.3. Without derogating from Articles 14.1 and 14.2 hereof, whenever shares are forfeited as herein provided, all dividends declared prior to
such forfeiture in respect of such shares and not actually paid shall be deemed to have been forfeited at the same time.
14.4.
14.5.
14.6.
The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share. A surrendered share shall be
treated as if it had been forfeited.
Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of
these Articles and the Companies Law, may be sold, re-allotted or otherwise disposed of as the Board of Directors deems fit.
Any shareholder whose shares have been forfeited or surrendered shall cease to be a holder in respect of the forfeited or surrendered shares,
but shall, notwithstanding, be liable to pay, and shall forthwith pay, to the Company, all calls, interest and expenses owing upon or in respect
of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual
payment, at the rate prescribed in Article 12.4 above, and the Board of Directors, in its discretion, may enforce the payment of such moneys
or any part thereof, but shall not be under any obligation to do so. In the event of such forfeiture or surrender, the Company, by resolution of
the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing by the holder in question (but not yet due) in
respect of all shares owned by such holder, solely or jointly with another.
14.7.
The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed
of, nullify the forfeiture or surrender on such conditions as it deems fit, but no such nullification shall estop the Board of Directors from re-
exercising its powers of forfeiture pursuant to this Article 14.
15.
Lien.
15.1.
Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the
shares registered in the name of each holder that were not paid up in full (without regard to any equitable or other claim or interest in such
shares on the part of any other person), and upon the proceeds of the sale thereof, in respect of money due to the Company on calls for
payment or payable at fixed times, whether or not presently payable, or the fulfillment and performance of the obligations and commitments
to which the Company is entitled in respect of the shares. Such lien shall extend to all distributions from time to time declared or made in
respect of such shares.
- 6 -
15.2.
15.3.
The Board of Directors may cause the Company to sell any shares subject to such lien when any such debt or obligation has matured, in
such manner as the Board of Directors may deem fit, but no such sale shall be made unless such debt or obligation has not been satisfied
within fourteen (14) days after written notice of the intention to sell shall have been served on such holder, his executors or administrators.
The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debt or obligation of
such holder, or any specific part of the same (as the Company may determine), and the residue (if any) shall be paid to the holder, his
executors, administrators or assigns, subject to a lien on amounts the date of payment of which has not yet arrived, similar to the lien on the
share before its sale.
16.
Sale after Forfeiture or Surrender or in Enforcement of Lien.
Upon any sale of shares after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint any person to execute an instrument
of transfer of the shares so sold and cause the purchaser's name to be entered in the Register of Shareholders in respect of such shares, and the
purchaser shall not be bound to see to the regularity of the proceedings, or to the application of the purchase money, and after his name has been
entered in the Register of Shareholders in respect of such shares, the validity of the sale shall not be impeached by any person, and the remedy of any
person aggrieved by the sale shall be in damages only and against the Company exclusively.
17.
Redeemable Shares.
The Company may, subject to applicable law, by resolution of the Board of Directors, issue redeemable securities and determine the terms of their
redemption and the provisions of the Companies Law shall apply to the issue of such securities. The Board of Directors shall determine which
redeemable securities shall be redeemed, from time to time, in accordance with the terms of the issuance of such securities.
TRANSFER OF SHARES
18.
Effectiveness and Registration.
18.1.
No transfer of shares shall be registered unless a proper instrument of transfer (in any customary form or any other form satisfactory to the
Board of Directors) signed by both the transferor and the transferee has been submitted to the Company or its transfer agent, together with
any share certificate(s) or such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been
registered in the Register of Shareholders in respect of the shares so transferred, the Company may continue to regard the transferor as the
owner thereof. The Board of Directors may, from time to time, prescribe a fee for the registration of a transfer.
18.2.
The instrument of transfer of shares shall be in writing and shall be substantially in the following form or in any other form satisfactory to
the Board of Directors:
I, _______, of ________ (the "Transferor"), for valuable consideration paid to me by _________ of __________ (the "Transferee"),
hereby transfer to the Transferee ________ _______ shares of Allot Communications Ltd., _____ nominal value each, to be held by the said
Transferee and/or its executors, administrators and assignees, upon all of the terms and conditions subject to which the Transferor held such
shares, and the said Transferee does hereby agree to take such shares subject to the above terms and conditions.
- 7 -
IN WITNESS WHEREOF the Transferor and the Transferee have executed this instrument this __ day of _______, 20__.
__________________________ __________________________
Transferor Transferee
18.3.
The Board of Directors may, in its discretion, refuse to register the transfer of share which was not fully paid up.
18.4.
Registered transfer instruments shall remain with the Company, but any transfer instrument, which the Board of Directors refused to
register, shall be returned to the transferor upon demand.
TRANSMISSION OF SHARES
19.
Decedents' Shares.
19.1.
19.2.
Upon the death of a shareholder, in case of a share registered in the names of two or more holders, the Company may recognize the
survivor(s) as the sole owner(s) thereof unless and until the provisions of Article 19.2 have been effectively invoked. In case of a share
registered in the names of two or more holders, each holder thereof shall be entitled to transfer their rights in such share(s).
Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or
letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient that
he sustains the character in respect of which he proposes to act under this Article or of his title), shall be registered as a holder in respect of
such share, or may, subject to the regulations as to transfer herein contained, transfer such share.
20.
Receivers and Liquidators.
20.1.
20.2.
The Company may recognize the receiver or liquidator of any corporate shareholder in winding-up or dissolution, or the receiver or trustee
in bankruptcy of any shareholder, as being entitled to the shares registered in the name of such shareholder.
The receiver or liquidator of a corporate shareholder in winding-up or dissolution, or the receiver or trustee in bankruptcy of any
shareholder, upon producing such evidence as the Board of Directors may deem sufficient that he sustains the character in respect of which
he proposes to act under this Article or of his title, shall be registered as a shareholder in respect of such shares, or may, subject to the
regulations as to transfer herein contained, transfer such shares.
RECORD DATE FOR NOTICES OF GENERAL MEETINGS AND OTHER ACTION
21.
Record Date for General Meetings.
Notwithstanding any provision to the contrary in these Articles, for the determination of the holders entitled to receive notice of and to participate in
and vote at a General Meeting, or to express consent to or dissent from any corporate action in writing, or to exercise any rights in respect of shares
of the Company (other than with respect to distribution of dividends as detailed in Article 22 below), the Board of Directors may fix, in advance, a
record date, which, subject to and except as otherwise permitted by any applicable law, shall not be earlier than forty (40) days prior to the date of
the General Meeting or other action, as the case may be, nor later than four (4) days prior to the date of the General Meeting or other action, as the
case may be. No persons other than holders of record of voting shares as of such record date shall be entitled to notice of and to participate in and
vote at such General Meeting, or to exercise such other right, as the case may be. A determination of holders of record with respect to a General
Meeting shall apply to any adjournment of such meeting, provided that the Board of Directors may fix a new record date for an adjourned meeting.
- 8 -
22.
Record Date for Distributions.
22.1.
22.2.
Subject to the applicable law, the person entitled to receive payment of any dividend or other distribution or allotment of any rights, shall be
the holder of record of shares of the Company that are entitled to distribution of dividends on the date upon which it was resolved to
distribute the dividends or at such later date as shall be provided in the resolution in question.
The transfer of shares shall not entitle the transferee to a dividend or any other monies payable by the Company on account of ownership of
shares that was agreed upon after said transfer, but before its registration with the Company, as required by these Articles and any applicable
law.
GENERAL MEETINGS
23.
Annual General Meeting.
An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last
preceding Annual General Meeting) and at such place as may be determined by the Board of Directors.
24.
Special Meetings.
All General Meetings other than Annual General Meetings shall be called "Special General Meetings". The Board of Directors may, whenever it
deems fit, convene a Special General Meeting at such time and place as may be determined by the Board of Directors, and shall be obliged to do so
upon a requisition in writing in accordance with Section 63 of the Companies Law.
25.
Class Meetings.
The provisions of these Articles with respect to General meetings shall apply, mutatis mutandis, to meetings of the holders of a class of shares of the
Company (herein "Class Meetings"); provided, however, that the requisite quorum at any such Class Meeting shall be at least two shareholders,
present in person or by proxy, and holding together shares representing not less than 25% of the voting power of the issued shares of such class.
26.
Notice of General Meetings.
26.1.
26.2.
To the extent permitted by applicable law, the Company is not required to deliver a personal notice of General Meetings to each holder of
record of the Company's Shares.
Subject to these Articles and to the applicable law and regulations, including the applicable laws and regulations of any stock market or
over-the-counter market on which the Company's shares are listed, the Company shall provide to those who are entitled to participate in a
General Meeting or publish a written notice not less than twenty-one (21) days prior to any General Meeting.
- 9 -
PROCEEDINGS AT GENERAL MEETINGS
27.
Quorum.
27.1.
27.2.
27.3.
Two or more shareholders (not in default in payment of any sum referred to in Article 12 hereof), present in person or by proxy and holding
shares conferring in the aggregate at least one twenty five percent (25%) of the voting power of the Company shall constitute a quorum at
General Meetings. No business shall be transacted at a General Meeting, or at any adjournment thereof, unless the requisite quorum is
present when the resolution is voted upon.
If within thirty (30) minutes from the time appointed for the meeting a quorum is not present, the meeting shall be dissolved, but shall stand
adjourned to the same day at the same time the following week (the "Deferred General Meeting"), and the Company shall not be obligated
to give notice to the shareholders of the Deferred General Meeting, or to a later date, if so specified in the notice of the General Meeting. In
the Deferred General Meeting, all matters for which the General Meeting was summoned shall be discussed, provided at least two
shareholders (not in default in payment of any sum referred to in Article 12 hereof), present in person or by proxy who hold shares
conferring in the aggregate at least ten percent (10%) of the voting power of the Company (subject to applicable law, rules and regulations).
If the General Meeting was convened pursuant to a request by the shareholders (in accordance with Section 63 of the Companies Law), then
the requisite quorum for the Deferred General Meeting must include at least the number of shareholders that are required in order to
convene a General Meeting under Section 63 of the Companies Law (i.e., one or more shareholders holding at least five percent (5%) of the
issued and outstanding share capital of the Company and at least one percent (1%) of the voting rights in the Company, or one or more
shareholders holding at least five percent (5%) of the voting rights of the Company).
28.
Chairperson.
The Chairperson, if any, of the Board of Directors shall preside as chairperson at every General Meeting of the Company, or any other person
appointed by the Board of Directors for such purpose. If there is no such Chairperson, or if at any meeting he is not present within fifteen (15)
minutes after the time fixed for holding the meeting or is unwilling to act as chairperson, then the directors present by a simple majority may elect
one of the directors present as the chairperson, and if the directors present shall not do so, then the shareholders present shall choose someone of the
shareholders present to be chairperson. The office of chairperson shall not, by itself, entitle the holder thereof to vote at any General Meeting nor
shall it entitle such holder to a second or casting vote (without derogating, however, from the rights of such chairperson to vote as a holder of voting
shares or proxy of a shareholder if, in fact, he is also a shareholder or such proxy).
29.
Adoption of Resolutions at General Meetings.
29.1.
Unless otherwise specified in these Articles or as otherwise required by applicable law, all matters brought to vote in a General Meeting,
including without limitation the amendment of these Articles, shall be deemed adopted if approved by an Ordinary Resolution. In the event
of a tie-vote the proposed resolution shall be rejected.
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29.2.
Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any shareholder
present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be
demanded before the voting on a proposed resolution or immediately after the declaration by the chairperson of the meeting of the results of
the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show of hands shall be of
no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may be withdrawn at any
time before the same is conducted, in which event another shareholder may then demand such written ballot. The demand for a written
ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which the written ballot was
demanded.
29.3.
A declaration by the chairperson of the meeting that a resolution has been adopted unanimously, or adopted by a particular majority, or
rejected, and an entry to that effect in the minute book of the Company, shall be prima facie evidence of the fact without proof of the
number or proportion of the votes recorded in favor of or against such resolution.
30.
Power to Adjourn.
The chairperson of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power
represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting, the
discussion or the decision in a matter that was on the agenda from time to time and from place to place, but no business shall be transacted at any
adjourned meeting except business which might lawfully have been transacted at the meeting as originally called and with respect to which no
resolution was adopted.
31.
Voting Power.
Subject to the provisions of Article 32 and subject to any provision hereof conferring special rights as to voting, or restricting the right to vote, every
shareholder shall have one vote for each share held by him of record, on every resolution, without regard to whether the vote hereon is conducted by
a show of hands, by written ballot or by any other means.
32.
Voting Rights.
32.1.
32.2.
32.3.
32.4.
Unless otherwise decided by the Board, a shareholder shall not be entitled to vote at any General Meeting (or be counted as a part of the
quorum thereat), with respect to shares for which all calls and other sums then payable by him have not been paid.
A company or other corporate body being a shareholder of the Company may authorize any person to be its representative at any General
Meeting of the Company. Any person so authorized shall be entitled to exercise on behalf of such shareholder all the power which the latter
could have exercised if it were an individual shareholder. Upon the request of the chairperson of the meeting, written evidence of such
authorization (in form acceptable to the chairperson) shall be delivered to him.
Any shareholder entitled to vote may vote either personally or by proxy (who need not be a holder of the Company), or, if the holder is a
company or other corporate body, by a representative authorized pursuant to Article 33.2.
If two or more persons are registered as joint holders of any share, the vote of the senior who tenders a vote, in person or by proxy, shall be
accepted to the exclusion of the vote(s) of the other joint holder(s); and for this purpose seniority shall be determined by the order in which
the names stand in the Register of Shareholders.
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32.5. Minors and legally incompetent persons shall only be allowed to vote through their legal guardian, and any such guardian may vote as a
proxy.
32.6.
The Board of Directors may determine, in its discretion, the matters that may be voted upon at the meeting by a proxy card in addition to the
matters listed in Section 87(a) of the Companies Law.
PROXIES
33.
Instrument of Appointment.
33.1.
The instrument appointing a proxy shall be in writing and shall be substantially in the following form:
"I _________ (Name of Shareholder) of _________ (Address of Shareholder) being a shareholder of Allot Communications Ltd. hereby
appoint _________ as my proxy to vote for me and on my behalf at the General Meeting of the Company to be held on the ___ day of
___________, 20__ and at any adjournment(s) thereof.
Signed this ___ day of ___________, 20__.
____________________
(Signature of Appointer)"
or in any usual or common form or in such other form as may be approved by the Board of Directors. It shall be duly signed by the
appointer or his duly authorized attorney or, if such appointer is a company or other corporate body, under its common seal, stamp or
printed name or the hand of its duly authorized agent(s) or attorney(s).
33.2.
33.3.
33.4.
The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall
either be delivered to the Company (at its registered office, or at its principal place of business, or at the office of its registrar and/or transfer
agent or at such place as the Board of Directors may specify) not less than twenty four (24) hours before the time fixed for the meeting, at
which the person named in the instrument proposes to vote, or presented to the chairperson of the meeting at such meeting. Delivery of an
instrument appointing a proxy shall not preclude a shareholder from attending and voting in person in the meeting, unless the instrument is
irrevocable by its terms.
The Board of Directors may cause the Company to send, by mail or otherwise, instruments of proxy to shareholders for use at any general
meeting.
Any shareholder who holds more than one share shall be entitled to appoint a proxy with respect to all or some of its shares or appoint more
than one proxy, provided that the instrument appointing a proxy shall include the number and class of shares with respect to which it was
issued.
34.
Effect of Death of Appointer or Revocation of Appointment.
A vote cast pursuant to an instrument appointing a proxy shall be valid notwithstanding the previous death of the appointing holder (or of his
attorney-in-fact, if any, who signed such instrument), or the revocation of the appointment or the transfer of the share in respect of which the vote is
cast, provided no written notice of such death, revocation or transfer shall have been received by the Company or by the chairperson of the meeting
before such vote is cast and provided, further, that the appointing holder, if present in person at said meeting, may revoke the appointment by means
of a writing or oral notification to the chairperson, or otherwise.
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BOARD OF DIRECTORS
35.
