UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 20-F
(Mark One)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ 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)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, par value ILS 0.10 per share
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
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, 2016: 33,057,719 ordinary shares,
ILS 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 ☐ No ☒
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 ☐ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Indicate by check mark basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting
Standards as issued by the International
Accounting Standards Board ☐
Other ☐
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 ☐
Yes ☐ No ☒
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.
Cautionary Note Regarding 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. Forward-looking statements include information concerning our possible or assumed future results of operations,
business strategies, financing plans, competitive position, industry environment, potential growth opportunities, potential market opportunities and the effects
of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,”
“believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar
expressions that convey uncertainty of future events or outcomes and the negatives of those terms. 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 in demand of our products
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.
3
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.
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.
4
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
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
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7
7
7
7
9
9
9
25
25
25
35
35
35
36
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47
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53
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62
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65
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66
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68
68
68
69
69
69
69
74
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74
86
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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 Proceeds
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
ITEM 16H: Mine Safety Disclosure
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, 2014, 2015 and 2016 and the consolidated balance sheet data as of December 31, 2015 and 2016 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, 2012 and 2013 and the consolidated
balance sheet data as of December 31, 2012, 2013 and 2014 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(1):
Products
Services
Expenses related to the settlement of the Israel Innovation
Authority(2)
Total cost of revenues
Gross profit
Operating expenses:
Research and development, gross
Less grant participation
Research and development, net(1)
Sales and marketing(1)
General and administrative(1)
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
___________________
(1)
2012
Year ended December 31,
2014
(in thousands, except per share and share data)
2015
2013
$
$
77,127
27,625
104,752
$
66,318
30,227
96,545
$
77,240
39,946
117,186
$
62,642
37,325
99,967
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)
$
$
$
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) $
27,389
7,350
-
34,739
82,447
29,998
984
29,014
44,599
11,941
85,554
(3,107)
660
(2,447)
50
(2,497) $
(0.08) $
(0.08) $
26,707
6,720
-
33,427
66,540
27,674
1,252
26,422
43,318
12,702
82,442
(15,902)
(584)
(16,486)
3,356
(19,842) $
(0.59) $
(0.59) $
$
$
$
2016
54,432
35,937
90,369
20,401
7,494
-
27,895
62,474
24,827
606
24,221
35,290
9,812
69,323
(6,849)
1,059
(5,790)
2,204
(7,994)
(0.24)
(0.24)
31,959,921
32,680,766
33,143,168
33,419,917
33,202,309
31,959,921
32,680,766
33,143,168
33,419,917
33,202,309
Includes stock-based compensation expense related to options and restricted stock units, or RSUs, granted to employees and others as follows:
7
Cost of revenues
Research and development expenses, net
Sales and marketing expenses
General and administrative expenses
Total
2012
2013
Year ended December 31,
2014
(in thousands)
2015
2016
$
$
222 $
1,186
2,060
1,349
4,817 $
368 $
1,666
3,106
2,591
7,731 $
353 $
1,919
3,322
2,501
8,095 $
324 $
1,637
2,802
2,407
7,170 $
367
1,240
1,833
1,701
5,141
(2) Represents the full balance of the contingent liability related to grants received, which was paid in 2013.
2012
2013
At December 31,
2014
(in thousands)
2015
2016
$
50,026 $
78,188
14,841
131,598
221,791
52,670
(67,385)
761
169,121
42,813 $
38,000
40,798
133,362
199,257
29,330
(73,842)
774
169,927
19,180 $
59,000
54,271
138,174
212,948
37,968
(76,339)
819
174,980
15,470 $
42,903
64,921
126,756
208,215
44,810
(96,181)
837
163,405
23,326
29,821
60,507
123,980
190,940
33,637
(104,175)
843
157,303
Consolidated balance sheet data:
Cash and cash equivalents
Short-term deposits and restricted deposits
Marketable securities
Working capital
Total assets
Total liabilities
Accumulated deficit
Share capital
Total shareholders’ equity
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Our business 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 and our other filings with the SEC. 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.
8
Risks Relating to Our Business
We have a history of losses and may not be able to achieve or maintain profitability in the future.
We have a history of net losses in all fiscal years since our inception, other than in 2006 and 2011. We had a net loss of $8.0 million in 2016, resulting mainly
from a decrease in both products revenues and services revenues. We had a net loss of $19.8 million in 2015, resulting mainly from impairment charge of $5.8
million, tax expenses which amounted to $3.4 million (including $2.7 million of deferred tax asset and pre-paid tax expenses write-off) and a decrease in
product revenues. We had a net loss of $2.5 million in 2014, resulting from an inventory write-off of approximately $3.4 million due to launches of newer
versions of our products, which rendered certain products in our inventory obsolete. 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.
Our revenues and business may be adversely affected if we do not effectively compete in the markets in which we operate.
We compete against large companies in a rapidly evolving and highly competitive sector of the networking technology and security markets, which offer, or
may offer in the future, competing technologies, including partial or alternative solutions to operators' challenges, and which, similarly to us, intensely pursue
the largest service providers (referred to as Tier 1 operators). Our ability to effectively compete in these markets may be limited since our competitors may
have greater financial resources, significant market share and established relationships with operators and distribution channels.
Our Deep Packet Inspection (DPI) technology enabled offerings face significant competition from router and switch infrastructure companies that integrate
functionalities into their platforms, addressing some of the same types of issues that our products are designed to address. In addition, increased network
encryption could limit the ability of our DPI solutions to provide analytic information.
Our security products are offered to operators and are deployed in their networks, enabling them to provide security services to their end customers. Such
products face significant competition from companies that directly approach end customers and offer them security applications to be installed on their
devices; companies that approach the business enterprise sector through distribution channels and offer cloud security products; and companies that offer
security products bundled with other products. By offering our security products to operators that provide security services to both business enterprises and
individual end customers, we aim to expand the reach of our products. However, such business model may prove to be slower to market or less effective than
our competitors' models, in which case our business may be harmed.
Certain of our current direct competitors are substantially larger than we are and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources. As the intelligent broadband solutions market has grown, including the markets for DPI enabled solutions for mobile
networks and for security products, new competitors have entered and may continue to enter the market. Furthermore, our market may be subject to industry
consolidation, as companies attempt to maintain or strengthen their positions in our evolving industry. For example, some of our current and potential
competitors have made acquisitions or have announced new strategic alliances designed to position them to provide many of the same products and services
that we provide to both the service provider and enterprise markets. Industry consolidation may result in stronger competitors that are better able to compete
as sole-source vendors for customers, may cause price reductions, reduced gross margins and loss of market share.
Therefore, if our competitors announce new products, services or enhancements that better meet the needs of customers or changing industry requirements,
offer alternative methods to achieve customer objectives or implement faster go to market strategies, if our business model proves less effective than those of
our competitors, if new competitors enter the market, or if industry consolidation results in stronger competitors with wider range of product offerings and
greater financial resources, our ability to effectively compete may be harmed, which could have a material adverse effect on our business, financial condition
or results of operations.
9
We depend on one or more significant customers and the loss of any such significant customer or a significant decrease in business from any such
customer could harm our results of operations.
We derived 44%, 37%, and 42% of our total revenues in 2014, 2015 and 2016, respectively, from two Tier 1 mobile and fixed operators. In addition,
revenues from individual customers may fluctuate from time to time based on the timing and the terms under which orders are received and the duration of
the delivery and implementation of such orders, potentially resulting in decreases in revenues from such customers. The loss of any significant customer or a
significant decrease in business from any such customer could have a material adverse effect on our revenues, results of operations and financial condition.
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. On June 12, 2015, the Open Internet Report and Order on Remand, Declaratory Ruling,
and Order (the “Open Internet Order”), issued by the United States Federal Communications Commission (the “FCC”), went into effect. The Open Internet
Order sets forth rules, grounded, among others, on Title II of the Communications Act of 1934; the Open Internet Order regulates both fixed and mobile
Internet Service Providers (ISPs) and prohibits them, subject to reasonable network management, from blocking and/or throttling of lawful
content, applications, services, or non-harmful devices, and from unreasonably interfering or disadvantaging of (i) end users’ ability to select, access service
of the lawful Internet content, applications, services, or devices of their choice or (ii) edge providers’ ability to make lawful content, applications, services, or
devices available to end users. The Open Internet Order also prohibits paid prioritization of content. On April 30, 2016, Regulation (EU) 2015/2120 of the
European Parliament and of the Council came into effect, setting forth the first EU-wide Net Neutrality (“Open Internet”) rules. Under these rules, blocking,
throttling and discrimination of internet traffic by ISPs is prohibited in the EU, with three exceptions: (i) compliance with legal obligations; (ii) integrity of
the network; and (iii) congestion management in exceptional and temporary situations. Under these rules, there can be no prioritization of traffic in the
internet access service. However, equal treatment permits reasonable day-to-day traffic management according to objectively justified technical requirements,
and which must be independent of the origin or destination of the traffic and of any commercial considerations.
However, these rules also allow internet access providers, as well as content and applications providers, to offer special services with specific quality
requirements, (provided the Open Internet is not negatively affected by the provision of these services). Such specialized services cannot be a substitute to
internet access services, can only be provided if there is sufficient network capacity to provide them in addition to any internet access service and must not be
to the detriment of the availability or general quality of internet access services for end-users.
Such regulation of both fixed and mobile ISPs may limit ISPs' ability to manage, prioritize and monetize their network. Additionally, these regulations may
attract growing public debate and attention of regulators in other jurisdictions we operate in. Demand from service providers, in affected jurisdictions, for the
traffic management and subscriber management features of our products may be adversely affected by such regulations. 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.
10
We need to increase the functionality of our products and offer additional features and products in order to maintain or increase our profitability.
The commoditization of DPI technology and the introduction of competitive features and value added services will result in a decrease of the average sale
prices of our DPI technology enabled products.
The market in which we operate is highly competitive and unless we continue to enhance the functionality of our products, add additional features and offer
additional products, our competitiveness may be harmed.
We endeavor to enhance our products by offering higher system speeds, additional features and value-added products, such as security and parental control
products, among other value added products and support for additional applications and enhanced reporting tools. We also continuously endeavor to assure
our solutions comply with contemporary network and software architectures such as virtualized network services (NFV).
Our value-added products offer customers additional tools to increase the efficiency of their networks or to help them offer additional services to their end
customers and derive additional revenues from their end customers. The industry and market for our value added products, are still developing and are
affected, among others, by trends and changes in internet broadband traffic, including changes in methods used by various content providers and broadband
applications and evolution of network security threats.
We cannot provide any assurance that demand for our additional features and value added 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 additional features and 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, network security threats and with advances in
technology, or if we do not achieve widespread market acceptance, including through significant investments.
We will need to invest heavily in the continued development of our technology in order to keep pace with rapid changes in applications, increased broadband
network speeds, network security threats 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 and distributors of various network security threats that our products identify, manage or mitigate, are using increasingly sophisticated methods
to avoid detection and management and/or mitigation 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 to new geographic territories because the applications vary from country to country and region to region.
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.
Alternative technologies could achieve widespread market acceptance and displace the technology on which we have based our product architecture.
Our business and revenues will be adversely affected if we fail to develop enhancements to our products, in order to keep pace with changes in broadband
applications, network security threats and advances in technology. We can give no assurance that our technological approach will achieve broad market
acceptance or that other technology or devices will not supersede our technology and products.
11
A failure of our products may adversely affect the operation of our customers' live networks, which could harm our reputation, brand position, and
financial condition.
Our products are, generally, installed in line, as part of our customers' networks. We endeavor to avoid any interruption to the regular operation of such
networks, including, by performing certain tasks during predetermined maintenance windows, and implementing a system bypass, in the event of
malfunctions. However, in certain cases, a failure of our products may result in our customers experiencing loss of functionality, denial of service and access,
disconnection of live traffic on their networks, loss of security protection, end user dissatisfaction and loss of revenues. Such failure of our products, may
cause commercial disputes with our customers and adversely affect our reputation.
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 into 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 and in certain instances up to one and a half years. 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 are increasing, and such 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 are increasing. The larger and more complex such projects are,
the greater the operational risks associated with them. These risks include, but are not limited to, the failure to meet high customization requirements of
service providers, the 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, original equipment manufacturers, or OEMs, and system integrators, to market and
sell a material portion of our products to end-customers. In 2016, approximately 41% 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 can give no assurance 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.
Because depend on our distributors and agents outside of Israel for compliance and adherence to local laws and regulations, significant political or regulatory
developments in those jurisdictions, such as those stemming from the recent change in the presidential administration in the U.S. or the U.K.’s “Brexit”
referendum are difficult to predict and may have a material adverse effect on us. For example, in the United States, the new presidential administration has
expressed support for and may implement greater restrictions on free trade and increase tariffs on goods imported into the United States, as well as a
comprehensive tax reform, including in corporate and income taxation. We cannot predict whether quotas, duties, tariffs, taxes or other similar restrictions
will be imposed by the United States or other countries upon the import or export of our products in the future. However, changes in U.S. political, regulatory
and economic conditions or in its policies governing international trade and foreign manufacturing and investment in the U.S. could adversely affect our sales
in the U.S.
In the United Kingdom, a recent referendum was held in which voters approved an exit from the E.U., commonly referred to as “Brexit.” On February 8,
2017, the U.K.’s House of Commons approved a bill authorizing the government to start exit talks with the E.U. The impact on us from Brexit will depend, in
part, on the outcome of tariff, trade, regulatory and other negotiations. Brexit could also lead to legal uncertainty and potentially divergent national laws and
regulations as the U.K. determines which E.U. laws to replace or replicate. Any of these developments could adversely affect our sales in Europe.
We are also subject to the U.S. Foreign Corrupt Practices Act 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.
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We depend on our traffic management systems and network management application suites for the substantial majority of our revenues.
In the past few years, we have increased sales of our Value Added Services. However, sales of our traffic management systems continue to account for a
major portion of our revenues, and accounted for 57%, 58% and 50% of our total revenues in 2014, 2015 and 2016, respectively. We expect the traffic
management systems will continue to account for a considerable portion of our revenues in the immediate future. 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 solution that we offer. Any factor adversely affecting our ability to sell, or the pricing of or demand for, our traffic management systems and
network management system, would severely harm our ability to generate revenues and could have a material adverse effect on our business.
We integrate into or bundle various third-party solutions with 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 offer third-party solutions bundled with our products. We 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 source alternative third-party
solutions, redesign our products to function with alternate third-party solutions or develop substitute components ourselves. As a result, our sales may be
delayed and/or adversely affected and we might 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 errors, we could experience, among
other things, loss of major customers, cancellation of 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 DPI technology enabled products depends, in part, on the rate of adoption of bandwidth-intensive broadband 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 for 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. If the rapid growth in the adoption of such applications does not continue, the demand
for our products may be adversely impacted.
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Demand for our security products depends, in part, on continued evolution of on-line threat as well as on operators’ interest in providing security
services to their end customers.
Our security products are used by service providers to offer security services to their end customers, comprising both of business enterprises as well as
individual end customers. The demand for these services depends highly on continued evolution and increase of online threats. In the event that such threats
decrease, that end customers are not willing to incur the costs of security services and/or in the event that ISPs do not continue to pursue security services to
their end customers as a revenue source, demand for our security products may be materially adversely impacted.
We currently depend on a single subcontractor to manufacture and provide hardware warranty support for our Service Gateway platforms and
NetEnforcer 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, Flex (Israel) Ltd. (previously Flextronics (Israel) Ltd.), a subsidiary of Flex (previously Flextronics), a global
electronics manufacturing services company, to manufacture, assemble, test, package and provide hardware warranty support for our Service Gateway
platforms and NetEnforcer platforms. In addition, our agreement with Flex (Israel) requires it to procure and store key components for our products at its
facilities. If Flex (Israel) experiences delays, disruptions or quality control problems in manufacturing our products, or if we fail to effectively manage our
relationship with Flex (Israel), product shipments may be delayed and our ability to deliver products to customers could be materially and adversely affected.
Flex (Israel) may terminate our agreement at any time during the term upon 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 Flex (Israel) could adversely affect our sales and
operating results and harm our reputation.
Certain hardware and software components for our products come from single or limited sources and we could lose sales if these sources fail to satisfy
our supply requirements or if our customers refuse to implement components from certain sources.
We obtain certain hardware components used in our products from single or limited sources.
Although the abovementioned hardware components are off-the-shelf items, because our systems have been designed to incorporate these specific hardware
components, any change to these components due to an interruption in supply or our inability to obtain such components on a timely basis, may require
engineering changes to our products before substitute hardware components could be incorporated. Such changes could be costly and result in lost sales
particularly to our traffic management systems. 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.
We obtain certain software components of our security products, from a few limited sources, depending primarily on our customers' preferences. In the event
that we are no longer able to source such software components from a particular source, and our customers refuse to implement components from our
alternative sources, we may be required to identify an alternative source from which we do not currently acquire such software or develop such software
ourselves. This may result in disputes with our customers and/or cancellation or delay of orders, which may materially adversely affect our business.
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.
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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. We have acquired a number of companies in recent years, including most recently,
the acquisition of substantially all of the business and assets of Optenet S.A., a Madrid-based global IT security company, in March 2015. The negotiation of
acquisitions, investments or joint ventures, as well as the integration of acquired or jointly developed businesses or technologies, could divert our
management’s time and resources. Acquired businesses, technologies or joint ventures may not be successfully integrated with our products and operations
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:
·
substantial cash expenditures;
· potentially dilutive issuances of equity securities;
·
the incurrence of debt and contingent liabilities;
· a decrease in our profit margins; and
· amortization of intangibles and potential impairment of goodwill.
If acquisitions disrupt our operations or result in significant expenditures or liabilities, our business, operating results or financial conditions may suffer.
If we 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, identifying applications and developing and maintaining security products is an
important aspect of our intellectual property. 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.
Further, 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, 2016, we had a patent portfolio consisting of twenty two issued U.S. patents and two pending patent applications. While we plan to
protect our intellectual property with, among other things, patent protection, there can be no assurance that:
· current or future U.S. or foreign patents applications will be approved;
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· our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third-parties;
· we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate;
·
the patents of others will not have an adverse effect on our ability to do business; or
· others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.
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 or unstable economic conditions in the markets in which we operate could have a material adverse effect on our business, financial
condition or operating results.
In recent years, economies worldwide have demonstrated instability. Negative economic conditions in the global economy or certain regions such as the
European Market, from which we derived 38% of our revenues in 2016, could cause a decrease in spending on the types of products and services that we
offer.
Additionally, if the worldwide economy remains unstable or further deteriorates, enterprises, telecommunication carriers and service providers in affected
regions may significantly reduce or postpone capital investments, which could result in reductions in sales of our products or services, longer sales cycles,
slower adoption of new technologies and increased price competition in such regions. Such circumstances would have a material adverse effect on our results
of operations and cash flows.
Further, because a substantial portion of our operating expenses consists of salaries, we may not be able to reduce our operating expenses in line with any
reduction in revenues and, therefore, may not be able to continue to generate increased revenues and manage our costs to maintain profitability.
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. A significant portion of our revenue is also generated in Euros, or EUR. Other significant portions of our expenses are
denominated in Israeli shekel (ILS) and to a lesser extent in Euros and other currencies. Our ILS-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 ILS. In the past years, we have
experienced material fluctuation between the ILS and the U.S. dollar and we anticipate that the ILS will continue to fluctuate against the U.S dollar in the
future. In 2016, the ILS appreciated by approximately 1.5% against the U.S. dollar and in 2015 the ILS depreciated by approximately 0.3% against the U.S.
dollar. In 2016, the EUR depreciated by approximately 3.3% against the U.S. dollar, and in 2015 the EUR depreciated by approximately 10.5% against the
U.S. dollar. If the U.S. dollar weakens against the ILS or other currencies we are exposed to 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 when they are sold in a non-U.S. dollar
currency devaluation in the non-U.S. dollar currencies relative to the U.S. dollar could cause our customers to decrease orders and adversely affect our
revenue, financial condition and results of operations.
Our actual financial results may differ materially from any guidance we may publish from time to time.
We may, from time to time, voluntarily publish guidance regarding our future performance that represents our management’s estimates as of the date of
relevant release. Any such guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, is inherently
subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific
assumptions with respect to future business decisions, some of which will change. The principal reason that we may release this data is to provide a basis for
our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by
any such persons. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us
will not materialize or will vary significantly from actual results. Further, our sales during any given quarter tend to be unevenly distributed as individual
orders tend to close in greater numbers immediately prior to the relevant quarter end and further. Our revenues from individual customers may also 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. Therefore, if our projected sales do not close before the end of the relevant quarter, our actual results may be inconsistent with our published
guidance. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the
guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the
future that the data is forecast. In light of the foregoing, investors are urged to consider any guidance we may publish in context and not to place undue
reliance on it.
18
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:
·
·
·
·
·
·
·
·
·
·
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 future repurchases, if any, of our ordinary shares pursuant to our current share repurchase program and/or any other share repurchase program
which may be approved in the future;
our sale of ordinary shares or other securities;
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 can provide no assurance 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.
19
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 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 currently follow Israeli home country practices with regard to the quorum requirement for
shareholder meetings and shareholder approval of equity compensation plans requirements. As permitted under the Israeli Companies Law, 5759-1999, or the
Companies Law, our articles of association provide that the quorum for any meeting of shareholders shall be the presence of at least two shareholders present
in person or by proxy who hold at least 25% of the voting power of our shares instead of 33 1/3% of our issued share capital (as prescribed by NASDAQ's
rules). 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). We submitted a letter from our outside counsel in connection with this item in June 2008.
In the future, we may also choose to follow Israeli corporate governance practices instead of NASDAQ requirements with regard to, among other things, the
composition of our board of directors, compensation of officers, director nomination procedures and quorum requirements at shareholders’ meetings. In
addition, we may choose to follow Israeli corporate governance practice instead of NASDAQ requirements to obtain shareholder approval for certain dilutive
events (such as for issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a
20% or more interest in the company and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded
the same protection as provided under NASDAQ corporate governance rules. Following our home country governance practices, as opposed to the
requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Select Market, may provide less protection than is accorded to
investors of domestic issuers. See “ITEM 16G: Corporate Governance”.
As a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act
reports.
As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements,
and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently
or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation
information for our executive officers on an individual basis and we are generally exempt from filing quarterly reports with the SEC under the Exchange
Act. Moreover, we are not required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information to, among
others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the
company’s securities on the basis of the information. These exemptions and leniencies reduce the frequency and scope of information and protections to
which you may otherwise have been eligible in relation to a U.S. domestic issuer.
We would lose our foreign private issuer status if (a) a majority of our outstanding voting securities were either directly or indirectly owned of record by
residents of the United States and (b)(i) a majority of our executive officers or directors were United States citizens or residents, (ii) more than 50 percent of
our assets were located in the United States or (iii) our business were administered principally in the United States. Our loss of foreign private issuer status
would make U.S. regulatory provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be
significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer
forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S.
proxy disclosure requirements, including the requirement to disclose, under U.S. law, more detailed information about the compensation of our senior
executive officers on an individual basis. We may also be required to modify certain of our policies to comply with accepted governance practices associated
with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon exemptions
from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
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Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.
Generally, if for any taxable year 75% or more of our gross income is passive income, or the average percentage of our assets which produce passive income
or which are held for the production of passive income (“passive assets”) is at least 50% of our total net assets, we would be characterized as a passive foreign
investment company (“PFIC”) for U.S. federal income tax purposes for such taxable year. Publicly traded corporations must determine the percentage of
assets on the basis of the value of their assets. No definitive guidance has been issued by the U.S. government concerning how to value the assets of a foreign
public company for PFIC testing purposes. It can be inferred from the legislative history that the fair market value of the total assets of a publicly traded
foreign corporation can be more easily measured, and is therefore likely to be less burdensome to taxpayers, by applying the “market capitalization” method.
Under the market capitalization method, the total asset value of a company would be considered to equal the aggregate fair market value of its outstanding
stock (i.e., its market capitalization) plus its outstanding liabilities, as of a relevant testing date. However, the legislative history did not specify the
circumstances under which it would be appropriate to use the “market capitalization” method, or that such method was an exclusive means for valuing the
total assets of a publicly traded corporation. Accordingly, if the market capitalization approach is found to be insufficient in the context of the facts and
circumstances of a particular case, other reasonable valuation methods may be employed to determine the fair market value of a corporation’s assets. In
certain circumstances, including extremely volatile market conditions, it may be appropriate to apply alternative valuation methods, to more accurately
determine the fair market value of our assets, such as a valuation of the assets by an independent qualified expert. Given the volatility of the capital markets in
recent years, we have obtained an independent valuation of our company for the 2016 tax year, as well as an opinion from a U.S. tax advisor that, applying
the results of the independent valuation of our company which employed an approach other than the market capitalization approach, and which provided the
reasoning underlying the use of such approach, we should not be a PFIC for the 2016 taxable year. We considered such valuation in determining the value of
our total assets and we also considered the above-referenced opinion. On that basis, we believe that we were not a PFIC for the 2016 tax year; however there
can be no certainty that the IRS will not challenge such a position and determine that based on the IRS’s interpretation of the asset test, we were a PFIC for
the 2016 tax year. Thus, there can be no assurance that we will not be considered a PFIC for 2016 or for any other taxable year. U.S. Holders should consult
their own tax advisors concerning the implication of the PFIC rules in his, her or its particular circumstances. See “ITEM 10: Taxation–United States Federal
Income Taxation–Passive Foreign Investment Company Considerations.”
If we were characterized as a passive foreign investment company, a U.S. Holder (as defined under “ITEM 10: Additional Information–Taxation–United
States Federal Income Taxation–Passive Foreign Investment Company Considerations”) could avoid certain adverse passive foreign investment company
consequences by making a qualified electing fund election to be taxed currently on its proportionate share of the passive foreign investment company’s
ordinary income and net capital gains. However, we do not intend to comply with the necessary accounting and record keeping requirements that would allow
a U.S. Holder to make a qualified electing fund election with respect to the Company. See “ITEM 10: Additional Information–Taxation–United States Federal
Income Taxation–Passive Foreign Investment Company Considerations.”
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.
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Disruption to our IT systems could adversely affect our reputation and have a material adverse effect on our business and results of operations.
Our business operations, production facilities and research and development technologies rely on our IT systems to collect, analyze and store our data. There
can be no guarantee that our back-up storages will be effective if it becomes necessary to rely on them. If our existing or future IT systems do not function
properly, or if the IT systems prove incompatible with new technologies, we could experience interruptions in data transmissions and slow response times,
preventing us from completing routine business, production or research activities.
Additionally, our IT systems contain personal, financial and other information that is entrusted to us by our customers and employees as well as financial,
proprietary and other confidential information related to our business. Despite our investments in risk prevention and contingencies, data protection,
prevention of intrusions, data leaks and access control systems, we can provide no assurance that our current IT systems are fully protected against third-party
intrusions, viruses, hacker attacks, information or data theft or other similar threats. Any such security breach, whether actual or alleged, could result in
system disruptions or shutdowns and/or destruction, alteration, theft or unauthorized disclosure of confidential information. The risk of a security breach or
disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has risen as the
number, intensity and sophistication of attempted attacks and intrusions from around the world has increased. Furthermore, there has been heightened
legislative and regulatory focus on data security in the U.S. and abroad, including requirements for varying levels of customer notification in the event of a
data breach. As we continue to develop our technologies, we may need to update our IT systems and storage capabilities. Any such breach of our information
security can result in adverse publicity, a loss of customer confidence, reduced sales and profits, and criminal penalties or civil liabilities, any of which could
materially adversely affect our business, operating results and financial condition.
Lastly, disruption or failure of our IT systems for technical reasons, due to natural disasters or other unanticipated catastrophic events, including power
interruptions, storms, fires, floods, earthquakes, acts of war or terrorism, could significantly impair our ability to deliver our products on schedule and
materially and adversely affect our relationships with our partners and customers, our business, our reputation and our results of operations.
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 2016. In recent years, these have included, among others, hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza strip, both
of which resulted in rockets being fired into Israel, causing casualties and significant disruption of economic activities. Any armed conflicts, terrorist
activities or political instability in the region may affect a significant portion of our work force, which is located in Israel, and 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.
Our operations may be disrupted by the obligations of personnel to perform military service.
As of December 31, 2016, we employed 440 people, of whom 254 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, Flex, 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.
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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 also have been granted benefited
enterprise status. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2016, our net operating
loss carry forwards for Israeli tax purposes amounted to approximately $46.6 million. 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. 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 in Israel for 2017 is 24% and for 2018 and thereafter will be 23% and was 25.0% and
26.5% in 2016 and 2015, respectively.
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. The termination
or reduction of these tax benefits would increase our tax liability, which would reduce our profits. 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
– 20% in 2014 and onwards, and (iii) non-Israeli resident – 20% in 2014 and onwards subject to a reduced tax rate under the provisions of an applicable
double tax treaty, would be subject to income tax 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.”
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 Israel Innovation Authority (formerly known as the Office of the Chief Scientist of the Ministry of Economy) 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 Israel Innovation Authority, and our failure to receive grants in the future could adversely affect our profitability.
In 2014, 2015 and 2016 we received and accrued non-royalty-bearing grants totaling $1.0 million, $1.3 million and $0.6 million, respectively, from the Israel
Innovation Authority, representing 3.3%, 4.5% and 2.4%, respectively, of our gross research and development expenditures. In 2014 and 2015 we qualified to
participate in two non-royalty-bearing research and development programs, and in one such program in 2016, funded by the Israel Innovation Authority 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. 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.
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The provisions of the Research and Development Law and the terms of the Israel Innovation Authority 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 Israel Innovation Authority, and
from transferring intellectual property rights in technologies developed using these grants, without special approvals from the Israel Innovation Authority.
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 Israel Innovation Authority. 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.
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.”
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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 2008,
we completed the acquisition of the business of Esphion Limited, a developer of network protection solutions for carriers and internet service providers. In
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 2012, we acquired the business of Ortiva Wireless Inc., a developer of video
optimization solutions for mobile and Internet networks. In 2012, we acquired the business of Oversi Networks Ltd., a developer of products and systems for
caching Internet content. In 2015, we acquired substantially all of the assets and business of Optenet S.A., a Madrid-based global IT security company.
B. Business Overview
Overview
We are a leading global provider of visibility, intelligence, security and monetization solutions that enable service providers and enterprises to protect and
personalize the digital experience. Allot’s flexible and highly scalable service delivery framework leverages the intelligence in data networks, enabling
service providers to get closer to their customers, safeguard network assets and users, and accelerate time-to-revenue for value-added services.
We have a global and diverse 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 (OTT) applications and services, monetize network utilization through value-added
product deployment, security service offerings, 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 in 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 that
our customers require.
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Industry Background
The rapid proliferation of broadband networks in recent years has been largely driven by demand from users for faster and more reliable access to the Internet
and by the proliferation in the number and complexity of broadband applications, as well as the proliferation of mobile smartphones, tablets and other
Internet-connected devices.
Rising Network Operational Costs Due to the Rapid Adoption of Broadband Applications
Advances in broadband access (such as the introduction of long-term evolution, or LTE, technology) combined with the advanced data capabilities of end-
user devices (such as smartphones and tablets) have promoted a growing number of applications and content delivered over broadband networks. The vast
majority of these applications run over-the-top 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 free usage for specific applications, content bundling, off-peak usage incentives, security services, improved quality
for VoIP and Internet video, 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 embodied in their networks. 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.
Network Security Threats
As reliance on the Internet has grown, service provider and enterprise networks have become increasingly vulnerable to a wide range of security threats,
including distributed denial of service attacks, spambots malware and other threats. 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.
End-User Security Threats
Broadband devices, especially mobile devices, are increasingly vulnerable to online threats such as malware and phishing. Since most broadband users have
limited cyber-security expertise, they become easy targets for cybercriminals. Mobile device users are even more exposed since the threat awareness is lower
than that of PC users. There are several options to safeguard broadband users on-the-go. We believe service providers must protect their subscribers by
providing security-as-a-service so that individual and business customers are always protected seamlessly from the network security threats.
Enterprise Demand for Visibility and Delivery of Mission-Critical Applications and Services in the Cloud
The proliferation of network applications, bring your own device and cloud computing present 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 many 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.
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 and services,
value-based charging, 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.
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Our Integrated Solutions include:
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Analytics solutions deliver accurate and meaningful network business intelligence to drive capacity planning, congestion management, service
planning and marketing decisions.
Traffic Management solutions prioritize existing network capacity, control congestion and optimize service delivery. Dynamic Quality of Service
(QoS) enforcement enables effective traffic management strategies that minimize infrastructure and operating costs.
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.
“Security as a Service” Solutions enable operators to secure the digital experience against online threats and harmful content, by providing network
based Security as a Service (SECaaS) to their end customers.
Network Core Security Solutions, focused on identifying and blocking large scale Distributed Denial of Service (DDoS) attacks on the core network
elements of service providers.
Allot’s Products (Our Platforms)
The Allot Service Gateway platforms (including Allot Service Gateway Tera, and Allot Service Gateway 9500) as well as Allot NetEnforcer platforms are
based on leading technology and high performance, designed for in-line deployment in a wide range of networks. Allot service Gateway platforms are
designed for deployment both on traditional and virtualized network access infrastructure. Within each platform, our Dynamic Actionable Recognition
Technology (DART) engine employs multiple deep packet inspection (DPI) 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
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Allot Service Gateway 9500 provides visibility, control and security of application and user traffic in cloud data centers and ISP networks. The
platform provides a unified framework and single point of integration for traffic visibility and policy enforcement, charging, as well as pre-integrated
services, including, web and cyber security, and web optimization, cyber threat protection, data sourcing, and network analytics.
Allot Service Gateway Tera powers the deployment and delivery of digital lifestyle services in fixed, mobile and cloud networks that are on the path
to software-defined networking (SDN) and virtualized network services (NFV). The Allot Service Gateway Tera provides a unified framework for
traffic detection, policy enforcement and service integration across any access network, and helps manage traffic loads, keeping pace with the growing
demand for services and the complex needs of application delivery. Allot Service Gateway Tera supports both physical and virtual service deployment
and serves as a single point of seamless integration in the network for real-time data sourcing, traffic management, service chaining, application-based
charging, endpoint protection and anti-DDoS, as well as value-added services from other leading vendors.
