UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
____________________
(Mark One)
FORM 20-F
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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, 2013: 32,877,118 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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter), 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 meaning of Section 27A of the U.S. Securities
Act of 1933, as amended (the “Securities Act”), Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 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
PART I
ITEM 1: Identity of Directors, Senior Management and Advisers
ITEM 2: Offer Statistics and Expected Timetable
TABLE OF CONTENTS
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
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Consolidated Financial Statements and Other Financial Information
Significant Changes
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, 2011, 2012 and 2013 the consolidated balance sheet data as of December 31, 2012 and 2013 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, 2009 and 2010 and the
consolidated balance sheet data as of December 31, 2009, 2010 and 2011 have been derived from our audited consolidated financial statements which are not
included in this annual report.
Consolidated Statements of Operations:
Revenues:
Products
Services
Total revenues
Cost of revenues(2):
Products
Services
Expenses related to the settlement of the Office of the
Chief Scientist grants(1)
Total cost of revenues
Gross profit
Operating expenses:
Research and development, gross
Less royalty-bearing grant participation
Research and development, net(2)
Sales and marketing(2)
General and administrative(2)
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
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
___________________
2009
Year ended December 31,
2011
(in thousands of U.S. dollars, except per share and share data)
2012
2010
$
$
29,641
12,110
41,751
$
40,852
16,120
56,972
$
56,810
20,943
77,753
$
77,127
27,625
104,752
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
$
$
$
(7,672) $
(5,762) $
(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) $
2013
66,318
30,227
96,545
20,572
6,246
-
26,818
69,727
28,073
1,051
27,022
39,817
9,952
76,791
(7,064)
727
(6,337)
120
(6,457)
(0.20)
(0.20)
22,185,702
22,831,014
25,047,771
31,959,921
32,680,766
22,185,702
22,831,014
27,071,872
31,959,921
32,680,766
(1) Represents the full balance of the contingent liability related to grants received, which was paid in 2013.
(2) 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
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
$
$
$
2009
2010
Year ended December 31,
2011
(in thousands of U.S. dollars)
2012
2013
$
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 $
368
1,666
3,106
2,591
7,731
2009
2010
At December 31,
2011
(in thousands of U.S. dollars)
2012
2013
$
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
42,813
38,000
40,798
139,934
199,257
29,330
(73,842)
774
169,927
$
36,470
2,324
14,490
38,179
82,943
22,531
(63,694)
492
60,412
7
B. Capitalization and Indebtedness
Not applicable.
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 2013, we had a net loss of $6.5 million. We have had a history of net losses in all prior fiscal years since our inception, other than in 2006 and 2011. Our
net losses in 2013 were a result of an increase in the company’s costs due to the last two acquisitions and due to the decrease in the company’s revenues. 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 Economy (formerly 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.
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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.
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 15% and 14% of our total revenues in 2011 and 2012, respectively,
from one global Tier 1 mobile operator group. In 2013, we derived 45% of our total revenues from three Tier 1 mobile and fixed operators. The revenues
derived from each of these three operators were higher than 10% from our total revenues.
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 rules in the United States Court of Appeals for the District of Columbia Circuit. In January 2014, the United States Court of Appeals for the District of
Columbia Circuit overturned the FCC’s anti-blocking and anti-discrimination rules, saying the agency overreached in barring broadband providers from
slowing or blocking selected Web traffic. Despite this decision, 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 products, such as video caching and optimization and parental control, may be lower than anticipated.
Our value-added products 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 products by
introducing video caching products and optimization products, among other value-added products. The industry and market for such services is still
developing. We cannot provide any assurance that demand for such products 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 products 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 products
with our customers’ existing network infrastructure. While we will continue to introduce innovative value-added products, 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.
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We need to increase the functionality of our products and offer additional features and value-added products 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 products such as additional security, video functions, and 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.
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 2013, approximately 40% 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.
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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, several years ago one of our channel
partners 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 2012
and 2013. 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 these systems has declined from 29% in 2012 to 25% in 2013. 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.
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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.
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, 2013, we had a limited patent portfolio. We had seven 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;
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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.
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.
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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.
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. Although a certain
recovery has occurred in the U.S. economy, 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 2013, the shekel continued to fluctuate against the U.S. dollar, and appreciated by approximately 7% 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 whether any conflict minerals that are used in our products originated from the Democratic Republic of the
Congo or adjoining countries and, if we determine that we are subject to the new disclosure rules, make the required disclosures with the SEC no later than by
May 31, 2014. 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 describe 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.
We relied on the market capitalization method to determine the fair market value of our assets for the taxable year ended December 31, 2013. 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, 2013 and do not expect to become a PFIC for our taxable
year ending December 31, 2014. 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 2014 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 2013. 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, 2013, we employed 430 people, of whom 302 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, 2013, 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 2012 and in 2013 was 25% of their taxable income, and will increase to 26.5% in 2014 and
going forward.
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 2016.
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 the following rates: (i) Israeli
resident corporation – 0%, (ii) Israeli resident individual – 15% in 2013 and 20% as of 2014 (iii) non-Israeli resident - 15% in 2013 and 20% as of 2014
subject to a reduced tax rate under the provisions of 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 grants from 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
the future we may not receive grants or we 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 2011 and 2012, we received and accrued from the Office of the Chief Scientist royalty-bearing grants totaling $3.7 million and $2.9 million,
representing 21.7% and 11.5%, respectively, of our gross research and development expenditures in these periods. In December 2012, we agreed to prepay
approximately $15.9 million of contingent royalties to the Office of the Chief Scientist, and thereby eliminated all future royalty obligations related to grants
received through 2012. We recorded this prepayment as a liability in 2012 and paid it on August 2013.
In 2013 we received and accrued non-royalty-bearing grants totaling $1.1 million from the Office of the Chief Scientist, representing 3.7% of our
gross research and development expenditures during the year. In 2013 we qualified to participate in two non-royalty-bearing research and development
programs funded by the Office of the Chief Scientist to develop generic technology relevant to the development of our products. Such programs are approved
pursuant to special provisions of the Research and Development Law. We were eligible to receive grants constituting between 40% and 55% of certain
research and development expenses relating to these programs. One of the programs are members of programs approved for companies with large Research
and Development activities and another members of a "Magnet" consortiums. Although the grants under these programs are not required to be repaid by way
of royalties, the restrictions of the Research and Development Law described below apply to these programs.
The provisions of the Research and Development Law and the terms of the Office of the Chief Scientist grants prohibit us from transferring manufacturing
products which we originally planned to manufacture in Israel outside of Israel if they incorporate technologies funded by the Office of the Chief Scientist,
and from transferring intellectual property rights in technologies developed using these grants, without special approvals from the Office of the Chief
Scientist.
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. Similarly, even if we receive
approval to transfer intellectual property rights in technologies developed using these grants, we may be required to repay a multiple of the original grants to
the Office of the Chief Scientist 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.
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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.
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.
22
We had capital expenditures of $2.7 million in 2013, $3.8 million in 2012 and $2.9 million in 2011. We have financed our capital expenditures with cash
generated from operations and through net proceeds from sales of our equity securities and investing activities.
Our capital expenditures during 2011, 2012 and 2013 consisted primarily of investments in lab equipment for research and development.
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 product
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.
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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.
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.
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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.
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 products, 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.
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·
·
·
·
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.
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.
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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: Provides and manages differentiated services and tiered service plans that are tailored to subscriber preferences.
Allot QuotaManager: Provides 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.
Analytics Services
Our analytics solutions analyze traffic data to drive smart business decisions.
Allot ClearSee Analytics: is a business intelligence application that helps network operators turn big data into valuable insight for the decision-makers
in their organization. Its self-service approach allows network operators to synthesize and analyze large varieties and volumes of data with
extreme efficiency. Tools include built-in dashboards for mining Network, Application, Subscriber, Device, and Quality of Experience data, plus Self-
Service data mining for modeling fresh perspectives and gaining deeper understanding of network usage and subscriber behavior.
Allot ClearSee Data Source extracts a rich variety of raw traffic statistics from operator networks, enriches it with data from operator business systems,
and loads it into a cutting-edge data warehouse where it is transformed into modeled data objects that are meaningful to telco operators and easy to
manipulate using the Allot ClearSee Analytics application This valuable source data may also be exported to external analytics tools and other business
applications.
Video Solutions
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 Solutions
Our security solutions protect network customers, network service integrity and brand reputation.
·
Allot WebSafe Personal: Opt-in security services that allow ISP subscribers to define and enforce safe-browsing limits (Parental Control) and to prevent
incoming malware from infecting their devices (Anti-Malware). Services are enforced at the network level, requiring no device involvement or battery
consumption.
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·
·
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 solutions, 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.
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 2013, we derived 23% of our revenues from Europe, 22% from the United
States, 31% from Asia and Oceania, 19% from the Middle East and Africa and 5% from the Americas (excluding the 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 2013, approximately 40% 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.
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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.
As of December 31, 2013, our sales and marketing staff, including product management and business development functions, consisted of 82
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.
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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, 2013, our technical staff consisted of 117 employees.
Research and Development
Our research and development activities take place primarily in Israel. As of December 31, 2013, 172 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.”
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.
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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.”
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.
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As of December 31, 2013, 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 Economy.
C. Organizational Structure
As of December 31, 2013, we held directly and indirectly the percentage indicated of the outstanding capital stock of the following subsidiaries:
Company
Jurisdiction of Incorporation
Percentage Ownership
Allot Communications Inc.
Allot Communications Europe SARL
Allot Communications (Asia Pacific) Pte. Limited
Allot Communications (UK) Limited
Allot Communications Japan K.K.