Powers of Board of Directors.
35.1.
35.2.
35.3.
General. The Board of Directors shall have all powers and responsibilities allocated to the Board of Directors by the Companies Law and
these Articles, including setting the Company's policies and supervising the execution of the powers and responsibilities of the General
Manager of the Company. The Board of Directors may execute any power of the Company that is not specifically allocated by applicable
law or by these Articles to another organ of the Company.
Borrowing Power. Subject to the terms of these Articles, the Board of Directors may from time to time, in its discretion, cause the Company
to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the
repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it deems fit, and, in
particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on
the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid
capital for the time being.
Reserves. The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves
for any purpose(s) which the Board of Directors, in its absolute discretion, shall deem fit, and may invest any sum so set aside in any
manner and from time to time deal with and vary such investments, and dispose of all or any part thereof, and employ any such reserve or
any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may
subdivide or re-designate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may
from time to time deem fit.
36.
Exercise of Powers of Directors.
36.1.
36.2.
A meeting of the Board of Directors at which a quorum is present shall be competent to exercise all the authorities, powers and discretions
vested in or exercisable by the Board of Directors.
Except as otherwise specifically set forth in these Articles or as required by applicable law, a resolution proposed at any meeting of the
Board of Directors shall be deemed adopted if approved by a majority of the directors present (or participating, in the case of a vote through
a permitted means of communications) and lawfully voting thereon (as conclusively determined by the Chairperson of the Board of
Directors). The Board of Directors may conduct a meeting by use of any means of communications, provided all persons participating in the
meeting can hear each other at the same time. A resolution approved by use of means of communications as aforesaid shall be deemed to be
a resolution lawfully adopted at a meeting of the Board of Directors. In the event of a tie-vote, the Chairperson of the Board of Directors
shall not have casting vote on such matter, and the proposed resolution shall be rejected.
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36.3.
36.4.
A resolution in writing signed by all directors then in office and lawfully entitled to vote thereon (as conclusively determined by the
Chairperson of the Board of Directors) or to which all such directors have given their consent (by letter, facsimile, e-mail message or
otherwise), shall be deemed to have been adopted by a meeting of the Board of Directors duly convened and held.
A resolution without convening may be adopted by the Board of Directors, provided, however, that all directors then in office and lawfully
entitled to vote thereon have given their consent not to convene for such resolution. If a resolution without convening, as aforementioned,
had been adopted, the Chairperson of the Board of Directors shall provide and sign a written minutes of the resolutions adopted, including
the resolution not to convene.
37.
Delegation of Powers.
37.1.
Committees of the Board of Directors:
37.1.1.
The Board of Directors may, subject to the provisions of the Companies Law and any other applicable law, delegate any of
its powers to committees ("Committees of the Board of Directors"), and it may from time to time revoke such delegation
or alter the composition of any such committee.
37.1.2.
The membership of each Committee of the Board of Directors shall comply with the requirements of the Companies Law.
37.1.3.
37.1.4.
Subject to the provisions of the Companies Law and except as otherwise prescribed by the Board of Director, any resolution
by the Committee of the Board of Directors within its authority shall be binding as if it was adopted by the Board of
Directors.
A Committee of the Board of Directors shall, in the exercise of the powers so delegated, conform to any regulations imposed
on it by the Board of Directors. The meetings and proceedings of any such Committee of the Board of Directors shall,
mutatis mutandis, be governed by the provisions herein contained for regulating the meetings of the Board of Directors, so
far as not superseded by any regulations adopted by the Board of Directors under this Article. Unless otherwise expressly
provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not
be empowered to further delegate such powers.
37.2. Without derogating from the powers and authorities of the Company's General Manager, the Board of Directors may from time to time,
subject to the provisions of the Companies Law, appoint a Secretary to the Company, as well as officers, agents, employees and independent
contractors, as the Board of Directors may deem fit, and may terminate the service of any such person. The Board of Directors may, subject
to the provisions of the Companies Law, determine the powers and duties, as well as the salaries and emoluments, of all such persons, and
may require security in such cases and in such amounts as it deems fit.
37.3. Without derogating from the powers and authorities of the Company's General Manager, the Board of Directors may from time to time, by
power of attorney or otherwise, appoint any person, company, firm or body of persons to be the attorney or attorneys of the Company at law
or in fact for such purpose(s) and with such powers, authorities and discretions, and for such period and subject to such conditions, as it
deems fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience of persons
dealing with any such attorney as the Board of Directors may deem fit, and may also authorize any such attorney to delegate all or any of
the powers, authorities and discretions vested in him.
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38.
Number of Directors.
Until otherwise determined by a Special Resolution of the Company's shareholders, and as so determined, the Board of Directors shall consist of not
less than five (5) nor more than nine (9) Directors, two of whom shall be Outside Directors (as such term is defined in the Companies Law). Any
change to this Article 38 shall only be carried out by a resolution of the shareholders of the Company, adopted by the holders of securities
representing at least 2/3 (two thirds) of the voting securities of the Company then outstanding.
39.
Election and Removal of Directors.
39.1.
39.2.
39.3.
Outside Directors shall serve on the Board according to the number required by law, will be appointed and removed pursuant to the law and
shall be governed by the relevant provisions of the law which applies to such Outside Directors.
All Directors, other than Outside Directors (who will be chosen and appointed, and whose term will expire, in accordance with applicable
law), shall be appointed in accordance with the provisions of this Article.
Subject to the provisions of Article 40, the members of the Board of Directors of the Company shall be elected by an Ordinary Resolution in
a General Meeting, according to the following conditions:
39.3.1.
39.3.2.
39.3.3.
The Directors of the Company (other than the Outside Directors) shall be divided into three classes, designated Class I,
Class II and Class III. Each class of Directors shall consist, as nearly as possible, of one-third of the total number of directors
constituting the entire Board of Directors. The above-described term of office of the Class I Directors shall expire at the first
Annual General Meeting ensuing next after the division into Classes; the above-described term of office of the Class II
Directors shall expire at the second Annual General Meeting ensuing after the division into Classes; and the above-described
term of office of the Class III Directors shall expire at the third Annual General Meeting ensuing after the division into
Classes.
At each Annual General Meeting, election or re-election of Directors following the expiration of the term of office of the
Directors of a certain Class, will be for a term of office that expires on the third Annual General Meeting following such
election or re-election, such that from 2007 and forward (inclusive), each year the term of office of only one Class of
Directors will expire. A Director shall hold office until the Annual General Meeting for the year in which his or her term
expires and until his or her successor shall be elected and qualified, subject to Article 41 below.
Upon a change in the number of Directors, in accordance with the provisions of these Articles, any increase or decrease shall
be apportioned among the Classes so as to maintain the number of Directors in each Class as nearly equal as possible. The
removal of any Director, other than in accordance with Article 41 below, shall only be carried out by a Special Resolution.
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39.3.4.
Any change to this Article 39.3 shall only be carried out by a resolution of the shareholders of the Company, adopted by the
holders of securities representing at least 2/3 (two thirds) of the voting securities of the Company then outstanding.
39.4.
Subject to applicable law, any Director whose term of service as Director has expired, shall be eligible for re-election as a Director.
Candidates for directorships to be elected by the Annual General Meeting shall be nominated either by the Board of Directors or by a
Committee of the Board of Directors authorized by the Board of Directors subject to the provisions of the Companies Law and other
applicable law. Any change to this Article 39.4 shall only be carried out by a resolution of the shareholders of the Company, adopted by the
holders of securities representing at least 2/3 (two thirds) of the voting securities of the Company then outstanding.
39.5.
Any Director shall assume his position as Director on the date of his election to the Board of Directors, unless a later date has been
designated in the resolution appointing such Director.
40.
Continuing Directors in the Event of Vacancies.
40.1.
Any vacancy in the Board of Directors, however occurring (including vacancy existing on the date of adoption of these Articles by reason
that less than nine (9) directors are serving on the date of such adoption, but excluding two seats reserved for Outside Directors and any
vacancy created with respect to an Outside Director), may be filled by a vote of a simple majority of the Directors then in office, even if less
than quorum, provided that the total number of directors shall not exceed nine (9). A Director elected to fill a vacancy shall be elected to
hold office until the next Annual General Meeting, and may be removed from the Board of Directors by a vote of simple majority of the
Directors then in office before such Annual General Meeting has convened. The Director elected by such next Annual General Meeting with
respect the vacancy shall be considered as a member of the class in which such vacancy was created. Any change to this Article 40.1 shall
only be carried out by a resolution of the shareholders of the Company, adopted by the holders of securities representing at least 2/3 (two
thirds) of the voting securities of the Company then outstanding.
40.2.
If the position of one or more Directors is vacated, the continuing Directors shall be entitled to act in every matter so long as their number is
not less than the statutory minimum number required at the time. If, at any time, their number decreases below said statutory minimum
number, the Directors will not be entitled to act except in an emergency, and they may fill vacant positions on the Board of Directors
pursuant to Article 40.1 herein or call a General Meeting of the Company for the purpose of electing Directors to fill any vacancies.
41.
Vacation of Office.
41.1.
The office of a Director shall be vacated, ipso facto, in accordance with the provision of the Companies Law, and upon the occurrence of
any of the following: (i) such Director's death, (ii) such Director becomes legally incompetent, (iii) if such Director is an individual, such
Director is declared bankrupt, (iv) if such Director is a corporate entity, upon its winding-up or liquidation, whether voluntary or
involuntary; (v) if such Director is prohibited by applicable law or listing requirements from serving as a Director of the Company.
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41.2.
The office of a Director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, or
upon the delivery thereof to the Company, whichever is later.
42.
Remuneration of Directors.
Subject to the provisions of applicable law, a Director may be paid remuneration by the Company for his services as a director to the extent that the
remuneration shall have been approved in accordance with applicable law.
43.
Conflict of Interests.
Subject to the provisions any applicable law, the Company may enter into any contract or otherwise transact any business with any Office Holder in
which contract or business such Director has a personal interest, directly or indirectly; and may enter into any contract of otherwise transact any
business with any third party in which contract or business an Office Holder has a personal interest, directly or indirectly. The Board of Directors
shall be entitled to delegate its approval power under Section 271 of the Companies Law to a Committee of the Board, and the power of such
committee shall be regarded as another method of approval within the meaning of Section 271 of the Companies Law.
PROCEEDINGS OF THE BOARD OF DIRECTORS
44. Meetings.
44.1.
44.2.
44.3.
The Board of Directors may meet and adjourn its meetings according to the Company's needs but at least once in every three (3) months,
and otherwise regulate such meetings and proceedings as the Directors think fit. The Board may meet by telephone conference call or other
communication equipment so long as each director participating in such call can hear, and be heard by, each other director participating in
such call. The directors participating in this manner shall be deemed to be present in person at such meeting and shall be entitled to vote or
be counted in a quorum accordingly.
Notice of meeting of the Board of Directors shall be given to each Director at the last address that the Director provided to the Company, or
via facsimile or e-mail message or other means of written or electronic communication. Unless otherwise determined by the Board of
Directors, the notice shall be given at least seventy-two (72) hours prior to the time fixed for the meeting and shall specify the place and
time where the meeting shall take place, as well as a reasonable account of the agenda to be discussed at such meeting.
Failure to deliver a notice to a Director in the manner required herein may be waived (in advance or retroactively) by such director and a
meeting shall be deemed to have been duly convened notwithstanding such defective notice if such failure or defective is so waived by all
Directors entitled to participate at such meeting and to notice was not duly given. The presence of a Director at any such meeting shall be
deemed due receipt or prior notice or a waiver of any such notice requirement by such Director.
44.4.
The Chairperson of the Board of Directors may convene a meeting of the Board of Directors at any time he so chooses, and shall convene
such a meeting in accordance with the provisions of Section 98 of the Companies Law.
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44.5.
Anything to the contrary notwithstanding, the Board of Directors may convene without any prior notice, contingent upon the approval
thereon of all members of the Board of Directors.
45.
Quorum.
45.1.
45.2.
A quorum at a meeting of the Board of Directors shall be constituted by the presence in person, or by conference call or similar
communications equipment (by means of which all persons participating in the meeting can hear each other at the same time) of a majority
of the Directors then in office who are lawfully entitled to participate in the meeting (as conclusively determined by the Chairperson of the
Board of Directors), but shall not be less than two (2).
If within half an hour (or within such longer time as the chairperson of the meeting may decide) from the time appointed for the meeting, a
quorum is not present, the Board of Directors meeting shall stand adjourned to the time and place determined by the chairperson of the
meeting, provided that a notice of at least 24 hours is given to the Directors of such adjourned meeting. The requisite quorum at an
adjourned meeting of the Board of Directors shall be those Directors who are present at such meeting, but not less than two (2). The only
business to be considered at an adjourned meeting of the Board of Directors shall be those matters which might have been lawfully
considered at the meeting of the Board of Directors originally called if a requisite quorum had been present.
46.
Chairperson of the Board of Directors.
The Board of Directors may from time to time elect one of its members to be the Chairperson of the Board of Directors, remove such Chairperson
from office and appoint another in its place. The Chairperson of the Board of Directors shall preside at every meeting of the Board of Directors, but
if there is no such Chairperson, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting, or if he is
unwilling to take the chair, the Directors present shall choose one of their number to be the chairperson of such meeting.
47.
Validity of Acts Despite Defects.
Subject to the provisions of the Companies Law, all acts done bona fide at any meeting of the Board of Directors, or of a Committee of the Board of
Directors, or by any person(s) acting as Director(s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the
appointment of the participants in such meetings or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be
as valid as if there were no such defect or disqualification.
GENERAL MANAGER
48.
Subject to applicable law, the Board of Directors shall appoint one or more persons, whether or not Directors, as General Manager(s) of the Company
and may confer upon such person(s), and from time to time modify or revoke, such title(s) (including Managing Director, President, Chief Executive
Officer, Director General or any similar or dissimilar title) and such duties and authorities of the Board of Directors as the Board of Directors may
deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe. Subject to applicable law, such
appointment(s) may be either for a fixed term or without any limitation of time subject to applicable law, and the Board of Directors may from time
to time (subject to the provisions of the Companies Law and of any contract between any such person and the Company) fix his or their salaries and
emoluments, remove or dismiss him or them from office and appoint another or others in his or their place or places.
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49.
The management and the operation of the Company's affairs and business in accordance with the policies determined by the Board of Directors shall
be vested in the General Manager, in addition to all powers and authorities of the General Manager as specified in the Companies Law. The Board of
Directors may assume the authority granted to the General Manager, either with respect to a certain issue or for a certain period of time.
MINUTES
50. Minutes.
50.1. Minutes of each General Meeting and of each meeting of the Board of Directors shall be recorded and duly entered in books provided for
that purpose. Such minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat.
50.2.
Any minutes as aforesaid, if purporting to be signed (i) by the chairperson of the meeting or by the chairperson of the next succeeding
meeting with respect to a General Meeting; and (ii) by the Director who conducted the meeting of the Board of Director, shall constitute
prima facie evidence of the matters recorded therein.
DISTRIBUTIONS
51.
Declaration and Payment of Distributions.
51.1.
51.2.
Subject to the Companies Law, the Board of Directors may from time to time declare, and cause the Company to effect Distributions as may
appear to the Board of Directors to be justified by the profits of the Company. Subject to the Companies Law and these Articles, the Board
of Directors shall determine the time for payment of such Distributions, and the record date for determining the shareholders entitled
thereto.
The Board of Directors may deduct from any Distribution payable to any shareholder, whether said shareholder is the sole holder of the
shares or a joint holder, in respect of a share any and all sums of money then payable by them, whether separately or jointly, to the Company
on account of calls or otherwise in respect of shares of the Company and/or on account of any other matter of transaction whatsoever. The
Board of Directors may retain any dividend or other moneys payable on or in respect of a share on which the Company has a lien, and may
apply the same in or toward the satisfaction of the debts, liabilities or engagement in respect of which the lien exists.
52.
Amount Payable by Way of Distribution.
52.1.
52.2.