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Allot Service Gateway Virtual Edition provides contemporary, software only based version of our Service Gateway functionality, enabling
telecommunication service providers to deploy leading integrated network intelligence, policy enforcement and revenue-generating services in a
scalable manner, which complies with any hardware and orchestration infrastructure used by the provider. Our Service Gateway Virtual Edition enables
both on-premises and cloud deployments, and provides the promise of expansion on demand based on the actual traffic dynamic of the network.
Allot Secure Service Gateway integrates network intelligence, policy enforcement, and web security in a single scalable platform for large enterprises.
This unified platform offers enterprises a cost-effective solution of advance technologies for visibility, control and security of their network. Allot’s
SSG ranges from several hundred Mbps (megabits per second ) to several dozen Gbps, hence providing full coverage to even the most complex
enterprise network.
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 16 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.
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.
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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.
Allot Smart Engage Onboarding: Allows operators to engage customers at first time broadband usage, and also increase on going engagement,
including, increasing introduction of services and number of opt-ins for add-on services.
Analytics Services
Our analytics solutions analyze traffic data to drive smart business decisions.
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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.
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Security Solutions
Our security solutions protect network customers, network service integrity and brand reputation.
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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.
Allot WebSafe: URL filtering service that blocks blacklisted content and enables access control to objectionable content on the Internet.
Allot WebSafe Business: Enables managed security service providers to protect the digital assets of business customers, whose applications are
migrating to the cloud and whose employees are increasingly mobile. Allot WebSafe Business provides flexible, multi-tenant Security as a Service to
small and medium business (SMB) customers, including, web (URL) filtering, anti-malware, application control and mail security.
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.
Allot Content Protector: Provides a carrier-class URL filtering service that blocks access to blacklisted and illegal content, enabling network operators
to comply with regulatory requirements.
Allot SpamOut Protector: Prevents malicious spambots from compromising operators' network service, and includes anti-spam filter which detects
and blocks outbound spam and protects network and IP domain against being blacklisted as a spammer or a phishing security risk.
McAfee Unified Security Powered by Allot: Provides end-to end security capabilities through combining Allot’s multi-tenant network-based security
platform and McAfee endpoint protection. Offering On-Net and Off-Net coverage, the solution blends advanced threat detection technologies in
network and at the endpoint with customer intelligence and comprehensive personalization capabilities to deliver a scalable platform that simplifies
security service activation, service awareness, operation and management.
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.
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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.
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Customers
We have a global, diversified 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,
OEMs and system integrators. In 2016, we derived 38% of our revenues from Europe, 31% from Asia and Oceania, 14% from the Middle East and Africa and
14% from the Americas (excluding the United States) and 3% from the United States. For a breakdown of total revenues by geographic location, see “ITEM
5.A – Operating Results – Results of Operations – Revenues.”
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 2016, approximately 41% of our revenues were derived from channel
partners. Our channel partners are responsible for installing and providing initial customer support for our products. Our channel partners are located around
the world and address most major markets. Our channel partners target a range of end-users, including carriers, alternative carriers, cable operators, private
networks, data centers and enterprises in a wide range of industries, including government, financial institutions and education. Our agreements with channel
partners that are distributors or resellers are generally non-exclusive, for an initial term of one year and automatically renew for successive one-year terms
unless terminated. After the first year, such agreements may typically be terminated by either party upon ninety days prior notice.
We offer support to our channel partners. This support includes the generation of leads through marketing events, seminars and web-based leads and incentive
programs as well as technical and sales training.
Sales and Marketing
Our product sales 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 territories: North America, South America, Europe, the Middle East and Africa; and Asia
and Oceania. We have regional offices in the United States, Israel, France, United Kingdom, Spain, Colombia, Singapore, Japan, New Zealand, China, Italy
and India and a regional presence in Germany, Mexico, Brazil, Hong Kong, South Korea, South Africa and Australia.
As of December 31, 2016, our sales and marketing staff, including product management and business development functions, consisted of 99 employees.
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Service and Technical Support
We believe our technical support and professional services capabilities are a key element of our sales strategy. Our technical staff provides support and
professional services, as well as assists in presale activities and advises channel partners on the integration of our solutions into end-customer networks. Our
basic warranty to end-customers (directly or through our partners) is three months for software and twelve months for hardware. Generally, end-customers are
also offered a choice of one year or multi-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 our global support organization, via phone, email and online support system, provided by regional support centers;
expedited replacement units in the event of a warranty claim;
software updates and upgrades offering new features and protocols and addressing new and changing network applications; and
periodic updates of solution documentation, technical information and training.
Our support plans are designed to maximize network up-time and minimize operating costs. Our customers, including partners and their end-customers, are
entitled to take advantage of our around-the-clock technical support which we provide through our six support centers, located in France, Israel, Singapore,
India, Colombia 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.
Many of our strategic customers purchase special support contracts, which include specifics service levels (for example, with respect to response time,
restoration time, resolution time, on-site support, spare parts management, and resident engineers).
We also offer particular professional services, such as, network audit, solution design, project management, business intelligence reports, customer project
documentation, integration services, interoperability testing and training and specific customizations.
The expenditures associated with the technical support staff are allocated in our statements of comprehensive loss between sale and marketing expenses and
cost of goods sold, based on the roles of and tasks performed by personnel.
As of December 31, 2016, our technical staff consisted of 117 employees, including 52 technical support persons, 51 deployment and professional services
engineers, 6 documentation and training persons, and eight business operation and CS management.
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Research and Development
Our research and development activities take place primarily in Israel. We also have research and development activities in Spain and Mexico. As of
December 31, 2016, 117 of our employees in Israel, 42 of our employees in Spain and four of our employees in Mexico, were engaged primarily in research
and development. We devote a significant amount of our resources towards research and development in order to introduce new products and continuously
enhance existing products and 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 have experience working for leading Israeli or international networking
companies. These engineers are involved in advancing our core technologies, as well as in applying these core technologies to our product development
activities. In previous years, our research and development efforts have benefited from royalty-bearing grants from the Israel Innovation Authority. As of
December 31 2016, there are no outstanding royalties due from us to the Israel Innovation Authority. In 2016, we benefited from additional grants from the
Israel Innovation Authority, however, these grants do not bear royalties. Under the terms of those grants we are required to perform our manufacturing
activities within the state of Israel, as a condition to maintaining these benefits. The State of Israel does not own any proprietary rights in technology
developed with the Innovation Authority funding and there is no restriction related to the Israel Innovation Authority on the export of products manufactured
using technology developed with the Israel Innovation Authority 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 the hardware components of our Service Gateway platforms and our NetEnforcer traffic management systems
to Flex (Israel) Ltd., which manufactures these components in accordance with our design. This strategy enables us to reduce our fixed costs, focus on our
core research and development competencies and provide flexibility in meeting market demand. Flex (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 Flex (Israel) is automatically renewed annually for additional one-year
terms. Flex (Israel) may terminate our agreement with them at any time during the term upon prior notice. We retain the right to procure independently any of
the components used in our products. Flex (Israel) has a U.S. affiliate to which it can, with the prior consent of the Israel Innovation Authority, transfer
manufacturing of our products if necessary, in which event we may be required to pay increased royalties to the Israel Innovation Authority. We expect that it
would take approximately six months to transition manufacturing of our products to an alternate manufacturer.
We subcontract the integration of our security software products with an off-the- shelf hardware platforms provided by Lenovo and Hewlett Packard
Enterprise (HP). Based on verbal understandings, Arrow ocs (Israel) performs the integration of the software product with HP servers, while Malam-Team
(Israel) performs the integration of such software with Lenovo Servers. Such hardware components are manufactured in accordance with our design.
We design and develop internally a number of the key components for our products, including printed circuit boards. 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 may 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, recently acquired by Avago). We also purchase off the shelf
hardware components from single or limited sources for our security and Traffic Management products. 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 against large companies in a rapidly evolving and highly competitive sector of the networking technology market, which offer, or may offer in
the future, competing technologies, including partial or alternative solutions to operators' challenges, and which, similarly to us, intensely pursue the largest
service providers (referred to as Tier 1 operators). Our DPI technology enabled offerings face significant competition from router and switch infrastructure
companies. that integrate functionalities into their platforms addressing some of the same types of issues that our products are designed to address.
Our security products, which are offered to operators and are deployed in their networks for the purpose of enabling them to provide security services to their
end customers, are subject to competition from companies which offer security products, based on different technology and marketing and sales approaches.
Generally, we compete on the basis of product performance, ease of use and installation, customer support and price.
Our security product offerings face significant competition from companies that directly approach end customers and offer them security applications to be
installed on their devices; companies that approach the business enterprise sector through distribution channels and offer cloud security products;
and companies that offer security products bundled with other products. By offering our security products to operators that provide security services to both
business enterprises and individual end customers, we aim to expand the reach of our products.
See “ITEM 3: Key Information—Risk Factors— Our revenues and business may be adversely affected if we do not effectively compete in the markets in
which we operate.”
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 into 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 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— If we are unable to successfully protect the intellectual property embodied
in our technology, our business could be harmed significantly.” 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 new markets, such as Japan, Korea and China, and Latin America countries we will evaluate how best to protect our
technologies in those markets. We intend to vigorously prosecute and defend the rights of our intellectual property.
As of December 31, 2016, we had twenty two issued U.S. patents and two 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.”
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Government Regulation
See “ITEM 5: Overview—Government Grants” for a description of grants received from the Israel Innovation Authority of the Ministry of Economy.
C. Organizational Structure
As of December 31, 2016, 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 (with branches in Spain, Italy
and Germany)
Allot Communications Japan K.K.
Allot Communications (New Zealand) Limited (with a branch in
Australia)
Oversi Networks Ltd.
Allot Communications (Hong Kong) Ltd
Allot Communications Africa (PTY) Ltd
Allot Communications India Private Ltd
Allot Communications Spain, S.L. Sociedad Unipersonal
Allot Communications (Colombia) S.A.S
Allot MexSub
United States
France
Singapore
United Kingdom
Japan
New Zealand
Israel
Hong Kong
South Africa
India
Spain
Colombia
Mexico
* Allot Communications Ltd. also holds a branch in Colombia.
D. Property, Plant and Equipment
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Our principal administrative and research and development activities are located in our approximately 68,049 square foot (6,322 square meter) facilities in
Hod-Hasharon, Israel. The leases for our facilities vary in dates and terms, with the main facility’s non-stabilized lease expiring in June 2018.
We also lease a 5,888 square foot (547 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. We lease a total of 10,872 square foot (1,010 square meter) in three facilities in Spain, mainly for our sales and
research and development operations in Spain, pursuant to lease agreements. The lease agreement of our main site in Spain expires on October 2017. We
lease other smaller facilities for the purpose of our sales and marketing and support activities in France, the United Kingdom, Italy, Germany,
Singapore, China, Japan, South Africa, Colombia, New Zealand and India.
ITEM 4A: Unresolved Staff Comments
Not applicable.
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ITEM 5: Operating and Financial Review and Prospects
The information contained in this section should be read in conjunction with our consolidated financial statements for the year ended December 31, 2016 and
related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with US GAAP. This
discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors, such as those set
forth under “ITEM 3.D: Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” our actual results may differ materially from those
anticipated in these forward-looking statements.
A. Operating Results
Overview
We are a leading global provider of security and monetization solutions that enable service providers and enterprises to protect and personalize the digital
experience. Allot’s flexible and highly scalable service delivery framework leverages the intelligence in data networks, enabling service providers to get
closer to their customers, safeguard network assets and users, and accelerate time-to-revenue for value-added services. Our 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 2016, the primary drivers of our revenues were the mobile and fixed markets, which were highlighted by our ongoing relationship with global Tier 1
mobile and fixed operators groups.
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.
In March 2015, we acquired the business and substantially all of the assets of Optenet, S.A., a developer of security solutions for internet service providers
and enterprises. Under the terms of the agreement, the consideration includes approximately $9.9 million (€8.9 million) in cash. In addition, there is a
performance-based earn-out over a period of five years following closing, which is capped at approximately $27.5 million (€25 million) and is contingent
upon reaching certain revenues threshold from sale of Optenet products. The fair value of the contingent consideration as of the acquisition date was
estimated at $8.1 million (€7.3 million). See Note 1(b) to our consolidated financial statements for further information.
Key measures of our performance
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 and professional services, including installation and training. We generally provide maintenance and
support services pursuant to a one- to three-year maintenance and support program, which may be purchased by customers at the time of product purchase or
on a renewal basis.
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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 warranty to customers that purchase annual maintenance and support. Typically
our support contracts with our customers, provide hot line support, warranty,software updates and upgrades, if and when available. 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 44%, 37% and 42% of our total revenues from two Tier 1 mobile and fixed operators in 2014, 2015 and 2016,
respectively.
Geographical breakdown. See “ITEM 4B: Information on Allot—Business Overview—Customers” for the geographic breakdown of our revenues by
percentage for the years ended December 31, 2014, 2015 and 2016.
Cost of revenues and gross margins
Our products’ cost of revenues consists primarily of costs of materials, manufacturing services and overhead, warehousing and product testing. 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 our percentage of gross margin to decrease as a result of additional personnel hiring and other operational expenditures related to product and services
sales. Such increases may be partially offset by increased sales of our value added products and services, as their related cost of revenues is generally lower.
In 2014 our gross margin decreased, primarily due to inventory write-offs of $3.4 million due to product cycle replacement. Specifically in 2014 we launched
the service gateway TERA and reduced the level of inventories related to the old product lines. In 2015 our gross margin decreased, primarily due to
intangible assets impairment of $5.8 million derived from Oversi’s and Ortiva’s technologies acquired in 2012 due to our decision to reach end of life on the
respective product lines. In 2016 we recorded no intangible assets impairment and as a result our gross margin increased compared to 2015.
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 grants from the Israel Innovation Authority. 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.
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, 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. 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.
While we do not expect our operating expenses to increase in 2017, they may increase in future periods.
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Financial income, net
Financial income, 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 2014, we had $0.7 million financial income, net. In 2015, we had $0.6 million financial expenses, net. The change in 2015 was primarily attributed to
foreign currency exchange losses. In 2016, we had $1.1 million financial income, net. The change in 2016 was primarily attributed to interest earned on our
cash balances and other financial investments.
In addition, financial income, 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, 2016,
our net operating loss carry forwards for Israeli tax purposes totaled approximately $46.6 million, which includes losses related to our acquisition of Oversi.
As a result of our acquisition of Oversi, we may offset operating losses in Israel against taxable income annually with a limitation of up to 14% 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 Israel Innovation Authority under our approved plans in
accordance with the Research and Development Law. In 2014, 2015 and 2016 we received grants from the Israel Innovation Authority through non-royalty
bearing programs.
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 42% of our total revenues in 2016 from two 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. 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. 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.
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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, and discounts given to channel partners in certain
territories. 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. 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.
Cost of revenues and cost reductions. Our cost of revenues as a percentage of total revenues was 29.7% for 2014, 33.4% for 2015 and 30.9% for 2016. 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 to reduce costs. Our products incorporate features that are
purchased from 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 2014, we recorded a write-off of
$3.4 million of inventory to our cost of revenues, due to product cycle replacement. Specifically in 2014 we launched the service gateway TERA that
supersedes the service gateway Sigma and Sigma E and as a result of the faster than anticipated adoption, we reduced the level of inventories related to the
old product lines. 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. The increase of our
cost of revenues in 2015 was primarily due to intangibles assets impairment of $5.8 million derived from Oversi’s and Ortiva’s technologies acquired in 2012
due to our decision to phase out the respective product lines. In 2016 we recorded no intangible assets impairment and as a result our gross margin increased
compared to 2015.
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
our revenues is incurred in currencies other than U.S. dollar, mostly in Euro. In addition, a significant portion of our 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. Also see “ITEM 11: Quantitative and Qualitative Disclosure About Market Risk.”
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. See “ITEM 11: Quantitative and
Qualitative Disclosure About Market Risk.”
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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;
Provision for returns;
Business combinations
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 account for revenue recognition in accordance with Accounting Standards Codification No. 605-25, “Multiple elements
arrangements” (“ASC No. 605-25”). We generate revenues mainly from selling our products along with related maintenance and support services. At times,
these arrangements may also include professional services, such as installation services or training. We generally sell our 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.
40
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, such as professional 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, we determined the “BESP” based on management’s estimated selling price by reviewing historical transactions and considering multiple
other factors, including but not limited to, pricing practices including discounting, and competition.
For the maintenance and support, the Company determined BESP 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.
Provision for returns. We provide a provision for product returns based on its experience with historical sales returns. Such provisions amounted to $0.9
million, $0.7 million and $1.1 million as of December 31, 2016, 2015 and 2014, respectively.
Business combinations. We account for our business acquisitions in accordance with Accounting Standards Codification (ASC) No. 805, Business
Combinations. We use management best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities
assumed at the business combination date. The total purchase price allocated to the tangible assets acquired is assigned based on the fair values as of the date
of the acquisition.
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 and RSUs, we recorded total stock-based compensation expenses of $8.1 million in 2014, $7.2 million in 2015, and
$5.1 million in 2016. In 2016, $0.4 million, $1.2 million, $1.8 million and $1.7 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, 2016, we had an aggregate of $5.0 million of unrecognized stock-
based compensation remaining to be recognized over a weighted average vesting period of 2.3 years.
41
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, 2016, 2015 and 2014 totaled $2.0 million, $1.7
million, and $4.5 million, respectively.
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, 2016, we held available for sale marketable securities of $60.5 million. As of December 31, 2016, the unrealized loss recorded in other
comprehensive income was $0.1 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 one 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 the 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, 2016 and determined that the carrying value of the reporting unit was more than the fair value of the reporting
unit. Fair value is determined using market capitalization. During the years ended 2014, 2015 and 2016, no impairment losses were recorded.
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.
42
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. During 2016, no impairment losses in respect of intangible assets were recorded.
During 2015, we recorded impairment losses of $5.8 million in respect of intangible assets. During 2014, no such 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 $46.6 million and capital losses of approximately $27.3 million for tax
purposes as of December 31, 2016, 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 $5.5 million as of December 31, 2016, and expire between
2026 and 2032. 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, 2016 was $14.7 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.
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.
For more information regarding recently issued accounting pronouncements see note 2 to the Financial Statements.
43
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 loss
Financing income (expenses), net
Loss before income tax expense
Income tax (expense) benefit
Net loss
Revenues
Year Ended December 31,
2015
2014
2016
65.9%
34.1
100.0
62.7%
37.3
100.0
23.4
6.3
29.7
70.3
24.8
38.1
10.2
73.1
2.7
0.6
2.1
0.0
2.1%
26.7
6.7
33.4
66.6
26.4
43.3
12.7
82.4
15.8
(0.6)
16.4
(3.4)
19.8%
60.2%
39.8
100.0
22.6
8.3
30.9
69.1
26.8
39.1
10.9
76.7
7.6
1.2
6.4
(2.4)
8.8%
The following table sets forth a breakdown of our revenues by geographic locations for the periods indicated:
2016
%
Revenues
Revenues by Location
%
Revenues
2015
($ in thousands)
2014
%
Revenues
Revenues:
Europe
Asia and Oceania
Middle East and Africa
United States
Americas (excluding United States)
Total Revenues
$
$
34,279
27,700
12,365
2,931
13,094
90,369
38% $
31%
14%
3%
14%
100% $
39,110
28,495
9,809
8,206
14,347
99,967
39% $
29%
10%
8%
14%
100% $
41,238
41,990
15,352
15,307
3,299
117,186
35%
36%
13%
13%
3%
100%
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
Products. Product revenues decreased by $8.2 million, or 13.1%, to $54.4 million in 2016 from $62.6 million in 2015. The decrease in revenues in 2016 was
attributable to a decrease in the number of transactions with large Tier-1 operators compared to 2015 and the sharp decrease in the EUR and other currencies
against the U.S. dollar.
44
Services. Service revenues decreased by $1.4 million, or 3.7%, to $35.9 million in 2016 from $37.3 million in 2015. A material part of the sales of our
Services is linked to the sales of our Products, which decreased due to the factors described above. Such factors also contributed to the decrease in Services
revenues.
Product revenues comprised 60.2% of our total revenues in 2016, a decrease of 2.4% compared to 2015 while the services revenues portion of total revenues
increased by 2.4%.
Cost of revenues and gross margin
Products. Cost of product revenues decreased by $6.3 million, or 23.6%, to $20.4 million in 2016 from $26.7 million in 2015. Product gross margin
increased to 62.5% in 2016 from 57.4% in 2015. The decrease of our cost of product revenues in 2016 was a mainly the result of an intangible assets
impairment of $5.8 million in 2015 derived from Oversi’s and Ortiva’s technologies acquired in 2012 due to our decision to reach end of life on the respective
product lines1.
Services. Cost of services revenues increased by $0.8 million, or 11.5%, to $7.5 million in 2016 from $6.7 million in 2015. This increase was attributed to
additional personnel hiring and increase in operational expenditures related to service sales.
Total gross margin, increased to 69.1% in 2016 from 66.6% in 2015.
Operating expenses
During 2016, the Company endeavored to reduce its operating expenses by decreasing, among others, its head count and other operating expenses.
Research and development. Gross research and development expenses decreased by $2.8 million, or 10.3%, to $24.8 million in 2016 from $27.7 million in
2015. Research and development expenses as a percentage of total revenues increased to 27.5% in 2016 from 27.7% in 2015.
Sales and marketing. Sales and marketing expenses decreased by $8.0 million, or 18.5%, to $35.3 million in 2016 from $43.3 million in 2015.
Sales and marketing expenses as a percentage of total revenues decreased to 39.1% in 2016 from 43.3% in 2015.
General and administrative. General and administrative expenses decreased by $2.9 million, or 22.8%, to $9.8 million in 2016 from $12.7 million in 2015.
General and administrative expenses as a percentage of revenues decreased to 10.9% in 2016 from 12.7% in 2015.
Financial income, net. In 2016 we had $1.1 million financial income, net, and in 2015, we had $0.6 million financial expenses, net. The change in 2016 was
primarily attributed to interest earned on our cash balances and other financial investments.
Income tax expense. Income tax expense in 2016 was $2.2 million, compared to income tax expense of $3.4 million in 2015. This decrease was due to a
write-off of $2.1 million of deferred tax assets done in 2015, which was offset by an increase in write-off of unutilized withholding taxes of $0.6 million in
2016.
45
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Products. Product revenues decreased by $14.6 million, or 18.9%, to $62.6 million in 2015 from $77.2 million in 2014. The decrease in revenues in 2015
was attributable to longer conversion cycles of bookings into revenues, mainly with respect to bookings from new customers, the sharp decrease in Euro and
other currencies against the U.S. dollar, and a decrease in the number of transactions with large Tier-1 operators up-scaling their equipment, compared
to previous year.
Services. Service revenues decreased by $2.6 million, or 6.6%, to $37.3 million in 2015 from $39.9 million in 2014. The decrease in services revenues is
primarily attributable to decrease in product revenue.
Product revenues comprised 62.7% of our total revenues in 2015, a decrease of 3.2% compared to 2014 while the services revenues portion of total revenues
increased by the same percentage.
Cost of revenues and gross margin
Products. Cost of product revenues decreased by $0.7 million, or 2.5%, to $26.7 million in 2015 from $27.4 million in 2014. Product gross margin, decreased
to 57.4% in 2015 from 64.5% in 2014. The decrease of our cost of product revenues in 2015 was in correlation with the decrease in product revenues, which
was compensated by an intangible assets impairment of $5.8 million derived from Oversi’s and Ortiva’s technologies acquired in 2012 due to our decision to
reach end of life on the respective product lines.
Services. Cost of services revenues decreased by $0.6 million, or 8.6%, to $6.7 million in 2015 from $7.3 million in 2014. This decrease is consistent with the
decrease in services revenues.
Total gross margin, decreased to 66.6% in 2015 from 70.4% in 2014
Operating expenses
Research and development. Gross research and development expenses decreased by $2.3 million, or 7.7%, to $27.7 million in 2015 from $30.0 million in
2014. This decrease is primarily attributable to a decrease in salaries and related expenses of approximately $1.7 million and a decrease in other overhead
expenses of approximately $0.5 million.
Research and development expenses, as a percentage of total revenues increased to 26.4% in 2015 from 24.8% in 2014.
Sales and marketing. Sales and marketing expenses decreased by $1.3 million, or 2.9%, to $43.3 million in 2015 from $44.6 million in 2014. This decrease is
primarily attributable to decrease in commission expenses of approximately $1.0 million, and decrease in salary expenses of approximately $0.3 million.
Sales and marketing expenses, as a percentage of total revenues increased to 43.3% in 2015 from 38.1% in 2014.
General and administrative. General and administrative expenses increased by $0.8 million, or 6.4%, to $12.7 million in 2015 from $11.9 million in 2014.
This increase is primarily attributable to increase in bad debt expense of approximately $0.7 million.
General and administrative expenses as a percentage of revenues increased to 12.7% in 2015 from 10.2% in 2014.
Financial income, net. In 2015 we had $0.6 million financial expenses, net, in 2014, we had $0.7 million financial income, net. The change in 2015 was
primarily attributed to foreign currency exchange losses.
46
Income tax expense. Income tax expense in 2015 was $3.4 million, compared to income tax expense of $0.05 million in 2014. This decrease is due to
realization of deferred tax assets of $0.7 million and write-off of $2 million of deferred and pre-paid tax assets, as well as $0.5 million write-off of unutilized
withholding taxes as it is more likely than not that these assets will not be utilized in the foreseeable future.
B. Liquidity and Capital Resources
As of December 31, 2016, we had $23.3 million in cash and cash equivalents, $60.5 million available for sale marketable securities and $29.8 million in
short-term deposits. As of December 31, 2016, our working capital, which we calculate by subtracting our current liabilities from our current assets, was
$123.9 million.
Based on our current business plan, we believe that our existing cash balances will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next twelve months. If our estimates of revenues, expense or capital or liquidity requirements change or are inaccurate and
are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. In addition, we may seek to
sell additional equity or arrange debt financing to give us financial flexibility to pursue attractive acquisitions or investment opportunities that may arise in the
future.
Operating activities.
During 2016, we used $3.5 million in cash and cash equivalents from operating activities. Net cash used in operating activities consisted mainly of a net loss
of $8.0 million, depreciation, amortization and impairment of intangible assets of $4.0 million, $5.1 million of stock-based compensation expense, a decrease
of $2.9 million in inventory, a decrease of $0.8 million in employees and payroll accruals, an increase of $0.3 million in trade receivables, a decrease of $4.2
million in deferred revenues attributed to sales which revenue recognition criteria were met while cash was collected in the previous years, a decrease of $3.8
million in trade payables, a decrease of $0.2 in long-term deferred taxes, net, a decrease of $0.7 million in other receivables and prepaid expenses and $0.7
million related to other operating activities.
Net cash we provided in operating activities in 2015 was $4.2 million. Net cash provided in operating activities consisted mainly of a net loss of $19.8
million, depreciation, amortization and impairment of intangible assets of $11.5 million, $7.2 million of stock-based compensation expense, an increase of
$0.06 million in inventory, an increase of $0.9 million in employees and payroll accruals, an increase of $0.8 million in trade receivables, an increase of $2.0
million in deferred revenues attributed to sales which revenue recognition criteria were met while cash was collected in the previous years, an increase of $2.2
million in trade payables, a decrease of $1.4 million in long-term deferred taxes, net, an increase of $2.6 million in other receivables and prepaid expenses and
$2.4 million related to other operating activities.
During 2014, we provided $15.8 million in cash and cash equivalents from operating activities. Net cash provided in operating activities consisted mainly of a
net loss of $2.5 million, depreciation and amortization of intangible assets of $5.2 million, $8.1 million of stock-based compensation expense, a decrease of
$3.7 million in inventory, an increase of $1.1 million in employees and payroll accruals, an increase of $6.9 million in trade receivables, an increase of $1.9
million in deferred revenues attributed to sales which revenue recognition criteria were met while cash was collected in the previous year, an increase of $3.1
million in trade payables and $2.1 million related to other operating activities.
Investing activities.
Net cash provided by investing activities in 2016 was $15.0 million, primarily attributable to an investment in available-for sale marketable securities of $29.7
million and the purchase of property and equipment of $1.6 million. The above changes were partially offset by redemption of marketable securities of $33.2
million and redemptions of short-term bank deposits of $12.9 million.
47
Net cash used by investing activities in 2015 was $7.9 million, primarily attributable to acquisitions of $9.9 million, an investment in available-for sale
marketable securities of $34.1 million and the purchase of property and equipment of $2.2 million. The above changes were partially offset by redemption of
marketable securities of $22.2 million and redemptions of short-term bank deposits of $16.3 million.
Net cash used in investing activities in 2014 was $40.9 million, primarily attributable to the investments of short-term bank deposits of $21.0 million, an
investment in available-for sale marketable securities of $22.7 million and the purchase of property and equipment of $3.4 million and a loan granted to a
third party of $2.1 million. The above changes were partially offset by redemption of marketable securities of $8.2 million.
We expect that our capital expenditures will total approximately $2.9 million in 2017. We anticipate that these capital expenditures will be primarily related to
further investments in lab equipment for research and development and for leasehold improvements.
Financing activities.
Net cash used in financing activities in 2016 was $3.7 million, which was attributable to issuance of share capital through the exercise of stock options and
RSUs of $0.1 million and repurchase of our ordinary shares of $3.8 million.
Net cash used in financing activities in 2015 was $0.03 million, which was attributable to issuance of share capital through the exercise of stock options and
RSUs of $0.13 million and repurchase of our ordinary shares of $0.17 million.
Net cash provided by financing activities in 2014 was $1.5 million, which was attributable to issuance of share capital through the exercise of stock options
and RSUs of $1.5 million.
C. Research and Development, Patents and Licenses
In previous years, our research and development efforts have benefited from royalty-bearing grants from the Israel Innovation Authority. In 2014, 2015 and
2016, we benefited from non-royalty bearing grants from the Israel Innovation Authority. 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 addition to our membership in a Magnet consortium which was approved prior to 2014, in 2014 we were also qualified to participate in one research and
development program funded by the Israel Innovation Authority to develop generic technology relevant to the development of our products. Such program is
approved pursuant to the Research and Development Law, and the regulations promulgated thereunder. The programs is for companies with large research
and development activities. We were eligible to receive non-royalty-bearing grants constituting between 40% and 55% of certain research and development
expenses relating to this program. 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 $30.0 million, $27.7 million and $24.8 million in the years
ended December 31, 2014, 2015 and 2016, respectively. Non-royalty -bearing grants amounted to $1.0 million, $1.3 million and $0.6 million in 2014, 2015
and 2016, respectively.
As of December 31, 2016, we had twenty two issued U.S. patents and two 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.
48
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, 2016, summarizes the aggregate effect that these
obligations are expected to have on our cash flows in the periods indicated.
Contractual Obligations
Operating leases —offices(1)
Operating leases —vehicles
Accrued severance pay(2)
Total
Payments due by period
Total
Less than 1 year
1–3 years
(in thousands of U.S. dollars)
Over 3 years
$
$
3,307 $
478
286
4,071 $
2,458 $
267
-
2,725 $
833
211
-
1,044 $
16
-
286
302
_____________________
(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, $33
thousands is unfunded.
49
ITEM 6: Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth the names, ages and positions of our directors and executive officers as of March 1, 2017:
Name
Directors
Yigal Jacoby(5)
Rami Hadar
Itzhak Danziger (5)
Nurit Benjamini(1)(2)(3) (4)(5)
Steven D. Levy(1)(2) (4)(5)
Miron (Ronnie) Kenneth (1)(2) (5)
Nadav Zohar(5)*
Executive Officers
Erez Antebi
Alberto Sessa
Amir Hochbaum
Anat Shenig
Ronen Priel
Rael Kolevsohn
Pini Gvili
Yossi Abraham
Shaked Levy
Age
Position
56
54
68
50
61
61
51
58
55
58
48
41
47
52
45
42
Chairman of the Board
Director
Director
Director
Director
Director
Director
Chief Executive Officer and President
Chief Financial Officer
Vice President, Research and Development
Vice President, Human Resources
VP Product Management & Marketing
Vice President, Legal Affairs, General Counsel and Company
Secretary
Vice President, Operations
Vice President, Business Development
Vice President, VP Global Business & Customer Success
(1) Member of our compensation and nomination committee.
(2) Member of our audit committee.
(3) Lead independent director.
(4) Outside director.
(5) Independent director under the rules of NASDAQ.
* Mr. Zohar servesas an interim director appointed by our Board of Directors effective February 6 2017, to serve until the date of the next Annaul General
Meeting of Shareholders. In the event that his nomination is not approved and he is not re-elected as a director by our shareholders at the Company's next
Annual General Meeting of Shareholders, he will no longer serve on the Board, following such meeting.
Directors
Yigal Jacoby has served as Chairman of the Board of Directors since November, 2016. Mr. 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 serving as Chairman at LiveU Ltd., a provider of live cellular video transmission solutions. 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.
Rami Hadar has served as a director since 2006 and served as our Chief Executive Officer and President from 2006 to 2014. Prior to joining us, Mr. Hadar
founded CTP Systems, a developer of cordless telephone 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. Since May
2015, Mr. Hadar has served as Managing General Partner of Euclyptus Growth Capital, an Israeli growth capital fund, focusing on investing and helping late
stage Israeli companies grow their business, penetrate international markets and achieve successful IPO's as part of their growth.
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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 a member 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. In the non-profit sector, Mr. Danziger serves as a the chairman of the Center for Educational Technology (CET), as Vice
President of the New Israel Fund (NIF), a director in Israel Venture Networks (IVN), a director in Israel Venture Network (IVN) , 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 a
B.Sc. cum laude and an M.Sc. in electrical engineering from the Technion - Israel Institute of Technology and an 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. Since December 2013, Ms. Benjamini
has served as the Chief Financial Officer of TabTale Ltd. a company that provides mobile content . Ms. Benjamini served as the Chief Financial Officer of
Wix.com, an internet company that offers technology, which makes it easy for all users to get online and create professional and functional web presence,
from 2011 to 2013. Previously, from 2007 to 2011, Ms. Benjamini has served as the Chief Financial Officer of CopperGate Communications Ltd. 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. (NASDAQ: BLRX), a member of its
compensation committee, and as a chairman of its audit committee. Ms. Benjamini serves as a director and chair-person of the audit committee of Redhill
Biopharma (NASDAQ/TASE: RDHL). 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.