Allot Communications (New Zealand) Limited
Oversi Networks Ltd.
Allot Communications (Hong Kong) Ltd
Allot Communications Africa (PTY) Ltd
Allot Communications India Private Ltd
D. Property, Plants and Equipment
United States
France
Singapore
United Kingdom
Japan
New Zealand
Israel
Hong Kong
South Africa
India
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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 June 2018.
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 2019 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.
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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 products. 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.
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 2013, the primary drivers of our growth were the mobile and fixed markets, which were highlighted by our ongoing relationship with a global Tier 1
mobile and fixed operators groups. Revenues from these customers in 2013 accounted for 45% 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 solutions and
platforms, 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.
33
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. We 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% and 15% of our total revenues in 2012 and 2011, respectively, from one global Tier 1 mobile operator group. In
2013, we derived 45% of our total revenues from three Tier 1 mobile and fixed operators.
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
Cost of revenues and gross margins
Year Ended December 31,
2012
2011
2013
12%
50
26
3
9
100%
24%
38
21
10
7
100%
22%
23
31
19
5
100%
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 (until the end of 2012; when the obligation to royalties to OCS ended due to the repayment to OCS). 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, 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. In 2013 our gross margin increased as a result of the elimination of royalty payments to
the Office of the Chief Scientist with respect to grants received through 2012.
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.
34
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 SEC, NASDAQ and the Tel-Aviv Stock Exchange (“TASE”) and premiums for our
director and officer liability insurance.
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 2013, we had $0.7 million financial income, net compared to $1.4 million financial income, net in 2012. The change is primarily attributed to a
decrease in our interest income which derived from lower interest rates received for our short-term bank deposits during 2013 and from the increase in the
amortization of our marketable securities’ premium during 2013.
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 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, 2013,
our net operating loss carry forwards for Israeli tax purposes totaled approximately $40 million, which includes losses related to our acquisition of Oversi. As
a result of our acquisition of Oversi, we offset operating losses in Israel 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 for 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 were
discontinued and will no longer be sold, the $4.1 million was cancelled, and we are not 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 was paid in 2013. Upon making this payment, we have eliminated all royalty obligations related to our anticipated revenues
and did not incur the expense associated with future interest payments related to such obligations.
35
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 45% of our total revenues in 2013 from three global Tier 1 mobile and fixed operator groups. While we have some
visibility into the likely scope of the customers’ projects, our relationships are conducted solely on a purchase order basis and we do not have any
commitment for future purchase orders from these customers. The loss of any of such significant customers could harm our results of operations and financial
condition.
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 2013, 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 products 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.
36
Cost of revenues and cost reductions. Our cost of revenues as a percentage of total revenues was 28.5% for 2011, 44.8% for 2012 (29.6% excluding the
impact of the $15.9 million expenses related to settlement of Office of Chief Scientist grants) and 27.8% for 2013. 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 2013, we recorded a write-off of $ 0.7 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.
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;
37
·
Provision for returns;
· 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.
Revenue recognition. We generate revenues mainly from selling its 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-users.
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. 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 based on their contractual term and recognized as revenues at the time the respective elements are provided.
Revenues arrangements with multiple deliverables are allocated using the relative selling price method. The Company determines the best estimated
selling price (“BESP”) in multiple elements arrangements as follows:
For the products the Company determine the “BESP” based on management’s estimated selling price (“ESP”) 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 years ended December 31, 2013 and 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.
38
Deferred revenues are classified as short- and long-term based on their contractual term and recognized as revenues at the time the respective
elements are provided.
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 $0.89 million and $0.79 million as of December 31, 2013 and 2012, respectively.
Warranty costs. We typically grant a one-year hardware and three months 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 $2.3 million in 2011, $4.8 million in 2012 and $7.7 million in
2013. In 2013, $0.3 million, $1.7 million, $3.1 million and $2.6 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, 2013, we had an aggregate of $15.8 million of deferred unrecognized stock-based
compensation remaining to be recognized over a weighted average vesting period of 2.13 years. Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventory and discontinued products.
Inventory write-off provision as of December 31, 2013, 2012 and 2011 totaled $1.8 million, $1.4 million and $1.7 million respectively.
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, 2013, we held available for sale marketable securities of $40.8 million. As of December 31, 2013, the unrealized loss recorded to other
comprehensive income was $0.02 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, 2013 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 2011, 2012 and 2013, 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, 2013, 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 2011, 2012 and 2013, 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.
In Israel, 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, 2013, 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 $5.0 million as of December 31, 2013, which expire
between 2024 and 2032. In France, we had approximately $4.4 million in net operating loss carry forwards as of December 31, 2013, 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, 2013 was $12.7 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,
2012
2011
2013
73.1%
26.9
100.0
73.6%
26.4
100.0
68.7%
31.3
100.0
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)%
21.3
6.5
27.8
72.2
28.0
41.2
10.3
79.5
(7.3)
0.8
(6.6)
(0.1)
(6.7)%
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenues
Products. Product revenues decreased by $10.8 million, or 14.0%, to $66.3 million in 2013 from $77.1 million in 2012.The decrease is derived by
the fact that, a portion of our sales are made to customers in countries in Europe, which have been impacted by the economic downturn and led our customers
to minimize their investments in Capital Expenditure activities in 2013 and, to a lesser degree in 2012 and 2011. Sales of our high-end products, primarily the
Allot Service Gateway platforms and value added products increase in 2013 (such as Allot Service Protector and Allot Proactive Analytics).
Services. Services revenues increased by $2.6 million, or 9.4%, to $30.2 million in 2013 from $27.6 million in 2012. The increase in service
revenues is primarily attributable to an increase in our installed base in 2013 and also the growth of our professional services activities.
Product revenues comprised 68.7% of our total revenues in 2013, a decrease of 4.9% compared to 2012 while services revenues’ portion of total
revenues increased by the same percentage.
During 2013, revenues in Europe decreased by $17.9 million, or 45.1%, compared to 2012. Revenues in the Americas (excluding the United States)
decreased by $2.6 million, or 32.7%, in 2013 compared to 2012, and revenues in Asia and Oceania increased by $8.0 million, or 36.2%, in 2013 compared to
2012. Revenues in the Middle East and Africa increased by $7.6 million, or 72.4%, compared to 2012. Revenues in the United States decreased by $3.3
million, or 13.5%, compared to 2012.
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Cost of revenues and gross margin
Products. Cost of product revenues decreased by $6.3 million, or 23.4%, to $20.6 million in 2013 from $26.9 million in 2012. Product gross margin,
increased to 69.0% in 2013 from 65.2% in 2012.The main reason is the contribution of the settlement reached with the Office of Chief Scientist in December
31, 2012. The Company paid to the Office of Chief Scientist an amount of $15.9 million liability outstanding in 2013 which eliminated recurring royalty
obligations related to revenues recorded.
Excluding the non-recurring payment to the Office of Chief Scientist in 2012, the decrease in cost of revenues is consistent with the decrease in
product revenues.
Services. Cost of service revenues increased by $2.1 million, or 49.4%, to $6.3 million in 2013 from $4.2 million in 2012. This increase is consistent
with the increase of service revenues.
Total gross margin, increased to 72.2% in 2013 from 70.4% in 2012, excluding the impact of the settlement.
Operating expenses
Research and development. Gross research and development expenses increased by $3.2 million, or 12.9%, to $28.1 million in 2013 from $24.9
million in 2012. This increase is primarily attributable to an increase in salaries and labor costs which principally resulted from an increase in the average
yearly head count derived mainly from the acquisitions of Ortiva and Oversi. This increase along with the increase in other overhead expenses amounted to
$2.7 million. In addition, stock-based compensation increased by $0.5 million.
Research and development expenses, net of received and accrued grants from the Office of the Chief Scientist, increased by $4.9 million, or 22.5%,
to $27.0 million in 2013 from $22.1 million in 2012. Grants received from the Office of the Chief Scientist totaled $1.1 million in 2013 compared to $2.9
million in 2012. The decrease in grants received is due the fact that from 2013, the Company is qualified to participate in an approved program with the OCS
for companies with large research and development activities and certain threshold of revenues. Under this program the Company is eligible to receive non-
bearing royalty grants that do not require repayments. The grants are smaller than the royalty bearing grants the company received in previous years.
Sales and marketing. Sales and marketing expenses increased by $5.7 million, or 16.7%, to $39.8 million in 2013 from $34.1 million in 2012. This
increase is primarily attributable to increased salaries and related expenses of approximately $4.7 million due to increase in average yearly head count from
the acquisitions of Ortiva and Oversi. Stock-based compensation increased by $1.5 million, commission expenses, travel and other expenses decreased by
$0.5 million.
Sales and marketing expenses, as a percentage of total revenues increased to 41.2% in 2013 from 32.6% in 2012.
General and administrative. General and administrative expenses decreased by $0.7 million, or 6.7%, to $10.0 million in 2013 from $10.7 million in
2012. This decrease is attributable to a decrease in acquisitions activity related expenses of approximately $3.1 million. These expenses were higher in 2012
as a result of non-recurring legal and finance expenses related to acquisition activities during 2012. Labor costs increased by approximately $0.7 million due
to increase in the average yearly head count. Stock-based compensation increased by approximately $1.2 million. Travel and other overhead expenses
increased by $0.5 million.
General and administrative expenses as a percentage of revenues increased to 10.3% in 2013 from 10.2% 2012.
43
Financial income (expenses), net. In 2013, we had $0.7 million financial income, net compared to $1.4 million financial income, net in 2012. The
change is primarily attributed to a decrease in our interest income derived from lower interest rates received for short-term bank deposits during 2013 and
from the increase in the amortization of the premium for our marketable securities during 2013.