Any Distribution paid by the Company shall be allocated among the shareholders entitled thereto in proportion to the outstanding capital
nominal value, on account of their respective holdings of the shares in respect of which such Distribution is being paid, without taking into
consideration any premium that was paid with regard to such shares.
Shares which are fully paid up or which are credited as fully or partially paid within any period which in respect thereof Distributions are
paid shall entitle the holders thereof to a Distribution in proportion of the amount paid up or credited as paid up in respect of the nominal
value of such shares and to the date of payment thereof (pro rata temporis).
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53.
Interest.
No Distribution shall carry interest as against the Company.
54.
Unclaimed Distribution.
All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors for the
benefit of the Company until claimed. The payment by the Board of Directors of any unclaimed dividend or such other moneys into a separate
account shall not constitute the Company a trustee in respect thereof, and any dividend unclaimed after a period of seven (7) years from the date of
declaration of such dividend, and any such other moneys unclaimed after a like period from the date the same were payable, shall be forfeited and
shall revert to the Company, provided, however, that the Board of Directors may, at its discretion, cause the Company to pay any such dividend or
such other moneys, or any part thereof, to a person who would have been entitled thereto had the same not reverted to the Company.
55.
Payment in Specie.
A Distribution may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid up shares, debentures or
debenture stock of the Company or of any other companies, or in any one or more of such ways.
56.
Capitalization of Profits, Reserves.
Upon the resolution of the Board of Directors, the Company -
56.1.
may cause any moneys, investments, or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve
fund, or to the credit of a reserve fund for the redemption of capital, or in the hands of the Company and available for dividends, or
representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and
distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same
proportion, on the footing that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf
of such shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures
or debenture stock of the Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any
issued shares or debentures or debenture stock; and
56.2.
may cause such distribution or payment to be accepted by such shareholders in full satisfaction of their interest in the said capitalized sum.
57.
Implementation of Resolutions Concerning Distributions.
For the purpose of giving full effect to any resolution concerning any Distribution, and without derogating from the provisions of Article 7.2 hereof,
and subject to applicable law, the Board of Directors may settle any difficulty which may arise in regard to the Distribution as it thinks expedient,
and, in particular, may issue fractional shares, and may fix the value for Distribution of any specific assets, and may determine that cash payments
shall be made to any shareholders upon the footing of the value so fixed, or that fractions of less value than the nominal value of one share may be
disregarded in order to adjust the rights of all parties, and may vest any such cash, shares, debentures, debenture stock or specific assets in trustees
upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board of Directors.
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OUTSIDE AUDITORS
58.
Auditors.
The outside auditor(s) of the Company shall be appointed by resolution of the Company's shareholders at the General Meeting and shall serve until
its/their re-election, removal or replacement by subsequent resolution. The authorities, rights and duties of the outside auditor(s) of the Company,
shall be regulated by the applicable law, provided, however, that the Board of Directors shall have the power and authority to fix the remuneration of
the auditor(s).
BRANCH REGISTERS
59.
Branch Registers.
Subject to and in accordance with the provisions of the Companies Law and to all orders and regulations issued thereunder, the Company may cause
branch registers to be kept in any place outside Israel as the Board of Directors may think fit, and, subject to all applicable requirements of law, the
Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such branch registers.
RIGHTS OF SIGNATURE
60.
Rights of Signature.
The Board of Directors shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company,
and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the
scope of his or their authority.
NOTICES
61.
Notices.
61.1.
Subject to applicable law, a notice or any other documents which the Company shall deliver and which it is entitled or required to give to a
shareholder pursuant to the provisions of these Articles shall be delivered by the Company in any of the following manners as the Company
may choose: in person, by mail, by fax or by electronic form. The notice or other document shall be delivered in accordance with the
contact details of the respective shareholder as described in the Register of Shareholder or such other contact details as a shareholder may
have designated in writing for the receipt of notices.
Any notice shall be deemed to have been served two (2) business days after it has been posted (seven (7) business days if sent
internationally), or when actually received by the addressee if sooner. Notice sent by facsimile or electronic or other similar form shall be
deemed to have been served twenty four (24) hours after being sent or when actually received by the addressee if sooner. A declaration in
writing of person authorized therefore by the Company or an authorized person from the Company's designated transfer agent stating that a
notice was sent to a shareholder shall suffice as evidence of the same for the purposes of this Article. If a notice is, in fact, received by the
addressee, then it shall be deemed to have been duly served, when received, notwithstanding it having been defectively addressed or failed
in some other respect, to comply with the provisions of this Article 61.
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61.2.
61.3.
61.4.
61.5.
61.6.
61.7.
61.8.
All notices to be given to the shareholders shall, with respect to any share to which persons are jointly entitled, be given to whichever of
such persons is named first in the Register of Shareholders, and any notice so given shall be sufficient notice to the holders of such share.
Any shareholder whose address is not described in the Register of Shareholders, and who shall not have designated in writing an address for
the receipt of notices, shall not be entitled to receive any notice from the Company.
Notwithstanding anything to the contrary herein, and without limiting the Company's right to serve notice in any other way permitted by
applicable law, notice by the Company which is published in one (1) daily newspaper of general circulation in the State of Israel and one (1)
daily newspaper of general circulation in the City of New York, if at all, shall be deemed to have been duly given to any shareholder whose
address as registered in the Registry of Shareholders is located in the State of Israel. The mailing or publication date and the date of the
meeting shall be counted as part of the days comprising any notice period.
Notwithstanding anything to the contrary contained herein and subject to the provisions of the Companies Law, notice to a Shareholder may
be served, as general notice to all Shareholders, in accordance with applicable rules and regulations of any stock exchange on which the
Company's shares are listed.
Subject to applicable law, any Shareholder, Director or any other person entitled to receive notice in accordance with these Articles or law,
may waive notice, in advance or retroactively, in a particular case or type of cases or generally, and if so, notice will be deemed as having
been duly served, and all proceedings or actions for which the notice was required will be deemed valid.
The accidental omission to give notice of a meeting to any shareholder or the non-receipt of notice by any shareholder entitled to receive
notice shall not invalidate the proceedings at any meeting or any resolution(s) adopted by such a meeting.
Notwithstanding the foregoing and subject to any applicable law, in cases where it is necessary to give advance notice of a particular
number of days or notice which shall remain in effect for a particular period, the day the notice was sent shall be excluded and the scheduled
date of the meeting or the last date of the period shall be included in the count.
INSURANCE AND INDEMNITY
62.
Insurance and Indemnity.
62.1.
Subject to the provisions of the Companies Law, the Company may indemnify an Office Holder in respect of any liability imposed on the
Office Holder or incurred by him in respect of any act or omission or alleged act or omission (each, an "action") performed by him in his
capacity as an Office Holder, in respect of the following:
62.1.1.
62.1.2.
any financial liability imposed on him or incurred by him in favor of another person by a court judgment, including a
compromise judgment or an arbitrator's award approved by court;
reasonable litigation expenses, including without limitation attorneys' fees and the fees and expenses of investigators,
accountants and other experts, expended by the Office Holder or charged to him by court, (i) in a proceeding instituted
against the Office Holder by the Company or on its behalf or by another person, or (ii) in any criminal proceeding in which
the Office Holder is acquitted, or (iii) in any criminal proceeding for an offense which does not require proof of criminal
intent of which the Office Holder convicted;
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62.1.3.
62.1.4.
reasonable litigation expenses, including without limitation attorneys' fees and the fees and expenses of investigators,
accountants and other experts, expended by an Office Holder as a result of an investigation or proceeding instituted against
the Office Holder by an authority authorized to conduct such investigation or proceeding, which: (i) is Concluded Without
The Filing Of An Indictment (as defined in the Companies Law) against the Office Holder and without the imposition on the
Office Holder of any Financial Obligation In Lieu of Criminal Proceedings (as defined in the Companies Law), or (ii) which
is Concluded Without The Filing Of An Indictment against the Office Holder, but with the imposition on the Office Holder
of a Financial Obligation In Lieu of Criminal Proceedings in respect of an offense that does not require proof of criminal
intent or in connection with a financial sanction; and
a financial obligation imposed upon an Office Holder and reasonable litigation expenses, including without limitation
attorney fees, expended by the Office Holder as a result of an administrative proceeding instituted against the Office Holder.
Without derogating from the generality of the foregoing, such obligation or expense will include a payment which the Office
Holder is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 1968 –
5728 (the "Securities Law") and expenses that the Office Holder incurred in connection with a proceeding under Chapters
H'3, H'4 or I'1 of the Securities Law, including reasonable legal expenses, which term includes attorney fees.
Subject to the provisions of the Companies Law, the Company may undertake to indemnify an Office Holder as aforesaid, (i) prospectively,
provided that a prospective undertaking under Article 62.1.1 is limited to events which in the opinion of the Board of Directors are foreseen
based on the Company's activities when the undertaking to indemnify is given, and to an amount or criteria determined by the Board of
Directors as reasonable under the circumstances and such undertaking under Article 62.1.1 shall detail the abovementioned events and
amount or criteria, and (ii) retroactively.
62.2.
62.3.
Subject to the provisions of the Companies Law, the Company may release, in advance, an Office Holder from liability to the Company for
damages which arise from breach of such Office Holder's duty of care to the Company (as such term is defined under the Companies Law)
other than with respect to liability arising out of a prohibited Distribution.
Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of all or part of the liability of any
Office Holder imposed on the Office Holder in respect of an act or omission or alleged act or omission performed in his capacity as an
Office Holder, in respect of each of the following:
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62.3.1.
A breach of his duty of care to the Company or to another person;
62.3.2.
A breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause
to assume that such act would not prejudice the interests of the Company;
62.3.3.
A financial liability imposed on the Office Holder in favor of another person; or
62.3.4.
A financial obligation imposed upon an Office Holder and reasonable litigation expenses, including without limitation
attorney fees, expended by the Office Holder as a result of an administrative proceeding instituted against him. Without
derogating from the generality of the foregoing, such obligation or expense will include a payment which the Office Holder
is obligated to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Securities Law and expenses that the
Office Holder incurred in connection with a proceeding under Chapters H'3, H'4 or I'1 of the Securities Law, including
reasonable legal expenses, which term includes attorney fees.
In any case that the Company is entitled to receive insurance compensation under a liability insurance policy, it is agreed and acknowledged
that the Company is authorized to provide Office Holders with priority over the Company’s entitlement to receive insurance compensation
under that policy.
The provisions of Articles 62.1 to 62.3 above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect
of the procurement of insurance and/or in respect of indemnification (i) in connection with any person who is not an Office Holder,
including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in
connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law;
provided that the procurement of any such insurance and/or the provision of any such indemnification shall be approved by the Board of
Directors of the Company.
In accordance with the Companies Law, Articles 62.1 to 62.3 above shall not apply to (i) breach of the Office Holder's fiduciary duty, other
than with respect to insurance as mentioned in Article 62.3.2, (ii) a breach of the Office Holder's duty of care for the Company that was
done intentionally or recklessly, other than a breach solely arising out of negligent conduct of the Office Holder; (iii) any act on behalf of
the Office Holder that was intended to gain unlawful personal benefit, and (iv) any kind of fine or penalty that the Office Holder was made
to pay.
Any amendment to the Companies Law, the Securities Law or any other applicable law, statute or rule adversely affecting the right of any
Office Holder to be indemnified or insured pursuant to this Article 62 shall be prospective in effect, and shall not affect the Company’s
obligation or ability to indemnify or insure an Office Holder for any act or omission occurring prior to such amendment, unless otherwise
provided by the Companies Law, the Securities Law or such other applicable law, statute or rule.
62.4.
62.5.
62.6.
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LIQUIDATION
63.
Subject to applicable law and to the rights of shares with special rights upon liquidation, in the case of dissolution of the Company, either voluntary
or involuntary, the assets of the Company available for distribution among the shareholders shall be distributed to them in proportion to the amount
paid or credited as paid on the nominal value of their respective holdings of the shares in respect of which such distribution is made.
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ALLOT COMMUNICATIONS LTD.
2006 INCENTIVE COMPENSATION PLAN
Exhibit 4.5
Allot Communications Ltd., an Israeli corporation (the “Company”), has adopted the Allot Communications Ltd. 2006 Incentive Compensation Plan
(the “Plan”) for the benefit of non-employee directors of the Company, officers and eligible employees and consultants of the Company and any Subsidiaries
and Affiliates (as each term is defined below), as follows:
ARTICLE I.
ESTABLISHMENT; PURPOSES; AND DURATION
1.1. Establishment of the Plan. The Company hereby establishes this incentive compensation plan to be known as the “Allot Communications
Ltd. 2006 Incentive Compensation Plan,” as set forth in this document. The Plan permits the grant of Stock Options, Stock Appreciation Rights, Restricted
Stock, Restricted Stock Units, Performance Units, Performance Shares, Cash-Based Awards and Other Stock-Based Awards. The Plan was adopted by the
Board of Directors (as defined below) on October 29, 2006. The Plan shall become effective immediately prior to the effective date of the initial public
offering of the Shares pursuant to a registration statement under the Securities Act (the “Effective Date”), provided that the Plan is approved by the holders of
a majority of the outstanding Shares which are present and voted at a meeting, which approval must occur within the period ending twelve (12) months after
the date the Plan is adopted by the Board. The effectiveness of any Awards granted prior to such shareholder approval shall be specifically subject to and
conditioned upon, and no Award shall be vested or exercisable until, such shareholder approval. If the Plan is not so approved by the Company's shareholders
or the Company’s initial public offering of Shares does not occur prior to December 31, 2006, the Plan shall not become effective, and shall terminate
immediately, and any Awards previously granted shall thereupon be automatically canceled and deemed to have been null and void ab initio. The Plan shall
remain in effect as provided in Section 1.3.
1.2. Purposes of the Plan. The purposes of the Plan are to provide additional incentives to non-employee directors of the Company and to
those officers, employees and consultants of the Company, Subsidiaries and Affiliates whose substantial contributions are essential to the continued growth
and success of the business of the Company and the Subsidiaries and Affiliates, in order to strengthen their commitment to the Company and the Subsidiaries
and Affiliates, and to attract and retain competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company
and to further align the interests of such non-employee directors, officers, employees and consultants with the interests of the shareholders of the
Company. To accomplish such purposes, the Plan provides that the Company may grant Stock Options, Stock Appreciation Rights, Restricted Stock,
Restricted Stock Units, Performance Units, Performance Shares, Cash-Based Awards and Other Stock-Based Awards.
1.3. Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1, and shall remain in effect, subject to
the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article XV, until all Shares subject to it shall have been delivered,
and any restrictions on such Shares have lapsed, pursuant to the Plan’s provisions. However, in no event may an Award be granted under the Plan on or after
ten years from the Effective Date.
ARTICLE II.
DEFINITIONS
Whenever used in the Plan, the fol lowing terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:
2.1. “Affiliate” means any entity other than the Company and any Subsidiary that is affiliated with the Company through stock or equity
ownership or otherwise and is designated as an Affiliate for purposes of the Plan by the Committee.
2.2. “Assumed” means that pursuant to a transaction resulting in a Change of Control, either (a) the Award is expressly affirmed by the
Company or (b) the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the surviving or
successor corporation or entity to the Company, or any parent or subsidiary of either thereof, or any other corporation or entity that is a party to the transaction
resulting in the Change of Control, in connection with such Change of Control, with appropriate adjustments to the number and kind of securities of such
surviving or successor corporation or entity, or such other applicable parent, subsidiary, corporation or entity, subject to the Award and the exercise or
purchase price thereof, which preserves the compensation element of the Award existing at the time of such Change of Control transaction, and provides for
subsequent payout in accordance with the same (or more favorable) payment and vesting schedule applicable to such Award, as determined in accordance
with the instruments evidencing the agreement to assume the Award. The determination of Award comparability for this purpose shall be made by the
Committee, and its determination shall be final, binding and conclusive.
2.3. “Award” means, individually or collectively, a grant under the Plan of Stock Options, Stock Appreciation Rights, Restricted Stock
Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards, and Other Stock-Based Awards.