Miron (Ronnie) Kenneth has served as a director since October 2014. Mr. Kenneth has more than 20 years of experience in the global high technology
business, and is currently a private investor in high technology startups. He serves as the Chairman of Teridion Technologies Ltd., a privately held company
specializing in overlay network technologies for service providers. From May 2011 to May 2013, Mr. Kenneth served as the CEO of Pontis Ltd., a privately-
held company specializing in providing online marketing and analytics platforms for service providers. Prior to his tenure at Pontis, Mr. Kenneth was the
Chairman and Chief Executive Officer of Voltaire Technologies Ltd. (from January 2001 to 2011). In 2011 Voltaire was acquired by Mellanox Technologies
Ltd. (NASDAQ: MLNX). Prior to his employment at Voltaire, Mr. Kenneth was a General Partner in Telos Venture Partners, a Silicon Valley based venture
firm. Prior to Telos, Mr. Kenneth also held senior management positions in Cadence Design Systems Inc.’s (NASDAQ: CDN) European organization. Mr.
Kenneth has an M.B.A. from Golden Gate University in San Francisco, California and a B.A. in Economics and Computer Science from Bar Ilan University
in Israel.
Nadav Zohar, has served as an interim director since February 2017. Mr. Zohar serves as the head of Business Development of Gett, an “on demand”
transportation service provider. Prior to joining Gett, Mr. Zohar served as Chief Operating Officer of Delek Global Real Estate PLC between 2066 and 2009
and held several executive positions with Morgan Stanley, between 2001 and 2006, the last of which was Executive Director, Financial Sponsors Group. Prior
to joining Morgan Stanley, Mr. Zohar served in executive roles at Lehman Brothers between 1997 and 2001. Mr. Zohar serves as a board member of
Matomy Media Group Ltd. (London Stock Exchange: MTMY), a digital performance-based advertising company. Mr. Zohar holds a Masters in Finance
(graduated with Merit) from the London Business School and a LLB in Law (graduated with honors) from the University of Reading.
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Executive Officers
Erez Antebi has served as our President and Chief Executive Officer since February 2017. Mr. Antebi served as the CEO of Gilat Satellite Networks
(NADAQ: GILT), a satellite communications technology and services provider, between 2012 and 2015. Between 2005 and 2012 Mr. Antebi also served in
several executive roles at Gilat Satellite Networks. Between 2003 and 2005 Mr. Antebi served as the CEO of Clariton Networks, a start-up company,
providing services in cellular coverage. Prior to that Mr. Antebi has served in a variety of roles at Gilat Satellite Networks, Tadiran, a provider of radio
communications for military applications and for Rafael, Israel Ministry of Defense. Mr. Antebi currently serves on the board and advisory boards of several
companies, including Effective Sapce Services, NSL, HiSky, Xinow and LiveU. Mr. Antebi holds a B. Sc., Electrical Engineering (Communications), Summa
Cum Laude, and a M.Sc., Electrical Engineering (Information Theory), both from the Technion, Israel.
Alberto Sessa has served as our Chief Financial Officer since January 2017. Prior to joining Allot, since 2009, Mr. Sessa served as the CFO of Flash
Networks, a leading provider of optimization solutions. Prior to joining Flash, between 2007 and 2009 Mr. Sessa served as the CFO of ARA Minerals. He
also served as Vice President, Finance at Amdocs Management Ltd. between 2000 and 2007. Between 1996 and 1999, Mr. Sessa served as Group Corporate
CFO at a privately held international group of companies. Mr. Sessa holds a B.A. in Statistics and Economics and an M.B.A., both from the Hebrew
University in Jerusalem.
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, both from the
Hebrew University of Jerusalem.
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 a B.A. in Psychology and Economics from Tel Aviv University and an
M.B.A. in organizational behavior from Tel Aviv University.
Ronen Priel has served as Vice President—Product Management & Marketing, since August 2016. Prior to joining Allot, Mr. Priel served as VP Business
Management and Strategy, Video Intelligence Solutions (VIS) Division of Verint (NADAQ: VRNT), a global leader in Actionable Intelligence® solutions
with a focus on customer engagement optimization, security intelligence, and fraud, risk and compliance, since 2014. Between 2008 and 2014 Mr. Priel
served in a number of executive roles in Verint. Between 2006 and 2008 he served as Senior Director of Products Marketing at Pontis Ltd. and between 1999
and 2004 Mr. Priel served as Product Line Manager & Director of Marketing at ECtel Ltd. Mr. Priel holds a BA in computer science from the Israeli Open
University and an M.B.A. from Insead, France.
Rael Kolevsohn joined our company in 2014 and serves as our Vice President—Legal Affairs, General Counsel, and Company Secretary. Prior to joining us,
he served as Vice President and General Counsel of Radvision Ltd. from 2007 to 2014. From 1998 to 2007, Mr. Kolevsohn served as General Counsel and
Vice President of Gilat Satellite Networks Ltd. after joining Gilat as Legal Counsel. From 1994 to 1998, he completed his legal internship and worked as an
Associate at the Tel Aviv law firm of Yossifof, Amir Cohen & Co. Mr. Kolevsohn is a member of the Israel Bar Association and holds an LL.B. degree, with
honors, from the Hebrew University in Jerusalem.
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.
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Yossi Abraham serves as our Vice President—Business Development since August 2015. Mr. Abraham is responsible for leading global business
development initiatives. Prior to joining us, between 2014 and 2015, Mr. Abraham served as Chief Marketing Officer of Excelacom Inc., services and
solutions company, providing consulting, professional services and products elements to communications and media providers. Before that, Mr. Abraham
held various positions in Comverse Inc., between 2000 and 2014. His last position with Comverse Inc. was Vice President, Global Services Sales and
Marketing. Mr. Abraham holds a B.A. in Logistics and Economics from the Bar Ilan University (Cum Laude) and a M.B.A. in marketing from the Tel Aviv
University (Magna Cum Laude).
Shaked Levy has served as our Vice President—Customer Success and Growth since February 2016. Prior to joining us Mr. Levy held various managerial
positions between 2002 and 2016 at Verint Ltd., a provider of actionable intelligence solutions, most recently as a Senior Vice President – Customer Care &
R&D Group, Communications & Cyber Intelligence solutions. Mr. Levy holds an M.B.A. from the Bar Ilan University, a B.A. in Social Sciences, Business
Management, from the Open University and a Computers and Electronics Technician diploma, from the Mosinzon college.
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 2016 consisted of approximately $3 million
in salary, fees, bonus, commissions and directors’ fees, including amounts we expended for automobiles made available to our officers, but excluding equity
based compensation, dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by
companies in Israel. This amount includes approximately $0.6 million set aside or accrued to provide pension, severance, retirement or similar benefits or
expenses.
In 2016, we paid or accrued to the chairman of the board of directors, Mr. Yigal Jacoby, an annual fee of ILS 146,880 (approximately $38,200). During such
time we also paid and accrued an annual fee of ILS 251,735 (approximately $65,470) to our former chairman of the board of directors, Mr. Shraga Katz. In
addition, we paid our directors, Itzhak Danziger and Rami Hadar ILS 79,440 (approximately $20,660) and ILS 81,690 (approximately $21,250), respectively,
and we paid or accrued to each of our outside directors, Nurit Benjamini, Steven Levy and Ronnie Keneth, as permitted by the Companies Law, an annual fee
of ILS 119,190 (approximately $31,000), ILS 117,690 (approximately $30,610) and ILS 123,690 (approximately $32,170), respectively. The above fees for
each of our directors (other than Yigal Jacoby) have included a per meeting attendance fee of ILS 3,750 (approximately $975) for any meeting he or she
attended in person, ILS 2,250 (approximately $585) for any meeting he or she attended by conference call or similar means, and ILS 1,875 (approximately
$488) for any written resolution of the Board executed by such director. Our directors are also typically granted upon election an agreed amount of equity
based awards, which vest over a period of not less than three years, and 10,000 RSUs, as of every third annual general meeting following the respective
director's initial election.
In 2016, we paid or accrued to our former President and Chief Executive Officer, Mr. Andrei Elefant, an annual salary of ILS 1,731,662 (approximately
$450,370).
During 2016, our officers and directors received, in the aggregate, options and RSUs to purchase 340,900 ordinary shares under our equity incentive plans.
The options (excluding RSUs) have a weighted average exercise price of approximately $5.34 and expire seven years after the date the options were granted.
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Compensation of our Five Most Highly Compensated Office Holders
Summary Compensation Table
The table and summary below outline the compensation granted to our five most highly compensated office holders during or with respect to the year ended
December 31, 2016. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, “compensation” includes base salary, discretionary and non-equity incentive bonuses, equity-based
compensation, payments accrued or paid in connection with retirement or termination of employment, and personal benefits and perquisites such as car,
phone and social benefits paid to or earned by each Covered Executive during the year ended December 31, 2016.
Name and Principal Position (1)
Andrei Elefant, Former President and Chief Executive Officer
Gary Drutin, former Chief Customer Officer
Amir Hochbaum, VP R&D
Tomas Gomez, Regional VP Sales EMEA South
Shmuel Arvatz, former CFO
Salary ($)
Bonus ($) (2)
Equity-Based
Compensation
($) (3)
All Other
Compensation
($) (4)
233,963
242,766
202,453
346,578
217,101
20,000
625,876
438,496
191,243
50,898
109,985
123,904
69,616
67,312
46,903
Total ($)
1,003,743
750,878
461,008
397,476
373,989
(1) Unless otherwise indicated herein, all Covered Executives are full-time employees of Allot.
(2) Amounts reported in this column represent annual incentive bonuses granted to the Covered Executives based on performance-metric based formulas set
forth in their respective employment agreements.
(3) Amounts reported in this column represent the grant date fair value computed in accordance with accounting guidance for stock-based compensation.
For a discussion of the assumptions used in reaching this valuation, see Note 12 to our consolidated financial statements for the year ended December
31, 2016, included herein.
(4) Amounts reported in this column include personal benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites
may include, to the extent applicable to the respective Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers
Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, vacation, car or car allowance, medical
insurances and benefits, risk insurance (e.g., life insurance or work disability insurance), telephone expense reimbursement, convalescence or recreation
pay, relocation reimbursement, payments for social security, and other personal benefits and perquisites consistent with the Company’s guidelines. All
amounts reported in the table represent incremental cost to the Company.
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.
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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 2016, and will be in effect for a period of three years following approval. Our compensation policy provides:
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Objectives: To attract, motivate and retain highly experienced personnel who will provide leadership for Allot’s success and enhance shareholder
value, and to promote for each executive officer an opportunity to advance in a growing organization.
Compensation instruments: Includes base salary; 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 (base salary, benefits and perquisites) and
variable compensation (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 maximum bonus opportunities, 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.
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 shall review and reassess the adequacy of the
Compensation Policy from time to time, as required by the Companies Law.
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C. Board Practices
Corporate Governance Practices
As a foreign private issuer, we are permitted under NASDAQ 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 appointments are 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.
Our Class II directors, Itzhak Danziger and Miron Kenneth, will hold office until our annual meeting of shareholders to be held in 2017. Our Class III
directors, Yigal Jacoby (who also serves as our Chairman of the board of directors) and Rami Hadar, will hold office until our annual meeting of shareholders
to be held in 2018. As disclosed in the Notice of Annual General Meeting of Shareholders published by the Company on March 15, 2017, at the 2017 Annual
General Meeting, Nadav Zohar will be nominated for election by our shareholders as a Class I director to hold office until the 2019 Annual General Meeting
of Shareholders (or, until the 2018 Annual General Meeting of Shareholders, if Proposal 1 on such meeting's agenda relating to the amendment of the Articles
of Association of the Company to de-classify the Board, as detailed in the notice of Annual General Meeting of Shareholders, previously published by the
Company, is approved). 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.
Under the Companies Law, a director (including an outside director) must declare in writing that he or she has the required skills and the ability to dedicate
the time required to serve as a director in addition to other statutory requirements. A director who ceases to meet the statutory requirements for his or her
appointment must immediately notify us of the same and his or her office will become vacated upon such notice.
Under our articles of association the approval of a special majority of the holders of at least 75% of the voting rights present and voting at a general meeting is
generally required to remove any of our directors (other than the outside directors) from office. The holders of a majority of the voting power present and
voting at a meeting may elect directors in their stead or fill any vacancy, however created, in our board of directors. In addition, vacancies on our board of
directors, other than a vacancy in the office of an outside director, may be filled by a vote of a simple majority of the directors then in office. A director so
chosen or appointed will hold office until the next annual general meeting of our shareholders, unless earlier removed by the vote of a majority of the
directors then in office prior to such annual meeting. See “—Outside Directors” for a description of the procedure for election of outside directors.
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Outside Directors
Qualifications of Outside Directors
The Companies Law requires companies incorporated under the laws of the State of Israel with shares listed on a stock exchange, including the NASDAQ
Global Select Market, to appoint at least two outside directors. Our outside directors are Ms. Benjamini and Mr. Levy. 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 Exchange Act
and the standards of the NASDAQ Stock Market rules for membership on the audit committee and also has financial and accounting expertise as defined in
the Companies Law, then the other outside directors are only required to meet the professional qualifications requirement. Under applicable regulations, a
director with financial and accounting expertise is a director who, through his or her education, professional experience and skill, has a high level of
proficiency in and understanding of business accounting matters and financial statements. He or she must be able to thoroughly comprehend the financial
statements of the company and initiate debate regarding the manner in which financial information is presented.
Election of Outside Directors
Outside directors are elected by a majority vote at a shareholders’ meeting, provided that either:
·
·
the majority of shares voted at the meeting, including at least a majority of the shares of non-controlling shareholder(s) and shareholders who do
not have a personal interest in the election of the outside director (other than a personal interest that does not result from the shareholder's
relationship with a controlling shareholder), voted at the meeting, excluding abstentions, vote in favor of the election of the outside director; or
the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the election of the outside
director (excluding a personal interest that does not result from the shareholder's relationship with a controlling shareholder) voted against the
election of the outside director does not exceed two percent of the aggregate voting rights in the company.
The initial term of an outside director is three years, and he or she may be reelected to up to two additional terms of three years each at a shareholders’
meeting, subject to the voting threshold set forth above. Thereafter, an outside director may be reelected for additional periods of up to three years each, only
if the company's audit committee and board of directors confirm that, in light of the outside director’s expertise and special contribution to the work of the
board of directors and its committees, the reelection for such additional period is beneficial to the company. Outside directors may be removed by the same
voting threshold as is required for their election, or by a court, and only if the outside directors cease to meet the statutory qualifications for their appointment
or if they violate their duty of loyalty to the company. The tenure of outside directors, like all directors, may also be terminated by a court under limited
circumstances. If the vacancy of an outside director position causes the company to have fewer than two outside directors, a company’s board of directors is
required under the Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint a new outside director. Each
committee of a company’s board of directors which is authorized to exercise the board of directors’ authorities is required to include at least one outside
director, except for the audit committee and the compensation committee, which are required to include all outside directors.
57
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, six of whom are independent under the NASDAQ Stock Market rules. Specifically, our board has determined that Ms. Nurit
Benjamini, Mr. Itzhak Danziger, Mr. Yigal Jacoby, Mr. Steven Levy Mr. Miron Kenneth and Mr. Nadav Zohar 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. See “ITEM 16G. Corporate Governance”
for additional information.
Audit Committee
Companies Law Requirements
Under the Companies Law, the board of directors of any public company must appoint an audit committee comprised of at least three directors, including all
of the outside directors. The following persons may not be appointed as members of the audit committee:
·
·
·
the chairperson of the board of directors;
a controlling shareholder or a relative of a controlling shareholder (as defined in the Companies Law); or
any director who is engaged by, or provides services on a regular basis to the company, the company’s controlling shareholder or an entity
controlled by a controlling shareholder or any director who generally relies on a controlling shareholder for his or her livelihood.
The Companies Law requires the majority of the audit committee members to be independent directors (as defined in the Companies Law), and the chairman
of the audit committee is required to be an outside director. Any person disqualified from serving as a member of the audit committee may not be present at
the audit committee meetings, unless the chairperson of the audit committee has determined that this person is required to be present for a particular matter.
The Companies Law provides for certain other exclusions to this provision.
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.
Each of the members of our audit committee is “independent” under the relevant NASDAQ Stock Market rules and as defined in Rule 10A-3(b)(1) under the
Exchange Act, which is different from the general test for independence of board and committee members.
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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 Stock Market, which include:
·
·
·
retaining and terminating the company’s independent auditors, subject to shareholder ratification;
pre-approval of audit and non-audit services provided by the independent auditors; and
approval of transactions with office holders and controlling shareholders, as described above, and other related-party transactions.
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. Miron Kenneth. The financial experts on the audit committee pursuant to the
definition of the SEC are all members of the audit committee.
59
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. Miron Kenneth. 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 and RSUs 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.
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.
60
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
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 which have been filed in 2016 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.
61
D. Employees
As of December 31, 2016, we had 440 employees of whom 254 were based in Israel, 95 in Europe, 19 in North America, 19 in Latin America and the
remainder in Asia, Africa 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
2014
December 31,
2015
2016
18
179
210
55
462
17
209
235
56
517
16
163
216
45
440
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.
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 1, 2017 by (i) each of our directors,
(ii) each of our executive officers and (iii) all of our executive officers and directors serving as of March 1, 2017, 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
Nurit Benjamini
Itzhak Danziger
Rami Hadar
Nadav Zohar
Steven D. Levy
Yigal Jacoby
Miron Kenneth
Executive Officers
Erez Antebi
Alberto Sessa
Amir Hochbaum
Anat Shenig
Ronen Priel
Rael Kolevsohn
Pini Gvili
Shaked Levy
Yossi Avraham
All directors and executive officers as a group
62
Number of
Shares
Beneficially Held(1) Percent of Class
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
359,310
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
1.08%
*
Less than one percent of the outstanding ordinary shares.
(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 1, 2017 through the exercise of any option or pursuant to vesting of RSU. Ordinary shares subject to options that are currently
exercisable or exercisable within 60 days of March 1, 2017 and outdstanding RSUs vesting within 60 days of March 1, 2017, are deemed outstanding
for computing the ownership percentage of the person holding such options or RSUs, 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
33,114,380 ordinary shares outstanding as of March 1, 2017 pursuant to Rule 13d-3(d)(1)(i) under the Exchange Act.
Our directors and executive officers hold, in the aggregate, 932,009 outstanding options and RSUs. The said amount includes options currently exercisable for
345,350 ordinary shares, as of March 1, 2017. The options (excluding RSUs) have a weighted average exercise price of $7.92 per share and have expiration
dates until 2024.
Share Option Plans
The following table summarizes our equity incentive plans, which have outstanding awards as of March 1, 2017:
Plan
2016 incentive compensation plan
2003 incentive compensation plan
1997 incentive compensation plan
Share reserved
grants, net (*)
Option and RSU
Outstanding
options and RSUs
Options
outstanding
exercise price
Date of
expiration
691,564
-
-
6,232,338
2,987,330
766,071
2,859,868
-
-
0.028-27.58 1/3/2017-6/11/2024
-
-
-
-
Options
exercisable
1,122,195
-
-
(*) “Option and RSU grants, net” is calculated by subtracting options and RSUs expired or forfeited.
As of March 1, 2017 we had 33,114,380 ordinary shares outstanding. We have adopted three share option plans. Under our share option plans, as of March 1,
2017, there were 2,859,868 outstanding options and RSUs. The said amount includes options currently exercisable for 1,122,195 ordinary shares. As of
March 1, 2017, 691,564 shares remained available for future grants under the 2016 Plan (as described below) Upon issuance, such ordinary shares may be
freely sold in the public market, except for shares held by affiliates who have certain restrictions on their ability to sell. The options (excluding RSUs) have a
weighted average exercise price of $8.06 per share.
We will only grant options, RSUs or other equity incentive awards under the 2016 Incentive Compensation Plan, although previously-granted options will
continue to be governed by our other plans.
63
2016 Incentive Compensation Plan, as amended (formerly, 2006 Incentive Compensation Plan)
The Allot Communications Ltd. 2006 Incentive Compensation Plan (the “2006 Plan”) was adopted by the Board on October 29, 2006 and became effective
immediately prior to the effective date of the Company’s IPO. Effective October 28, 2016, the Board of Directors of the Company amended and restated the
2006 Plan to extend the term of the 2006 Plan by ten years and to rename the 2006 Plan as the Allot Communications Ltd. 2016 Incentive Compensation Plan
(the “2016 Plan”). The 2016 Plan will remain in effect, subject to the right of the Board of Directors to amend or terminate the 2016 Plan at any time
pursuant to the terms of the 2016 Plan, until all shares reserved for issuance under the 2016 Plan shall have been delivered, and any restrictions on such
shares shall have lapsed, provided that in no event may an award under the 2016 Plan be granted on or after October 27, 2026.
The 2016 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 2016 Plan will increase on the first day of each fiscal year during the term of the 2016 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 2016 Plan is also subject to adjustment if particular capital
changes affect our share capital. Ordinary shares subject to outstanding awards under the 2016 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 2016 Plan. As of March 1, 2017, there were
2,859,868 outstanding options and RSUs under the 2016 Plan and 691,564 ordinary shares remained reserved for future grants under the 2016 Plan.
Israeli participants in the 2016 Plan may be granted options and/or restricted stock units subject to Section 102 of the Ordinance. Section 102 of the
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 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 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 2016 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 2016 Plan and it selects which of our and our subsidiaries’ and affiliates’ eligible employees,
directors and/or consultants receive options, RSUs or other awards under the 2016 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 2016 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, RSUs 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, RSUs
and other awards, in any such case, generally based on the consideration received by our shareholders in the transaction.
64
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 1, 2017, 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.
Zohar Zisapel (2)
Migdal Insurance & Financial holdings Ltd (3)
FMR LLC and Abigail P. Johnson (4)
Clal Insurance Enterprises Holdings Ltd. (5)
Soros Fund Management LLC (6)
______________
Ordinary Shares
Beneficially
Owned(1)
Percentage of
Ordinary Shares
Beneficially
Owned
2,842,378
2,391,117
3,227,461
2,437,644
3,336,166
8.6%
7.2%
9.7%
7.4%
10.1%
(1) As used in this table, “beneficial ownership” means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of
any security. For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired within 60 days from
March 1, 2017 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
33,114,380 ordinary shares outstanding as of March 1, 2017.
(2)
(3)
(4)
(5)
(6)
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 filed on January 26, 2017, Midgal Insurance & Financial Holdings Ltd reported that it had shared voting power and
dispositive power over these shares. Of these shares, 2,391,117 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: 1,222,490 shares are held by Profit participating life assurance accounts; 947,042 shares are held by
Provident funds and companies that manage provident funds and 200,577 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. In addition, 21,008, shares are beneficially held for their own account (Nostro account). 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 14, 2017. FMR LLC reported that it had sole voting power over 1,885,000 shares and sole
dispositive power over 3,227,461 shares and Abigail P. Johnson, director, vice-chairman and chief executive officer of FMR LLC had sole
dispositive power over 3,227,461 shares. The address of the reporting person is 245 Summer Street, Boston, Massachusetts 02210.
Based on information provided to us by Clal Insurance Enterprises Holdings Ltd. (“Clal”) on March 1, 2017 Clal had shared voting and
dispositive power over 2,437,644 of our shares as of such date. The address of the reporting person is 36 Raoul Wallenberg Street, Tel Aviv
37070, Israel.
Based on a Schedule 13G filed on February 2, 2017, each of Soros Fund Management LLC, George Soros and Robert Soros reported that they
held sole voting and dispositive power over 3,336,166 shares. The address for the reporting persons is 250 West 55th Street, 38th Floor, New
York, New York 10019.
65
Significant Changes in the Ownership of Major Shareholders
As of March 1, 2017, Zohar Zisapel was the beneficial owner of 2,842,378, or 8.6%, of our ordinary shares. His beneficial ownership did not change since
December 31, 2010.
As of March 1, 2017, Migdal Insurance & Financial Holdings Ltd was the beneficial owner 2,391,117 shares, or 7.2% of our ordinary shares. As of March 1,
2016, Migdal Insurance & Financial Holdings Ltd was the beneficial owner of 2,573,259, or 7.7%, of our ordinary shares. As of March 1, 2015, Migdal
Insurance & Financial Holdings Ltd was the beneficial owner of 2,484,436, or 7.4%, of our ordinary shares.
As of March 1, 2017, FMR LLC was the beneficial owner of 3,227,461, or 9.7% of our ordinary shares. As of March 1, 2016, FMR LLC was the beneficial
owner of 2,742,676, or 8.2% of our ordinary shares. As of March 1, 2015, FMR LLC was the beneficial owner of 3,250,691, or 9.9%, of our ordinary shares.
As of March 1, 2017, T. Rowe Price Associates, Inc. ceased to be the beneficial owner of 5% or more of our ordinary shares. As of March 1, 2016, T. Rowe
Price Associates, Inc. was the beneficial owner of 1,866,840, or 5.5%, of our ordinary shares. As of March 1, 2015, T. Rowe Price Associates, Inc. was the
beneficial owner of 1,531,880, or 4.6%, of our ordinary shares.
As of March 1, 2017. Alyeska Investment Group, L.P. ceased to be the beneficial owner of 5% or more of our ordinary shares. As of March 1, 2016, Alyeska
Investment Group, L.P. was the beneficial owner of 1,842,720, or 5.5%, of our ordinary shares.
As of March 1, 2017, Soros Fund Management LLC was the beneficial owner of 3,336,166, or 10.1% of our ordinary shares.
As of March 1, 2017, Clal Insurance Enterprises Holdings Ltd. was the beneficial owner of 2,437,644, or 7.4% of our ordinary shares
Record Holders
As of March 1, 2017, there were 17 record holders of ordinary shares, of which eight consisted of United States record holders holding approximately 99.47%
of our outstanding ordinary shares. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are
beneficial owners, but whose shares are held in street name by brokers and other nominees. 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.
66
Agreements with Directors and Officers
Engagement of Officers. We have entered into employment 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 2016 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 a member of the board of directors of Galil Software Ltd and holds less than 10% of its shares. We have engaged Galil
Software since 2010 to provide us with certain quality assurance services in the ordinary course of our business. Since Janaury 1, 2016 and through the date
of the filing of this annual report, we did not pay any fees to Galil Software.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8: Financial Information
A. Consolidated Financial Statements and Other Financial Information.
Consolidated Financial Statements
For our audited consolidated balance sheets as of December 31, 2016 and 2015, 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, 2016, please see pages F-3 to F-46 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.
67
B. Significant Changes
Since the date of our audited financial statements included elsewhere in this annual report, there have not been any significant changes in our financial
position
ITEM 9: The Offer and Listing
Not applicable, except for Items 9.A.4 and 9.C, which are detailed below.
Stock Price History
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 each of the NASDAQ Global Select Market, in U.S. dollars, and the Tel Aviv Stock
Exchange (since December 2012), in ILS, for the periods indicated below:
Year
2012
2013
2014
2015
2016
2017 (through March 1, 2017)
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Most Recent Six Months
March 2017 (through March 1, 2017)
February 2017
January 2017
December 2016
November 2016
October 2016
September 2016
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
28.03 $
18.28
18.09
9.85
5.89
5.67
15.55 NIS
11.01
7.88
4.41
4.24
4.75
111.60 NIS
68.12
63.99
39.9
23.50
21.53
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
9.85 $
9.41
7.34
6.23
8.71 NIS
6.92
4.41
4.82
39.9 NIS
36.9
27.83
24.21
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
$
5.89
5.65
5.63
5.66
4.24 NIS
4.53
4.52
4.50
23.50 NIS
20.50
21.75
20.80
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
4.94
5.36
5.67
5.09
5.14
5.66
5.50
4.86 NIS
4.78
4.75
4.50
4.58
5.14
5.00
18.22 NIS
20.00
21.53
18.98
20.29
20.80
20.71
$
68
58.56
39.20
31.13
18.21
16.84
17.58
33.62
26.36
18.21
18.83
16.84
17.56
17.33
17.67
17.58
17.90
18.00
17.79
17.67
19.97
19.00
Markets
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.
As of March 1, 2017, the last reported sale price of our ordinary shares on the Nasdaq Global Select Market was 4.92 per share and on the Tel Aviv Stock
Exchange was 18.01 per share.
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 ILS 0.10 per share. As of March 1, 2017, we had 33,114,380 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.”
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.
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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.
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.
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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.
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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.
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.
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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.”
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company. Its address is 6201 15th Avenue, Brooklyn, New York
11219, and its telephone number is (800) 937-5449.
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C. Material Contracts
We have not been party to any material contracts within the two years prior to the date of this annual report, other than contracts entered into in the ordinary
course of business, or as otherwise described below in this ITEM 10.C.
Material Contract
Agreement with Flex (Israel) Ltd. and Amendment
No. 1 thereto
Agreement with Optenet S.A
Non-Stabilized Lease Agreement
D. Exchange Controls
Location
“ITEM 4.B: Information on the Company–Business Overview–Manufacturing.”
“ITEM 5.A: Operating and Financial Review and Prospects-Operating Results”
“ITEM 4: Information on Allot – D. Property, Plant and Equipment”
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.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax. In 2016 and 2015, the corporate tax rate was 25% and 26.5%, respectively. The corporate tax rate for
2017 is scheduled to be 24% and the corporate tax rate for 2018 and thereafter is scheduled to be 23%. However, the effective tax rate payable by a company
that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise (as discussed below) may be considerably less. Capital
gains derived by an Israeli company are generally subject to the prevailing corporate tax rate.
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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 Ordinance. Expenditures from research and development that not so approved are
deductible in equal amounts over three years, according to the Ordinance.
From time to time we may apply the Israel Innovation Authority 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 which is located in Israel” 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, are deductible in equal amounts over three years.
Under certain tax laws and regulations, an “Industrial Enterprise” may be eligible for special depreciation rates for machinery, equipment and buildings.
These rates differ based on various factors, including the date the operations begin and the number of work shifts. An “Industrial Company” owning an
approved enterprise may choose between these special depreciation rates and the depreciation rates available to the approved enterprise.
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We can give no
assurance that we qualify or will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.
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Israeli Transfer Pricing Regulations
On November 29, 2006, the Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Ordinance, came into
effect (the “TP Regulations”). Section 85A of the 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 did not have a material effect on us.
Tax Benefits under the Law for Encouragement of Capital Investments, 1959
Tax Benefits Prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April 1, 2005), generally referred to as the Investments Law,
provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Commerce of
the State of Israel, be designated as an “Approved Enterprise.” The Investment Center bases its decision as to whether or not to approve an application,
among other things, on the criteria set forth in the Investments Law and regulations, the policy of the Investment Center, and the specific objectives and
financial criteria of the applicant. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its
financial scope, including its capital sources, and by its physical characteristics, such as the equipment to be purchased and utilized pursuant to the program.
The Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs. The
tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by
the Approved Enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided
that such income is generated within the Approved Enterprise’s ordinary course of business. If a company has more than one approval or only a portion of its
capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. The tax benefits under the Investments Law
are not, generally, available with respect to income derived from products manufactured outside of Israel. In addition, the tax benefits available to an
Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of
tax benefits, plus a consumer price index linkage adjustment and interest.
The Investments Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an
Approved Enterprise program in the first five years of using the equipment.
Taxable income of a company derived from an Approved Enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate
tax rate, for the benefit period.
Should we derive income from sources other than the Approved Enterprise during the relevant period of benefits, such income will be taxable at the regular
corporate tax rates.
Under certain circumstances (as further detailed below), the benefit period may extend to a maximum of ten years from the commencement of the benefit
period.
A company may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from
the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year the company derives taxable income
under the program, after the commencement of production, depending on the geographic location of the Approved Enterprise within Israel, and such company
will be eligible for a reduced tax rate for the remainder of the benefits period. The year’s limitation does not apply to the exemption period.
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A company that has elected the alternative package of benefits, such as us, that subsequently pays a dividend out of income derived from the approved
enterprise(s) during the tax exemption period will be subject to corporate tax in the year the dividend is distributed in respect of the gross amount
distributed, at the rate which would have been applicable had the company not elected the alternative package of benefits, (generally 10%-25%, depending on
the percentage of the company’s ordinary shares held by foreign shareholders). The dividend recipient is subject to withholding tax at the reduced rate of 15%
applicable to dividends from approved enterprises, if the dividend is distributed during the tax exemption period or within twelve years thereafter. In the
event, however, that the company qualifies as a foreign investors’ company, there is no such time limitation.
As of December 31, 2016, we believe that we met the aforementioned conditions.
Foreign Investors' Company (“FIC”)
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a foreign investors’ company. A foreign investors’
company is a company of which, among other criteria, more than 25% of its share capital and combined share and loan capital is owned by non-Israeli
residents. A company that qualifies as a foreign investors’ company and has an approved enterprise program is eligible for tax benefits for a ten-year benefit
period. As specified above, depending on the geographic location of the approved enterprise within Israel, income derived from the approved enterprise
program may be entitled to the following:
·
·
Extension of the benefit period to up to ten years.
An additional period of reduced corporate tax liability at rates ranging between 10% and 25%, depending on the level of foreign (that is, non-
Israeli) ownership of our shares.
Subject to applicable provisions concerning income under the alternative package of benefits, dividends paid by a company are considered to be attributable
to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates,
excluding any tax-exempt income. Under the Investments Law, a company that has elected the alternative package of benefits is not obliged to distribute
retained profits, and may generally decide from which year’s profits to declare dividends.
In 1998, the production facilities of the Company related to its computational technologies were granted the status of an “Approved Enterprise” under the
Law. In 2004, an expansion program was granted the status of “Approved Enterprise.” According to the provisions of the Law, the Company has elected the
alternative package of benefits and has waived Government grants in return for tax benefits.
Tax Benefits under the 2005 Amendment
An amendment to the Investments Law, generally referred as the 2005 Amendment, effective as of April 1, 2005 has significantly changed the provisions of
the Investments Law. The amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise. The 2005
Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved
prior to December 31, 2004, and therefore to benefits included in any certificate of approval that was granted before the 2005 Amendment came into effect,
which will remain subject to the provisions of the Investments Law as they were on the date of such approval.
However, a company that was granted benefits according to Section 51 of the Investments Law (prior the 2005 Amendment) will not be allowed to choose a
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.