Income tax expense (benefit). Income tax expense in 2013 was $0.1 million, compared to income tax benefit of $1.0 million in 2012. The change is
primarily due to the fact that the company recorded deferred tax assets for the first time in 2012 related to our net operating losses expected to be utilized in
the foreseeable future.
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 $1.7 million, or 8.4%, in 2012 compared to
2011. Revenues in the Middle East and Africa increased by $7.8 million, or 288.9%, 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.
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.
44
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.
Financial expenses (income), net. Financial and other income, net in 2012 was $1.4 million income compared to $0.4 million in 2011. The decrease
is primarily attributable to the decrease in interest income received from 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.
B. Liquidity and Capital Resources
As of December 31, 2013, we had $42.8 million in cash and cash equivalents, $40.8 million available for sale marketable securities and $38.0
million short-term deposits. As of December 31, 2013, our working capital, which we calculate by subtracting our current liabilities from our current assets,
was $133.9 million.
45
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.
Operating activities.
Net cash we used in operating activities in 2013 was $19.2 million. Net cash used in operating activities consisted of a net loss of $6.5 million, a
decrease of $15.9 million in liability related to settlement of the Office of Chief Scientist grants, depreciation and amortization of intangible assets of $6.3
million, $7.7 million of stock-based compensation expense, an increase of $3.8 million in inventory, a decrease of $2.1 million in employees and payroll
accruals, a decrease of $3.3 million in trade receivables, a decrease of $2.8 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 $1.6 million in trade payables.
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.
Investing activities.
Net cash provided by investing activities in 2013 was $11.1 million, primarily attributable to the redemption of short-term bank deposits of $40.0
million, an investment in available-for sale marketable securities of $32.8 million and the purchase of property and equipment of $2.7 million and an increase
due to redemption of marketable securities of $6.5 million.
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.
We expect that our capital expenditures will total approximately $3.0 million in 2014. 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 2013 was $0.9 million, which was attributable to issuance of share capital through the exercise of stock
options of $0.9 million.
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.
46
C. Research and Development, Patents and Licenses
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.
In 2013 we were qualified to participate in two research and development program funded by the Office of the Chief Scientist to develop generic
technology relevant to the development of our products. Such programs are approved pursuant to the Research and Development Law, and the regulations
promulgated thereunder. One of the programs is for companies with large research and development activities and the other is for members of a "Magnet"
consortium. We were eligible to receive non-royalty-bearing grants constituting between 40% and 55% of certain research and development expenses relating
to these programs. Although the grants under these programs are not required to be repaid by way of royalties, the restrictions under the Research and
Development Law described above apply to these programs.
Total research and development expenses, before royalty bearing grants, were approximately $16.9 million, $24.9 million and $28.1 million in the years
ended December 31, 2011, 2012 and 2013, respectively. Royalty bearing grants amounted to $3.7 million and $2.9 million in 2011 and 2012 respectively and
non-bearing royalty grants amounted to $1.1 million in 2013.
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, 2013, 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
$
$
8,742
799
1,166
282
$
2,447
461
934
-
$
5,389
338
116
-
$
906
-
116
-
$
10,989 $
3,842 $
5,843 $
1,022 $
-
-
-
282
282
_____________________
(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, $28,000
is unfunded.
47
ITEM 6: Directors, Senior Management and Employees
A. Directors and Senior Management
Our directors and executive officers, their ages and positions as of March 6, 2014 are as follows:
Name
Directors
Shraga Katz
Rami Hadar
Itzhak Danziger
Nurit Benjamini(1)(2)(3)
Steven D. Levy(1)(2)
Dov Baharav(1)(2)
Yigal Jacoby
Executive Officers
Nachum Falek
Amir Hochbaum
Anat Shenig
Andrei Elefant
Gary Drutin
Itamar Rosen
Jay Klein
Lior Moyal
Pini Gvili
Ramy Moriah
Age
Position
61
50
65
47
57
63
53
42
54
44
40
52
49
50
42
48
58
Chairman of the Board
Director, Chief Executive Officer and President
Director
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 — Operations
Vice President — Customer Care and Information Technology
57
Vin Costello
_______________________
(1) Member of our compensation and nomination committee.
(2) Member of our audit committee.
(3) Lead independent director.
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 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.
48
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.
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 and serves as the lead independent director on our board. 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
Dov Baharav joined our board of directors in 2013. He has served as a member of Mellanox’s Board of Directors since November 2010. Mr. Baharav was
previously the chairman of the Board of Directors of Israel Aerospace Industries Ltd., a world leader in defense and civil aerospace technology, with revenue
over 3.5 Billion dollars, of which 82% is exported. In addition, Mr. Baharav was also previously President and Chief Executive Officer and a member of the
board of directors of Amdocs Management Limited, where he transformed the company through vertical and horizontal expansion, various acquisitions, and
corporate restructuring. Beginning in 1991 when he joined Amdocs, Mr. Baharav served as Vice President and then President of Amdocs’ principal US
subsidiary, Amdocs, Inc. Four years later, he served as Chief Financial Officer of Amdocs Management, and in July 2002, was appointed President and Chief
Executive Officer. He was instrumental in transitioning the company back to a state of growth with annual revenues more than doubling over a span of a few
years following his appointment. Prior to 1991, Mr. Baharav served as Chief Operating Officer of Optrotech Ltd., a publicly held company that develops,
manufactures and markets electro-optical devices. Mr. Baharav is actively involved with the College of Management Academic Studies in Rishon Lezion,
Israel. He is also a member of the board of directors at SeamBI, a company specializing in dynamic product placement. Mr. Baharav holds a Bachelor of
Science in Physics and Accounting, as well as an MBA from Tel Aviv University.
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.
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.
50
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.
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.
51
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.
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 a 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 2013 consisted of approximately
$3.5 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 2013, we paid the chairman of the board of directors, Mr. Shraga Katz, an annual fee of NIS 279,000 (approximately $80,000). Mr. Katz is also
entitled to customary benefits for a senior executive officer at an Israeli company. In 2013, we paid each of our directors, Itzhak Danziger and Yigal Jacoby,
an annual fee of NIS 45,000 (approximately $12,900) and a per meeting attendance fee of NIS 3,750 (approximately $1,100), linked to the Israeli consumer
price index. During such time, we paid each of our outside directors, Nurit Benjamini, Steven Levy and Dov Baharav, fees as permitted by the Israeli
Companies Law (the “Companies Law”). In 2013, we paid each of our directors (except for Shraga Katz and Rami Hadar) a per meeting attendance fee of
NIS 3,750 (approximately $1,100) for any meeting he or she attended in person, NIS 2,250 (approximately $650) for any meeting he or she attended by
conference call or similar means, and NIS 1,875 (approximately $550) 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 in equal
installments on a quarterly basis over a period of three years.
In 2013, we paid our President and Chief Executive Officer, Mr. Rami Hadar, an annual salary of NIS 1,003,000 (approximately $288,000) and a
bonus of NIS 401,000 (approximately $115,000) in connection with his performance in 2012.
During 2013, our officers and directors received, in the aggregate, options to purchase 263,334 ordinary shares under our equity based compensation
plan. These options have a weighted average exercise price of approximately $12.68 and the options will expire ten years after the date the options were
granted.
52
Compensation Policy
Under the Companies Law, we are required to adopt a compensation policy, recommended by the compensation and nominating committee and
approved by the Board of Directors and the shareholders, in that order. The shareholder approval requires a majority of the votes cast by shareholders,
excluding any controlling shareholder and those who have a personal interest in the matter. In general, all directors and executive officers’ terms of
compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the
grant of an exemption from liability – must comply with the compensation policy.
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling
shareholder must be approved separately by the compensation and nominating committee, the Board of Directors and the shareholders of the Company (by
the same majority noted above), in that order. The compensation terms of other executive officers require the approval of the compensation and nominating
committee and the Board of Directors.
Our compensation policy was approved by our compensation and nominating committee and by our Board of Directors, and subsequently approved
by our shareholders in August 2013, and will be in effect for a period of three years following approval. The following is a summary of our Compensation
Policy and is qualified by reference to the full text thereof, a copy of which was attached to our Proxy Statement for our 2013 Annual Meeting of
Shareholders.
●
●
●
●
●
●
●
●
Objectives: To attract, motivate and retain highly experienced personnel who will provide leadership for Allot’s success and enhance
shareholder value, and to provide for each executive officer an opportunity to advance in a growing organization.
Compensation instruments: Includes base salary; limited personal benefits and perquisites; cash bonuses; equity-based awards; and
retirement and termination arrangements.
Ratio between fixed and variable compensation: Allot aims to balance the mix of fixed compensation (such as base salary) and variable
compensation (such as performance based cash bonuses and equity-based awards) pursuant to the ranges set forth in the Compensation Policy
in order, among other things, to tie the compensation of each executive officer to Allot’s financial and strategic achievements and enhance the
alignment between the executive officer’s interests and the long-term interests of Allot and its shareholders.
Internal compensation ratio: Allot will target a ratio between overall compensation of the executive officers and the average and median
salary of the other employees of Allot, as set forth in the Compensation Policy, to ensure that levels of executive compensation will not have
a negative impact on work relations in Allot.
Base salary, benefits and perquisites: The Compensation Policy provides guidelines and criteria for determining base salary, benefits and
perquisites for executive officers.
Cash bonuses: Allot’s policy is to allow annual cash bonuses, which may be awarded to executive officers pursuant to the guidelines and
criteria, including caps on maximum payouts, set forth in the Compensation Policy.