2.4. “Award Agreement” means either: (a) a written agreement entered into by the Company and a Participant setting forth the terms and
provisions applicable to an Award granted under the Plan, or (b) a written or electronic statement issued by the Company to a Participant describing the terms
and provisions of such Award, including any amendment or modification thereof. The Committee may provide for the use of electronic, internet or other non-
paper Award Agreements, and the use of electronic, internet or other non-paper means for the acceptance thereof and actions thereunder by a Participant.
2.5. “Beneficial Ownership” (including correlative terms) shall have the meaning given such term in Rule 13d-3 promulgated under the
Exchange Act.
2.6. “Board” or “Board of Directors” means the Board of Directors of the Company.
2.7. “Cash-Based Award” means an Award granted to a Participant, as described in Article IX.
2.8. “Cause” shall have the definition given such term in a Participant’s Award Agreement, or in the absence of any such definition, as
determined in good faith by the Committee.
2.9. “Change of Control” means the occurrence of any of the following:
(a) an acquisition in one transaction or a series of related transactions (other than directly from the Company or pursuant to Awards
granted under the Plan or compensatory options or other similar awards granted by the Company) by any Person of any Voting Securities of the
Company, immediately after which such Person has Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the
Company’s then outstanding Voting Securities; provided, however, that in determining whether a Change of Control has occurred pursuant to this Section
2.9(a), Voting Securities of the Company which are acquired in a Non-Control Acquisition shall not constitute an acquisition that would cause a Change
of Control; or
(b) the consummation of any merger, consolidation, recapitalization or reorganization involving the Company unless:
(i) the shareholders of the Company, immediately before such merger, consolidation, recapitalization or reorganization,
own, directly or indirectly, immediately following such merger, consolidation, recapitalization or reorganization, more than fifty percent
(50%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation
or reorganization (the “Company Surviving Corporation”) in substantially the same proportion as their ownership of the Voting Securities
of the Company immediately before such merger, consolidation, recapitalization or reorganization; and
(ii) the individuals who were members of the Board immediately prior to the execution of the agreement providing for such
merger, consolidation, recapitalization or reorganization constitute at least a majority of the members of the board of directors of the
Company Surviving Corporation, or a corporation Beneficially Owning, directly or indirectly, a majority of the voting securities of the
Company Surviving Corporation, and
(iii) no Person, other than (A) the Company, (B) any Related Entity, (C) any employee benefit plan (or any trust forming a
part thereof) that, immediately prior to such merger, consolidation, recapitalization or reorganization, was maintained by the Company,
the Company Surviving Corporation, or any Related Entity or (D) any Person who, together with its Affiliates, immediately prior to such
merger, consolidation, recapitalization or reorganization had Beneficial Ownership of fifty percent (50%) or more of the then outstanding
Voting Securities of the Company, owns, together with its Affiliates, Beneficial Ownership of fifty percent (50%) or more of the
combined voting power of the Company Surviving Corporation’s then outstanding Voting Securities
(a transaction described in clauses (d)(i) through (d)(iii) above is referred to herein as a “Non-Control Transaction”); or
(c) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially
all of the assets or business of the Company to any Person (other than (A) a transfer or distribution to a Related Entity, or (B) a transfer or distribution to
the Company’s shareholders of the stock of a Related Entity or any other assets).
Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial
Ownership of fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities of the Company as a result of the
acquisition of Voting Securities of the Company by the Company which, by reducing the number of Voting Securities of the Company then outstanding,
increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change of Control would occur (but for the
operation of this sentence) as a result of the acquisition of Voting Securities by the Company and (1) before such share acquisition by the Company the
Subject Person becomes the Beneficial Owner of any new or additional Voting Securities of the Company in a related transaction or (2) after such share
acquisition by the Company the Subject Person becomes the Beneficial Owner of any new or additional Voting Securities of the Company which in either
case increases the percentage of the then outstanding Voting Securities of the Company Beneficially Owned by the Subject Person, then a Change of Control
shall be deemed to occur.
Solely for purposes of this Section 2.9, (1) “Affiliate” shall mean, with respect to any Person, any other Person that, directly or indirectly, controls, is
controlled by, or is under common control with, such Person, and (2) “control” (including with correlative meanings, the terms “controlling,” “controlled by”
and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the
management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. Any Relative (for this purpose,
“Relative” means a spouse, child, parent, parent of spouse, sibling or grandchild) of an individual shall be deemed to be an Affiliate of such individual for this
purpose. None of the Company or any Person controlled by the Company shall be deemed to be an Affiliate of any holder of Shares.
2.10. “Committee” means the Compensation Committee of the Board of Directors or a subcommittee thereof, or such other committee
designated by the Board to administer the Plan.
2.11. “Company Surviving Corporation” has the meaning provided in Section 2.9(b)(i).
2.12. “Consultant” means an independent contractor who performs services for the Company or a Subsidiary or Affiliate in a capacity other
than as an Employee or Director.
2.13. “Director” means any individual who is a member of the Board of Directors of the Company.
2.14. “Dividend Equivalents” means the equivalent value (in cash or Shares) of dividends that would otherwise be paid on the Shares subject
to an Award but that have not been issued or delivered, as described in Article XI.
2.15. “Effective Date” shall have the meaning ascribed to such term in Section 1.1.
2.16. “Employee” means any person designated as an employee of the Company, a Subsidiary and/or an Affiliate on the payroll records
thereof. An Employee shall not include any individual during any period he or she is classified or treated by the Company, a Subsidiary or an Affiliate as an
independent contractor, a consultant, or any employee of an employment, consulting, or temporary agency or any other entity other than the Company, a
Subsidiary and/or an Affiliate without regard to whether such individual is subsequently determined to have been, or is subsequently retroactively reclassified
as a common-law employee of the Company, a Subsidiary and/or an Affiliate during such period. As further provided in Section 18.4, for purposes of the
Plan, upon approval by the Committee, the term Employee may also include Employees whose employment with the Company, a Subsidiary or an Affiliate
has been terminated subsequent to being granted an Award under the Plan. For the avoidance of doubt, a Director who would otherwise be an “Employee”
within the meaning of this Section 2.16 shall be considered an Employee for purposes of the Plan.
2.17. “Exchange Act” means the Securities Exchange Act of 1934, as it may be amended from time to time, including the rules and regulations
promulgated thereunder and successor provisions and rules and regulations thereto.
2.18. “Fair Market Value” means the fair market value of the Shares as determined by the Committee by the reasonable application of a
reasonable valuation method, consistently applied, as the Committee deems appropriate.
2.19. “Fiscal Year” means the calendar year, or such other consecutive twelve-month period as the Committee may select.
2.20. “Freestanding SAR” means an SAR that is granted independently of any Options, as described in Article VII.
2.21. “Good Reason” shall have the definition given such term in a Participant’s Award Agreement, or in the absence of any such definition, as
determined in good faith by the Committee.
2.22. “Grant Price” means the price established at the time of grant of an SAR pursuant to Article VII, used to determine whether there is any
payment due upon exercise of the SAR.
2.23. “Insider” means an individual who is, on the relevant date, an officer, director or ten percent (10%) Beneficial Owner of any class of the
Company’s equity securities that is registered pursuant to Section 12 of the Exchange Act, as determined by the Committee in accordance with Section 16 of
the Exchange Act.
2.24. “Non-Control Acquisition” means an acquisition (whether by merger, stock purchase, asset purchase or otherwise) by (a) an employee
benefit plan (or a trust forming a part thereof) maintained by (i) the Company or (ii) any corporation or other Person of which fifty percent (50%) or more of
its total value or total voting power of its Voting Securities or equity interests is owned, directly or indirectly, by the Company (a “Related Entity”); (b) the
Company or any Related Entity; (c) any Person in connection with a Non-Control Transaction; or (d) any Person that owns, together with its Affiliates,
Beneficial Ownership of fifty percent (50%) or more of the outstanding Voting Securities of the Company on the Effective Date.
2.25. “Non-Control Transaction” shall have the meaning provided in Section 2.9(b).
2.26. “Non-Employee Director” means a Director who is not an Employee.
2.27. “Notice” means notice provided by a Participant to the Company in a manner prescribed by the Committee.
2.28. “Option” or “Stock Option” means a Stock Option, as described in Article VI.
2.29. “Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.
2.30. “Other Stock-Based Award” means an equity-based or equity-related Award described in Section 10.1, granted in accordance with the
terms and conditions set forth in Article X.
2.31. “Participant” means any eligible Person as set forth in Article V who holds one or more outstanding Awards.
2.32. “Performance Period” means the period of time during which the performance goals must be met in order to determine the degree of
payout and/or vesting with respect to, or the amount or entitlement to, an Award.
2.33. “Performance Share” means an Award of a performance share granted to a Participant, as described in Article IX.
2.34. “Performance Unit” means an Award of a performance unit granted to a Participant, as described in Article IX.
2.35. “Period of Restriction” means the period during which Shares of Restricted Stock or Restricted Stock Units are subject to a substantial
risk of forfeiture, and, in the case of Restricted Stock, the transfer of Shares of Restricted Stock is limited in some way, as provided in Article VIII.
2.36. “Person” means “person” as such term is used for purposes of Section 13(d) or 14(d) of the Exchange Act, including any individual,
corporation, limited liability company, partnership, trust, unincorporated organization, government or any agency or political subdivision thereof, or any other
entity or any group of persons.
2.37. “Prior Option Plans” means the Allot Communications Ltd. Stock Option Plan (2003), the Allot Communications Ltd. Key Employees
Share Incentive Plan and the Allot Communications Ltd. Key Employees of subsidiaries and consultants Share Incentive Plan.
2.38. “Replaced” means that pursuant to a transaction resulting in a Change of Control, the Award is replaced with a comparable stock award
or a cash incentive program by the Company, the surviving or successor corporation or entity to the Company, or any parent or subsidiary of either thereof, or
any other corporation or entity that is a party to the transaction resulting in the Change of Control, in connection with such Change of Control, which
preserves the compensation element of the Award existing at the time of such Change of Control transaction, and provides for subsequent payout in
accordance with the same (or more favorable) payment and vesting schedule applicable to such Award, as determined in accordance with the instruments
evidencing the agreement to assume the Award. The determination of Award comparability for this purpose shall be made by the Committee, and its
determination shall be final, binding and conclusive.
2.39. “Restricted Stock” means an Award granted to a Participant pursuant to Article VIII.
2.40. “Restricted Stock Unit” means an Award, whose value is equal to a Share, granted to a Participant pursuant to Article VIII.
2.41. “Rule 16b-3” means Rule 16b-3 under the Exchange Act, or any successor rule, as the same may be amended from time to time.
2.42. “Securities Act” means the Securities Act of 1933, as it may be amended from time to time, including the rules and regulations
promulgated thereunder and successor provisions and rules and regulations thereto.
2.43. “Share” means an Ordinary Share, par value NIS0.10 per share, of the Company (including any new, additional or different stock or
securities resulting from any change in corporate capitalization as listed in Section 4.2).
2.44. “Stock Appreciation Right” or “SAR” means an Award, granted alone (a “Freestanding SAR”) or in connection with a related Option (a
“Tandem SAR”), designated as an SAR, pursuant to the terms of Article VII.
2.45. “Subject Person” has the meaning provided in Section 2.9.
2.46. “Subsidiary” means any present or future corporation which is or would be a “subsidiary corporation” of the Company as determined by
the Committee.
2.47. “Substitute Awards” means Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for,
options or other awards previously granted, or the right or obligation to grant future options or other awards, by a company acquired by the Company, a
Subsidiary and/or an Affiliate or with which the Company, a Subsidiary and/or an Affiliate combines, or otherwise in connection with any merger,
consolidation, acquisition of property or stock, or reorganization involving the Company, a Subsidiary or an Affiliate.
2.48. “Tandem SAR” means an SAR that is granted in connection with a related Option pursuant to Article VII.
2.49. “Termination” means the time when a Participant ceases the performance of services for the Company, any Affiliate or Subsidiary, as
applicable, for any reason, with or without Cause, including a Termination by resignation, discharge, death, Disability or Retirement, but excluding (a) a
Termination where there is a simultaneous reemployment (or commencement of service) or continuing employment (or service) of a Participant by the
Company, Affiliate or any Subsidiary, (b) at the discretion of the Committee, a Termination that results in a temporary severance, and (c) at the discretion of
the Committee, a Termination of an Employee that is immediately followed by the Participant’s service as a Non-Employee Director.
2.50. “Voting Securities” shall mean, with respect to any Person that is a corporation, all outstanding voting securities of such Person entitled
to vote generally in the election of the board of directors of such Person.
ARTICLE III.
ADMINISTRATION
3.1. General. The Committee shall have exclusive authority to operate, manage and administer the Plan in accordance with its terms and
conditions. Notwithstanding the foregoing, in its absolute discretion, the Board may at any time and from time to time exercise any and all rights, duties and
responsibilities of the Committee under the Plan, including establishing procedures to be followed by the Committee, but excluding matters which under any
applicable law, regulation or rule, including any exemptive rule under Section 16 of the Exchange Act (including Rule 16b-3), are required to be determined
in the sole discretion of the Committee. If and to the extent that the Committee does not exist or cannot function, the Board may take any action under the
Plan that would otherwise be the responsibility of the Committee, subject to the limitations set forth in the immediately preceding sentence.
3.2. Committee. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of
Directors.
3.3. Authority of the Committee. The Committee shall have full discretionary authority to grant or, when so restricted by applicable law,
recommend the Board to grant, pursuant to the terms of the Plan, Awards to those individuals who are eligible to receive Awards under the Plan. Except as
limited by law or by the Articles of Association of the Company, and subject to the provisions herein, the Committee shall have full power, in accordance
with the other terms and provisions of the Plan, to:
(a) select Employees, Non-Employee Directors and Consultants who may receive Awards under the Plan and become Participants;
(b) determine eligibility for participation in the Plan and decide all questions concerning eligibility for, and the amount of, Awards
under the Plan;
(c) determine the sizes and types of Awards;
(d) determine the terms and conditions of Awards, including the Option Prices of Options and the Grant Prices of SARs;
compensation plans, arrangements or policies of the Company or a Subsidiary or Affiliate;
(e) grant Awards as an alternative to, or as the form of payment for grants or rights earned or payable under, other bonus or
(f) grant Substitute Awards on such terms and conditions as the Committee may prescribe;
(g) make all determinations under the Plan concerning Termination of any Participant’s employment or service with the Company or
a Subsidiary or Affiliate, including whether such Termination occurs by reason of Cause, Good Reason, disability, retirement or in connection with a
Change of Control and whether a leave constitutes a Termination;
(h) construe and interpret the Plan and any agreement or instru ment entered into under the Plan, including any Award Agreement;
provisions of or relating to any Award;
(i) establish and administer any terms, conditions, restrictions, limitations, forfeiture, vesting or exercise schedule, and other
(j) establish and administer any performance goals in connection with any Awards, including performance criteria and applicable
Performance Periods, determine the extent to which any performance goals and/or other terms and conditions of an Award are attained or are not
attained;
and/or any Award Agreement or any other instrument relating to any Awards;
(k) construe any ambiguous provisions, correct any defects, supply any omissions and reconcile any inconsistencies in the Plan
operation or administration;
(l) establish, adopt, amend, waive and/or rescind rules, regulations, procedures, guidelines, forms and/or instruments for the Plan’s
(m) make all valuation determinations relating to Awards and the payment or settlement thereof;
vesting or exercisability of any Award;
(n) grant waivers of terms, conditions, restrictions and limitations under the Plan or applicable to any Award, or accelerate the
number and/or class of shares of stock subject to any outstanding Award;
(o) subject to the provisions of Article XV, amend or adjust the terms and conditions of any outstanding Award and/or adjust the
(p) at any time and from time to time after the granting of an Award, specify such additional terms, conditions and restrictions with
respect to such Award as may be deemed necessary or appropriate to ensure compliance with any and all applicable laws or rules, including terms,
restrictions and conditions for compliance with applicable securities laws or listing rules, methods of withholding or providing for the payment of
required taxes and restrictions regarding a Participant’s ability to exercise Options through a cashless (broker-assisted) exercise;
communicate to the Participant at the time such offer is made;
(q) offer to buy out an Award previously granted, based on such terms and conditions as the Committee shall establish with and
canceled or suspended; and
(r) determine whether, and to what extent and under what circumstances Awards may be settled in cash, Shares or other property or
advisable for the proper operation and/or administration of the Plan.