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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 tax
routes, which may be applicable to us:
·
·
Similar to the aforementioned alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on
the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits
period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of
foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the dividend that we may be
distributed. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the
Benefited Enterprise; and
A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on
income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a
rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
Generally, a company that is Abundant in Foreign Investment (owned by at least 74% foreign shareholders and has undertaken to invest a minimum sum of
$20 million in the Benefited 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 requires a minimal investment of ILS 5.0
million by foreign investors. Furthermore, such definition also includes the purchase of shares of a company from another shareholder, provided that the
company’s outstanding and paid-up share capital exceeds ILS 5.0 million. Such changes to the aforementioned definition took effect retroactively from 2003.
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As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon
distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.
We elected the years of 2006 and 2009 as “year of election” under the Investments Law after the 2005 Amendment.
We expect that a substantial portion of any taxable operating income that we may realize in the future will be derived from our approved enterprise status.
As of December 31, 2016, we did not generate exempt income under the provisions of the Investments Law.
Tax Benefits under the 2011 Amendment
As of January 1, 2011 new legislation amending the Investment Law came into effect (the “2011 Amendment”). The 2011 Amendment introduced a new
status of “Preferred Company” and “Preferred Enterprise”, replacing the then existing status of “Benefited Company” and “Benefited Enterprise”. Similar to a
“Benefited 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 legislation the requirement for a minimum investment in productive assets was cancelled.
Under the 2011 Amendment, a uniform corporate tax rate applies to all qualifying income of the Preferred Company, as opposed to the former law, which was
limited to income from the Approved Enterprises and Benefited Enterprise during the benefits period. The uniform corporate tax rate was 9% in areas in
Israel designated as Development Zone A and 16% elsewhere in Israel during 2015 and 2016, an amendment to the Investment law from December 2016
reduced the tax rate in Development Zone A to 7.5% starting from 2017 while the tax rate in other areas remains 16%.
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 – 20% in 2014 and onwards (iii) non-Israeli resident - 20% in 2014 and
onwards, subject to a reduced tax rate under the provisions of an applicable double tax treaty.
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 Benefited 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 have examined the possible effect, if any, of these provisions of the 2011 Amendment on our
financial statements and have decided, at this time, not to opt to apply the new benefits under the 2011 Amendment.
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Tax Benefits under the 2016 Amendment
In December 2016 new legislation amended the Investment Law (the “2016 Amendment”). Under the 2016 Amendment a new status of “Technological
Preferred Enterprise” was introduced to the Investment Law.
Under the 2016 Amendment two new tracks are available:
·
·
Technological Preferred Enterprise – an enterprise which is part of a consolidated group with consolidated revenues of less than ILS 10 billion. A
Technological Preferred Enterprise which is located in areas other than Development Zone A will be subject to tax at a rate of 12% on profits derived
from intellectual property, and a Technological Preferred Enterprise in Development Zone A will be subject to tax at a rate of 7.5%; and
Special Technological Preferred Enterprise – an enterprise which is part of a consolidated group with consolidated revenues exceeding ILS 10
billion. Such an enterprise will be subject to tax at a rate of 6% on profits derived from intellectual property regardless of the enterprise’s
geographical location.
Any dividends distributed to foreign companies, as defined in the Investment law, derived from income from the Technological Preferred Enterprise will be
subject to tax at a rate of 4%.
The implementation of the new tracks under the 2016 Amendment is subject to regulations to be promulgated by the Finance Minister by March 31, 2017. As
such regulations have not yet been promulgated and as the definitive criteria to determine the tax benefits have not yet been established, it cannot be
concluded that the legislation with respect to Technological Preferred Enterprises had been enacted or substantively enacted as of that date. Accordingly, the
above changes in the tax rates were not taken into account in the computation of deferred taxes as of December 31, 2016.
Special Provisions Relating to Tax Reporting in United States Dollars
Under the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli
Consumer Price Index ("Israeli CPI"). Accordingly, until 2011, results for tax purposes were measured in terms of earnings in ILS after certain adjustments
for increases in the Israeli CPI. Commencing in the taxable year 2012, we have elected to measure our taxable income and file our tax return in United States
Dollars, 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.
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.
As of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% 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 30%. 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 30%. Israeli companies are
subject to the Corporate Tax rate on capital gains derived from the sale of shares. 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).
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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.
In addition, as of January 1, 2013, shareholders that are individuals who have taxable income that exceeds ILS 800,000 in a tax year (linked to the CPI each
year - ILS 803,520 in 2016), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their taxable income for such tax year
which is in excess of such amount. Starting from January 1, 2017, the High Income tax rate has increased to 3% and its threshold has been lowered to 640,000
ILS. For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions.
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 more than 25% in such non-Israeli corporation, or (ii)
is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to
the withholding of Israeli tax at the source.
Pursuant to the Convention between the government of the United States and the government of Israel with respect to taxes on income, as amended (the
“U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as
a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-
Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such U.S. resident holds, directly or
indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject
to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the
sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such U.S.
resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
United States Federal Income Taxation
The following is a description of the material United States federal income tax consequences of the ownership and disposition of our ordinary shares. This
description addresses only the United States federal income tax considerations of holders that hold such ordinary shares as capital assets. This description
does not address tax considerations applicable to holders that may be subject to special tax rules, including:
·
·
·
·
·
financial institutions or insurance companies;
real estate investment trusts, regulated investment companies or grantor trusts;
dealers or traders in securities or currencies;
tax-exempt entities;
certain former citizens or long-term residents of the United States;
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·
·
·
·
·
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 individual resident of the United States;
corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United
States or any state thereof, including the District of Columbia;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or if (1) a court within
the United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to
control all of the substantial decisions of such trust.
A “Non-U.S. Holder” is a beneficial owner of our ordinary shares that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership for
United States federal income tax purposes).
If a partnership (or any other entity treated as a partnership for United States federal income tax purposes) holds our ordinary shares, the tax treatment of a
partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult
its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to the United States federal, state, local and foreign tax consequences of owning and disposing of
our ordinary shares.
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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. In addition, for periods in which we are a “United Stated-owned foreign corporation”, a portion of dividends
paid by us may be treated as U.S. source solely for purposes of the foreign tax credit. We would be treated as a United States-owned foreign corporation if
50% or more of the total value or total voting power of our stock is owned, directly, indirectly or by attribution, by United States persons. To the extent any
portion of our dividends is treated as U.S. source income pursuant to this rule, the ability of a U.S. Holder to claim a foreign tax credit for any Israeli
withholding taxes payable in respect of our dividends may be limited. A U.S. Holder entitled to benefits under the United States-Israel Tax Treaty may,
however, elect to treat any dividends as foreign source income for foreign tax credit purposes if the dividend income is separated from other income items for
purposes of calculating the U.S. Holder’s foreign tax credit. 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.(or, if required by an applicable income tax treaty, the
dividends are attributable to a permanent establishment that such holder maintains in the United States).
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.
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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, if required by an applicable income tax treaty,
the gain is attributable to a permanent establishment that you maintain 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 in future years will depend on our income, assets and
activities in each of those years. Therefore there can be no assurance that we will not be considered a PFIC for any taxable year. While public companies
often employ a market capitalization method to value their assets, the IRS has not issued guidance concerning how to value a foreign public company’s assets
for PFIC purposes. 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. In certain circumstances, including volatile market conditions, it may be appropriate to employ alternative methods to more accurately
determine the fair market value of our assets other than the market capitalization method. Given the volatility of the capital markets in recent years, we have
obtained an independent valuation of our company for the 2016 tax year, as well as an opinion from a U.S. tax advisor that, applying the results of the
independent valuation of our company which employed an approach other than the market capitalization approach, and which provided the reasoning
underlying the use of such approach, we should not be a PFIC for the 2016 taxable year. We considered such valuation in determining the value of our total
assets and we also considered the above-referenced opinion. On that basis, we believe that we were not a PFIC for the 2016 tax year. However there can be no
certainty that the IRS will not challenge such a position and determine that based on the IRS’s interpretation of the asset test, we were a PFIC for the 2016 tax
year. If we were a PFIC, and you are a U.S. Holder, 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. A U.S. Holder should consult his, her or its own tax advisor with respect to the potential application of the PFIC rules in his, her or its particular
circumstances.
Because the market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been especially volatile,
and because that market price may affect the determination of whether we will be considered a PFIC, we cannot assure you that we will not be considered a
PFIC for any taxable year.
Under the PFIC rules, unless a U.S. Holder makes one of the elections described in the next paragraphs, a special tax regime will apply to both (a) any
“excess distribution” by us (generally, the U.S. Holder’s ratable portion of distributions in any year which are greater than 125% of the average annual
distribution received by such U.S. Holder in the shorter of the three preceding years or the U.S. Holder’s holding period) and (b) any gain realized on the sale
or other disposition of the ordinary shares. Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject
to tax as if (a) the excess distribution or gain had been realized ratably over the U.S. Holder’s holding period, (b) the amount deemed realized had been
subject to tax in each year of that holding period, and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes
deemed to have been payable in those years. In addition, dividend distributions made to you will not qualify for the lower rates of taxation applicable to long
term capital gains discussed above under “Distributions.”
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Certain elections are available to U.S. Holders of shares that may serve to alleviate some of the adverse tax consequences of PFIC status. If we agreed to
provide the necessary information, you could avoid the interest charge imposed by the PFIC rules by making a qualified electing fund, or a QEF election,
which election may be made retroactively under certain circumstances, in which case you generally would be required to include in income on a current basis
your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gains as long-term capital gain. We do not expect to
provide to U.S. Holders the information needed to report income and gain pursuant to a QEF election, and we make no undertaking to provide such
information in the event that we are a PFIC.
Under an alternative tax regime, you may also avoid certain adverse tax consequences relating to PFIC status discussed above by making a mark-to-market
election with respect to our ordinary shares annually, provided that the shares are “marketable.” Shares will be marketable if they are regularly traded on
certain U.S. stock exchanges (including NASDAQ) or on certain non-U.S. stock exchanges. For these purposes, the shares will generally be considered
regularly traded during any calendar year during which they are traded, other than in negligible quantities, on at least fifteen days during each calendar
quarter.
If you choose to make a mark-to-market election, you would recognize as ordinary income or loss each year an amount equal to the difference as of the close
of the taxable year between the fair market value of the PFIC shares and your adjusted tax basis in the PFIC shares. Losses would be allowed only to the
extent of net mark-to-market gain previously included by you under the election for prior taxable years. If the mark-to-market election were made, then the
PFIC rules set forth above relating to excess distributions and realized gains would not apply for periods covered by the election. If you make a mark-to-
market election after the beginning of your holding period of our ordinary shares, you would be subject to interest charges with respect to the inclusion of
ordinary income attributable to the period before the effective date of such election.
Under certain circumstances, ordinary shares owned by a Non-U.S. Holder may be attributed to a U.S. person owning an interest, directly or indirectly, in the
Non-U.S. Holder. In this event, distributions and other transactions in respect of such ordinary shares may be treated as excess distributions with respect to
such U.S. person, and a QEF election may be made by such U.S. person with respect to its indirect interest in us, subject to the discussion in the preceding
paragraphs.
We may invest in stock of non-U.S. corporations that are PFICs. In such a case, provided that we are classified as a PFIC, a U.S. Holder would be treated as
owning its pro rata share of the stock of the PFIC owned by us. Such a U.S. Holder would be subject to the rules generally applicable to shareholders of
PFICs discussed above with respect to distributions received by us from such a PFIC and dispositions by us of the stock of such a PFIC (even though the U.S.
Holder may not have received the proceeds of such distribution or disposition). Assuming we receive the necessary information from the PFIC in which we
own stock, certain U.S. Holders may make the QEF election discussed above with respect to the stock of the PFIC owned by us, with the consequences
discussed above. However, no assurance can be given that we will be able to provide U.S. Holders with such information. A. U.S. Holder generally would not
be able to make the mark-to-market election described above with respect to the stock of any PFIC owned by us.
If we were a PFIC, a holder of ordinary shares that is a U.S. Holder must file United States Internal Revenue Service Form 8621 for each tax year in which
the U.S. Holder owns the ordinary shares.
You should consult your own tax advisor regarding our potential status as a PFIC and the tax consequences and filing requirements that would arise
if we were treated as a PFIC.
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Foreign Asset Reporting
Certain U.S. Holders who are individuals (and certain specified entities) are required to report information relating to an interest in ordinary shares, subject to
certain exceptions (including an exception for securities held in certain accounts maintained by financial institutions). U.S. Holders are encouraged to consult
their own tax advisers regarding the effect of this reporting requirement on their ownership and disposition of ordinary shares.
3.8% Medicare Tax on “Net Investment Income”
Certain U.S. Holders who are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends and capital gains from
the sale or other disposition of ordinary shares. U.S. Holders are encouraged to consult their own tax advisers regarding the effect of this additional tax on
their ownership and disposition of ordinary shares.
Backup Withholding Tax and Information Reporting Requirements
United States backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock.
Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, ordinary shares made within the
United States, or by a United States payor or United States middleman, to a holder of ordinary shares, other than an exempt recipient (including a corporation,
a payee that is not a United States person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup
withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a United
States payor or United States middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number
or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate currently is
28.0%.
Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the beneficial owner’s United States federal income
tax liability, if any, provided that the required information is furnished to the IRS.
The above description is not intended to constitute a complete analysis of all tax consequences relating to ownership and disposition of our ordinary
shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are currently subject to the information and periodic reporting requirements of the Exchange Act, and file periodic reports and other information with the
SEC through its electronic data gathering, analysis and retrieval (EDGAR) system. Our securities filings, including this annual report and the exhibits thereto,
are available for inspection and copying at the public reference facilities of the SEC located at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. You
may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC
20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC 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 permitted under NASDAQ Stock Market Rule 5250(d)(1)(C), we will post our
annual reports filed with the SEC on our website at http://www.allot.com. We will furnish hard copies of such reports to our shareholders upon written request
free of charge. The information contained on our website is not part of this or any other report filed with or furnished to the SEC.
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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. However, we are required to file with the SEC, within 120 days after the
end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which will be examined and reported on, with an opinion
expressed, by an independent public accounting firm. We also file with the SEC reports on Form 6-K containing quarterly unaudited financial information.
I.
Subsidiary Information
Not applicable.
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including foreign currency exchange fluctuations, changes in interest rates and inflation. We regularly assess
currency, interest rate and inflation risks to minimize any adverse effects on our business as a result of those factors.
Risk of Interest Rate Fluctuation
The primary objectives of our investment activities are to preserve principal, support liquidity requirements, and maximize income without significantly
increasing risk. Our investments are subject to market risk due to changes in interest rates, which may affect our interest income and fair market value of our
investments.
To minimize this risk, we maintain our portfolio of cash, cash equivalents and short and long-term investments in a variety of securities, including U.S.
government and agency securities, and corporate debt securities. 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 and available for sale marketable securities. These
investments expose us to risks related to 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. We do not believe that a 10% increase or decrease in interest rates would have a material impact on our
operating results, cash flows or the fair value of our portfolio. 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 ILS. In 2016, we derived our revenues primarily in U.S. dollars and a substantial 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 ILS and to a lesser extent in
Euros and other currencies. Our ILS-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. Any strengthening or weakening in the value of the ILS against the U.S. is being partially mitigated using
hedging transactions and therefore, though we cannot provide any assurance that such transaction will fully mitigate the effect on our net income, it is not
likely that such effect will be material.
87
In the event of a 10% hypothetical strengthening or weakening in the value of the Euro against the U.S. dollar, we may be able to mitigate the effect of such
currency exchange fluctuation by adapting our pricing. However, in the event that market conditions will limit our ability to adjust our pricing, we might not
be able to fully mitigate the adverse effect of such currency fluctuation. We estimate that in such event, the impact on our net income in 2016 is not likely to
exceed $1,000,000. For more information regarding foreign currency related risks, see “ITEM 3: Key Information—Risk Factors—our international
operations expose us to the risk of fluctuations in currency exchange rates.”
We use currency forward contracts together with currency options primarily to hedge payments in ILS. These transactions constitute a future cash flow
hedge. As of December 31, 2016, we had outstanding forward contracts in the amount of $13.3 million. These transactions were for a period of up to twelve
months. As of December 31, 2016, the fair value of the above mentioned foreign currency derivative contracts was $0.02 million.
ITEM 12: Description of Securities Other Than Equity Securities
Not applicable.
88
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
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 ILS 0.10, was November 15,
2006. We registered 6,500,000 ordinary shares in the offering and received net proceeds of $70.5 million.
From the effective date of the registration statement and until December 31, 2016, the net proceeds had been invested in cash equivalents, marketable
securities, capital expenditure and other corporate purposes. None of the net proceeds of the offering was paid directly or indirectly to any director, officer,
general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates.
We conducted a subsequent public offering of our ordinary shares on November 15, 2011 raising net proceeds of $85 million.
ITEM 15: Controls and Procedures
(a) Disclosure Controls and Procedures. As of the end of the period covered by this report, 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, 2016. Based upon, and as of the date of, such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2016, our disclosures controls and procedures were effective such that the information
required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(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.
89
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.
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, 2016 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.
ITEM 16B: Code of Ethics
We have adopted a code of ethics applicable to our Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller and persons
performing similar functions. This code has been posted on our website, www.allot.com. Information contained on, or that can be accessed through, our
website does not constitute a part of this annual report and is not incorporated by reference herein. Waivers of our code of ethics may only be granted by the
board of directors. Under Item 16B of Form 20-F, if a waiver or amendment of the code of ethics applies to the persons specified in Item 16B(a) of the Form
20-F and relates to standards promoting any of the values described in Item 16B(b) of Form 20-F, we will disclose such waiver or amendment (i) on our
website within five business days following the date of amendment or waiver in accordance with the requirements of Instruction 4 to such Item 16B or (ii)
through the filing of a Form 6-K. We granted no waivers under our code of ethics in 2016.
90
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)
Total
Year ended December, 31,
2015
2016
(in thousands of U.S. dollars)
265 $
57
188
510 $
238
-
95
333
$
$
(1) “Audit fees” include fees for services performed by our independent public accounting firm in connection with our annual audit for 2015 and 2016,
certain procedures regarding our quarterly financial results submitted on Form 6-K 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.
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.
91
ITEM 16E: Purchase of Equity Securities by the Company and Affiliated Purchasers
Repurchase of Equity Securities
Period
January 1st – January 31st
February 1st – February 29th
March 1st – March 31st
April 1st – April 30th
May 1st – May 31st
June 1st – June 30th
July 1st – July 31st
August 1st – August 31st
September 1st – September 30th
October 1st – October 31st
November 1st – November 30th
December 1st – December 31st
Total
(a)
Total Number of
Shares Purchased(1)
(b)
Average Price
Paid Per Share
(c)
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs(2)
(d)
Maximum Dollar
Value in millions
of Shares That May
Yet Be Purchased
Under the Plans or
Programs (in millions)
14.6
13.8
13.8
13.8
11.5
11.5
11.5
11.5
11.5
11.5
11.0
11.0
46,950 $
178,050 $
- $
- $
466,000 $
- $
- $
- $
- $
- $
100,000 $
- $
791,000
46,950 $
178,050 $
- $
- $
466,000 $
- $
- $
- $
- $
- $
100,000 $
- $
791,000
5.14
4.50
-
-
4.87
-
-
-
-
-
4.98
-
$
(1) On August 2015, the Board of Directors approved a program for the Company to repurchase up to $15 million of its outstanding ordinary shares, which
program was thereafter approved by the Israeli court, pursuant to Israeli law on November 26, 2015. Share purchases will take place in open market
transactions or in privately negotiated transactions and may be made from time to time depending on market conditions, share price, trading volume and
other factors. Such purchases will be made in accordance with all applicable securities laws and regulations. The repurchase program does not require
Allot to acquire a specific number of shares, and may be suspended from time to time or discontinued. The court approvals previously granted were
each valid for a period of six months. During 2016, we repurchased a total of 0.8 million shares of our ordinary shares for approximately $3.8 million at
an average price of $4.82 per share under this program.
ITEM 16F: Change in Registrant’s Certifying Accountant
None.
ITEM 16G: Corporate Governance
As a foreign private issuer, we are permitted under NASDAQ 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 33.33%, who hold or represent between them at least 25% of the voting power
of our shares, instead of the issued share capital provided by under the NASDAQ 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.
92
·
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 2016 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.
93
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
94
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 23, 2017
Allot Communications Ltd.
By: /s/ Erez Antebi
Erez Antebi
Chief Executive Officer and President
95
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
Number
1.1
1.2
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
8.1
11.1
12.1
12.2
13.1
Description
Articles of Association of the Registrant (2)
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)
2016 Incentive Compensation Plan, as amended and restated
Israeli Subplan (Appendix A) of the 2016 Incentive Compensation Plan, as amended and restated
US Subplan (Appendix B) of the 2016 Incentive Compensation Plan, as amended and restated
Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd. and the Registrant (5)
Amendment No. 1, dated September 1, 2012, to the Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd.
and the Registrant*(3)
Asset Purchase Agreement, dated February 19, 2015, by and between Optenet S.A. and the Registrant. (4)
Compensation Policy for Executive Officers and Directors (6)
List of Subsidiaries of the Registrant
Code of Ethics (7)
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), furnished herewith
15.1
101.INS
101.SCH
101.PRE
101.CAL
101.LAB
101.DEF
__________________________
Consent of Kost Forer Gabbay & Kasierer
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
(1)
(2)
(3)
(4)
(5)
(6)
(7)
*
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.
Previously filed with the Securities and Exchange Commission on March 26, 2014 as Exhibit 1.1 to Form 20-F for the year ended December 31,
2013 and incorporated by reference herein.
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.
Previously filed with the Securities and Exchange Commission on March 26, 2015 as Exhibit 4.8 to Form 20-F for the year ended December 31,
2014 and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on March 28, 2016 as Exhibit 5.1 to Form 20-F for the year ended December 31,
2015 and incorporated by reference herein.
Previously included in Exhibit A-1 to Proxy statement included in Exhibit 99.1 to Form 6-K furnished to the Securities and Exchange
Commission on August 15, 2016 and incorporated by reference herein.
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.
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.
96
ALLOT COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2016
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Loss
Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F - 2 - F - 4
F - 5 - F - 6
F - 7
F - 8
F - 9 - F - 10
F - 11 - F - 46
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") as of December 31, 2016 and 2015,
and the related consolidated statements of comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2016. 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We have also 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, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 23, 2017 expressed an unqualified opinion thereon.
Tel Aviv, Israel
March 23, 2017
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 2
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") internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
(the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying management’s report. 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 - 3
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, 2016, 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, 2016 and 2015, and the related consolidated statements of comprehensive loss,
changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated March 23, 2017
expressed an unqualified opinion thereon.
Tel Aviv, Israel
March 23, 2017
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 4
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted deposit
Short-term bank deposits
Available-for-sale marketable securities
Trade receivables (net of allowance for doubtful accounts of $ 924 and $ 657 at December 31, 2016 and 2015,
$
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 - 5
ALLOT COMMUNICATIONS LTD.
December 31,
2016
2015
23,326 $
-
29,821
60,507
24,158
3,879
7,235
15,470
203
42,700
64,921
23,874
4,513
10,169
148,926
161,850
252
267
1,136
282
501
2,712
1,655
3,495
4,387
5,189
4,410
31,562
6,119
31,562
$
190,940 $
208,215
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
Other payables and accrued expenses
Total current liabilities
LONG-TERM LIABILITIES:
Deferred revenues
Accrued severance pay
Other long-term liability
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, 2016 and 2015;
Issued: 33,873,719 and 33,583,102 shares at December 31, 2016 and 2015, respectively; Outstanding:
33,057,719 and 33,558,102 shares at December 31, 2016 and 2015, respectively
Additional paid-in capital
Treasury stock at cost - 816,000 and 25,000 shares at December 31, 2016 and 2015, respectively
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
ALLOT COMMUNICATIONS LTD.
December 31,
2016
2015
$
3,275 $
7,381
11,133
3,157
7,107
8,211
14,066
5,710
24,946
35,094
3,597
592
4,502
4,912
651
4,153
8,691
9,716
843
264,782
(3,998)
(149)
(104,175)
837
259,385
(166)
(470)
(96,181)
157,303
163,405
$
190,940 $
208,215
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
U.S. dollars in thousands, except share and per share data
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development (net of grant participations of $ 606, $ 1,252 and $ 984 for the years
ended December 31, 2016, 2015 and 2014, respectively)
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Financial income (expense), net
Loss before income tax expense
Income tax expense
Net loss
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2016
2015
2014
$
54,432 $
35,937
90,369
62,642 $
37,325
99,967
77,240
39,946
117,186
20,401
7,494
26,707
6,720
27,389
7,350
27,895
33,427
34,739
62,474
66,540
82,447
24,221
35,290
9,812
26,422
43,318
12,702
29,014
44,599
11,941
69,323
82,442
85,554
(6,849)
1,059
(15,902)
(584)
(5,790)
2,204
(16,486)
3,356
(3,107)
660
(2,447)
50
$
(7,994) $
(19,842) $
(2,497)
Unrealized gain (loss) on available-for-sale marketable securities
Unrealized gain (loss) on foreign currency cash flow hedges transactions
337
(16)
(261)
1,411
(205)
(1,781)
Total comprehensive loss
Net loss per share:
Basic and diluted
$
(7,673) $
(18,692) $
(4,483)
$
(0.24) $
(0.59) $
(0.08)
Weighted average number of shares used in per share computations of net loss:
Basic and diluted
33,202,309
33,419,917
33,143,168
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
ALLOT COMMUNICATIONS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data
Ordinary shares
Additional
Outstanding
shares
Amount
paid-in
capital
Treasury
stock
Accumulated other
comprehensive
income (loss)
Accumulated
deficit
Total
shareholders'
equity
32,877,118 $
774 $
242,629 $
- $
366 $
(73,842) $
169,927
442,805
45
1,431
-
-
-
-
-
-
8,060
-
-
33,319,923
819
252,120
263,179
18
114
-
-
-
-
-
-
(25,000)
-
-
-
-
-
-
-
-
(166)
7,151
-
-
-
-
-
-
-
-
-
(1,986)
-
-
(2,497)
1,476
8,060
(1,986)
(2,497)
(1,620)
(76,339)
174,980
-
-
-
-
-
-
132
(166)
7,151
1,150
-
-
(19,842)
1,150
(19,842)
33,558,102
837
259,385
(166)
(470)
(96,181)
163,405
290,617
(791,000)
-
-
-
6
-
-
-
-
236
-
-
(3,832)
5,161
-
-
-
-
-
-
-
-
-
-
-
321
-
-
(7,994)
242
(3,832)
5,161
321
(7,994)
33,057,719
843
264,782
(3,998)
(149)
(104,175)
157,303
Balance at January 1,
2014
Exercise of stock
options
Stock-based
compensation
Other comprehensive
loss
Net loss
Balance at December
31, 2014
Exercise of stock
options
Treasury stock
acquired, net *)
Stock-based
compensation
Other comprehensive
income
Net loss
Balance at December
31, 2015
Exercise of stock
options
Treasury stock
acquired, net *)
Stock-based
compensation
Other comprehensive
income
Net loss
Balance at December
31, 2016
*) Including acquisition expenses of $ 5 and $ 35 for the years ended December 31, 2016 and 2015, respectively.
Accumulated other comprehensive loss:
Accumulated unrealized loss on available-for-sale marketable securities
Accumulated unrealized loss on foreign currency cash flows hedge transactions
Accumulated other comprehensive loss
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
Year ended
December 31,
2015
2016
2014
$
$
(88) $
(61)
(425) $
(45)
(164)
(1,456)
(149) $
(470) $
(1,620)
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
Impairment of intangible assets
Stock-based compensation
Capital loss
Increase (decrease) in accrued severance pay, net
Decrease in other assets
Decrease in accrued interest and amortization of premium on marketable securities
Increase in trade receivables
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories
Decrease (increase) in long-term deferred taxes, net
Increase (decrease) in trade payables
Increase (decrease) in employees and payroll accruals
Increase (decrease) in deferred revenues
Increase (decrease) in other payables and accrued expenses
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Redemption of (Investment in) restricted cash
Redemption of (Investment in) short-term deposits
Purchase of property and equipment
Investment in available-for sale marketable securities
Proceeds from redemption or sale of marketable securities
Proceeds from sale of property and equipment
Loan granted to third party
Repayment of loan to third party
Acquisition of Optenet, net of cash (see schedule A below)
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2015
2016
2014
$
(7,994)
$
(19,842) $
(2,497)
4,043
-
5,141
24
(29)
1,576
1,238
(284)
699
2,934
234
(3,832)
(811)
(4,248)
(2,155)
(3,464)
203
12,879
(1,582)
(29,695)
33,208
26
-
-
-
5,708
5,777
7,170
328
349
1,205
967
(847)
(2,623)
(60)
1,403
2,218
901
1,961
(429)
5,166
-
8,095
-
(8)
100
793
(6,851)
(1,321)
3,689
(224)
3,109
1,073
1,911
2,800
4,186
15,835
(203)
16,300
(2,223)
(34,098)
22,221
-
-
-
(9,859)
-
(21,000)
(3,391)
(22,736)
8,266
-
(2,735)
652
-
Net cash (used in) provided by investing activities
15,039
(7,862)
(40,944)
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Proceeds from exercise of stock options
Purchase of treasury stock, net
ALLOT COMMUNICATIONS LTD.
Year ended
December 31,
2015
2016
2014
113
(3,832)
132
(166)
1,476
-
Net cash provided by (used in) financing activities
(3,719)
(34)
1,476
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
7,856
15,470
(3,710)
19,180
(23,633)
42,813
Cash and cash equivalents at the end of the year
$
23,326 $
15,470 $
19,180
Supplementary cash flow information:
Cash paid (received) during the year for:
Taxes
Schedule A- Acquisition of Optenet:
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
Total consideration
Non cash consideration
Payment for acquisition, net of cash
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
$
175 $
139 $
82
$
$
$
$
- $
-
-
-
- $
- $
- $
(204) $
152
7,242
10,748
17,938 $
(8,079) $
9,859 $
-
-
-
-
-
-
-
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 service optimization and monetization solutions for mobile, fixed and cloud
service providers, and enterprises. The Company’s flexible and highly scalable service delivery framework, in the form of hardware
platforms and software applications, leverages the intelligence in data networks enabling service providers to get closer to their
customers; to safeguard network assets and users; and to accelerate time-to-revenue for value-added services. The Company's products
consist of the Service Gateway and NetEnforcer service delivery platforms, the NetXplorer and Subscriber Management Platform
network management and provisioning suites and value added services such as WebSafe Personal and Business Security solution,
Service Protector network protection solution, ClearSee for Network analytics and MediaSwift E and VideoClass for media optimization.
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.
The Company holds twelve 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 commenced its activity in 2013, Allot Communications Africa (PTY) Ltd. (the "African subsidiary”),
which was incorporated in 2013 under the laws of South Africa, Allot Communications (Hong Kong) Limited (the "HK subsidiary”),
which was incorporated in 2013 under the laws of Hong-Kong, Allot Communications Spain, S.L. Sociedad Unipersonal (the "Spanish
subsidiary”), which was incorporated in 2015 under the laws of Spain, Allot Communications (Colombia) S.A.S (the "Colombian
subsidiary”), which was incorporated in 2015 under the laws of Colombia and Allot MexSub (the "Mexican subsidiary"), which was
incorporated in 2015 under the laws of Mexico.
The U.S. subsidiary is engaged in the sale, marketing and technical support and development services in the Americas of products
manufactured and imported by the Company. The European, Japanese, NZ, UK, Singaporean, Indian, HK African, Colombian and
Mexican subsidiaries are engaged in marketing and technical support services of the Company's products in Europe, Japan, Oceania,
UK, Asia, Africa and Latin America, respectively.
F - 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
ALLOT COMMUNICATIONS LTD.
The Spanish subsidiary commenced its operations in 2015 and is engaged in the marketing, technical support and development activities
of one of the Company's product lines.
b.
Acquisition:
On March 23, 2015 (the "Optenet acquisition date"), the Company entered into an asset purchase agreement (the "Optenet APA") with
the shareholders of Optenet S.A. ("Optenet") a private, global IT security company that develops security solutions for internet service
providers and enterprises.
The total consideration for the acquisition was $ 17,938, which consisted of $ 9,859 paid in cash and primarily an additional contingent
consideration estimated at fair value of $ 8,079 at the Optenet acquisition date. As of December 31, 2016 and 2015, the contingent
consideration is estimated at fair value of $ 4,504 and $ 6,102, respectively. The change in fair value of the contingent consideration was
recorded as reduction to general and administrative expenses.
The contingent consideration is payable over a five year term ending March 23, 2020 based on achievement of certain thresholds of
revenues derived from Optenet’s products and has payments cap of $27,500. The obligation in respect of the contingent consideration is
presented under Other payables and accrued expenses and Other long-term liability.
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 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
Technology
Customer relationships
Backlog
Goodwill
Net assets acquired
F - 12
Fair value
54
$
152
(155)
(103)
4,032
2,824
386
10,748
$
17,938
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
ALLOT COMMUNICATIONS LTD.
Technology includes security solutions for internet service providers and enterprises such as encompass parental control, anti-malware
and anti-spam products. The technology is amortized over the estimated useful life of 4.34 years using the straight line method.
Backlog from customer orders is amortized over the estimated useful life of 2.8 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 4.8 years.
The Company acquisition transaction costs amounted to $ 397.
Unaudited pro forma condensed results of operations:
The following represents the unaudited consolidated pro forma revenue and net loss for the years ended December 31, 2015 and 2014, to
give effect to the acquisition of Optenet as if it had occurred on January 1, 2014. The pro forma information is not necessarily indicative
of the results of operations that would have been had the acquisition actually occurred on January 1, 2014, nor does it purport to
represent the results of operations for future periods.
Revenues
Net loss
c.
Cost reduction plans:
Year ended December 31,
2015
2014
Unaudited
$
$
100,683 $
(21,177) $
124,244
(17,976)
During the third quarter of 2016, the Company initiated a limited restructuring plan to reduce its operating cost and improve its
efficiency, mainly by reducing staff functions and some operations positions, as well as other measures. The restructuring expenses
include mainly severance and other compensation related expenses associated with the termination of employment under a restructuring
plan. The total restructuring costs in 2016 associated with exiting activities of the Company were $ 1,290 and recorded in operating
expenses. As of December 31, 2016, the total liability balance for the restructuring plan was $ 309, mainly due to termination of
employment expenses.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
ALLOT COMMUNICATIONS LTD.