“Clawback”: In the event of an accounting restatement, Allot shall be entitled to recover from current executive officers bonus compensation
in the amount of the excess over what would have been paid under the accounting restatement, with a three-year look-back.
Equity-based awards: Allot’s policy is to provide equity-based awards in the form of stock options, restricted stock units and other forms of
equity, which may be awarded to executive officers pursuant to the guidelines and criteria, including minimum vesting period, set forth in the
Compensation Policy.
53
●
●
●
●
●
Retirement and termination: The Compensation Policy provides guidelines and criteria for determining retirement and termination
arrangements of executive officers, including limitations thereon.
Exculpation, indemnification and insurance: The Compensation Policy provides guidelines and criteria for providing directors and executive
officers with exculpation, indemnification and insurance.
Directors: The Compensation Policy provides guidelines for the compensation of our directors in accordance with applicable regulations
promulgated under the Companies Law, and for equity-based awards that may be granted to directors pursuant to the guidelines and criteria,
including minimum vesting period, set forth in the Compensation Policy.
Applicability: The Compensation Policy applies to all compensation agreements and arrangements approved after the date on which the
Compensation Policy is approved by the shareholders.
Review: The compensation and nominating committee and the Board of Directors of Allot reviews the adequacy of the Compensation Policy
from time to time, as required by the Companies Law.
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 applicable to the U.S. issuers, provided we disclose which requirements we are not following and describe 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 2016. 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 duly 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.
54
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.
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, Mr. Levy and Mr. Baharav. Ms. Benjamini also serves as
the lead independent director.
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.
55
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.
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
consists of seven members, four of whom are independent under the NASDAQ Stock Market rules. Specifically, our board has determined that Ms. Nurit
Benjamini, Mr. Dov Baharav, Mr. Yigal Jacoby and Mr. Steven Levy meet the independence standards of the NASDAQ Stock Market rules. In reaching this
conclusion, the board determined that none of these directors have a relationship that would preclude a finding of independence and that the other
relationships that these directors have with us do not impair their independence. As stated above under “– Corporate Governance Practices,”. 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;
56
·
·
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.
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.
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
57
·
approval of transactions with office holders and controlling shareholders, as described above, and other related-party transactions.
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. Dov Baharav. The financial experts on the audit committee pursuant to the
definition of the SEC are all members of the audit committee.
Compensation and Nominating Committee
Under the Companies Law, the compensation committee of a public company must consist of at least three directors who satisfy certain independence
qualifications, including the additional independence requirements of the NASDAQ Stock Market rules applicable to the members of compensation
committees, and the chairman of the compensation committee is required to be an outside director. We have established a compensation and nominating
committee which currently consists of Ms. Nurit Benjamini, Mr. Steven Levy, and Mr. Dov Baharav. The chairperson is Mr. Levy. This committee oversees
matters related to our compensation policy and practices. Our board of directors has adopted a compensation and nominating committee charter setting forth
the responsibilities of the committee consistent with the Companies Law and 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.
The compensation committee is also authorized to retain and terminate compensation consultants, legal counsel or other advisors to the committee
and to approve the engagement of any such consultant, counsel or advisor, to the extent it deems necessary or appropriate after specifically analyzing the
independence of any such consultant retained by the committee.
58
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.
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;
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
59
·
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, 2013, we had 430 employees of whom 302 were based in Israel, 66 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
2011
December 31,
2012
2013
19
117
153
35
324
18
178
199
47
442
16
172
199
44
430
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 Economy 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.
60
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 6, 2014 by (i) each of our directors
and nominees, (ii) each of our executive officers and (iii) all of our executive officers and directors serving as of March 6, 2014, as a group. Unless otherwise
stated, the address of each named executive officer and director is c/o Allot Communications Ltd., 22 Hanagar Street, Neve Ne’eman Industrial Zone B, Hod-
Hasharon 4501317, Israel.
Name of Beneficial Owner
Directors
Itzhak Danziger
Nurit Benjamini
Rami Hadar
Shraga Katz
Steven D. Levy
Yigal Jacoby
Dov Baharav
Executive Officers
Amir Hochbaum
Anat Shenig
Andrei Elefant
Gary Drutin
Itamar Rosen
Jay Klein
Lior Moyal
Nachum Falek
Pini Gvili
Ramy Moriah
Vin Costello
All directors and executive officers as a group (18 persons)
__________________________
*
Less than one percent of the outstanding ordinary shares.
Number of
Shares
Beneficially
Held(1)
Percent of
Class
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
635,242
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
1.89%
(1)
As used in this table, “beneficial ownership” is determined in accordance with the rules of the SEC and consists of either or both voting or
investment power with respect to securities. 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 6, 2014 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 the purpose of computing the ownership percentage of any other person. Except as otherwise
indicated, the persons named in the table have reported that they have sole voting and sole investment power with respect to all shares of common
stock shown as beneficially owned by them. The amounts and percentages are based upon 33,001,100 ordinary shares outstanding as of March 6,
2014 pursuant to Rule 13d-3(d)(1)(i) under the Exchange Act.
Our directors and executive officers hold, in the aggregate, outstanding options exercisable for 1,113,431 ordinary shares, as of March 6, 2014.
These options have a weighted average exercise price of $9.84 per share and have expiration dates until 2024.
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Share Option Plans
We have adopted four share option plans and, as of March 6, 2014, we had 2,799,950 ordinary shares outstanding and 715,457 remained available for future
options or other awards.
Total shares outstanding as of March 6, 2014 totaled 33,001,100. Under our share option plans, as of March 6, 2014 options to purchase 2,799,950
ordinary shares at a weighted average exercise price of $10.76 per share were outstanding of which options to purchase 1,327,802 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 6, 2014, options or
other awards to purchase 2,796,269 ordinary shares were outstanding under the 2006 plan and 638,190 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.
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.
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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 6, 2014, there were outstanding options to purchase 3,681 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.
63
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 6, 2014, 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.
FMR LLC (2)
Zohar Zisapel (3)
T. Rowe Price Associates, Inc (4)
Migdal Insurance & Financial holdings Ltd (5)
Psagot Investment Ltd (6)
______________
Ordinary
Shares
Beneficially
Owned(1)
Percentage of
Ordinary
Shares
Beneficially
Owned
3,250,691
2,842,378
2,786,740
2,616,542
1,876,791
9.9%
8.6%
8.4%
7.9%
5.7%
(1)
(2)
(3)
(4)
(5)
(6)
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 6, 2014 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
33,001,100 ordinary shares outstanding as of March 6, 2014.
Based on a Schedule 13G/A filed on February 14, 2013. Includes 2,920,191 shares beneficially owned by Fidelity Management & Research
Company, a wholly-owned subsidiary of FMR LLC, of which Edward C. Johnson 3d and FMR LLC, through its control of Fidelity
Management & Research Company, and the funds each has sole dispositive power; Edward C. Johnson 3d and FMR LLC, through its control of
Pyramis Global Advisors, LLC , each has sole dispositive power and sole voting power over 11,900 shares; and Edward C. Johnson 3d and
FMR LLC, through its control of Pyramis Global Advisors Trust Company each has sole dispositive power and sole voting power over 318,600
shares. The address of the FMR entities is 82 Devonshire St., Boston MA 02109.
Based on a Schedule 13G/A filed on January 13, 2011. Consists of 2,777,487 shares held by Zohar Zisapel and 64,891 shares 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.
Based on a Schedule 13G/A filed on February 13, 2014. Of these shares, T. Rowe Price Associate reported that it held sole voting power over
613,300 and sole dispositive power over 2,786,740 shares. The address of T. Rowe Price Associates Inc is 100 E. Prat Street, Baltimore,
Maryland 21202.
Based on a Schedule 13G/A filed on February 13, 2014.Midgal Insurance & Financial Holdings Ltd reported that it held shared voting power
and shared dispositive power over these shares. Of these shares, 2,553,131 shares are held for members of the public through, among others,
provident funds, mutual funds, pension funds and insurance policies, which are managed by subsidiaries of Midgal Insurance & Financial
Holdings Ltd, according to the following segmentation: 1,465,149 shares are held by Profit participating life assurance accounts; 991,940 shares
are held by Provident funds and companies that manage provident funds and 96,042 shares are held by companies for the management of funds
for joint investments in trusteeship, each of which subsidiaries operates under independent management and makes independent voting and
investment decisions. The address of the reporting person is 4 Efal Street; P.O BOX 3063; Petach Tikva 49512, Israel.
Based on a Schedule 13G filed on February 19, 2014. Psagot Investment House Ltd. reported that it held shared voting power and shared
dispositive power over these shares. Consists of 699,295 shares beneficially owned by Psagot Securities Ltd; 327,646 shares beneficially owned
by Psagot Provident Funds and Pension Ltd; 34,194 shares beneficially owned by Psagot Mutual Funds Ltd (of this amount, 8,508 shares may
also be considered beneficially owned by Psagot Securities Ltd., but are not included in the shares beneficially owned by Psagot Securities Ltd.,
as indicated above); and 815,656 shares beneficially owned by Psagot Exchange Traded Notes Ltd. The address of the Psagot entities is Psagot
Investment House Ltd. – 14 Ahad Ha’am Street, Tel Aviv 65142, Israel.
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Significant Changes in the Ownership of Major Shareholders
As of March 6, 2014, FMR LLC was the beneficial owner of 3,250,691, or 9.9%, of our ordinary shares. Its beneficial ownership did not change
compared to the amounts reported in our 2012 Annual Report. As of August 31, 2012, FMR LLC was the beneficial owner of 4,032,891, or 12.6%, of our
ordinary shares, as reported in FMR LLC’s Schedule 13G filed on September 10, 2012.