(s) exercise all such other authorities, take all such other actions and make all such other determinations as it deems necessary or
3.4. Award Agreements. The Committee shall, subject to applicable laws and rules, determine the date an Award is granted. Each Award shall
be evidenced by an Award Agreement; however, two or more Awards granted to a single Participant may be combined in a single Award Agreement. An
Award Agreement shall not be a precondition to the granting of an Award; provided, however, that (a) the Committee may, but need not, require as a
condition to any Award Agreement’s effectiveness, that such Award Agreement be executed on behalf of the Company and/or by the Participant to whom the
Award evidenced thereby shall have been granted (including by electronic signature or other electronic indication of acceptance), and such executed Award
Agreement be delivered to the Company, and (b) no person shall have any rights under any Award unless and until the Participant to whom such Award shall
have been granted has complied with the applicable terms and conditions of the Award. The Committee shall prescribe the form of all Award Agreements,
and, subject to the terms and conditions of the Plan, shall determine the content of all Award Agreements. Any Award Agreement may be supplemented or
amended in writing from time to time as approved by the Committee; provided that the terms and conditions of any such Award Agreement as supplemented
or amended are not inconsistent with the provisions of the Plan. In the event of any dispute or discrepancy concerning the terms of an Award, the records of
the Committee or its designee shall be determinative.
3.5. Discretionary Authority; Decisions Binding. The Committee shall have full discretionary authority in all matters related to the discharge
of its responsibilities and the exercise of its authority under the Plan. All determinations, decisions, actions and interpretations by the Committee with respect
to the Plan and any Award Agreement, and all related orders and resolutions of the Committee shall be final, conclusive and binding on all Participants, the
Company and its shareholders, any Subsidiary or Affiliate and all persons having or claiming to have any right or interest in or under the Plan and/or any
Award Agreement. The Committee shall consider such factors as it deems relevant to making or taking such decisions, determinations, actions and
interpretations, including the recommendations or advice of any Director or officer or employee of the Company, any director, officer or employee of a
Subsidiary or Affiliate and such attorneys, consultants and accountants as the Committee may select. A Participant or other holder of an Award may contest a
decision or action by the Committee with respect to such person or Award only on the grounds that such decision or action was arbitrary or capricious or was
unlawful, and any review of such decision or action shall be limited to determining whether the Committee’s decision or action was arbitrary or capricious or
was unlawful.
3.6. Attorneys; Consultants. The Committee may consult with counsel who may be counsel to the Company. The Committee may, with the
approval of the Board, employ such other attorneys and/or consultants, accountants, appraisers, brokers, agents and other persons, any of whom may be an
Employee, as the Committee deems necessary or appropriate. The Committee, the Company and its officers and Directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. The Committee shall not incur any liability for any action taken in good faith in reliance upon the advice
of such counsel or other persons.
3.7. Delegation of Administration. Except to the extent prohibited by applicable law, including any applicable exemptive rule under Section
16 of the Exchange Act (including Rule 16b-3), or the applicable rules of a stock exchange, the Committee may, in its discretion, allocate all or any portion of
its responsibilities and powers under this Article III to any one or more of its members and/or delegate all or any part of its responsibilities and powers under
this Article III to any person or persons selected by it; provided, however, that the Committee may not delegate its authority to correct defects, omissions or
inconsistencies in the Plan. Any such authority delegated or allocated by the Committee under this Section 3.7 shall be exercised in accordance with the
terms and conditions of the Plan and any rules, regulations or administrative guidelines that may from time to time be established by the Committee, and any
such allocation or delegation may be revoked by the Committee at any time.
ARTICLE IV.
SHARES SUBJECT TO THE PLAN
4.1. Number of Shares Available for Grants. The shares of stock subject to Awards granted under the Plan shall be Shares. Such Shares
subject to the Plan may be either authorized and unissued shares or previously issued shares acquired by the Company or any Subsidiary. Subject to
adjustment as provided in Section 4.2, the total number of Shares that may be delivered pursuant to Awards under the Plan shall be (x) 89,732 Shares,
representing all Shares remaining available for issuance and not subject to outstanding awards under the Prior Option Plans on the Effective Date (as may be
increased by no more than 3,451,439 Shares subject to outstanding awards under the Prior Option Plans on the Effective Date that are subsequently forfeited
or terminate for any other reason before being exercised) and (y) an annual increase on the first day of each fiscal year during the term of the Plan, beginning
January 1, 2007, in each case in an amount equal to the lesser of (i) 1,000,000 Shares, (ii) 3.5% of the outstanding Shares on the last day of the immediately
preceding year, or (iii) an amount determined by the Board. If (a) any Shares are subject to an Option, SAR, or other Award which for any reason expires or
is terminated or canceled without having been fully exercised or satisfied, or are subject to any Restricted Stock Award (including any Shares subject to a
Participant’s Restricted Stock Award that are repurchased by the Company at the Participant’s cost), Restricted Stock Unit Award or other Award granted
under the Plan which are forfeited, or (b) any Award based on Shares is settled for cash, expires or otherwise terminates without the issuance of such Shares,
the Shares subject to such Award shall, to the extent of any such expiration, termination, cancellation, forfeiture or cash settlement, be available for delivery
in connection with future Awards under the Plan. Any Shares delivered under the Plan upon exercise or satisfaction of Substitute Awards shall not reduce the
Shares available for delivery under the Plan.
4.2. Adjustments in Authorized Shares. In the event of any reclassification, recapitalization, merger or consolidation (other than if resulting in
a Change of Control), reorganization, , stock dividend or other distribution in securities of the Company, stock split or reverse stock split, combination or
exchange of shares, repurchase of shares, or other like change in corporate structure, that proportionally apply to all shares of the Company, the Committee,
shall substitute or adjust, as applicable, the number, class and kind of securities which may be delivered under Section 4.1; the number, class and kind, and/or
price (such as the Option Price of Options or the Grant Price of SARs) of securities subject to outstanding Awards; and other value determinations applicable
to outstanding Awards, as determined by the Committee, in order to prevent dilution or enlargement of Participants’ rights under the Plan; provided, however,
that the number of Shares subject to any Award shall always be a whole number. The Committee, shall also make appropriate adjustments and modifications,
as determined by the Committee, in the terms of any outstanding Awards to reflect or related to any such events, adjustments, substitutions or changes,
including modifications of performance goals and changes in the length of Performance Periods. All determinations of the Committee as to adjustments or
changes, if any, under this Section 4.2 shall be conclusive and binding on the Participants.
4.3. No Limitation on Corporate Actions. The existence of the Plan and any Awards granted hereunder shall not affect in any way the right or
power of the Company, any Subsidiary or any Affiliate to make or authorize any adjustment, recapitalization, reorganization or other change in its capital
structure or business structure, any merger or consolidation, any issuance of debt, preferred or prior preference stock ahead of or affecting the Shares,
additional shares of capital stock or other securities or subscription rights thereto, any dissolution or liquidation, any sale or transfer of all or part of its assets
or business or any other corporate act or proceeding.
ARTICLE V.
ELIGIBILITY AND PARTICIPATION
5.1. Eligibility. Employees, Non-Employee Directors and Consultants shall be eligible to become Participants and receive Awards in
accordance with the terms and conditions of the Plan.
5.2. Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select Participants from all eligible
Employees, Non-Employee Directors and Consultants and shall determine the nature and amount of each Award.
ARTICLE VI.
STOCK OPTIONS
6.1. Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such
terms, and at any time and from time to time as shall be determined by the Committee. The Committee may grant an Option or provide for the grant of an
Option, either from time to time in the discretion of the Committee or automatically upon the occurrence of specified events, including the achievement of
performance goals, the satisfaction of an event or condition within the control of the recipient of the Option or within the control of others. The granting of an
Option shall take place when the Committee by resolution, written consent or other appropriate action determines to grant such Option for a particular number
of Shares to a particular Participant at a particular Option Price.
6.2. Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the maximum
duration of the Option, the number of Shares to which the Option pertains, the conditions upon which the Option shall become exercisable and such other
provisions as the Committee shall determine, which are not inconsistent with the terms of the Plan.
6.3. Option Price. The Option Price for each Option shall be determined by the Committee and set forth in the Award Agreement; provided
that Substitute Awards or Awards granted in connection with an adjustment provided for in Section 4.2, in the form of stock options, shall have an Option
Price per Share that is intended to maintain the economic value of the Award that was replaced or adjusted, as determined by the Committee.
6.4. Duration of Options. Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant
and set forth in the Award Agreement; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary of its date of grant.
6.5. Exercise of Options. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall
in each instance determine and set forth in the Award Agreement, which need not be the same for each grant or for each Option or Participant.
6.6. Payment. Options shall be exercised by the delivery of a written notice of exercise to the Company, in a form specified or accepted by the
Committee, or by complying with any alternative exercise procedures that may be authorized by the Committee, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for such Shares, which shall include applicable taxes, if any, in accordance with
Article XVI. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equiva lent; (b) subject to such
terms, conditions and limitations as the Committee may prescribe, by tendering (either by actual delivery or attestation) unencumbered Shares previously
acquired by the Participant exercising such Option having an aggregate Fair Market Value at the time of exercise equal to the total Option Price, (c) by a
combination of (a) and (b); or (d) by any other method approved or accepted by the Committee in its sole discretion, including, if the Committee so
determines, (x) a cashless (broker-assisted) exercise that complies with all applicable laws or (y) withholding of Shares otherwise deliverable to the
Participant pursuant to the Option having an aggregate Fair Market Value at the time of exercise equal to the total Option Price. Subject to any governing
rules or regulations, as soon as practicable after receipt of a written notifi cation of exercise and full payment in accordance with the preceding provisions of
this Section 6.6, the Company shall deliver to the Participant exercising an Option, in the Participant’s name, evidence of book entry Shares, or, upon the
Participant’s request, Share certificates, in an appropriate amount based upon the number of Shares purchased under the Option, subject to Section 18.10.
6.7. Rights as a Shareholder. No Participant or other person shall become the beneficial owner of any Shares subject to an Option, nor have
any rights to dividends or other rights of a shareholder with respect to any such Shares, until the Participant has actually received such Shares following
exercise of his or her Option in accordance with the provisions of the Plan and the applicable Award Agreement.
6.8. Termination of Employment or Service. Except as otherwise provided in the Award Agreement, an Option may be exercised only to the
extent that it is then exercisable, and if at all times during the period beginning with the date of granting of such Option and ending on the date of exercise of
such Option the Participant is an Employee or Non-Employee Director, and shall terminate immediately upon a Termination of the Participant. An Option
shall cease to become exercisable upon a Termination of the holder thereof. Notwithstanding the foregoing provisions of this Section 6.8 to the contrary, the
Committee may determine in its discretion that an Option may be exercised following any such Termination, whether or not exercisable at the time of such
Termination; provided, however, that in no event may an Option be exercised after the expiration date of such Option specified in the applicable Award
Agreement, except as determined by the Committee.
6.9. Grants to Non-Employee Directors. The Company:
(a) may grant each Non-Employee Director, upon his or her initial election by shareholders to the Board, Options to purchase such
number of Shares as shall be determined by the Committee and otherwise approved in the manner required by law; and
(b) shall grant each Non-Employee Director, as of every third annual general meeting of the Company’s shareholders following his
or her initial election, provided that he or she is reelected at such annual general meeting, Options to purchase 30,000 Shares. The grants pursuant to this
clause (b) shall be automatic and shall not require any approval.
Unless specifically provided otherwise in the approval of any Options granted pursuant to clause (a), Options granted pursuant to this Section 6.9 shall vest
ratably over a period of three years, such that 1/12 of the Options shall vest and become exercisable at the end of each three-month period from the date of
their grant. Options granted pursuant to this Section 6.9 shall immediately vest and become exercisable upon the occurrence of a Change of Control, unless
otherwise expressly provided in the Award Agreement. All such Options shall have an Option Price equal to the closing sale price of the Shares as quoted on
the Nasdaq Global Select Market (or other Nasdaq market on which the Shares are traded) on the date of their grant.
ARTICLE VII.
STOCK APPRECIATION RIGHTS
7.1. Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as
shall be determined by the Committee. The Committee may grant an SAR (a) in connection and simultaneously with the grant of an Option (a Tandem SAR)
or (b) independent of, and unrelated to, an Option (a Freestanding SAR). The Committee shall have complete discretion in determin ing the number of Shares
to which an SAR pertains (subject to Article IV) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to any
SAR.
7.2. Grant Price. The Grant Price for each SAR shall be determined by the Committee and set forth in the Award Agreement, subject to the
limitations of this Section 7.2. The Grant Price for each Freestanding SAR shall be not less than one hundred percent (100%) of the Fair Market Value of a
Share on the date such Freestanding SAR is granted, except in the case of Substitute Awards or Awards granted in connection with an adjustment provided for
in Section 4.2. The Grant Price of a Tandem SAR shall be equal to the Option Price of the related Option.
7.3. Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender
of the right to exercise the equivalent portion of the related Option. A Tandem SAR shall be exercisable only when and to the extent the related Option is
exercisable and may be exercised only with respect to the Shares for which the related Option is then exercisable. A Tandem SAR shall entitle a Participant
to elect, in the manner set forth in the Plan and the applicable Award Agreement, in lieu of exercising his or her unexercised related Option for all or a portion
of the Shares for which such Option is then exercisable pursuant to its terms, to surrender such Option to the Company with respect to any or all of such
Shares and to receive from the Company in exchange therefor a payment described in Section 7.7. An Option with respect to which a Participant has elected
to exercise a Tandem SAR shall, to the extent of the Shares covered by such exercise, be canceled automatically and surrendered to the Company. Such
Option shall thereafter remain exercisable according to its terms only with respect to the number of Shares as to which it would otherwise be exercisable, less
the number of Shares with respect to which such Tandem SAR has been so exercised.
7.4. Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole
discretion, in accordance with the Plan, determines and sets forth in the Award Agreement.
7.5. Award Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the number of Shares to which the SAR
pertains, the Grant Price, the term of the SAR, and such other terms and conditions as the Committee shall determine in accordance with the Plan.
7.6. Term of SARs. The term of an SAR granted under the Plan shall be determined by the Committee, in its sole discre tion; provided,
however, that the term of any Tandem SAR shall be the same as the related Option and no SAR shall be exercisable more than ten (10) years after it is
granted.
7.7. Payment of SAR Amount. An election to exercise SARs shall be deemed to have been made on the date of Notice of such election to the
Company. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:
(a) The excess of the Fair Market Value of a Share on the date of exercise over the Grant Price of the SAR; by
(b) The number of Shares with respect to which the SAR is exercised.
Notwithstanding the foregoing provisions of this Section 7.7 to the contrary, the Committee may establish and set forth in the applicable Award Agreement a
maximum amount per Share that will be payable upon the exercise of an SAR. At the discretion of the Committee, such payment upon exercise of an SAR
shall be in cash, in Shares of equivalent Fair Market Value, or in some combination thereof.
7.8. Rights as a Shareholder. A Participant receiving an SAR shall have the rights of a Shareholder only as to Shares, if any, actually issued to
such Participant upon satisfaction or achievement of the terms and conditions of the Award, and in accordance with the provisions of the Plan and the
applicable Award Agreement, and not with respect to Shares to which such Award relates but which are not actually issued to such Participant.
7.9. Termination of Employment or Service. Each SAR Award Agreement shall set forth the extent to which the Participant shall have the
right to exercise the SAR following such Participant’s Termination, if at all, subject to Section 6.8, as applicable to any Tandem SAR. Such provisions shall
be determined in the sole discretion of the Committee, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on
the reasons for Termination.