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.
b.
Financial statements in U.S. dollars:
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 deposits:
The restricted deposits are held in favor of financial institutions in respect of fulfillments of forward contract and operating obligations.
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
f.
Short-term bank deposits:
ALLOT COMMUNICATIONS LTD.
Short-term bank deposits are deposits with maturities of more than three months but less than one year at the balance sheet date. The
deposits are in dollars and bear interest at annual weighted average rate of 1.37% and 0.93% at December 31, 2016 and 2015,
respectively.
g.
Marketable securities:
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 loss.
The Company's securities are reviewed for impairment in accordance with ASC 320-10-35. 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 2016, 2015 and 2014, 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 primarily from end of
life products and from slow-moving items, technological obsolescence, and excess inventory. Inventory write-offs during the year ended
December 31, 2016, 2015 and 2014 amounted to $ 1,004, $ 775 and $ 4,097, respectively, and were recorded in cost of revenues for
products.
Inventory write-off provision as of December 31, 2016 and 2015 amounted to $ 1,957 and $ 1,663, respectively.
Cost is determined using the weighted average cost method.
F - 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
i.
Property and equipment, net:
ALLOT COMMUNICATIONS LTD.
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
j.
Goodwill impairment:
%
25 - 33
15 - 33
6 - 15
Over the shorter of the term of
the
lease or the useful life of the asset
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.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further
impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is
performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to
performing the first step of the goodwill impairment test.
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, 2016
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 2016, 2015 and 2014, no impairment losses were recorded.
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k.
Impairment of long lived assets and intangible assets subject to amortization:
ALLOT COMMUNICATIONS LTD.
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.
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 the years ended December 31, 2016 and 2014, no impairment losses were recorded. During 2015, the Company recorded $ 5,777
impairment loss (see Note 9).
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 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 - 17
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.
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.
Revenue arrangements with multiple deliverables are allocated using the relative selling price method. The Company determines the
estimated selling price in multiple elements arrangements as follows:
The Company determines the ESP in multiple-element arrangements for the products, based on reviewing historical transactions, and
considering several other external and internal factors including, but not limited to, pricing practices including discounting and
competition.
The Company determines the selling price for maintenance and support 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.
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
The Company records a provision for estimated product returns based on its experience with historical product returns and other known
factors. Such provisions amounted to $ 910 and $ 688 as of December 31, 2016 and 2015, respectively.
m.
Advertising expenses:
Advertising expenses are charged to the statement of comprehensive loss, as incurred. Advertising expenses for the years ended
December 31, 2016, 2015 and 2014 amounted to $ 1,081, $ 1,201 and $ 1,131, 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 comprehensive loss as
incurred.
F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
o.
Severance pay:
ALLOT COMMUNICATIONS LTD.
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.
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, 2016, 2015 and 2014, amounted to $ 1,976, $ 2,286 and $ 2,092, respectively.
p.
Restructuring costs:
The Company accounts for restructuring activities in accordance to ASC 712 "Compensation-Nonretirement Postemployment Benefits"
("ASC 712"), which requires that a liability for a cost associated with a contractual postemployment benefits be recognized and
measured, initially at fair value, only when it is probable that the employees will be entitled to the benefits and the amount is estimable.
q.
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 comprehensive loss. The Company recognizes
compensation expenses for the value of its awards based on the straight line method over the requisite service period of each of the
awards, net of estimated forfeitures.
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.
The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an
award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair
value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental
value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the
original award measured immediately before its terms are modified based on current circumstances.
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 and restricted share units
("RSUs") granted to employees included in the consolidated statements of comprehensive loss, for the years ended December 31, 2016,
2015 and 2014:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Year ended
December 31,
2015
2016
2014
$
367 $
1,240
1,833
1,701
324 $
1,637
2,802
2,407
353
1,919
3,322
2,501
Total stock-based compensation expense
$
5,141 $
7,170 $
8,095
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, 2016, 2015 and 2014:
Suboptimal exercise multiple
Risk free interest rate
Volatility
Dividend yield
Year ended
December 31,
2015
2016
2014
2.9-3.5
0.47%-1.58%
33%-51%
0%
3
0.23%-2.35%
37%-55%
0%
3
0.10%-2.73%
44%-60%
0%
The expected annual post-vesting and pre-vesting forfeiture rates affects the number of exercisable options. Based on the Company's
historical experience, the annual pre-vesting and post-vesting are in the range of 0%-31% and 0%-29%, respectively, in the years 2016,
2015, and 2014.
The computations of expected volatility and suboptimal exercise multiple is based on the average of the Company's realized historical
stock price. 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.
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.
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.
r.
Treasury stock:
The Company repurchases its Ordinary shares from time to time on the open market and holds such shares as treasury stock. The
Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity.
s.
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 and short-term deposits of the Company are invested in dollar deposits in major U.S. and
Israeli banks. Such investments 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.
Marketable securities include investments in dollar linked corporate and municipal bonds. Marketable securities consist of highly liquid
debt instruments with high credit standing. The Company’s investment policy, approved by the Board of Directors, limits the amount the
Group may invest in any one type of investment or issuer, thereby reducing credit risk concentrations. Management believes that the
portfolio is well diversified and, accordingly, minimal credit risk exists with respect to these marketable debt securities
The Company's trade receivables are primarily derived from sales to customers located mainly in EMEA, as well as in APAC, Latin
America and the United States. 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 $ 924 and $ 657 as of December 31,
2016 and 2015, respectively.
The Company has no significant off balance sheet concentrations of credit risk.
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
t.
Grants from the Israel Innovation Authority:
ALLOT COMMUNICATIONS LTD.
Participation grants from the Israel Innovation Authority (Previously known as the Office of the Chief Scientist) 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 non royalty bearing grants recognized amounted to $ 606,
$ 1,252 and $ 984 in 2016, 2015 and 2014, respectively.
u.
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.
v.
Basic and diluted net income (loss) per share:
Basic net income (loss) per share is computed based on the weighted average number of Ordinary Shares outstanding during each year.
Diluted net income (loss) per share is computed based on the weighted average number of Ordinary Shares outstanding during each year,
plus dilutive potential Ordinary Shares considered outstanding during the year, in accordance with FASB ASC 260 "Earnings Per
Share".
For the years ended December 31, 2016, 2015 and 2014, all outstanding options and RSUs have been excluded from the calculation of
the diluted net loss per share since their effect was anti-dilutive. See Note 16.
F - 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
w.
Comprehensive income (loss):
ALLOT COMMUNICATIONS LTD.
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 loss 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.
The following table shows the components and the effects on net loss of amounts reclassified from accumulated other comprehensive
loss as of December 31, 2016:
Year ended
December 31, 2016
Unrealized
gains (losses)
on marketable
securities
Unrealized
gains (losses)
on cash
flow hedges
Total
Balance as of December 31, 2015
Changes in other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss) to :
Cost of revenues
Operating expenses
Financial income, net
$
(425) $
293
-
-
44
(45) $
226
(32)
(210)
-
Net current-period other comprehensive income (loss)
337
(16)
(470)
519
(32)
(210)
44
321
Balance as of December 31, 2016
$
(88) $
(61) $
(149)
x.
Fair value of financial instruments:
The Company measures its cash and cash equivalents, marketable securities, derivative instruments, 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.
F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
The Company uses a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 -
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 -
Include other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in Level
1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived
valuations in which significant inputs are observable), or can be derived principally from or corroborated by observable
market data; and
Level 3 -
Unobservable inputs which are supported by little or no market activity.
The Company categorized each of its fair value measurements in one of those three levels of hierarchy. The fair value hierarchy also
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company's earn-out consideration is classified within Level 3. The valuation methodology used by the Company to calculate the
fair value consideration is the discounted cash flow using Monte-Carlo simulation method by taking into account, forecast future
revenues, expected volatility of 39.2% and weighted average cost of debt of 2%.
y.
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.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
z.
Business combinations:
ALLOT COMMUNICATIONS LTD.
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 recorded as goodwill and any subsequent changes in estimated
contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and
acquired income tax positions are to be recognized in earnings.
aa. Warranty costs:
The Company generally provides three months software 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, 2016, 2015 and 2014 were immaterial.
ab. Recently Issued Accounting Pronouncements:
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation
of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial
position. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. No prior periods were
retrospectively adjusted.
In January 2016, the FASB issued a new standard to amend certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of our equity investments,
with certain exceptions, to be recognized through net income rather than accumulated other comprehensive income (loss). ASU 2016-01
is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by
public entities is permitted only for certain provisions. The Company is currently in the process of evaluating the impact of the adoption
of this standard on its consolidated financial statements.
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.
In February 2016, the FASB issued ASU 2016-02, “Leases”, on the recognition, measurement, presentation and disclosure of leases for
both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as
either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This
classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over
the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of
greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner
similar to the accounting under existing guidance for operating leases today. The new standard requires lessors to account for leases
using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
ASC 842 supersedes the previous leases standard, ASC 840, "Leases". The guidance is effective for the interim and annual periods
beginning on or after December 15, 2018, and early adoption is permitted. The Company is currently in the process of evaluating the
impact of the adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation”, which effects all entities that issue share-based
payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits and
deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures,
the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes
paid on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2016. This
guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method. Early adoption is
permitted. The Company does not expect that this new guidance will have a material impact on the Company’s Consolidated Financial
Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments” (“ASU 2016-13”). The standard changes the methodology for measuring credit losses on financial instruments
and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after
December 15, 2018. The Company is currently evaluating the impact of this standard on its Consolidated Financial Statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
(ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in
cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This new guidance doesn't have a
material impact on the Company’s Consolidated 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.)
ALLOT COMMUNICATIONS LTD.
In May 2014, the FASB issued a new standard related to revenue recognition. The new revenue recognition standard provides a unified
model to determine when and how revenue is recognized. The core principle of the new revenue recognition standard is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. The FASB has recently issued several amendments to the
standard, including clarification on identifying performance obligations.
The guidance permits two methods of modification: retrospectively to each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the
cumulative catch-up transition method). The Company has not yet selected a transition method.
The new standard will be effective for the Company beginning January 1, 2018, and adoption as of the original effective date of January
1, 2017 is permitted. The Company will adopt the new standard as of January 1, 2018.
The Company has made progress toward completing its evaluation of the potential changes from adopting this new standard on its
financial reporting and disclosures. The Company has developed a project plan to analyze the potential impact this guidance will have
on its consolidated financial statements and related disclosures as well as its business processes, systems and controls. This includes
reviewing revenue contracts across all revenue streams and evaluating potential differences that would result from applying the
requirements under the new guidance, including among others, the impact on specific performance obligations and variable
consideration transactions. The Company is still currently evaluating the impact of the adoption of this standard on its consolidated
financial statements.
F - 27
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities:
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
Available-for-sale - matures
after
three years through five
years:
Governmental debentures
Corporate debentures
December 31, 2016
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Fair
value
Amortized
cost
December 31, 2015
Gross
Gross
unrealized
unrealized
loss
gain
Fair
value
$
339 $
19,693
0 $
31
(0) $
(14)
339 $
19,710
293 $
20,077
- $
1
(0) $
(19)
293
20,059
20,032
31
(14)
20,049
20,370
1
(19)
20,352
-
34,472
-
70
-
(78)
-
34,464
978
29,004
-
3
(6)
(230)
972
28,777
34,472
70
(78)
34,464
29,982
3
(236)
29,749
100
5,991
6,091
-
2
2
-
(99)
100
5,894
344
14,650
-
5
(5)
(174)
339
14,481
(99)
5,994
14,994
5
(179)
14,820
$
60,595 $
103 $
(191) $
60,507 $
65,346 $
9 $
(434) $
64,921
All investments with an unrealized loss as of December 31, 2016 are with continuous unrealized losses for less than 12 months.
F - 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:-
FAIR VALUE MEASUREMENTS
ALLOT COMMUNICATIONS LTD.
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.
The earn-out liability related to the acquisition of Optenet is classified within Level 3 because this liability is based on present value
calculations and an external valuation model whose inputs include market interest rates, estimated operational capitalization rates and
volatilities.
The Company's financial net assets measured at fair value on a recurring basis, including accrued interest components, consisted of the
following types of instruments as of December 31, 2016 and 2015, respectively:
Available-for-sale marketable securities
Foreign currency derivative contracts
Earn-out liability
Total financial net assets
Available-for-sale marketable securities
Foreign currency derivative contracts
Earn-out liability
Total financial net assets
As of December 31, 2016
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
- $
-
-
60,507 $
28
-
- $
-
4,504
60,507
28
4,504
- $
60,535 $
4,504 $
65,039
As of December 31, 2015
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
- $
-
-
64,921 $
401
-
- $
-
6,102
64,921
401
6,102
- $
65,322 $
6,102 $
71,424
$
$
$
$
Fair value measurements using significant unobservable inputs (Level 3):
Balance at January 1, 2016
Earn Out liability payments, settlements and adjustments due to exchange rates
Adjustment due to change in the forecast of earn-out consideration
Balance at December 31, 2016
F - 29
$
6,102
(636)
(962)
$
4,504
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:- DERIVATIVE INSTRUMENTS
ALLOT COMMUNICATIONS LTD.
The Company enters into hedge transactions with a major financial institution, using derivative instruments, primarily forward contracts and
options to purchase and sell foreign currencies, in order to reduce the net currency exposure associated with anticipated expenses (primarily
salaries and related expenses that are designated as cash flow hedges) in currencies other than U.S. dollar, and forecasted revenues denominated
in Euro. The net income recognized in "Financial income, net" during the years ended December 31, 2016, 2015 and 2014 was $ 286, $ 1,200
and $ 2,144, respectively.
The Company currently hedges such future exposures for a maximum period of one year. However, the Company may choose not to hedge
certain foreign currency exchange exposures for a variety of reasons, including but not limited to immateriality, accounting considerations and
the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the
financial impact resulting from movements in foreign currency exchange rates.
The Company records all derivatives on the consolidated balance sheets at fair value in accordance with ASC No. 820 at Level 2. The effective
portion of cash flow hedges are recorded in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective
portion of cash flow hedges are adjusted to fair value through earnings in financial income (expenses), net. The Company does not enter into
derivative transactions for trading purposes.
The Company had a net unrealized loss associated with cash flow hedges of $ 61 and $ 45 recorded in other comprehensive loss as of
December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, the Company had outstanding hedge transactions in the amount
of $ 13,302 and $ 18,361, respectively.
The fair value of the outstanding foreign exchange contracts recorded by the Company on its consolidated balance sheets as of December 31,
2016 and 2015, as assets and liabilities is as follows:
Foreign exchange forward and
options contracts
Balance sheet
Fair value of foreign exchange hedge transactions
Fair value of foreign exchange hedge transactions
Other receivables and prepaid expenses
Other payables and accrued expenses
Total derivatives designated as hedging instruments
Other Comprehensive loss
December 31,
2016
2015
$
$
40 $
(101)
104
(149)
(61) $
(45)
Gain or loss on the derivative instruments, which partially offset the foreign currency impact from the underlying exposures, reclassified from
other comprehensive loss to operating expenses for the years ended December 31, 2016, 2015 and 2014 were $ (242), $ 1,407 and $ 717,
respectively.
F - 30
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, 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. As of December 31, 2016 and 2015, the Company’s
transactions were $ 14,969 and $ 14,901, respectively.
The fair value of the outstanding non-designated foreign exchange contracts recorded by the Company on its consolidated balance sheets as of
December 31, 2016 and 2015, as assets and liabilities is as follows:
Foreign exchange forward and
options contracts
Balance sheet
December 31,
2016
2015
Fair value of foreign exchange non-designated hedge
transactions
Other receivables and prepaid expenses
$
181 $
Fair value of foreign exchange non-designated hedge
transactions
Other payables and accrued expenses
(92)
Total derivatives designated as hedging instruments
$
89 $
459
(13)
446
NOTE 6:- OTHER RECEIVABLES AND PREPAID EXPENSES
Prepaid expenses
Government authorities
Receivable from third-party
Foreign currency derivative contracts
Short-term lease deposits
Grants receivable from the Israel Innovation Authority
Others
F - 31
December 31,
2016
2015
$
1,739 $
1,003
426
221
127
-
363
1,959
898
-
566
215
728
147
$
3,879 $
4,513
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:-
INVENTORIES
Raw materials
Finished goods
ALLOT COMMUNICATIONS LTD.
December 31,
2016
2015
$
$
1,257 $
5,978
1,584
8,585
7,235 $
10,169
As of December 31, 2016 and 2015, 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 $ 512 and $ 572, respectively.
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
$
December 31,
2016
2015
13,225 $
18,704
975
1,238
12,527
18,667
955
1,164
34,142
33,313
10,788
17,750
521
696
9,483
17,453
568
620
29,755
28,124
Depreciated cost
$
4,387 $
5,189
Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $ 2,334, $ 2,813 and $ 3,308, respectively.
F - 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
INTANGIBLE ASSETS, NET
a.
The following table shows the Company's intangible assets for the periods presented:
ALLOT COMMUNICATIONS LTD.
Original Cost:
Technology *)
Backlog
Customer relationships **)
Accumulated amortization:
Technology
Backlog
Customer relationships
Amortized cost
December 31,
2016
2015
$
9,111 $
1,877
3,592
9,111
1,877
3,592
$
14,580 $
14,580
$
6,705 $
1,867
1,598
5,765
1,632
1,064
$
10,170 $
8,461
$
4,410 $
6,119
*) During 2015, the Company recorded an impairment loss of $ 3,214 and $ 2,432 related to technology purchased in 2012 from
acquisitions of Ortiva Wireless Inc. and Oversi Networks Ltd. ("Oversi"), respectively, due to the Company's decision to reach end of
life on the respective product lines. The impairment loss was recorded in cost of revenues.
**) During 2015, the Company recorded an impairment loss of $ 131 related to Oversi's customer relationships, due to the Company's
decision to reach end of life on the respective product line. The impairment loss was recorded in sales and marketing.
b.
c.
Amortization expense for the years ended December 31, 2016, 2015 and 2014 was $ 1,709, $ 2,895 and $ 1,858, respectively.
Estimated amortization expense for the years ending:
Year ending December 31,
2017
2018
2019
Total
F - 33
1,478
1,630
1,302
4,410
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- OTHER PAYABLES AND ACCRUED EXPENSES
Accrued expenses
Accrued taxes
Foreign currency derivative contracts
Advances from customers
Contingent consideration
Others
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
ALLOT COMMUNICATIONS LTD.
December 31,
2016
2015
$
2,255 $
416
193
23
-
270
1,758
473
163
1,103
1,949
264
$
3,157 $
5,710
The Company signed several non-cancelable agreements for its facilities which vary in dates and terms. In March 2013, the Company
engaged in renting its main facilities for an average period of five years, starting July 2013. The total rental expenses are approximately
$ 144 per month.
The U.S. subsidiary has an operating lease for office facilities in Woburn, Massachusetts and in San Diego, California, the leases expire
on August 31, 2019 and on April 30, 2018, respectively. The Spanish subsidiary has an operating lease for office facilities in Madrid,
Spain, the leases expire within three month notice period. The Company's subsidiaries maintain smaller offices in South Africa, China,
Singapore, Japan, New Zealand, Colombia and various locations in Europe.
In addition, the Company has operating lease agreements for its motor vehicles, which terminate in 2016 through 2019.
Operating leases (offices and motor vehicles) expense for the years ended December 31, 2016, 2015 and 2014 was $ 2,758, $ 2,828 and
$ 3,155, respectively.
As of December 31, 2016, the aggregate future minimum lease obligations (offices and motor vehicles) under non-cancelable operating
leases agreements were as follows:
Year ending December 31,
2017
2018
2019
Total
F - 34
$
2,480
651
103
$
3,234
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
b.
Major subcontractor:
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.
c.
Litigations:
On November 8, 2016, a former employee filed a claim against the Company alleging that he is entitled to compensation for unlawful
dismissal by the Company. A mediation attempt has failed, the Company is waiting for the first hearing to take place. The Company
believes that it has valid defenses to the claim. According to the Company's legal counsel the award will not exceed $ 32.
NOTE 12:- SHAREHOLDERS' EQUITY
a.
Company's shares:
As of December 31, 2016, 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.
Treasury stock:
On August 2015, the Company's Board of Directors authorized the repurchase of up to an aggregate of $ 15 million of the Company's
Ordinary shares in the open market, subject to normal trading restrictions. During November 2015, the Company received court's
approvals to purchase up to $ 15 million of its ordinary shares. The court's approval for share repurchases was expired on May 26, 2016.
On July 6, 2016, the Company received the court's approval to extend the share repurchase period for additional 6 months. During 2015
the Company purchased 25,000 of its Ordinary shares for a total consideration of $ 166. During 2016 the Company purchased 791,000
of its Ordinary shares for a total consideration of $ 3,832. Total consideration for the purchase of these Ordinary shares was recorded as
Treasury stock, at cost, as part of shareholders' equity.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
c.
Stock option plan:
ALLOT COMMUNICATIONS LTD.
A summary of the Company's stock option activity, pertaining to its option plans for employees and related information is as follows:
2016
Number
of shares
upon
exercise
Weighted
average
exercise
price
Year ended December 31,
2015
Number
of shares
upon
exercise
Weighted
average
exercise
price
2014
Number
of shares
upon
exercise
Weighted
average
exercise
price
Outstanding at beginning of year
Granted
Forfeited
Exercised
2,811,966 $
643,697 $
(1,358,492) $
(138,157) $
10.70
4.99
12.41
1.75
2,531,381 $
704,348 $
(320,496) $
(103,267) $
11.99
6.73
15.13
1.28
2,875,003 $
572,533 $
(562,787) $
(353,368) $
12.02
11.93
17.02
4.18
Outstanding at end of year
1,959,014 $
8.24
2,811,966 $
10.70
2,531,381 $
11.99
Exercisable at end of year
1,072,658 $
9.87
1,646,204 $
11.99
1,440,143 $
11.75
Vested and expected to vest
1,407,930 $
9.04
2,197,848 $
11.16
1,950,116 $
11.97
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 years 2016, 2015 and 2014 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, 2016, 2015 and 2014,
respectively. 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, 2016, 2015 and 2014, were $ 728, $ 1,580 and $ 4,085, respectively. The total intrinsic value of exercisable
options at December 31, 2016, 2015 and 2014, were approximately $ 604, $ 1,170 and $ 2,983, respectively. The total intrinsic value of
options vested and expected to vest at December 31, 2016, 2015 and 2014, were approximately $ 634, $ 1,363 and $ 3,436, respectively.
The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 were approximately $ 415, $
469 and $ 1,901, respectively. The weighted-average grant-date fair value of the options granted during the years ended December 31,
2016, 2015 and 2014 were $ 2.12, $ 3.45 and $ 6.31, respectively. The number of options vested during the year ended December 31,
2016 was 279,088. The weighted-average remaining contractual life of the outstanding options as of December 31, 2016 is 5.53 years.
The weighted-average remaining contractual life of exercisable options as of December 31, 2016 is 4.99 years.
On May 2, 2016 the Board of Directors of the Company approved the repricing of 384,635 stock options for the Company's employees
and executive officers, previously granted. As part of the repricing, options with exercise price higher than $ 7 per share were repriced.
Repriced options were replaced by options with lower exercise price or RSU's.
F - 36
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 vesting period for the new granted options and RSU's was schedule for two years. The incremental expense for the repricing of the
options was approximately $ 470. For the year ended December 31, 2016, the Company recorded expenses totaling $ 155 associated
with the repricing.
The options outstanding as of December 31, 2016, have been classified by exercise price, as follows:
Exercise price
Shares upon exercise
of options outstanding
as of December 31, 2016
Weighted average
remaining contractual
life
Years
Shares upon exercise
of options exercisable
as of December 31, 2016
$
$
$
$
$
23.31-27.58
15.20-17.07
10.16-14.68
5.01-9.25
0.03-4.95
73,000
129,059
383,233
827,398
546,324
1,959,014
5.62
4.75
6.59
5.43
5.12
73,000
123,088
297,998
321,964
256,608
1,072,658
The following provides a summary of the restricted stock unit activity for the Company for the two years ended December 31, 2016:
Year ended December 31,
2016
2015
Number
of shares
upon exercise
Weighted average
share price
Number
of shares
upon exercise
Weighted average
share price
Outstanding at beginning of year
Granted
Vested
Forfeited
359,404 $
531,570 $
(152,460) $
(146,388) $
10.95
4.59
10.08
6.85
445,264 $
158,551 $
(159,912) $
(84,499) $
Unvested at end of year
592,126 $
6.53
359,404 $
12.43
8.52
11.22
12.57
10.95
As of December 31, 2016, $ 2,194 and $ 2,801 unrecognized compensation cost related to stock options and RSUs respectively is
expected to be recognized over a weighted average vesting period of 2.34 years.
As of December 31, 2016, the Company holds outstanding options under the 2016 option plan (formerly, 2006 Plan). The outstanding
options and RSUs under the 2016 plan are exercisable to 1,959,014 and 592,126 Ordinary shares respectively.
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.
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, 2016, 807,322 Ordinary shares are available for future issuance under the option plans.
In 2015 the Company granted 1,732 options to employees with an exercise price of $ 0.03, which was lower than the trading price of the
Company's Ordinary Shares quoted on the NASDAQ Global Select Market on the date of the grants. During 2016, the Company did not
grant options with an exercise price lower than the trading price of the Company's Ordinary Shares.
In addition to granting stock options, the Company granted 531,570 and 158,551 RSUs in 2016 and 2015, respectively under the 2016
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 income tax rate was 25% in 2016 and 26.5% in 2015 and 2014.
In January 2016, the Law for Amending the Income Tax Ordinance (No. 216) (Reduction of Corporate Tax Rate), 2016 was approved,
which includes a reduction of the corporate tax rate from 26.5% to 25%, effective from January 1, 2016.
In December 2016, a further reduction in the corporate tax rate to 24% effective January 2017 and to 23% effective January 1, 2018 and
thereafter was enacted.
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 - 38
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 track of benefits and has waived Government grants in return for tax benefits. 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.
According to the provisions of the Law under the alternative track, the Company's income may be 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.
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, 2016, management believes that the Company meets the aforementioned
conditions.
If the Company pays a dividend out of exempt income derived from the Approved and Beneficiary Enterprise, 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.
F - 39
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.
As of December 31, 2016, there are no profits earned by the Company Israel’s “Approved Enterprises” and “Beneficiary Enterprise”.
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 the Investment Law came into effect (the "2011 Amendment"). The 2011 Amendment
introduced a new status of "Preferred Company" and "Preferred Enterprise", replacing the then existing 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 was 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel during 2015 and
2016, an amendment to the Investment law from December 2016 reduced the tax rate in Development Zone A to 7.5% starting from
2017 while the tax rate in other areas remains 16%.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018
Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the Amendment") was
published. According to the Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5%
instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas
remains at 16%).
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 – 20% as of 2014 and
thereafter (iii) non-Israeli resident - 20% as of 2014 and thereafter subject to a reduced tax rate under the provisions of an applicable
double tax treaty.
In December 2016 new legislation amended the Investment Law (the “2016 Amendment”). Under the 2016 Amendment a new status of
“Technological Preferred Enterprise” was introduced to the Investment Law. Under the 2016 amendment, a Technological Preferred
Enterprise which is located in areas other than Development Zone A will be subject to tax at a rate of 12% on profits derived from
intellectual property. The implementation of the 2016 Amendment is subject to regulations to be promulgated by the Finance Minister by
March 31, 2017. As such regulations have not yet been promulgated and as the definitive criteria to determine the tax benefits have not
yet been established, it cannot be concluded that the legislation with respect to Technological Preferred Enterprises had been enacted or
substantively enacted as of that date. Accordingly, the above changes in the tax rates were not taken into account in the computation of
deferred taxes as of December 31, 2016. 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.
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.
d.
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.
e.
Pre-tax income (loss) is comprised as follows:
Domestic
Foreign
F - 41
Year ended
December 31,
2015
2016
2014
$
(7,033) $
1,243
(16,898) $
412
(3,792)
1,345
$
(5,790) $
(16,486) $
(2,447)
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.
f.
A reconciliation of the theoretical tax expenses, assuming all income is taxed at the statutory tax rate applicable to the income of the
Company and the actual tax expenses is as follows:
Year ended
December 31,
2015
2016
2014
Loss before taxes on income
$
(5,790) $
(16,486) $
(2,447)
Theoretical tax expense computed at the Israeli statutory tax rate (25%, 26.5% and
26.5% for the years 2016, 2015 and 2014, respectively)
$
(1,448) $
(4,369) $
(649)
Changes in valuation allowance
Increase (decrease) in losses and temporary differences due to change in Israeli
corporate and “Approved Enterprise" tax
Write off of prepaid and withholding taxes
Foreign tax rates differences related to subsidiaries
Non-deductible expenses and other
Non-deductible share-based compensation expense
(469)
3,716
(1,328)
(216)
1,759
576
567
1,435
679
1,150
103
181
1,896
611
-
(34)
(381)
1,831
Actual tax expense
$
2,204 $
3,356 $
50
g.
Income tax expense is comprised as follows:
Current taxes
Deferred taxes (benefit)
Write off of prepaid and withholding taxes
F - 42
Year ended December 31,
2015
2016
2014
$
203 $
242
1,759
146 $
2,060
1,150
612
(562)
-
$
2,204 $
3,356 $
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
h.
Net operating losses carry forward:
ALLOT COMMUNICATIONS LTD.
The Company has accumulated net operating losses for tax purposes as of December 31, 2016, in the amount of approximately $ 46,600,
which may be carried forward and offset against taxable income in the future for an indefinite period. In December 2014, the Israeli Tax
Authorities approved a final tax ruling with respect to the Company’s acquisition of Oversi. According to the ruling, the net operating
losses may be offset against taxable income annually with a limitation of up to 14% of the total accumulated losses but no more than
50% of the Company's taxable income. As of December 31, 2016, the Company recorded a full valuation allowance with respect to its
deferred tax assets in Allot Communications Ltd. and wrote-off prepaid and withholding taxes of $ 1,759 as the Company does not
expect to utilize these tax assets in the near future. In addition, the Company has accumulated capital losses for tax purposes as of
December 31, 2016, 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 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 $ 5,517. The federal
accumulated losses for tax purposes expire between 2026 and 2032. The state accumulated losses for tax purposes began to expire in
2014. An amount of $ 1,707 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.
F - 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
i.
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,
2016
2015
$
12,900
2,022
$
14,842
948
14,922
(14,655)
267
15,790
(15,124)
666
$
-
267
$
(157)
509
j.
As of December 31, 2016, the provision in respect of ASC 740-10 was immaterial. As of December 31, 2015, the Company recorded a
provision in the amount of $293. The accrued interest and penalties related to the provision in income taxes is immaterial.
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
a few exceptions, the Company is no longer subject to Israeli tax assessment through the year 2012 and the European and U.S.
subsidiaries have final tax assessments through 2012.
F - 44
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
Americas (excluding the United States)
Middle East and Africa
United States
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, 2016 and 2015:
Long-lived assets:
Israel
United States
Other
F - 45
Year ended
December 31,
2015
2016
$
34,279 $
27,700
13,094
12,365
2,931
39,110 $
28,495
14,347
9,809
8,206
2014
41,238
41,990
3,299
15,352
15,307
$
90,369 $
99,967 $
117,186
Year ended
December 31,
2015
2016
2014
25%
17%
-
42%
27%
-
10%
37%
27%
-
17%
44%
December 31,
2016
2015
$
4,156 $
42
189
4,924
109
156
$
4,387 $
5,189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- FINANCIAL INCOME (EXPENSES), NET
Financial income:
Interest income
Financial expenses:
ALLOT COMMUNICATIONS LTD.
Year ended
December 31,
2015
2016
2014
$
2,466 $
2,174 $
1,900
Exchange rate differences and other
Amortization/accretion of premium/discount on marketable securities, net
186
1,221
1,480
1,278
174
1,066
$
1,059 $
(584) $
660
NOTE 16:- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share:
Numerator:
Net loss
Year ended
December 31,
2015
2016
2014
$
(7,994) $
(19,842) $
(2,497)
Denominator:
Weighted average number of shares outstanding used in computing diluted net loss per share
33,202,309
33,419,917 33,143,168
Basic and diluted net loss per share
$
(0.24) $
(0.59) $
(0.08)
The following numbers of shares were excluded from the computation of diluted net loss per ordinary share for the periods presented because
including them would have had an anti-dilutive effect:
Year ended
December 31,
2015
2016
2014
Ordinary shares
2,000,757
3,424,891
2,300,425
F - 46
ALLOT COMMUNICATIONS LTD.
2016 INCENTIVE COMPENSATION PLAN [AMENDMENT OF 2006 PLAN]
EXHIBIT 4.2
Allot Communications Ltd., an Israeli corporation (the “Company”), has adopted the Allot Communications Ltd. 2016 Incentive Compensation Plan
(the “Plan”) for the benefit of non-employee directors of the Company, officers and eligible employees and consultants of the Company and any Subsidiaries
and Affiliates (as each term is defined below), as follows:
ARTICLE I.
ESTABLISHMENT; PURPOSES; AND DURATION
1.1. Establishment of the Plan. This incentive compensation plan, to be known as the “Allot Communications Ltd. 2016 Incentive
Compensation Plan” (the “Plan”) as set forth in this document, amends and restates the Allot Communications Ltd. 2006 Incentive Compensation Plan. The
Plan permits the grant of Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares, Cash-
Based Awards and Other Stock-Based Awards. The Plan was adopted by the Board of Directors (as defined below) on October 29, 2006 and amended and
restated effective as of October 28, 2016 (the "Effective Date").
1.2. Purposes of the Plan. The purposes of the Plan are to provide additional incentives to non-employee directors of the Company and to those
officers, employees and consultants of the Company, Subsidiaries and Affiliates whose substantial contributions are essential to the continued growth and
success of the business of the Company and the Subsidiaries and Affiliates, in order to strengthen their commitment to the Company and the Subsidiaries and
Affiliates, and to attract and retain competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company and
to further align the interests of such non-employee directors, officers, employees and consultants with the interests of the shareholders of the Company. To
accomplish such purposes, the Plan provides that the Company may grant Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock
Units, Performance Units, Performance Shares, Cash-Based Awards and Other Stock-Based Awards.