As of March 6, 2014, Alydar Group was no longer a major shareholder. As of March 8, 2013, Alydar Group was the beneficial owner of 1,708,860,
or 5.3%, of our ordinary shares, as reported in our 2012 Annual Report.
As of March 6, 2014, Zohar Zisapel was the beneficial owner of 2,842,378, or 8.6%, of our ordinary shares. Its beneficial ownership did not change
since December 31, 2010.
As of March 6, 2014, Turner Investments was no longer a major shareholder. As of March 8, 2013, Turner Investments was the beneficial owner of
1,661,239, or 5.0%, of our ordinary shares, as reported in our 2012 Annual Report.
As of March 6, 2014, T. Rowe Price Associates, Inc. was the beneficial owner of 2,786,740, or 8.4%, of our ordinary shares. As of May 31, 2013, T.
Rowe Price Associates, Inc. was the beneficial owner of 3,280,510, or 10.0%, of our ordinary shares as reported in T. Rowe Price Associates, Inc.’s Schedule
13G filed on June 10, 2013.
As of March 6, 2014, Migdal Insurance & Financial Holdings Ltd was the beneficial owner of 2,616,542, or 7.9%, of our ordinary shares. As of
April 12, 2013, Migdal Insurance & Financial Holdings Ltd was the beneficial owners of 1,662,268, or 5.1%, of our ordinary shares as reported in Midgal
Insurance & Financial Holdings Ltd filed on May 21, 2013.
As of March 6, 2014, Psagot Investment House Ltd was the beneficial owner of 1,876,791, or 5.75% of our ordinary shares. As of April 30, 2013,
Psagot investment Ltd was the beneficial owner of 1,785,319, or 5.5%, of our ordinary shares as reported in Psagot Investment House Ltd’s Schedule 13G
filed on May 13, 2013.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of March 1, 2014, 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 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.
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Agreements with Directors and Officers
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 $305,000 in 2012, approximately $302,000
in 2013 and approximately $13,000 in 2013 through March 6, 2014.
C. Interests of Experts and CounselNot 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
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.
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ITEM 9: The Offer and Listing
Not applicable, except for Items 9.A.4 and 9.C, which are detailed below.
Stock Price History
Our ordinary shares have been trading on the NASDAQ Global Select Market under the symbol “ALLT” since November 2006. 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, for 2013 and 2013, each quarter in the 2013
and 2012 and the most recent six months prior to the filing of this annual report as reported by the Tel Aviv Stock Exchange (since December 2010), in NIS,
for each of the last five years:
Year
2010
2011
2012
2013
2014 (through March 6, 2014)
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Most Recent Six Months
March 2014 (through March 6, 2014)
February 2014
January 2014
December 2013
November 2013
October 2013
Markets
$
$
$
$
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
High
Low
$
11.64
19.05
28.03
18.28
17.06
NIS
NIS
4.00
9.45
15.55
11.01
14.93
42.57
71.22
111.60
68.12
62.96
37.20
35.74
58.56
39.2
52.01
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
23.25
28.03
27.82
25.50
NIS
15.55
21.87
21.32
17.12
NIS
86.17
110.00
111.60
99.72
58.56
83.07
88.58
63.60
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
18.28
13.79
15.55
15.13
NIS
11.94
11.01
12.02
12.63
NIS
68.12
50.14
54.86
53.18
45.19
39.20
42.86
45.04
NASDAQ Global Market
High
Low
Tel Aviv Stock Exchange
High
Low
$
16.51
17.13
17.06
15.13
13.77
14.35
NIS
NIS
16.29
15.78
14.93
13.02
12.71
12.63
58.22
60.28
62.96
53.18
48.17
50.43
57.13
54.54
52.01
45.89
45.08
45.04
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.
67
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 6, 2014, we had 33,001,100
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:
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.”
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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% or more of our share capital
and 1% of our voting power or the holder or holders of 5% 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.
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.
69
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 at least 75% 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% 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 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.
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
approve such a transaction or action only if it is in the best interests of the Company.
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.
70
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”).
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.
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Merger. The Companies Law permits merger transactions between two Israeli companies 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.
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.”
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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.
Location
“ITEM 4.B: Information on the Company–Business Overview–Manufacturing.”
D. Exchange Controls
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.
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.
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General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax. In 2013 and 2012, the corporate tax rates were25% of their taxable income. The corporate
tax rate for 2014 is 26.5%. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Preferred Enterprise or
a Beneficiary Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are generally subject to the prevailing
corporate tax rate.
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.
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.
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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.
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.
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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.
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.
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·
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
Other Regions
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
Reduced Tax Period
5 years
8 years
8 years
8 years
8 years
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%
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.
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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.
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
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·
A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on
income of the 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.
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 2011 Amendment
As of January 1, 2011 new legislation amending to the Investment Law came into effect (the “2011 Amendment”). The 2011 Amendment introduced a new
status of “Preferred Company” and “Preferred Enterprise”, replacing the existed status of “Beneficiary Company” and “Beneficiary Enterprise”. Similarly to
“Beneficiary Company”, a Preferred Company is an industrial company owning a Preferred Enterprise which meets certain conditions (including a minimum
threshold of 25% export). However, under this new legislation the requirement for a minimum investment in productive assets was cancelled.
Under the 2011 Amendment, a uniform corporate tax rate will apply to all qualifying income of the Preferred Company, as opposed to the former
law, which was limited to income from the Approved Enterprises and Beneficiary Enterprise during the benefits period. The uniform corporate tax rate will
be 7 % in areas in Israel designated as Development Zone A and 12.5% elsewhere in Israel during 2013, 9% and 16%, respectively, in 2014.
A dividend distributed from income which is attributed to a Preferred Enterprise/Special Preferred Enterprise will be subject to withholding tax at
source at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 15% in 2013 and 20% as of 2014 (iii) non-Israeli resident -
15% in 2013 and 20% as of 2014 subject to a reduced tax rate under the provisions of an applicable double tax treaty.
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The provisions of the 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits. These
transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in
2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an
Approved Enterprise, which chose to receive grants, before the 2011 Amendment came into effect, will remain subject to the provisions of the Investment
Law as in effect on the date of such approval, and subject to certain conditions; (ii) terms and benefits included in any certificate of approval that was granted
to an Approved Enterprise, which had participated in an alternative benefits program, before the 2011 Amendment came into effect will remain subject to the
provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Beneficiary Enterprise can
elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.
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 2016.
Tax benefits under the 2012 Amendment
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 2011, 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 2012.
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).
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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.
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;
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·
·
·
·
·
·
·
·
·
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;
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).
82
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.
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.
83
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.
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.
84
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.”
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.
85
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.
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.
86
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.
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.”
87
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, 2013, we had outstanding forward contracts in the amount of $1.7 million. These transactions were for a period of up to twelve
months. As of December 31, 2013, the fair value of the above mentioned foreign currency derivative contracts was $0.3 million.
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, 2013, 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.
88
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
31,2013. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2013, our disclosures
controls and procedures were effective at the reasonable assurance level.
(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; and
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 assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. 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, 2013 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for
external reporting purposes in accordance with generally accepted accounting principles.
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 an “audit committee financial expert” as defined under the U.S. federal securities laws and is
independent under the rules of the NASDAQ Stock Market.
89
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. Waivers of our code of ethics may only be granted by the board of directors. Any amendments to this
code or any waiver that is granted, and the basis for granting the waiver, will be publicly communicated as appropriate. We granted no waivers under our
Code of Ethics in 2013.
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,
2012
2013
(in thousands of U.S. dollars)
285 $
105
73
41
504 $
275
25
83
15
398
$
$
(1) “Audit fees” include fees for services performed by our independent public accounting firm in connection with our annual audit for 2012 and 2013,
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.
90
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 describe 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 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. 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 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 16H: Mine Safety Disclosure
Not applicable.
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 26, 2014
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
Description
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
14.1
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(2)
Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd. and the Registrant* (3)
Amendment No. 1, dated September 1, 2012, to the Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd.
and the Registrant*(4)
List of Subsidiaries of the Registrant
Code of Ethics (5)
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) (6)
Consent of Kost Forer Gabbay & Kasierer
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.PRE
101.CAL
101.LAB
101.DEF
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
__________________________
(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) Previously filed with the Securities and Exchange Commission on March 21, 2013 as Exhibit 4.5 to Form 20-F for the year ended December 31,
2012 and incorporated by reference herein.
(3) Previously filed 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.
(4) Previously filed with the Securities and Exchange Commission on March 21, 2013 as Exhibit 4.7 to Form 20-F for the year ended December 31,
2012 and incorporated by reference herein.
(5) Previously filed 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.
(6) Furnished herewith.
*
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, 2013
U.S. DOLLARS IN THOUSANDS
ALLOT COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2013
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
F - 2
Page
F - 3 - F - 5
F - 6 - F - 7
F - 8
F - 9 - F - 10
F - 11 - F - 12
F - 13 - F - 47
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
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") and its subsidiaries as of
December 31, 2013 and 2012, 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, 2013. 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, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2013, 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, 2013, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 26, 2014 expressed an unqualified opinion thereon.
Tel Aviv, Israel
March 26, 2014
/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 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
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,
2013, 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 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
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, 2013, 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, 2013 and 2012, 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, 2013 and our report dated March 26, 2014
expressed an unqualified opinion thereon.