ARTICLE VIII.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
8.1. Awards of Restricted Stock and Restricted Stock Units. Subject to the terms and provisions of the Plan, the Committee, at any time and
from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to Participants in such amounts as the Committee shall
determine. Subject to the terms and conditions of this Article VIII and the Award Agreement, upon delivery of Shares of Restricted Stock to a Participant, or
creation of a book entry evidencing a Participant’s ownership of Shares of Restricted Stock, pursuant to Section 8.6, the Participant shall have all of the rights
of a shareholder with respect to such Shares, subject to the terms and restrictions set forth in this Article VIII or the applicable Award Agreement or as
determined by the Committee. Restricted Stock Units shall be similar to Restricted Stock, except no Shares are actually awarded to a Participant who is
granted Restricted Stock Units on the date of grant, and such Participant shall have no rights of a shareholder with respect to such Restricted Stock Units.
8.2. Award Agreement. Each Restricted Stock and/or Restricted Stock Unit Award shall be evidenced by an Award Agreement that shall
specify the Period of Restriction, the number of Shares of Restricted Stock or the number of Restricted Stock Units granted, and such other provisions as the
Committee shall determine in accordance with the Plan. Any Restricted Stock Award must be accepted by the Participant within a period of ninety (90) days
(or such shorter period as determined by the Committee at the time of award) after the award date, by executing such Restricted Stock Award Agreement and
providing the Committee or its designee a copy of such executed Award Agreement and payment of the applicable purchase price of such Shares of Restricted
Stock, if any, as determined by the Committee.
8.3. Nontransferability of Restricted Stock. Except as provided in this Article VIII, Shares of Restricted Stock may not be sold, transferred,
pledged, assigned, encumbered, alienated, hypothecated or otherwise disposed of until the end of the applicable Period of Restriction established by the
Committee and specified in the Restricted Stock Award Agreement.
8.4. Period of Restriction and Other Restrictions. The Period of Restriction shall lapse based on continuing service as a Non-Employee
Director or Consultant or continuing employment with the Company, a Subsidiary or an Affiliate, the achievement of performance goals, the satisfaction of
other conditions or restrictions or upon the occurrence of other events, in each case, as determined by the Committee, at its discretion, and stated in the Award
Agreement.
8.5. Delivery of Shares, Payment of Restricted Stock Units. Subject to Section 18.10, after the last day of the Period of Restriction applicable
to a Participant’s Shares of Restricted Stock, and after all conditions and restrictions applicable to such Shares of Restricted Stock have been satisfied or lapse
(including satisfaction of any applicable withholding tax obligations), pursuant to the applicable Award Agreement, such Shares of Restricted Stock shall
become freely transferable by such Participant. After the last day of the Period of Restriction applicable to a Participant’s Restricted Stock Units, and after all
conditions and restrictions applicable to Restricted Stock Units have been satisfied or lapse (including satisfaction of any applicable withholding tax
obligations), pursuant to the applicable Award Agreement, such Restricted Stock Units shall be settled by delivery of Shares, a cash payment determined by
reference to the then-current Fair Market Value of Shares or a combination of Shares and such cash payment as the Committee, in its sole discretion, shall
determine, either by the terms of the Award Agreement or otherwise.
8.6. Forms of Restricted Stock Awards. Each Participant who receives an Award of Shares of Restricted Stock shall be issued a stock
certificate or certificates evidencing the Shares covered by such Award registered in the name of such Participant, which certificate or certificates may contain
an appropriate legend. The Committee may require a Participant who receives a certificate or certificates evidencing a Restricted Stock Award to
immediately deposit such certificate or certificates, together with a stock power or other appropriate instrument of transfer, endorsed in blank by the
Participant, with signatures guaranteed in accordance with the Exchange Act if required by the Committee, with the Secretary of the Company or an escrow
holder as provided in the immediately following sentence. The Secretary of the Company or such escrow holder as the Committee may appoint shall retain
physical custody of each certificate representing a Restricted Stock Award until the Period of Restriction and any other restrictions imposed by the Committee
or under the Award Agreement with respect to the Shares evidenced by such certificate expire or shall have been removed. The foregoing to the contrary
notwithstanding, the Committee may, in its discretion, provide that a Participant’s ownership of Shares of Restricted Stock prior to the lapse of the Period of
Restriction or any other applicable restrictions shall, in lieu of such certificates, be evidenced by a “book entry” (i.e., a computerized or manual entry) in the
records of the Company or its designated agent in the name of the Participant who has received such Award. Such records of the Company or such agent
shall, absent manifest error, be binding on all Participants who receive Restricted Stock Awards evidenced in such manner. The holding of Shares of
Restricted Stock by the Company or such an escrow holder, or the use of book entries to evidence the ownership of Shares of Restricted Stock, in accordance
with this Section 8.6, shall not affect the rights of Participants as owners of the Shares of Restricted Stock awarded to them, nor affect the restrictions
applicable to such shares under the Award Agreement or the Plan, including the Period of Restriction.
8.7. Voting Rights. Unless otherwise determined by the Committee and set forth in a Participant’s Award Agreement, to the extent permitted
or required by law, as determined by the Committee, Participants holding Shares of Restricted Stock may be granted the right to exercise full voting rights
with respect to those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted Stock Units.
8.8. Dividends and Other Distributions. During the Period of Restriction, Participants holding Shares of Restricted Stock shall be credited
with any cash dividends paid with respect to such Shares while they are so held, unless determined otherwise by the Committee and set forth in the Award
Agreement. The Committee may apply any restrictions to such dividends that the Committee deems appropriate. Except as set forth in the Award
Agreement, in the event of (a) any adjustment as provided in Section 4.2, or (b) any shares or securities are received as a dividend, or an extraordinary
dividend is paid in cash, on Shares of Restricted Stock, any new or additional Shares or securities or any extraordinary dividends paid in cash received by a
recipient of Restricted Stock shall be subject to the same terms and conditions, including the Period of Restriction, as relate to the original Shares of
Restricted Stock.
8.9. Termination of Employment or Service. Except as otherwise provided in this Section 8.9, during the Period of Restriction, any Restricted
Stock Units and/or Shares of Restricted Stock held by a Participant shall be forfeited and revert to the Company (or, if Shares of Restricted Sock were sold to
the Participant, the Participant shall be required to resell such Shares to the Company at cost) upon the Participant’s Termination or the failure to meet or
satisfy any applicable performance goals or other terms, conditions and restrictions to the extent set forth in the applicable Award Agreement. Each applicable
Award Agreement shall set forth the extent to which, if any, the Participant shall have the right to retain Restricted Stock Units and/or Shares of Restricted
Stock following such Participant’s Termination. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the
applicable Award Agreement, need not be uniform among all such Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for,
or circumstances of, such Termination.
ARTICLE IX.
PERFORMANCE UNITS, PERFORMANCE SHARES, AND CASH-BASED AWARDS
9.1. Grant of Performance Units, Performance Shares and Cash-Based Awards. Subject to the terms of the Plan, Performance Units,
Performance Shares, and/or Cash-Based Awards may be granted to Participants in such amounts and upon such terms, and at any time and from time to time,
as shall be determined by the Committee, in accordance with the Plan. A Performance Unit, Performance Share or Cash-Based Award entitles the Participant
who receives such Award to receive Shares or cash upon the attainment of performance goals and/or satisfaction of other terms and conditions determined by
the Committee when the Award is granted and set forth in the Award Agreement. Such entitlements of a Participant with respect to his or her outstanding
Performance Unit, Performance Share or Cash-Based Award shall be reflected by a bookkeeping entry in the records of the Company, unless otherwise
provided by the Award Agreement. The terms and conditions of such Awards shall be consistent with the Plan and set forth in the Award Agreement and
need not be uniform among all such Awards or all Participants receiving such Awards.
9.2. Value of Performance Units, Performance Shares and Cash-Based Awards. Each Performance Unit shall have an initial value that is
established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of
grant. Each Cash-Based Award shall have a value as shall be determined by the Committee. The Committee shall set performance goals in its discretion
which, depending on the extent to which they are met, will determine the number and/or value of Performance Units and Performance Shares and Cash-Based
Awards that will be paid out to the Participant.
9.3. Earning of Performance Units, Performance Shares and Cash-Based Awards. Subject to the terms of the Plan, after the applica ble
Performance Period has ended, the holder of Perform ance Units, Performance Shares or Cash-Based Awards shall be entitled to receive payment on the
number and value of Performance Units, Performance Shares or Cash-Based Awards earned by the Participant over the Performance Period, to be determined
as a function of the extent to which the corresponding performance goals and/or other terms and conditions have been achieved or satisfied. The Committee
shall determine the extent to which any such pre-established performance goals and/or other terms and conditions of a Performance Unit, Performance Share
or Cash-Based Award are attained or not attained following conclusion of the applicable Performance Period. The Committee may, in its discretion, waive
any such performance goals and/or other terms and conditions relating to any such Award.
9.4. Form and Timing of Payment of Performance Units, Performance Shares and Cash-Based Awards. Payment of earned Performance Units,
Performance Shares and Cash-Based Awards shall be as determined by the Committee and as set forth in the Award Agreement. Subject to the terms of the
Plan, the Committee, in its sole discretion, may pay earned Performance Units, Performance Shares and Cash-Based Awards in the form of cash or in Shares
(or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned Performance Units, Performance Shares or Cash-
Based Awards as soon as practicable after the end of the Performance Period and following the Committee’s determination of actual performance against the
performance goals and/or other terms and conditions established by the Committee. Such Shares may be granted subject to any restrictions imposed by the
Committee, including pursuant to Section 18.10. The determination of the Committee with respect to the form of payment of such Awards shall be set forth
in the Award Agreement pertaining to the grant of the Award.
9.5. Rights as a Shareholder. A Participant receiving a Performance Unit, Performance Share or Cash-Based Award shall have the rights of a
shareholder only as to Shares, if any, actually received by the Participant upon satisfaction or achievement of the terms and conditions of such Award and not
with respect to Shares subject to the Award but not actually issued to such Participant.
9.6. Termination of Employment or Service. Each Award Agreement shall set forth the extent to which the Participant shall have the right to
retain Performance Units, Performance Shares and/or Cash-Based Award following such Participant’s Termination, if at all. Such provisions shall be
determined in the sole discretion of the Committee, shall be included in the applicable Award Agreement, need not be uniform among all such Awards issued
pursuant to the Plan, and may reflect distinctions based on the reasons for Termination.
ARTICLE X.
OTHER STOCK-BASED AWARDS
10.1. Other Stock-Based Awards. The Committee may grant types of equity-based or equity-related Awards not otherwise described by the
terms of the Plan (including the grant or offer for sale of unrestricted Shares), in such amounts (subject to Article IV) and subject to such terms and
conditions, as the Committee shall determine. Such Other Stock-Based Awards may involve the transfer of actual Shares to Participants, or payment in cash
or otherwise of amounts based on the value of Shares and may include Awards designed to comply with or take advantage of the applicable local laws of
jurisdictions in which the Participants are located.
10.2. Value of Other Stock-Based Awards. Each Other Stock-Based Award shall be expressed in terms of Shares or units based on Shares, as
determined by the Committee. The Committee may establish performance goals in its discretion, and any such performance goals shall be set forth in the
applicable Award Agreement. If the Committee exercises its discretion to establish performance goals, the number and/or value of Other Stock-Based Awards
that will be paid out to the Participant will depend on the extent to which such performance goals are met.
10.3. Payment of Other Stock-Based Awards. Payment, if any, with respect to an Other Stock-Based Award shall be made in accordance with
the terms of the Award, as set forth in the Award Agreement, in cash or Shares as the Committee determines.
10.4. Termination of Employment or Service. The Committee shall determine the extent to which the Participant shall have the right to
receive Other Stock-Based Awards following the Participant’s Termination, if at all. Such provisions shall be determined in the sole discretion of the
Committee, such provisions may be included in the applicable Award Agreement, but need not be uniform among all Other Stock-Based Awards issued
pursuant to the Plan, and may reflect distinctions based on the reasons for Termination.
ARTICLE XI.
DIVIDEND EQUIVALENTS
11.1. Dividend Equivalents. Unless otherwise provided by the Committee, no adjustment shall be made in the Shares issuable or taken into
account under Awards on account of cash dividends that may be paid or other rights that may be issued to the holders of Shares prior to issuance of such
Shares under such Award. The Committee may grant Dividend Equivalents based on the dividends declared on Shares that are subject to any Award,
including any Award the payment or settlement of which is deferred pursuant to Section 18.6. Dividend Equivalents may be credited as of the dividend
payment dates, during the period between the date the Award is granted and the date the Award becomes payable or terminates or expires. Dividend
Equivalents may be subject to any limitations and/or restrictions determined by the Committee. Dividend Equivalents shall be converted to cash or additional
Shares by such formula and at such time, and shall be paid at such times, as may be determined by the Committee.
ARTICLE XII.
TRANSFERABILITY OF AWARDS; BENEFICIARY DESIGNATION
12.1. All Other Awards. Except as otherwise provided in Section 8.5 or Section 12.3 or a Participant’s Award Agreement or otherwise
determined at any time by the Committee, no Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution; provided that the Committee may permit further transferability, on a general or a
specific basis, and may impose conditions and limitations on any permitted transferability, subject to any applicable Period of Restriction. Further, except as
otherwise provided in a Participant’s Award Agreement or otherwise determined at any time by the Committee, or unless the Committee decides to permit
further transferability, subject any applicable Period of Restriction, all Awards granted to a Participant under the Plan, and all rights with respect to such
Awards, shall be exercisable or available during his or her lifetime only by or to such Participant. With respect to those Awards, if any, that are permitted to be
transferred to another individual, references in the Plan to exercise or payment related to such Awards by or to the Participant shall be deemed to include, as
determined by the Committee, the Participant’s permitted transferee. In the event any Award is exercised by or otherwise paid to the executors,
administrators, heirs or distributees of the estate of a deceased Participant, or such a Participant’s beneficiary, or the transferee of an Award, in any such case,
pursuant to the terms and conditions of the Plan and the applicable Agreement and in accordance with such terms and conditions as may be specified from
time to time by the Committee, the Company shall be under no obligation to issue Shares thereunder unless and until the Company is satisfied, as determined
in the discretion of the Committee, that the person or persons exercising such Award, or to receive such payment, are the duly appointed legal representative
of the deceased Participant’s estate or the proper legatees or distributees thereof or the named beneficiary of such Participant, or the valid transferee of such
Award, as applicable. Any purported assignment, transfer or encumbrance of an Award that does not comply with this Section 12.1 shall be void and
unenforceable against the Company.
12.2. Beneficiary Designation. Each Participant may, from time to time, name any beneficiary or beneficiaries who shall be permitted to
exercise his or her Option or SAR or to whom any benefit under the Plan is to be paid in case of the Participant’s death before he or she fully exercises his or
her Option or SAR or receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the
absence of any such beneficiary designation, a Participant’s unexercised Option or SAR, or amounts due but remaining unpaid to such Participant, at the
Participant’s death, shall be exercised or paid as designated by the Participant by will or by the laws of descent and distribution.
ARTICLE XIII.
RIGHTS OF PARTICIPANTS
13.1. Rights or Claims. No individual shall have any rights or claims under the Plan except in accordance with the provisions of the Plan and
any applicable Award Agreement. The grant of an Award under the Plan shall not confer any rights upon the Participant holding such Award other than such
terms, and subject to such conditions, as are specified in the Plan as being applicable to such type of Award, or to all Awards, or as are expressly set forth in
the Award Agreement evidencing such Award. Without limiting the generality of the foregoing, nothing contained in the Plan or in any Award Agreement
shall be deemed to:
(a) Give any Employee or Non-Employee Director the right to be retained in the service of the Company, an Affiliate and/or a
Subsidiary, whether in any particular position, at any particular rate of compensation, for any particular period of time or otherwise;
(b) Restrict in any way the right of the Company, an Affiliate and/or a Subsidiary to terminate, change or modify any Employee’s
employment or any Non-Employee Director’s service as a Director at any time with or without Cause;
(c) Confer on any Consultant any right of continued relationship with the Company, an Affiliate and/or a Subsidiary, or alter any
relationship between them, including any right of the Company or an Affiliate or Subsidiary to terminate, change or modify its
relationship with a Consultant;
(d) Give any Employee, Non-Employee Director or Consultant the right to receive any bonus, whether payable in cash or in Shares, or in
any combination thereof, from the Company, an Affiliate and/or a Subsidiary, nor be construed as limiting in any way the right of the
Company, an Affiliate and/or a Subsidiary to determine, in its sole discretion, whether or not it shall pay any Employee, Non-
Employee Director or Consultant bonuses, and, if so paid, the amount thereof and the manner of such payment; or
(e) Give any Participant any rights whatsoever with respect to an Award except as specifically provided in the Plan and the Award
Agreement.