1.3. Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1, and shall remain in effect, subject to
the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article XV, until all Shares subject to it shall have been delivered,
and any restrictions on such Shares have lapsed, pursuant to the Plan’s provisions. However, in no event may an Award be granted under the Plan on or after
ten years from the Effective Date.
ARTICLE II.
DEFINITIONS
Whenever used in the Plan, the fol-lowing terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:
2.1. “Affiliate” means any entity other than the Company and any Subsidiary that is affiliated with the Company through stock or equity
ownership or otherwise and is designated as an Affiliate for purposes of the Plan by the Committee.
2.2. “Assumed” means that pursuant to a transaction resulting in a Change of Control, either (a) the Award is expressly affirmed by the
Company or (b) the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the surviving or
successor corporation or entity to the Company, or any parent or subsidiary of either thereof, or any other corporation or entity that is a party to the transaction
resulting in the Change of Control, in connection with such Change of Control, with appropriate adjustments to the number and kind of securities of such
surviving or successor corporation or entity, or such other applicable parent, subsidiary, corporation or entity, subject to the Award and the exercise or
purchase price thereof, which preserves the compensation element of the Award existing at the time of such Change of Control transaction, and provides for
subsequent payout in accordance with the same (or more favorable) payment and vesting schedule applicable to such Award, as determined in accordance
with the instruments evidencing the agreement to assume the Award. The determination of Award comparability for this purpose shall be made by the
Committee, and its determination shall be final, binding and conclusive.
2.3. “Award” means, individually or collectively, a grant under the Plan of Stock Options, Stock Appreciation Rights, Restricted Stock
Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards, and Other Stock-Based Awards.
2.4. “Award Agreement” means either: (a) a written agreement entered into by the Company and a Participant setting forth the terms and
provisions applicable to an Award granted under the Plan, or (b) a written or electronic statement issued by the Company to a Participant describing the terms
and provisions of such Award, including any amendment or modification thereof. The Committee may provide for the use of electronic, internet or other non-
paper Award Agreements, and the use of electronic, internet or other non-paper means for the acceptance thereof and actions thereunder by a Participant.
2.5. “Beneficial Ownership” (including correlative terms) shall have the meaning given such term in Rule 13d-3 promulgated under the
Exchange Act.
2.6. “Board” or “Board of Directors” means the Board of Directors of the Company.
2.7. “Cash-Based Award” means an Award granted to a Participant, as described in Article IX.
2.8. “Cause” shall have the definition given to such term in a Participant’s Award Agreement, or in the absence of any such definition, as
determined in good faith by the Committee.
2.9. “Change of Control” means the occurrence of any of the following:
(a) an acquisition in one transaction or a series of related transactions (other than directly from the Company or pursuant to Awards
granted under the Plan or compensatory options or other similar awards granted by the Company) by any Person of any Voting Securities of the Company,
immediately after which such Person has Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the Company’s then
outstanding Voting Securities; provided, however, that in determining whether a Change of Control has occurred pursuant to this Section 2.9(a), Voting
Securities of the Company which are acquired in a Non-Control Acquisition shall not constitute an acquisition that would cause a Change of Control; or
(b) the consummation of any merger, consolidation, recapitalization or reorganization involving the Company unless:
(i) the shareholders of the Company, immediately before such merger, consolidation, recapitalization or reorganization, own,
directly or indirectly, immediately following such merger, consolidation, recapitalization or reorganization, more than fifty percent (50%) of the
combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation or reorganization (the
“Company Surviving Corporation”) in substantially the same proportion as their ownership of the Voting Securities of the Company immediately
before such merger, consolidation, recapitalization or reorganization; and
(ii) the individuals who were members of the Board immediately prior to the execution of the agreement providing for such merger,
consolidation, recapitalization or reorganization constitute at least a majority of the members of the board of directors of the Company Surviving
Corporation, or a corporation Beneficially Owning, directly or indirectly, a majority of the voting securities of the Company Surviving Corporation,
and
(iii) no Person, other than (A) the Company, (B) any Related Entity, (C) any employee benefit plan (or any trust forming a part
thereof) that, immediately prior to such merger, consolidation, recapitalization or reorganization, was maintained by the Company, the Company
Surviving Corporation, or any Related Entity or (D) any Person who, together with its Affiliates, immediately prior to such merger, consolidation,
recapitalization or reorganization had Beneficial Ownership of fifty percent (50%) or more of the then outstanding Voting Securities of the Company,
owns, together with its Affiliates, Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the Company Surviving
Corporation’s then outstanding Voting Securities
(a transaction described in clauses (d)(i) through (d)(iii) above is referred to herein as a “Non-Control Transaction”); or
(c) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially
all of the assets or business of the Company to any Person (other than (A) a transfer or distribution to a Related Entity, or (B) a transfer or distribution to the
Company’s shareholders of the stock of a Related Entity or any other assets).
Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial
Ownership of fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities of the Company as a result of the
acquisition of Voting Securities of the Company by the Company which, by reducing the number of Voting Securities of the Company then outstanding,
increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change of Control would occur (but for the
operation of this sentence) as a result of the acquisition of Voting Securities by the Company and (1) before such share acquisition by the Company the
Subject Person becomes the Beneficial Owner of any new or additional Voting Securities of the Company in a related transaction or (2) after such share
acquisition by the Company the Subject Person becomes the Beneficial Owner of any new or additional Voting Securities of the Company which in either
case increases the percentage of the then outstanding Voting Securities of the Company Beneficially Owned by the Subject Person, then a Change of Control
shall be deemed to occur.
Solely for purposes of this Section 2.9, (1) “Affiliate” shall mean, with respect to any Person, any other Person that, directly or indirectly, controls, is
controlled by, or is under common control with, such Person, and (2) “control” (including with correlative meanings, the terms “controlling,” “controlled by”
and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the
management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. Any Relative (for this purpose,
“Relative” means a spouse, child, parent, parent of spouse, sibling or grandchild) of an individual shall be deemed to be an Affiliate of such individual for this
purpose. None of the Company or any Person controlled by the Company shall be deemed to be an Affiliate of any holder of Shares.
2.10. “Committee” means the Compensation Committee of the Board of Directors or a subcommittee thereof, or such other committee
designated by the Board to administer the Plan. Corporate Law defined the provisions applicable to the Compensation Committee]
2.11. “Company Surviving Corporation” has the meaning provided in Section 2.9(b)(i).
2.12. “Consultant” means an independent contractor who performs services for the Company or a Subsidiary or Affiliate in a capacity other
than as an Employee or Director.
2.13. “Director” means any individual who is a member of the Board of Directors of the Company.
2.14. “Dividend Equivalents” means the equivalent value (in cash or Shares) of dividends that would otherwise be paid on the Shares subject
to an Award but that have not been issued or delivered, as described in Article XI.
2.15. “Effective Date” shall have the meaning ascribed to such term in Section 1.1.
2.16. “Employee” means any person designated as an employee of the Company, a Subsidiary and/or an Affiliate on the payroll records
thereof. An Employee shall not include any individual during any period he or she is classified or treated by the Company, a Subsidiary or an Affiliate as an
independent contractor, a Consultant, or any employee of an employment, consulting, or temporary agency or any other entity other than the Company, a
Subsidiary and/or an Affiliate without regard to whether such individual is subsequently determined to have been, or is subsequently retroactively reclassified
as a common-law employee of the Company, a Subsidiary and/or an Affiliate during such period. As further provided in Section 18.4, for purposes of the
Plan, upon approval by the Committee, the term Employee may also include Employees whose employment with the Company, a Subsidiary or an Affiliate
has been terminated subsequent to being granted an Award under the Plan. For the avoidance of doubt, a Director who would otherwise be an “Employee”
within the meaning of this Section 2.16 shall be considered an Employee for purposes of the Plan.
2.17. “Exchange Act” means the Securities Exchange Act of 1934, as it may be amended from time to time, including the rules and
regulations promulgated thereunder and successor provisions and rules and regulations thereto.
2.18. “Fair Market Value” means (i) If the Shares are listed on any established Share exchange or a national market system, including without
limitation the Tel-Aviv Share Exchange, the NASDAQ National Market system, or the NASDAQ SmallCap Market of the NASDAQ Share Market, the Fair
Market Value shall be the closing sales price for such Shares (or the closing bid, if no sales were reported), as quoted on such exchange or system for the last
market trading day prior to time of determination, as reported in the Wall Street Journal, or such other source as the Board deems reliable; (ii) If the Shares are
regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value shall be the mean between the high bid and low
asked prices for the Shares on the last market trading day prior to the day of determination, or; (iii) In the absence of an established market for the Shares, the
Fair Market Value thereof shall be determined in good faith by the Board.
2.19. “Fiscal Year” means the calendar year, or such other consecutive twelve-month period as the Committee may select.
2.20. “Freestanding SAR” means a SAR that is granted independently of any Options, as described in Article VII.
2.21. “Good Reason” shall have the definition given such term in a Participant’s Award Agreement, or in the absence of any such definition,
as determined in good faith by the Committee.
2.22. “Grant Price” means the price established at the time of grant of a SAR pursuant to Article VII, used to determine whether there is any
payment due upon exercise of the SAR.
2.23. “Insider” means an individual who is, on the relevant date, an officer, director or ten percent (10%) Beneficial Owner of any class of the
Company’s equity securities that is registered pursuant to Section 12 of the Exchange Act, as determined by the Committee in accordance with Section 16 of
the Exchange Act.
2.24. “Non-Control Acquisition” means an acquisition (whether by merger, stock purchase, asset purchase or otherwise) by (a) an employee
benefit plan (or a trust forming a part thereof) maintained by (i) the Company or (ii) any corporation or other Person of which fifty percent (50%) or more of
its total value or total voting power of its Voting Securities or equity interests is owned, directly or indirectly, by the Company (a “Related Entity”); (b) the
Company or any Related Entity; (c) any Person in connection with a Non-Control Transaction; or (d) any Person that owns, together with its Affiliates,
Beneficial Ownership of fifty percent (50%) or more of the outstanding Voting Securities of the Company on the Effective Date.
2.25. “Non-Control Transaction” shall have the meaning provided in Section 2.9(b).
2.26. “Non-Employee Director” means a Director who is not an Employee.
2.27. “Notice” means notice provided by a Participant to the Company in a manner prescribed by the Committee.
2.28. “Option” or “Stock Option” means a Stock Option, as described in Article VI.
2.29. “Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.
2.30. “Other Stock-Based Award” means an equity-based or equity-related Award described in Section 10.1, granted in accordance with the
terms and conditions set forth in Article X.
2.31. “Participant” means any eligible Person as set forth in Article V who holds one or more outstanding Awards.
2.32. “Performance Period” means the period of time during which the performance goals must be met in order to determine the degree of
payout and/or vesting with respect to, or the amount or entitlement to, an Award.
2.33. “Performance Share” means an Award of a performance share granted to a Participant, as described in Article IX.
2.34. “Performance Unit” means an Award of a performance unit granted to a Participant, as described in Article IX.
2.35. “Period of Restriction” means the period during which Shares of Restricted Stock or Restricted Stock Units are subject to a substantial
risk of forfeiture, and, in the case of Restricted Stock, the transfer of Shares of Restricted Stock is limited in some way, as provided in Article VIII.
2.36. “Person” means “person” as such term is used for purposes of Section 13(d) or 14(d) of the Exchange Act, including any individual,
corporation, limited liability company, partnership, trust, unincorporated organization, government or any agency or political subdivision thereof, or any other
entity or any group of persons.
2.37. “Prior Option Plans” means the Allot Communications Ltd. Stock Option Plan (2003), the Allot Communications Ltd. Key Employees
Share Incentive Plan and the Allot Communications Ltd. Key Employees of subsidiaries and consultants Share Incentive Plan.
2.38. “Replaced” means that pursuant to a transaction resulting in a Change of Control, the Award is replaced with a comparable stock award
or a cash incentive program by the Company, the surviving or successor corporation or entity to the Company, or any parent or subsidiary of either thereof, or
any other corporation or entity that is a party to the transaction resulting in the Change of Control, in connection with such Change of Control, which
preserves the compensation element of the Award existing at the time of such Change of Control transaction, and provides for subsequent payout in
accordance with the same (or more favorable) payment and vesting schedule applicable to such Award, as determined in accordance with the instruments
evidencing the agreement to assume the Award. The determination of Award comparability for this purpose shall be made by the Committee, and its
determination shall be final, binding and conclusive.
2.39. “Restricted Stock” means an Award granted to a Participant pursuant to Article VIII.
2.40. “Restricted Stock Unit” means an Award, whose value is equal to a Share, granted to a Participant pursuant to Article VIII.
2.41. “Rule 16b-3” means Rule 16b-3 under the Exchange Act, or any successor rule, as the same may be amended from time to time.
2.42. “Securities Act” means the Securities Act of 1933, as it may be amended from time to time, including the rules and regulations
promulgated thereunder and successor provisions and rules and regulations thereto.
2.43. “Share” means an Ordinary Share, par value NIS0.10 per share, of the Company (including any new, additional or different stock or
securities resulting from any change in corporate capitalization as listed in Section 4.2).
2.44. “Stock Appreciation Right” or “SAR” means an Award, granted alone (a “Freestanding SAR”) or in connection with a related Option (a
“Tandem SAR”), designated as an SAR, pursuant to the terms of Article VII.
2.45. “Subject Person” has the meaning provided in Section 2.9.
2.46. “Subsidiary” means any present or future corporation which is or would be a “subsidiary corporation” of the Company as determined by
the Committee.
2.47. “Substitute Awards” means Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for,
options or other awards previously granted, or the right or obligation to grant future options or other awards, by a company acquired by the Company, a
Subsidiary and/or an Affiliate or with which the Company, a Subsidiary and/or an Affiliate combines, or otherwise in connection with any merger,
consolidation, acquisition of property or stock, or reorganization involving the Company, a Subsidiary or an Affiliate.
2.48. “Tandem SAR” means an SAR that is granted in connection with a related Option pursuant to Article VII.
2.49. “Termination” means the time when a Participant ceases the performance of services for the Company, any Affiliate or Subsidiary, as
applicable, for any reason, with or without Cause, including a Termination by resignation, discharge, death, Disability or Retirement, but excluding (a) a
Termination where there is a simultaneous reemployment (or commencement of service) or continuing employment (or service) of a Participant by the
Company, Affiliate or any Subsidiary, (b) at the discretion of the Committee, a Termination that results in a temporary severance, (c) at the discretion of the
Committee, a Termination of an Employee that is immediately followed by the Participant’s service as a Non-Employee Director or Consultant.
2.50. “Voting Securities” shall mean, with respect to any Person that is a corporation, all outstanding voting securities of such Person entitled
to vote generally in the election of the board of directors of such Person.
ARTICLE III.
ADMINISTRATION
3.1. General. The Committee shall have exclusive authority to operate, manage and administer the Plan in accordance with its terms and
conditions. Notwithstanding the foregoing, in its absolute discretion, the Board may at any time and from time to time exercise any and all rights, duties and
responsibilities of the Committee under the Plan, including establishing procedures to be followed by the Committee, but excluding matters which under any
applicable law, regulation or rule, including any exemptive rule under Section 16 of the Exchange Act (including Rule 16b-3), are required to be determined
in the sole discretion of the Committee. If and to the extent that the Committee does not exist or cannot function, the Board may take any action under the
Plan that would otherwise be the responsibility of the Committee, subject to the limitations set forth in the immediately preceding sentence.
3.2. Committee. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of
Directors.
3.3. Authority of the Committee. The Committee shall have full discretionary authority to grant or, when so restricted by applicable law,
recommend the Board to grant, pursuant to the terms of the Plan, Awards to those individuals who are eligible to receive Awards under the Plan. Except as
limited by law or by the Articles of Association of the Company, and subject to the provisions herein, the Committee shall have full power, in accordance
with the other terms and provisions of the Plan, to:
(a) select Employees, Non-Employee Directors and Consultants who may receive Awards under the Plan and become Participants;
(b) determine eligibility for participation in the Plan and decide all questions concerning eligibility for, and the amount of, Awards
under the Plan;
(c) determine the sizes and types of Awards;
(d) determine the terms and conditions of Awards, including the Option Prices of Options and the Grant Prices of SARs;
(e) grant Awards as an alternative to, or as the form of payment for grants or rights earned or payable under, other bonus or
compensation plans, arrangements or policies of the Company or a Subsidiary or Affiliate;
(f) grant Substitute Awards on such terms and conditions as the Committee may prescribe;
(g) make all determinations under the Plan concerning Termination of any Participant’s employment or service with the Company or
a Subsidiary or Affiliate, including whether such Termination occurs by reason of Cause, Good Reason, disability, retirement or in connection with a Change
of Control and whether a leave constitutes a Termination;
(h) construe and interpret the Plan and any agreement or instru-ment entered into under the Plan, including any Award Agreement;
(i) establish and administer any terms, conditions, restrictions, limitations, forfeiture, vesting or exercise schedule, and other
provisions of or relating to any Award;
(j) establish and administer any performance goals in connection with any Awards, including performance criteria and applicable
Performance Periods, determine the extent to which any performance goals and/or other terms and conditions of an Award are attained or are not attained;
(k) construe any ambiguous provisions, correct any defects, supply any omissions and reconcile any inconsistencies in the Plan
and/or any Award Agreement or any other instrument relating to any Awards;
(l) establish, adopt, amend, waive and/or rescind rules, regulations, procedures, guidelines, forms and/or instruments for the Plan’s
operation or administration;
(m) make all valuation determinations relating to Awards and the payment or settlement thereof;
(n) grant waivers of terms, conditions, restrictions and limitations under the Plan or applicable to any Award, or accelerate the
vesting or exercisability of any Award;
(o) subject to the provisions of Article XV, amend or adjust the terms and conditions of any outstanding Award and/or adjust the
number and/or class of shares of stock subject to any outstanding Award;
(p) at any time and from time to time after the granting of an Award, specify such additional terms, conditions and restrictions with
respect to such Award as may be deemed necessary or appropriate to ensure compliance with any and all applicable laws or rules, including terms, restrictions
and conditions for compliance with applicable securities laws or listing rules, methods of withholding or providing for the payment of required taxes and
restrictions regarding a Participant’s ability to exercise Options through a cashless (broker-assisted) exercise;
(q) offer to buy out an Award previously granted, based on such terms and conditions as the Committee shall establish with and
communicate to the Participant at the time such offer is made;
(r) determine whether, and to what extent and under what circumstances Awards may be settled in cash, Shares or other property or
canceled or suspended; and
(s) exercise all such other authorities, take all such other actions and make all such other determinations as it deems necessary or
advisable for the proper operation and/or administration of the Plan.
3.4. Award Agreements. The Committee shall, subject to applicable laws and rules, determine the date an Award is granted. Each Award
shall be evidenced by an Award Agreement; however, two or more Awards granted to a single Participant may be combined in a single Award Agreement.
An Award Agreement shall not be a precondition to the granting of an Award; provided, however, that (a) the Committee may, but need not, require as a
condition to any Award Agreement’s effectiveness, that such Award Agreement be executed on behalf of the Company and/or by the Participant to whom the
Award evidenced thereby shall have been granted (including by electronic signature or other electronic indication of acceptance), and such executed Award
Agreement be delivered to the Company, and (b) no person shall have any rights under any Award unless and until the Participant to whom such Award shall
have been granted has complied with the applicable terms and conditions of the Award. The Committee shall prescribe the form of all Award Agreements,
and, subject to the terms and conditions of the Plan, shall determine the content of all Award Agreements. Any Award Agreement may be supplemented or
amended in writing from time to time as approved by the Committee; provided that the terms and conditions of any such Award Agreement as supplemented
or amended are not inconsistent with the provisions of the Plan. In the event of any dispute or discrepancy concerning the terms of an Award, the records of
the Committee or its designee shall be determinative.
3.5. Discretionary Authority; Decisions Binding. The Committee shall have full discretionary authority in all matters related to the discharge
of its responsibilities and the exercise of its authority under the Plan. All determinations, decisions, actions and interpretations by the Committee with respect
to the Plan and any Award Agreement, and all related orders and resolutions of the Committee shall be final, conclusive and binding on all Participants, the
Company and its shareholders, any Subsidiary or Affiliate and all persons having or claiming to have any right or interest in or under the Plan and/or any
Award Agreement. The Committee shall consider such factors as it deems relevant to making or taking such decisions, determinations, actions and
interpretations, including the recommendations or advice of any Director or officer or employee of the Company, any director, officer or employee of a
Subsidiary or Affiliate and such attorneys, consultants and accountants as the Committee may select. A Participant or other holder of an Award may contest a
decision or action by the Committee with respect to such person or Award only on the grounds that such decision or action was arbitrary or capricious or was
unlawful, and any review of such decision or action shall be limited to determining whether the Committee’s decision or action was arbitrary or capricious or
was unlawful.
3.6. Attorneys; Consultants. The Committee may consult with counsel who may be counsel to the Company. The Committee may, with the
approval of the Board, employ such other attorneys and/or consultants, accountants, appraisers, brokers, agents and other persons, any of whom may be an
Employee, as the Committee deems necessary or appropriate. The Committee, the Company and its officers and Directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. The Committee shall not incur any liability for any action taken in good faith in reliance upon the advice
of such counsel or other persons.
3.7. Delegation of Administration. Except to the extent prohibited by applicable law, including any applicable exemptive rule under Section
16 of the Exchange Act (including Rule 16b-3), or the applicable rules of a stock exchange, the Committee may, in its discretion, allocate all or any portion of
its responsibilities and powers under this Article III to any one or more of its members and/or delegate all or any part of its responsibilities and powers under
this Article III to any person or persons selected by it; provided, however, that the Committee may not delegate its authority to correct defects, omissions or
inconsistencies in the Plan. Any such authority delegated or allocated by the Committee under this Section 3.7 shall be exercised in accordance with the terms
and conditions of the Plan and any rules, regulations or administrative guidelines that may from time to time be established by the Committee, and any such
allocation or delegation may be revoked by the Committee at any time.
ARTICLE IV.
SHARES SUBJECT TO THE PLAN
4.1. Number of Shares Available for Grants. The shares of stock subject to Awards granted under the Plan shall be Shares. Such Shares
subject to the Plan may be either authorized and unissued shares or previously issued shares acquired by the Company or any Subsidiary. Subject to
adjustment as provided in Section 4.2, the total number of Shares that may be delivered pursuant to Awards under the Plan shall be (x) 543,003 Shares,
representing all Shares remaining available for issuance and not subject to outstanding awards under the Prior Option Plans on the Effective Date (as may be
increased by no more than 3,001,204 Shares subject to outstanding awards under the Prior Option Plans on the Effective Date that are subsequently forfeited
or terminate for any other reason before being exercised) and (y) an annual increase on the first day of each fiscal year during the term of the Plan, beginning
January 1, 2017, in each case in an amount equal to the lesser of (i) 1,000,000 Shares, (ii) 3.5% of the outstanding Shares on the last day of the immediately
preceding year, or (iii) an amount determined by the Board. If (a) any Shares are subject to an Option, SAR, or other Award which for any reason expires or
is terminated or canceled without having been fully exercised or satisfied, or are subject to any Restricted Stock Award (including any Shares subject to a
Participant’s Restricted Stock Award that are repurchased by the Company at the Participant’s cost), Restricted Stock Unit Award or other Award granted
under the Plan which are forfeited, or (b) any Award based on Shares is settled for cash, expires or otherwise terminates without the issuance of such Shares,
the Shares subject to such Award shall, to the extent of any such expiration, termination, cancellation, forfeiture or cash settlement, be available for delivery
in connection with future Awards under the Plan. Any Shares delivered under the Plan upon exercise or satisfaction of Substitute Awards shall not reduce the
Shares available for delivery under the Plan.
4.2. Adjustments in Authorized Shares. In the event of any reclassification, recapitalization, merger or consolidation (other than if resulting in
a Change of Control), reorganization, , stock dividend or other distribution in securities of the Company, stock split or reverse stock split, combination or
exchange of shares, repurchase of shares, or other like change in corporate structure, that proportionally apply to all shares of the Company, the Committee,
shall substitute or adjust, as applicable, the number, class and kind of securities which may be delivered under Section 4.1; the number, class and kind, and/or
price (such as the Option Price of Options or the Grant Price of SARs) of securities subject to outstanding Awards; and other value determinations applicable
to outstanding Awards, as determined by the Committee, in order to prevent dilution or enlargement of Participants’ rights under the Plan; provided, however,
that the number of Shares subject to any Award shall always be a whole number. The Committee, shall also make appropriate adjustments and modifications,
as determined by the Committee, in the terms of any outstanding Awards to reflect or related to any such events, adjustments, substitutions or changes,
including modifications of performance goals and changes in the length of Performance Periods.] All determinations of the Committee as to adjustments or
changes, if any, under this Section 4.2 shall be conclusive and binding on the Participants.
4.3. No Limitation on Corporate Actions. The existence of the Plan and any Awards granted hereunder shall not affect in any way the right or
power of the Company, any Subsidiary or any Affiliate to make or authorize any adjustment, recapitalization, reorganization or other change in its capital
structure or business structure, any merger or consolidation, any issuance of debt, preferred or prior preference stock ahead of or affecting the Shares,
additional shares of capital stock or other securities or subscription rights thereto, any dissolution or liquidation, any sale or transfer of all or part of its assets
or business or any other corporate act or proceeding.
ARTICLE V.
ELIGIBILITY AND PARTICIPATION
5.1. Eligibility. Employees, Non-Employee Directors and Consultants shall be eligible to become Participants and receive Awards in
accordance with the terms and conditions of the Plan.
5.2. Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select Participants from all eligible
Employees, Non-Employee Directors and Consultants and shall determine the nature and amount of each Award.
ARTICLE VI.
STOCK OPTIONS
6.1. Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such
terms, and at any time and from time to time as shall be determined by the Committee. The Committee may grant an Option or provide for the grant of an
Option, either from time to time in the discretion of the Committee or automatically upon the occurrence of specified events, including the achievement of
performance goals, the satisfaction of an event or condition within the control of the recipient of the Option or within the control of others. The granting of an
Option shall take place when the Committee by resolution, written consent or other appropriate action determines to grant such Option for a particular number
of Shares to a particular Participant at a particular Option Price, unless a later date is indicated in such a resolution .
6.2. Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the maximum
duration of the Option, the number of Shares to which the Option pertains, the conditions upon which the Option shall become exercisable and such other
provisions as the Committee shall determine, which are not inconsistent with the terms of the Plan.
6.3. Option Price. The Option Price for each Option shall be determined by the Committee and set forth in the Award Agreement; provided
that Substitute Awards or Awards granted in connection with an adjustment provided for in Section 4.2, in the form of stock options, shall have an Option
Price per Share that is intended to maintain the economic value of the Award that was replaced or adjusted, as determined by the Committee.
6.4. Duration of Options. Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant
and set forth in the Award Agreement. provided, however, that, unless the Board determines otherwise, no Option shall be exercisable later than the tenth
(10th) anniversary of its date of grant.
6.5. Exercise of Options. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall
in each instance determine and set forth in the Award Agreement, which need not be the same for each grant or for each Option or Participant.
6.6. Payment. Options shall be exercised by the delivery of a written notice of exercise to the Company, in a form specified or accepted by
the Committee, or by complying with any alternative exercise procedures that may be authorized by the Committee, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for such Shares, which shall include applicable taxes, if any, in accordance with
Article XVI. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equiva-lent; (b) subject to such
terms, conditions and limitations as the Committee may prescribe, by tendering (either by actual delivery or attestation) unencumbered Shares previously
acquired by the Participant exercising such Option having an aggregate Fair Market Value at the time of exercise equal to the total Option Price, (c) by a
combination of (a) and (b); or (d) by any other method approved or accepted by the Committee in its sole discretion, including, if the Committee so
determines, (x) a cashless (broker-assisted) exercise that complies with all applicable laws or (y) withholding of Shares otherwise deliverable to the
Participant pursuant to the Option having an aggregate Fair Market Value at the time of exercise equal to the total Option Price. Subject to any governing
rules or regulations, as soon as practicable after receipt of a written notifi-cation of exercise and full payment in accordance with the preceding provisions of
this Section 6.6, the Company shall deliver to the Participant exercising an Option, in the Participant’s name, evidence of book entry Shares, or, upon the
Participant’s request, Share certificates, in an appropriate amount based upon the number of Shares purchased under the Option, subject to Section 18.10.
6.7. Rights as a Shareholder. No Participant or other person shall become the beneficial owner of any Shares subject to an Option, nor have
any rights to dividends or other rights of a shareholder with respect to any such Shares, until the Participant has actually received such Shares following
exercise of his or her Option in accordance with the provisions of the Plan and the applicable Award Agreement.
6.8. Termination of Employment or Service. Except as otherwise provided in the Award Agreement, an Option may be exercised only to the
extent that it is then exercisable, and if at all times during the period beginning with the date of granting of such Option and ending on the date of exercise of
such Option the Participant is an Employee, Consultant or Non-Employee Director, and shall terminate immediately upon a Termination of the Participant.
An Option shall cease to become exercisable upon a Termination of the holder thereof. Notwithstanding the foregoing provisions of this Section 6.8 to the
contrary, the Committee may determine in its discretion that an Option may be exercised following any such Termination, whether or not exercisable at the
time of such Termination; provided, however, that in no event may an Option be exercised after the expiration date of such Option specified in the applicable
Award Agreement, except as determined by the Committee.
6.9. Grants to Non-Employee Directors. The Company:
(a) may grant each Non-Employee Director, upon his or her initial election by shareholders to the Board, Options to purchase such
number of Shares as shall be determined by the Committee and otherwise approved in the manner required by law; and
(b) shall grant each Non-Employee Director, as of every third annual general meeting of the Company’s shareholders following his
or her initial election, provided that he or she is reelected at such annual general meeting, Options to purchase 30,000 Shares. The grants pursuant to this
clause (b) shall be automatic and shall not require any approval.
Unless specifically provided otherwise in the approval of any Options granted pursuant to clause (a), Options granted pursuant to this Section 6.9 shall vest
ratably over a period of three years, such that 1/12 of the Options shall vest and become exercisable at the end of each three-month period from the date of
their grant. Options granted pursuant to this Section 6.9 shall immediately vest and become exercisable upon the occurrence of a Change of Control, unless
otherwise expressly provided in the Award Agreement. All such Options shall have an Option Price equal to the closing sale price of the Shares as quoted on
the Nasdaq Global Select Market (or other Nasdaq market on which the Shares are traded) on the date of their grant.
ARTICLE VII.
STOCK APPRECIATION RIGHTS
7.1. Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time
as shall be determined by the Committee. The Committee may grant an SAR (a) in connection and simultaneously with the grant of an Option (a Tandem
SAR) or (b) independent of, and unrelated to, an Option (a Freestanding SAR). The Committee shall have complete discretion in determin-ing the number of
Shares to which an SAR pertains (subject to Article IV) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to
any SAR.
7.2. Grant Price. The Grant Price for each SAR shall be determined by the Committee and set forth in the Award Agreement, subject to the
limitations of this Section 7.2. The Grant Price for each Freestanding SAR shall be not less than one hundred percent (100%) of the Fair Market Value of a
Share on the date such Freestanding SAR is granted, except in the case of Substitute Awards or Awards granted in connection with an adjustment provided for
in Section 4.2. The Grant Price of a Tandem SAR shall be equal to the Option Price of the related Option.
7.3. Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender
of the right to exercise the equivalent portion of the related Option. A Tandem SAR shall be exercisable only when and to the extent the related Option is
exercisable and may be exercised only with respect to the Shares for which the related Option is then exercisable. A Tandem SAR shall entitle a Participant
to elect, in the manner set forth in the Plan and the applicable Award Agreement, in lieu of exercising his or her unexercised related Option for all or a portion
of the Shares for which such Option is then exercisable pursuant to its terms, to surrender such Option to the Company with respect to any or all of such
Shares and to receive from the Company in exchange therefor a payment described in Section 7.7. An Option with respect to which a Participant has elected
to exercise a Tandem SAR shall, to the extent of the Shares covered by such exercise, be canceled automatically and surrendered to the Company. Such
Option shall thereafter remain exercisable according to its terms only with respect to the number of Shares as to which it would otherwise be exercisable, less
the number of Shares with respect to which such Tandem SAR has been so exercised.
7.4. Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole
discretion, in accordance with the Plan, determines and sets forth in the Award Agreement.
7.5. Award Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the number of Shares to which the
SAR pertains, the Grant Price, the term of the SAR, and such other terms and conditions as the Committee shall determine in accordance with the Plan.
7.6. Term of SARs. The term of a SAR granted under the Plan shall be determined by the Committee, in its sole discre-tion; provided,
however, that the term of any Tandem SAR shall be the same as the related Option and unless determined otherwise, no SAR shall be exercisable more than
ten (10) years after it is granted.
7.7. Payment of SAR Amount. An election to exercise SARs shall be deemed to have been made on the date of Notice of such election to the
Company. Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:
(a) The excess of the Fair Market Value of a Share on the date of exercise over the Grant Price of the SAR; by
(b) The number of Shares with respect to which the SAR is exercised.
Notwithstanding the foregoing provisions of this Section 7.7 to the contrary, the Committee may establish and set forth in the applicable Award Agreement a
maximum amount per Share that will be payable upon the exercise of an SAR. At the discretion of the Committee, such payment upon exercise of an SAR
shall be in cash, in Shares of equivalent Fair Market Value, or in some combination thereof.
7.8. Rights as a Shareholder. A Participant receiving a SAR shall have the rights of a Shareholder only as to Shares, if any, actually issued to
such Participant upon satisfaction or achievement of the terms and conditions of the Award, and in accordance with the provisions of the Plan and the
applicable Award Agreement, and not with respect to Shares to which such Award relates but which are not actually issued to such Participant.
7.9. Termination of Employment or Service. Each SAR Award Agreement shall set forth the extent to which the Participant shall have the
right to exercise the SAR following such Participant’s Termination, if at all, subject to Section 6.8, as applicable to any Tandem SAR. Such provisions shall
be determined in the sole discretion of the Committee, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on
the reasons for Termination.
ARTICLE VIII.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
8.1. Awards of Restricted Stock and Restricted Stock Units. Subject to the terms and provisions of the Plan, the Committee, at any time and
from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to Participants in such amounts as the Committee shall determine.