Tel Aviv, Israel
March 26, 2014
/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 $ 441 and $ 280 at December 31, 2013 and 2012
$
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,
2013
2012
42,813 $
-
38,000
40,798
16,908
8,218
13,798
50,026
146
78,042
14,841
20,236
6,815
9,963
160,535
180,069
254
1,602
771
213
1,525
239
2,627
1,977
5,874
6,609
9,407
20,814
12,322
20,814
$
199,257 $
221,791
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, 2013 and 2012; Issued
and outstanding: 32,877,118 and 32,547,151 shares at December 31, 2013 and 2012, respectively
Additional paid-in capital
Accumulated other comprehensive income
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,
2013
2012
$
3,191 $
6,129
12,504
-
4,777
4,809
8,182
13,829
15,886
5,765
26,601
48,471
2,447
282
3,945
254
2,729
4,199
774
242,629
366
(73,842)
761
233,985
1,760
(67,385)
169,927
169,121
$
199,257 $
221,791
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 $ 1,051, $ 2,855 and
$ 3,674 for the years ended December 31, 2013, 2012 and 2011, respectively)
Sales and marketing
General and administrative
Total operating expenses
Operating income (loss)
Financial income, net
Income (loss) before income tax expenses (benefit)
Income tax expenses (benefit)
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2012
2013
2011
$
66,318 $
30,227
96,545
77,127 $
27,625
104,752
20,572
6,246
-
26,818
26,857
4,180
15,886
46,923
56,810
20,943
77,753
19,540
2,635
-
22,175
69,727
57,829
55,578
27,022
39,817
9,952
22,060
34,127
10,664
13,222
26,543
7,474
76,791
66,851
47,239
(7,064)
(727)
(6,337)
120
(9,022)
(1,358)
(7,664)
(926)
8,339
(415)
8,754
(55)
Net income (loss)
$
(6,457) $
(6,738) $
8,809
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
(20)
(1,374)
(7,851) $
15
2,555
(4,168) $
68
(1,312)
7,565
(0.20) $
(0.20) $
(0.21) $
(0.21) $
0.35
0.33
$
$
$
32,680,766
31,959,921
25,047,771
32,680,766
31,959,921
27,071,872
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, 2011
23,806,313 $
527 $
133,483 $
434 $
(69,456) $
64,988
Issuance of shares related to 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
Exercise of stock options
Stock-based compensation
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
32,547,151 $
761 $
233,985 $
1,760 $
(67,385) $
169,121
(*) $ 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
Balance at December 31, 2012
32,547,151 $
761 $
233,985 $
1,760 $
(67,385) $
169,121
Exercise of stock options
Stock-based compensation
Other comprehensive loss
Net loss
329,967
-
-
-
13
-
-
-
913
7,731
-
-
-
-
(1,394)
-
-
-
-
(6,457)
926
7,731
(1,394)
(6,457)
Balance at December 31, 2013
32,877,118 $
774 $
242,629 $
366 $
(73,842) $
169,927
Accumulated other comprehensive income (loss):
Year ended December 31,
2012
2013
2011
Accumulated unrealized gain on available-for-sale marketable securities
Accumulated unrealized gain (loss) on foreign currency cash flows hedge
transactions
$
41 $
61 $
45
325
1,699
(855)
Accumulated other comprehensive income (loss) (see note 2u)
$
366 $
1,760 $
(810)
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2012
2013
2011
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
(6,457) $
(6,738) $
8,809
Depreciation and amortization
Stock-based compensation
Capital loss
Decrease (increase) in accrued severance pay, net
Decrease (increase) in other assets
Decrease in accrued interest and amortization of premium on marketable securities
Decrease (increase) in trade receivables
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories, net
Increase in long-term deferred taxes, net
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)
6,338
7,731
18
(13)
(532)
366
3,328
(2,749)
(3,835)
(77)
(1,618)
(2,053)
(2,823)
(988)
(15,886)
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)
-
Net cash provided by (used in) operating activities
(19,250)
8,692
15,197
Cash flows from investing activities:
Decrease (increase) in restricted cash and deposits
Investments in short-term bank deposits
Proceeds 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 sales 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)
146
-
40,042
(2,706)
-
(32,805)
2,597
3,864
-
913
(54,042)
-
(3,820)
-
(8,194)
750
9,986
(24,892)
(78)
(24,000)
-
(2,953)
30
(4,735)
803
1,800
-
Net cash provided by (used in) investing activities
11,138
(79,299)
(29,133)
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,
2012
2013
2011
-
899
-
-
5,903
(1,952)
84,922
2,838
-
899
3,951
87,760
(7,213)
50,026
(66,656)
116,682
73,824
42,858
Cash and cash equivalents at the end of the year
$
42,813 $
50,026 $
116,682
Supplementary cash flow information:
Cash paid (received) during the year for:
Taxes
$
(9) $
(48) $
100
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
Schedule B –non cash activities during the year for:
$
$
$
$
- $
-
-
-
-
- $
-
- $
(4,501) $
597
14,025
17,663
409
(1,952)
26,241 $
(1,349) $
24,892 $
Proceeds from exercise of stock options
$
27 $
- $
The accompanying notes are an integral part of the consolidated financial statements.
F - 12
-
-
-
-
-
-
-
-
-
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, Allot India Private Limited. (the "Indian subsidiary”),
which was incorporated in 2012 under the laws of India and started it’s activity in 2013 and Allot Communication Africa (PTY) Ltd.
(the "African subsidiary”), which was incorporated in 2013 under the laws of South Africa.
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,
Singaporean, Indian and African 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 No. 805, “Business
Combinations” ("ASC No. 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.
On December 31, 2012 Ortiva was merged into the U.S. subsidiary.
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 had 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 and was presented in other payables and accrued expenses. During 2013, the fair
value of the contingent consideration was estimated to $ 0 as the booking threshold was not achieved. The changes in fair value
of the contingent consideration were recorded in general and administrative expenses.
The acquisition of Oversi was accounted for using the purchase method of accounting in accordance with ASC No. 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.
On December 31, 2012, Oversi was merged into the Company.
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
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1: GENERAL (CONT.)
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.
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES
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:
The restricted cash and deposits are held in favor of financial institutions in respect of 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 0.51% and 1.1% at December 31, 2013 and
2012 respectively.
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 investments in Marketable securities in accordance with ASC 320, "Investments - Debt and Equity
Securities". Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-
evaluates such determinations at each balance sheet date.
Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and
losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss). Gains and
losses are recognized when realized, on a specific identification basis, in the Company's consolidated statements of comprehensive
income.
The Company's securities are reviewed for impairment in accordance with ASC 320-10-65. If such assets are considered to be
impaired, the impairment charge is recognized in earnings when a decline in the fair value of its investments below the cost basis is
judged to be Other-Than-Temporary Impairment (OTTI). Factors considered in making such a determination include the duration and
severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including
whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. Based on the
above factors, the Company concluded that unrealized losses on its available-for-sale securities, for the years ended 2013, 2012 and
2011, were not OTTI.
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, technological obsolescence, excess inventory and discontinued products. Inventory write-off as of December 31, 2013, 2012 and
2011 totaled $ 1,835, $ 1,385 and $ 1,714, respectively.
Cost is determined as follows:
Raw materials and Finished goods – weighted average cost method
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 is not amortized, but rather subject to an
annual impairment test, 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. The first step, identifying a potential impairment, compares the fair
value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step would need to be
performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of
the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the applied fair value is
recognized as an impairment loss, and the carrying value of goodwill is written down to fair value.
The Company operates in a single reportable unit. The Company has performed an annual impairment analysis as of December 31,
2013 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 2013, 2012 and 2011 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.
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 2011, 2012 and 2013, no impairment losses were recorded.
l.
Revenue recognition:
The Company generates revenues mainly from selling its 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-users.
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.
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.
In October 2009, the FASB issued ASU 2009-14, "Certain Arrangements That Include Software Elements, (amendments to ASC Topic
985, Software)" (ASU 2009-14). 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.
Revenues arrangements with multiple deliverables are allocated using the relative selling price method. The Company determines the
best estimated selling price (“BESP”) in multiple elements arrangements as follows:
For the products the Company determine the “BESP” – it is based on management ESP 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, 2013 and 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.
Deferred revenues are classified as short and long term based on their contractual term and recognized as revenues at the time the
respective elements are provided
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 records a provision for estimated product returns and stock rotation based on its experience with historical product
returns, stock rotations and other known factors. Such provisions amounted to $ 892 and $ 785 as of December 31, 2013 and 2012,
respectively.
m.
Advertising expenses:
Advertising expenses are charged to the statement of operations, as incurred. Advertising expenses for the years ended December 31,
2013, 2012 and 2011 amounted to $ 973, $ 1,002 and $ 885, respectively.
n.
Research and development costs:
Accounting Standards Codification No. 985-20, 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, 2013, 2012 and 2011, amounted to $ 2,139, $ 1,486 and $ 1,280, 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, 2013, 2012 and 2011:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Year ended December 31,
2012
2013
2011
$
368 $
1,666
3,106
2,591
222 $
1,186
2,060
1,349
103
442
1,001
710
Total stock-based compensation expense
$
7,731 $
4,817 $
2,256
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, 2013, 2012 and 2011:
Year ended December 31,
2012
2011
2013
Suboptimal exercise multiple
Risk free interest rate
Volatility
Dividend yield
F - 23
3
2.5-3.5
0.1%-2.77% 0.15%-1.39% 0.11%-5.46%
50%-53%
0%
51%-66%
0%
53%-63%
0%
2.5-3.5
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 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%-5.7%.
The computations of expected volatility and suboptimal exercise multiple are based on the average of the Company's realized historical
stock price volatility 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, marketable securities, short-term bank deposits, trade receivables and derivative instruments.