13.2. Adoption of the Plan. The adoption of the Plan shall not be deemed to give any Employee, Non-Employee Director or Consultant or any
other individual any right to be selected as a Participant or to be granted an Award, or, having been so selected, to be selected to receive a future Award.
13.3. Vesting. Notwithstanding any other provision of the Plan, a Participant’s right or entitlement to exercise or otherwise vest in any Award
not exercisable or vested at the time of grant shall only result from continued services as a Non-Employee Director or Consultant or continued employment,
as the case may be, with the Company or any Subsidiary or Affiliate, or satisfaction of any other performance goals or other conditions or restrictions
applicable, by its terms, to such Award.
13.4. No Effects on Benefits. Payments and other compensation received by a Participant under an Award are not part of such Participant’s
normal or expected compensation or salary for any purpose, including calculating termination, indemnity, severance, resignation, redundancy, end of service
payments, bonuses, long-service awards, pension or retirement benefits or similar payments under any laws, plans, contracts, arrangements or otherwise. No
claim or entitlement to compensation or damages arises from the termination of the Plan or diminution in value of any Award or Shares purchased or
otherwise received under the Plan.
13.5. One or More Types of Awards. A particular type of Award may be granted to a Participant either alone or in addition to other Awards
under the Plan.
ARTICLE XIV.
CHANGE OF CONTROL
14.1. Treatment of Outstanding Awards. In the event of a Change of Control, unless otherwise specifically prohibited by any applicable laws,
rules or regulations or otherwise provided in any applicable Award Agreement, as in effect prior to the occurrence of the Change of Control, specifically with
respect to a Change of Control:
(a) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that any Options, SARs and Other Stock-Based
Awards (if applicable) which are outstanding shall become exercisable as determined by the Committee, notwithstanding anything to the contrary in the
Award Agreement.
(b) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that restrictions, performance goals or other conditions
applicable to Restricted Stock Units, Shares of Restricted Stock and Other Stock-Based Awards previously awarded to Participants shall be canceled or
deemed achieved, the Period of Restriction applicable thereto shall terminate, and restrictions on transfer, sale, assignment, pledge or other disposition
applicable to any such Shares of Restricted Stock shall lapse, in each case, to the extent provided by the Committee, notwithstanding anything to the
contrary in the Award Agreement.
(c) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that any Awards which are outstanding shall, in whole
or in part, immediately become vested and nonforfeitable.
(d) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that the target payment opportunities attainable under
any outstanding Awards of Performance Units, Performance Shares, Cash-Based Awards and other Awards shall be deemed to have been fully or
partially earned for any Performance Period(s), as determined by the Committee, immediately prior to the effective date of the Change of Control.
(e) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of such Change of Control, that any Award the payment
or settlement of which was deferred under Section 18.6 or otherwise may be paid or distributed immediately prior to the Change of Control, except as
otherwise provided by the Committee in accordance with Section 16.1(f).
(f) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of the
Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of the Change of Control, that any outstanding Award shall
be adjusted by substituting for each Share subject to such Award immediately prior to the transaction resulting in the Change of Control the consideration
(whether stock or other securities of the surviving corporation or any successor corporation to the Company, or a parent or subsidiary thereof, or that may
be issuable by another corporation that is a party to the transaction resulting in the Change of Control) received in such transaction by holders of Shares
for each Share held on the closing or effective date of such transaction, in which event the aggregate Option Price or Grant Price, as applicable, of the
Award shall remain the same; provided, however, that if such consideration received in such transaction is not solely stock of a successor, surviving or
other corporation, the Committee may provide for the consideration to be received upon exercise or payment of an Award, for each Share subject to such
Award, to be solely stock or other securities of the successor, surviving or other corporation, as applicable, equal in fair market value, as determined by
the Committee, to the per-Share consideration received by holders of Shares in such transaction.
(g) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of the Change of Control, that any outstanding Award (or
portion thereof) shall be converted into a right to receive cash, on or as soon as practicable following the closing date or expiration date of the transaction
resulting in the Change of Control in an amount equal to the highest value of the consideration to be received in connection with such transaction for one
Share, or, if higher, the highest Fair Market Value of a Share during the thirty (30) consecutive business days immediately prior to the closing date or
expiration date of such transaction, less the per-Share Option Price, Grant Price or outstanding unpaid purchase price, as applicable to the Award,
multiplied by the number of Shares subject to such Award, or the applicable portion thereof.
(h) The Committee may, in its discretion, provide that an Award can or cannot be exercised after, or will otherwise terminate or not
terminate as of, a Change of Control.
14.2. No Implied Rights; Other Limitations. No Participant shall have any right to prevent the consummation of any of the acts described in
Section 4.2 or 14.1 affecting the number of Shares available to, or other entitlement of, such Participant under the Plan or such Participant’s Award. Any
actions or determinations of the Committee under this Article XVI need not be uniform as to all outstanding Awards, nor treat all Participants
identically. Notwithstanding the adjustments described in Section 14.1, in no event may any Option or SAR be exercised after ten (10) years from the date it
was originally granted.
ARTICLE XV.
AMENDMENT, MODIFICATION, AND TERMINATION
15.1. Amendment, Modification, and Termination. The Board may, at any time and with or without prior notice, amend, alter, suspend, or
terminate the Plan, and the Committee may, to the extent permitted by the Plan, amend the terms of any Award theretofore granted, including any Award
Agreement, in each case, retroactively or prospectively.
In addition, no such amendment, alteration, suspension or termination of the Plan or any Award theretofore granted, including any Award Agreement, shall be
made which would materially impair the previously accrued rights of a Participant under any outstanding Award without the written consent of such
Participant, provided, however, that the Board may amend or alter the Plan and the Committee may amend or alter any Award, including any Agreement,
either retroactively or prospectively, without the consent of the applicable Participant, (x) so as to preserve or come within any exemptions from liability
under Section 16(b) of the Exchange Act, pursuant to the rules and releases promulgated by the SEC (including Rule 16b-3), or (y) if the Board or the
Committee determines in its discretion that such amendment or alteration either (I) is required or advisable for the Company, the Plan or the Award to satisfy,
comply with or meet the requirements of any law, regulation, rule or accounting standard or (II) is not reasonably likely to significantly diminish the benefits
provided under such Award, or that such diminishment has been or will be adequately compensated.
ARTICLE XVI.
TAX WITHHOLDING AND OTHER TAX MATTERS
16.1. Tax Withholding. The Company and/or any Subsidiary or Affiliate are authorized to withhold from any Award granted or payment due
under the Plan the amount of all taxes due in respect of such Award or payment and take any such other action as may be necessary or appropriate, as
determined by the Committee, to satisfy all obligations for the payment of such taxes. The recipient of any payment or distribution under the Plan shall make
arrangements satisfactory to the Company, as determined in the Committee’s discretion, for the satisfaction of any tax obligations that arise by reason of any
such payment or distribution. The Company shall not be required to make any payment or distribution under or relating to the Plan or any Award until such
obligations are satisfied or such arrangements are made, as determined by the Committee in its discretion.
16.2. Withholding or Tendering Shares. Without limiting the generality of Section 16.1, the Committee may in its discretion permit a
Participant to satisfy or arrange to satisfy, in whole or in part, the tax obligations incident to an Award by: (a) electing to have the Company withhold Shares
or other property otherwise deliverable to such Participant pursuant to his or her Award (provided, however, that the amount of any Shares so withheld shall
not exceed the amount necessary to satisfy required withholding obligations using the minimum statutory withholding rates for tax purposes, including
payroll taxes, that are applicable to supplemental taxable income) and/or (b) tendering to the Company Shares owned by such Participant (or by such
Participant and his or her spouse jointly) and purchased or held for the requisite period of time as may be required to avoid the Company’s or the Affiliates’ or
Subsidiaries’ incurring an adverse accounting charge, based, in each case, on the Fair Market Value of the Shares on the payment date as determined by the
Committee. All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the
Committee, in its sole discretion, deems appropriate.
16.3. Restrictions. The satisfaction of tax obligations pursuant to this Article XVI shall be subject to such restrictions as the Committee may
impose, including any restrictions required by applicable law or the rules and regulations of the SEC, and shall be construed consistent with an intent to
comply with any such applicable laws, rule and regulations.
ARTICLE XVII.
LIMITS OF LIABILITY; INDEMNIFICATION
17.1. Limits of Liability.
(a) Any liability of the Company or a Subsidiary or Affiliate to any Participant with respect to any Award shall be based solely upon
contractual obligations created by the Plan and the Award Agreement.
(b) None of the Company, any Subsidiary, any Affiliate, any member of the Board or the Committee or any other person
participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any
liability, in the absence of bad faith, to any party for any action taken or not taken in connection with the Plan, except as may expressly be provided by
statute.
(c) Each member of the Committee, while serving as such, shall be considered to be acting in his or her capacity as a director of the
Company. Members of the Board of Directors and members of the Committee acting under the Plan shall be fully protected in relying in good faith upon
the advice of counsel and shall incur no liability except for gross negligence or willful misconduct in the performance of their duties.
(d) The Company shall not be liable to a Participant or any other person as to: (i) the non-issuance of Shares as to which the
Company has been unable to obtain from any regulatory body having relevant jurisdiction the authority deemed by the Committee or the Company’s
counsel to be necessary to the lawful issuance and sale of any Shares hereunder, and (ii) any tax consequence expected, but not realized, by any
Participant or other person due to the receipt, exercise or settlement of any Option or other Award.
17.2. Indemnification. Subject to the requirements of applicable law, each individual who is or shall have been a member of the Committee or
of the Board, or an officer of the Company to whom authority was delegated in accordance with Article III, shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting
from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf, unless such loss, cost, liability, or
expense is a result of the individual’s own willful misconduct or except as provided by statute. The foregoing right of indemnification shall not be exclusive
of any other rights of indemnification to which such individual may be entitled under the Company’s Articles of Association, as a matter of law, or otherwise,
or any power that the Company may have to indemnify or hold harmless such individual.
ARTICLE XVIII.
MISCELLANEOUS
18.1. Drafting Context. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singu lar shall include the plural. The words “Article,” “Section,” and “paragraph” herein shall refer to provisions of
the Plan, unless expressly indicated otherwise. The words “include,” “includes,” and “including” herein shall be deemed to be followed by “without
limitation” whether or not they are in fact followed by such words or words of similar import, unless the context otherwise requires.
18.2. Forfeiture Events.
(a) Notwithstanding any provision of the Plan to the contrary, the Committee shall have the authority to determine (and may so
provide in any Agreement) that a Participant’s (including his or her estate’s, beneficiary’s or transferee’s) rights (including the right to exercise any
Option or SAR), payments and benefits with respect to any Award shall be subject to reduction, cancellation, forfeiture or recoupment in the event of the
Participant’s Termination for Cause or due to voluntary resignation; serious misconduct; violation of the Company’s or a Subsidiary’s or Affiliate’s
policies; breach of fiduciary duty; unauthorized disclosure of any trade secret or confidential information of the Company or a Subsidiary or Affiliate;
breach of applicable noncompetition, nonsolicitation, confidentiality or other restrictive covenants; or other conduct or activity that is in competition with
the business of the Company or any Subsidiary or Affiliate, or otherwise detrimental to the business, reputation or interests of the Company and/or any
Subsidiary or Affiliate; or upon the occurrence of certain events specified in the applicable Award Agreement (in any such case, whether or not the
Participant is then an Employee, Non-Employee Director or Consultant). The determination of whether a Participant’s conduct, activities or
circumstances are described in the immediately preceding sentence shall be made by the Committee in its good faith discretion, and pending any such
determination, the Committee shall have the authority to suspend the exercise, payment, delivery or settlement of all or any portion of such Participant’s
outstanding Awards pending an investigation of the matter.
(b) If the Company is required to prepare an accounting restatement (x) due to the material noncompliance of the Company, as a
result of misconduct, with any financial reporting requirement under the securities laws, if a Participant knowingly or grossly negligently engaged in such
misconduct, or knowingly or grossly negligently failed to prevent such misconduct, or if a Participant is one of the individuals subject to automatic
forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, the Participant shall reimburse the Company the amount of any payment in settlement of
an Award earned or accrued during the twelve- (12-) month period following the first public issuance or filing with the SEC (whichever just occurred) of
the financial document embodying such financial reporting requirement, and (y) the Committee may in its discretion provide that if the amount earned
under any Participant’s Award is reduced by such restatement, such Participant shall reimburse the Company the amount of any such reduction
previously paid in settlement of such Award.
18.3. Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
18.4. Transfer, Leave of Absence. The Committee shall have the discretion to determine the effects upon any Award, upon an individual’s
status as an Employee, Non-Employee Director or Consultant for purposes of the Plan (including whether a Participant shall be deemed to have experienced a
Termination or other change in status) and upon the exercisability, vesting, termination or expiration of any Award in the case of: (a) any Participant who is
employed by an entity that ceases to be an Affiliate or Subsidiary (whether due to a spin-off or otherwise), (b) any transfer of a Participant between locations
of employment with the Company, an Affiliate, and/or Subsidiary or between the Company, an Affiliate or Subsidiary or between Affiliates or Subsidiaries,
(c) any leave of absence of a Participant, (d) any change in a Participant’s status from an Employee to a Consultant or a Non-Employee Director, or vice
versa, (e) any increase or decrease in the scope of engagement of a Participant; and (f) upon approval by the Committee, any Employee who experiences a
Termination but becomes employed by a partnership, joint venture, corporation or other entity not meeting the requirements of an Affiliate or Subsidiary.
18.5. Exercise and Payment of Awards. An Award shall be deemed exercised or claimed when the Secretary of the Company or any other
Company official or other person designated by the Committee for such purpose receives appropriate written notice from a Participant, in form acceptable to
the Committee, together with payment of the applicable Option Price, Grant Price or other purchase price, if any, and compliance with Article XVI, in
accordance with the Plan and such Participant’s Award Agreement.
18.6. Deferrals. To the extent provided in the Award Agreement, the Committee may permit or require a Participant to defer such Participant’s
receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the lapse or waiver of the Period of
Restriction or other restrictions with respect to Restricted Stock or the payment or satisfaction of Restricted Stock Units, Performance Units, Performance
Shares, Cash-Based Awards or Other Stock-Based Awards. If any such deferral election is required or permitted, (a) such deferral shall represent an unfunded
and unsecured obligation of the Company and shall not confer the rights of a shareholder unless and until Shares are issued thereunder; (b) the number of
Shares subject to such deferral shall, until settlement thereof, be subject to adjustment pursuant to Section 4.2; and (c) the Committee shall establish rules and
procedures for such deferrals and payment or settlement thereof, which may be in cash, Shares or any combination thereof, and such deferrals may be
governed by the terms and conditions of any deferred compensation plan of the Company or Affiliate specified by the Committee for such purpose.
18.7. Loans. The Company may, in the discretion of the Committee, extend one or more loans to Participants in connection with the exercise
or receipt of an Award granted to any such Participant; provided, however, that the Company shall not extend loans to any Participant if prohibited by law or
the rules of any stock exchange or quotation system on which the Company’s securities are listed. The terms and conditions of any such loan shall be
established by the Committee.
18.8. No Effect on Other Plans. Neither the adoption of the Plan nor anything contained herein shall affect any other compensation or
incentive plans or arrangements of the Company or any Subsidiary or Affiliate, or prevent or limit the right of the Company or any Subsidiary or Affiliate to
establish any other forms of incentives or compensation for their directors, officers, eligible employees or consultants or grant or assume options or other
rights otherwise than under the Plan.