Subject to the terms and conditions of this Article VIII and the Award Agreement, upon delivery of Shares of Restricted Stock to a Participant, or creation of
a book entry evidencing a Participant’s ownership of Shares of Restricted Stock, pursuant to Section 8.6, the Participant shall have all of the rights of a
shareholder with respect to such Shares, subject to the terms and restrictions set forth in this Article VIII or the applicable Award Agreement or as determined
by the Committee. Restricted Stock Units shall be similar to Restricted Stock, except no Shares are actually awarded to a Participant who is granted
Restricted Stock Units on the date of grant, and such Participant shall have no rights of a shareholder with respect to such Restricted Stock Units.
8.2. Award Agreement. Each Restricted Stock and/or Restricted Stock Unit Award shall be evidenced by an Award Agreement that shall
specify the Period of Restriction, the number of Shares of Restricted Stock or the number of Restricted Stock Units granted, and such other provisions as the
Committee shall determine in accordance with the Plan. Any Restricted Stock Award must be accepted by the Participant within a period of ninety (90) days
(or such shorter period as determined by the Committee at the time of award) after the award date, by executing such Restricted Stock Award Agreement and
providing the Committee or its designee a copy of such executed Award Agreement and payment of the applicable purchase price of such Shares of Restricted
Stock, if any, as determined by the Committee.
8.3. Nontransferability of Restricted Stock. Except as provided in this Article VIII, Shares of Restricted Stock may not be sold, transferred,
pledged, assigned, encumbered, alienated, hypothecated or otherwise disposed of until the end of the applicable Period of Restriction established by the
Committee and specified in the Restricted Stock Award Agreement.
8.4. Period of Restriction and Other Restrictions. The Period of Restriction shall lapse based on continuing service as a Non-Employee
Director or Consultant or continuing employment with the Company, a Subsidiary or an Affiliate, the achievement of performance goals, the satisfaction of
other conditions or restrictions or upon the occurrence of other events, in each case, as determined by the Committee, at its discretion, and stated in the Award
Agreement.
8.5. Delivery of Shares, Payment of Restricted Stock Units. Subject to Section 18.10, after the last day of the Period of Restriction applicable
to a Participant’s Shares of Restricted Stock, and after all conditions and restrictions applicable to such Shares of Restricted Stock have been satisfied or lapse
(including satisfaction of any applicable withholding tax obligations), pursuant to the applicable Award Agreement, such Shares of Restricted Stock shall
become freely transferable by such Participant. After the last day of the Period of Restriction applicable to a Participant’s Restricted Stock Units, and after all
conditions and restrictions applicable to Restricted Stock Units have been satisfied or lapse (including satisfaction of any applicable withholding tax
obligations), pursuant to the applicable Award Agreement, such Restricted Stock Units shall be settled by delivery of Shares, a cash payment determined by
reference to the then-current Fair Market Value of Shares or a combination of Shares and such cash payment as the Committee, in its sole discretion, shall
determine, either by the terms of the Award Agreement or otherwise.
8.6. Forms of Restricted Stock Awards. Each Participant who receives an Award of Shares of Restricted Stock shall be issued a stock
certificate or certificates evidencing the Shares covered by such Award registered in the name of such Participant, which certificate or certificates may contain
an appropriate legend. The Committee may require a Participant who receives a certificate or certificates evidencing a Restricted Stock Award to
immediately deposit such certificate or certificates, together with a stock power or other appropriate instrument of transfer, endorsed in blank by the
Participant, with signatures guaranteed in accordance with the Exchange Act if required by the Committee, with the Secretary of the Company or an escrow
holder as provided in the immediately following sentence. The Secretary of the Company or such escrow holder as the Committee may appoint shall retain
physical custody of each certificate representing a Restricted Stock Award until the Period of Restriction and any other restrictions imposed by the Committee
or under the Award Agreement with respect to the Shares evidenced by such certificate expire or shall have been removed. The foregoing to the contrary
notwithstanding, the Committee may, in its discretion, provide that a Participant’s ownership of Shares of Restricted Stock prior to the lapse of the Period of
Restriction or any other applicable restrictions shall, in lieu of such certificates, be evidenced by a “book entry” (i.e., a computerized or manual entry) in the
records of the Company or its designated agent in the name of the Participant who has received such Award. Such records of the Company or such agent
shall, absent manifest error, be binding on all Participants who receive Restricted Stock Awards evidenced in such manner. The holding of Shares of
Restricted Stock by the Company or such an escrow holder, or the use of book entries to evidence the ownership of Shares of Restricted Stock, in accordance
with this Section 8.6, shall not affect the rights of Participants as owners of the Shares of Restricted Stock awarded to them, nor affect the restrictions
applicable to such shares under the Award Agreement or the Plan, including the Period of Restriction.
8.7. Voting Rights. Unless otherwise determined by the Committee and set forth in a Participant’s Award Agreement, to the extent permitted
or required by law, as determined by the Committee, Participants holding Shares of Restricted Stock may be granted the right to exercise full voting rights
with respect to those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted Stock Units.
8.8. Dividends and Other Distributions. During the Period of Restriction, Participants holding Shares of Restricted Stock shall be credited
with any cash dividends paid with respect to such Shares while they are so held, unless determined otherwise by the Committee and set forth in the Award
Agreement. The Committee may apply any restrictions to such dividends that the Committee deems appropriate. Except as set forth in the Award
Agreement, in the event of (a) any adjustment as provided in Section 4.2, or (b) any shares or securities are received as a dividend, or an extraordinary
dividend is paid in cash, on Shares of Restricted Stock, any new or additional Shares or securities or any extraordinary dividends paid in cash received by a
recipient of Restricted Stock shall be subject to the same terms and conditions, including the Period of Restriction, as relate to the original Shares of
Restricted Stock.
8.9. Termination of Employment or Service. Except as otherwise provided in this Section 8.9, during the Period of Restriction, any Restricted
Stock Units and/or Shares of Restricted Stock held by a Participant shall be forfeited and revert to the Company (or, if Shares of Restricted Sock were sold to
the Participant, the Participant shall be required to resell such Shares to the Company at cost) upon the Participant’s Termination or the failure to meet or
satisfy any applicable performance goals or other terms, conditions and restrictions to the extent set forth in the applicable Award Agreement. Each applicable
Award Agreement shall set forth the extent to which, if any, the Participant shall have the right to retain Restricted Stock Units and/or Shares of Restricted
Stock following such Participant’s Termination. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the
applicable Award Agreement, need not be uniform among all such Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for,
or circumstances of, such Termination.
ARTICLE IX.
PERFORMANCE UNITS, PERFORMANCE SHARES, AND CASH-BASED AWARDS
9.1. Grant of Performance Units, Performance Shares and Cash-Based Awards. Subject to the terms of the Plan, Performance Units,
Performance Shares, and/or Cash-Based Awards may be granted to Participants in such amounts and upon such terms, and at any time and from time to time,
as shall be determined by the Committee, in accordance with the Plan. A Performance Unit, Performance Share or Cash-Based Award entitles the Participant
who receives such Award to receive Shares or cash upon the attainment of performance goals and/or satisfaction of other terms and conditions determined by
the Committee when the Award is granted and set forth in the Award Agreement. Such entitlements of a Participant with respect to his or her outstanding
Performance Unit, Performance Share or Cash-Based Award shall be reflected by a bookkeeping entry in the records of the Company, unless otherwise
provided by the Award Agreement. The terms and conditions of such Awards shall be consistent with the Plan and set forth in the Award Agreement and
need not be uniform among all such Awards or all Participants receiving such Awards.
9.2. Value of Performance Units, Performance Shares and Cash-Based Awards. Each Performance Unit shall have an initial value that is
established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of
grant. Each Cash-Based Award shall have a value as shall be determined by the Committee. The Committee shall set performance goals in its discretion
which, depending on the extent to which they are met, will determine the number and/or value of Performance Units and Performance Shares and Cash-Based
Awards that will be paid out to the Participant.
9.3. Earning of Performance Units, Performance Shares and Cash-Based Awards. Subject to the terms of the Plan, after the applica-ble
Performance Period has ended, the holder of Perform-ance Units, Performance Shares or Cash-Based Awards shall be entitled to receive payment on the
number and value of Performance Units, Performance Shares or Cash-Based Awards earned by the Participant over the Performance Period, to be determined
as a function of the extent to which the corresponding performance goals and/or other terms and conditions have been achieved or satisfied. The Committee
shall determine the extent to which any such pre-established performance goals and/or other terms and conditions of a Performance Unit, Performance Share
or Cash-Based Award are attained or not attained following conclusion of the applicable Performance Period. The Committee may, in its discretion, waive
any such performance goals and/or other terms and conditions relating to any such Award.
9.4. Form and Timing of Payment of Performance Units, Performance Shares and Cash-Based Awards. Payment of earned Performance
Units, Performance Shares and Cash-Based Awards shall be as determined by the Committee and as set forth in the Award Agreement. Subject to the terms
of the Plan, the Committee, in its sole discretion, may pay earned Performance Units, Performance Shares and Cash-Based Awards in the form of cash or in
Shares (or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned Performance Units, Performance Shares or
Cash-Based Awards as soon as practicable after the end of the Performance Period and following the Committee’s determination of actual performance
against the performance goals and/or other terms and conditions established by the Committee. Such Shares may be granted subject to any restrictions
imposed by the Committee, including pursuant to Section 18.10. The determination of the Committee with respect to the form of payment of such Awards
shall be set forth in the Award Agreement pertaining to the grant of the Award.
9.5. Rights as a Shareholder. A Participant receiving a Performance Unit, Performance Share or Cash-Based Award shall have the rights of a
shareholder only as to Shares, if any, actually received by the Participant upon satisfaction or achievement of the terms and conditions of such Award and not
with respect to Shares subject to the Award but not actually issued to such Participant.
9.6. Termination of Employment or Service. Each Award Agreement shall set forth the extent to which the Participant shall have the right to
retain Performance Units, Performance Shares and/or Cash-Based Award following such Participant’s Termination, if at all. Such provisions shall be
determined in the sole discretion of the Committee, shall be included in the applicable Award Agreement, need not be uniform among all such Awards issued
pursuant to the Plan, and may reflect distinctions based on the reasons for Termination.
ARTICLE X.
OTHER STOCK-BASED AWARDS
10.1. Other Stock-Based Awards. The Committee may grant types of equity-based or equity-related Awards not otherwise described by the
terms of the Plan (including the grant or offer for sale of unrestricted Shares), in such amounts (subject to Article IV) and subject to such terms and
conditions, as the Committee shall determine. Such Other Stock-Based Awards may involve the transfer of actual Shares to Participants, or payment in cash
or otherwise of amounts based on the value of Shares and may include Awards designed to comply with or take advantage of the applicable local laws of
jurisdictions in which the Participants are located.
10.2. Value of Other Stock-Based Awards. Each Other Stock-Based Award shall be expressed in terms of Shares or units based on Shares, as
determined by the Committee. The Committee may establish performance goals in its discretion, and any such performance goals shall be set forth in the
applicable Award Agreement. If the Committee exercises its discretion to establish performance goals, the number and/or value of Other Stock-Based Awards
that will be paid out to the Participant will depend on the extent to which such performance goals are met.
10.3. Payment of Other Stock-Based Awards. Payment, if any, with respect to an Other Stock-Based Award shall be made in accordance with
the terms of the Award, as set forth in the Award Agreement, in cash or Shares as the Committee determines.
10.4. Termination of Employment or Service. The Committee shall determine the extent to which the Participant shall have the right to
receive Other Stock-Based Awards following the Participant’s Termination, if at all. Such provisions shall be determined in the sole discretion of the
Committee, such provisions may be included in the applicable Award Agreement, but need not be uniform among all Other Stock-Based Awards issued
pursuant to the Plan, and may reflect distinctions based on the reasons for Termination.
ARTICLE XI.
DIVIDEND EQUIVALENTS
11.1. Dividend Equivalents. Unless otherwise provided by the Committee, no adjustment shall be made in the Shares issuable or taken into
account under Awards on account of cash dividends that may be paid or other rights that may be issued to the holders of Shares prior to issuance of such
Shares under such Award. The Committee may grant Dividend Equivalents based on the dividends declared on Shares that are subject to any Award,
including any Award the payment or settlement of which is deferred pursuant to Section 18.6. Dividend Equivalents may be credited as of the dividend
payment dates, during the period between the date the Award is granted and the date the Award becomes payable or terminates or expires. Dividend
Equivalents may be subject to any limitations and/or restrictions determined by the Committee. Dividend Equivalents shall be converted to cash or additional
Shares by such formula and at such time, and shall be paid at such times, as may be determined by the Committee.
ARTICLE XII.
TRANSFERABILITY OF AWARDS; BENEFICIARY DESIGNATION
12.1. All Other Awards. Except as otherwise provided in Section 8.5 or Section 12.3 or a Participant’s Award Agreement or otherwise
determined at any time by the Committee, no Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution; provided that the Committee may permit further transferability, on a general or a
specific basis, and may impose conditions and limitations on any permitted transferability, subject to any applicable Period of Restriction. Further, except as
otherwise provided in a Participant’s Award Agreement or otherwise determined at any time by the Committee, or unless the Committee decides to permit
further transferability, subject any applicable Period of Restriction, all Awards granted to a Participant under the Plan, and all rights with respect to such
Awards, shall be exercisable or available during his or her lifetime only by or to such Participant. With respect to those Awards, if any, that are permitted to be
transferred to another individual, references in the Plan to exercise or payment related to such Awards by or to the Participant shall be deemed to include, as
determined by the Committee, the Participant’s permitted transferee. In the event any Award is exercised by or otherwise paid to the executors,
administrators, heirs or distributees of the estate of a deceased Participant, or such a Participant’s beneficiary, or the transferee of an Award, in any such case,
pursuant to the terms and conditions of the Plan and the applicable Agreement and in accordance with such terms and conditions as may be specified from
time to time by the Committee, the Company shall be under no obligation to issue Shares thereunder unless and until the Company is satisfied, as determined
in the discretion of the Committee, that the person or persons exercising such Award, or to receive such payment, are the duly appointed legal representative
of the deceased Participant’s estate or the proper legatees or distributees thereof or the named beneficiary of such Participant, or the valid transferee of such
Award, as applicable. Any purported assignment, transfer or encumbrance of an Award that does not comply with this Section 12.1 shall be void and
unenforceable against the Company.
12.2. Beneficiary Designation. Each Participant may, from time to time, name any beneficiary or beneficiaries who shall be permitted to
exercise his or her Option or SAR or to whom any benefit under the Plan is to be paid in case of the Participant’s death before he or she fully exercises his or
her Option or SAR or receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the
absence of any such beneficiary designation, a Participant’s unexercised Option or SAR, or amounts due but remaining unpaid to such Participant, at the
Participant’s death, shall be exercised or paid as designated by the Participant by will or by the laws of descent and distribution.
ARTICLE XIII.
RIGHTS OF PARTICIPANTS
13.1. Rights or Claims. No individual shall have any rights or claims under the Plan except in accordance with the provisions of the Plan and
any applicable Award Agreement. The grant of an Award under the Plan shall not confer any rights upon the Participant holding such Award other than such
terms, and subject to such conditions, as are specified in the Plan as being applicable to such type of Award, or to all Awards, or as are expressly set forth in
the Award Agreement evidencing such Award. Without limiting the generality of the foregoing, nothing contained in the Plan or in any Award Agreement
shall be deemed to:
(a) Give any Employee or Non-Employee Director the right to be retained in the service of the Company, an Affiliate and/or a Subsidiary, whether
in any particular position, at any particular rate of compensation, for any particular period of time or otherwise;
(b) Restrict in any way the right of the Company, an Affiliate and/or a Subsidiary to terminate, change or modify any Employee’s employment or
any Non-Employee Director’s service as a Director at any time with or without Cause;
(c) Confer on any Consultant any right of continued relationship with the Company, an Affiliate and/or a Subsidiary, or alter any relationship
between them, including any right of the Company or an Affiliate or Subsidiary to terminate, change or modify its relationship with a
Consultant;
(d) Give any Employee, Non-Employee Director or Consultant the right to receive any bonus, whether payable in cash or in Shares, or in any
combination thereof, from the Company, an Affiliate and/or a Subsidiary, nor be construed as limiting in any way the right of the Company, an
Affiliate and/or a Subsidiary to determine, in its sole discretion, whether or not it shall pay any Employee, Non-Employee Director or
Consultant bonuses, and, if so paid, the amount thereof and the manner of such payment; or
(e) Give any Participant any rights whatsoever with respect to an Award except as specifically provided in the Plan and the Award Agreement.
13.2. Adoption of the Plan. The adoption of the Plan shall not be deemed to give any Employee, Non-Employee Director or Consultant or
any other individual any right to be selected as a Participant or to be granted an Award, or, having been so selected, to be selected to receive a future Award.
13.3. Vesting. Notwithstanding any other provision of the Plan, a Participant’s right or entitlement to exercise or otherwise vest in any Award
not exercisable or vested at the time of grant shall only result from continued services as a Non-Employee Director or Consultant or continued employment,
as the case may be, with the Company or any Subsidiary or Affiliate, or satisfaction of any other performance goals or other conditions or restrictions
applicable, by its terms, to such Award.
13.4. No Effects on Benefits. Payments and other compensation received by a Participant under an Award are not part of such Participant’s
normal or expected compensation or salary for any purpose, including calculating termination, indemnity, severance, resignation, redundancy, end of service
payments, bonuses, long-service awards, pension or retirement benefits or similar payments under any laws, plans, contracts, arrangements or otherwise. No
claim or entitlement to compensation or damages arises from the termination of the Plan or diminution in value of any Award or Shares purchased or
otherwise received under the Plan.
13.5. One or More Types of Awards. A particular type of Award may be granted to a Participant either alone or in addition to other Awards
under the Plan.
ARTICLE XIV.
CHANGE OF CONTROL
14.1. Treatment of Outstanding Awards. In the event of a Change of Control, unless otherwise specifically prohibited by any applicable laws,
rules or regulations or otherwise provided in any applicable Award Agreement, as in effect prior to the occurrence of the Change of Control, specifically with
respect to a Change of Control:
(a) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that any Options, SARs and Other Stock-Based Awards (if
applicable) which are outstanding shall become exercisable as determined by the Committee, notwithstanding anything to the contrary in the Award
Agreement.
(b) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that restrictions, performance goals or other conditions
applicable to Restricted Stock Units, Shares of Restricted Stock and Other Stock-Based Awards previously awarded to Participants shall be canceled or
deemed achieved, the Period of Restriction applicable thereto shall terminate, and restrictions on transfer, sale, assignment, pledge or other disposition
applicable to any such Shares of Restricted Stock shall lapse, in each case, to the extent provided by the Committee, notwithstanding anything to the contrary
in the Award Agreement.
(c) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that any Awards which are outstanding shall, in whole or in
part, immediately become vested and nonforfeitable.
(d) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement or by resolution adopted prior to the occurrence of such Change of Control, that the target payment opportunities attainable under any
outstanding Awards of Performance Units, Performance Shares, Cash-Based Awards and other Awards shall be deemed to have been fully or partially earned
for any Performance Period(s), as determined by the Committee, immediately prior to the effective date of the Change of Control.
(e) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of such Change of Control, that any Award the payment or
settlement of which was deferred under Section 18.6 or otherwise may be paid or distributed immediately prior to the Change of Control, except as otherwise
provided by the Committee in accordance with Section 18.10(f).
(f) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of the Change of Control, that any outstanding Award shall be
adjusted by substituting for each Share subject to such Award immediately prior to the transaction resulting in the Change of Control the consideration
(whether stock or other securities of the surviving corporation or any successor corporation to the Company, or a parent or subsidiary thereof, or that may be
issuable by another corporation that is a party to the transaction resulting in the Change of Control) received in such transaction by holders of Shares for each
Share held on the closing or effective date of such transaction, in which event the aggregate Option Price or Grant Price, as applicable, of the Award shall
remain the same; provided, however, that if such consideration received in such transaction is not solely stock of a successor, surviving or other corporation,
the Committee may provide for the consideration to be received upon exercise or payment of an Award, for each Share subject to such Award, to be solely
stock or other securities of the successor, surviving or other corporation, as applicable, equal in fair market value, as determined by the Committee, to the per-
Share consideration received by holders of Shares in such transaction.
(g) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide, either by the terms of
the Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of the Change of Control, that any outstanding Award (or
portion thereof) shall be converted into a right to receive cash, on or as soon as practicable following the closing date or expiration date of the transaction
resulting in the Change of Control in an amount equal to the highest value of the consideration to be received in connection with such transaction for one
Share, or, if higher, the highest Fair Market Value of a Share during the thirty (30) consecutive business days immediately prior to the closing date or
expiration date of such transaction, less the per-Share Option Price, Grant Price or outstanding unpaid purchase price, as applicable to the Award, multiplied
by the number of Shares subject to such Award, or the applicable portion thereof.
terminate as of, a Change of Control.
(h) The Committee may, in its discretion, provide that an Award can or cannot be exercised after, or will otherwise terminate or not
14.2. No Implied Rights; Other Limitations. No Participant shall have any right to prevent the consummation of any of the acts described in
Section 4.2 or 14.1 affecting the number of Shares available to, or other entitlement of, such Participant under the Plan or such Participant’s Award. Any
actions or determinations of the Committee under this Article XVI need not be uniform as to all outstanding Awards, nor treat all Participants identically.
Notwithstanding the adjustments described in Section 14.1, in no event may any Option or SAR be exercised after ten (10) years from the date it was
originally granted.
ARTICLE XV.
AMENDMENT, MODIFICATION, AND TERMINATION
15.1. Amendment, Modification, and Termination. The Board may, at any time and with or without prior notice, amend, alter, suspend, or
terminate the Plan, and the Committee may, to the extent permitted by the Plan, amend the terms of any Award theretofore granted, including any Award
Agreement, in each case, retroactively or prospectively.
In addition, no such amendment, alteration, suspension or termination of the Plan or any Award theretofore granted, including any Award Agreement, shall be
made which would materially impair the previously accrued rights of a Participant under any outstanding Award without the written consent of such
Participant, provided, however, that the Board may amend or alter the Plan and the Committee may amend or alter any Award, including any Agreement,
either retroactively or prospectively, without the consent of the applicable Participant, (x) so as to preserve or come within any exemptions from liability
under Section 16(b) of the Exchange Act, pursuant to the rules and releases promulgated by the SEC (including Rule 16b-3), or (y) if the Board or the
Committee determines in its discretion that such amendment or alteration either (I) is required or advisable for the Company, the Plan or the Award to satisfy,
comply with or meet the requirements of any law, regulation, rule or accounting standard or (II) is not reasonably likely to significantly diminish the benefits
provided under such Award, or that such diminishment has been or will be adequately compensated.
ARTICLE XVI.
TAX WITHHOLDING AND OTHER TAX MATTERS
16.1. Tax Withholding. The Company and/or any Subsidiary or Affiliate are authorized to withhold from any Award granted or payment due
under the Plan the amount of all taxes due in respect of such Award or payment and take any such other action as may be necessary or appropriate, as
determined by the Committee, to satisfy all obligations for the payment of such taxes. The recipient of any payment or distribution under the Plan shall make
arrangements satisfactory to the Company, as determined in the Committee’s discretion, for the satisfaction of any tax obligations that arise by reason of any
such payment or distribution. The Company shall not be required to make any payment or distribution under or relating to the Plan or any Award until such
obligations are satisfied or such arrangements are made, as determined by the Committee in its discretion.
16.2. Withholding or Tendering Shares. Without limiting the generality of Section 16.1, the Committee may in its discretion permit a
Participant to satisfy or arrange to satisfy, in whole or in part, the tax obligations incident to an Award by: (a) electing to have the Company withhold Shares
or other property otherwise deliverable to such Participant pursuant to his or her Award (provided, however, that the amount of any Shares so withheld shall
not exceed the amount necessary to satisfy required withholding obligations using the minimum statutory withholding rates for tax purposes, including
payroll taxes, that are applicable to supplemental taxable income) and/or (b) tendering to the Company Shares owned by such Participant (or by such
Participant and his or her spouse jointly) and purchased or held for the requisite period of time as may be required to avoid the Company’s or the Affiliates’ or
Subsidiaries’ incurring an adverse accounting charge, based, in each case, on the Fair Market Value of the Shares on the payment date as determined by the
Committee. All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the
Committee, in its sole discretion, deems appropriate.
16.3. Restrictions. The satisfaction of tax obligations pursuant to this Article XVI shall be subject to such restrictions as the Committee may
impose, including any restrictions required by applicable law or the rules and regulations of the SEC, and shall be construed consistent with an intent to
comply with any such applicable laws, rule and regulations.
ARTICLE XVII.
LIMITS OF LIABILITY; INDEMNIFICATION
17.1. Limits of Liability (a) Any liability of the Company or a Subsidiary or Affiliate to any Participant with respect to any Award shall be
based solely upon contractual obligations created by the Plan and the Award Agreement.
(b) None of the Company, any Subsidiary, any Affiliate, any member of the Board or the Committee or any other person
participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any liability, in
the absence of bad faith, to any party for any action taken or not taken in connection with the Plan, except as may expressly be provided by statute.
(c) Each member of the Committee, while serving as such, shall be considered to be acting in his or her capacity as a director of
the Company. Members of the Board of Directors and members of the Committee acting under the Plan shall be fully protected in relying in good faith upon
the advice of counsel and shall incur no liability except for gross negligence or willful misconduct in the performance of their duties.
(d) The Company shall not be liable to a Participant or any other person as to: (i) the non-issuance of Shares as to which the
Company has been unable to obtain from any regulatory body having relevant jurisdiction the authority deemed by the Committee or the Company’s counsel
to be necessary to the lawful issuance and sale of any Shares hereunder, and (ii) any tax consequence expected, but not realized, by any Participant or other
person due to the receipt, exercise or settlement of any Option or other Award.
17.2. Indemnification. Subject to the requirements of applicable law, each individual who is or shall have been a member of the Committee or
of the Board, or an officer of the Company to whom authority was delegated in accordance with Article III, shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting
from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf, unless such loss, cost, liability, or
expense is a result of the individual’s own willful misconduct or except as provided by statute. The foregoing right of indemnification shall not be exclusive
of any other rights of indemnification to which such individual may be entitled under the Company’s Articles of Association, as a matter of law, or otherwise,
or any power that the Company may have to indemnify or hold harmless such individual.
ARTICLE XVIII.
MISCELLANEOUS
18.1. Drafting Context. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singu-lar shall include the plural. The words “Article,” “Section,” and “paragraph” herein shall refer to provisions of
the Plan, unless expressly indicated otherwise. The words “include,” “includes,” and “including” herein shall be deemed to be followed by “without
limitation” whether or not they are in fact followed by such words or words of similar import, unless the context otherwise requires.
18.2. Forfeiture Events. (a) Notwithstanding any provision of the Plan to the contrary, the Committee shall have the
authority to determine (and may so provide in any Agreement) that a Participant’s (including his or her estate’s, beneficiary’s or
transferee’s) rights (including the right to exercise any Option or SAR), payments and benefits with respect to any Award shall be
subject to reduction, cancellation, forfeiture or recoupment in the event of the Participant’s Termination for Cause or due to
voluntary resignation; serious misconduct; violation of the Company’s or a Subsidiary’s or Affiliate’s policies; breach of fiduciary
duty; unauthorized disclosure of any trade secret or confidential information of the Company or a Subsidiary or Affiliate; breach of
applicable noncompetition, nonsolicitation, confidentiality or other restrictive covenants; or other conduct or activity that is in
competition with the business of the Company or any Subsidiary or Affiliate, or otherwise detrimental to the business, reputation or
interests of the Company and/or any Subsidiary or Affiliate; or upon the occurrence of certain events specified in the applicable
Award Agreement (in any such case, whether or not the Participant is then an Employee, Non-Employee Director or Consultant).
The determination of whether a Participant’s conduct, activities or circumstances are described in the immediately preceding
sentence shall be made by the Committee in its good faith discretion, and pending any such determination, the Committee shall
have the authority to suspend the exercise, payment, delivery or settlement of all or any portion of such Participant’s outstanding
Awards pending an investigation of the matter.
(b) If the Company is required to prepare an accounting restatement (x) due to the material noncompliance of the Company, as a
result of misconduct, with any financial reporting requirement under the securities laws, if a Participant knowingly or grossly negligently engaged in such
misconduct, or knowingly or grossly negligently failed to prevent such misconduct, or if a Participant is one of the individuals subject to automatic forfeiture
under Section 304 of the Sarbanes-Oxley Act of 2002, the Participant shall reimburse the Company the amount of any payment in settlement of an Award
earned or accrued during the twelve- (12-) month period following the first public issuance or filing with the SEC (whichever just occurred) of the financial
document embodying such financial reporting requirement, and (y) the Committee may in its discretion provide that if the amount earned under any
Participant’s Award is reduced by such restatement, such Participant shall reimburse the Company the amount of any such reduction previously paid in
settlement of such Award.
18.3. Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
18.4. Transfer, Leave of Absence. The Committee shall have the discretion to determine the effects upon any Award, upon an individual’s
status as an Employee, Non-Employee Director or Consultant for purposes of the Plan (including whether a Participant shall be deemed to have experienced a
Termination or other change in status) and upon the exercisability, vesting, termination or expiration of any Award in the case of: (a) any Participant who is
employed by an entity that ceases to be an Affiliate or Subsidiary (whether due to a spin-off or otherwise), (b) any transfer of a Participant between locations
of employment with the Company, an Affiliate, and/or Subsidiary or between the Company, an Affiliate or Subsidiary or between Affiliates or Subsidiaries,
(c) any leave of absence of a Participant, (d) any change in a Participant’s status from an Employee to a Consultant or a Non-Employee Director, or vice
versa, (e) any increase or decrease in the scope of engagement of a Participant; and (f) upon approval by the Committee, any Employee who experiences a
Termination but becomes employed by a partnership, joint venture, corporation or other entity not meeting the requirements of an Affiliate or Subsidiary.
18.5. Exercise and Payment of Awards. An Award shall be deemed exercised or claimed when the Secretary of the Company or any other
Company official or other person designated by the Committee for such purpose receives appropriate written notice from a Participant, in form acceptable to
the Committee, together with payment of the applicable Option Price, Grant Price or other purchase price, if any, and compliance with Article XVI, in
accordance with the Plan and such Participant’s Award Agreement.
18.6. Deferrals. To the extent provided in the Award Agreement, the Committee may permit or require a Participant to defer such
Participant’s receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the lapse or waiver of the
Period of Restriction or other restrictions with respect to Restricted Stock or the payment or satisfaction of Restricted Stock Units, Performance Units,
Performance Shares, Cash-Based Awards or Other Stock-Based Awards. If any such deferral election is required or permitted, (a) such deferral shall
represent an unfunded and unsecured obligation of the Company and shall not confer the rights of a shareholder unless and until Shares are issued thereunder;
(b) the number of Shares subject to such deferral shall, until settlement thereof, be subject to adjustment pursuant to Section 4.2; and (c) the Committee shall
establish rules and procedures for such deferrals and payment or settlement thereof, which may be in cash, Shares or any combination thereof, and such
deferrals may be governed by the terms and conditions of any deferred compensation plan of the Company or Affiliate specified by the Committee for such
purpose.
18.7. Loans. The Company may, in the discretion of the Committee, extend one or more loans to Participants in connection with the exercise
or receipt of an Award granted to any such Participant; provided, however, that the Company shall not extend loans to any Participant if prohibited by law or
the rules of any stock exchange or quotation system on which the Company’s securities are listed. The terms and conditions of any such loan shall be
established by the Committee.
18.8. No Effect on Other Plans. Neither the adoption of the Plan nor anything contained herein shall affect any other compensation or
incentive plans or arrangements of the Company or any Subsidiary or Affiliate, or prevent or limit the right of the Company or any Subsidiary or Affiliate to
establish any other forms of incentives or compensation for their directors, officers, eligible employees or consultants or grant or assume options or other
rights otherwise than under the Plan.
18.9. Section 16 of Exchange Act. Unless otherwise stated in the Award Agreement, notwithstanding any other provision of the Plan, any
Award granted to an Insider shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act
(including Rule 16b-3) that are requirements for the application of such exemptive rule, and the Plan and the Award Agreement shall be deemed amended to
the extent necessary to conform to such limitations.
18.10. Requirements of Law; Limitations on Awards. (a) The granting of Awards and the issuance of Shares under the Plan shall be subject
to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
(b) If at any time the Committee shall determine, in its discretion, that the listing, registration and/or qualification of Shares upon
any securities exchange or under any law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the sale or purchase of Shares hereunder, the Company shall have no obligation to allow the grant, exercise or payment of any Award, or to
issue or deliver evidence of title for Shares issued under the Plan, in whole or in part, unless and until such listing, registration, qualification, consent and/or
approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Committee.
(c) If at any time counsel to the Company shall be of the opinion that any sale or delivery of Shares pursuant to an Award is or may
be in the circumstances unlawful or result in the imposition of excise taxes on the Company or any Subsidiary or Affiliate under the statutes, rules or
regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to
maintain any qualification or registration under the Securities Act, or otherwise with respect to Shares or Awards and the right to exercise or payment of any
Option or Award shall be suspended until, in the opinion of such counsel, such sale or delivery shall be lawful or will not result in the imposition of excise
taxes on the Company or any Subsidiary or Affiliate.
(d) Upon termination of any period of suspension under this Section 18.10, any Award affected by such suspension which shall not
then have expired or terminated shall be reinstated as to all Shares available before such suspension and as to the Shares which would otherwise have become
available during the period of such suspension, but no suspension shall extend the term of any Award.
(e) The Committee may require each person receiving Shares in connection with any Award under the Plan to represent and agree
with the Company in writing that such person is acquiring such Shares for investment without a view to the distribution thereof, and/or provide such other
representations and agreements as the Committee may prescribe. The Committee, in its absolute discretion, may impose such restrictions on the ownership
and transferability of the Shares purchasable or otherwise receivable by any person under any Award as it deems appropriate. Any such restrictions shall be
set forth in the applicable Award Agreement, and the certificates evidencing such shares may include any legend that the Committee deems appropriate to
reflect any such restrictions.
(f) An Award and any Shares received upon the exercise or payment of an Award shall be subject to such other transfer and/or
ownership restrictions and/or legending requirements as the Committee may establish in its discretion and may be referred to on the certificates evidencing
such Shares, including restrictions under applicable securities laws, under the requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable to such Shares.