The majority of cash and cash equivalents, marketable securities, restricted cash 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.
The Company's trade receivables are primarily derived from sales to customers located mainly in the United States, as well as in
EMEA, APAC 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 $ 441 and $ 280 as of
December 31, 2013 and 2012, respectively.
The Company has no significant off balance sheet concentrations of credit risk, except for hedging arrangements to cover the currency
exposure on identified cash flow items (see also Note 2w).
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
r.
Grants from the OCS:
ALLOT COMMUNICATIONS LTD.
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 $ 1,051, $ 2,855
and $ 3,674 in 2013, 2012 and 2011, respectively.
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.
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 income/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".
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.
For the years ended December 31, 2013 and 2012, 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 Consolidated Statement of
Comprehensive Income.
In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, which requires entities to present information
about significant items reclassified out of accumulated other comprehensive income (loss) by component either on the face of the
statement where net income is presented or as a separate disclosure in the notes to the financial statements.
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The following table shows the components and the effects on net income of amounts reclassified from Accumulated other
comprehensive income as of December 31, 2013:
ALLOT COMMUNICATIONS LTD.
Year ended December 31, 2013
Unrealized
gains
(losses) on
cash flow
hedges
Unrealized
gains (losses)
on
marketable
securities
Total
Balance as of December 31, 2012
Changes in other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income to :
Cost of revenues
Operating expenses
Financial income, net
Net current-period other comprehensive loss
$
61 $
(5)
-
-
(15)
(20)
1,699 $
1,636
(184)
(2,826)
-
(1,374)
1,760
1,631
(184)
(2,826)
(15)
(1,394)
Balance as of December 31, 2013
$
41 $
325 $
366
v. Fair value of financial instruments:
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.
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.
The following table shows the components of Accumulated other comprehensive income, net of taxes, as of December 31, 2013:
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.
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. ASC No. 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. Any
excess of the fair value of net assets acquired over the purchase price is recorder as goodwill, 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.
F - 28
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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
expenses for the years ended December 31, 2011, 2012 and 2013 were immaterial.
NOTE 3:
AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities:
December 31, 2013
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Fair
value
Amortized
cost
December 31, 2012
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
- $
3,921
3,921
- $
7
7
- $
-
- $
3,928
200 $
3,701
1 $
12
- $
-
201
3,713
-
3,928
3,901
13
-
3,914
1,673
35,163
4
77
(1)
(46)
1,676
35,194
933
9,946
4
48
(4)
-
933
9,994
36,836
81
(47)
36,870
10,879
52
(4)
10,927
$
40,757 $
88 $
(47) $
40,798 $
14,780 $
65 $
(4) $
14,841
All investments with unrealized loss as of December 31, 2013 are with continuous unrealized losses for less than 12 months.
NOTE 4:
FAIR VALUE MEASUREMENTS
In accordance with ASC No. 820, the Company measures its cash equivalents, marketable securities and foreign currency derivative instruments
at fair value. Cash equivalents and available for sale 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, including accrued interest components, consisted of the following
types of instruments as of December 31, 2013 and 2012, 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
NOTE 5:
DERIVATIVE INSTRUMENTS
As of December 31, 2013
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
- $
-
40,798 $
264
- $
-
40,798
264
- $
41,062 $
- $
41,062
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
$
$
$
$
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 income, net" during the years ended December 31, 2013, 2012 and 2011 were $ 181, $ (231) and $ 230, 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.
F - 30
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 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 $ 325 and $ 1,699 recorded in other comprehensive income
(loss) as of December 31, 2013 and 2012, respectively.
As of December 31, 2013 and 2012, the Company had outstanding forward contracts in the amount of $ 14,904 and $ 33,938, respectively.
The fair value of the outstanding foreign exchange contracts recorded by the Company on its consolidated balance sheets as of December 31,
2013 and 2012, as an asset is as follows:
Foreign exchange forward and
options contracts
Balance sheet
December 31,
2013
2012
Fair value of foreign exchange forward contracts,
net
Other receivables and prepaid expenses
325
1,699
Total derivatives designated as hedging
instrument
Total derivatives not designated as hedging
$
325 $
1,699
instruments, net
Other payables and accrued expenses
$
(61) $
(75)
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, 2013 and 2012 were $ 3,010 and $ 748, respectively.
F - 31
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:
DERIVATIVE INSTRUMENTS (CONT.)
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.
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
December 31,
2013
2012
$
5,815 $
1,540
282
325
94
162
2,772
1,284
211
1,702
224
622
$
8,218 $
6,815
December 31,
2013
2012
$
3,693 $
10,105
2,371
7,592
$
13,798 $
9,963
As of December 31, 2013 and 2012, 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 $ 3,436 and $ 1,200, respectively.
F - 32
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,
2013
2012
$
9,967 $
17,405
675
674
8,134
16,910
606
703
28,721
26,353
6,676
15,293
398
480
5,093
13,770
358
523
22,847
19,744
Depreciated cost
$
5,874 $
6,609
Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $ 3,423, $ 3,120 and $ 2,754, respectively.
NOTE 9:
INTANGIBLE ASSETS, NET
a.
The following table shows the Company's intangible assets for the periods presented:
Original Cost:
Technology
Backlog
Customer relationships
Accumulated amortization:
Technology
Backlog
Customer relationships
Amortized cost
Weighted average
remaining useful life
December 31,
2013
2012
6.1
1.0
2.5
6.1
1.0
2.5
$
$
$
$
$
10,725 $
1,491
899
13,115 $
2,103 $
1,330
275
3,708 $
11,451
2,401
899
14,751
1,217
1,168
44
2,429
9,407 $
12,322
F - 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:
INTANGIBLE ASSETS, NET (CONT.)
ALLOT COMMUNICATIONS LTD.
Amortization expense for the years ended December 31, 2013, 2012 and 2011 was $ 2,915, $ 1,947 and $ 124, respectively.
b.
c.
Estimated amortization expense for the years ending:
Year ending December 31,
2014
2015
2016
2017
Thereafter
Total
NOTE 10: OTHER PAYABLES AND ACCRUED EXPENSES
Accrued expenses
Foreign currency derivative contracts
Contingent consideration payable
Accrual taxes
Others
NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES
a.
Royalties:
$
1,912
1,718
1,621
1,489
2,667
$
9,407
December 31,
2013
2012
$
3,806 $
61
-
824
86
3,887
78
1,088
409
303
$
4,777 $
5,765
The Company receives 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 - 34
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 was
fully paid during 2013. Upon making this payment, the Company eliminated all future royalty obligations related to its anticipated
revenues. These expenses were included in the cost of revenues in the consolidated statement of operations.
For the years ended December 31, 2013, 2012 and 2011, the royalties expense paid and accrued, as part of the Company's cost of
revenues, was $ 250, $ 17,703 and $ 2,746 respectively.
From 2013, the Company is qualified to participate in an approved program with the OCS for companies with large research and
development activities and certain threshold of revenues. Under this program the Company is eligible to receive grants that do not
require repayments.
b.
Lease commitments:
In March 2013, the Company signed an agreement to rent offices for an average period of five years, starting July 2013. The total rental
expenses are approximately $ 155 per month.
The U.S. subsidiary has an operating lease for office facilities in Woburn, Massachusetts and in San Diego, California, the lease expires
on August 31, 2019 and on April 30, 2018 respectively. The Company's subsidiaries maintain smaller offices in South Africa, 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 2014 through 2016.
Operating leases (offices and motor vehicles) expense for the years ended December 31, 2013, 2012 and 2011 was $ 3,273, $ 2,345 and
$ 2,415, respectively.
As of December 31, 2013, the aggregate future minimum lease obligations (offices and motor vehicles) under non-cancelable operating
leases agreements were as follows:
Year ending December 31,
2014
2015
2016
2017
Thereafter
Total
F - 35
$
2,908
2,156
1,836
1,736
905
$
9,541
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
c.
Major subcontractor:
ALLOT COMMUNICATIONS LTD.
The Company currently depends on one subcontractor to manufacture and provide hardware, warranty and 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.
d.
Purchase commitments:
At December 31, 2013, the Company had approximately $ 1,167 off-balance non-cancelable purchase commitments with its suppliers.
F - 36
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, 2013, 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.
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:
2013
Number
of shares
upon
exercise
Weighted
average
exercise
price
Year ended December 31,
2012
Number
of shares
upon
exercise
Weighted
average
exercise
price
2011
Number
of shares
upon
exercise
Weighted
average
exercise
price
Outstanding at beginning of year
Granted
Forfeited
Exercised
2,709,910 $
764,224 $
(254,956) $
(329,967) $
11.03
11.52
11.63
2.85
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
Outstanding at end of year
2,889,211 $
11.96
2,709,910 $
11.03
3,164,090 $
5.90
Exercisable at end of year
1,364,620 $
10.38
819,869 $
6.62
1,592,432 $
3.66
Vested and Expected to Vest
2,117,348 $
11.65
1,686,435 $
9.86
2,324,031 $
4.80
F - 37
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 2013 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, 2013. 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, 2013, was $ 14,261. The
total intrinsic value of exercisable options at December 31, 2013 was approximately $ 8,321. The total intrinsic value of options vested
and expected to vest at December 31, 2013 was approximately $ 10,993.
The total intrinsic value of options exercised during the year ended December 31, 2013 was approximately $ 76,922. The number of
options vested during the year ended December 31, 2013 was 874,802. The weighted-average remaining contractual life of the
outstanding options as of December 31, 2013 is 8.27 years. The weighted-average remaining contractual life of exercisable options as
of December 31, 2013 is 6.92 years.