18.9. Section 16 of Exchange Act. Unless otherwise stated in the Award Agreement, notwithstanding any other provision of the Plan, any
Award granted to an Insider shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act
(including Rule 16b-3) that are requirements for the application of such exemptive rule, and the Plan and the Award Agreement shall be deemed amended to
the extent necessary to conform to such limitations.
18.10. Requirements of Law; Limitations on Awards.
and to such approvals by any governmental agencies or national securities exchanges as may be required.
(a) The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations,
(b) If at any time the Committee shall determine, in its discretion, that the listing, registration and/or qualification of Shares upon
any securities exchange or under any law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or
in connection with, the sale or purchase of Shares hereunder, the Company shall have no obligation to allow the grant, exercise or payment of any Award,
or to issue or deliver evidence of title for Shares issued under the Plan, in whole or in part, unless and until such listing, registration, qualification,
consent and/or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Committee.
(c) If at any time counsel to the Company shall be of the opinion that any sale or delivery of Shares pursuant to an Award is or may
be in the circumstances unlawful or result in the imposition of excise taxes on the Company or any Subsidiary or Affiliate under the statutes, rules or
regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or
to maintain any qualification or registration under the Securities Act, or otherwise with respect to Shares or Awards and the right to exercise or payment
of any Option or Award shall be suspended until, in the opinion of such counsel, such sale or delivery shall be lawful or will not result in the imposition
of excise taxes on the Company or any Subsidiary or Affiliate.
(d) Upon termination of any period of suspension under this Section 18.10, any Award affected by such suspension which shall not
then have expired or terminated shall be reinstated as to all Shares available before such suspension and as to the Shares which would otherwise have
become available during the period of such suspension, but no suspension shall extend the term of any Award.
(e) The Committee may require each person receiving Shares in connection with any Award under the Plan to represent and agree
with the Company in writing that such person is acquiring such Shares for investment without a view to the distribution thereof, and/or provide such
other representations and agreements as the Committee may prescribe. The Committee, in its absolute discretion, may impose such restrictions on the
ownership and transferability of the Shares purchasable or otherwise receivable by any person under any Award as it deems appropriate. Any such
restrictions shall be set forth in the applicable Award Agreement, and the certificates evidencing such shares may include any legend that the Committee
deems appropriate to reflect any such restrictions.
(f) An Award and any Shares received upon the exercise or payment of an Award shall be subject to such other transfer and/or
ownership restrictions and/or legending requirements as the Committee may establish in its discretion and may be referred to on the certificates
evidencing such Shares, including restrictions under applicable securities laws, under the requirements of any stock exchange or market upon which such
Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares.
18.11. Participants Deemed to Accept Plan. By accepting any benefit under the Plan, each Participant and each person claiming under or
through any such Participant shall be conclusively deemed to have indicated their acceptance and ratification of, and consent to, all of the terms and
conditions of the Plan and any action taken under the Plan by the Board, the Committee or the Company, in any case in accordance with the terms and
conditions of the Plan.
18.12. Governing Law. The Plan and, except as provided below or in an applicable subplan, each Award Agreement to a Participant shall be
governed by the laws of the State of Israel, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation
of the Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, Participants are deemed to submit to the
exclusive jurisdiction and venue of the courts in Tel-Aviv, Israel, to resolve any and all issues that may arise out of or relate to the Plan or any related Award
Agreement.
18.13. Plan Unfunded. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any
other segregation of assets to assure the issuance of Shares or the payment of cash upon exercise or payment of any Award. Proceeds from the sale of Shares
pursuant to Options or other Awards granted under the Plan shall constitute general funds of the Company.
18.14. Administration Costs. The Company shall bear all costs and expenses incurred in administering the Plan, including expenses of issuing
Shares pursuant to any Options or other Awards granted hereunder.
18.15. Uncertificated Shares. To the extent that the Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of
such Shares may nevertheless be effected on a noncertificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange.
18.16. No Fractional Shares. An Option or other Award shall not be exercisable with respect to a fractional Share or the lesser of fifty (50)
shares or the full number of Shares then subject to the Option or other Award. No fractional Shares shall be issued upon the exercise or payment of an Option
or other Award and any such fractions shall be rounded to the nearest whole number.
18.17. Participants. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws or practices of countries in
which the Company, any Affiliate, and/or any Subsidiary operates or has Employees, Non-Employee Directors or Consultants, the Committee, in its sole
discretion, shall have the power and authority to:
(a) Determine which Affiliates and Subsidiaries shall be covered by the Plan;
(b) Determine which Employees, Non-Employee Directors and/or Consultants are eligible to participate in the Plan;
(c) Grant Awards (including substitutes for Awards), and modify the terms and conditions of any Awards, on such terms and
conditions as the Committee determines necessary or appropriate to permit participation in the Plan by individuals otherwise
eligible to so participate, or otherwise to comply with applicable laws or conform to applicable requirements or practices of the
applicable jurisdictions;
(d)
Establish subplans and adopt or modify exercise procedures and other terms and procedures, to the extent such actions may be
necessary or advisable. Any subplans and modifications to Plan terms and procedures established under this Section 18.18 by the
Committee shall be attached to the Plan as appendices; and
(e)
Take any action, before or after an Award is made, that the Committee, in its discretion, deems advisable to obtain approval or
comply with any necessary local government regulatory exemptions or approvals.
Notwithstanding the above, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate any applicable law.
Amendment No. 1 to the MSA Agreement
Exhibit 4.7
This Amendment no. 1 (this "Amendment") is an addendum to the Manufacturing Services Agreement between Allot Communications Ltd., with a place of
business at 22 Hanagar St., Hod Hasharon, Israel ("Allot") and Flextronics (Israel) Ltd., with a place of business at 1 Hatasiya St., Ramat Gabriel Industrial
Zone, Migdal Haemek 23108, P.O.B 867, Israel ("Flextronics") dated July 19, 2007 (the "MSA Agreement"). Allot and Flextronics shall be referred to
collectively as the "Parties".
This Amendment shall take effect as of September 1, 2012 (1/9/12).
The Parties agree as follows:
1. General
1.1. Except as provided in this Amendment, all provisions of the MSA Agreement shall remain in full force and effect. In the event of any conflict
between the provisions of the MSA Agreement and the provisions of this Amendment with respect to the matters specified herein, the provisions
of this Amendment shall prevail.
1.2. Capitalized terms used, but undefined herein, shall have the same meaning ascribed to them in the MSA Agreement.
2. Blanket PO, Release PO and BA
2.1. The definition of "Purchase Order/s" or "purchase order/s" under Section 1.3 of the MSA Agreement shall be replaced with the following
definition:
"Blanket Purchase Order/s" or "Blanket PO/s" shall mean frame purchase order/s for Products, issued by Customer in accordance with
the terms hereof."
2.2. The following wording shall be added at the end of the "Cost" definition under Section 1.3 of the MSA Agreement:
"As it relates to BA, shall mean the cost represented in the agreed pricelist."
2.3. All references within the MSA Agreement to the term "Purchase Order/s" or "purchase order/s" shall be replaced with the term "Blanket PO/s".
*** Confidential treatment has been requested for redacted portions of this exhibit. This copy omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been provided separately to the Securities and Exchange Commission.
2.4. The following definitions shall be added under Section 1.3 of the MSA Agreement:
"BA Dead Inventory"
"BA Excess Inventory"
"Build Authorization" or "BA"
"Finished Goods"
"Inventory Turnover Ratio"
"[***]-ITO Balance"
"Release Purchase Order/s" or
"Release PO/s"
"Semi-Finished Goods"
-
-
-
-
-
-
-
-
Shall mean any BA that remains in Flextronics's possession for more than [***] days, as agreed
between parties agreed between parties in accordance with inventory keeping methods generally
practiced by Flextronics.
Shall mean any BA for which there is no demand under open Release PO/s, as agreed between
parties agreed between parties in accordance with inventory keeping methods generally practiced
by Flextronics.
Shall mean Finished Goods and/or Semi-Finished Goods inventory held by Flextronics in
accordance with the terms hereof.
Shall mean Products whose manufacturing process has been completed.
Shall mean the applicable inventory turnover ratio measured by Flextronics in accordance with
inventory accounting methods generally practiced by Flextronics.
Shall mean the balance between: (A) all current raw-materials (RM), work-in-process (WIP) and
BA in Flextronics's possession for which the Inventory Turnover Ratio is lower than [***]; and
(B) the amount of all such inventories if the Inventory Turnover Ratio was equal to [***].
Shall mean consumption purchase order/s for Products ordered under a respective Blanket PO,
issued by Customer in accordance with the terms hereof.
Shall mean Products whose manufacturing process has been partially completed.
2.5. The title of Section 2.2 of the MSA shall be replaced with the following title: "Blanket PO/s, BA Report and Release PO/s".
*** Confidential treatment has been requested for redacted portions of this exhibit. This copy omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been provided separately to the Securities and Exchange Commission.
2
2.6. The first paragraph of Section 2.2 of the MSA Agreement shall be replaced with the following wording:
"2.2.1. Customer will issue written electronic or fax transmitted Blanket POs once per calendar month which specify all Products
to be delivered within a minimum five (5) month period commencing on the date of acceptance of the Blanket PO. Each Blanket PO shall
reference this Agreement and the applicable Specifications. Flextronics shall accept or reject each Blanket PO within five (5) working days
of receipt of such Blanket PO. If a Blanket PO has not been confirmed within such period it shall be deemed rejected.
2.2.2. Customer will issue written electronic or fax transmitted BA reports once per calendar month indicating Customer's
requirements for BA for the following month (the "BA Report").
2.2.3. Customer will issue, from time to time, written electronic or fax transmitted Release POs which specify the requested
quantities and delivery dates for each Product listed under the applicable accepted Blanket PO, in compliance with such Blanket PO. Each
Release PO shall reference this Agreement, the applicable accepted Blanket PO and the applicable Specifications. Customer may cancel any
portion of the Product quantity of a Release PO at any time, provided that it will thereupon pay Flextronics for Products, Inventory, Special
Inventory and expenses affected by such cancellation as specified in Section 3.3 of the MSA Agreement."
3. Materials Procurement and Manufacture
3.1. The title of Section 2.3 of the MSA Agreement shall be replaced with the following title: "Materials Procurement and Manufacture".
3.2. The first paragraph of Section 2.3 of the MSA Agreement shall be replaced with the following wording:
"Any Blanket PO accepted by Flextronics will constitute authorization for Flextronics to procure Materials in accordance with their Lead
Times and in compliance with the Logistics Data, as required for the manufacture of the Products covered by such Blanket PO.
Any BA Report will constitute authorization for Flextronics to manufacture the Materials into BA covered by such BA Report.
*** Confidential treatment has been requested for redacted portions of this exhibit. This copy omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been provided separately to the Securities and Exchange Commission.
3
Any Release PO will constitute authorization for Flextronics to manufacture the BA into Products covered by such Release PO."
4. Delivering and Shipment
Notwithstanding the provisions of Section 3.1 of the MSA Agreement, shipment terms shall be as follows: (i) in Israel – directly to Customer's facility in
Hod Hasharon or as otherwise designated by Customer in writing; (ii) abroad - EXW (incoterms 2000) Flextronics's facility in Migdal Haemek.
BA Liability
4.1. The following wording shall be added following Section 3.2 of the MSA Agreement as new Section 3.2A, under the title "BA Liability":
"By the end of each calendar quarter, Flextronics shall provide to Customer a BA liability report listing for the end of such quarter: (i) all
BA Dead Inventory (as defined below); and (ii) all BA Excess Inventory (as defined below) (the "BA Liability Report").
Customer shall: (a) pay Flextronics an advance in the amount of [***]% of the Cost of the BA Excess Inventory; and (b) purchase all BA
Dead Inventory and pay Flextronics [***]% of the Cost of all BA Dead Inventory, crediting any amount already paid on account thereof as
BA Excess Inventory per subsection (a) above.
Payment of the foregoing amounts for BA Excess Inventory shall be made by Customer within fourteen (14) calendar days following
receipt of the BA Liability Report, by wire transfer to Flextronics's bank account, the details of which shall be provided by Flextronics.
Payment of the foregoing amounts for BA Dead Inventory shall be made by Customer against the presentation of valid invoice by
Flextronics, in accordance with the payment terms set forth in Section 7.1 of the MSA Agreement. Customer will issue Flextronics a
purchase order for the BA Dead Inventory within fourteen (14) calendar days following receipt of the BA Liability Report.
*** Confidential treatment has been requested for redacted portions of this exhibit. This copy omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been provided separately to the Securities and Exchange Commission.
4
5.
Inventory Turnover
The following wording shall be added following the new Section 3.2A as Section 3.2B, under the title "Inventory Turnover":
"Customer is hereby committed that the Inventory Turnover Ratio for all inventories held in Flextronics's possession (whether raw-materials, work-
in-process or BA) shall be at least [***].
By the end of each calendar quarter, Flextronics shall provide to Customer, along with the BA liability report, a report listing for the end of such
quarter, all inventories for which the Inventory Turnover Ratio is lower than [***] (the "ITO Report").
Customer will purchase the [***]-ITO Balance and pay Flextronics 100% of the Cost of such [***]-ITO Balance; provided that with respect to raw
materials included in the the [***]-ITO Balance Customer will pay Flextronics [***]% of the Cost of such raw materials.
Payment of the foregoing amounts for [***]-ITO Balance shall be made by Customer against the presentation of valid invoice by Flextronics, in
accordance with the payment terms set forth in Section 7.1 of the MSA Agreement. Customer will issue Flextronics a purchase order for the [***]-
ITO Balance within fourteen (14) calendar days following receipt of the ITO Report.
[SIGNATURE PAGE TO FOLLOW]
*** Confidential treatment has been requested for redacted portions of this exhibit. This copy omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been provided separately to the Securities and Exchange Commission.
5
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment as of the date first set forth above.
Flextronics (Israel) Ltd.
/s/ Nir Weisbrod
By: Nir Weisbrod
Title: Account
Manager
Allot Communications Ltd.
/s/ Nachum Falek
By: Nachum Falek
Title: Chief Financial Officer
/s/ Pini Gvili
By : Pini Gvili
Title: VP Operations
*** Confidential treatment has been requested for redacted portions of this exhibit. This copy omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been provided separately to the Securities and Exchange Commission.
6
Exhibit 8.1
Company
Allot Communications, Inc.
Allot Communication Europe SARL
Allot Communications (Asia Pacific) Pte. Limited
Allot Communications (UK) Limited
Allot Communications Japan K.K.
Allot Communications (New Zealand) Limited
Ortiva Wireless Inc.
Oversi Networks Ltd.
List of Subsidiaries
Jurisdiction of Incorporation
United States
France
Singapore
United Kingdom
Japan
New Zealand
United States
Israel
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 12.1
I, Rami Hadar, certify that:
1. I have reviewed this annual report on Form 20-F of Allot Communications Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 21, 2013
/s/Rami Hadar
Rami Hadar
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 12.2
I, Nachum Falek, certify that:
1. I have reviewed this annual report on Form 20-F of Allot Communications Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 21, 2013
/s/Nachum Falek
Nachum Falek
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.1
In connection with the Annual Report of Allot Communications Ltd. (the “Company”) on Form 20-F for the period ended December 31, 2012, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Rami Hadar, and I, Nachum Falek, do hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
●
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
●
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
Date: March 21, 2013
Date: March 21, 2013
/s/Rami Hadar
Rami Hadar
President and Chief Executive Officer
(Principal Executive Officer)
/s/Nachum Falek
Nachum Falek
Chief Financial Officer
(Principal Financial Officer)
Exhibit 14.1
Kost Forer Gabbay &
Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement on Form S-8 (File Nos. 333-140701, 333-149237, 333-159306, 333-165144, 333-
172492 and 333-180770) pertaining to the 2006 Compensation Incentive Plan of Allot Communications Ltd., of our report dated March 21, 2013, with
respect to the consolidated financial statements and the effectiveness of internal control over financial reporting of Allot Communications Ltd. included in
this annual report on Form 20-F for the year ended December 31, 2012.
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
March 21, 2013