18.11. Participants Deemed to Accept Plan. By accepting any benefit under the Plan, each Participant and each person claiming under or
through any such Participant shall be conclusively deemed to have indicated their acceptance and ratification of, and consent to, all of the terms and
conditions of the Plan and any action taken under the Plan by the Board, the Committee or the Company, in any case in accordance with the terms and
conditions of the Plan.
18.12. Governing Law. The Plan and, except as provided below or in an applicable subplan, each Award Agreement to a Participant shall be
governed by the laws of the State of Israel, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation
of the Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, Participants are deemed to submit to the
exclusive jurisdiction and venue of the courts in Tel-Aviv, Israel, to resolve any and all issues that may arise out of or relate to the Plan or any related Award
Agreement.
18.13. Plan Unfunded. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make
any other segregation of assets to assure the issuance of Shares or the payment of cash upon exercise or payment of any Award. Proceeds from the sale of
Shares pursuant to Options or other Awards granted under the Plan shall constitute general funds of the Company.
18.14. Administration Costs. The Company shall bear all costs and expenses incurred in administering the Plan, including expenses of issuing
Shares pursuant to any Options or other Awards granted hereunder.
18.15. Uncertificated Shares. To the extent that the Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of
such Shares may nevertheless be effected on a noncertificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange.
18.16. No Fractional Shares. An Option or other Award shall not be exercisable with respect to a fractional Share or the lesser of fifty (50)
shares or the full number of Shares then subject to the Option or other Award. No fractional Shares shall be issued upon the exercise or payment of an Option
or other Award and any such fractions shall be rounded to the nearest whole number.
18.17. Participants. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws or practices of countries in
which the Company, any Affiliate, and/or any Subsidiary operates or has Employees, Non-Employee Directors or Consultants, the Committee, in its sole
discretion, shall have the power and authority to:
(a)
Determine which Affiliates and Subsidiaries shall be covered by the Plan;
(b)
Determine which Employees, Non-Employee Directors and/or Consultants are eligible to participate in the Plan;
(c)
(d)
(e)
Grant Awards (including substitutes for Awards), and modify the terms and conditions of any Awards, on such terms and conditions as the
Committee determines necessary or appropriate to permit participation in the Plan by individuals otherwise eligible to so participate, or
otherwise to comply with applicable laws or conform to applicable requirements or practices of the applicable jurisdictions;
Establish subplans and adopt or modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or
advisable. Any subplans and modifications to Plan terms and procedures established under this Section 18.18 by the Committee shall be attached
to the Plan as appendices; and
Take any action, before or after an Award is made, that the Committee, in its discretion, deems advisable to obtain approval or comply with any
necessary local government regulatory exemptions or approvals.
Notwithstanding the above, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate any applicable law.
ALLOT COMMUNICATIONS LTD.
APPENDIX A - ISRAEL
TO THE 2006 INCENTIVE COMPENSATION PLAN
EXHIBIT 4.3
1.
GENERAL
1.1.
1.2
1.3.
1.4.
This appendix (the: “Appendix”) shall apply only to Israeli Participants who are residents of the state of Israel or those who are deemed to be
residents of the state of Israel for the payment of tax. The provisions specified hereunder shall form an integral part of the 2006 Incentive
Compensation Plan of Allot Communications Ltd. (hereinafter: the “Plan”, the “Company”), which applies to the issuance of Awards to
employees, directors, consultants and service provides of the Company or its Affiliates.
This Appendix is effective with respect to Awards granted as of January 1, 2003 and shall comply with Amendment no. 132 of the Israeli Tax
Ordinance.
This Appendix is to be read as a continuation of the Plan and only modifies Awards granted to Israeli Participants so that they comply with the
requirements set by the Israeli law in general, and in particular with the provisions of Section 102 (as specified herein), as may be amended or
replaced from time to time. For the avoidance of doubt, this Appendix does not add to or modify the Plan in respect of any other category of
Participants.
The Plan and this Appendix are complimentary to each other and shall be deemed as one. Subject to section 1.3 above, in any case of contradiction,
whether explicit or implied, between any definitions and/or provisions of this Appendix and the Plan, the provisions set out in this Appendix shall
prevail.
1.5.
Any capitalized terms not specifically defined in this Appendix shall be construed according to the interpretation given to it in the Plan.
2.
2.1
2.2
2.3
DEFINITIONS
“Affiliate” means any “employing company” within the meaning of Section 102(a) of the Ordinance.
“Approved 102 Award” means an Award granted pursuant to Section 102(b) of the Ordinance and held in trust by a Trustee for the benefit of the
Israeli Participant.
“Award” notwithstanding Section 2.3 of the Plan, for the purpose of this Appendix, Award means an Award to purchase one or more Shares of the
Company or Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based
Awards, and Other Stock-Based Awards.
2.4
2.5
2.6
2.7
2.8
2.9
“Capital Gain Award (CGA)” means an Approved 102 Award elected and designated by the Company to qualify under the capital gain tax
treatment in accordance with the provisions of Section 102(b)(2) of the Ordinance.
“Controlling Shareholder” shall have the meaning ascribed to it in Section 32(9) of the Ordinance.
“Employee” means an Israeli Participant who is employed by the Company or its Affiliates, including an individual who is serving as a director or
an office holder, but excluding any Controlling Shareholder.
“Israeli Participant” means a person who receives or holds an Award under the Plan and this Appendix.
“ITA” means the Israeli Tax Authorities.
“Ordinary Income Award (OIA)” means an Approved 102 Award elected and designated by the Company to qualify under the ordinary income tax
treatment in accordance with the provisions of Section 102(b)(1) of the Ordinance.
2.10
“102 Award” means any Award granted to Employees pursuant to Section 102 of the Ordinance.
2.11
“3(i) Award” means an Award granted pursuant to Section 3(i) of the Ordinance to any person who is a Non- Employee.
2.12
2.13
“Israeli Award Agreement” notwithstanding Section 2.4 of the Plan, for the purpose of this Appendix, Israeli Award Agreement shall mean a
written agreement entered into and signed by the Company and an Israeli Participant that sets out the terms and conditions of an Award.
“Non-Employee” means an Israeli Participant who is a consultant, adviser, service provider, Controlling Shareholder or any other person who is not
an Employee.
2.14
“Ordinance” means the Israeli Income Tax Ordinance [New Version] 1961 as now in effect or as hereafter amended.
2.15
“Ordinary Share” means an ordinary share of, par value NIS 0.10 of the Company.
2.16
2.17
“Section 102” means section 102 of the Ordinance and any regulations, rules, orders or procedures promulgated thereunder as now in effect or as
hereafter amended.
“Trustee” means any person appointed by the Company to serve as a trustee and approved by the ITA, all in accordance with the provisions of
Section 102(a) of the Ordinance.
2.18
“Unapproved 102 Award” means an Award granted pursuant to Section 102(c) of the Ordinance and not held in trust by a Trustee.
3.
3.1
ISSUANCE OF AWARDS
Notwithstanding Article V of the Plan and in addition thereto, any Israeli Participants eligible for participation in the Plan and this Appendix as
Israeli Participants shall include any Employees and/or Non-Employees of the Company or of any of the Company’s Affiliate; provided, however,
that (i) Employees may only be granted 102 Awards; and (ii) Non-Employees and/or Controlling Shareholders may only be granted 3(i) Awards.
3.2
The Company may designate Awards granted to Employees pursuant to Section 102 as Unapproved 102 Awards or Approved 102 Awards.
3.3
3.4
3.5
3.6
3.7
The grant of Approved 102 Awards shall be made under this Appendix, and shall be conditioned upon the approval of this Appendix by the ITA.
Approved 102 Awards may either be classified as Capital Gain Awards (“CGAs”) or Ordinary Income Awards (“OIAs”).
No Approved 102 Awards may be granted under this Appendix to any eligible Employee, unless and until, the Company’s election of the type of
Approved 102 Awards as CGA or OIA granted to Employees (the “Election”), is appropriately filed with the ITA. Such Election shall become
effective beginning the first date of grant of an Approved 102 Award under this Appendix and shall remain in effect until the end of the year
following the year during which the Company first granted Approved 102 Awards. The Election shall obligate the Company to grant only the type of
Approved 102 Award it has elected, and shall apply to all Israeli Participants who were granted Approved 102 Awards during the period indicated
herein, all in accordance with the provisions of Section 102(g) of the Ordinance. For the avoidance of doubt, such Election shall not prevent the
Company from granting Unapproved 102 Awards simultaneously.
All Approved 102 Awards must be held in trust by a Trustee, as described in Section 4 below.
For the avoidance of doubt, the designation of Unapproved 102 Awards and Approved 102 Awards shall be subject to the terms and conditions set
forth in Section 102.
4. TRUSTEE
4.1
4.2
4.3
4.4
Approved 102 Awards which shall be granted under this Appendix and/or any Ordinary Shares allocated or issued upon exercise or vesting of such
Approved 102 Awards and/or other shares received subsequently following any realization of rights, including without limitation bonus shares, shall
be allocated or issued to the Trustee and held for the benefit of the Employee for such period of time as required by Section 102 (the “Holding
Period”). In case the requirements for Approved 102 Awards are not met, then the Approved 102 Awards shall be regarded as Unapproved 102
Awards, all in accordance with the provisions of Section 102.
Notwithstanding anything to the contrary, the Trustee shall not release any Ordinary Shares allocated or issued upon exercise or vesting of Approved
102 Awards prior to the full payment of the Employee’s tax liabilities, if any, arising from Approved 102 Awards which were granted to him/her
and/or any Ordinary Shares allocated or issued upon exercise or vesting of such Awards.
With respect to any Approved 102 Award, subject to the provisions of Section 102, an Israeli Participant shall not sell or release from trust any Share
received upon the exercise or vesting of an Approved 102 Award and/or any share received subsequently following any realization of rights,
including without limitation, bonus shares, until the lapse of the Holding Period required under Section 102. Notwithstanding the above, if any such
sale or release occurs during the Holding Period, the sanctions under Section 102 shall apply to and shall be borne solely by such Israeli Participant.
Upon receipt of any Approved 102 Award, the Employee will sign an undertaking to release the Trustee from any liability in respect of any action or
decision duly taken and bona fide executed in relation with this Appendix, or any Approved 102 Award or Ordinary Share granted to him thereunder.
5.
THE AWARDS
Notwithstanding anything to the contrary in the Plan and in addition thereto, the terms and conditions upon which the Awards shall be issued and exercised
or vest, as applicable, shall be as specified in the Israeli Award Agreement to be executed pursuant to the Plan and to this Appendix. Each Israeli Award
Agreement shall state, inter alia, the number of Ordinary Shares to which the Award relates, the type of Award granted thereunder (whether a CGA, OIA,
Unapproved 102 Award or a 3(i) Award), and any applicable vesting provisions and exercise price that may be payable.
6. FAIR MARKET VALUE
Without derogating from Section 2.18 of the Plan and solely for the purpose of determining the tax liability pursuant to Section 102(b)(3) of the Ordinance, if
at the date of grant of any CGA, the Company’s Shares are listed on any established stock exchange or a national market system or if the Company’s Shares
will be registered for trading within ninety (90) days following the date of grant of the CGAs, the fair market value of the Ordinary Shares at the date of grant
shall be determined in accordance with the average value of the Company’s Shares on the thirty (30) trading days preceding the date of grant or on the thirty
(30) trading days following the date of registration for trading, as the case may be.
7. EXERCISE OF AWARDS THAT ARE OPTIONS TO PURCHASE ORDINARY SHARES
Awards that represent options to purchase Ordinary Shares shall be exercised by the Israeli Participant by giving a written or electronic notice to the Company
and/or to any third party designated by the Company (the “Representative”), in such form and method as may be determined by the Company and, when
applicable, by the Trustee, in accordance with the requirements of Section 102, which exercise shall be effective upon receipt of such notice by the Company
and/or the Representative and the payment of the exercise price for the number of Ordinary Shares with respect to which the Award is being exercised, at the
Company’s or the Representative’s principal office. The notice shall specify the number of Ordinary Shares with respect to which the Award is being
exercised.
8. ASSIGNABILITY AND SALE OF AWARDS
8.1.
8.2
Notwithstanding any other provision of the Plan, no Award or any right with respect thereto, or purchasable hereunder, whether fully paid or not,
shall be assignable, transferable or given as collateral or any right with respect to them given to any third party whatsoever, and during the lifetime of
the Israeli Participant each and all of such Israeli Participant's rights with respect to an Award shall belong only to the Israeli Participant.
Any such action made directly or indirectly, for an immediate validation or for a future one, shall be void.
As long as Awards or Ordinary Shares purchased or issued hereunder are held by the Trustee on behalf of the Israeli Participant, all rights of the
Israeli Participant over the Shares are personal, can not be transferred, assigned, pledged or mortgaged, other than by will or laws of descent and
distribution.
9.
INTEGRATION OF SECTION 102 AND TAX ASSESSING OFFICER’S PERMIT
9.1.
9.2.
With regards to Approved 102 Awards, the provisions of the Plan and/or the Appendix and/or the Israeli Award Agreement shall be subject to the
provisions of Section 102 and the Tax Assessing Officer’s permit and/or any pre-rulings obtained by the ITA, and the said provisions, permit and/or
pre-rulings shall be deemed an integral part of the Plan and of the Appendix and of the Israeli Award Agreement.
Any provision of Section 102 and/or the said permit and/or pre-rulings which is necessary in order to receive and/or to keep any tax benefit pursuant
to Section 102, which is not expressly specified in the Plan or the Appendix or the Israeli Award Agreement, shall be considered binding upon the
Company and the Israeli Participants.
10.
DIVIDEND
Notwithstanding anything to the contrary in the Plan and solely for the purpose of Awards granted under this Appendix, with respect to all Ordinary Shares
(but excluding, for avoidance of any doubt, any unexercised Awards) allocated or issued upon the exercise or vesting of Awards purchased or received, as
applicable, by the Israeli Participant and held by the Israeli Participant or by the Trustee, as the case may be, the Israeli Participant shall be entitled to receive
dividends, if any, in accordance with the quantity of such Shares, subject to the provisions of the Company’s Articles of Association (and all amendments
thereto) and subject to any applicable taxation on distribution of dividends, and when applicable subject to the provisions of Section 102.
11.
TAX CONSEQUENCES
11.1
Notwithstanding anything to the contrary in Article XVI of the Plan and solely for the purpose of Awards granted under this Appendix, any tax
consequences arising from the grant, exercise or vesting of any Award, from the payment for Ordinary Shares covered thereby or from any other
event or act (of the Company, and/or its Affiliates, and the Trustee or the Israeli Participant), hereunder, shall be borne solely by the Israeli
Participant. The Company and/or its Affiliates, and/or the Trustee shall withhold taxes according to the requirements under the applicable laws,
rules, and regulations, including withholding taxes at source. Furthermore, the Israeli Participant shall agree to indemnify the Company and/or its
Affiliates and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including
without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Israeli Participant.
11.2
The Company and/or, when applicable, the Trustee shall not be required to release any share certificate to a Israeli Participant until all required
payments have been fully made.
11.3 With respect to Unapproved 102 Award, if the Israeli Participant ceases to be employed by the Company or any Affiliate, the Israeli Participant shall
extend to the Company and/or its Affiliate a security or guarantee for the payment of tax due at the time of sale of Shares, all in accordance with the
provisions of Section 102 and the rules, regulation or orders promulgated thereunder.
12. TERM OF PLAN AND APPENDIX
Notwithstanding anything to the contrary in Article XV of the Plan and in addition thereto, the Company shall obtain all approvals for the adoption of this
Appendix or for any amendment to this Appendix as are necessary to comply with (i) any applicable law, including without limitation U.S. securities laws and
the securities laws of any other jurisdiction applicable to Awards granted to Israeli Participant under this Appendix, (ii) any national securities exchange on
which the Shares are traded, and (iii) any applicable rules and regulations promulgated by the U.S. Securities and Exchange Commission.
13. GOVERNING LAW & JURISDICTION
This Appendix shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be
performed therein, without giving effect to the principles of conflict of laws. The competent courts in Tel Aviv shall have sole jurisdiction in any matters
pertaining to this Appendix.
ALLOT COMMUNICATIONS LTD.
APPENDIX B – UNITED STATES
TO THE 2006 INCENTIVE COMPENSATION PLAN
EXHIBIT 4.4
1. SPECIAL PROVISIONS FOR U.S. TAXPAYERS
1.1.
This Appendix (the “Appendix”) to the Allot Communications Ltd. 2006 Incentive Compensation Plan (the “Plan”) was adopted by the Board on
October 29, 2006. The Appendix shall become effective on the Effective Date, provided that the Appendix is approved by the holders of a majority
of the outstanding Shares which are present and voted at a meeting, or by written consent in lieu of a meeting, which approval must occur within the
period ending twelve (12) months after the date the Appendix is adopted by the Board. The effectiveness of any Awards granted pursuant to this
Appendix prior to such shareholder approval shall be specifically subject to and conditioned upon, and no such Award shall be vested or exercisable
until, such shareholder approval. If the Appendix is not so approved by the Company's shareholders or the Company’s initial public offering of
Shares does not occur prior to December 31, 2006, the Appendix shall not become effective, and shall terminate immediately, and any Awards
previously granted pursuant to the Appendix shall thereupon be automatically canceled and deemed to have been null and void ab initio.
1.2.
The provisions specified hereunder apply only to persons who are subject to U.S. federal income tax (any such person, a “U.S. Taxpayer”).
1.3.
1.4.
This Appendix is to be read as a continuation of the Plan and only applies with respect to Options and other Awards granted under the Plan to U.S.
Taxpayers. The purpose of this Appendix is to establish certain rules and limitations applicable to Options and other Awards that may be granted or
issued under the Plan to U.S. Taxpayers from time to time, in compliance with applicable tax, securities and other applicable laws currently in force.
For the avoidance of doubt, this Appendix does not add to or modify the Plan in respect of any other category of Israeli Participants.
The Plan and this Appendix are complimentary to each other and shall be deemed as one. Subject to section 1.3 above, in any case of contradiction,
whether explicit or implied, between any definitions and/or provisions of this Appendix and the Plan, the provisions set out in this Appendix shall
prevail.
2. DEFINITIONS
Capitalized terms not otherwise defined herein shall have the meaning assigned to them in the Plan. The following additional definitions will apply to grants
made pursuant to this Appendix, provided, however, that to the extent that such definitions are provided for in the Plan and this Appendix, the definitions in
this Appendix shall apply to Awards granted to U.S. Taxpayers:
2.1.
2.2.
2.3.
“Affiliate” means any entity other than the Company and any Subsidiary that is affiliated with the Company through stock or equity ownership or
otherwise and is designated as an Affiliate for purposes of the Plan by the Committee; provided, however, that, notwithstanding any other provisions
of the Plan to the contrary, for purposes of NQSOs and SARs, if an individual who otherwise qualifies as an Employee or Non-Employee Director
provides services to such an entity and not to the Company or a Subsidiary, such entity may only be designated an Affiliate if the Company qualifies
as a “service recipient,” within the meaning of Code Section 409A, with respect to such individual; provided further that such definition of “service
recipient” shall be determined by (i) applying Code Section 1563(a)(1), (2) and (3), for purposes of determining a controlled group of corporations
under Code Section 414(b), using the language “at least 50 percent” instead of “at least 80 percent” each place it appears in Code Section 1563(a)(1),
(2) and (3), and by applying Treasury Regulations Section 1.414(c)-2, for purposes of determining trades or businesses (whether or not incorporated)
that are under common control for purposes of Code Section 414(c), using the language “at least 50 percent” instead of “at least 80 percent” each
place it appears in Treasury Regulations Section 1.414(c)-2, and (ii) where the use of Shares with respect to the grant of an Option or SAR to such an
individual is based upon legitimate business criteria, by applying Code Section 1563(a)(1), (2) and (3), for purposes of determining a controlled
group of corporations under Code Section 414(b), using the language “at least 20 percent” instead of “at least 80 percent” at each place it appears in
Code Section 1563(a)(1), (2) and (3), and by applying Treasury Regulations Section 1.414(c)-2, for purposes of determining trades or businesses
(whether or not incorporated) that are under common control for purposes of Code Section 414(c), using the language “at least 20 percent” instead of
“at least 80 percent” at each place it appears in Treasury Regulations Section 1.414(c)-2. This definition shall have no effect on the definition of
Affiliate used with respect to the definition of Change of Control.
“Code” means the Internal Revenue Code of 1986, as it may be amended from time to time, including rules and regulations promulgated thereunder
and successor provisions and rules and regulations thereto.
“Fair Market Value” means the fair market value of the Shares as determined by the Committee by the reasonable application of a reasonable
valuation method, consistently applied, as the Committee deems appropriate; provided, however, that, with respect to ISOs, for purposes of Section
6.3 of the Plan and Sections 3.4 and 3.5 of this Appendix, such fair market value shall be determined subject to Section 422(c)(7) of the Code;
provided further, however, that if the Shares are readily tradable on an established securities market, Fair Market Value on any date shall be the last
sale price reported for the Shares on such market on such date or, if no sale is reported on such date, on the last date preceding such date on which a
sale was reported. In each case, the Committee shall determine Fair Market Value in a manner that satisfies the applicable requirements of Code
Section 409A.
2.4.
“Incentive Stock Option” or “ISO” means a right to purchase Shares under the Plan in accordance with the terms and conditions set forth in Article
VI of the Plan and which is designated as an Incentive Stock Option and which is intended to meet the requirements of Section 422 of the Code.
2.5.
2.6.
“Nonqualified Stock Option” or “NQSO” means a right to purchase Shares under the Plan in accordance with the terms and conditions set forth in
Article VI of the Plan and which is not intended to meet the requirements of Section 422 of the Code or otherwise does not meet such requirements.
“Qualified Change of Control” means a Change of Control that qualifies as a change in the ownership or effective control of the Company, or in the
ownership of a substantial portion of the assets of the Company, within the meaning of Section 409A(a)(2)(A)(v) of the Code.
2.7.
“Separation from Service” means a Termination that qualifies as a separation from service within the meaning of Code Section 409A(a)(2)(A)(i).
2.8.
“Subsidiary” means any present or future corporation which is or would be a “subsidiary corporation” of the Company as the term is defined in
Section 424(f) of the Code.
3. INCENTIVE STOCK OPTIONS
3.1.
3.2.
3.3.
3.4.
Each Award Agreement shall specify whether an Option is intended to be a ISO or an NQSO. To the extent that any Option granted to a U.S.
Taxpayer does not qualify as an ISO (whether because of its provisions or the time or manner of its exercise or otherwise), such Option, or the
portion thereof which does not so qualify, shall constitute a separate NQSO.
No ISO shall be granted to any individual otherwise eligible to participate in the Plan who is not an Employee of the Company or a Subsidiary on the
date of granting of such Option. Any ISO granted under the Plan shall contain such terms and conditions, consistent with the Plan, as the Committee
may determine to be necessary to qualify such Option as an “incentive stock option” under Section 422 of the Code. Any ISO granted under the
Plan may be modified by the Committee to disqualify such Option from treatment as an “incentive stock option” under Section 422 of the Code
The total number of Shares that may be delivered pursuant to Incentive Stock Options granted under the Plan shall be the number of Shares set forth
in the third sentence of Section 4.1 of the Plan, as adjusted pursuant to Section 4.1 of the Plan, but without application of the last sentence of such
section.
Notwithstanding any intent to grant ISOs, an Option granted under the Plan will not be considered an ISO to the extent that it, together with any
other “incentive stock options” (within the meaning of Section 422 of the Code, but without regard to subsection (d) of such Section) under the Plan
and any other “incentive stock option” plans of the Company, any Subsidiary and any “parent corporation” of the Company within the meaning of
Section 424(e) of the Code, are exercisable for the first time by any Participant during any calendar year with respect to Shares having an aggregate
Fair Market Value in excess of $100,000 (or such other limit as may be required by the Code) as of the time the Option with respect to such Shares is
granted. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted.
3.5.
3.6.
3.7.
3.8.
3.9.
No ISO shall be granted to an individual otherwise eligible to participate in the Plan who owns (within the meaning of Section 424(d) of the Code),
at the time the Option is granted, more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or a
Subsidiary or any “parent corporation” of the Company within the meaning of Section 424(e) of the Code. This restriction does not apply if at the
time such ISO is granted the Option Price of the ISO is at least 110% of the Fair Market Value of a Share on the date such ISO is granted, and the
ISO by its terms is not exercisable after the expiration of five years from such date of grant.
Notwithstanding any other provision of the Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem
SAR will expire no later than the expira-tion of the related ISO; (ii) the value of the payment with respect to the Tandem SAR may not exceed the
difference between the Fair Market Value of the Shares subject to the related ISO at the time the Tandem SAR is exercised and the Option Price of
the related ISO; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option
Price of the ISO.
No ISO or Tandem SAR granted in connection with an ISO may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution or in accordance with Section 11.2 of the Plan. Further, all ISOs and Tandem SARs
granted in connection with ISOs granted to a Participant shall be exercisable during his or her lifetime only by such Participant.
Any changes to ISOs pursuant to Section 4.2 of the Plan shall, unless the Committee determines otherwise, only be effective to the extent such
adjustments or changes do not cause a “modification” (within the meaning of Section 424(h)(3) of the Code) of such ISOs or adversely affect the tax
status of such ISOs. Any such adjustment with respect to an Award intended to be an ISO shall be made only to the extent consistent with such
intent, unless the Board or the Committee determines otherwise.
The Committee may require a Participant to give prompt written notice to the Company concerning any disposition of Shares received upon the
exercise of an ISO within: (i) two (2) years from the date of granting such ISO to such Participant or (ii) one (1) year from the transfer of such
Shares to such Participant or (iii) such other period as the Committee may from time to time determine. The Committee may direct that a Participant
with respect to an ISO undertake in the applicable Award Agreement to give such written notice described in the preceding sentence, at such time
and containing such information as the Committee may prescribe, and/or that the certificates evidencing Shares acquired by exercise of an ISO refer
to such requirement to give such notice.
4. DEFERRED COMPENSATION
4.1.
4.2.
4.3.
4.4.
4.5.
4.6.
If any Award would be considered deferred compensation as defined under Code Section 409A and would fail to meet the requirements of Code
Section 409A, then such Award shall be null and void; provided, however, that the Committee may permit deferrals of compensation pursuant to the
terms of a Participant’s Award Agreement, a separate plan, or a subplan which (in each case) meets the requirements of Code Section 409A.
Additionally, to the extent any Award is subject to Code Section 409A, notwithstanding any provision herein to the contrary, this Appendix shall not
permit the acceleration of the time or schedule of any distribution related to such Award, except as permitted by Code Section 409A.
Notwithstanding any provisions of the Plan to the contrary, in no event shall any deferral under Section 18.6 of the Plan be permitted if the
Committee determines that such deferral would result in the imposition of additional tax under Code Section 409A of the Code.
The Committee shall not extend the period to exercise an Option or Stock Appreciation Right to the extent that such extension would cause the
Option or Stock Appreciation Right to become subject to Code Section 409A. An Agreement may provide that the period of time over which an
NQSO may be exercised shall be automatically extended if on the scheduled expiration date of such Option the Participant’s exercise of such Option
would violate applicable securities laws; provided, however, that during such extended exercise period the Option may only be exercised to the
extent the Option was exercisable in accordance with its terms immediately prior to such scheduled expiration date; provided further, however, that
such extended exercise period shall end not later than thirty (30) days after the exercise of such Option first would no longer violate such laws.
Unless the Committee provides otherwise in an Award Agreement, each Restricted Stock Unit, Performance Unit, Performance Share, Cash-Based
Award and/or Other Stock-Based Award shall be paid in full to the Participant no later than the fifteenth day of the third month after the end of the
first calendar year in which such Award is no longer subject to a “substantial risk of forfeiture” within the meaning of Code Section 409A. If the
Committee provides in an Award Agreement that a Restricted Stock Unit, Performance Unit, Performance Share, Cash-Based Award or Other Stock-
Based Award is intended to be subject to Code Section 409A, the Award Agreement shall include terms that are intended to satisfy the requirements
of Section 409A.
No Dividend Equivalents shall relate to Shares underlying an Option or SAR unless such Dividend Equivalent rights are explicitly set forth as a
separate arrangement and do not cause any such Option or SAR to be subject to Code Section 409A.
Notwithstanding any other provisions of the Plan or any Award Agreement to the contrary, if a Termination that is not a Separation from Service
occurs, and payment or distribution of an Award constituting deferred compensation subject to Code Section 409A would otherwise be made or
commence on the date of such Termination (pursuant to the Plan, the Award Agreement or otherwise), (i) the vesting of such Award shall accelerate
in accordance with the Plan and the Award Agreement, (ii) such payment or distribution shall not be made or commence prior to the earliest date on
which Code Section 409A permits such payment or distribution to be made or commence without additional taxes or penalties under Code Section
409A, and (iii) in the event any such payment or distribution is deferred in accordance with the immediately preceding clause (ii), such payment or
distribution that would have been made prior to the deferred payment or commencement date, but for Code Section 409A, shall be paid or distributed
on such earliest payment or commencement date, together, if determined by the Committee, with interest at the rate established by the Committee.
4.7.
4.8.
4.9.
Notwithstanding any other provisions of the Plan or any Award Agreement to the contrary, if a Change of Control that is not a Qualified Change of
Control occurs, and payment or distribution of an Award constituting deferred compensation subject to Section 409A of the Code would otherwise
be made or commence on the date of such Change of Control (pursuant to the Plan, the Award Agreement or otherwise), (i) the vesting of such
Award shall accelerate in accordance with the Plan and the Award Agreement, (ii) such payment or distribution shall not be made or commence prior
to the earliest date on which Code Section 409A permits such payment or distribution to be made or commence without additional taxes or penalties
under Section 409A, and (iii) in the event any such payment or distribution is deferred in accordance with the immediately preceding clause (ii), such
payment or distribution that would have been made prior to the deferred payment or commencement date, but for Code Section 409A, shall be paid
or distributed on such earliest payment or commencement date, together, if determined by the Committee, with interest at the rate established by the
Committee.
Neither the Board nor the Committee shall take any action that would cause an Award that is otherwise exempt from Code Section 409A to become
subject to Code Section 409A, or that would cause an Award that is subject to Code Section 409A to fail to satisfy the requirements of Code Section
409A.
Although the Company intends to administer the Plan so that Awards will be exempt from, or will comply with, the requirements of Code Section
409A, the Company does not warrant that any Award under the Plan will qualify for favorable tax treatment under Code Section 409A or any other
provision of federal, state, local, or non-United States law. The Company shall not be liable to any Participant for any tax, interest, or penalties the
Participant might owe as a result of the grant, holding, vesting, exercise, or payment of any Award under the Plan.
5. SECTION 83(B) ELECTION
If a Participant makes an election under Section 83(b) of the Code to be taxed with respect to an Award as of the date of transfer of Shares rather than as of
the date or dates upon which the Participant would otherwise be taxable under Section 83(a) of the Code, such Participant shall deliver a copy of such election
to the Company immediately after filing such election with the United States Internal Revenue Service. Neither the Company nor any Subsidiary or Affiliate
shall have any liability or responsibility relating to or arising out of the filing or not filing of any such election or any defects in its construction.
6. GOVERNING LAW AND JURISDICTION
This Appendix shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be
performed therein, without giving effect to the principles of conflict of laws. Unless otherwise provided in the Award Agreement, Participants are deemed to
submit to the exclusive jurisdiction and venue of the courts in Tel-Aviv, Israel, to resolve any and all issues that may arise out of or relate to this Appendix or
any related Award Agreement.
List of Subsidiaries
Company
Jurisdiction of Incorporation
EXHIBIT 8.1
Allot Communications Inc.
Allot Communications Europe SARL
Allot Communications (Asia Pacific) Pte. Limited
United States
France
Singapore
Allot Communications (UK) Limited (with branches in Spain, Italy and Germany) United Kingdom
Allot Communications Japan K.K.
Japan
Allot Communications (New Zealand) Limited (with a branch in Australia)
New Zealand
Oversi Networks Ltd.
Allot Communications (Hong Kong) Ltd
Allot Communications Africa (PTY) Ltd
Allot Communications India Private Ltd
Allot Communications Spain, S.L. Sociedad Unipersonal
Allot Communications (Colombia) S.A.S
Allot MexSub
Israel
Hong Kong
South Africa
India
Spain
Colombia
Mexico
* Allot Communications Ltd. also holds a branch in Colombia.
EXHIBIT 12.1
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
I, Erez Antebi, certify that:
1. I have reviewed this annual report on Form 20-F of Allot Communications Ltd. (the “company”);
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 company 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 Rules 13a-15(f) and 15d-15(f)) for the company
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 company, 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 company’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 company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’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 company’s internal control over
financial reporting.
Date: March 23, 2017
/s/Erez Antebi
Erez Antebi
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 12.2
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
I, Alberto Sessa, certify that:
1. I have reviewed this annual report on Form 20-F of Allot Communications Ltd. (the “company”);
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 company as of, and for, the periods presented in this report;
4. The company’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 Rules 13a-15(f) and 15d-15(f)) for the company
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 company, 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 company’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 company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’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 company’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 23, 2017
/s/Alberto Sessa
Alberto Sessa
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 13.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Allot Communications Ltd. (the “Company”) on Form 20-F for the period ended December 31, 2016, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Erez Antebi, and I, Alberto Sessa, 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 23, 2017
Date: March 23, 2017
/s/ Erez Antebi
Erez Antebi
President and Chief Executive Officer
(Principal Executive Officer)
/s/Alberto Sessa
Alberto Sessa
Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Allot Communications Ltd. and will be retained by Allot
Communications Ltd. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 15.1
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 consaent to the incorporation by reference in this Registration Statement on Form S-8 (File Nos. 333-140701, 333-149237, 333-159306, 333-165144,
333-172492, 333180770, 333-187406, 333-194833, 333-203028 and 333-210420) pertaining to the 2016 Incentive Compensation Plan of Allot
Communications Ltd., of our report dated March 23, 2017, with respect to the consolidated financial statements and the effectiveness of internal control over
financial reporting of Allot Communication Ltd. included in this annual report on Form 20-F for the year ended December 31, 2016.
/s/ KOST FORER GABBAY &
KASIERER
KOST FORER GABBAY &
KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
March 23, 2017