As of December 31, 2013, $ 15,770 unrecognized compensation cost related to stock options is expected to be recognized over a
weighted average vesting period of 2.13 years.
The options outstanding as of December 31, 2013, have been classified by exercise price, as follows:
Exercise price
Shares upon exercise of
options outstanding as of
December 31, 2013
Weighted average
remaining contractual life
Years
Shares upon exercise of
options exercisable as of
December 31, 2013
$
$
$
$
$
23.31-27.58
16.82-17.07
11.32-15.43
5.25-9.25
0-4.95
456,969
317,410
1,024,648
256,401
833,783
2,889,211
F - 38
8.57
7.96
8.43
6.63
8.54
153,876
148,099
323,948
221,876
516,821
1,364,620
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12: SHAREHOLDERS' EQUITY (CONT.)
The Company has two option plans under which outstanding options as of December 31, 2013, are as follows: (i) under the 2003 option
plan, the outstanding options are exercisable for 4,681 Ordinary shares, and (ii) under the 2006 option plan, the outstanding options are
exercisable for 2,884,530 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, 2013, 442,881 Ordinary shares are available for future issuance under the option plans.
In 2013, and 2012 the Company granted 75,099 and 436,455 options respectively to Israeli employees with an exercise price in the
range of $ 0 - $ 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.
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.
NOTE 13: TAXES ON INCOME
a.
Corporate tax rates:
The Israeli corporate tax rate was 24% in 2011 and 25% in 2012 and 2013.
On July 30, 2013, the Israeli Parliament passed a law, which, among other things, was designated to increase the tax levy for years
2013 and 2014 (the "New Law"). The New Law increases the Israeli corporate tax rate from 25% to 26.5%. However, the effective tax
rate payable by a company that derives income from an Approved Enterprise, a Preferred Enterprise or a Beneficiary Enterprise (as
discussed below) may be considerably less. Capital gains derived by an Israeli company are generally subject to the prevailing
corporate tax rate.
b.
Foreign Exchange Regulations:
Commencing in taxable year 2013, 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 - 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13: TAXES ON INCOME (CONT.)
c.
Tax benefits under Israel's law for the Encouragement of Capital Investments, 1959 ("the Law"):
ALLOT COMMUNICATIONS LTD.
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, 2013 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 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, 2013, management believes that the Company is meeting the
aforementioned conditions.
F - 40
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.
As of January 1, 2011 new legislation amending to the Investment Law came into effect (the "2011 Amendment"). The 2011
Amendment introduced a new status of "Preferred Company" and "Preferred Enterprise", replacing the existed status of "Beneficiary
Company" and "Beneficiary Enterprise". Similarly to "Beneficiary Company", a Preferred Company is an industrial company owning a
Preferred Enterprise which meets certain conditions (including a minimum threshold of 25% export). However, under this new
legislation the requirement for a minimum investment in productive assets was cancelled.
Under the 2011 Amendment, a uniform corporate tax rate will apply to all qualifying income of the Preferred Company, as opposed to
the former law, which was limited to income from the Approved Enterprises and Beneficiary Enterprise during the benefits period. The
uniform corporate tax rate will be 7 % in areas in Israel designated as Development Zone A and 12.5% elsewhere in Israel during 2013,
9% in development Zone A and 16% elsewhere in Israel, respectively, in 2014.
A dividend distributed from income which is attributed to a Preferred Enterprise/Special Preferred Enterprise will be subject to
withholding tax at source at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 15% in 2013 and
20% as of 2014 (iii) non-Israeli resident - 15% in 2013 and 20% as of 2014 subject to a reduced tax rate under the provisions of an
applicable double 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
2016.
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.
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 Exchange 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 - 42
Year ended December 31,
2012
2013
2011
$
(6,556) $
219
(2,372) $
(5,292)
9,737
(983)
$
(6,337) $
(7,664) $
8,754
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,
2012
2013
2011
Income (loss) before taxes on income
$
(6,337) $
(7,664) $
8,754
Theoretical tax expense (benefit) computed at the Israeli statutory tax rate (25%,
25% and 24% for the years 2013, 2012 and 2011, respectively)
$
(1,584) $
(1,916) $
2,101
Creation (Utilization) of valuation allowance
Increase (decrease) in losses and temporary differences due to change in Israeli
931
(1,554)
(4,328)
corporate " and Approved Enterprise" tax
3,056
(7,073)
5,419
Increase (decrease) in valuation allowance related to losses and temporary
differences due to change in Israeli corporate " and Approved Enterprise" tax
Taxes with respect to prior years
Impairment (recording) of withholding tax asset
Increase in deferred tax assets related to losses and temporary differences due to
changes in tax rates and different basis of measurement
Non-deductible expenses and other
Non-deductible share-based compensation expenses
Exchange rate differences
(3,056)
-
-
(594)
(223)
1,590
-
7,073
2
-
1,699
833
10
(5,419)
(84)
221
(27)
541
1,521
Actual tax expenses (benefit)
$
120 $
(926) $
(55)
F - 43
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,
2012
2013
2011
$
408 $
(288)
-
-
(2) $
(926)
2
-
31
(223)
(84)
221
$
120 $
(926) $
(55)
The Company has accumulated losses for tax purposes as of December 31, 2013, in the amount of approximately $ 39,800, 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, 2013, 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, but are limited as stated above. 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.
The U.S. subsidiary has accumulated losses for U.S. federal income tax return purposes of approximately $ 4,977. The federal
accumulated losses for tax purposes expire between 2024 and 2032. The state accumulated losses for tax purposes begin to expire in
2014. An amount of $ 1,519 of the net operating loss carry-forwards relates to excess tax deductions from stock options.
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,
2013 to approximately $ 4,400, which may be carried forward and offset against taxable gains in the future for an indefinite period.
F - 44
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:
ALLOT COMMUNICATIONS LTD.
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,
2013
2012
$
14,567 $
785
15,352
(12,736)
2,616
(609)
2,007 $
$
11,264
215
11,479
(8,749)
2,730
(1,006)
1,724
k.
As of December 31, 2013 and 2012, 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 2008 and the European and U.S.
subsidiaries have final tax assessments through 2009.
F - 45
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)
The following are the company’s major customers:
Customer A
Customer B
Customer C
The following presents total long-lived assets as of December 31, 2013 and 2012:
Long-lived assets:
Israel
United States of America
Other
F - 46
Year ended December 31,
2012
2013
2011
$
21,753 $
29,909
21,350
18,210
5,323
39,655 $
21,953
24,674
10,565
7,905
38,409
20,195
9,484
2,723
6,942
$
96,545 $
104,752 $
77,753
Year ended December 31,
2012
2011
2013
17%
17%
11%
45%
14%
-
-
14%
15%
-
-
15%
December 31,
2013
2012
$
27,747 $
10,514
207
26,976
14,380
153
$
38,468 $
41,509
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,
2012
2013
2011
$
(1,358) $
(1,746) $
(661)
Exchange rate differences and other
Amortization/accretion of premium/discount on marketable securities , net
47
584
176
212
95
151
$
(727) $
(1,358) $
(415)
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)
Denominator:
Weighted average number of shares outstanding used in computing basic net earnings per
share
Dilutive effect: stock options
Year ended December 31,
2012
2013
2011
$
(6,457) $
(6,738) $
8,809
32,680,766 31,959,921 25,047,771
2,024,101
-
-
Total weighted average number of shares used in computing diluted net earnings per share
32,680,766 31,959,921 27,071,872
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
$
$
(0.20) $
(0.21) $
0.35
(0.20) $
(0.21) $
0.33
F - 47
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"
the Articles of Association of the Company, as shall be in force from time to time.
"Board of Directors"
the Company's Board of Directors.
"Company"
"Companies Law"
Allot Communications Ltd.
the Israeli Companies Law 5759 - 1999, as may be amended from time to time, and
the regulations promulgated thereunder.
"Companies Ordinance"
the Israeli Companies Ordinance (New Version), 1983, as may be amended from time
to time, and the regulations promulgated thereunder.
"Director"
"Distribution"
"Office Holder"
"Ordinary Resolution"
"Special Resolution"
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.
If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise
(i)
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.
- 7 -
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.
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.
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, or to such day and at such time and place as the Chairman may determine
with the consent of the holders of a majority of the shares present in person or by proxy and voting on the question of adjournment (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).
27.3.
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.
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.
32.3.
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.
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32.4.
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.
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.
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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.
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.
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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.
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, at least 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.
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.
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39.3.3.
39.3.4.
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.
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.
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;
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62.1.2.
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 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;
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:
62.3.1.
A breach of his duty of care to the Company or to another person;
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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.
- 25 -
List of Subsidiaries
Company
Jurisdiction of Incorporation
Exhibit 8.1
Allot Communications Inc.
Allot Communications Europe SARL
Allot Communications (Asia Pacific) Pte. Limited
Allot Communications (UK) Limited
Allot Communications Japan K.K.
Allot Communications (New Zealand) Limited
Oversi Networks Ltd.
Allot Communications (Hong Kong) Ltd
Allot Communications Africa (PTY) Ltd
Allot Communications India Private Ltd
United States
France
Singapore
United Kingdom
Japan
New Zealand
Israel
Hong Kong
South Africa
India
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 26, 2014
/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 26, 2014
/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, 2013, 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 26, 2014
Date: March 26, 2014
/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, 333-180770 and 333-187406) pertaining to the 2006 Compensation Incentive Plan of Allot Communications Ltd., of our report dated March 26,
2014, 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, 2013.
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
March 26, 2014